Damages

• Author: John D. McCamus
• Pages: 971-1083

971

CHAPTER 22

DA M AGES

A. INTRODUCTION

The principal remedy available to a victim of a breach of contract is an

award of compensatory damages. Damage awards may be contrasted

with court orders that require 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

requires the party 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 princi-

ple and its operation. Further, an account is offered of the principles

that limit or reduce the scope of compensatory damage awards such

as the principle that the plaintiff cannot recover for losses that which

could have been avoided by reasonable steps taken in mitigation by the

plaintiff. In the typical case, the subject of compensation is economic

loss suffered by the plaintiff. It must be considered, however whether

compensation may also be awarded for certain intangible losses such

1 See Chapter 23.

THE LAW OF CONTR ACTS972

as the mental stres s and anxiety that the plaintiff may suffer as a result

of breach. As we will see, limited recognition has been given by the

common law to compensate for injuries of this kind.

Although the e xpectancy princ iple is the governing pri nciple, other

forms of monetary relief can be imagined. Thus, compensation could

be calculated on the basis 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 recovery of out-of-pocket

expenses incurred in reliance on the contract and other similar losses.

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

sure, is simila r to the general principle for calculating damages in a tort

claim. Occasionally, damages calculated on a reliance measure can be

awarded in a claim for damages for breach of contract on the basis of

the analysis considered further in this chapter. A further alternative

measure of relief would be to simply require the party in breach to

restore to the plaintiff b enef‌its that the plaintiff has confer red upon the

party in breach through 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

restitutionary relief in contract law.2

A further possible alternative 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 goods 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 analysis, the initial pur-

chaser would be entitled to recover only the difference between the

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

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 that in exceptional circumstances, the initial buyer might

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

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

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

correspond to any loss suffered by the f‌irst buyer. Disgorgement relief

2 See Chapter 24, Section B(1).

3 If in this si mple illustration, there are s ubstitute goods readily ava ilable to the

buyer in the market , the breach is likely to be con sidered “eff‌icient” and not

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

Damages 973

is generally considered to be a second type of a restitutionary mea-

sure of recovery that has a s its purpose the 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

restitutionary relief, it can be asked whether the victim of a breach of

contract may be able to seek punitive or exemplary damages against

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

being collected by the plaintiff. Under traditional doctrine, although

such awards have been made in a particular range of tort cases, awards

of punitive damages have had no place in t he law of contract. In recent

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 will be further considered below.6

Finally, the complexity and uncertainties that may complicate

the exercise of assessing damages in a breach of contract claim may

lead the parties to stipulate in their agreement the monetary 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 that are enforceable and those that are not will be

examined in the concluding part 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 expectancy 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 the benef‌its of performance rather than merely restoring

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

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

tiff recovery of all the 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 plaintiff whole in the sense

of restoring the plaintiff to the f‌inancial position the plaintiff was

4 See ibid.

5 Whiten v Pilot Insurance Co, [2002] 1 SCR 595 [Pilot Insurance].

6 See Section I, below in thi s chapter.