Contracts – Midterm Course Summary

Damages

The Basics

  1. Expectation Damages
  • The presumptive starting point for damages.
  • Goal is to put the innocent party in the position they would have been in, had the contract been fully performed.
  • Formula: [Reliance Damages] + [Lost Profits] = [Expectation Damages]
  • If Expectation Damages are too speculative or are otherwise inappropriate, the courts may move to 2: Reliance Damages.
  1. Reliance Damages
  • Goal is to put the innocent party in the position they would have been in, had they never entered the contract.
  • Includes expenses incurred in reliance on the contract.
  • Subject to the duty to mitigate.
  • If there are no Reliance Damages, or if they are otherwise inappropriate, the court may move to 3: Restitution Damages.
  1. Restitution Damages
  • The breaching party must give back the ‘unjust enrichment’ to the innocent party.

Cases

  1. Peeveyhouse v. Garland Coal:
  • Facts: Garland agreed to perform expensive land repair when done, then breached. Court held that the cost of performance was all out of proportion to the increase in value of the land, so awarded only that difference in value ($300.00 instead of $29,000.00.)
  • Land restoration was an incidental clause in the contract.
  • Court didn’t believe Peeveyhouses would use money to restore land.
  • Economic waste: courts are sympathetic to efficient breach.
  • Relevance: ‘Cost of performance’ is the normal starting point for expectation damages, but not where they are all out of proportion to the benefit gained.

Problems in Damages

  1. Consumer Surplus
  • Applies only to consumer contracts, not commercial contracts.
  • Nominal damages may be awarded to reflect ‘loss of amenities’.
  • Consumer surplus = the amount above market value that you would be willing to pay. Courts may factor in ‘reasonableness’ of this value.
  • Cases:
  • Radford: Neighbour refused to build stone wall, which wouldn’t have affected land value. Court awarded specific performance; ‘privacy’ was being contracted for.
  • Ruxley: Pool was not built to specified dimensions, but this didn’t affect the property value. Court awarded nominal damages.
  1. Sale of Goods – Lost Opportunities
  • Applies only to contracts for sale of goods (not land!).
  • Occurs where someone breaches a contract to buy an item, so the seller has to then find someone else to sell it to.
  • Standard formula: [Market Price] – [Sale Price] = [Damages]
  • Where [Market Price] = [Sale Price], some reliance damages may be awarded if seller had to, for example, incur extra advertising expenses.
  • Special exception: Dealers
  • ‘Lost Volume’: if the dealer must sell the same item twice, they have lost the opportunity to sell another unit, and thus lost the profits on that unit.
  • If Supply > Demand: damages are the lost profit from the sale.
  • If Demand > Supply: there are no lost profits.
  • Cases:
  • Victory Motors: Car dealership case. Affirms the above principles.
  1. Quantum of Expectations is Too Speculative
  • Where it is almost impossible to know what the profits would have been, courts may move to reliance damages.
  • Plaintiff cannot move to reliance damages when they exceed expectation damages. So if defendant can show costs would have exceeded profits regardless, they can get around this.
  • ‘Chance at a Chance’: formula is [Expectation Damages] x [Probability of Success]. The ‘cutoff’ is 20% success rate or less: below this, courts will not award expectation damages.
  • Cases:
  • Anglia Television Ltd v. Reed: Actor backed out of a movie contract, and movie didn’t get made. Court said plaintiff can elect for reliance damages (in this case pre-contractual expenses) where they can’t prove what expectations were. Important: actor was a sophisticated party in the movie industry, so should have contemplated those expenses. This case is often distinguished on that basis.
  • Bowlay Logging v.Domtar: Bowlay relied on Anglia, thinking they could elect reliance damages, but Domtar proved Bowlay had underestimated costs and would have lost money regardless. Court held reliance damages should not be used to put plaintiff in a better position than they would have been in via performance.
  • Hicks: Beauty contest. Established ‘Chance at a Chance’ formula.
  • Tex Mall: Agent failed to get property re-zoned, but courts said there was only a 20% he would have succeeded anyway; applied ‘chance at a chance’ formula.
  • Carson: Oil drilling is very speculative; ‘chance at a chance’ was too low to award any expectation damages at all.
  • Eastwalsh: Established 20% or less cutoff for ‘chance at a chance’ damages.

Remoteness

  • The Hadley Principle: Damages must 1) arise naturally from the breach and 2) be in the reasonable contemplation of the parties at the time of contract formation.
  • ‘Arise Naturally’: the kind of predictable consequences that would normally arise from such a contract.
  • ‘Reasonably Foreseeable’: based on what parties knew, and what they ought to have known. (Party sophistication will be factored in.)
  • The burden is on the defendant to establish that a damage was too remote.
  • Special circumstances: where unusual damages would result from breach:
  • The onus is on the relying party to communicate those issues.
  • The other party must accept the special risks.
  • Cases:
  • Hadley v. Baxendale: Broken mill shaft. The seminal case setting out the Hadley rule.
  • Victoria Laundry: Lucrative dyeing contracts could not be claimed, because they failed to notify the other party. However, engineers were a sophisticated party, so general knowledge of laundry works was imputed to them. Thus, normal loss of profits could be claimed.
  • Horne v.Midland:Shoe manufacturer during the Napoleonic wars. Delivery was late, and thus refused. Manufacturer had told carrier that prompt delivery was important, but not why, so special profit loss could not be claimed. This case introduced principle that defendant must also accept the special risks.
  • Cornwall: Cornwall lost a contract because Purolator delivered their tender late. Special circumstances had been communicated, and Purolator was deemed to have accepted them because of their advertising about their reliable delivery.

Non-Pecuniary (i.e. psychological harms) Damages

  • The general rule is that there is no compensation in contracts for non-pecuniary damages. In order to move away from this presumption, you must fit your case into one of the narrow categories of exceptions. (Such as aggravated damages, which required an independent actionable wrong.)
  • Post-Fidler, this is no longer necessary; mental damages are treated as physical damages, can flow directly from the breach, and can be claimed so long as they fit the Hadley rule re: reasonable foreseeability.
  • Mental distress damages are part of ‘general damages’, which also includes expectation, reliance and restitution. The other two kinds of damages are ‘aggravated’ damages and ‘punitive’ damages, discussed below.
  • Requirements to claim mental distress damages:
  • Plaintiff must prove that a psychological benefit was part of the contract.
  • The damage resulting from breach must have been reasonably foreseeable (based on actual or imputed knowledge) at time of contract formation.
  • The degree of distress must be sufficient to merit damages.
  • In employment contracts, this works differently. (See next section.)
  • Cases:
  • Attis v. Gramophone Co.: Lays out the ‘no recovery for non-pecuniary damages’ rule.
  • Jarvis v.Swan Tours: Bad Swiss vacation. Since ‘enjoyment’ was an essential element of the contract, it could be recovered for.
  • Farley: ‘Enjoyment’ doesn’t need to be the core of the contract, just a very important part of it.
  • Wilson v.Sooter Studios: Bad wedding photos. Court awarded $1000.00 for ‘consumer surplus’.
  • Wharton v. Tom Harris Chevrolet: Luxury car with bad sound system. Court held that because it was a luxury item, part of the contract was for pleasure. Also, the mental distress arose not from the breach itself, but from physical discomfort caused by the breach.
  • Warrington v.Great West Life:Disability insurance wouldn’t pay out on chronic fatigue syndrome. Court held that all insurance contracts are ‘peace of mind’ contracts, but the decision not to pay must also be made in bad faith before mental distress damages are available.
  • Fidler v. Sun Life Insurance: Another ‘chronic fatigue syndrome’ case. Here her policy required that she be unable to do any job, whereas SLI’s video surveillance suggested to them that she could work. Aggravated damages were awarded by SCC, but not punitive damages. Lays out modern principles for psychological harms.

Damages in Employment Contracts

  • There are four kinds of employment damages:
  • 1. Reasonable Notice Damages
  • Employer may fire employee at any time for any reason, but it is implied in every employment contract that they will give reasonable notice.
  • Reasonable notice can be given either via advance notice or equivalent pay, at employer`s option.
  • Courts award reasonable notice damages as a period of time. It is up to the parties to determine the dollar value of that amount of time.
  • 2. Wallace Damages
  • A ‘bump up’ on the Reasonable Notice period, (usually an extra 1-6 months), where manner of firing was in bad faith.
  • Court held that the damages flowed not from the breach itself, but from the manner of the breach.
  • No longer applies to Mental Distress, but may be used where the manner of firing makes it harder for you to get a new job for other reasons, such as where employer falsely alleges fraud.
  • 3. Aggravated Damages
  • Requires an IAW, usually found in a breach of statute or nominate tort.
  • 4. Punitive Damages
  • See next section
  • Cases:
  • Vorvis: Employee was humiliated and bullied into leaving. Court found an independent actionable wrong, and so awarded mental distress damages as aggravated damages.
  • Wallace: Courts couldn’t find an IAW, so introduced Wallace Damages instead.
  • Keyes: Took Mental Distress out of Wallace Damages and made them a separate head of damages.

Punitive Damages

  • Exceptionality: Punitive damages are very rare. They require an IAW and reprehensible behaviour. The IAW can come from tort, breach of statute, or breach of another important term of the contract.
  • Rationality: The court must tie the damages to at least one of the following rationales: punishment, deterrence or denouncement.
  • Proportionality: the amount awarded should be the bare minimum necessary to achieve the rational objective.
  • In insurance contracts, the court will imply two terms in the contract which can form the basis of an IAW:
  • 1. The Duty to Pay: the insurance company must pay when the thing that is contracted for is lost or destroyed.
  • 2. The Duty to Act in Good Faith: the insurance company must review all evidence in their possession, and must also investigate any other evidence if they are aware of its existence.
  • The insurance company may not delay payment so as to put financial pressure on the claimant.
  • The insurance company may not go looking for loopholes in the contract; if they decline to pay, it must be based on a reasonable interpretation of the contract.
  • The insurance company does not have to be correct – if they make a mistake in good faith, punitive damages will not be awarded.
  • Cases:
  • Whiten v. Pilot Insurance:Insurance company tried to fake evidence that claimant had committed arson on their own house, thinking they could not afford to pursue litigation.
  • Fidler v. Sun Life Assurance: see above.

Mitigation

  • The plaintiff may not recover damages which they could reasonably have avoided after the breach.
  • The burden is on the defendant to show insufficient mitigation. The plaintiff may then defend the measures they took (or didn’t take). The standard is what a reasonable businessperson/consumer would have done, but the courts tend not to second-guess the efforts of the plaintiff given that they probably had to scramble.
  • Impecuniosity: plaintiff bears the risk, b/c it is unreasonable to expect the other party to have the financial stability of the plaintiff in mind at time of contract formation.
  • Narrow exception: in the case of a consumer contract for land, if specific performance is impossible, courts may allocate risk of impecuniosity to the defendant.
  • Doctrine of Election: in a fully executory (i.e. neither party has begun performance) commercial contract, where one party announces an anticipatory breach (i.e. “I will not perform on the relevant date), the other party may elect to perform rather than accept the repudiation of the contract. If they accept repudiation they must mitigate and may then sue for breach, but if they elect to perform they need not mitigate and can sue for the value of the contract.
  • Qualification 1: this is only available where the plaintiff can perform the contract unilaterally, i.e. with ho assistance from the breaching party.
  • Qualification 2: this is only available where the plaintiff has a legitimate interest in performance, financial or otherwise. This is quite hard to prove.
  • Cases:
  • Payzu Limited v. Saunders:Based on bad information, defendant cancelled plaintiff’s line of credit, but still offered to sell silk at a discount. Plaintiff refused out of pique. Court held that plaintiff should still have dealt with defendant in order to mitigate damages b/c it is more economically efficient. (Personal feelings are not relevant to commercial contracts, except contracts for personal services.)
  • Roth v.Tyler: Establishes narrow exception to impecuniosity rule. Courts couldn’t order specific performance because man who sold the land didn’t own it.
  • White and Carter v.McGregor: Ads were put on dustbins despite repudiation of contract. Established doctrine of election.
  • Finelli v.Dee: Contractor could not elect to perform because they required defendant’s permission to go on his land and pave his driveway.

Time of Measurement of Damages

  • Presumptive rule: Damages are measured from the time of the breach.
  • However, the court may, at its discretion, set another date up to and including the date of trial, where:
  • The value of the goods contracted for is fluctuating rapidly in the marketplace, and,
  • The plaintiff is seeking specific performance.
  • Cases:
  • Asamera Oil Corp. v. Sea Oil: Loaned shares were not returned, and had gone up rapidly in value. Plaintiff sought specific performance because it could not mitigate – there were no other shares to be bought. Court set time of damages closer to the date of trial.

Equitable Remedies

Specific Performance

  • A court order to perform the contract.
  • Damages are the presumptive remedy. Specific performance is available only where the plaintiff can establish that they are inadequate.
  • Specific performance is always a discretionary remedy. The court is never required to award it.
  • Specific performance is almost never awarded in commercial contracts, and is never awarded in personal service contracts.
  • Unique goods will generally qualify for specific performance.
  • Goods can be unique by their nature, or due to circumstances.
  • In contracts involving land, the presumption used to be reversed – specific performance was the presumptive remedy. This is no longer the case (because of ‘cookie-cutter’ development lots), but it is still very easy to establish that land is a unique good.
  • Cases:
  • Sky Petroleum: Cheap gasoline was held to be a unique good during the oil crisis.

Injunctions

  • A court order to stop breaching a contract.
  • Three doctrinal requirements for an injunction to be awarded:
  • 1. A negative clause in the contract (i.e. a promise not to do something.) This will occasionally be implied by the courts, but must usually be explicitly stated.
  • 2. The plaintiff must show that damages are inadequate. (Usually because they are too difficult to quantify.)
  • 3. The effect of the injunction must not amount to specific performance. (Particularly in contracts for personal services – the injunction must not effectively force you to remain with your former employer.)
  • Non-competition clauses: an agreement not to compete with, for example, an employer you are leaving, or a business you have just sold. A form of negative covenant.
  • If these are too severe because they unduly constrain one party from going out into the marketplace and earning a living, the court may strike them down fully or partially as a ‘contract in constraint of trade.’
  • However, the court has distinguished between ‘compelling’ someone to perform an contract and merely ‘inducing’ them to because it is more attractive than the remaining post-injunction options.
  • Cases:
  • RBC v. Merryl-Lynch: RBC employees were recruited en-masse by Merryl-Lynch. They also called their clients before moving and told them about the switch. The courts upheld the non-competition clause and awarded heavy damages.
  • Lumley: Opera singer was barred from singing in anyone but the plaintiff’s opera-houses. Court said this was not specific performance because she didn’t have to sing. Time and place (injunction was only for three months, and only applied to England) may have played a factor in this decision.
  • Warner Bros Pictures In v. Nelson: Bette Davis had a negative covenant that she would not act for any other companies. Warner Bros showed that damages were too speculative, and courts held that it was not specific performance because she could earn some other living.

Contract Formation

Basic Theory

  • Three steps to contract formation:
  • 1. Offer
  • 2. Acceptance
  • 3. Consideration
  • Factors courts will consider in deciding whether there was a contract:
  • Unfair surprise: were the parties aware that they were taking on legal obligations?
  • Reasonable expectations: people who receive promises should be able to count on them wherever possible, particularly when combined with reasonable reliance.
  • Reasonable reliance: did the promisee rely on the promise made? Was that reliance reasonable?

Offer