The Ontario Court of Appeal’s decision in Southcott Estates Inc. v Toronto Catholic School Board1 (judgment on appeal to the Supreme Court of Canada currently on reserve) may mark a departure from traditional approaches to assessing damages following a failure by the plaintiff to mitigate its losses.
The plaintiff, Southcott Estates Inc., was a wholly owned subsidiary of Ballantry Homes Inc.2 The defendant, the Toronto Catholic District School Board (the School Board), entered into an agreement to sell Southcott certain surplus lands. As required by the Planning Act, the contract was subject to the condition that severance of the subject lands be obtained. Consent was not obtained, and the School Board declared the contract to be at an end. The trial court held (and this point was not overturned on appeal) that the School Board had failed to use its “best efforts” to obtain the severance and had thus breached the contract.
The defendant argued that the plaintiff had a duty to mitigate, and that the plaintiff’s losses were in fact mitigated through purchases of alternative investment property made by Ballantry. Alternatively, the defendant argued, if the purchases made by Ballantry were not in mitigation of Southcott’s losses, Southcott ought to have mitigated, and its failure to do so should result in the loss of “their right to consequential damages.”3
The trial judge noted that, “[t]he plaintiff admitted that it never had any intention and never tried to mitigate the damages. The plaintiff was a single purpose company incorporated solely for the purposes of this project with no assets other than the money advanced to it by Ballantry for the deposit.”4 Additionally, he held that Ballantry’s purchases of land would have occurred in any event. As a result, profits made on these purchases did not go to reducing the damages recoverable based on the widely accepted principle that, “The subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business.”5 In this case, the purchases by Ballantry would have been made whether a breach had occurred or not. The trial judge also held that the evidence of alternative properties available for purchase for the purpose of mitigation was inconclusive.6
Decision of the Court of Appeal
The Court of Appeal allowed an appeal with respect to the issue of damages. The Court of Appeal focused on “Southcott’s admission that it had no intention of taking any steps to mitigate its loss.”7 It was held that this satisfied “the onus resting upon the Board to prove failure to mitigate and [was sufficient] to shift the evidentiary onus to Southcott of demonstrating that, even if it had attempted to mitigate, it could not have done so.”8 It also held that Ballantry’s subsequent purchases could not be credited towards mitigation by Southcott, emphasizing the companies’ separate legal identities.9 The Court of Appeal awarded nominal damages of $1.10
Leaving aside the complexities created by the corporate structure in Southcott Estates and the plaintiff’s failed claim for specific performance, the approach taken by the Court of Appeal indicates a departure from the traditional approach to mitigation of damages in at least two ways.
First, it appears the Court of Appeal has created a new evidentiary onus applicable to situations where the plaintiff admits it did not attempt to mitigate. The court indicates that in such circumstances, the plaintiff will be required to show that even if it had attempted to mitigate, it could not have done so. This seems to modify the approach to mitigation previously endorsed by the courts. In a previous case, the Supreme Court of Canada stated: “If it is the defendant’s position that the plaintiff could reasonably have avoided some part of the loss claimed, it is for the defendant to carry the burden of that issue, subject to the defendant being content to allow the matter to be disposed of on the trial judge’s assessment of the plaintiff’s evidence on avoidable consequences.”11
Second, until Southcott Estates it was generally accepted that the failure to mitigate damages simply lowered the amount of recoverable losses.12 The failure to mitigate did not automatically disentitle the plaintiff to more than nominal damages; it simply lowered the recoverable damages by the amount of loss the court believed the plaintiff could have avoided had it taken steps to mitigate. This approach is consonant with two of the rationales cited in support of the duty to mitigate—the limit of causation (the defendant cannot fairly be said to have “caused” losses that the plaintiff could have avoided)—and the principle that only reasonably foreseeable losses are recoverable (it is not reasonably foreseeable that the plaintiff will do nothing to protect itself from avoidable losses).13 The Court of Appeal judgment in Southcott does not clarify whether or to what extent its award of nominal damages modifies this approach.
If upheld, the Court of Appeal’s decision in Southcott may alter the way the plaintiff’s duty to mitigate its damages operates in Canadian law. Nevertheless, the impact of the case in the broader context may require further clarification in subsequent decisions owing to the unique facts present in Southcott.