The recent decision of the Court of Appeal for British Columbia in Rosas v. Toca has changed the law of contract variation. This decision will be important for employment lawyers to consider when varying employment agreements or enforcing amended agreements.
The law was settled that consideration — the payment or benefit exchanged for a contractual action or promise — is a fundamental requirement to establish that a contract is enforceable. If you want the right to sue on a promise made, you have to purchase the right.
In the employment context, consideration has always been required to support changes made to an employment contract during employment. An employer cannot enforce a change to an employment contract, such as the introduction of a limitation on termination pay or a non-solicitation covenant, unless it has given the employee something new of value in exchange. A variation to an existing employment contract that is not supported by fresh consideration is voidable and non-binding.
In Rosas v. Toca, Chief Justice Baumann writing for the court canvassed the evolution of the law of consideration and noted that at times, the absence of consideration has been used by litigants as grounds to sidestep their contractual obligations. In the past, the legal requirement for consideration has been so rigidly applied that it has created room for injustice. Until now. The court held that the application and formality of an artificial rule like consideration can no longer be used as a tool to allow parties to avoid their legal contractual obligations. The court wrote: “When parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid term unenforceable…(A) lack of fresh consideration will no longer be determinative.”
As a result of the decision in Rosas v. Toca, consideration may not be required in cases where the parties voluntarily agree to vary the terms of a contract during employment, subject to finding illegitimate pressure. Judges now have the ability to arrive at results which reflect the true intentions of the contracting parties – even in the absence of the legal formality of consideration.
How the reasoning in the case of Rosas v. Toca will be applied in employment cases is yet to be determined. On the one hand, a court may be ready to accept that the principle of consideration should not apply so rigidly as to undermine the expectations of the parties to an employment contract. The practical reality of long-term employment relationships is that contractual changes do occur. In those cases, the parties rely on the amendments to be enforceable. Employers may expect to rely on the finding in the case of Rosas v. Toca to enforce such amendments, even in the absence of fresh consideration.
On the other hand, as noted in the Rosas v. Toca decision, proof of the parties’ mutual expectations or intentions to be bound by the varied terms will be required. Consideration has a purpose. It changes the nature of the promises we make — from one which is morally based to one which is legally enforceable. It operates as a signal that the parties intend to be bound by their agreement. Where an employer seeks to diminish an existing employee right or seeks to impose a new obligation on the employee, but fails to provide a new benefit in exchange, it will be interesting to see whether the court will accept that the parties genuinely expected to be bound by the proposed amendments, such that the contract should be deemed enforceable without fresh consideration.
The takeaway message is that the law in British Columbia has adopted a change to the rule of consideration in a debt collection case. It remains to be seen what this means for employers and employees. The decision provides an argument for enforcement where consideration is absent. An employer who wants to ensure that changes to an existing employment contract are enforceable would be wise to continue to ensure fresh consideration is in place to support such changes.
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MIchael A. Watt is a partner with Alexander Holburn Beaudin and Lang LLP in Vancouver and leader of the firm's Labour and Employment Practice. He can be reached at (604) 484-1733 or email@example.com.