F. Limitations on Expectancy Damages

Author:John D. McCamus
Profession:Professor of Law. Osgoode Hall Law School, York University

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1) Causation

The party in default under an agreement is liable to the plaintiff only for such losses as have been caused by the breach. Issues of causation arise more frequently in the context of tort law than in contract cases. Presumably this is because contract law normally deals with economic loss whereas tort law normally deals with personal injury and property damage. Difficult issues of causation may, however, arise in a contractual setting. Moreover, the causation principle appears to underlie other rules relating to the calculation of contractual damages. Thus, as we have seen,107the proposition that a claim in the reliance measure for wasted expenditures is subject to an expectancy limitation is often explained on the basis of a causation principle. The loss resulting from the unprofitability of the agreement is caused by the plaintiff’s bad bargaining rather than the defendant’s breach. Further, causation issues may arise in cases where intervening forces, such as a decline in market values or the intervention of a careless third party, may have the effect of reducing the value of the defendant’s performance to the plaintiff. In such cases, the plaintiff may be unable to establish that all or part of the loss has been caused by the defendant’s breach. The plaintiff may argue in such circumstances, however, that but for entering into the agreement with the defendant, the loss would not have been sustained. The defendant’s response may be that though this is true, it was not the defendant’s conduct that was the effective cause of the loss. The contest in such a case, then, is between two competing versions of the concept of causation.108Where a claim concerns loss of value in an asset provided to the plaintiff under the agreement by the defendant and where the loss results from the careless intervention of a third party, it is easily seen, on causation principles, that the defendant should not be liable for the loss. The facts of Canson v. Boughton & Co.109are illustrative. The plaintiff was a purchaser of land under a transaction on which it had been represented by the defendant law firm. The defendant had failed to

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disclose certain material information to the plaintiff prior to the formation of the agreement. The plaintiff maintained that if all the facts had been disclosed by the defendant, it would not have agreed to purchase the land. Once the parcel had been acquired, the plaintiff built a large warehouse on the property. As a result of negligence on the part of the soils engineers and a pile-driving company, the warehouse sank into the earth and sustained considerable damage. Having failed to obtain complete satisfaction from the engineers and the pile driver, the plaintiff brought an action against the defendant law firm for damages arising from the non-disclosure. Arguably, the conduct of the defendant was either tortious or constituted a breach of contract. On these facts, the plaintiff can argue that but for the defendant’s misleading conduct, it would not have entered the transaction and, therefore, would not have suffered the loss. The Supreme Court of Canada accepted, however, that in either a tort claim or a claim for damages for breach of contract, the defendants could not be responsible "for the very substantial damages that arose from the actions of the engineering firm and the pile-driving company."110

More difficult questions may arise where the asset acquired under the transaction by the plaintiff suffers a loss in value as a result of market forces. In Waddell v. Blockey,111for example, the plaintiff had instructed the defendant, his agent, to buy a quantity of rupee paper. The defendant sold the plaintiff his own rupee paper, fraudulently representing that it was the rupee paper of third parties. The plaintiff then held on to the rupee paper for a period of months during which the market value of rupee paper declined steeply. The plaintiff sold the rupee paper at a significant loss and sought to recover that amount from the defendant. The claim was rejected on the basis that there was "no natural and proximate connection between the wrong done and the damage suffered."112The plaintiff was entitled to recover only such loss, if any, as resulted from the fact that he had sold the plaintiff his own rupee paper rather than that of a third party. The loss in value

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resulted from the plaintiff’s decision to hold on to the paper in a declining market. Moreover, one might add, it was the plaintiff’s decision, not the defendant’s, to invest in rupee paper in the first place. The British Columbia Court of Appeal came to a different result, however, on what might appear to be the similar facts of Allan v. MCLENNAN.113Allan, the plaintiff, had purchased from the defendant shares in the Bank of Vancouver on the faith of the defendant’s false statements that they were shares owned by the bank. The shares were actually owned by the defendant. If they were the bank’s own shares, of course, the purchase price would go to the bank. In fact, the price was received by the defendant. The shares were valueless. The trial judge accepted Allan’s evidence that he had relied on these representations and been induced by them to purchase the shares. Allan successfully sued the defendant for the loss sustained in purchasing the shares. Although this decision appears, on first impression, to be inconsistent with Waddell, the two decisions can be reconciled. The plaintiff in Waddell made the decision to invest in rupee paper and to hold it in a declining market. There is nothing in the report in the Allan case that suggests that the plaintiff had made a decision to buy shares in the Bank of Vancouver owned by any other party than the bank itself or, indeed, to buy any other shares of any kind. Unlike Waddell, then, Allan is a case in which there is no decision made by the plaintiff that is independent of the defendant’s misrepresentation and that may be said to have occasioned the loss.

The Waddell line of authority is, however, difficult to reconcile with the decision of the Supreme Court of Canada in Hodgkinson v. Simms.114

The plaintiff, Hodgkinson, was a stockbroker who had enjoyed a substantial increase in his employment income. As a result, he sought investment advice from the defendant Simms with a view to sheltering as much of his income as possible from taxation. Hodgkinson accepted Simms’ advice to invest in four so-called MURBS, a type of tax-sheltered real estate investment, not realizing that Simms had a relationship with the sellers of the MURBS pursuant to which Simms would receive a commission on these sales. With a subsequent downturn in the real estate market, Hodgkinson lost heavily on these investments. At trial, Hodgkinson’s evidence was that he would not have entered into these transactions but for Simms’ non-disclosure of his conflict of interest. On this basis, he claimed for the losses sustained on the MURB investments. The defendant, relying on the Waddell line of authority, argued that given Hodgkinson’s interest in tax shelters, he would nonetheless

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have invested in real estate tax shelters even if he had known of Simms’ conflict of interest. Accordingly, Hodgkinson would have sustained similar losses in any event. Hodgkinson’s decision to invest in real estate shelters was not induced, or so it was argued, by Simms’ non-disclosure. Although the Court divided on this point, a majority held that Hodgkinson was entitled to recover his full losses from Simms. La Forest J. held that the defendant’s suggestion that Hodgkinson would in any event have invested in real estate tax shelters simply flew in the face of the findings at trial, which had been upheld in the Court of Appeal. Further, it was his view that in any event, in a case of this kind, "the onus is on the defendant to prove that the innocent victim would have suffered the same loss regardless of the breach."115The defendant had not successfully established at trial that Hodgkinson would have invested in real estate in any event. More generally, La Forest J. was of the view that "[f]rom a policy perspective it is simply unjust to place the risk of market fluctuations on a plaintiff who would not have entered into a given transaction but for the defendant’s wrongful conduct."116

In their dissenting opinion in Hodgkinson, however, Sopinka and MCLACHLIN JJ. reasoned as follows:

In our view, it cannot be concluded that the devaluation of the appellant’s investments arose naturally from the respondent’s breach of contract. The loss in value was caused by a downturn which did not reflect any inadequacy in the advice provided by the respondent. We would reject application of the but for approach to causation in circumstances where the loss resulted from forces beyond the control of the respondent who, the trial judge determined, had provided otherwise sound investment advice.117The minority stopped short, however, of making a clear finding that, in their view, Hodgkinson would have invested in real estate tax shelters even if he had been aware of Simms’ conflict of interest.

The Hodgkinson court appeared divided over the question of the continuing validity of the Waddell line of authority. La Forest J. saw an irreconcilable conflict between Waddell and Allan and indicated a preference for the latter. Sopinka and MCLACHLIN JJ. placed reliance on

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Waddell in departing from a simple "but for" test on the present facts. It is likely, however, that on facts similar to Waddell, the claim for investment losses would fail, as it did in that case. If Hodgkinson had made a clear decision to invest in real estate tax shelters before meeting with Simms, his claim would surely have failed. Simms would not have caused the loss. Accordingly, the preferable explanation for the majority view in Hodgkinson is that the Court...

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