What's It Worth? A Look at the Types of Damages in Contract Law

by Anna Fitz, Student-at-Law

Before you go to court, you should know what relief you want the court to give you. Courts can award a wide variety of damages, or financial remedies, to a party that suffered a wrong. The damages a court will award vary depending on the applicable area of law. This article will focus on the typical categories of damages a party might be entitled to receive in a contract dispute.

Damages in contract

In contract law, damages are meant to put the wronged party in the position it would have been in had the other party followed through on its end of the bargain. This requires the court to examine the contract, what it was worth, and what loss the wronged party suffered.

A wronged party must choose which type of remedy it wants: damages, or specific performance. Specific performance is when the court requires a breaching party to fulfil the agreement as promised. If the party chooses money equivalent to its entire loss, it cannot then seek specific performance as well. For example, if Alice contracted to sell her house to Mark and then refused to follow through, Mark could ask the court to award him either the house (specific performance) or damages equivalent to what the house is worth. He cannot seek both the house and the damages; otherwise, he would recover twice the contract’s value.

Reliance

Reliance damages compensate a plaintiff for expenses they incurred while expecting the other party to honour the contract. For example, let’s say Valerie hires Gary to build her a fence and Gary buys the supplies he needs. If Valerie tells him not to build and refuses to pay, Gary can claim for the supplies he bought while relying on the contract.

Restitution

If one party provides the other party with a benefit before the breach, it can sue to get that benefit back. For example, say Jolene agreed to pay Lola $1,000 for her motorcycle: $500 up front, and $500 after receiving the motorcycle. She paid the initial $500, but Lola never gave her the motorcycle as promised. Lola can sue to get her $500 back in restitution.

Loss of profits

A plaintiff may lose profits because of the defendant’s breach. Say Emile hired Sharon, a famous singer, to perform at his concert hall, and advertised accordingly. If Sharon then refuses to perform, Emile loses the profit he would have made. He can sue Sharon for that lost profit.

Diminution in value

Sometimes in the interim between breach and trial, the property contracted for decreases in value. For example, one party could contract to buy another party’s stocks. If the buyer refuses to go through with the transaction, and the stocks then fall in value, the seller could claim for the difference in the stocks’ value.

Loss of chance

Sometimes parties sue when, because of someone else’s wrongful behaviour, they lose the opportunity to obtain a benefit. As this area of the law is by definition nebulous, certain requirements apply. The benefit cannot be so remote that imposing liability on the other party would be unfair. Furthermore, the plaintiff must prove the probability that it would have obtained the benefit if not for the other party’s wrongful behaviour. The fact the opportunity existed is not enough; the plaintiff must show (on the balance of probabilities) that it would have earned the benefit.

Punitive Damages

Courts award punitive damages when a party has committed egregious behaviour which the court wishes to punish and deter. For example, in one case an insurance company tried to avoid covering a family’s home which burned down by claiming the family committed arson. In that case, the Supreme Court of Canada held that a high punitive damages award was justified.

Courts will only award punitive damages where a party has committed particularly shocking behaviour; therefore, a common breach of contract is likely not enough to meet this threshold.

Mitigation and nominal damages

Even if the court determines you were in the right, and that the other party owes you damages, you still bear the responsibility to mitigate. This means you must do what you can to keep your losses as minimal as possible.

For example, if Beth contracts to buy Louise’s painting for $1,000 then refuses to go through with the deal, Beth is liable for breach of contract. However, Louise must mitigate her damages by trying to find another buyer for the painting. If she sells the painting for $800, she can then sue Beth for the remaining $200, as she has mitigated the other damages.

If Louise unreasonably refuses to sell the painting, she has failed to mitigate, and a court may then lower her damages accordingly. In some situations, the court may only award her nominal damages—a very low amount which only covers a fraction of her claim. For example, in some cases, courts have awarded nominal damages of a single dollar.

Therefore to protect her interests and her right to full recovery, Louise must properly mitigate what she suffered.

Conclusion

If you have encountered a contractual dispute, it is important to know what damages and other remedies are properly recoverable. With that knowledge you might be in a better position to resolve your dispute, failing which you will be better armed to preserve your position.

McLennan Ross has a broad based commercial litigation practice involving all aspects of contractual complexities and damages claims. If you require assistance or wish to know more about any of the concepts referenced above please contact Anna Fitz or Peter J. Major, Q.C. or any other member of the firm’s commercial litigation group. 

Attacking Expert Preference: Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Stout & Company LLP, 2019 ABCA 455

By Don Dear, Q.C., Marco Baldasaro, and Michelle Terris

A recent Alberta Court of Appeal decision regarding standard of care, negligent misrepresentation, and auditor’s liability involved a rare successful attack on the trial judge’s reasoning for preferring the evidence of one expert over another.  

Factual Background

Beginning in 2001, Rabobank agreed to finance Agra by purchasing its receivables. By 2004 the parties had entered into an agreement requiring Agra to provide audited financial statements to Rabobank. The respondent here was an accounting firm, Stout & Company LLP, which performed the audits from 2007 to 2010. Agra began to provide false purchase and sale agreements in 2009, distorting their sales and costs of sales for 2009 and 2010 by at least 25 percent and 40 percent respectively. As a result of the fraud, Rabobank suffered a loss of over $36 million.

While performing the audits, Stout assessed the fraud risk as low and the fraud continued undiscovered. Rabobank sued for negligent misrepresentation alleging it had relied on Stout’s audit opinions in continuing to provide financing to Agra. It argued that if the risk had been properly assessed as high, the fraud would have been identified. Rabobank’s expert, Mr. Henry, opined that Stout’s failure to assess Agra’s fraud risk as high was negligent. Both parties agreed that the audit procedures were appropriate if the fraud risk had actually been low.

Queen’s Bench Decision

The initial Statement of Claim named a multi-national accounting firm as a co-defendant. That firm had purchased Stout assets after the Agra audits had been concluded. The multi-national accounting firm, represented by McLennan Ross LLP, successfully applied for summary judgment and had the case against it dismissed.[1]

 

At trial, the judge preferred the opinion of Stout’s expert, Mr. Muccilli, over Rabobank’s expert based on the belief that Mr. Muccilli had conducted a broader review of the available information, and that Mr. Henry was influenced by his knowledge of the fraud and the benefit of hindsight. Based on this preference, the trial judge found that Stout had met the standard of care expected of an auditor. On a provisional basis only, the trial judge also found that reliance and damages had been proven by Rabobank. 

Court of Appeal

While there were three grounds of appeal, the Court of Appeal focused on the trial judge’s alleged error in preferring Stout’s expert on the standard of care. Stout cross-appealed the trial judge’s assessment of damages and failure to address Rabobank’s contributory negligence.  

The Court of Appeal found that the trial judge erred in concluding that Stout’s expert had conducted a broader review of the available information. After reviewing the evidence, it found there was no justification for inferring a significant difference between the files reviewed by the experts, particularly with respect to the relevant documents. This error was found to be a palpable and overriding error of fact.

As this was the only reason the trial judge gave for rejecting Mr. Henry’s assertion that Stout should have set the risk of fraud at high, the Court of Appeal concluded that there was no rational basis to accept the opinion of one expert over the other. The Court of Appeal was unable to determine on the evidence whether to accept one expert’s opinion over the other and directed a new trial.  

There was a brief discussion of the recent Supreme Court decision of Deloitte & Touche v Livent Inc. (Receiver of), 2017 SCC 63, which expanded the duty of care framework owed by an auditor. Livent was released after the trial judge gave her decision and whether it alters the trial judge’s conclusion that a duty of care exists will be determined in a new trial.

Conclusion

This case provides us with an important lesson in dealing with experts in accountants professional liability cases. Namely, it is extremely important that you control/identify clearly what documents your independent expert is reviewing and which he or she is relying upon for the purposes of his or her expert opinion. Unfortunately both parties are heading towards a new trial, absent settlement.

---

[1] Cooperatieve Centrale Raiffeisen-BoerenleenBank BA (Rabobank International) v Liebig & Keown LLP, 2016 ABQB 417 (https://www.canlii.org/en/ab/abqb/doc/2016/2016abqb417/2016abqb417.html)