ONTARIO – Where an innocent purchaser claims damages for the vendor’s breach of a real estate transaction, damages are limited to the actual loss suffered by the purchaser. In the absence of evidence of mitigation, the loss is limited to costs thrown away. The innocent purchaser is not entitled to recover as damages the profit subsequently earned by the breaching vendor on the resale of the property.

Akelius Canada Ltd. v. 2436196 Ontario Inc.
2022 ONCA 259, March 30, 2022
Ontario Court of Appeal (Lauwers, Harvison Young and Sossin JJ.A.)

This case deals with the remedies available to an innocent purchaser of real estate when a vendor fails to close the transaction in breach of the agreement of purchaser and sale.

The transaction was for seven apartment buildings for a total value of nearly $229 million.  The vendor breached the agreement by failing to remove encumbrances worth close to $49 million. The deal did not close. The vendor commenced an action for damages arising from the vendor’s breach.

More than two years later, the vendor sold the property for $56.5 million more than the purchase price of the aborted transaction. The summary motion judge, E.M. Morgan J., held that the purchaser was entitled to a return of its deposit and damages for costs thrown away as a result of the vendor’s refusal to close amounting to $775,855.  However, Justice Morgan refused to disgorge the $56 million profit the vendor earned as a result of the breach: paras. 7

The vendor cross-appealed to reverse the award of damages for costs thrown away and also recover the costs of the trial on the basis of the relative success of the parties on the summary motion, namely, that the claim for $56.5 million was dismissed: paras. 37-40.

The Court of Appeal dismissed both the appeal and the cross-appeal: para. 41.

Analysis

The Court of Appeal applied the principle established in 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd. 1978 CanLII 1630 (ONCA) and affirmed in 6472047 Ontario Ltd. v. Fleischer 2001 CanLII 8623 (ON CA) at para. 41, that

• the starting point for the assessment of damages for breach of contract is the date of breach.
• that the basic principle for assessing damages for breach of contract applies: the award of damages should put the injured party as nearly as possible in the position it would have been in had the contract been performed.
• the Court may choose a different date from the date of closing to assess damages to produce a fair result.
• the purchaser must mitigate its damages.
• where, however, the vendor retains the property in order to speculate on the market, damages will be assessed at the date of closing: 22.

The Court of Appeal agreed with Justice Morgan that the purchaser could not prove its loss. There was no basis to change the date for assessment of damages. The Court of Appeal rejected the appellant’s argument that the date of assessment should be moved as it was in Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation et al., 1978 CanLII 16 (SCC), where the Supreme Court of Canada held that the purchaser was unable to re-enter the market to mitigate its damages as of the date of the breach: para. 25. Those facts did not apply in the present case: paras. 34-35.

Editor’s Note:

The decision in this case emphasizes the importance of mitigation where a vendor refuses to close a real estate transaction in a rising market. The innocent purchaser is unlikely to recover damages merely because the breaching vendor later sells the property for a substantially larger amount.

However, there is no discussion in the Court of Appeal’s judgment case of disgorgement of the breaching vendor’s profit as a remedy for damages.

In the recent decision in Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 (CanLII), the majority of the Supreme Court (5-4 decision) held that disgorgement of the profit gained by the breaching party is applicable in limited circumstance and established the following principles (see the case for references to other jurisprudence)

• The ordinary form of monetary relief for breach of contract is an award of damages, measured according to the position which the plaintiff would have occupied had the contract been performed. Correspondingly, the orthodox position maintained that disgorgement of the defendant’s profits was not an available remedy for breach of contract: 50;
• Courts have accepted that disgorgement may be available for breach of contract in certain exceptional circumstances but only where, at a minimum, the remedies of damages, specific performance, and injunction are inadequate: 51-52
• In Attorney General v. Blake, [2001] 1 A.C. 268 (H.L.), the House of Lords ordered disgorgement of profit as a remedy for breach of contract. Lord Nicholls held that “[n]o fixed rules can be prescribed” in this analysis and stressed the importance of having regard to all the circumstances, including:
• the subject matter of the contract.
• the purpose of the contractual provision which has been breached.
• the circumstances in which the breach occurred.
• the consequences of the breach; and
• the circumstances in which relief is being sought:

A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit‑making activity and, hence, in depriving him of his profit: para. 52

An award that appears to be measured by a defendant’s gain might arguably, in certain circumstances, serve a compensatory purpose that distinguishes it from disgorgement, and which therefore tends to support recovery. Whether viewed as compensatory or not, these cases are indicative of the types of circumstances where a plaintiff is entitled to receive a monetary award that goes beyond the economic position that it would have occupied had its contract been. While the circumstances in which a gain‑based award will be appropriate cannot be clearly delineated in advance, one would expect future legitimate interests protected by a gain‑based award to resemble those interests that have been protected in the past: para. 60.

As result, the majority of the SCC held that disgorgement for breach of contract is exceptional relief; it is not available at the plaintiff’s election to obviate matters of proof: para. 62.