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.
6 See Section I, below in thi s chapter.
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