Commercial Law Damages: Market Efficiency or Regulation of Behaviour?
| Author | Mr. Justice Robert J. Sharpe |
| Pages | 327-349 |
Commercial
Law
Damages:
Market
Efficiency
or
Regulation
of
Behaviour?
Mr.
Justice
Robert
J.
Sharpe"
A.
INTRODUCTION
Traditional
common
law
contract damage rules
focus
on the
economic
expectation
interest
of the
innocent party. Damages
are
entirely com-
pensatory
in
nature.
The law
does
not
measure
the
innocent
party's
loss
in
terms
of any
gain accruing
to the
party
in
breach.
If a
more
profitable
opportunity arises that involves
the
breach
of an
existing
contract,
a
con-
tracting party
is
free
to
pursue
it,
provided only that
the
other party's
expectation
losses
are
compensated. Damages
are not
intended
to
sanc-
tion moral wrongdoing
nor do
they
aim to
discourage contract breaking.
Traditional
contract damage rules
facilitate
a
free
and
open market con-
tract
by
providing contracting parties with
a
predictable
and
objectively
measured cost
of
breach.
In
this
paper,
I
will consider
a
number
of
developments that indi-
cate
an
increasing judicial reluctance
to be
bound
by
these traditional
rules
when
awarding damages
in the
commercial setting.
In
several
areas, courts appear
to be
chafing
under
the
restrictions
of the
tradi-
tional common
law
approach.
On
occasion, judges have
been
willing
to
craft
damages awards that mark disapproval
of the
wrongful
conduct
Robert
J.
Sharpe
is a
Justice
with
the
Court
of
Appeal
for
Ontario.
I
wish
to
thank
Erin
Shaw,
Law
Clerk
at the
Court
of
Appeal,
for her
assistance
in the
preparation
of
this paper.
327
*
328 MR.
JUSTICE ROBERT
J.
SHARPE
of
the
contract breaker
and
that
aim to
discourage such conduct
in the
future.
Restitutionary damages have been awarded
to
deprive
the
con-
tract
breaker
of the
profit
accruing
from
the
breach.
In
some
cases,
courts
have explicitly taken into account
the
moral quality
of the
contract-
breaker's conduct
as a
justification
for
increased damages.
In
other
cases,
the
compensatory goal
has
been abandoned
and
punitive awards have
been
made. Procedural changes
facilitating
class actions
in the
commer-
cial
context
are
motivated
by the
perceived need
to
sanction
wrongful
behaviour.
In
discussing these
developments,
my
approach will
be
descriptive
rather than prescriptive.
I
will report
on the
developments
I see and I
will consider possible explanations
for
these developments.
I do
not,
however, wish
to be
taken
as
supporting,
advocating,
or
even predict-
ing a
fundamental change
in the way
contract damages
are
awarded.
I
will
suggest,
rather, that
the
developments
I am
reporting
are
likely
to
remain
the
exception rather than
the
rule
and
that
the
traditional com-
mon law
approach will continue
to
dominate.
B.
THE
CLASSIC
MODEL:
MARKET
EFFICIENCY
Let
me
begin
by
sketching
out
certain
features
of
what
I
will
call
the
"classic"
model
of the
traditional common
law
rules
of
contract reme-
dies.
On
this theory, contract remedies
function
to
facilitate
an
efficient,
free,
and
open market
for
goods
and
services. Market
efficiency
requires
a
set of
clear
rules that
define
in
unambiguous terms
the
consequences
of
contract breach. While
the
common
law has
always
reflected
to
some
extent
the
basic moral principle that promises should
be
kept, when
it
comes
to the law of
contract remedies,
efficiency
trumps morality.
The
common
law
approach
to
contract remedies
may be
contrasted
with
the
civilian approach adopted
in
Quebec, where there
is a
general
principle that
no one
should
profit
from
his or her bad
faith
or
wrong-
doing.1
A
general obligation
of
good
faith
is one of the
basic principles
of
both contractual
and
extra-contractual responsibility
(or
tort,
as it is
known
to the
common
law).2
In
fact,
some commentators have
argued
1
National
Bank
of
Canada
v.
Soucisse,
[Soucisse];
Bank
of
Montreal
v.
Kuet
Leong
Ng,
[1989]
2
S.C.R.
429
[Ng];
Houle
v.
Canadian
National
Bank,
[Houle];
Bank
of
Montreal
v.
Bail
Ltee,
[Bail].
2
With
respect
to
contractual
obligations,
art. 1675
C.C.Q.
provides:
"The
parties
shall
conduct
themselves
in
good
faith
both
at the
time
the
obligation
is
created
and at
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