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Contracts - Consideration - Principle in Gilbert Steel

Richcraft Homes Ltd. v. Urbandale Corporation (Ont CA, 2016)

In this case the court discusses the principle that 'past consideration is no consideration', as recognized in the case of Gilbert Steel v University Construction Ltd. (Ont CA, 1976):
[14] The appellant argues Richcraft gave no consideration for the 2005 Agreement. It is accordingly not a true bargain, and therefore not enforceable: see John D. McCamus, The Law of Contracts, 2d ed. (Toronto: Irwin Law, 2012), at p. 215; G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto, Carswell, 2011), at p. 81-82. The appellant also relies on the proposition of Ontario law that a subsequent agreement that purports to alter the terms of an existing agreement also requires consideration to be enforceable: see Gilbert Steel Ltd. v. University Construction Ltd. (1976), 1976 CanLII 672 (ON CA), 12 O.R. (2d) 19 (C.A.), at p. 24.


[26] The appellant submits Richcraft gave no consideration for the 2005 document, so it is not a true bargain, and is therefore unenforceable. The only enforceable contract between the parties is the original LPA. The appellant relies on three decisions of this court to argue the law of Ontario precludes enforcement of the 2005 agreement: Gilbert Steel; Gregorio v. Intrans-Corp (1994), 1994 CanLII 2241 (ON CA), 18 O.R. (3d) 527 (C.A.); and Holland v. Inc., 2015 ONCA 762 (CanLII), 392 D.L.R. (4th) 650.

[27] The facts of Gilbert Steel bear repeating. The plaintiff contracted with the defendant to supply fabricated steel at a fixed price per ton for the construction of apartment buildings. Steel for the first two of three projects was delivered and paid for at the prices set by the contract. Before construction on the third project started, the plaintiff was notified by the steel mill that the price of unfabricated steel was about to increase, and warned that the price would increase again in the near future. The plaintiff approached the defendant about this price increase, the parties entered a new written agreement for the supply of fabricated steel at a higher price, and construction on the third project commenced.

[28] The steel mill then notified the plaintiff of another price increase. The plaintiff again approached the defendant about the price increase, and the defendant agreed orally to pay higher prices. Following this discussion, the plaintiff submitted a written contract containing these higher prices to the defendant, but the agreement was never executed. The defendant accepted delivery of the fabricated steel and was invoiced at the higher prices, but paid in rounded amounts that left an amount owing equal to the difference between the prices agreed to orally and the prices set out in the previous written agreement.

[29] The plaintiff sued to recover the difference. The trial judge found that the defendant’s promise to pay higher prices was unenforceable due to a lack of consideration, given that the plaintiff was already obligated to deliver steel at the prices agreed to in the previous written agreement. This court, relying on the rule set out by Ellenborough L.J. in Stilk v. Myrick (1809), 170 E.R. 1168 (K.B), that a promise to perform a pre-existing duty is not consideration for a contractual variation, upheld that finding on appeal.

[30] The results were similar in both Gregorio and Holland. In Gregorio, this court held that a warranty agreement signed by a purchaser failed for lack of consideration, since the purchase agreement had been executed on a previous occasion and the warranty agreement was unsupported by fresh consideration. In Holland, this court held that an employment agreement limiting an employee’s entitlement to notice on termination to the statutory minimums was unenforceable; it was entered into almost nine months after the employee originally signed an offer letter that was silent on the issue of reasonable notice, and there was no fresh consideration. The court noted, at para. 52: “[i]t is well-settled that a promise to perform an existing contract is not consideration.”

[31] When Gilbert Steel was issued, it attracted much commentary from academics critical of this court’s application of the doctrine of consideration to the facts of the case: see e.g. J. Swan, “Consideration and the Reasons for Enforcing Contracts” (1976) 15 U.W. Ontario L. Rev. 83; B.J. Reiter, “Courts, Consideration, and Common Sense” (1977) 27 U.T.L.J. 439; S.M. Waddams, “Variations of Contracts and the Requirement of Consideration: Gilbert Steel Ltd. v. University Construction Ltd.” (1977) 2 Can. Bus. L.J. 232. The basic point was made by Professor Reiter, at p. 452, who questioned this court’s rejection of the arguments advanced in favour of enforcing the agreement to pay higher prices: “The effect … was to refuse enforcement to a business promise apparently made for valid commercial reasons, a surprising and seemingly undesirable result.” Professor Swan observed, at p. 91, that,
[T]he doctrine of consideration is a most unsatisfactory tool for deciding what promises are going to be enforced by the courts. There may have been a good reason for refusing to enforce the contract in Gilbert Steel v. University Construction, but the finding of the trial judge that there was no duress would tend to show the contrary and, far more importantly, the justification given for the decision by both courts is quite irrelevant to any valid reason for refusing enforcement.
[32] Professor McCamus, in The Law of Contracts, at p. 250, comments that the doctrine established in Stilk v. Myrick “produces reasonable outcomes in cases where the promise to provide additional consideration is extracted by a promisee who is exploiting the promisor’s vulnerability” but, referring specifically to Gilbert Steel, also notes that “[t]he doctrine is also applicable … to what appear to be voluntary arrangements entered into by commercial parties with relatively equal bargaining power.” He then argues that “[i]t is thus over-inclusive in the sense that it captures and renders unenforceable many agreements that do not result from an unfair exploitation of vulnerability.”

[33] The respondent submits that the common law world has moved on since Gilbert Steel. For example, in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512 (C.A.), Russell L.J. stated:
A gratuitous promise, pure and simple, remains unenforceable unless given under seal. But where, as in this case, a party undertakes to make a payment because by so doing it will gain an advantage arising out of the continuing relationship with the promisee the new bargain will not fail for want of consideration.
See also MWB Business Exchange Centres Ltd v Rock Advertising Ltd, [2016] EWCA Civ 553.

[34] The respondent also points out that the New Zealand Court of Appeal built upon the reasoning in Williams v. Roffey Bros. in Antons Trawling Co. Ltd. v. Smith, [2003] 2 N.Z.L.R. 23 (C.A.). In that case the court held, at para. 93:
We are satisfied that Stilk v Myrick can no longer be taken to control such cases as Roffi Bros [sic], … and the present case where there is no element of duress or other policy factor suggesting that an agreement, duly performed, should not attract the legal consequences that each party must reasonably be taken to have expected. On the contrary, a result that deprived Mr. Smith of the benefit of what Antons promised he should receive would be inconsistent with the essential principle underlying the law of contract, that the law will seek to give effect to freely accepted reciprocal undertakings. The importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself. Where the parties who have already made such intention clear by entering legal relations have acted upon an agreement to a variation, in the absence of policy reasons to the contrary they should be bound by their agreement. [Emphasis added.]
[35] And recently, in Teat v. Willcocks, [2013] NZCA 162, [2014] 3 N.Z.L.R. 129, at para. 54, that same court, upholding the reasoning in Antons Trawling, observed:
[W]e are attracted to the alternative view expressed by this Court in Antons Trawling Co Ltd v Smith that no consideration at all may be required provided the variation is agreed voluntarily and without illegitimate pressure. This seems to us to reflect the reality of what happened in the present case – a variation was proposed and willingly accepted, and the parties proceeded on that basis. In the context of an existing agreement supported by consideration, that seems to us to be sufficient to constitute a binding variation. [Emphasis added, citation omitted.]
[36] The respondent relies most heavily on Greater Fredericton Airport Authority v. NAV Canada, 2008 NBCA 28 (CanLII), 229 N.B.R. (2d) 238, where the court held, at para. 31, that “a post-contractual modification, unsupported by consideration, may be enforceable so long as it is established that the variation was not procured under economic duress.” The court observed, at para. 28, that existing contracts are often varied and modified in response to contingencies not covered by the original agreement and in the interests of “commercial efficacy” such agreements should be enforceable with the modifications and variations. At para. 30, the court declared that “[t]he doctrine of consideration and the concept of bargain and exchange should not be frozen in time so as to reflect only the commercial realities of another era.”

[37] The appellant submitted that the court should accept that Gilbert Steel, whatever the doctrinal fate of its premises might be in other jurisdictions, was settled Ontario law and applies squarely to preclude enforcement of the 2005 document.


[43] While the developing case law outside Ontario suggests that the time might be ripe for this court to re-consider the role that consideration plays in the enforceability of contractual variations, in my view, Gilbert Steel was a fundamentally different case on the facts and its holding has no application to this case.

[44] The 2005 document lacks the formality of the LPA. As the application judge found, it was intended by Mr. Nadolny and Mr. Singhal to clarify the terms of the LPA. The potential for a dispute between the parties was plain enough on the language of Article 3.4 LPA to cause Mr. Singhal anxiety. On the facts, Richcraft was in no position to exert any kind of pressure on its senior partner, and Urbandale was not in a vulnerable position. The 2005 agreement was not, in my view, entirely one-sided in Richcraft’s favour.

[45] The observations of Angela Swan & Jakub Adamski, in Canadian Contract Law, 3d ed. (Markham: LexisNexis Canada, 2012), at para. 2.31, have merit here:
What is common to each type [of commercial exchange] is that the parties are exchanging commercial equivalents and that the reliance of each on the other permits needs to be satisfied and plans made. Because these relations are commercial exchanges, each party can obtain a benefit from the other’s performance and each may incur a detriment from its own performance.
[46] Certainty in a long-term, ongoing business relationship is of value to the contracting parties because it avoids disputes and allows the parties to plan both their own affairs and also the orderly and reasonable unfolding of their business relationship. In Gilbert Steel, the respective obligations of each of the contracting parties were already clear: Gilbert Steel was supplying fabricated steel; University Construction was purchasing it at an agreed-upon price. Therefore, it was also clear to see that when University Construction promised to pay a higher price than it had previously agreed, it received nothing in return over and above the steel to which it was already entitled under the contract.

[47] The appellant’s assertion that the 2005 document represented a compromise of its entitlement to a greater than equal share of the lots, or in other words, a promise for which it received no consideration, assumes that it was in fact originally entitled to a greater than equal share. However, in my view, under the original terms of the LPA it was far from clear how many lots Urbandale Construction and Richcraft were each entitled to under Article 3.4. That article entitled Richcraft to “such residential house lots to meet Richcraft’s needs”, with no limitation. The 2005 document clarified the issue of quantum: Richcraft was entitled to share equally in the available lots with Urbandale Construction. Clarifying an unclear term in a long-term contract, in order to create certainty and to avoid future costly disputes, enures to the parties’ mutual benefit, and is something of value that flows from and to each contracting party. It thus serves as a functional form of consideration.

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