Ontario Contract Remedies — Damages, Specific Performance, and Rescission

Overview of Contract Remedies

Upon breach of contract, the innocent party has a range of potential remedies, categorized as legal (damages) or equitable (specific performance, injunction, rescission, rectification). The primary objective of contract damages is to put the innocent party in the position they would have been in had the contract been performed — the "expectation interest" or "benefit of the bargain" principle.

Remedies in contract are distinguished from tort remedies: in contract, the court aims to give the claimant what they were promised; in tort, the court aims to restore the claimant to the position they were in before the wrong. This distinction matters for damages calculations, particularly in concurrent contract/tort cases.

Expectation Damages

Expectation damages compensate the claimant for the benefit they expected to receive under the contract — the "gain from performance" they were deprived of by the breach. The measure is: (value of performance promised) minus (value of performance received or saved costs).

For a seller who breaches a contract for the sale of goods, expectation damages are typically the difference between the contract price and the market price at the time of breach (the "market differential" measure). For a buyer who breaches, the seller's expectation is the contract price minus the proceeds of resale to a substitute buyer (or the full contract price if no substitute sale is possible).

Wrotham Park / negotiating damages: where expectation damages would be nominal but the breach conferred an identifiable benefit on the defendant, courts may award a "gain-based" remedy representing a share of the defendant's gain from breach (Attorney General v Blake [2001] AC 268; adopted in Canada in Laboratoires Servier v Apotex Inc 2008 ONCA). This is an exceptional remedy for cases involving breach of a "skimped performance" or breach of confidence with identifiable gain.

Reliance Damages

The claimant may alternatively claim reliance damages — expenses incurred in reliance on the contract that are wasted as a result of the breach. Reliance damages are an alternative to expectation damages, not an addition — the claimant elects which measure provides greater recovery.

Reliance damages are useful where expectation damages are difficult to quantify (e.g., lost profits on a new venture are too speculative). However, the defendant may reduce reliance damages by proving that even if the contract had been performed, the claimant would not have recovered its expenditures — the claimant made a bad bargain (C.C.C. Films (London) Ltd v Impact Quadrant Films Ltd [1985] QB 16).

Remoteness — Hadley v Baxendale

Contract damages are limited by the remoteness rule from Hadley v Baxendale(1854) 9 Exch 341: damages must either (1) arise naturally from the breach (direct losses in the ordinary course of events) or (2) be within the reasonable contemplation of both parties at the time of contracting as a probable result of breach (indirect losses requiring special knowledge).

The contemplation test was reformulated in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 and confirmed in Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350: "a real danger" or "a serious possibility" not a mere possibility. Canada applies the same framework: Fidler v Sun Life Assurance Co of Canada [2006] 2 SCR 3 — remoteness is a question of reasonable contemplation at contracting.

Lost profits from business operations disrupted by a breach are recoverable if the defendant knew or should have known at contracting that the breach would likely cause business loss. A carrier told that a machine is the only piece of equipment enabling a plant to operate must contemplate shutdown losses if delayed.

Mitigation

The innocent party has a duty to mitigate — to take reasonable steps to minimize its loss following breach. Failure to mitigate reduces the damages recoverable to the amount that would have been suffered had the claimant taken reasonable steps. The burden of proving failure to mitigate lies on the defendant (Red Deer College v Michaels[1976] 2 SCR 324).

What is "reasonable" for mitigation purposes is assessed objectively but with sensitivity to the claimant's position. The claimant is not required to take risky, burdensome, or unreasonable steps. For employment contracts: Evans v Teamsters Local Union No 31 [2008] 1 SCR 661 — a wrongfully dismissed employee may be required to return to the same employer if a reasonable person would accept the offer in the circumstances.

Steps taken in reasonable mitigation that incur costs are recoverable even if they ultimately do not reduce the loss. Reasonable mitigation expenditures are part of the damages award.

Liquidated Damages vs Penalty Clauses

Parties may agree in advance on the measure of damages for breach — "liquidated damages" clauses. Liquidated damages clauses are enforceable if they represent a genuine pre-estimate of the loss likely to be suffered from the breach.

Penalty clauses — provisions designed to punish breach rather than compensate for loss — were historically unenforceable in equity. The Supreme Court of the United Kingdom reformed the penalty doctrine in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 — the test is whether the clause is out of all proportion to the legitimate interest of the innocent party in enforcement. Canadian courts are divided on whether to follow the UK reform or maintain the traditional genuine pre-estimate test.

Ontario courts continue to apply the traditional rule: a clause is a penalty if, on a true construction at the time of contracting, it was imposed in terrorem — as a threat — rather than as compensation for anticipated loss (H.F. Clarke Ltd v Thermidaire Corp Ltd [1976] 1 SCR 319). The legitimate interest test from Cavendish has not been definitively adopted in Ontario.

Specific Performance

Specific performance is an equitable remedy compelling the defaulting party to perform the contract. It is discretionary and will not be ordered where damages provide an adequate remedy. The adequacy of damages test historically meant specific performance was available only for unique goods (land, rare chattels) or cases where damages would be impossible to assess.

The Supreme Court of Canada reformed the rule in Semelhago v Paramadevan[1996] 2 SCR 415 — specific performance for real property is no longer available as of right; the court must assess whether damages are adequate in the circumstances. Where comparable properties are readily available in the market, damages at the market-price differential may be adequate. However, specific performance remains commonly ordered for unique residential properties.

Bars to specific performance: (1) inadequate consideration (gross inadequacy); (2) unfair dealing at contracting; (3) hardship if ordered — the court considers whether enforcement would cause severe hardship disproportionate to the benefit to the claimant; (4) impossibility; (5) the contract requires constant court supervision (service contracts, personal performance contracts — courts will not order personal service contracts performed because of slavery concerns and the difficulty of supervision).

Injunctions in Contract

Prohibitory injunctions may enforce negative covenants in contracts — promises not to do something. Courts will enforce negative covenants by injunction even where specific performance of the affirmative obligation would be refused (e.g., exclusive service contracts — an employer cannot compel an employee to perform, but can enjoin the employee from working for a competitor during the notice period).

Interlocutory (interim) injunctions: the RJR-MacDonald Inc v Canada (AG)[1994] 1 SCR 311 test — (1) serious issue to be tried; (2) irreparable harm if not granted; (3) balance of convenience. The "serious issue" test is a low threshold — the court does not conduct a mini-trial. Irreparable harm means harm that cannot be adequately compensated by damages.

Rescission

Rescission sets aside the contract ab initio — treats it as never having existed and restores both parties to their pre-contract positions. Rescission is available for: misrepresentation (innocent, negligent, or fraudulent — Kupchak v Dayson Holdings Ltd 1965 BCCA; Bank of British Columbia v Turbo Resources Ltd 1983 ABCA); mistake; undue influence; duress; and unconscionability.

Bars to rescission: (1) affirmation — the party entitled to rescind takes a benefit with knowledge of the ground for rescission; (2) lapse of time — unreasonable delay in electing rescission; (3) third party rights acquired for value without notice; (4) impossibility of restitutio in integrum (restoring parties to original position).

Indemnity: where rescission is granted for innocent misrepresentation, indemnity may be awarded for obligations necessarily created by the contract — but not for all losses (that is the domain of damages for misrepresentation under the Misrepresentation Actor tort of negligent misrepresentation: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Queen v Cognos Inc [1993] 1 SCR 87).

Rectification

Rectification corrects a written instrument that does not accurately reflect the parties' agreed terms — either due to a common mistake (both parties intended the same thing but wrote it differently) or unilateral mistake (one party's mistake known to the other). The court reforms the document to express what was actually agreed.

Standard of proof for rectification: clear and convincing evidence — above the balance of probabilities but below criminal standard. The party seeking rectification must establish with precision what the agreed terms were and how the written instrument departs from them (Performance Industries Ltd v Sylvan Lake Golf and Tennis Club Ltd [2002] 1 SCR 678).

Common uses in Ontario practice: rectification of agreements of purchase and sale where a property description is wrong, rectification of share purchase agreements where price or share number was mis-typed, and rectification of deeds or transfers.

Limitation Periods

Breach of contract claims in Ontario are subject to the Limitations Act 2002SO 2002 c 24 Sch B: 2-year basic period from discovery (s.4) and 15-year ultimate limitation period (s.15 — runs from date of act or omission regardless of discovery). The discovery rule: the period runs from the date the claimant knew, or ought to have known through the exercise of reasonable diligence, that the claim was appropriate (s.5(1)).

For continuing breach (e.g., ongoing failure to pay instalments), each breach gives rise to a separate limitation period running from each due date. Parties may extend the limitation period by written agreement, or suspend it by acknowledgment of the debt in writing (s.13 — acknowledgment suspends but does not restart the period).

Contractual limitation clauses — parties may shorten the limitation period by contract (common in insurance contracts, supply agreements). Courts enforce contractual limitation periods if they comply with the Limitations Act minimums — agreements purporting to eliminate the basic limitation period entirely are void under s.22.