May 6, 2015

Breach of Contract and Gain-based Profit Remedies

Leland Walton & Sons Ltd. v. Hillspring Farms Ltd., 2007 NBCA 7 (CanLII)

The policy basis of the current rule was clarified by the New Brunswick Court of Appeal in the 2007 case of Leland Walton v Hillspring Farms.  This litigation involved a breach of contract for the commercial sale and delivery of a potato crop.  There was no lack of substitute potatoes on the market and the plaintiff had admitted he could even have used some of his own crop to make up for the defendant’s shortfall, thus the plaintiff had no problem in accessing a replacement crop on the open market beyond his own cash flow issues.  

 

The Court of Appeal held that the measure of damages assessed at the trial level by the expert witness, an agronomist, was legally incorrect and was properly subject to traditional rules of common law and equity in this area rather than a specialist technical measure. The Court of Appeal discarded the notion that an expert witness was needed on the issue of the plaintiff’s damages, noting that “to properly assess damages in this case, one must have an understanding of legal concepts such as repudiation, anticipatory repudiation, mitigation and the defence of impecuniosity - concepts that are critical to the task of quantifying damages and matters over which lay experts can claim no legal expertise” (2).  

 

The Court held that the proper measure of the plaintiff’s alleged losses was held to be a more conventional measure of damages, based on the price difference on the open market for the potatoes as of the date of breach - the price of replacement goods - was.  The Court of Appeal engaged in a clarification of the rules that govern the assessment of market damages for the sale of goods due to the erroneous trial level ruling.

 

In general, the Court of Appeal sought to dispel any belief that the moral worth of the defendant could ground an award for breach of profits in bad faith, noting that “it needs to be emphasized that the task of ordinary damage assessment is not to be influenced by the fact that we are dealing with a defendant/seller who profited from a deliberate breach or that the breach forced the plaintiff/buyer into breaching a contract with a third party” (10).

 

The Court concluded that it was inappropriate to award the profits made by the defendant for even a deliberate breach of a contract to deliver potatoes.  This reasoning was most appropriate in the context of damages awarded in the case of the sale of goods, especially for which a ready market exists for their replacement.  The Court clarified that “the law seeks only to ensure that the innocent party is put in the position he or she would have been but for the breach. Consequently, the law does not discourage a party from deliberately breaching a contract for the purpose of profit maximization. The reality is that a contractual breach may give rise to opportunities for profit taking that would not have existed but for the breach and yet the plaintiff's damage award may be less than the defendant's gain” (36).