Damages

• Author: John D. McCamus
• Pages: 871-974

871

CHAP TER 22

DA M AGES

A. INTRODUCTION

The principal remedy available to a victi m of a breach of contract is an

award of compensatory damages. Damage awards may be contrasted

with court orders that requi re the party in breach of contract either to

perform the contract or to refrai n from conduct that amounts to a breach

of contract. Such orders, sometimes referred to as “coercive” remedies,

were granted in exceptional circumstances by courts of equity and will

be the subject of treatment in a subsequent chapter.1 Compensatory

damages are, however, the usual remedy for breach of contract. The

governing principle for calculating compensatory damages in a claim

for damages for breach of contract is the expectancy principle that re-

quires the part y in breach to pay, as damages, an amount of money that

will provide the victim of the breach with the f‌inancial equivalent of

performance. In this chapter, we examine the expectancy principle and

its operat ion. Furt her, an account is of fered of the pr inciples that li mit

or reduce the scope of compensatory damage awards such a s the prin-

ciple that the plaintif f cannot recover for losses that which could have

been avoided by reasonable steps taken in m itigation by the plaintiff. In

the typical ca se, the subject of compensation is economic loss suffered

by the pla intiff. It must be considered, however whether compen sation

may also be awarded for certain intangible losses such a s the mental

1 See Chapter 23.

THE LAW OF CONTR ACTS872

stress and anxiety that the plaintiff may suffer as a re sult of breach. As

we will see, limited recognition has been given by t he common law to

compensate for injuries of this k ind.

Although the expecta ncy principle is the governi ng principle, other

forms of monetary relief can be i magined. Thus, compensation could

be calculated on the basi s of a principle that would restore the plain-

tiff to the position he or she was in prior to entering the contract. On

this basis, the plaintiff would be awarded recover y of out-of-pocket ex-

penses incur red in reliance on the contract and other sim ilar losses.

This measure of relief, referred to in contract law as the reliance meas-

ure, is similar to t he general principle for calculating dam ages in a tort

claim. Occasionally, damages ca lculated on a reliance measure ca n be

awarded in a claim for damages for breach of contract on the basi s of

the analysis considered further in thi s chapter. A further alternative

measure of relief would be to simply require the part y in breach to re-

store to the plaintiff benef‌it s that the plainti ff has conferred upon the

party in breach th rough performance of the agreement. Such awards

are considered to be restitutionary in nature. The availability of resti-

tutionary relief in the context of contract breach will be considered in

Chapter 24, which provides a more general examination of the role of

restitutionar y relief in contract law.2

A further possible altern ative measure of relief — disgorgement of

prof‌its— has emerged in recent years. A party in breach of contract

may enjoy a prof‌it as a result of the contract breach. Thus, a seller of

goods who refuses to deliver the good s to a f‌irst purchaser might prof‌it

by selling the very goods in question to a second purchaser at a much

higher price, indeed, let us assume a price that is higher than the mar-

ket price. Under the traditional expectancy an alysis, the initial pur-

chaser would be entitled to recover only the difference between the

initial sale price and the market price. Thus compensated, the initi al

purchaser could acquire a substitute in the market and would be in as

good a position as he or she would have been in if the contract had been

performed. There is recent Canadian and English authority, however,

suggesting th at in exceptional circum stances, the initial buyer might

be entitled to recover all the seller’s prof‌its on the second tra nsaction.3

This type of relief, ty pically referred to as “disgorgement” relief, is not

truly compensatory i n nature. The seller’s prof‌it does not necessarily

correspond to any loss suffered by t he f‌irst buyer. Disgorgement relief

2 See Chapter 24, Section B(1).

3 If in this si mple illustration, there a re substitute goods readi ly available to the

buyer in the market , the breach is likely to be cons idered “eff‌icient” and not

subject to disgorgement rel ief. See further Chapter 24, Sect ion B(2).

Damages 873

is generally considered to be a second ty pe of a restitutionar y measure

of recovery that has a s its purpose t he stripping of the defendant’s ill-

gotten gains. It will be examined separately in the context of a more

general discussion of restitutionary relief.4

As a further alter native to these various forms of compensatory and

restitutionar y relief, it can be asked whether the v ictim of a breach of

contract may be able to seek punitive or exemplar y damages again st

the party in breach. Such awards would amount, in effect, to civil f‌ines

being collected by the plaintiff. Under traditional doctri ne, although

such a wards have bee n made in a p articular r ange of tort cas es, award s

of punitive d amages have had no place in t he law of cont ract. In re cent

years, however, the Supreme Court of Canada has recognized the pos-

sibility of awarding punitive damages in contract cases.5 The current

Canadian law on this issue w ill be further considered below.6

Finally, the complexity and uncertainties that may complicate

the exercise of asse ssing damages in a bre ach of contract claim may

lead the parties to st ipulate in their agreement the monetar y conse-

quences of breach of contract. Although provisions of this kind are

commonly included in agreements, they are not invariably considered

to be enforceable by the courts. The analysi s underlying the distinction

between those terms t hat are enforceable and those that are not will be

examined in the concluding pa rt of this chapter.

B. THE EXPECTANCY PRINCIPLE

1) The Basic Principle

The basic principle for calculating an award of damages in a contract

claim — the e xpectancy principle — has the objective of providing the

plaintiff with a monetary equivalent of performance. The expectancy

principle is forward-looking in the sense that it attempts to secure for

the plaintiff t he benef‌its of performance rather than merely restoring

the plaintiff to t he position he or she was in before the contract was cre-

ated. The latter objective could be served by simply awarding the plain-

tiff recovery of all t he out-of-pocket expenses sustained in reliance on

the contract. Reimbursement of such losses as have been incurred in

reliance on the contract would make the pla intiff whole in the sense

4See ibid.

5Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595 [Pilot Insurance].

6 See Section I, below in th is chapter.