What Is “Consumer Surplus”?

January 3, 2017

By Brian Babcock

Traditionally, courts award damages for breach of contract mainly from a commercial viewpoint- asking questions such as “what additional expenses did the breach cause?” or, sometimes “what was the loss of profits suffered?”

These approaches however do not adequately capture the non-monetary benefits which flow from certain types of consumer contracts. So economists have developed, and courts have cautiously adopted, the concept of “consumer surplus”. Consumer surplus can be defined as the value placed on an exchange by a specific purchaser over and above the market price for the goods or services involved.1

Take the example of a holiday or vacation trip. When the resort turns out not to be as advertised, what the consumer loses is not merely the price paid for the trip, but the intangible value to her of the enjoyment and relaxation that had been expected. Damages equal to the purchase price would not be enough to compensate that plaintiff.

This concept has been extended in Canada to cover other situations involving intangible or psychological benefits, such as peace of mind, enjoyment or entertainment.

Examples include failure to deliver a vacation motor home; the death of a pet dog while being transported by an airplane; the loss of a loved one’s ashes following cremation and a photographer botching a couple’s wedding photographs. In many of these cases, in addition to recovering out of pocket losses, the disappointed consumer recovers a modest amount for the mental distress and inconvenience caused by the defendant. The full cost of restoring the lost value would be out of proportion to the mental distress, yet mental distress, being intangible, is notoriously hard to value, because there is no market that determines the cost of distress. Any amount selected by a judge must necessarily be arbitrary.

Following a leading Supreme Court of Canada decision, Canadian courts generally limit damages for mental distress to modest or conventional amounts. The courts will examine similar facts in earlier cases, and attempt to award an amount sufficient to provide some comfort to the plaintiff, and discourage future similar breaches of contract. This approach remains somewhat controversial, as some commentators argue that modest awards effectively only serve as a “licensing fee” for misbehaviour. Our courts, however, continue to take the view that punitive damages, which are on top of compensatory damages for mental distress, remain the preferred route to discourage truly improper behaviour by the defendant. Punitive damages are determined by the extent and nature of the defendant’s misconduct, and not the extent of the plaintiff’s suffering or loss.

Despite the historical reluctance of courts to award damages for intangible losses arising from a breach of contract, the door is now open to these claims. This has had significant impact in the law of insurance, and in wrongful dismissal cases, and the law of privacy seems to be the newest frontier. Not every ordinary contract will give rise to mental distress damages but if the contract is the sort of contract that makes distress a foreseeable consequence of a breach, you may be entitled to damages.

1See  Cassels and Adjin-Tettey, Remedies: The Law of Damages, third edition,  Irwin Law 2014, at p. 255,  from which this definition is derived. This web article relies heavily on the approach taken in that text, though it is written for a general audience and any errors are this writer’s, not that of the text.