Southcott Estates Inc. v. Toronto Catholic District School Board

104 O.R. (3d) 784

2010 ONCA 310

Court of Appeal for Ontario,

Sharpe, Blair and MacFarland JJ.A.

May 3, 2010*

• This judgment was recently brought to the attention of the editors.

Contracts -- Breach of contract -- Defendant breaching clause in Agreement of Purchase and Sale requiring it to use its best efforts to [page785] obtain severance prior to closing date -- Defendant not entitled to rely on time of the essence clause and terminate agreement.

Damages -- Mitigation -- Plaintiff admitting that it had no intention of mitigating its damages -- Evidentiary onus shifting to plaintiff to demonstrate that it could not have mitigated its damages even if it had attempted to do so -- Plaintiff leading no evidence to that effect -- Trial judge erring in refusing to find that plaintiff had failed to mitigate its damages.

The defendant entered into an Agreement of Purchase and Sale with the plaintiff pursuant to which it agreed to sell the plaintiff land for a proposed residential development. The land was part of a larger parcel, and the agreement was conditional on the defendant obtaining a severance from the Committee of Adjustment on or before the closing date. The defendant's severance application was deferred at the municipality's request as premature because it was not accompanied by a development plan. As a result, it was impossible to close the transaction by the closing date. The defendant refused the plaintiff's request to extend the closing date, declared the transaction to be at an end and returned the plaintiff's deposit. The plaintiff brought an action for specific performance or, alternatively, for damages. The trial judge found that the defendant had breached its obligation to use its best efforts to obtain the severance and awarded damages for a 60 per cent loss of the chance the transaction would have closed but for the breach. The defendant appealed.

Held, the appeal should be allowed.

Given the trial judge's unchallenged finding that the defendant was in breach, the defendant was not entitled to rely on the time of the essence clause and terminate the agreement.

The trial judge erred in finding that the defendant had not met its onus to demonstrate that the plaintiff had failed to mitigate its damages. The plaintiff's clear admission that it had no intention of taking any steps to mitigate its loss was sufficient to satisfy the onus on the defendant to prove failure to mitigate and to shift the evidentiary onus to the plaintiff of demonstrating that, even if it had attempted to mitigate, it could not have done so. The plaintiff led no evidence to that effect.

As the plaintiff had made out a breach of contract but failed to make out a case for specific performance or damages, the appropriate order was to set aside the judgment and substitute a judgment in the plaintiff's favour for nominal damages, fixed at $1.

APPEAL from the judgment of Spiegel J., 2009 3567 (ON SC), [2009] O.J. No. 428, 78 R.P.R. (4th) 285 (S.C.J.) for damages for breach of contract.

Cases referred to Asamera Oil Corp. v. Sea Oil and General Corp., 1978 16 (SCC), [1979] 1 S.C.R. 633, [1978] S.C.J. No. 106, 89 D.L.R. (3d) 1, 23 N.R. 181, [1978] 6 W.W.R. 301, 12 A.R. 271, 5 B.L.R. 225, [1978] 3 A.C.W.S. 291; British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways Co. of London, Ltd., [1912] A.C. 673 (H.L.); Domowicz v. Orsa Investments Ltd. (1998), 1998 17748 (ON CA), 40 O.R. (3d) 256, [1998] O.J. No. 452 (C.A.), varg (1994), 1994 7329 (ON SC), 20 O.R. (3d) 722, [1994] O.J. No. 2489, 43 R.P.R. (2d) 300, 51 A.C.W.S. (3d) 367 (Gen. Div.); McCallum v. Zivojinovic (1977), 1977 1151 (ON CA), 16 O.R. (2d) 721, [1977] O.J. No. 2341, 79 D.L.R. (3d) 133, 2 R.P.R. 164, [1977] 2 A.C.W.S. 674 (C.A.); New Zealand Shipping Co. v. Société des Ateliers et Chantiers de France, [1919] A.C. 1 (H.L.); Shapiro (c.o.b. ISR Ent. in Trust) v. 1086891 Ontario Inc., 2006 2050 (ON SC), [2006] O.J. No. 302, 39 R.P.R. (4th) 246, [2006] O.T.C. 79 (S.C.J.); St. Thomas Subdividers Ltd. v. 639373 Ontario Ltd., 1996 575 (ON CA), [1996] O.J. No. 1976, 91 O.A.C. 193, 2 R.P.R. (3d) 133, 63 A.C.W.S. (3d) 624 (C.A.) [page786] Authorities referred to Perell, Paul M., and Bruce H. Engell, Remedies and the Sale of Land, 2nd ed. (Toronto: Butterworths, 1998) Waddams, Stephen M., The Law of of Damages, 2nd ed., looseleaf (Aurora, Ont.: Canada Law Book, 2009)

Andrew M. Robinson, Elizabeth Ackman and Andrea Farkouh, for appellant (defendant). Milton A. Davis, J.T. Curry and David A. Vitale, for respondent (plaintiff).

The judgment of the court was delivered by

[1] SHARPE J.A.: -- The appellant Toronto Catholic School Board (the "Board") appeals from a judgment for damages arising from a failed real estate transaction. The Board does not challenge the trial judge's finding that it was in breach of its contractual obligation to use its best efforts to obtain the severance required to complete the sale. However, the Board submits that the trial judge erred by finding that its breach caused the transaction to fail and by refusing to find that the respondent purchaser, Southcott Estates Inc. ("Southcott"), had failed to mitigate its damages.

Facts

[2] The Board entered into an Agreement of Purchase and Sale (the "agreement") with Southcott, pursuant to which the Board agreed to sell and Southcott agreed to purchase 4.78 acres of land in Toronto. The land was part of a larger parcel used for school purposes by the Board, which had been declared surplus to the Board's needs.

[3] Southcott is a single-purpose company with no assets except the deposit it paid for the purchase. Southcott is a wholly owned subsidiary of Ballantry Homes Inc., and part of a larger group of companies called Ballantry Group of Companies ("Ballantry").

[4] Southcott sought to purchase the land for the purpose of a proposed residential development. The agreement was conditional upon the Board obtaining a severance from the Committee of Adjustment on or before the closing date. The agreement was signed on June 14, 2004, with an original closing date of August 31, 2004. The agreement was conditional for a 30-day due-diligence period during which Southcott could terminate the [page787] agreement at will. The due-diligence period was extended twice, and the agreement finally became firm on August 23, 2004. As there was not enough time to obtain the severance and close by August 31, 2004, the closing date was extended. The Board offered to extend the closing date to a fixed number of days after the severance was obtained, but Southcott insisted on an outside date for closing, namely, January 31, 2005.

[5] The Board made a severance application to the Committee of Adjustment, which came to a hearing on December 16, 2004. The Board's severance application was deferred at the municipality's request as premature because it was not accompanied by a development plan. This made it impossible to close the transaction by the closing date. Southcott took the position that the Board had breached its obligation to use its best efforts to obtain the severance and that the Board was, therefore, not entitled to rely on the time of the essence clause. The Board refused Southcott's request to extend the closing date, declared the transaction to be at an end and returned Southcott's deposit.

Trial Proceedings

[6] Southcott brought this action for specific performance and, in the alternative, damages. The trial judge found that the Board had breached its obligation to use its best efforts to obtain the severance. The trial judge found that the Board should have advised Southcott in a timely fashion that it was necessary to file a development plan to obtain the severance and that the Board should have done more by way of communicating with the planning authorities and the municipal counsellor. The trial judge also found that but for these breaches, there was a 60 per cent chance that the required severance would have been granted in time to permit closing on or before January 31, 2005.

[7] The trial judge held that as the land had been purchased for investment purposes, specific performance was not an available remedy. With respect to damages, there was no increase in the value of the land between the date of the agreement and the date of breach and, accordingly, no award was made for loss of bargain. The parties had agreed on the amount of profit Southcott would have made on the proposed residential development, had the transaction closed on January 31, 2005. In that regard, the trial judge awarded Southcott damages for a 60 per cent loss of the chance the transaction would have closed but for the breach which, when applied to the agreed amount for lost profits, resulted in an award of $1,935,500. No issue is taken before us with the availability of "consequential" damages of this [page788] nature arising as a result of a failed real estate transaction, the quantification of the damages or the loss of chance.

Issues

[8] On this appeal, the Board does not challenge the trial judge's finding that it breached its contractual duty to use its best efforts to obtain the severance required to close the transaction. The Board argues, however, that the trial judge erred in two respects: (1) by finding that the Board's breach of duty was the cause of the failure to obtain the severance by the closing date; and (2) by failing to find that Southcott had not met its duty to mitigate damages.

Analysis

1. Causation

[9] The Board argues that, even if it had not breached its obligation in relation to the severance and done the things the trial judge said it should have done, there simply was insufficient time to obtain the severance by January 31, 2005. It follows, the Board submits, that its breach cannot be said to have been the cause of the failure to complete the transaction by the specified closing date.

[10] When the Board was unable to obtain the severance by January 31, 2005, Southcott took the position that the closing date should be extended. Although the Board had earlier proposed a flexible closing date to accommodate the need to obtain a severance, it now insisted upon strict adherence to the specified date of January 31, 2005.

[11] I agree with Southcott's submission that there is a fundamental and fatal legal flaw in the Board's argument. The Board's causation argument rests upon the assumption that it was entitled to rely upon the time of the essence clause, and to impose the January 31, 2005 closing date as an inviolable outside limit for the closing of this transaction.

[12] In my view, given the trial judge's unchallenged finding that the Board was in breach, the Board was not entitled to rely on the time of the essence clause and terminate the agreement.

[13] It is a well-established principle of contract law that a party cannot use its own breach or default in satisfying a condition precedent as a basis for being relieved of its contractual obligations while a party in breach of its obligation to do what is required to complete a transaction cannot terminate the agreement [page789] by relying on a time of the essence clause: see, e.g., Paul M. Perell and Bruce H. Engell, Remedies and the Sale of Land, 2nd ed. (Toronto: Butterworths, 1998) at 44-5; St. Thomas Subdividers Ltd. v. 639373 Ontario Ltd., 1996 575 (ON CA), [1996] O.J. No. 1976, 91 O.A.C. 193 (C.A.), at paras. 36-37; Shapiro (c.o.b. ISR Ent. in Trust) v. 1086891 Ontario Inc., 2006 2050 (ON SC), [2006] O.J. No. 302, 39 R.P.R. (4th) 246 (S.C.J.), at para. 107; McCallum v. Zivojinovic (1977), 1977 1151 (ON CA), 16 O.R. (2d) 721, [1977] O.J. No. 2341 (C.A.), at p. 726 O.R., quoting New Zealand Shipping Co. v. Société des Ateliers et Chantiers de France, [1919] A.C. 1 (H.L.), at p. 6, for the following proposition: "It is a principle of law that no one can in such a case take advantage of the existence of a state of things which he himself produced."

[14] In my view, this principle applies here to preclude the Board from relying on the time of the essence clause as a ground for escaping its contractual obligations, given the unchallenged finding that the Board was in breach of its obligation to use its best efforts to obtain the severance and, therefore, satisfy the condition precedent.

[15] Accordingly, I would not give effect to this ground of appeal.

2. Mitigation

[16] In Asamera Oil Corp. v. Sea Oil and General Corp., 1978 16 (SCC), [1979] 1 S.C.R. 633, [1978] S.C.J. No. 106, at p. 661 S.C.R., Estey J. quoted the oft-cited passage from Viscount Haldane's speech in the House of Lords' decision in British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways Co. of London, Ltd., [1912] A.C. 673 (H.L.), at p. 689, explaining the obligation to mitigate damages in the following terms:

The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps . . . "The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiffs not being under any obligation to do anything otherwise than in the ordinary course of business." (Citation omitted)

[17] The trial judge found that Southcott did not have a viable claim for specific performance. Accordingly, Southcott was subject to the ordinary obligation imposed upon a party seeking damages for breach of contract to take reasonable steps to mitigate its damages. In that regard, the remarks found in [page790] Domowicz v. Orsa Investments Ltd. (1994), 1994 7329 (ON SC), 20 O.R. (3d) 722, [1994] O.J. No. 2489 (Gen. Div.), at pp. 732-33 O.R., vard (1998), 1998 17748 (ON CA), 40 O.R. (3d) 256, [1998] O.J. No. 452 (C.A.) are apposite:

One is not insulated from the duty to mitigate by merely instituting and pursuing proceedings for specific performance. Before a party can rely on such conduct, it must have "some fair, real, and substantial justification" for its claim to specific performance. . . .

Thus, it is only where a plaintiff reasonably seeks specific performance that it will be permitted to postpone mitigation until trial.

[18] David Hill, principal of Southcott and co-owner of Ballantry, flatly admitted in his evidence that Southcott had no intention of mitigating its damages and that it took no steps to do so. In cross-examination, the following exchange took place: Q. . . . But do I take it then that even had you been able to find 4.5 acres or whatever the exact amount of land -- A. Would I have bought it in Southcott's name? Q. Yes? A. No, it doesn't make sense. Q. All right. So you weren't really then looking for land to buy in the name of Southcott? A. No, I was just looking for land to buy -- period. . . . . .

The Court: Tell me -- elaborate a little bit why you wouldn't put it into Southcott? Because Southcott was involved in litigation? A. Exactly. I think they -- I can't imagine my lawyer ever letting me do that. Q. Why, would the fact that they were involved in litigation -- why would they (ph.) -- the fact that they were involved in litigation? A. Why? Q. Why would that affect you not putting it in Southcott? A. I don't need the headaches. Q. Well, what do you mean you don't need the headaches? I don't understand this. A. I just would -- to have my lawyers say: "Don't do that." For whatever reason it would just be a bad move. And generally we wouldn't buy anything in another company if it's still involved in something. . . . . . Q. All right. But on that theory you would never ever mitigate your damages, would you? You would never mitigate your damages. You would never take any steps in Southcott to make sure your damages were as small as possible? [page791] A. Southcott has got nothing to do with what we buy. I mean, we are always buying and it's not like this -- that was -- we are not saying that was our only project and I have never built anything since or bought anything since. I can see that. But we are always buying or trying to buy land or lots.

[19] The trial judge made the following finding, at para. 137:

The plaintiff admitted that it never had any intention and never tried to mitigate the damages. The plaintiff was a single purpose company incorporated solely for the purposes of this project with no assets other than the money advanced to it by Ballantry for the deposit. It was never intended that it would purchase other land.

[20] The Board led expert evidence that 81 parcels of vacant undeveloped land in the Greater Toronto Area were sold between the date of breach and the date of trial; in the same time period, 49 properties subdivided into lots suitable for building were also sold. That evidence was uncontroverted. There was also evidence that Ballantry made several purchases of comparable lands for development purposes during this same period.

[21] Despite the clear evidence and the clear finding that Southcott had failed to take any steps to mitigate, and despite the evidence of other available lands and other purchases made by Ballantry, the trial judge found that the Board did not meet its onus to demonstrate that Southcott had failed to mitigate.

[22] The trial judge dismissed the Board's expert evidence on the basis that there was no evidence that the numerous investment properties sold during the relevant period "were available to the public for sale", and no evidence that any of these properties "could have been profitably developed" or that, had they been purchased, Southcott's loss would have been avoided or reduced. As for the properties actually purchased by Ballantry, and despite finding that Southcott failed to provide reliable evidence as to Ballantry's financial situation, the trial judge found, at para. 143, that Ballantry had the financial capacity to make these purchases, regardless of the breach in the present case. Further, he found that the purchases were "collateral, independent transactions that did not arise out of the consequences of the breach", thereby not constituting mitigation of the loss claimed by Southcott.

[23] With respect, it is my view that the trial judge erred in law in his approach to mitigation.

[24] First, Southcott's admission that it had no intention of taking any steps to mitigate its loss was sufficient to satisfy the onus resting upon the Board to prove failure to mitigate and to shift the evidentiary onus to Southcott of demonstrating that, even if it had attempted to mitigate, it could not have done so. [page792] Southcott led no evidence to that effect. In my view, the trial judge erred by holding that the Board had failed to meet the onus imposed upon it to prove that Southcott had failed to mitigate its damages.

[25] Second, the trial judge erred in the manner in which he dealt with the evidence the Board led as to the land that was available, had Southcott been willing to mitigate. By requiring the Board to prove the precise manner in which 81 parcels of investment land had been sold or to prove the profitability of individual parcels, the trial judge raised any bar the Board had to satisfy to an unrealistic level, particularly in the face of Southcott's admission that it had no intention to mitigate and of the evidence that Ballantry actually did find other suitable development properties to purchase.

[26] Third, the trial judge erred in the manner in which he dealt with the evidence of purchases made by Ballantry. Those purchases clearly demonstrate that the directing mind of Southcott knew that investment-quality lands, suitable for profitable development, were available on the market.

[27] The plaintiff in this case was Southcott, a distinct legal entity, and the issue is whether it took reasonable steps to mitigate its damages. Southcott cannot escape or avoid its duty to mitigate damages by arguing that it was a part of Ballantry and that Ballantry would have purchased the other lands even if this transaction had not failed. Thus, the duty to mitigate rests upon Southcott. Southcott decided not to take any steps to mitigate damages. Ballantry's actions demonstrate that other good-quality investment properties were available and that Southcott could have mitigated its losses. The controlling mind of Southcott decided not to put any assets in Southcott's name to avoid exposing those assets to the risks associated with Southcott's litigation against the Board. Southcott and Ballantry were certainly entitled to claim the legal benefit of limited liability by virtue of Southcott's distinct legal personality. However, Southcott and Ballantry also have to live with the consequences of the fact that because Southcott has a distinct legal personality, it is able to assert a claim for damages and, as a party asserting that claim, it thus bears the ordinary duty of mitigating its loss.

[28] In my view, it is clear that Southcott, and those controlling Southcott, flatly repudiated or, at the very least, sought to avoid the legal duty imposed upon Southcott to mitigate its loss by purchasing property that would have mitigated Southcott's loss in the name of other newly corporate [page793] entities and to, thereby, isolate such property from the legal consequences arising from this action.

[29] I conclude, accordingly, that the trial judge erred in failing to find that Southcott failed to make any effort to mitigate its loss.

Disposition

[30] Southcott made out a breach of contract but failed to make out a case for either specific performance or damages. In these circumstances, the appropriate order is to allow the appeal, set aside the judgment and substitute a judgment in Southcott's favour for nominal damages, fixed at $1: see Stephen M. Waddams, The Law of Damages, 2nd ed., looseleaf (Aurora, Ont.: Canada Law Book, 2009) at paras. 10.10 to 10.30.

[31] The Board is entitled to costs of the appeal in the amount agreed to by the parties, namely, $70,000, inclusive of disbursements and GST. If the parties are unable to resolve the issue of the trial costs, they may submit brief written submissions within 15 days of the release of these reasons.

Appeal allowed.