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Calculating Contract Damages

. Hamilton v. Open Window Bakery Ltd.

In Hamilton v. Open Window Bakery Ltd. (SCC, 2021) the Supreme Court of Canada considered the damage quantum in a contract case where the defendant wrongfully repudiated a contract and there were options over calculating the quantum:
A. Damages

11 There is a general principle regarding damages awarded in cases where a defendant who wrongfully repudiated a contract had alternative modes of performing the contract. This general principle traces its roots at least as far back as the case of Cockburn v. Alexander (1848), 6 C.B. 791. In that case, Maule J. articulated the general principle, at p. 814, as follows:
Generally speaking, where there are several ways in which the contract might be performed, that mode is adopted which is the least profitable to the plaintiff, and the least burthensome to the defendant.
This general principle has been adopted by decisions in Canada (see Park v. Parsons Brown & Co. (1989), 1989 CanLII 2801 (BC CA), 39 B.C.L.R. (2d) 107 (C.A.); Aldo Ippolito & Co. v. Canada Packers Inc. (1986), 1986 CanLII 2478 (ON CA), 57 O.R. (2d) 65 (C.A.); and, more generally, S. M. Waddams, The Law of Damages (loose-leaf ed.), at pp. 13‑19 to 13‑21), and has been confirmed in the United Kingdom (see Lavarack v. Woods of Colchester Ltd., [1967] 1 Q.B. 278 (C.A.); and The “World Navigator”, [1991] 2 Lloyd’s Rep. 23 (C.A.)).

12 This approach is also the one that is generally applicable in the United States (see, for example, Restatement (Second) of Contracts § 344 (1981); Williston on Contracts (3rd ed. 1968) § 1407; Western Oil & Fuel Co. v. Kemp, 245 F.2d 633 (8th Cir. 1957), at p. 640; Stewart v. Cran‑Vela Rental Co., 510 F.2d 982 (5th Cir. 1975), at p. 986; and 22 Am. Jur. 2d Damages § 126 (1988)).

13 The general principle was explained by Scrutton L.J. in Withers v. General Theatre Corp., [1933] 2 K.B. 536 (C.A.), at pp. 548‑49:
Now where a defendant has alternative ways of performing a contract at his option, there is a well settled rule as to how the damages for breach of such a contract are to be assessed. . . . A very common instance explaining how that works is this: A. undertakes to sell to B. 800 to 1200 tons of a certain commodity; he does not supply B. with any commodity. On what basis are the damages to be fixed? They are fixed in this way. A. would perform his contract if he supplied 800 tons, and the damages must therefore be assessed on the basis that he has not supplied 800 tons, and not on the basis that he has not supplied 1200 tons, not on the basis that he has not supplied the average, 1000 tons, and not on the basis that he might reasonably be expected, whatever the contract was, to supply more than 800 tons. The damages are assessed . . . on the basis that the defendant will perform the contract in the way most beneficial to himself and not in the way that is most beneficial to the plaintiff.
If one substitutes duration in time for quantity of goods into Scrutton L.J.’s statement, then it directly addresses the case at bar. Indeed, the application of this general principle to a breach of a contract with various possible durations is addressed immediately following the above example by Scrutton L.J., at pp. 549‑50:
[Consider] a lease for seven, fourteen or twenty‑one years which is wrongfully determined at the end of five years by the landlord. On what basis are damages to be assessed? Answer: On the basis that the landlord can determine the lease in seven years, and therefore the plaintiff can only recover damages on the assumption that he had only two more years of the lease to run.
This passage speaks directly to our case, and is persuasive in its application.

14 Notwithstanding the broad acceptance of the general principle, the appellant in this case advocates another approach — the one employed by Wilkins J. at trial. This approach involves an inquiry into how the defendant would likely have performed his or her obligations under the contract, hypothetically, but for his or her repudiation. This, the appellant argues, is the true test of the position the plaintiff would have been in had the contract not been repudiated.

15 This tort‑like analysis proposed by Hamilton is not an established part of Canadian law. There are compelling reasons for this. Contractual obligations are voluntarily assumed by parties and given effect to by the courts. The failure to perform certain promised positive contractual obligations in contract law is conceptually distinct from the breach of unpromised negative obligations to not harm another’s interests in tort law: see G. H. L. Fridman, The Law of Torts in Canada (2nd ed. 2002), at p. 11.

16 In a successful tort claim for damages, unliquidated damages are awarded to a plaintiff on the basis that the plaintiff has suffered a loss through some wrongful interference by the defendant. The plaintiff in such cases has legally protected interests that have been found by a court to be unduly compromised. In tort cases, it is widely recognized that the inquiry into what would have been but for the tort is appropriate, since the plaintiff’s interest is in being restored to (or at least awarded compensation in respect of) the position the plaintiff would otherwise be in. See Fridman, supra, at p. 2; A. M. Linden, Canadian Tort Law (7th ed. 2001), at p. 4, (“[f]irst and foremost, tort law is a compensator”); J. G. Fleming, The Law of Torts (9th ed. 1998), at p. 5; and R. F. V. Heuston and R. A. Buckley, Salmond and Heuston on the Law of Torts (21st ed. 1996), at pp. 8-9.

17 However, under the general principle applicable in breach of contracts with alternative performances enunciated above, it is not necessary that the non‑breaching party be restored to the position they would likely, as a matter of fact, have been in but for the repudiation. Rather, the non‑breaching party is entitled to be restored to the position they would have been in had the contract been performed.

18 In this case, the relevant contractual duties have been expressly set out by the parties in the agreement. Hamilton is entitled to OWB’s performance of these voluntarily assumed duties. Hamilton has no compensable interest in the advantages she might have expected under any particular performance of the contract, since the contract itself provided for alternative methods of performance at the election of the defendant. If Hamilton wanted to secure herself the benefits associated with a given particular method of performance, she should have contracted for only that method of performance.

19 The trial judge erred in this case in engaging in a tort-like inquiry as to what would have happened if OWB had not breached its contractual obligations to Hamilton, and in concluding that OWB would not have terminated at the earliest opportunity.

20 The assessment of damages required only a determination of the minimum performance the plaintiff was entitled to under the contract, i.e., the performance which was least burdensome for the defendant. The plaintiff agreed at the outset that she was entitled to no more by contracting for a contractual term that could be truncated with notice entirely at the discretion of the defendant.

21 This is not to say that the general principle will never require a factual inquiry. The method of performance that is most advantageous or least costly for the defendant may not always be clear at the outset from the contract’s terms. A court may have to consider evidence to determine an estimated cost of the various means of performance. In some cases it will only be after this factual investigation that a court can confidently conclude that a certain mode of performance would have been the least burdensome for the defendant. That this factual investigation might need to be conducted in some instances does not undermine the general principle.

22 A factual investigation of this type is not necessary on the facts of this case. The case at bar raises only a question of the extent of time the contract will be performed which, with three months’ notice given after the expiration of the 18th month, is entirely at the election of the defendant.

23 The analytical approach adopted by Simmons J.A. at the Court of Appeal in this case regarding the appropriate quantum of damages is one that comports with the long-standing and widely accepted general principle, is sound in policy, and is one that leads to predictable and justifiable results. For the foregoing reasons, the appeal with regard to damages is dismissed.
. Agribrands Purina Canada Inc. v. Kasamekas

In Agribrands Purina Canada Inc. v. Kasamekas (Ont CA, 2020) the Court of Appeal engaged in this discussion of how to calculate damages on contract breach:
Second issue -- The method of calculating breach of contract damages

[44] In Hamilton [SS: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9 (CanLII), [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72], Ms. Hamilton entered into a contract with Open Window Bakery Ltd. ("Open Window") for a term of 36 months to serve as its exclusive agent in Japan. The contract gave Open Window the unconditional right to terminate the contract on three months' notice, effective after the commencement of the 19th month of the contract. In the 16th month, Open Window wrongfully terminated the contract. The trial judge determined Ms. Hamilton's damages by inquiring into how Open Window would likely have performed its obligations under the contract hypothetically, but for its repudiation. This resulted in an award reflecting the payments that would have been made over the full 36-month term less a 25 per cent reduction for contingencies.

[45] The Supreme Court held that this was the wrong approach and substituted a damage award based on early termination at [page440] the 19th month mark together with three months' notice, reflecting Open Window's maximum exposure to damages. The court based this on the principle articulated in Cockburn v. Alexander (1848), 6 C.B. 791 that, generally speaking, where there are several ways in which the contract might be performed, the mode that is adopted is the least profitable to the plaintiff and the least burdensome to the defendant, for the purposes of assessing damages. The court described the rationale for this principle and the error in the approach used by the trial judge in the following language [at paras. 15-18]:
This tort-like analysis proposed by Hamilton is not an established part of Canadian law. There are compelling reasons for this. Contractual obligations are voluntarily assumed by parties and given effect to by the courts. The failure to perform certain promised positive contractual obligations in contract law is conceptually distinct from the breach of unpromised negative obligations to not harm another's interests in tort law: see G. H. L. Fridman, The Law of Torts in Canada (2nd ed. 2002), at p. 11.

In a successful tort claim for damages, unliquidated damages are awarded to a plaintiff on the basis that the plaintiff has suffered a loss through some wrongful interference by the defendant. The plaintiff in such cases has legally protected interests that have been found by a court to be unduly compromised. In tort cases, it is widely recognized that the inquiry into what would have been but for the tort is appropriate, since the plaintiff's interest is in being restored to (or at least awarded compensation in respect of) the position the plaintiff would otherwise be in. See Fridman, supra, at p. 2; A. M. Linden, Canadian Tort Law (7th ed. 2001), at p. 4, ("[f]irst and foremost, tort law is a compensator"); J. G. Fleming, The Law of Torts (9th ed. 1998), at p. 5; and R. F. V. Heuston and R. A. Buckley, Salmond and Heuston on the Law of Torts (21st ed. 1996), at pp. 8-9.

However, under the general principle applicable in breach of contracts with alternative performances enunciated above, it is not necessary that the non-breaching party be restored to the position they would likely, as a matter of fact, have been in but for the repudiation. Rather, the non-breaching party is entitled to be restored to the position they would have been in had the contract been performed.

In this case, the relevant contractual duties have been expressly set out by the parties in the agreement. Hamilton is entitled to OWB's performance of these voluntarily assumed duties. Hamilton has no compensable interest in the advantages she might have expected under any particular performance of the contract, since the contract itself provided for alternative methods of performance at the election of the defendant. If Hamilton wanted to secure herself the benefits associated with a given particular method of performance, she should have contracted for only that method of performance. (Emphasis in original)
[46] The trial judge distinguished Hamilton [at para. 106], finding that it applied only where the parties acted honestly and in good faith, and that Purina had not done so, having [page441] "conducted itself in a manner that 'defeated or eviscerated the very purpose and objective' of its agreement with Raywalt".

[47] With respect, I do not agree. The trial judge erred in finding Hamilton to be premised on good faith conduct by the breaching party. Contrary to his view, there was no finding by the trial judge in Hamilton that Open Window had acted in good faith at all material times. Nor is there any suggestion in the Supreme Court's decision that good faith conduct is a pre- requisite for the least burdensome principle to apply. Indeed, Open Window had wrongfully terminated Ms. Hamilton by repudiating the entire contract, thereby defeating its very purpose, yet the least burdensome principle of calculating damages was applicable.

[48] In my view, Hamilton cannot be distinguished as the trial judge did, and should have been followed in assessing the breach of contract damages in this case, even if Purina did not act in good faith in breaching the contract.

[49] Had that been done, the trial judge would not have embarked on a hypothetical inquiry into how Purina would likely have performed its obligations under the contract if it had not breached the contract. That is the very sort of inquiry that Hamilton says should not be done in approaching breach of contract damages where there are alternate modes of performing the contract.

[50] The contract provided that Purina had the unconditional right to cancel the contract at any time on 60 days' notice. Article V(B) of the contract reads, "Notwithstanding anything to the contrary in this article, either of the parties may cancel this Agreement at any time by giving sixty (60) days advance notice to the other party." There is no doubt that this is the least burdensome mode of performance for Purina. It should have been used as the basis for calculating the damages for breach of contract.


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