On October 17, 2012, the Supreme Court of Canada released its ruling in Southcott Estates Inc. v. Toronto Catholic District School Board (2012 SCC 51). The decision addressed two issues of general application to the remedies for breach of a contract for the purchase of land: 1) whether a single-purpose corporation plaintiff should mitigate its losses; and 2) to what extent a plaintiff seeking specific performance must also take action to mitigate its losses.
Facts of the case
Southcott Estates Inc. ("Southcott"), a single-purpose corporation in the Ballantry Group of Companies, was created solely for the acquisition and development of the property that was the subject of the action. The vendor, in breach of the agreement of purchase and sale, failed to complete the sale. Southcott sought specific performance of the contract, but did not attempt to mitigate its losses by seeking to purchase another property.
The doctrine of mitigation provides that a plaintiff cannot recover losses that could reasonably have been avoided by its own actions after the breach. Southcott argued that, as a single-purpose corporation it was impecunious - its only assets were the funds advanced by its parent company for the deposit paid to the vendor - and therefore that it was unable to mitigate by pursuing an alternative property acquisition. Was this an unreasonable failure to mitigate? The court decided that it was and held that a single-purpose corporation cannot avoid the duty to mitigate simply by asserting that by its very nature it lacks funds to pursue alternative transactions or that its corporate mandate was confined to pursuing only the opportunity that was denied to it by the defendant's breach.
This conclusion has two principal bases in the majority's reasons. First, in the specific circumstances of this case, the court inferred that Southcott must have had access to additional funds from its parent if it planned to complete the subject transaction. Secondly, as a matter of fairness the court took the view that to hold otherwise would confer an unfair advantage to those conducting business through single-purpose corporations and impose larger damages awards (i.e., awards not subject to reduction by mitigation) against defendants contracting with them as compared with those contracting with operating companies or individuals with other assets that are subject to the duty to mitigate.
Southcott's second line of argument was that it was reasonable for it not to take steps to mitigate its losses since it was pursuing a claim of specific performance. Is the very pursuit of specific performance sufficient reason for a plaintiff to forgo mitigating its losses? The court recognized established case law to the effect that where a plaintiff has a "fair, real and substantial justification" or a "substantial and legitimate interest" in specific performance, its inaction to purchase other property may be reasonable depending on the circumstances. However, the court concluded that "a plaintiff deprived of an investment property" does not have such an interest "unless he can show that that money is not a complete remedy because the land has 'a peculiar and special value' to him". The majority decision went on: "Southcott could not make such a claim. It was engaged in a commercial transaction for the purpose of making a profit. The property's particular qualities were only of value due to their ability to further profitability." The practical effect of the decision is that pursuing specific performance will only allow a plaintiff to safely forgo efforts at mitigation when it is absolutely confident that its claim for specific performance will be successful. Further, if the plaintiff's aim in the transaction was profit, the ruling suggests that, in most cases, it is likely to have a very hard time convincing a court to grant specific performance. As a consequence, such a plaintiff will always be obliged to mitigate where it is possible to do so. If not, it could end up in the position of the plaintiff in this case, whose damages award of nearly $2 million at trial was cut to $1 on appeal (as has now been affirmed by the Supreme Court).
Effect of decision on real estate developers
As a result of this decision, a purchaser whose aim in acquiring land is profit will almost certainly be required to attempt to mitigate its losses in the event of failure by the vendor to close in breach of the purchase agreement. This will apply regardless of whether the purchaser is seeking the remedy of specific performance, and even if it is a single-purpose corporation with no assets (but which may be inferred to have access to additional capital from a parent company). This will mean pursuing the purchase of an available alternative property whether or not the purchaser has any interest in acquiring that other property or has the funds to do so (without a capital call on its parent). In this case, it should be noted, the Supreme Court - against the lone dissent of the Chief Justice on this point - agreed that the assessment of what, for mitigation purposes, is an "alternative property" can take into account the investment priorities of the entire corporate group, not just those of the special-purpose corporation.