Nav Canada and the Greater Fredericton Airport Authority ("GFAA") were parties to an Aviation Services Facilities Agreement ("ASF Agreement") which included terms governing responsibilities for certain capital expenditures. As part of a $6,000,000 runway extension project, GFAA requested that Nav Canada relocate an instrument landing system to the runway being extended. Rather than relocate existing equipment, Nav Canada concluded that it made better economic sense to replace the navigational aid with another type labelled a distance measuring equipment ("DME"). It was GFAA's position that Nav Canada should pay the acquisition costs of $223,000 for the DME. In a letter to the Authority, Nav Canada stated that it would not provide for the purchase of the DME in its fiscal budget unless GFAA agreed to pay the acquisition cost. GFAA wrote to Nav Canada on February 20, 2003, indicating it would pay, but "under protest". On the basis of that letter, Nav Canada completed the work, and incurred the $223,000 expense. GFAA refused to pay.
The dispute was referred to arbitration. The arbitrator held that there was nothing in the ASF Agreement entitling Nav Canada to claim reimbursement for the costs of acquiring the DME. However, the arbitrator held that the subsequent exchange of correspondence between the parties gave rise to a separate and binding contract that was supported by consideration, and that Nav Canada was entitled to recover the acquisition costs on that basis. The arbitrator rejected the argument that the words "under protest" were sufficient to negate contractual liability. This ruling was overturned by the Court of Queen's Bench and Nav Canada appealed.
- Was there sufficient consideration to find that a contract was created, or the existing contract modified?
- Was the promise obtained under economic duress?
The Court of Appeal characterized GFAA's "under protest" letter promising to pay for the DME as a variation to the existing contract, however found that the arbitrator had erred in finding that the variation was supported by fresh consideration (and constituted therefore a binding agreement). The Court of Appeal took the opportunity, however, to examine in great detail whether the traditional rule requiring consideration should provide the answer, or whether there was good reason to move away from the strict application of the rule and offered several reasons:
- the doctrine in Stilk v Myrick was an unsatisfactory way of addressing the enforceability of post-contractual modifications as existing contracts are frequently varied and modified to respond to contingencies not anticipated at the time the initial contract was negotiated and the law must then protect legitimate expectations that the modifications or variations will be adhered to and regarded as enforceable,
- the courts should recognize that while some gratuitous promises are not bargains supported by consideration, there may be other sound reasons for enforcement,
- the 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; to the extent that the old doctrines interfere with the policy objectives underscoring the new, change is warranted.
Thus, the Court accepted that a post-contractual modification, unsupported by consideration, may be enforceable as long as it is established that the variation was not procured by economic duress.
On the issue of duress, the Court lays out a framework for deciding if a contract was established under coercion or economic duress. First, two conditions must be met:
- the promise must be extracted as a result of the exercise of pressure (a demand or a threat);
- the pressure must be such that the coerced party had no practical alternative but to agree.
If those conditions are present, it must then be determined if the coerced party legitimately consented to the item in the contract. Three factors must be analyzed:
- whether the promise was supported by consideration;
- whether the coerced party made the promise "under protest" or "without prejudice";
- whether the coerced party took reasonable steps to disaffirm the promise as soon as possible.
The Court found that in the circumstances of the case, GFAA had no practical alternatives. Nav Canada had exerted pressure to obtain what amounted to a contractual modification of the ASF Agreement. It was held that GFAA did not consent to the variation irrespective of the circumstances. In that regard, the Court noted both the "under protest" language and the absence of any evidence that GFAA otherwise acquiesced.
- A post-contractual modification, unsupported by consideration, may be enforceable as long as it is established that the variation was not procured by economic duress.
- To establish economic duress, two conditions must be met:
- the promise but be made under pressure (demand/threat);
- the pressured party must have no option but agreeing.
- If these conditions are met, three factors must be analyzed:
- was the promise supported by consideration?
- was the promise made "under protest"?
- were reasonable steps taken to disaffirm the promise?