Contract Variation and Changed Expectations.

• Author: Ilg, Michael
• Position: Special Section: McGill Companion to Law

Introduction I. Consideration, Duress, and Discontent II. Practical Benefit and Economic Duress III. Contract Variation in an Economic Perspective IV. The Moral and Economic Arguments for Contract Relaxation V. A Model of Changed Expectations A. The Problem of Promise Revocation B. Change to Contract Expectations Conclusion Introduction

The doctrine of consideration has long been a source of criticism and antipathy, especially when contract variation is at stake. While consideration in general has remained, in Lord Denning's phrasing, "too firmly fixed to be overcome by a side-wind," (1) years of persistent ill wind have nevertheless eroded the consideration requirement for contract variations. The consideration requirement, or the pre-existing duty rule, has long been criticized as a cumbersome tool for preventing commercial extortion or duress. The pre-existing duty rule has been characterized as both overinclusive and underinclusive. (2) Overinclusive because the rule may endorse promises brought about through coercion, but which also happen to have some consideration present. Underinclusive because it precludes gratuitous promises that were sensibly and freely given. A growing impression shared by many is that the pre-existing duty rule is inconsistent with modern commercial reality and the legitimate expectations of business parties. (3) Given the persistent dissatisfaction with the rule, it is perhaps unsurprising that the doctrine of economic duress has steadily come to displace the consideration requirement in many common law jurisdictions.

The leading case of Williams v. Roffey (4) initiated the shift away from the pre-existing duty rule associated with Stilk v. Myrick. (5) Appellate courts in New Zealand and Canada have since gone further, dispensing with the consideration requirement altogether to fully embrace the doctrine of economic duress. (6) The view that a promise to vary a contract should be enforceable so long as it was not procured under economic duress will accordingly be labelled the economic duress model. While the economic duress model provides advantages over the classical approach of Stilk v. Myrick, there are substantial shortcomings that should cause a reconsideration of the trend toward its embrace.

An initial difficulty is that economic duress has not been definitively expressed as a replacement for consideration, but rather as merely an alternative means of determining enforceability. The ungainly patchwork of rules governing contract variation has thus only been expanded. Various doctrines currently sit alongside one another, with their respective use often contingent upon distinctions between promises for more or promises for less performance. (7) In Canada, a purported contract variation could potentially be analyzed simultaneously through four doctrines or rule sets, including: common law consideration under either Stilk v. Myrick or Foakes v. Beer, the doctrine of economic duress, promissory estoppel under equity, or part performance permissible under statute. (8) Such an overlapping mix, containing both redundancies and contradictions, can hardly be said to be conducive to contractual certainty or economic efficiency.

A model based on economic duress offers the prospect of promoting socially useful variations that reflect the reasonable expectations of the parties; however, this must be balanced against the potential for incentivizing opportunistic renegotiations, and undermining the pricing function of contracts in the first instance. Another challenge is that economic duress is not nearly as straightforward or clear-cut as it may at first appear. Determining what constitutes legitimate or illegitimate pressure in a commercial context can be quite subjective and open to interpretation. The most significant concern with the economic duress model addressed here, however, is the potential for it to undermine the complementary role of promissory estoppel in protecting parties from unfair retractions of promises. The economic duress model may tend to be overly inclusive in finding promises enforceable. In particular, it risks transforming gratuitous indulgences meant only to temporarily suspend contract terms into binding contract variations. In other words, the economic duress model may transform a commercial favour or leniency into an entitlement. The move toward the economic duress model threatens the distinction between 7 8 promises that are deserving of an equitable protection and promises that are deserving of becoming an irrevocable contractual right or entitlement.

It is proposed that a model based on the changed expectations of the parties may serve to maintain the distinction between promises that vary or alter contractual rights and those promises that merely suspend them, such as relaxations or indulgences, that may be binding but which do not change contractual terms. It is also suggested that a model of changed expectations can provide an improvement upon both the pre-existing duty rule and the model of economic duress, while also covering the role played by promissory estoppel in a more coherent and efficient fashion.

Under a model of changed expectation, the promisor changes the reasonable expectations of the parties with a promise, whether gratuitous or backed by consideration. What determines how permanent the change may be, or whether it is a relaxation or a variation of contractual terms, becomes a question of how the promise was initiated or provided for. The key distinction becomes not enforceability of a post-formation promise, but the availability of revocation. The proposed model of changed expectations would hold that all seriously intended promises that alter the expectations of the parties are enforceable, subject to revocation. Revocation of post-formation promises must occur in the same manner as the promised variation. Bilateral promises, in which both parties alter their promised performance, as with consideration, will require both parties to consent to the revocation and the return to the original terms. Unilateral promises, which are given gratuitously by one party alone, may be revoked unilaterally by the promisor subject to reasonable notice. The first level of promises, termed bilateral, is essentially a traditional inquiry into the presence of consideration. The modest, or incremental, innovation proposed here occurs on the second level of promise, labelled unilateral, wherein gratuitous promises become binding but are subject to unilateral revocation.

The proposed approach draws on the flexibility of promissory estoppel, in that the original terms can be reinstated. The difference under the proposed model of changed expectations is that only the issue of notice would be assessed, not whether the return would be inequitable or not. This streamlines the inquiry into enforceability based on timing, dispensing with the need for a qualitative assessment of fairness between the parties, or an assessment of whether the promisee relied on the promise to their detriment. Also jettisoned would be the differing treatment between promises for more and less, and the traditional restriction that promissory estoppel can only serve as a shield and not a sword.

The proposed model of changed expectations would: i) streamline the role previously played by equity; while ii) being far more generous in enforcing seriously intended promises than the classical approach of Stilk; but iii) remaining less generous than the economic duress model which may freely transform all serious promises into contractual rights. Unlike the economic duress model, under a model of changed expectations, not all seriously intended promises are treated equal. Gratuitous promises depend for their enforceability on having performance occur before the promisor revokes the promise with reasonable notice. The gratuitous promisor who decides to pursue the original terms after the promisee has tendered performance will be out of luck. For example, the gratuitous promisor who revokes (with reasonable notice) halfway through delivery instalments will have to pay for half of the deliveries based on the changed expectation rate and half based on the original rate, and so on.

The proposed model of changed expectations would distill the inquiry into enforceability into two questions facing a promisor who wishes to resile from a post-formation promise: 1) Was the promise gratuitous? 2) Is there a reasonable time to change expectations back to the original terms before performance? If both questions are answered in the affirmative, then the promisor may revert to the original contract's terms for the performance that remains after a reasonable revocation.

Part I of this article examines the historical connection between the pre-existing duty rule and the policy objective of protecting parties from undue commercial pressure or duress after a contract has been formed. Part II addresses the modern move away from the consideration requirement in favour of the doctrine of economic duress. Part III examines contract variation from an economic perspective. Part IV elaborates on the disadvantages of an overly permissive approach to contract variation, with particular emphasis on the Rosas v. Toca decision of the British Columbia Court of Appeal. Part V explains a model of changed expectations, and attempts to demonstrate its advantages over both a model of economic duress and that of the previous status quo based on consideration and promissory estoppel.

1. Consideration, Duress, and Discontent

   Consideration provides a basic evaluative function for determining the enforceability of promises under the common law. Ideally, consideration distinguishes purely gratuitous promises from those which resemble a bargain, or tie a provided promise to some contingency, or direction of value, involving the promisee. A well-known definition of consideration was given in Currie v. Misa:

   A valuable...