Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, 2004 SCC 9

Jane Hamilton Appellant

v.

Open Window Bakery Limited Respondent

Indexed as: Hamilton v. Open Window Bakery Ltd.

Neutral citation: 2004 SCC 9.

File No.: 29225.

Hearing and judgment: November 13, 2003.

Reasons delivered: February 19, 2004.

Present: McLachlin C.J. and Major, Bastarache, Binnie, Arbour, LeBel and Deschamps JJ.

on appeal from the court of appeal for ontario

Contracts — Repudiation — Damages — Approach to assessing damages for breach of contract with alternative modes of performance.

Costs — Scale — Variation of scale by appellate court — Elements required for appellate court to set aside or vary award of costs.

The parties had entered into a 36‑month contract which provided for termination by the respondent: (1) for cause “without notice or other act if . . . the [appellant] acts in a manner . . . detrimental to [the respondent’s] reputation and well being”; or (2) by the exercise of an unconditional right to terminate the contract on three months’ notice “effective after the commencement of the [contract’s] 19th month”. The respondent repudiated the contract pursuant to the first clause and later pursuant to the second. The trial judge held that the respondent had 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 per cent to reflect the possibility that the respondent might have validly exercised its right to terminate the contract with notice at some later time. He ordered the respondent to pay the appellant’s costs on a party‑and‑party scale to a certain date and on a solicitor‑and‑client scale from that date forward. A majority at the Court of Appeal held that the early termination clause with three months’ notice constituted both the minimum guaranteed benefits under the contract and the respondent’s maximum exposure for damages. The damages award was reduced accordingly and the costs order was varied by reducing the award of costs on a solicitor‑and‑client scale to costs on a party‑and‑party scale.

Held: The appeal should be dismissed on the issue of damages and allowed only on the issue of costs.

Where a contract might be performed in several ways, the mode which is the least profitable to the plaintiff, and the least burdensome to the defendant, is adopted. The test is not how the defendant would likely have performed his or her obligations under the contract but for his or her repudiation. The non‑breaching party need not be restored to the position it would likely have been in but for the repudiation but rather to the position it would have been in had the contract been performed. A factual inquiry to determine an estimated cost of the various means of performance may be required but was not necessary here.

A costs award should be set aside on appeal only if the trial judge made an error in principle or if the costs award was plainly wrong. The trial judge’s costs order was restored as neither condition was met here.

Cases Cited

Referred to: Cockburn v. Alexander (1848), 6 C.B. 791; Park v. Parsons Brown & Co. (1989), 1989 CanLII 2801 (BC CA), 39 B.C.L.R. (2d) 107; Aldo Ippolito & Co. v. Canada Packers Inc. (1986), 1986 CanLII 2478 (ON CA), 57 O.R. (2d) 65; Lavarack v. Woods of Colchester Ltd., [1967] 1 Q.B. 278; The “World Navigator”, [1991] 2 Lloyd’s Rep. 23; Western Oil & Fuel Co. v. Kemp, 245 F.2d 633 (1957); Stewart v. Cran‑Vela Rental Co., 510 F.2d 982 (1975); Withers v. General Theatre Corp., [1933] 2 K.B. 536; Young v. Young, 1993 CanLII 34 (SCC), [1993] 4 S.C.R. 3; Duong v. NN Life Insurance Co. of Canada (2001), 2001 CanLII 24151 (ON CA), 141 O.A.C. 307.

Authors Cited

American Jurisprudence, vol. 22, 2nd ed. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1988.

American Law Institute. Restatement (Second) of Contracts, vol. 3. St. Paul, Minn.: American Law Institute Publishers, 1981.

Fleming, John G. The Law of Torts, 9th ed. Sydney: LBC Information Services, 1998.

Fridman, Gerald Henry Louis. The Law of Torts in Canada, 2nd ed. Toronto: Carswell, 2002.

Heuston, R. F. V., and R. A. Buckley. Salmond and Heuston on the Law of Torts, 21st ed. London: Sweet & Maxwell, 1996.

Linden, Allen M. Canadian Tort Law, 7th ed. Markham, Ont.: Butterworths, 2001.

Orkin, Mark M. The Law of Costs, 2nd ed. Aurora, Ont.: Canada Law Book, 1987 (loose‑leaf updated December 2003).

Waddams, S. M. The Law of Damages, loose‑leaf ed. Toronto: Canada Law Book, 2003.

Williston, Samuel. A Treatise on the Law of Contracts, vol. 11, 3rd ed. by Walter H. E. Jaeger. Mount Kisco, N.Y.: Baker, Voorhis, 1968.

APPEAL from a judgment of the Ontario Court of Appeal (2002), 2002 CanLII 41449 (ON CA), 58 O.R. (3d) 767, 211 D.L.R. (4th) 443, 157 O.A.C. 222, [2002] O.J. No. 1228 (QL), reversing a judgment of the Superior Court of Justice, [2000] O.J. No. 5004 (QL). Appeal dismissed on the issue of damages. Appeal allowed on the issue of costs.

Susan J. Heakes and Tiffany Little, for the appellant.

Paul Gemmink, for the respondent.

The judgment of the Court was delivered by

Arbour J. —

I. Facts and Overview

[1] This case requires us to determine the appropriate approach to assessing damages for the breach of a contract with alternative modes of performance.

[2] The appellant, Jane Hamilton, entered into a contract with Open Window Bakery Limited (“OWB”) for a term of 36 months. By its terms, Hamilton was to be an exclusive agent for the marketing and sale of OWB’s baked goods in Japan.

[3] The contract provided that OWB could terminate the agreement in several ways, two of which are apposite to this appeal. First, OWB could terminate the contract “without notice or other act if . . . the Agent acts in a manner which is detrimental to the reputation and well being” of OWB. Second, the contract granted OWB the unconditional right to terminate the contract “with notice to the Agent effective after the commencement of the 19th month of the term herein, on three (3) months notice”.

[4] Approximately 16 months later, OWB repudiated the contract. In a letter of termination addressed to Hamilton, dated May 19, 1998, OWB made two allegations in support of the termination. The first allegation was that Hamilton behaved in a manner “detrimental to the reputation and well being” of OWB by deliberately falsifying ingredient lists in omitting sugar on shipments of bagels to Japan (sugar content was an important factor in the assessment of Japanese import tariffs). The second allegation was that Hamilton disclosed pricing and other confidential information to an employee of one of Japan’s largest food retailers (who also was an employee of the Japanese External Trade Organization) in violation of the contract’s confidentiality clause. The letter stated that Hamilton’s termination was “effective immediately”.

[5] In the letter, OWB claimed entitlement to a return of all commission advances paid (but not yet earned) and denied any further obligation to pay commissions or to reimburse Hamilton for expenses. The letter stated that OWB would not pursue the return of commission advances already paid if Hamilton did not legally challenge her termination.

[6] OWB sent a subsequent letter of termination dated August 5, 1998. This letter was motivated by OWB’s desire to rely upon the clause in the agreement which provided for early termination with notice in the event its earlier termination was successfully challenged by Hamilton.

[7] Hamilton subsequently commenced an action against OWB and its chief executive officer, Gail Agasi, in the Ontario Superior Court of Justice. OWB counterclaimed against Hamilton. At the outset of the trial the action against Agasi was dismissed on consent, as was the counterclaim. The matter proceeded as an action for general damages in breach of contract against OWB. The trial judge, Wilkins J., 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: [2000] O.J. No. 5004 (QL). The discount reflected the possibility that OWB might at some later point have validly exercised its right to terminate the contract with notice.

[8] In addition to the damages award, Wilkins J. ordered OWB to pay Hamilton’s costs on a party-and-party scale up to October 30, 2000 and from that date forward on a solicitor-and-client scale. Wilkins J. held that costs on a solicitor-and-client scale were appropriate for several reasons. OWB defended the action on the “most serious” and “narrow” basis that Hamilton had behaved dishonestly. OWB failed to demonstrate on a balance of probabilities that Hamilton had in fact been dishonest. OWB persisted in its allegations of dishonesty even after October 30, 2000, at which time pre-trial production and discovery had been completed. By that date, Wilkins J. held that OWB had access to information sufficient to conclude that Hamilton had not behaved dishonestly or fraudulently. OWB appealed.

[9] Simmons J.A. for the majority at the Court of Appeal for Ontario (2002), 2002 CanLII 41449 (ON CA), 58 O.R. (3d) 767 (Goudge J.A. dissenting), held that the early termination clause with three months’ notice constituted the minimum guaranteed benefits under the contract. As such, in the court’s opinion, it also constituted OWB’s maximum exposure for damages. The damages award was reduced accordingly. Simmons J.A. also varied the costs order of Wilkins J., reducing the award of costs on a solicitor-and-client scale after October 30, 2000, to costs on a party-and-party scale.

[10] Hamilton appealed to this Court with respect to both damages and costs. From the bench, this Court dismissed the appeal with respect to the damages, but allowed the appeal with respect to costs.

II. Analysis

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.

B. Costs

[24] In overturning the costs award ordered by Wilkins J. at trial, Simmons J.A. for the majority of the Court of Appeal, at para. 57, stated:

The trial judge found that the appellant had not met the high standard of proof required to sustain allegations of fraud or dishonesty. He did not find the pleading to be without foundation. In these circumstances and in light of my disposition of the main ground of appeal, I would set aside the order for solicitor and client costs and substitute an award on the partial indemnity scale.

[25] In this case, Wilkins J. assessed the tenability of the allegations of dishonesty and fraud, assisted by his observation of the demeanour of all the witnesses. He concluded that, while the allegations had, perhaps, some circumstantial plausibility, OWB relied only upon the narrow issue of dishonesty and persisted unduly in these allegations.

[26] In Young v. Young, 1993 CanLII 34 (SCC), [1993] 4 S.C.R. 3, at p. 134, McLachlin J. (as she then was) for a majority of this Court held that solicitor-and-client costs “are generally awarded only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties”. An unsuccessful attempt to prove fraud or dishonesty on a balance of probabilities does not lead inexorably to the conclusion that the unsuccessful party should be held liable for solicitor-and-client costs, since not all such attempts will be correctly considered to amount to “reprehensible, scandalous or outrageous conduct”. However, allegations of fraud and dishonesty are serious and potentially very damaging to those accused of deception. When, as here, a party makes such allegations unsuccessfully at trial and with access to information sufficient to conclude that the other party was merely negligent and neither dishonest nor fraudulent (as Wilkins J. found), costs on a solicitor-and-client scale are appropriate: see, generally, M. M. Orkin, The Law of Costs (2nd ed. (loose-leaf)), at para. 219.

[27] A court should set aside a costs award on appeal only if the trial judge has made an error in principle or if the costs award is plainly wrong (Duong v. NN Life Insurance Co. of Canada (2001), 2001 CanLII 24151 (ON CA), 141 O.A.C. 307, at para. 14). In Wilkins J.’s costs order I find no such error of principle, nor can I conclude that the award is plainly wrong. In light of the privileged position of the trial judge to assess first-hand the credibility of witnesses, and given the highly fact‑driven nature of the analysis that was required here, the costs order made by Wilkins J. must be restored.

III. Conclusion

[28] For the foregoing reasons, the appeal was dismissed from the bench with regard to damages and allowed only on the issue of costs. The trial judge’s award of solicitor-client costs at trial is restored. Each party is to bear its own costs in the Court of Appeal for Ontario and in this Court.

Appeal dismissed on the issue of damages. Appeal allowed on the issue of costs.

Solicitors for the appellant: Heenan Blaikie, Toronto.

Solicitors for the respondent: Gemmink & Associate, Toronto.