The Latest Word from the SCC on Assessment of Contractual Damages

The recent Supreme Court decision in IBM Canada Limited v Waterman, 2013 SCC 70, has gotten much attention for its ruling and comments about the “collateral benefits” principle and how it applies to pension benefits paid to wrongfully dismissed employees during the notice period. The issue was whether the exception should apply to preclude a reduction, in the amount of the pension benefits, to the compensatory damages payable to the employee for the wrongfull dismissal. The application of the “collateral benefits” principle was the central point of disagreement between the majority judgment of Cromwell J. and the dissenting judgment of Rothstein J. and McLachlin C.J. The former found it applied in this case while the latter found it did not, mostly due to the specific nature of the pension plan at issue.

However, there are many interesting comments made in this case about contractual damages principles more generally, including the general approach, availability of restitution damages, the role of reasonable expectations and ensuring a good “remedial fit” between breach and remedy. These general principles were largely agreed on by both the majority and dissent, making this case relevant and quite informative to contract law more generally.

Brief Background

Mr. Waterman was a long-term employee who was dismissed without cause on only 2 months’ notice. He began drawing pension benefits immediately upon dismissal. After he sued for wrongful dismissal, the trial judge established that the appropriate notice period was 20 months and that no deduction should be made for the pension benefits paid during the notice period. The sole issue on appeal was whether the pension benefits should be deducted from the damages award for wrongful dismissal. The Court of Appeal of British Columbia dismissed the appeal, finding the pension benefits should not be deducted. A majority of the Supreme Court followed suit.

Assessment of Contractual Damages

Both the majority and dissent of the Supreme Court in this case highlighted the governing general principle of damages for breach of contract – that the non-breaching party be placed in the position he would have been in had the contract been performed or that he be compensated for actual loss. This is also referred to as expectation damages. (In regards to wrongful dismissal, it was said that damages should generally equal the salary the employee would have earned during the notice period.) It was also agreed that a straightforward application of the governing principle here led to the conclusion that the deduction was required. (Again, there was disagreement on whether an exception applied.)

The starting point for the analysis of both the majority and dissent was discerning the intention of the parties as expressed in the terms of the contract. While the dissent found the contract terms here were a full answer to the issue raised (considering the type of pension benefit at issue), the majority found that the terms of the contract were not sufficiently conclusive or explicit (or were silent on the precise issue raised) and so that the general principle of compensation was not a full answer to the issue in this case.

The majority emphasized that the general principle is not, on its own, the answer in all cases (including this one) and that it cannot be strictly or inflexibly applied without heed to other considerations (giving rise to exceptions). While not expressly stated, it would appear that the dissent would accept the same proposition, but perhaps not in cases such as this involving assessment of loss under the terms of a “single contract”.

Such other considerations (showing the general compensation principle should not be applied strictly), aside from instances of “collateral benefits” like private insurance, included when strict application would not do justice between the parties. For example, in some cases restitution damages may be available and an award of damages in contract may be based on the advantage gained by the defendant as a result of the breach (instead of the loss of the plaintiff). This could occur when a defendant has profited in excess of his expected profit as a result of his own breach.

The majority noted that the general compensation principle must give way to considerations of reasonableness, or whether a plaintiff’s expectation of the contract and his or her conduct in response to the breach of it were reasonable. Further, that the proper approach to damages includes considering how well the award of damages furthers other important principles of contract law, such as protection of the reasonable expectations of the parties. That consideration can be taken into account, along with other damages principles, to ensure there is a good “remedial fit” between the breach of obligation and the remedy.

Finally, both the majority and dissent found broader policy concerns to be relevant, notably promotion of equal treatment of employees but they disagreed on whether deducting the pension benefits from the damages award in this case would promote equal treatment (the dissent view) or would constitute unequal treatment (the majority view).

Case Information

IBM Canada Limited v Waterman, 2013 SCC 70

Court Docket: 34472

Date of Decision: December 13, 2012

collateral benefits contractual damages pension benefits remedial fit Supreme Court of Canada wrongfully dismissed employees



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