Canada: Important Ruling From Ontario Court Of Appeal On Damage Awards For Breach Of Contract

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Litigation & Dispute Resolution, June 2011

On June 20, 2011, the Ontario Court of Appeal released its decision in Agribrands Purina Canada Inc. v. Kasamekas. This bulletin focuses on an aspect of the Agribrands decision that will impact damage awards in breach of contract cases and, as a result, on how breach of contract cases will be litigated in the future.

Before Agribrands, the 2004 leading Supreme Court of Canada case in Hamilton v. Open Window Bakery Ltd. established that where there are multiple ways in which a contract might be performed, for purposes of assessing damages, courts should adopt the mode that is least profitable to the plaintiff and least burdensome to the defendant. There was uncertainty, however, as to whether this approach to assessing damages would apply even in the absence of good faith on the part of the party found to be in breach. As a result, plaintiffs in breach of contract cases would invariably claim that there had been bad faith and that, as a result, damages could not be capped.

The Court in Agribrands has now clarified that damages should always be calculated on the assumption that the defendant would have performed the agreement in the least burdensome fashion, even absent good faith. This finding brings greater certainty as to how damages will be calculated in breach of contract cases and will impact how breach of contract cases are litigated going forward.

Trial Decision

At issue in Agribrands was a dealership agreement giving territorial exclusivity to the plaintiff. The terms of the dealership agreement allowed either party to terminate the contract on 60 days' notice.

The trial judge found that Agribrands Purina Canada Inc. (Purina) had breached the territorial exclusivity provisions of the dealership agreement.

On application of the principle from Hamilton, assuming that the agreement would have been performed in the mode least burdensome to the defendant, the maximum amount of damages that the plaintiff could recover against Purina were those that would have been suffered had the defendant given 60 days' notice to terminate. The trial judge found, however, that as there had been an absence of good faith on the part of Purina, the damages were not limited to 60 days. Instead, he found that, absent a breach, the contract would have continued indefinitely and ordered damages for breach of contract in the amount of C$2,096,406 and punitive damages of C$30,000.

Court of Appeal Decision

The Court of Appeal found that the trial judge erred in finding that absent good faith damages should be calculated as if the contract would have been renewed indefinitely. The Court stated that "there was no finding by the trial judge in Hamilton that Open Window had acted in good faith at all material times. Nor is there any suggestion in the Supreme Court's decision that good faith conduct is a pre-requisite for the least burdensome principle to apply." The Court went on to note that "the contract gave Purina the unconditional right of cancelling the agreement on sixty days' notice. This was the mode of performance least burdensome to Purina and therefore constituted its maximum exposure for damages for breach of the contract with Raywalt."

On the basis of these findings, the Court of Appeal reduced damages significantly to C$198,655.83. The punitive damage award of C$30,000 was upheld.

Conclusion

Following Agribrands, the value of most pure breach of contract cases should be more readily determinable, as it is now clear that the conduct of the defendant will not impact the general damage award. The conduct of the party in breach can still lead to punitive damage awards, as it did in Agribrands. On the whole, however, the case brings greater certainty to this area of the law.

Greater certainty respecting the value of such claims may facilitate resolution. It is fair to expect, however, that claimants will continue the trend of disguising breach of contract claims as tort claims in an attempt to avoid the limits that the terms of the underlying agreement impose on the value of their claim.

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