Court of Appeal for Ontario

Date: 2018-04-18

Docket: C63181

Judges: Simmons, Brown and Fairburn JJ.A.

Between

Atos IT Solutions and Services GMBH and Atos Inc. Plaintiffs (Respondents)

and

Sapient Canada Inc. Defendant (Appellant)

Counsel

For the Appellant: Mark Gelowitz, Alexander Cobb and Evan Thomas

For the Respondents: Peter H. Griffin, Paul-Erik Veel and Laurel D. Hogg

Heard: November 27, 2017

On appeal from the judgment of Justice Laurence A. Pattillo of the Superior Court of Justice, dated December 7, 2016, with reasons reported at 2016 ONSC 6852, 63 B.L.R. (5th) 1, and from the costs judgment, dated May 1, 2017.

Brown J.A.:

I. OVERVIEW

[1] Sapient Canada Inc. ("Sapient") appeals three aspects of the damages awarded to the respondent, Atos Inc. ("Atos"), following a lengthy breach of contract trial. Sapient seeks to reduce the damages awarded to Atos from $6,291,680.00 to $1,510,738.89.

[2] Sapient contends the trial judge made three errors when calculating damages: (i) he failed to apply the minimum performance principle set out in Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, in respect of the data conversion services portion of the parties' contract; (ii) he did not properly interpret a formula in the data conversion services portion of the contract; and (iii) he misinterpreted a limitation of damages clause as it applied to application management support services.

[3] Sapient also seeks leave to appeal the trial judge's award of costs to Atos. It asks this court to reduce the $3.1 million costs award to zero or, alternatively, to remit the issue of costs to the trial judge for determination in accordance with the outcome of this appeal.

[4] For the reasons set out below, I would not interfere with the trial judge's interpretation of the two contractual provisions determining available damages. However, I conclude, with respect, that the trial judge erred in law in failing to apply the Open Window Bakery minimum performance principle.

[5] As a result, I would vary para. 1 of his Judgment and reduce the award of damages to Atos to $4,947,405. Since that alters the basis upon which the parties had agreed to the amount of the costs below, but only in part, I would grant Sapient leave to appeal costs but, as agreed by the parties, would remit the issue of costs to the trial judge for determination in accordance with the results of this appeal.

II. SUMMARY OF THE DISPUTE, THE TRIAL JUDGE'S FINDINGS, AND THE ISSUES

The Dispute

[6] Only a brief review of the facts is required to place the damages issues in context.

[7] In early 2006, Enbridge Gas Distribution Inc. ("Enbridge") embarked on a major project to replace its many legacy customer information software systems with a single new system using enterprise resource planning software on a single IT platform (the "Project").

[8] Sapient was the successful bidder and became the Project's prime contractor. Sapient entered into a fixed price subcontract with Siemens Canada Limited ("Siemens") dated June 4, 2007, which was amended as of September 30, 2007 (collectively, the "Subcontract"). The Subcontract required Siemens to provide two services for the Project: (i) data conversion ("DC") services, which would convert data from the legacy systems into the new system's format; and (ii) application management support ("AMS") services to Enbridge personnel for a period of time after the new system went into operation.

[9] The respondent, Atos, is the corporate successor to Siemens. Since the trial judge's reasons refer to Siemens, for ease of reference I will refer to Atos as Siemens.

[10] The Project involved extensive planning and implementation. Installation of the software began in June 2007 but was not completed until September 2009, five months behind schedule.

[11] On June 29, 2009 Sapient terminated the Subcontract with Siemens for cause.

[12] Siemens sued, claiming damages for wrongful termination of the Subcontract. In turn, Sapient counterclaimed for damages arising from the delay in completing the Project.

The Trial Judge's Findings

[13] The trial judge concluded that Sapient wrongfully terminated the Subcontract. However, he also held that Siemens breached parts of the Subcontract at various times during the Project, entitling Sapient to damages as well. Neither party appeals those findings.

[14] The trial judge awarded damages to Siemens for both the DC and AMS services portions of the Subcontract. I will deal in some detail with the trial judge's damages calculations later in these reasons. At this point, I shall simply summarize the awards he made to Siemens.

[15] The trial judge awarded Siemens damages of $2.404 million for the balance owing for DC services. He rejected Sapient's argument that the minimum performance principle in Open Window Bakery should limit Siemens' damages to a lesser amount calculated in accordance with the Subcontract's termination for convenience clause. However, the trial judge quite properly performed an alternative damages calculation for DC services using the termination for convenience formula, resulting in alternative damages for the termination of DC services of $1,059,725.

[16] The trial judge awarded Siemens damages of $3,575,990 for the wrongful termination of AMS services, representing Siemens' estimated gross profits.

The Issues

[17] This appeal raises four issues, which I will deal with in the following order:

(i) In calculating damages for the DC services portion of the Subcontract, did the trial judge err by failing to apply the Open Window Bakery minimum performance principle?

(ii) If he did, and DC services damages should have been calculated in accordance with the formula contained in the Subcontract's termination for convenience clause, did the trial judge err in interpreting that clause?

(iii) In calculating damages for the AMS services portion of the Subcontract, did the trial judge err in his interpretation of the Subcontract's limitation of liability clause?

(iv) Finally, if the trial judge erred in any part of his calculation of damages, should his award of costs be set aside and the issue of the costs below be remitted to him for further determination?

III. FIRST ISSUE: DOES THE OPEN WINDOW BAKERY PRINCIPLE APPLY TO THE CALCULATION OF DAMAGES FOR DATA CONVERSION SERVICES?

A. The Issue Stated

The Subcontract's Termination Provisions

[18] Article 17 of the Subcontract afforded Sapient two rights to terminate. First, s. 17.2 entitled Sapient to terminate the entire Subcontract for cause by providing notice to Siemens in certain circumstances, one of which (contained in s. 17.2.2) was where Siemens "commits a material breach of its obligations under this Agreement and such breach is not capable of being cured".

[19] A more limited termination right was available in s. 17.4 of the Subcontract: it entitled Sapient to terminate the DC services part of the Subcontract "for convenience".

[20] Sapient relied on the s. 17.2 termination "for cause" provision in its June 29, 2009 termination letter by which it terminated the entire Subcontract "effective immediately".

[21] When Sapient terminated the Subcontract, the DC services were "almost, if not entirely, complete": Trial Reasons ("Reasons"), at para. 325. There was little work left for Sapient to finish.

[22] At the time of termination Siemens was putting in place the organization to provide AMS services, but those services would not commence until the "go-live" date in September 2009. The trial judge found Sapient "had no intention of terminating just the Data Conversion portion of the Subcontract": Reasons, para. 331. Sapient wanted to provide the AMS services itself. And, in the result, the day after it terminated Siemens, Sapient executed a new agreement with Enbridge to provide AMS services.

The Calculation of Damages for Data Conversion Services

[23] The Subcontract set a fixed fee for DC services. Siemens' damages claim for the wrongful termination of that portion of the Subcontract included a claim for the amount of the balance owing: $2,404,000.

[24] Sapient contended such an award would dramatically over-compensate Siemens. Instead, Siemens was entitled only to the difference between the Subcontract price and its costs to complete the DC services. According to Sapient, Siemens had not established the amount of that difference.

[25] The trial judge accepted Siemens' submission that the proper measure of damages for the termination of the DC services portion of the Subcontract was the balance owing.

[26] Sapient advanced an alternative argument: Siemens was only entitled to damages for DC services calculated in accordance with the formula contained in the Subcontract's termination for convenience clause. Although Sapient had invoked the termination "for cause" provision (s. 17.2) to end the Subcontract, not the termination "for convenience" clause (s. 17.4), it argued that using the termination for convenience formula would result in it paying a smaller amount of damages. Sapient pointed to the Open Window Bakery minimum performance principle to argue it was entitled to the benefit of the less burdensome mode of performance of the Subcontract offered by the termination "for convenience" clause.

[27] At paras. 327 to 331 of the Reasons, the trial judge described Sapient's argument and explained why he rejected it:

Sapient further submits that even if it did not have the right to terminate the Subcontract for cause, it had the right to terminate the Data Conversion portion of the Subcontract for convenience pursuant to Section 17.4 of the Subcontract. Accordingly, it submits that Siemens' damages in respect of Data Conversion should be limited to the amount provided for in Section 17.4 in accordance with the rule confirmed by the Supreme Court of Canada in Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303. According to that rule, where there are several ways in which a contract may be performed, damages are awarded based on the mode of performance that is least profitable to the plaintiff and least burdensome to the defendant.

Section 17.4 of the Subcontract (Section 2.5 of the Data Conversion Amendment) provides:

Sapient may terminate the Data Conversion Services for convenience by providing notice to the Subcontractor of such termination, effective as of the date set forth in the notice of termination. Subcontractor shall receive payment for the last milestone preceding the termination plus the lesser of (a) a time and materials rate of $1450 per person (not to exceed 12 people) per day for each day of Data Conversion Services provided following the last completed milestone until the effective date of termination, plus a one time charge of $50,000 and (b) the amount due at the next milestone, had the Data Conversion Services not been terminated.

Sapient submits that, given the termination date of June 29, 2009, the amount that would be owing to Siemens in accordance with the formula set out in Section 17.4 is $622,725.

In my view, the rule in Open Window does not apply to Sapient's termination of the Subcontract having regard to its terms. Simply put, given Sapient's intention to terminate the entire Subcontract pursuant to Section 17.2, Section 17.4 is not an alternative mode of performance permitting Sapient to terminate the entire Subcontract.

Section 17.2 of the Subcontract permitted Sapient to terminate the entire Subcontract, including AMS. As I have found, that is exactly what Sapient intended to do. It had no intention of terminating just the Data Conversion portion of the Subcontract. On the other hand, Section 17.4, the termination for convenience provision, applies only to the Data Conversion portion of the Subcontract. Accordingly, termination for convenience is not an alternate mode enabling Sapient to terminate the entire Subcontract. It follows that because Sapient intended to terminate the entire Subcontract, it cannot rely on the termination for convenience provision to limit Siemens' Data Conversion damages.

The Issue on Appeal

[28] Sapient submits the trial judge erred in law by failing to calculate damages for the DC services portion of the Subcontract in accordance with the minimum performance principle. That error attracts review on the correctness standard.

[29] Siemens argues the trial judge was "quite right" in his conclusion that the minimum performance principle did not apply. Since Sapient could not terminate the entire Subcontract using the termination for convenience clause, the Subcontract did not contain an alternative means of performance upon which the minimum performance principle rests. Further, the reasons in Open Window Bakery must be read in light of the decision of the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, which recognized an over-arching duty of good faith and honest performance of contracts. In the present case, bad faith characterized Sapient's termination of the Subcontract. As a result, Siemens argues, the minimum performance principle could not apply.

B. Analysis

The Minimum Performance Principle

[30] Compensatory damages are the usual measure of damages for breach of contract. The expectancy principle governs the calculation of compensatory damages. It requires the breaching party to pay as damages an amount that will provide the non-breaching party with the financial equivalent of performance: John D. McCamus, The Law of Contracts, 2d ed. (Toronto: Irwin Law, 2012), at p. 871; and Angela Swan & Jakub Adamski, Canadian Contract Law, 3d ed. (Markham, ON: LexisNexis Canada, 2012), at pp. 381-383.

[31] The common law places several limits on the expectancy principle: see McCamus, at pp. 877-882; and Swan & Adamski at p. 471. One limit is the minimum performance principle. The principle has been expressed in several different ways. In Open Window Bakery, at paras. 11 and 20, the Supreme Court of Canada expressed the principle this way: in cases where the defaulting party had alternative modes of performing the contract, damages are calculated on the basis of the mode of performance least burdensome to the defaulting party and least profitable to the non-breaching party.

[32] The jurisprudence and legal literature contain other formulations of the minimum performance principle:

(i) "[D]amages for breach of a contract with alternative performances are assessed by reference to the promisor's minimum or least extensive performance": Michael G. Pratt, "Damages for Breach of Contracts with Alternative Performances" in Jeff Berryman & Rick Bigwood, eds., The Law of Remedies: New Directions in the Common Law (Toronto: Irwin Law, 2010), p. 105 at p. 107;

(ii) "[W]here the option of fulfilling one of two alternative promises rests with the promisor who is in default, the measure of damages is the loss caused by reason of the promisor failing to perform the promise with the lesser value": Stewart v. Cran-Vela Rental Co., Inc., 510 F.2d 982 (U.S. C.A. 5th Cir. 1975), at p. 986; and

(iii) 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": Withers v. General Theatre Corp., [1933] 2 K.B. 536 (C.A.), at p. 549.

[33] In Withers, at p. 549, the English Court of Appeal gave a simple example of the principle in operation. If a vendor agreed to sell a purchaser 800 to 1200 tons of a certain commodity but failed to deliver any amount, the court would assess damages on the basis the vendor had failed to supply the lower amount – 800 tons – not on the basis of a failure to supply the higher amount of 1200 tons.

[34] In the Open Window Bakery case, the supplier, Open Window Bakery ("OWB"), was entitled under the terms of its contract with a distributor, Hamilton, to terminate in several ways, two of which were relevant on appeal: (i) for cause; or (ii) on three months' notice, without cause, but only after the 19th month of the contractual term.

[35] The trial judge, as summarized by the Supreme Court at para. 7, "held that OWB wrongfully repudiated the contract and awarded damages reflecting the payments that would have been made under the full 36-month term of the contract, less an allowance of 25 percent. The discount reflected the possibility that OWB might at some later point have validly exercised its right to terminate the contract with notice" (citations omitted).

[36] This court and the Supreme Court, however, held that damages for OWB's wrongful termination of the contract for cause should be calculated on the basis of the three-month's notice provision. The Supreme Court explained the rationale for applying the minimum performance principle, at paras. 17-18:

[U]nder 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.]

[37] In Open Window Bakery, the Supreme Court acknowledged that "[t]he 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"; as a result, "[a] court may have to consider evidence to determine an estimated cost of the various means of performance": para. 21. The need for such a factual inquiry, however, does not undermine the general principle: para. 21.

Application to the Present Case

[38] The trial judge held that the minimum performance principle did not apply to Sapient's termination of the Subcontract because the termination for convenience clause was not an alternative mode open to Sapient to terminate the entire Subcontract. That clause only entitled Sapient to terminate the DC services part of the Subcontract, not the AMS services portion. Since Sapient intended to terminate the entire Subcontract, not just the DC services portion, it was not entitled to have the damages for its termination of DC services calculated using the less burdensome formula in the termination for convenience clause: Reasons, paras. 330-331.

[39] With respect, I disagree. Instead, I accept Sapient's submission that the damages for the wrongful termination of the DC services should have been calculated on the basis of the minimum performance Siemens was entitled to expect under the Subcontract with respect to those services alone.

[40] Under the terms of the Subcontract, Sapient could terminate the DC services portion in one of two ways: (i) under s. 17.4, for convenience; or (ii) under 17.2, for cause. Although the Subcontract did not contain a formula for calculating damages where DC services were terminated for cause, s. 17.4 specified the formula the parties were to use where those services were terminated for convenience. In those circumstances, the minimum performance principle applied to the calculation of damages for the termination of the DC services because the alternative mode of performance contained in s. 17.4 shaped and constrained Siemens' reasonable expectations concerning the damages it could recover in the event Sapient terminated the DC services.

[41] That Sapient terminated the entire contract, and not just the DC services portion, does not alter how the expectancy principle operates in connection with its termination of the DC services. The terms of the Subcontract did not prevent Sapient terminating both the DC and AMS services portions at the same time. The termination for convenience clause did not stipulate it would apply only in the event Sapient terminated the DC services portion but continued the contract with Siemens for AMS services.

[42] On the language of the Subcontract, it was open to Sapient to use the termination for convenience clause to terminate the DC services part, while relying on the termination for cause provision to terminate the rest of the contract. While Sapient did not purport to terminate the Subcontract in that fashion, it was a mode of termination open on the language of ss. 17.2 and 17.4. Even if Sapient ultimately could not justify its termination of AMS services for cause, that would not alter the limit placed by the Subcontract's language on Siemens' reasonable expectation about the damages recoverable for the termination of the other part of the contract involving DC services. The termination for convenience clause effectively defined the upper limit of Sapient's liability for damages in respect of DC services: Open Window Bakery (2002), 58 O.R. (3d) 767 (C.A.), at para. 43, varied on other grounds, 2004 SCC 9, [2004] 1 S.C.R. 303, at paras. 9 and 23.

[43] Siemens argues that even if the terms of the Subcontract provided Sapient with alternative modes of performance, the minimum performance principle should not apply because Sapient did not act in good faith when it terminated the Subcontract. Siemens contends the minimum performance principle should be read in light of the over-arching duty of good faith and honest performance recognized in Bhasin. Siemens argues that, in terminating the Subcontract, Sapient breached its common law duty of good faith, as well as its contractual duty of good faith set out in s. 20.1 of the Subcontract. Consequently, Sapient cannot take advantage of the less burdensome damages calculation formula contained in the Subcontract's termination for convenience clause.

[44] I am unable to accept these submissions for two reasons.

[45] First, although the trial judge found that Sapient did not act in good faith when invoking the termination for cause provision to end the entire Subcontract, he did not conclude that Sapient's lack of good faith barred the application of the minimum performance principle. Instead, he concluded the principle did not apply because the termination for convenience clause was not an available alternative mode of performance given Sapient's intention to terminate the entire Subcontract, not just the DC services portion.

[46] Second, in Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460, 106 O.R. (3d) 427, at para. 47, this court stated that the application of the minimum performance principle did not depend upon good faith conduct by the breaching party.

[47] Siemens submits that the decision in Agribrands has been overtaken by that in Bhasin. I am not persuaded by that submission. Bhasin focused on the issue of the performance of contracts: specifically, the existence of a general organizing principle of good faith contractual performance and a common law duty to perform contractual obligations honestly. Bhasin did not purport to alter the existing principles concerning the proper measure of expectation damages in the event of a breach of contract.

[48] Indeed, there are suggestions in Bhasin – albeit not definitive – that the minimum performance principle operates in conjunction with the general organizing principle of good faith. Recall that in Bhasin the contract ran for an initial term of three years, with an automatic renewal for a further three years unless one party gave six month's written notice to the contrary. At issue was whether the terminating party, Can-Am, had acted honestly in exercising the non-renewal clause. In the course of discussing the breadth of an organizing principle of good faith, the Supreme Court alluded to the minimum performance principle when it stated, at para. 90:

Even if there were a breach of a broader duty of good faith by forcing the merger, Can-Am's contractual liability would still have to be measured by reference to the least onerous means of performance, which in this case would have meant simply not renewing the contract. Since no damages flow from this breach, it is unnecessary to decide whether reliance on a discretionary power to achieve a purpose extraneous to the contract and which undermined one of its key objectives might call for further development under the organizing principle of good faith contractual performance.

[49] Given that comment, I am not persuaded, as Siemens submits, that this court's decision in Agribrands has been overtaken by that in Bhasin.

[50] Accordingly, I conclude the trial judge should have applied the minimum performance principle and calculated Siemen's damages for the wrongful termination of the DC services portion of the Subcontract by using the formula in s. 17.4, the termination for convenience clause. His failure to do so amounted to an error of law, which is subject to review on the correctness standard: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293, 135 O.R. (3d) 241, at paras. 58-61, leave to appeal refused, 37039 (Oct. 19, 2017). Accordingly, I would set aside his finding that Siemens was entitled to damages for the wrongful termination of the DC services portion of the Subcontract in the amount of $2,404,000: Reasons, at paras. 321, 345 and 410.

IV. SECOND ISSUE: THE INTERPRETATION OF THE DAMAGES FORMULA IN THE TERMINATION FOR CONVENIENCE CLAUSE

A. The Issue Stated

[51] As noted, the trial judge performed an alternative calculation of damages in accordance with the formula set out in the Subcontract's termination for convenience clause. That section, s. 17.4, provided for a payment to Siemens calculated as follows:

[Siemens] shall receive payment for the last milestone preceding the termination plus the lesser of (a) a time and materials rate of $1450 per person (not to exceed 12 people) per day for each day of Data Conversion Services provided following the last completed milestone until the effective date of the termination, plus a one time charge of $50,000 and (b) the amount due at the next milestone, had the Data Conversion Services not been terminated. [Emphasis added.]

[52] Sapient had argued that under the termination for convenience clause Siemens was entitled to damages of $622,725. Siemens disagreed. It submitted that s. 17.4 entitled it to an additional $437,000, representing the payment due for the last milestone preceding termination. As put by the trial judge, the dispute was "what is meant by the words 'for the last milestone preceding termination' in Section 17.4."

[53] The trial judge accepted Siemens' submission that it was entitled to an additional $437,000. He stated, at paras. 336 to 338:

The plain language of the words in that Section provides that Sapient must pay Siemens for the last milestone preceding the termination in the event of termination. Significantly, the words do not provide that payment in respect of the last milestone is only to be made if it has not yet been paid.

Further, it is reasonable to conclude that at the time the termination for convenience provision is invoked, Sapient's obligation to pay the previous milestone would have already crystallized and been paid. Consequently, the provision in Section 17.4 to pay for the last milestone preceding termination is not to ensure that Siemens was paid for that previous milestone but rather to provide an additional level of compensation to Siemens given that termination was for convenience and not cause.

I conclude, therefore, that Section 17.4 requires Sapient to pay to Siemens the amount owing for the last milestone preceding termination regardless of whether that amount has already been paid, together with the lesser of the two amounts set out for services since the last completed milestone.

[54] The trial judge concluded Siemens would be entitled under s. 17.4 to damages for breach of the DC services in the amount of $1,059,725 – the undisputed $622,725, plus an additional $437,000.

B. The Positions of the Parties

[55] Sapient submits the trial judge interpreted the formula in s. 17.4 in a commercially absurd manner. Under his interpretation, Siemens would be entitled to a payment of $437,000 "for the last milestone preceding the termination" even though it already had received payment for that milestone. According to Sapient, where a contract provides that a party "'shall receive payment for' something," it means only one payment, unless clear words to the contrary are present to sanction payment twice.

[56] Siemens contends that the plain language of s. 17.4 supports the trial judge's interpretation. The section does not provide that payment for the last milestone was to be made only if it had not already been paid. The trial judge's interpretation was reasonable and entitled to deference.

C. Analysis

[57] The standard of review applicable to the contractual interpretation issues raised on this appeal is that set out by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and subsequent decisions. As summarized by this court in Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, 13 C.E.L.R. (4th) 28, at para. 55:

That standard holds the interpretation of non-standard form contracts involves issues of mixed fact and law that are subject to deferential review on appeal and in respect of which appellate courts may not intervene in the absence of a palpable and overriding error. Although it may be possible to identify an extricable question of law in a contractual interpretation dispute, courts should be cautious about identifying such questions because of the close relationship between the selection and application of principles of contractual interpretation. The construction ultimately given to the contract means that the circumstances in which a question of law can be extricated from the interpretation process will be rare: Sattva, paras. 50 to 55; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, at para. 24; Uniprix inc. v. Gestion Gosselin et Bérubé inc., 2017 SCC 43, at para. 41.

[58] On first impression, how to interpret the phrase "for the last milestone preceding the termination" in s. 17.4 of the Subcontract would seem to raise a quintessential question of mixed fact and law, with the trial judge's interpretation entitled to deference. However, Sapient contends the interpretation reached by the trial judge ran afoul of the legal principle of contractual interpretation that requires any interpretation to accord with good business sense and avoid a commercial absurdity. Sapient paints the trial judge's interpretation as offending that principle, thereby raising an extricable question of law which attracts review on a correctness standard.

[59] Sapient's argument does not persuade me.

[60] The interpretive principle of commercial efficacy – and its corollary, avoiding interpretations that result in a commercial absurdity – is merely one of several tools used by courts to give an accurate meaning to the parties' intentions as stated in a contract: Geoff R. Hall, Canadian Contractual Interpretation Law, 3d ed. (Toronto: LexisNexis Canada, 2016), at pp. 55-66. Commercial reasonableness is not "judged solely from the perspective of one of the contracting parties but rather must be assessed objectively": Hall, at p. 57. "[I]n assessing commercial reasonableness the court will consider both the language of the contract as a whole (such that individual provisions are not assessed in isolation for commercial reasonableness) and the factual matrix (as the surrounding circumstances are essential to understanding whether a particular interpretation makes good business sense)": Hall, at p. 58.

[61] The trial judge's reasons disclose that he was attentive to the plain language of s. 17.4, the provisions of the Subcontract as a whole, and the factual matrix from which the Subcontract emerged. Given those circumstances, little ground remains on which Sapient can erect an argument based on commercial absurdity.

[62] Moreover, the trial judge offered a commercial rationale for interpreting s. 17.4 as requiring an additional payment of $437,000. He stated, at para. 337:

Further, it is reasonable to conclude that at the time the termination for convenience provision is invoked, Sapient's obligation to pay the previous milestone would have already crystallized and been paid. Consequently, the provision in Section 17.4 to pay for the last milestone preceding termination is not to ensure that Siemens was paid for that previous milestone but rather to provide an additional level of compensation to Siemens given that termination was for convenience and not cause.

[63] As the trial judge noted, a payment of $437,000 "due for the last milestone preceding termination" would amount to only 10% of the total Subcontract price. Although a material amount, in the circumstances of this case awarding damages of that magnitude would not come close to approaching a commercially unreasonable result.

[64] Accordingly, I see no basis for appellate interference with the trial judge's interpretation of s. 17.4. He applied the governing principles of contractual interpretation and clearly explained the basis for his interpretation. His interpretation was reasonable in the circumstances and was not the product of palpable and overriding error. I would not give effect to this ground of appeal.

V. THIRD ISSUE: DAMAGES FOR AMS SERVICES

A. The Issue Stated

[65] The AMS portion of the Subcontract required Siemens to implement and operate a 24/7 toll free call centre to respond to questions or concerns from Enbridge personnel after the new system went into operation. Although Siemens' delivery of the AMS services would start after the new system went live, the Subcontract required Siemens to perform some preparatory work, including having AMS personnel on site before the "go-live" date.

[66] The trial judge did not accept Sapient's position that it had cause to terminate the AMS portion of the Subcontract because of a "lack of urgency" by Siemens in performing the preparatory work. He found that as of June 29, 2009 Siemens was not in breach of its contractual obligations concerning AMS services.

[67] Siemens claimed damages for loss of profits arising from Sapient's wrongful termination of the AMS portion of the Subcontract in the amount of $3,575,990. That amount represented Siemens' estimate of the total gross profits it would have earned from the AMS portion of the Subcontract had it remained in force for the full three year period following the "go live" date. The trial judge accepted the accuracy of Siemens' estimate.

[68] Sapient contended that s. 18.6 of the Subcontract, entitled "Limitation of Liability", precluded Siemens from recovering damages for lost profits resulting from the termination of the AMS services. The relevant portions of s. 18.6 provided:

18.6.1 SUBJECT TO SECTION 18.6.2, NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, EACH OF SUBCONTRACTOR AND SAPIENT WILL BE LIABLE TO THE OTHER WITH RESECT TO THIS AGREEMENT AND ANY OTHER OBLIGATIONS RELATED THERETO ONLY FOR DIRECT DAMAGES AND FOR AN AMOUNT THAT WILL NOT EXCEED, IN THE AGGREGATE

FOR GREATER CERTAINTY, SUBJECT TO SECTION 18.6.2, NEITHER SUBCONTRACTOR NOR SAPIENT WILL BE LIABLE TO THE OTHER FOR INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR FOR LOSS OF PROFITS (COLLECTIVELY, " EXCLUDED DAMAGES "), EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

18.6.3 THIS SECTION 18.6 WILL APPLY IRRESPECTIVE OF THE NATURE OF THE CAUSE OF ACTION, DEMAND OR CLAIM, INCLUDING BUT NOT LIMITED TO, BREACH OF CONTRACT (INCLUDING FUNDAMENTAL BREACH), NEGLIGENCE, TORT OR ANY OTHER LEGAL THEORY, AND WILL SURVIVE A FUNDAMENTAL BREACH OR BREACHES AND/OR FAILURE OF ESSENTIAL PURPOSE OF THIS AGREEMENT OR OF ANY REMEDY CONTAINED HEREIN. [Bold in original and italics added.]

[69] Sapient argued s. 18.6.1 clearly excluded any liability on its part for "loss of profits", with the result that Siemens' damages for the AMS portion of the Subcontract should be limited to its alternative claim of incremental staffing costs in the amount of $543,548.89.

[70] The trial judge did not accept Sapient's position. He started his analysis by considering the first step in the test set out in Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at para. 122. Under the first step, a court must ask whether the exclusion clause would even apply in the circumstances of the case.

[71] The trial judge applied the principles of contractual interpretation discussed in Sattva and concluded, at para. 354, that "when the words in Section 18.6.1 are read both on their own and in the context of the Subcontract as a whole, the limitation of liability set out in Section 18.6.1 does not apply to Siemens damage claim for loss of profits in respect of AMS."

[72] The trial judge explained how he reached this conclusion, at paras. 356 to 361 of his reasons:

Turning first to the wording of Section 18.6, the wording in Section 18.6.1, which limits damages to direct damages only, includes loss of profits under the Subcontract. As previously discussed, expectation damages, which are direct damages, include loss of profits.

Section 18.6.1 goes on, however, "for greater certainty" to provide that neither Siemens nor Sapient will be liable to the other for "indirect, special, consequential or punitive damages or for loss of profits (collectively, 'Excluded Damages'), even if the party has been advised of the possibility of such damages."

Given the above grouping and inclusion of "loss of profits" as Excluded Damages along with "indirect, special and consequential damages", in my view the reference to "loss of profits" in Section 18.6.1 refers to consequential or indirect lost profits, i.e., a breach that causes either Siemens or Sapient to lose profit from other work forgone as a result of the breach. Consequential lost profits do not include profits under the Subcontract but rather are indirect losses which are only recoverable when they are foreseeable or communicated to the defendant: Hadley v. Baxendale (1854), 9 Exch. 341, 156 E.R. 145 (Eng. Ex. Div.) at para. 3. My conclusion that the provision of "loss of profits" in Excluded Damages relates to consequential or indirect profits is further confirmed by the concluding words of the paragraph which provide: "even if the party has been advised of the possibility of such damages." That language is in accordance with the Hadley recovery principle for consequential damages.

In my view, the above interpretation of "loss of profits" in s. 16.1 is also confirmed when considering the context of the Subcontract. The AMS portion of the Subcontract is a fixed price commercial contract for services. It is reasonable to assume that parties who enter into such a contract would rely on the fact that they would receive the loss of profit component of the price in the event of a breach. As stated by Professor Waddams in the Law of Contracts, (6th ed.), at pp. 523-524, the main purpose of contracts in a commercial context is to allow and protect reliance. The learned author goes on to state:

Thus… reliance can only be fully protected, at least in a commercial context, by a rule that measures damages by the value of performance, enabling the plaintiff to recover what has been called the "expectation" interest or damages for "the loss of bargain."

Further, there is no evidence surrounding the formation of the contract that would support a finding that it was the intention of the parties at the outset of the Subcontract that the limitation of liability clause would apply to prevent the recovery of loss of profits in the event of a breach of the Subcontract.

For the above reasons, therefore, I conclude as a matter of interpretation that the limitation of liability clause in Section 18.6 of the Subcontract does not apply to Siemens' claim for loss of profits arising from Sapient's breach of the AMS portion of the Subcontract. The claim for lost profits is a direct damage claim and does not come within the exclusion in Section 18.6.1 of the Subcontract. As a result of my conclusion, as noted above by Justice Binnie in Tercon, there is no need to proceed further with the Tercon analysis.

[73] The trial judge awarded Siemens damages of $3,575,990 for Sapient's breach of the AMS portion of the Subcontract.

B. Positions of the Parties

[74] Sapient advances two main arguments in support of its position that the trial judge erred in concluding s. 18.6.1 did not exclude a claim for loss of profits: (i) the proper interpretation of this exclusion clause involves an extricable question of law to which the correctness standard applies; or (ii) alternatively, the trial judge made a palpable and overriding error in light of the unambiguous and unqualified language chosen by the parties in s. 18.6 to exclude liability for loss of profits.

[75] Siemens contends the trial judge's interpretation of the limitation of liability provision is a question of mixed fact and law, reviewable on a deferential standard. His interpretation was a reasonable one.

C. Analysis

The Standard of Review

[76] In support of its argument that the correctness standard applies, Sapient points to this court's decision in Biancaniello v. DMCT LLP, 2017 ONCA 386, 138 O.R. (3d) 210. Sapient contends Biancaniello stands for the proposition that the interpretation of a contractual term that uses language common to other contracts – such as "consequential" or "indirect" damages – involves an extricable question of law to which the correctness standard applies.

[77] I am not persuaded by this submission.

[78] Sapient seeks to stretch the decision in Biancaniello beyond its specific circumstances. At issue in that case was whether the words releasing any claim "existing to the present time" covered claims unknown at the time the parties signed a release. The issue of the standard of review was intertwined with the litigation history of the case: leave to appeal had been granted by the Divisional Court from the initial dismissal of the summary judgment motion; the Divisional Court dismissed the appeal; and then this court granted further leave to appeal. This court stated, at paras. 20-22, that this litigation history affected the applicable standard of review because leave to appeal would only have been granted if the issue raised was one of general public importance.

[79] Consequently, I do not read this court's explanation in Biancaniello for its choice of the correctness standard of review in that particular case as establishing some broader proposition that a correctness standard applies to contractual interpretation when a non-standard form contract uses words found in other agreements. The choice of the standard of review in Biancaniello was firmly rooted in that case's procedural history.

[80] Further, Sapient's submission that a correctness standard should apply where a non-standard form contract uses words found in other contracts runs against the grain of two basic directions given by this court about contractual interpretation.

[81] First, following Sattva this court has cautioned that reviewing courts should be slow to identify extricable questions of law in interpretation disputes given that the goal of ascertaining the objective intentions of the parties is inherently fact specific: Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 ONCA 544, 72 B.L.R. (5th) 177, at para. 25, leave to appeal refused, [2017] S.C.C.A. No. 366, citing Sattva, at paras. 54-55. As Sattva emphasized, at para. 55, "[t]he close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare." To adopt the correctness standard whenever a contract uses a word found in another would turn the "rare" into the "common".

[82] Second, the meaning of a contractual term is derived not just from the words used, but from the context or circumstances in which the words are used. Sometimes it may prove difficult to understand contractual language without some knowledge of its context and the purpose of the contract: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at para. 52. This too militates against adopting the correctness standard of review simply because a contract uses a word found in other agreements.

[83] Accordingly, the trial judge's interpretation of s. 18.6 of the Subcontract attracts the deferential Sattva standard of review.

The Trial Judge's Interpretation of s. 18.6 of the Subcontract

[84] Sapient contends the trial judge made numerous errors in interpreting s. 18.6: (i) he failed to determine the parties' intentions in accordance with the language they used; (ii) he read one part of s. 18.6 – "direct damages" – in isolation, without construing the contract as a whole; (iii) he ignored the ordinary and grammatical meaning of the clause, including the disjunctive language used; (iv) his interpretation deprived the phrase "loss of profits" of any meaning; (v) he failed to consider the clause in relation to a similar (but not identical) clause in the Prime Contract between Sapient and Enbridge; and (vi) he did not have regard to the overall commercial context of the Subcontract.

[85] I would not accept these submissions. Sapient's long list of purported errors simply reflects its disagreement with the trial judge's detailed analysis, at paras. 356 to 361 of the Reasons, reproduced above. Sapient would have interpreted s. 18.6 in a different fashion. So be it. Reasonable people can disagree about the meaning of some contractual provisions.

[86] But Sattva and its successors are premised on the inevitability of reasonable disagreements about the interpretation of provisions in a non-standard form contract. Where, as in this case, the trial judge gives a considered, detailed, and context-sensitive explanation about how he arrived at the specific interpretation, and his analysis is not marked by a rare extricable error of law or palpable and overriding errors of fact, then an appellate court should defer to his interpretation. That another interpretation might reasonably be available does not provide a basis for appellate intervention.

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

VI. SUMMARY ON THE APPEAL FROM DAMAGES

[88] I conclude the trial judge erred in his assessment of the damages for the termination of DC services. Instead of awarding damages based upon the balance owing for DC services ($2,404,000), he should have applied the formula contained in s. 17.4 of the Subcontract. However, I see no basis for appellate intervention in the alternative damages calculation he performed under s. 17.4 ($1,059,725) or in his award of damages for termination of the AMS services part of the Subcontract.

[89] Consequently, I would reduce the damages awarded to Siemens by $1,344,275 (i.e., $2,404,000 less $1,059,725). That would result in an award of damages to Siemens of $4,947,405 (i.e., $6,291,680 less $1,344,275).

VII. FOURTH ISSUE: COSTS

[90] Siemens and Sapient resolved the costs below, fixed at an award of $3,100,000 to Siemens, subject to the outcome of any appeal made by Sapient.

[91] In the event this court reduced the damages awarded to Siemens, the parties agreed that the costs of the proceedings below should be remitted to the trial judge for his further consideration.

VIII. DISPOSITION

[92] For the reasons set out above, I would reduce the damages awarded to Siemens by $1,344,275. Accordingly, I would set aside para. 1 of the judgment and substitute an award of damages in favour of Siemens in the amount of $4,947,405. I would also set aside the award of costs to Siemens and remit the issue of the costs below back to the trial judge.

[93] The parties agreed that the successful party on the appeal would be entitled to costs fixed at $50,000. In the result, success on the appeal has been mixed. In the event the parties are unable to resolve the issue of the costs of the appeal, they may file brief, written cost submissions to the panel no later than April 30, 2018.

Released: April 18, 2018

"David Brown J.A." "I agree. Janet Simmons J.A." "I agree. Fairburn J.A."