Damages 101

October 26, 2020

By Brian Babcock

The objective of calculating damages for a breach of contract seems simple – the injured party, or plaintiff, is supposed to be placed, so far as money can do it, in the same position they would have been in if the contract had been performed. This is sometimes called the principle of full compensation.

So why do we have several textbooks devoted to The Law of Damages, and over half of my law school course on Remedies spent on this topic?

Because, as with most things in life and in law, what appears to be simple seldom is. Calculating and proving damages, is a complex exercise.

Here are just a few of the issues that might arise:

  1. The Plaintiff always bears the onus of proving their loss on a balance of credible evidence. Evidence may be unavailable due to the absence of witnesses, destruction of documents or other factors.
  2. Remoteness of damages. The defendant is generally only responsible for damages arising fairly and reasonably (or naturally) from the breach, within the “reasonable contemplation” of the parties at the time. In special circumstances, made known by the Plaintiff to the defendant, the defendant will be liable for damages flowing from the special circumstances.
  3. What is reasonably contemplated? The court considers whether: “If they had considered the question, they would have, as reasonable people, have concluded that the loss would occur.”
    • What knowledge does each party have of the other’s circumstances – especially their needs?
    • What is the subject matter of the contract?
    • Risk Allocation indicators
      • Who could have taken steps to prevent more easily? More economically?
      • Did the defendant receive a premium price indicating an implied promise of safeguards?
      • OR was it at a low cost, suggesting the Plaintiff accepted the risk?
    • This all considered as at the date the contract was entered into, not with the hindsight of knowing about the breach. This is a very artificial and difficult exercise.
  1. The problem of mathematical certainty. In many cases, mathematical certainty is neither required nor obtainable – where there is evidence that a loss has been suffered, the court will not refuse an award of damages. But where an absence of evidence makes it impossible to assess damages, the Plaintiff is entitled to nominal damages at best – they risk having the claim dismissed. Situations where the damages assessment is difficult because of the nature of the damages proved must be distinguished from situations where the assessment is difficult due to the absence of evidence of loss. It is the latter which results in no recovery.
  2. Where loss has been suffered in a complex commercial setting, a “flexible and imaginative approach” to the assessment of the damages may be required.
  3. Certainty, or more properly, uncertainty about future events in the absence of the breach may limit recovery. No one has a crystal ball for the future. This often arises where what is lost is an opportunity for profit which depended upon future events. Plaintiffs generally recover where there was a real possibility of the future events occurring. That means more than a mere chance. The amount awarded attempts to reflect the risk, but there is always uncertainty as to the “right” result.
  4. Causation is related to uncertainty. Was the loss the result of the breach, or caused by outside factors? Often, multiple factors are in play. The Plaintiff is only entitled to the loss caused by the breach. This involves constructing hypothetical situations, which means the compensation may be less than full.
  5. A Plaintiff has an obligation to take reasonable steps to avoid or reduce the amount of damages. The debate is usually about what is reasonable. It does not require perfection, or extraordinary steps or risks. The burden is on the defendant to show a failure to mitigate. This is a very hot issue in wrongful dismissal cases, but in practice the results usually favour a Plaintiff who has made any effort to find work, or has a legitimate reason not to work.
  6. The basic principle of double recovery is that a Plaintiff should not recover twice for the same loss. Although more commonly a problem in personal injury cases, it also arises in wrongful dismissal cases, and may arise in contract cases, especially involving insurance.
  7. Contracts often contain clauses which fix or limit damages – read the fine print. Agreeing to a fixed amount of damages is attractive if it avoids issues of proof, but can result in unfairness. Courts will sometimes ignore such clauses if they are extravagant or unconscionable, but will uphold them if they are a genuine pre-estimate of damages. They are ignored more often in consumer contracts, less so in negotiated commercial agreements involving sophisticated parties.

As you might gather by now, full compensation is the goal, but it is seldom achieved. Although self-represented parties in small claims court often attempt to prove their damages on their own, it is always difficult for the judge when they are asked to essentially pick a number out of the air.  The same issue can arise in Superior Court where the evidence is not available, or the uncertainties are significant. Preserving evidence and working closely with your lawyer will increase your chances of recovering something close to full compensation.