ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 12-4350-SR

DATE: 2015/09/21

BETWEEN:

JUSTIN YOUNG and SHELLEY AUBREY-YOUNG
Plaintiffs/Defendants to the Counterclaim

– and –

EURO CUSTOM HOMES INC.
Defendant/Plaintiff by Counterclaim

Gene P. Chiarello, for the Plaintiffs

J. Sebastian Winny, for the Defendant/Plaintiff by Counterclaim

HEARD: September 14, 2015

THE HONOURABLE JUSTICE DAVID A. BROAD

Background

[1] The plaintiffs are husband and wife and were the purchasers from the defendant, as vendor, of a property on Voisin Crescent in the community of St. Clements in the Regional Municipality of Waterloo pursuant to an agreement of purchase and sale (the “Agreement”) dated April 2, 2012. The defendant has carried on business as a home builder in or around the Kitchener-Waterloo area since 1994.

[2] The Agreement called for the defendant to construct a luxury home, designed to the plaintiffs’ specifications, on the property. The total purchase price for the land and home under the Agreement was $1,080,000.00 plus the enrolment fee under the Ontario New Home Warranty Plan (the “Tarion fee”) in the sum of $1,582.00. The plaintiffs paid a deposit in the sum of $40,000 to the defendant. The Agreement called for a closing date of December 14, 2012.

[3] On or about August 3, 2012 the plaintiffs gave notice to the defendant that they did not intend to complete the purchase of the property with the completed home on the closing date and requested the defendant to cease construction. As of the date of the plaintiffs’ notice, the defendant had completed the foundation of the main building and garage, incurring $58,752.92 in project costs, including all labour and materials.

[4] Following delivery of the plaintiffs’ notice of August 3, 2012 that they would not be completing the purchase of the property and home, the parties entered into a period of negotiations with the assistance of counsel. When no agreement could be reached, the defendant’s lawyer wrote to the plaintiffs’ lawyer on September 17, 2012 advising that the defendant had decided to accept the plaintiffs’ repudiation of the Agreement and would proceed as expeditiously as possible to mitigate its losses on the transaction and would be looking to the plaintiffs for compensation for all losses and expenses it should incur resulting from the plaintiffs’ repudiation.

[5] This proceeding was commenced by the plaintiffs issuing a Statement of Claim, under the Simplified Procedure, seeking the return of the deposit in the sum of $40,000. The defendant defended the plaintiffs’ action by Statement of Defence and counterclaimed for its losses arising from the plaintiffs’ repudiation of the Agreement. Due to the amount claimed in the counterclaim, the proceeding continued under the Ordinary Procedure.

[6] By the time of trial the parties had agreed that the plaintiffs had committed an anticipatory breach of the Agreement and that they were liable to the defendant for damages. The parties were therefore in agreement that the plaintiffs’ action should be dismissed. The trial proceeded only on the question of the amount of the defendant’s damages pursuant to the counterclaim.

[7] The parties entered into a Statement of Agreed Facts and also agreed that the evidence-in-chief of the principal of the defendant, Henry Frey, could be given by affidavit. Mr. Frey was then cross-examined by plaintiffs’ counsel. The plaintiff, Justin Young, gave viva voce evidence and was cross-examined by the defendant’s counsel.

[8] The material facts are not in dispute. The parties differed on the basis by which the defendant’s damages were to be determined and on whether, on the agreed facts and the undisputed facts, the defendant had taken reasonable steps to mitigate its damages.

[9] Based upon the Statement of Agreed Facts and the affidavit of Henry Frey, the following additional facts were established in the evidence:

(a) the defendant’s anticipated gross profit on the transaction with the plaintiffs, if it had closed, was the sum of $353,000 without deduction for overhead or general operating costs;

(b) during the period of negotiation following the plaintiffs’ notification to the defendant that they did not intend to close the transaction, construction on the home was suspended;

(c) when negotiations broke down, Mr. Frey had to decide on how to complete construction and sell the property to another buyer. The construction was at an early stage which permitted design changes to be made to make the property more attractive, according to Mr. Frey, to potential buyers;

(d) the defendant implemented design changes in the course of completing construction at a cost of $66,092.69;

(e) Mr. Frey’s decisions on the revisions to the design of the home were based on his business judgment and were intended by him to increase the attractiveness of the property to potential buyers and to attain the highest possible sale price. Mr. Frey’s decisions in this respect were not challenged on cross-examination and no contrary evidence was led by the plaintiffs;

(f) the defendant listed the property for sale with a real estate brokerage at a listing price of $1,169,000 and a commission rate of 4%. Construction was completed in or about June 2013;

(g) the defendant accepted an offer from Ms. Kohlsmith on November 4, 2013 at a price of $1 million, conditional on a number of matters including the sale of her existing property, with the closing date of June 27, 2014. The condition respecting the sale of Ms. Kohlsmith’s home was not waived by her by the deadline and the agreement of purchase and sale expired on February 14, 2014;

(h) the defendant accepted an offer to purchase the property from Paul and Caitlin Barton (the “Bartons”) dated April 13, 2014 at a price of $1,085,000, conditional on financing and on the sale of the Bartons’ existing property and subject to the defendant performing certain renovations to the kitchen at its expense.

(i) The Bartons did not waive the condition respecting the sale of their property by the deadline of June 30, 2014. The defendant then entered into four successive conditional agreements of purchase and sale with the Bartons, the first three of which expired at the end of their respective conditional periods. The Bartons waived the condition respecting the sale of their existing property on the fourth agreement of purchase and sale on September 10, 2014. The purchase price on the final agreement of purchase and sale with the Bartons was $1,040,000 inclusive of the Tarion fee of $1,582.

(j) The sale transaction between the defendant and the Bartons closed on February 27, 2015. The sale price to the Bartons was $41,582 less than the plaintiffs would have paid had they closed their agreement of purchase and sale with the defendant on December 14, 2012;

(k) the defendant incurred the cost of the listing realtor’s commission on the sale of the property to the Bartons in the sum of $42,560. There was no such commission payable in relation to the Agreement between the defendant and the plaintiffs;

(l) the parties have agreed that the plaintiffs are responsible to reimburse the defendant for the defendant’s legal costs in relation to the Agreement in the sum of $4,000;

(m) the defendant incurred the cost of renovations to the kitchen required pursuant to the agreement of purchase and sale with the Bartons in the amount of $3010.04;

(n) the defendant incurred carrying costs for the subject property during the period from December 14, 2012 to February 27, 2015 in the total sum of $25,789.17, exclusive of interest on borrowed funds. Those carrying costs were comprised of property tax, property insurance, hydro, water heater rental, natural gas supply, water usage, snow removal, heating, grass cutting, fertilizer service and painting;

(o) the defendant incurred financing costs on borrowed funds in the amount of $986,066.65 during the period from December 14, 2012 to February 27, 2015, at an interest rate of 5.5%, in the amount of $115,044.00. The said indebtedness of the defendant of $986,066.65 would have been repaid by the defendant in December, 2012 had the plaintiffs closed the transaction pursuant to the Agreement;

Position of the Defendant/Plaintiff by Counterclaim

[10] The defendant claims damages in respect of its counterclaim against the plaintiffs in the amount of $298,077.90, less the deposit paid by the plaintiffs pursuant to the Agreement in the sum of $40,000, for a net claim of $258,077.90. The defendant’s gross damage claim is broken down as follows:

(a) Legal expenses thrown away $4,000.00
(b) Increased costs of construction due to design changes $66,092.69
(c) Carrying costs of property $ 25,789.17
(d) Realtor commission at 4% $42,560.00
(e) Change to kitchen required by purchasers $3,010.04;
(f) Difference on sale price inclusive of Tarion fee $41,582.00
(g) Interest or finance charge $115,044.00

[11] The defendant states that is entitled to damages which will place it in the position it would have been but for the plaintiffs’ breach of contract, being what is referred to as expectation measure of damages. The plaintiffs should have paid $1,080,000 on December 14, 2012, being the closing date under the Agreement. That figure is subject to reduction for mitigation measured by the difference between the actual mitigation recovery of $1,040,000 and the actual mitigation and carrying costs incurred between the original closing date under the Agreement, and the eventual closing date on the sale to the Bartons, being 2.21 years.

[12] The defendant submits that the onus is on the plaintiffs to prove that it could have made better or different efforts to mitigate its loss and that such efforts would in fact have reduced its loss. The defendant states that the plaintiffs have not discharged the onus on them to prove that it failed to mitigate its loss.

Position of the plaintiffs/defendants by counterclaim

[13] The plaintiffs, for their part, argue that by accepting their repudiation of the contract, the defendant was relieved from its obligations to build a home and the plaintiffs were relieved from their obligations to complete the purchase of the home. The plaintiffs say that the defendant’s loss crystallized on the date of its acceptance of their breach, consisting of the project cost incurred to that date being the sum of $58,752.92. The plaintiffs assert that a reasonable action on the part of the defendant following their anticipatory breach would have been to demolish the foundation, backfill the excavation and restore the property to a vacant lot. Accordingly, they acknowledge that, in addition to the said sum of $58,752.92, they would be liable to the defendant for the reasonable cost of demolishing the existing foundation and restoration of the land to a vacant lot. However, they deny that they are liable for the increased construction costs due to the defendant’s design changes, the realtor’s commission, carrying costs for 2.21 years and the shortfall of approximately $40,000 on the eventual sale price because the defendant acted unreasonably in choosing to proceed with building a high-end home on the lot, knowing it would be difficult to market.

Analysis

(a) Basis for Calculating Damages

[14] It is well recognized that the principle by which the court ought to be guided in awarding damages is restitution in integrum, that is, so far as money can do it, to place the injured person in the same situation as if the contract had been performed (see Horning v. Dan Keller Construction Equipment [1944] O.J. No. 176 (C.A.) at para. 40. See also the recent case of Hav-A-Kar Leasing Ltd. v. Vekselshtein 2012 ONCA 826 (C.A.) at para. 49). Damages calculated according to this principle are often called “expectancy damages” and are forward-looking (see McCamus, The Law of Contracts, at pp. 815-816).

[15] The plaintiffs’ position is that the defendant should simply be restored to the position it was in prior to the Agreement being entered into, by reimbursing it for the cost of constructing the foundation and restoring the property to a vacant lot, representing what are often referred to as “reliance damages” which are, in contrast to the expectancy principle, backward –looking (see McCamus, at p. 816).

[16] Professor Waddams in The Law of Contracts (6th ed.) explains the justification for the recognition of expectancy principle as the guiding principle for the awarding of damages for breach of contract at pp. 523-524 as follows:

If the law of contracts protected only provable out-of-pocket losses incurred by the promisee, its usefulness to a commercial society would be substantially impaired. If A makes an agreement with B that is advantageous to B, B could not safely rely on it unless and until B incurred provable losses or expenses equal to the contractual advantage. Similarly it would be profitable for A to break the contract until such losses were incurred by B, for compensation would be cheaper than performance. Such a state of uncertainty would defeat the main purpose of contracts in a commercial context, that is, to allow and protect reliance. 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 he has been called the “expectation” interest or damages for “the loss of bargain.”

[17] The plaintiffs were not able to point to any authority suggesting that the damages in this case should be calculated based upon the reliance principle rather than the expectation principle. I am not satisfied that the situation is so unique, as argued by the plaintiffs, so as to depart from the well-established principle that the innocent party, in this case the defendant, should be put into the same position by an award of damages as it would have been had the contract been performed.

[18] I similarly find no merit in the plaintiffs’ submission that the acceptance by the defendant of the plaintiffs’ repudiation of the Agreement brought a total end to the Agreement, thereby limiting the plaintiffs’ liability for their breach to the out-of-pocket expenses incurred by the defendant to that point. In Waddams, The Law of Contracts (6th ed.) it is stated, at p. 470, as follows:

“a repudiation puts an end to the contract in the sense that it releases the innocent party from the duty of further performance, but it does not abrogate the whole contract - the innocent party can sue for damages.”

[19] In support of this principle, Prof. Waddams quotes Lord Porter in Heyman v. Darwin Ltd. [1942] A.C. 356 (H.L.) at p. 399 as follows:

“strictly speaking, to say that on acceptance of the renunciation of a contract the contract is rescinded is incorrect. In such a case the injured party may accept the renunciation as a breach going to the root of the whole of the consideration. By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.”

[20] On these principles, acceptance by the defendant of the plaintiffs’ repudiation of the Agreement had no effect on the basis upon which the defendant’s damages are to be determined. They are to be determined in accordance with the expectancy principle referred to above. Acceptance by the defendant of the plaintiffs’ repudiation only had the effect of relieving the defendant from further performance under the Agreement and conferring on the defendant the right to sue for its damages arising from the plaintiffs’ anticipatory breach.

[21] As indicated previously, the defendant is entitled to be placed in the same position as it would have been had the plaintiffs performed their obligation under the Agreement, namely by payment the purchase price in the sum of $1,080,000 on the closing date.

(b) Mitigation

[22] It is well-established that the party which is not in breach cannot recover for losses that could reasonably have been avoided. This principle is often referred to as the duty to mitigate. The mitigation principle has two bases, one of causation, that the breach does not cause losses that were reasonably avoidable, and the other being the desirability of avoiding economic waste (see Waddams, The Law of Contracts (6th ed.) at pp. 563-564).

[23] The onus to prove a failure to mitigate on the part of the defendant is on the plaintiffs (see Michaels v. Red Deer College, [1976] 2. S.C.R. 324 (S.C.C.) and Southcott Estates Inc. v. Toronto Catholic District School Board, [2012] 2. S.C.R. 675 (S.C.C.)). In order to discharge this onus, the plaintiffs must prove not just that the defendant could have made better or different efforts to mitigate its losses, but that such efforts would in fact have reduced its losses.

[24] The plaintiffs argue that it would have been more reasonable for the defendant to have removed the installed foundation and to restore the property to a vacant lot. However, they do not go on to suggest what the defendant should have done next to reduce its expectancy loss represented by the unpaid purchase price of $1,080,000. Had it restored the property to a vacant lot, thereby throwing away the costs incurred to install the constructed foundation and incurring additional costs to remove it, the defendant’s choices presumably would have been three-fold, namely, firstly to attempt to sell the vacant lot, secondly to design and build another house on the lot and attempt to sell it, or thirdly to seek out new purchaser(s), like the plaintiffs, of a home designed and built to such purchasers’ specifications.

[25] The plaintiffs led no expert or other evidence to prove that, had the defendant restored the property to a vacant lot and thereafter followed one of the three available options, its expectancy damages would have been reduced from those currently being claimed by the defendant.

[26] Moreover, the plaintiffs led no expert or other evidence to suggest that the decisions which the defendant did make in its attempt to mitigate its damages, namely to utilize the constructed foundation to build the home, to implement design changes to make the home more saleable, to list the property with a realtor at the listing price and commission rate referred to above, and to accept the various conditional offers it received on the property, including the ultimate offer to purchase from the Bartons, were unreasonable.

[27] There is no evidence that the defendant delayed the redesign, construction and marketing of the home on the property, thereby incurring additional damages, such as carrying costs, which could have been avoided.

[28] I therefore find that the plaintiffs have failed to discharge the onus on them to prove that the defendant failed to take reasonable steps to mitigate its damages.

[29] The defendant’s claim for damages exclusive of interest is the sum of $183,033.90, giving credit to the plaintiffs for the defendant’s mitigation. It is worth noting that had the contract between the parties been a straight construction contract for work and materials (for example, had the plaintiffs owned the lot and contracted with the defendant to build the home) the measure of damages which the defendant would have been entitled to for a breach by repudiation by the plaintiffs would have been the difference between the amount the defendant would have received under the contract and the amount it would have cost it to complete it (see Brainer v. Hedges 1947 444 (MB KB), [1947] 2 D.L.R. 49 (Man K.B.) at para. 20). This would have been the defendant’s anticipated profit in the sum of $353,000, subject to a possible allowance for the release of the defendant from the care, trouble and risk associated with a full execution of the contract (see Brainer v. Hedges at para. 21.) Because the defendant owned the lot upon which the home was to be constructed it was in a position to mitigate its damages by completing construction of a home on the installed foundation and selling it to a new purchaser, thereby reducing the amount of what would otherwise have been its claim against the plaintiffs.

(c) Interest

[30] On the question of interest, the statement of agreed facts recited that the defendant incurred financing costs on borrowed funds in the amount of $986,066.65 during the period from December 14, 2012 to February 27, 2015, at an interest rate of 5.5%, in the amount of $115,044. Mr. Frey, in his affidavit, deposed that the defendant’s borrowings in the above amount would have been repaid in December 2012 from the proceeds of sale had the plaintiffs closed the transaction.

[31] It is well-established that the court is free to award interest in a breach of contract case such as this at commercial rates, and is not bound by the prescribed rate under the Courts of Justice Act R.S.O.1990, c. 43. Prof. Waddams in The Law of Damages at para. 7.470. citing Foundation Co. of Canada Ltd. v. Prince Albert Pulp Co. 1976 151 (SCC), [1977] 1 S.C.R. 200 (S.C.C.) states:

“a commercial plaintiff can almost always show that had the debt in question been paid promptly, it could have reduced its outstanding indebtedness, and in all such cases it would seem that the cost to the claimant of borrowing is the appropriate rate provided that it was within the reasonable contemplation of the defendant.”

[32] There was no evidence led by the plaintiffs that it was not in their reasonable contemplation that the defendant would be financing its operations with debt, nor was there evidence that a borrowing rate of 5.5% was unreasonable or not within the plaintiffs’ reasonable contemplation. In my view, the principal amount upon which interest should be calculated is not limited to the amount incurred by the defendant in constructing the home, but rather should be calculated on the defendant’s actual borrowings which would have been paid down upon receipt of the closing proceeds expected from the plaintiffs, in this case the sum of $986,066.65.

Disposition

[33] For the reasons set forth above the plaintiffs action is dismissed and judgment is granted in favour of the defendant on its counterclaim for damages in the sum of $298,077.90, less the deposit paid by the plaintiffs pursuant to the Agreement in the sum of $40,000, for net damages of $258,077.90. This amount is inclusive of interest at the defendant’s cost of borrowing of 5.5% per annum to February 27, 2015. The amount of the damages exclusive of the claim for interest on borrowed funds in the sum of $143,033.90 (giving credit for the deposit) shall bear pre-judgment interest at the rate of 1.3% per annum from February 27, 2015 to today’s date pursuant to the Courts of Justice Act.

Costs

[34] If the parties cannot agree on costs, the defendant may make written submissions as to costs within 21 days of the release of these Reasons. The plaintiffs have 14 days after receipt of the defendant’s submissions to respond. All such written submissions are to be forwarded to me at my chambers at 85 Frederick Street, 7th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.

D.A. Broad

Released: September 21, 2015

COURT FILE NO.: 12-4350-SR
DATE: 2015/09/21

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

JUSTIN YOUNG and SHELLEY AUBREY-YOUNG
Plaintiffs/Defendants to the Counterclaim

– and –

EURO CUSTOM HOMES INC.
Defendant/Plaintiff by Counterclaim

REASONS FOR JUDGMENT

D. A. Broad

Released: September 21, 2015