Of what practical benefit is practical benefit to consideration?

• Author: Ogilvie, M.H.
• Position: Law of contract

INTRODUCTION

Modification of ongoing contractual transactions is an everyday occurrence both in commercial and consumer contracts, especially consumer contracts involving the provision of services to consumers, as well as in relation to contracts of employment whose terms inevitably change over time. Differences of opinion between parties to these agreements as to precisely what was promised by one party to the other by way of modification is inevitable as is the possibility that one party might make a promise to modify an obligation and then renege on that promise once the other party has performed by declining to pay. Thus, the reluctance of courts to enforce modified promises is understandable from a non-legal perspective, and notwithstanding the commercial frequency and social desirability of permitting parties to adjust their contractual relationships to changed and unforeseen circumstances.

The law of contract has traditionally approached the dilemma posed by contract modification by devising legal principles which both permit and refuse judicial enforcement of modified promises. Refusal has typically been expressed in the rule that performance of a pre-existing duty is not good consideration for a new promise in return, as established in Stilk v Myrick (1) and confirmed in Gilbert Steel Ltd. v University Construction Ltd. (2) The rule that past consideration is not good consideration, (3) can also be conscripted by a court intent on refusing to enforce a modified promise. On the other hand, courts have also been prepared to enforce modified promises not only on the ground that there is actually consideration in the modified promise because the promisor has promised to do substantially more in the modified promise (4) but also on the alternative grounds that there may be consideration in a forbearance to sue to enforce the original promise once the promisor has asked for a modification on the threat of potential breach of contract; or in detrimental reliance by the promisee who has accepted the modified contract at the insistence of the promisor; (5) or in a mutual agreement to rescind the original contract and replace it with a new contract containing the modified promise. (6)

Another principle for the enforcement of modified promises was proposed some two decades ago by the English Court of Appeal in Williams v Roffey Bros. & Nicholls (Contractors Ltd.), (7) in that there could be said to be a "practical benefit" to the promisee in a promise to perform a pre-existing legal duty which could constitute consideration in certain factual circumstances. Without even knowing what "practical benefit" means, prima facie, Roffey flatly contradicted the rule against finding consideration in the performance of a pre-existing duty set out in Stilk, notwithstanding the assertions of the court to the contrary. (8) Nevertheless, Roffey has settled into the law of contract in England, (9) although some English commentators have uneasily accepted it and argued to constrain its application. (10) Until recently, it has been ignored by Canadian courts although Canadian contract texts have discussed it since the early 1990's (11) and a generation of Canadian lawyers have studied it in first year contract courses. (12) However, it has now been applied, apparently for the first time, by a Canadian appellate court in Greater Fredericton Airport Authority Inc. v NAV Canada (13) a decision in which significant new approaches were taken both to consideration and economic duress. (14)

For the past two decades, the story of Roffey in Canadian courts has been a story about absence. The purpose of this paper is to suggest some reasons for that absence. Normally, law review articles are about presence, the reception of particular principles and their analysis. Instead, after an initial discussion of Roffey, this paper will turn to the recent NA V Canada decision, and then speculate about why Canadian courts have not followed their English counterparts until now and about whether that reluctance is well justified.

THE "PRACTICAL BENEFIT" OF WILLIAMS V ROFFEY

In Roffey, a general contractor retained a subcontractor to do some carpentry work in relation to the refurbishment of a building for 20,000 [pounds sterling]. The subcontractor would receive interim payments for work completed. After receiving interim payments for 16,200 [pounds sterling] worth of work, the subcontractor found that he was in financial difficulty because the price was too low and he had not supervised his workmen sufficiently. The general contractor was liable under a penalty clause in the main contract if the project was not completed on time and was aware of the subcontractor's problems. The general contractor called a meeting with the subcontractor and suggested a further 10,300 [pounds sterling] to ensure the completion of the work on time. Further work was done but the subcontractor stopped work and sued for 10,847 [pounds sterling]. The general contractor argued that the sum was not payable because there was no consideration for the promise to pay more than the original contract provision. The trial judge awarded the additional payments less a small deduction for defective and incomplete items. The English Court of Appeal upheld this decision on the basis that there was consideration for the promise to pay more but found that consideration in the novel concept of "practical benefit."

The general contractor's argument was based on Stilk and Glidewell L.J.

considered Stilk through the lens of several later cases (15) so as to present the law in relation to the performance of a pre-existing duty in a set of six propositions which can be re-stated thus: where two parties have entered a contract and where it becomes unclear that one party will be able to perform his promises under the contract, when one party promises to make an additional payment in return for the other party's promise to perform his obligation under the contract, provided this promise was not procured by economic duress or fraud, then the promise to pay extra is enforceable because there is practical benefit to the promisor capable of being consideration for the promise to pay more. (16) In concurring judgements, Russell and Purchas L.J.J. agreed, and all three found practical benefit constituting consideration in the continued performance, avoidance of the trouble and expense of finding a substitute subcontractor, avoiding the penalty for late performance under the head contract, and the establishment of a payment schedule which required more orderly performance by the subcontractor. All three justices conceptualized the practical benefit principle as a refinement of Stilk and upheld the rule that performance of a pre-existing contractual duty does not constitute consideration for a promise to pay more in return. Russell L.J. opined that consideration was still required but that it could be found in the intention of the parties which he thought to be, on the facts, to take a pragmatic approach to ensure the completion of the contract. (17) Purchas L.J. wondered whether Stilk should be confined to its own facts on public policy grounds of protecting shipmasters on the high seas from extortion, and noted that economic duress might have been a better approach, but in the end he agreed that Stilk still stood. (18)

Roffey remains a controversial case. Several obvious observations can be made about it. Firstly, it casts considerable doubt on Stilk, especially if the court's finding of consideration is doubted as being "real" consideration adding something new to the original bargain. By analogy, it also casts doubt on the rule in Pinnel's Case (19) and Foakes v Beet (20) by suggesting that part performance of a promise to pay an indebtedness may be good consideration for a promise to accept part payment in full settlement. Secondly, it seems to relax the consideration requirement so that technical consideration requirements may be overtaken by issues of equity, fairness, reasonableness or commercial efficacy. It also shifts the burden of regulating the enforcement of promises from consideration to economic duress and fraud, and challenges courts to clarify how these operate. Thirdly, it is in line with reliance-based justifications for enforcing promises since there is no need for a detriment to the promisee provided there is a requested benefit conferred on the promisor. Fourthly, it casts doubt on the role of the doctrine of frustration which tends not to favour enforcing modified promises made in light of unforeseen circumstances, and, again, challenges the courts to clarify the nature and operation of frustration. Fifthly, the meaning of "practical benefit" is unclear and potentially threatens the underpinning doctrinal role of consideration in contract law. If merely avoiding having to find an alternative contractor constitutes practical benefit, then that is characteristic of all attempts to modify contracts and would result in enforcement of all such attempts except where there is economic duress or fraud. This may be in accord with the expectations of the parties but then such cases are unlikely to result in litigation. The meaning and role of consideration in distinguishing enforceable from unenforceable contracts is again cast into considerable doubt. To accept that a practical benefit can be consideration in contract modification cases is to substantially dilute and distort consideration as traditionally understood.

Yet, the possibility of ensuring that contracts can be performed substantially as originally promised under the rubric practical benefit makes the decision in Roffey an attractive one, despite the inherent ambiguity in the phrase and the substantial discretion it seems to bestow on the courts to uphold modified contracts in certain circumstances as yet to be defined. The difficulty of fitting Roffey into the pre-existing doctrine of consideration has been...