Callow in More Ways Than One: The Supreme Court Causes More Confusion in Contract.

• Author: Maharaj, Krish
• Position: Canada

1. INTRODUCTION

   In recent years, the parameters of ordinary damages for breach of contract have been somewhat blurred by decisions purporting to award "contract damages" without adhering to the "contract measure." This has not yet had a noticeable deleterious effect on wider contract and damages jurisprudence. However, given that the decisions in question are from the Supreme Court of Canada, it appears necessary to challenge and correct the misunderstandings present. In this article, I will address a key misunderstanding evident in relation to the nature of contract damages in the majority decision in CM Callow Inc v Zollinger. (1)

   Many will already be familiar with Callow's facts and its outcome, but to contextualize the later discussion and identify the source of my concern, I will briefly recap the facts and holding. The case, in short, involved a winter maintenance contract (including work such as snow removal) between Callow and a group of condominium corporations in Ontario represented by a joint use committee (the defendants) that covered the period from November 1, 2012, to April 30, 2014. (2) Callow was apparently led to believe that its performance under the contract was satisfactory despite some early performance issues. (3) The Supreme Court accepted that this led Callow to believe that the winter maintenance contract was not in jeopardy, which subsequently turned out to be untrue. (4) In reality, the defendants had decided in March or April 2013 to terminate the contract, but only did so in September 2013 so as not to jeopardize Callow's performance under a separate summer maintenance contract. (5) Termination occurred on ten days' notice as permitted, but came as a surprise to Callow given what had been communicated about the quality of the work done. (6) A majority of the Court held in two separate judgments that this deception was a breach of the defendants' duty of honest performance and confirmed an award of damages equivalent to the value of the balance of the contract. (7) The Supreme Court's view of the remedy was that it was necessary because Callow had foregone the opportunity to bid on other contracts for the second winter, and that it was justifiable (in the majority's opinion) under the expectation measure despite the Court's emphasis on reliance and the fact of the termination clause. (8) It is these latter two points relating to the assessment of the award that I will focus on in my critique of the case.

   Before getting to the crux of my critique of Callow, however, I will first explain the nature of contract damages for context. I will then turn to explain how the majority position in Callow is incorrect, as well as the position taken in relation to the same matter in the Court's earlier decision in Bhasin v Hrynew. (9)

2. EXPECTATION VS. RELIANCE

   Expectation damages are inherent in contract. (10) So inherent, in fact, that they are frequently referred to simply as "contract damages," and the expectation measure as the "contract measure." (11) As such, one could be forgiven for thinking that the expectation measure and the idea behind it are universally understood. In light of the recent decisions referred to above, however, these fundamentals bear some review.

   The expectation measure is a paradigm for the assessment of damages that is geared towards vindicating the injured party's expectation interest. (12) An expectation interest is quite literally the relevant party's interest in obtaining benefits they could have expected to get had the relevant "injury" not occurred. (13) It is this interest that contract is most concerned with, and it is clear that contract is the legal context where regard for such an interest and the application of such a measure for damages makes the most sense, since contracts are prospective by nature and thus invariably involve expectations--typically of benefit. Of course, it is possible to find occasions outside of contract in which expectations are also engaged. (14) But, it is worth noting that the expectation interest and associated measure of damages first arose in contract and have prevailed there since at least Robinson v Harman. (15) One should also note that expectation's emphasis on benefits or betterment is particularly appropriate for contract, given that the relevant "injury" in a contract case is frequently not an injury in the common sense of having made the relevant party worse off in some way, but is often instead no more than a failure to have made the relevant party better off. (16) I note that this approach makes contract damages seem rather generous, and in some respects that is a fair assessment. (17) There are, however, intrinsic limits as to how far the expectation measure can go in relieving a disappointed plaintiff, although they may not be readily apparent. Fortunately, these limits become clear if one contrasts expectation with its long-time rival, reliance, which I will do after first explaining the reliance concept in contract law next.

   The reliance interest and reliance theories of contract first entered modern contract discourse in 1936 with the publication of Lon Fuller and William Perdue's seminal article, "The Reliance Interest in Contract Damages." (18) This so-called "reliance interest" was explained by Fuller and Perdue as the plaintiff's interest in being able to rely on their contract in making other and further decisions. (19) The reliance measure, which is the paradigm of damage assessment geared towards vindicating a plaintiff's reliance interest, is assessed so as to ensure that the plaintiff is no worse off as a result of a breach than they would have been had the contract not been breached. (20) This, the learned authors contended, was ethically superior to expectation as manifestations of corrective rather than distributive justice in the Aristotelian sense, and arguably already reflected in the law itself. (21) Although, none of the modern authorities appeared to actually admit to protecting a distinct reliance interest or employing a reliance measure, or at least not at the particular time that the authors were writing. (22) Academic and professional audiences were undeniably impressed by the authors' analysis, however, and it is fair to say that reliance theories of promissory liability only entered the fray of modern contract theory as a result of Fuller and Perdue's work.

   Although reliance theories only came to prominence in contract discourse after Fuller and Perdue's work, one should note that support for their position can be found both before and after their seminal article. (23) The former can arguably be found as far back as the reign of Elizabeth I, at which time assumpsit was arguably understood to be an action to recover the value of reliance a party had placed on a promise, rather than the value of the promise itself. (24) The latter can be found in the English Court of Appeal's seminal decision in Anglia Television Ltd v Reed nearly 30 years later. (25) Readers will recall that Anglia Television is noteworthy for being the first decision in the modern era to explicitly hold that wasted expenditure could be recovered in contract notwithstanding uncertainty about the relevant contract's profitability for the plaintiff, which gave credence to the argument that reliance was an interest protected by contract quite apart from expectation. In the particular case, this led to Anglia being able to recover production costs for a show that were wasted because of the defendant actor's decision to withdraw from the project, even though the plaintiff production company could not show that the project would have been profitable and that the production costs would not have been wasted in any event. (26) But, as we know, if there was support for the view that contracts protect reliance rather than expectation, or that reliance constitutes a separate interest protected under contract, that support was short-lived in the wider jurisprudence.

   Reliance's fall from favour in the Commonwealth came later than it appears to have in the United States, (27) but only a few short years after Anglia Television suggested that reliance may have a life of its own in contract. The end began with the seminal British Columbia Supreme Court decision of Justice Berger in Bowlay Logging Ltd v Domtar Ltd in 1978. (28) Thereafter, appellate courts in other leading Commonwealth jurisdictions disavowed reliance as a distinct interest protected in contract, including England in 1983 (29) and Australia in 1991. (30) The reasons for this uniform rejection will be explained next using Bowlay as an example. Before doing so, I should reiterate that my reasons for exploring Bowlay's rejection of the reliance interest are to explain the intrinsic limits on contract damages referred to above and to establish--specifically for the later discussion of the Supreme Court's recent work--what contract damages are, and just as importantly, what they are not.

   The litigants in Bowlay were parties to a contract under which Bowlay was to cut timber on Domtar's behalf. (31) Domtar, for its part, was to supply trucks to transport the timber to its yard in the town of Golden, British Columbia. (32) Unfortunately for Bowlay, however, logistical challenges caused Domtar to provide fewer trucks than anticipated. Bowlay alleged that this was a breach of the parties' contract and that it prevented Bowlay from being able to carry out the contract efficiently, which led to Bowlay being forced out of business. (33) Bowlay sued Domtar for breach of contract on this basis and claimed damages for the out-of-pocket expenses that it incurred while attempting to perform its part of the bargain. (34) What Bow-lay notably did not sue for, though, was lost profits. (35)

   Domtar defended Bowlay's claim against it on the basis that Bowlay would have lost money on the contract even if there had been no breach, and that it would have only lost more had the...