Lawsuits arise for nearly as many reasons as there are plaintiffs. The types of relief awarded to successful plaintiffs are also diverse, and may include declarations from the court, orders compelling or preventing certain types of behaviour, orders compelling the transfer of property, and other types of possible relief. However, the most common relief a plaintiff will seek is an award of damages. Briefly stated, an order for damages requires that one party transfer an amount of money to another party.
For most litigants, the amount of damages awarded is the “bottom line” consideration which defines success or failure in the lawsuit. The prospect of damages is often the key factor in the plaintiff’s analysis of whether or not to pursue an action. The amount of potential damages is often key to how aggressively the plaintiff chooses to litigate the dispute. Because the transactional costs of litigation can be significant, the amount claimed in damages will often inform the strategy that both sides will apply in the litigation: unless another principle is at play, a multi-million dollar claim in damages will be litigated more vigorously than a much smaller claim, even if the two claims arise from the same incident.
Stated in its most general terms, the principle applied by Canadian courts in calculating compensatory damages in cases of both tort and breach of contract is the same: the plaintiff is to be made whole, and the award is to provide compensation for the loss suffered insofar as that can be done by money. However, the methods courts use to achieve that goal are quite different in cases of tort and breach of contract.
This bulletin will address how damages are calculated in both contract and tort, highlighting examples of common types of damage claims in each. It will then address the concept of restitution, which is similar in effect to damages, but grounded in the principles of equity and trust law. The bulletin will close with a discussion of punitive damages, which are predicated not on compensation but on some of the principles akin to those considered in criminal sentencing: deterrence, retribution and denunciation.
Damages in Contract
In actions based on breach of contract, damages are generally calculated on a forward-looking basis. The plaintiff is “made whole” by being put in the position he or she would have been in had the contract been fulfilled, insofar as that can be achieved by money. Thus the damage award is designed to approximate the profits or other benefits that a plaintiff would have achieved if the defendant had followed through with its obligations under the contract, as expected.
The plaintiff can also claim “consequential” damages to compensate for losses suffered as a consequence of the breach of the contract (in addition to the lost value of the expected fulfillment of the contract). The test that determines whether a particular loss should be compensated for by consequential damages is objective: at the time the contract was formed, should the parties reasonably have foreseen such a loss as a potential consequence of a breach of the contract. Thus the damage claim in a breach of contract case can extend beyond the value of the contract itself if.
However, the damages calculation is subject to the requirement that the plaintiff take reasonable steps to mitigate its damages. If the plaintiff fails to take such steps, then damages are calculated based on the reasonable steps that the plaintiff should have taken to limit such losses.
As an example, if a manufacturer enters into a contract with its supplier for the provision of materials, and the supplier ultimately fails to provide the materials as agreed, then the manufacturer may claim for damages arising from the supplier’s breach of the contract.1 However, the manufacturer must also mitigate its loss by returning to the market to make all reasonable efforts to find an alternative supplier for the materials that were the subject matter of the contract. The damage award would then be calculated as any increase in the price for the substitute materials. In other words, the manufacturer could not simply allow its supplies to run out and shut down production in the hope of later being compensated for all lost profits. In this case, consequential damages may include such items as a loss of profits incurred due to a reasonable slowdown in production which arose despite the manufacturer’s reasonable efforts to mitigate the loss.
Damages in Employment Law
Because of their unique character, employment contracts are treated differently than other commercial contracts. At the time the contract is formed, employees are rarely on an equal footing in bargaining with their employers. Moreover, employment itself is considered by the courts to be fundamental to a person’s feelings of self-worth. As a result, courts have identified as an implied term in such contracts that an employee has the right to certain additional protections. Paramount among these protections is the right to reasonable notice of termination.2
The common law does not impose a permanent relationship on either an employer or an employee; however, it does impose a duty on an employer to give reasonable notice to a departing employee before termination (unless the employee breaches the contract first by wrongful conduct in the workplace, which would give the employer “just cause” to terminate the employment relationship without notice). The common practice in the termination of an employment relationship is for employers to give employees the amount of pay they would earn in their notice period “in lieu” of an actual time period of “working” notice.
The duty to give notice is not a reciprocal duty. While an employee usually owes his or her employer some amount of notice before resigning, such notice periods are generally much shorter than the notice an employer must give an employee.
Wrongful dismissal occurs when an employer fails to give the proper notice to the employee. Damages in cases of wrongful termination are generally calculated as a multiplier of the employee’s monthly compensation, based on the reasonable notice period. The factors the court considers in calculating an appropriate notice period include: the character of the employment, the length of service of the employee, the age of the employee, and the availability of similar employment, having regard to the experience, training and qualifications of the employee.3
Despite this context-specific manner of compensating for wrongful dismissal, the fundamental principle is the same as that in other cases of breach of contract: the plaintiff is to be made whole by being put in the position he or she would have been in if the contract had been completed, insofar as that can be done by money.
Until recently, courts would commonly extend the notice period in instances where the employer demonstrated bad faith in the manner of termination. Such an extension was commonly referred to as “Wallace damages”, after the seminal Supreme Court of Canada decision in Wallace v. United Grain Growers Ltd4. Traditional Wallace damages were not specifically compensatory, as the plaintiff did not need to establish a specific loss or mental anguish suffered as a result of the bad faith.
More recently the Supreme Court of Canada’s decision in Honda Canada Inc. v. Keays5 significantly limited the availability of such awards. The Court held that “Wallace-type damages” awards are appropriate only where they are compensatory, such as in cases where the employer’s bad faith causes the employee a degree of mental distress. Moreover, as in the general case of breach of contract, such damages are available only where such mental distress would have been foreseeable at the time of contract formation. The Court specifically excluded the “normal distress and hurt feelings” resulting from dismissal.6 Additionally, the post-Honda “Wallace-type damages” are no longer to be determined by an extension of the notice period; rather, damage awards are to reflect an amount based on the loss being compensated, as is the case in other cases of breach of contract.7
Damages in Tort
In tort law as in contract law, damages are generally calculated on the basis of an amount which will make the plaintiff whole, so far as that can be done with money. However, unlike the law of contract where the analysis looks forward in time to estimate the full benefit of the contract, damages in tort are based on a retrospective analysis: the plaintiff is made whole by being returned to the position he or she would have been in had the tort not occurred.
As in the law of contract, a plaintiff may claim damages to compensate any losses which would have been reasonably foreseeable consequences of the tort. As well, a tort plaintiff has a duty to take reasonable steps to mitigate his or her damages arising from the tort.
A plaintiff in a personal injury matter will generally claim damages under a number of “heads” or types of damage. These can generally be described as falling into two categories: pecuniary and nonpecuniary damages. Pecuniary damages are those damages representing sums of money that can normally be calculated. Less tangible damages which are not normally quantified in money, such as compensation for pain and suffering, are nonpecuniary in nature.
In personal injury actions, pecuniary damage claims typically include:
(a) Loss of past income (between the date of the injury and the trial) and the estimated loss of future income (post-trial);
(b) Costs of past and future care required as a result of the injury;
(c) Past and future healthcare-related costs required as a result of the injury; and
(d) Costs of past and future housekeeping.
Claims for future costs and future income are usually calculated using actuarial tables and statistical average ages of retirement, death, etc. Such claims are usually reduced by a multiplier to account for contingencies, and by a capitalization rate to account for present value of money.
In most personal injury actions, a plaintiff will also claim a number of non-pecuniary heads of damages. As such claims are not normally quantifiable in money, the quantum attached to such claims is somewhat arbitrary. Such non-pecuniary claims generally include such items as pain and suffering, loss of amenities, and loss of expectation of life. In Andrews v. Grand and Toy8, the Supreme Court of Canada limited the aggregate total of non-pecuniary claims to $100,000. The plaintiff was a young man who became a quadriplegic as a result of the tort, which put the plaintiff’s non-pecuniary claims among the most extreme cases for non-pecuniary damages. He was awarded $100,000 to compensate his non-pecuniary losses, and the Court stated that the $100,000 figure should be considered the “upper limit on non-pecuniary loss” save in exceptional circumstances.9
This judicially-imposed “Andrews cap” continues in force today. While the $100,000 “cap” has been adjusted for inflation, a claimant today would be entitled in the most extreme case to non-pecuniary damages of a relatively modest $300,000 to $400,000.
It is often said that plaintiffs in Canada do not have access to the same level of damages as those in the United States. The relatively conservative cap on non-pecuniary damages is one of the main differences between the two systems. The second key difference is the way punitive damages are awarded: as discussed below, such damages are relatively uncommon in Canada, and are usually awarded in relatively small quantums.
Pure Economic Loss in Tort
Traditionally, tort plaintiffs were prevented from claiming damages if the only damage they had suffered was a “pure” economic loss (such as a decrease in the market value of an asset, or a decrease in the productivity of a manufacturing plant), unless the claim was based on a fraudulent misrepresentation. Such damages were not awarded in cases of negligent misrepresentation, because of the concern that such claims would result in “liability in an indeterminate amount for an indeterminate time to an indeterminate class”10. However, a series of more recent decisions has led to damage awards in cases of negligent misrepresentation.
In 1964, the House of Lords (in England) recognized negligent misrepresentation as a cause of action in tort in Hedley Byrne v. Heller & Partners Ltd. 11 (though no damages were awarded in that case as such liability had been included in a disclaimer). The “Hedley Byrne principle” has since been adopted by Canadian courts. In Hercules Managements Ltd. v. Ernst & Young12 , the Supreme Court of Canada held that a prima facie duty of care exists where:
(a) the defendant ought reasonably to have foreseen that the plaintiff would rely on his representation; and
(b) reliance by the plaintiff, in the circumstances, would be reasonable.13
The equitable principle of restitution is a remedy available in cases involving unjust enrichment, wherein the defendant has benefited in some way from a corresponding loss suffered by the plaintiff, and there is no juristic reason for the benefit.14 Such claims do not require fault or breach of contract (though unjust enrichment is commonly pled as an alternative legal ground to breach of contract); rather, the focus is on the transfer, and whether it is justified. If a transfer of funds, services or other items of value cannot be justified, then a court may order that the value gained by the defendant be restored to the plaintiff.
Strictly speaking, such awards are not awards in damages; they are more akin to the reversal or completion of a transaction than they are to compensating a loss. The restitution order is often predicated on a finding of a resulting trust, whereby the defendant is deemed to hold the benefit which has been transferred in trust for the plaintiff. Nonetheless, the order to transfer funds usually has the same effect as a damage award.
Punitive, Aggravated and Exemplary Damages
In some cases, a court may award punitive (also known as “exemplary”) damages to a plaintiff. Unlike the compensatory damage awards described above, punitive damages are based on the principles of retribution, deterrence and denunciation, and are awarded in cases where the court deems it appropriate to impose a degree of punishment. In the leading case of Whiten v. Pilot Insurance Co.15, the Supreme Court of Canada set out the principles governing whether a punitive damages award is appropriate:
- Punitive damages are very much the exception rather than the rule.
- Punitive damages are imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.
- Where they are awarded, punitive damages should be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.
- Punitive damages should be assessed having regard to any other fines or penalties suffered by the defendant for the misconduct in question.
- Punitive damages are generally given only where the misconduct would otherwise be unpunished or where other penalties are or are likely to be inadequate to achieve the objectives of retribution, deterrence and denunciation.
- The purpose of punitive damages is not to compensate the plaintiff.
- The purpose of punitive damages is to give a defendant his or her just dessert (retribution), to deter the defendant and others from similar misconduct in the future (deterrence), and to mark the community’s collective condemnation (denunciation) of what has happened.
- Punitive damages are awarded only where compensatory damages, which to some extent are punitive, are insufficient to accomplish these objectives.
- They are given in an amount that is no greater than necessary to rationally accomplish their purpose.
- While normally the state would be the recipient of any fine or penalty for misconduct, the plaintiff will keep punitive damages as a “windfall” in addition to compensatory damages.
- Judges and juries in our system have usually found that moderate awards of punitive damages, which inevitably carry a stigma in the broader community, are generally sufficient.16
While Canadian courts have imposed at least one punitive damages award as high as $1,000,000 in the most egregious of cases17 , punitive damages awards are rare in Canada, and where they are made, the quantum of such an award is relatively low. Notably, unlike compensatory damages, the court’s calculation of the amount of punitive damages that should be payable involves the particular circumstances of the defendant, including its ability to pay.
Egregious conduct may also warrant an award of aggravated damages in cases where the plaintiff suffered some aggravation and mental distress. While it is common for a plaintiff to claim “punitive, exemplary and aggravated damages” in a single paragraph in a pleading, it should be noted that aggravated damages are based on a compensatory principle, rather than a punitive principle: the plaintiff is compensated for the mental distress suffered as a result of the wrong. Thus a court will properly impose separate awards for punitive and/or aggravated damages, sometimes for the same conduct.18 Aggravated damages are akin to the post-Honda “Wallace-type damages” discussed above.
Damages can be calculated in a variety of ways. The general rule is that a party which has suffered a loss is to be made whole, insofar as money can accomplish that. However, this goal is not easy to achieve, and sometimes requires creativity on the part of both counsel and the court. Moreover, in the relatively rare case where punitive damages are awarded, compensation takes a backseat to other factors such as retribution, denunciation and deterrence. Throughout any litigation, counsel and litigants must, when assessing their strategy, consider the nature of the potential damage award at stake, and the likelihood that a court would make such an award.