Remedies and the sale of goods

When a contract is broken, the innocent party wants to know what it can get. The law's main answer is money: damages designed to put the innocent party in the position it would have been in if the contract had been performed. In some cases courts order a party to perform or to stop doing something. This lesson explains how damages are measured and limited, when equitable remedies are available and how the law protects someone who has conferred a benefit without a valid contract. It then turns to the special rules for contracts for the sale of goods, which govern a huge share of business transactions.

The purpose of contract damages

Contract damages compensate; they do not punish. The usual measure is expectation damages, which give the innocent party the benefit of its bargain: the value it would have received from performance, minus any costs it saved by not having to perform. When expected profits are too speculative to prove, for example for a new venture, a court may award reliance damages, which reimburse expenses the innocent party incurred in reliance on the contract, putting it back where it was before the contract. Restitution returns to the innocent party the value of any benefit it conferred on the party in breach, preventing unjust enrichment.

Limits on damages: remoteness, mitigation and certainty

Not every loss that follows a breach is recoverable. Under the rule in Hadley v. Baxendale (1854), damages are limited to losses that arise naturally, in the usual course of things, from the breach, or that were in the reasonable contemplation of both parties when they made the contract as a probable result of breach. In Hadley, a mill's crankshaft broke and a carrier delayed delivering it for repair. The mill sued for profits lost while it stood idle. The court held the carrier was not liable, because it did not know that the mill had no spare shaft, and stopping a mill was not the natural consequence of a delayed parcel. The practical lesson is that a business that faces unusual losses if a supplier fails should tell the supplier when contracting, so those losses are in contemplation, and the supplier can price the risk or refuse it.

The innocent party must also mitigate: take reasonable steps to reduce its loss. It cannot recover losses it could reasonably have avoided, but it can recover reasonable costs of mitigating, even if the attempt fails. A landlord whose tenant abandons commercial premises, a seller whose buyer refuses goods and an employee who is wrongfully dismissed are all expected to seek substitute arrangements, and their damages are reduced by what they earned or should have earned. Finally, damages must be proved with reasonable certainty; courts do their best with difficult evidence, but they will not award damages based on pure speculation.

Canadian law also allows damages for mental distress in contracts whose object is to secure a psychological benefit, such as disability insurance or a holiday, where such distress was within the reasonable contemplation of the parties (Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30). Punitive damages are exceptional in contract cases. In Whiten v. Pilot Insurance Co., 2002 SCC 18, an insurer that refused to pay a fire claim and falsely alleged arson was ordered to pay $1 million in punitive damages because its conduct was a separate actionable wrong, a breach of its duty of good faith, and was high-handed and malicious.

Liquidated damages and penalties

Parties often agree in advance on the damages payable for a breach, such as a fixed amount per day of construction delay. A liquidated damages clause is enforceable if it is a genuine pre-estimate of the loss when the contract was made. A clause that sets an amount out of all proportion to any likely loss, intended to frighten the other party into performing, is an unenforceable penalty, and the innocent party recovers only its actual damages. Canadian courts have also applied unconscionability analysis to penalty clauses, and some commentators expect the Supreme Court eventually to follow the United Kingdom, which in 2015 reframed the test to ask whether the clause protects a legitimate interest. Deposits paid as an earnest of performance are generally forfeited on the payer's breach, though courts may grant relief if forfeiture would be unconscionable.

Equitable remedies and restitution

When damages are inadequate, courts may grant equitable remedies, which are discretionary. Specific performance orders a party to carry out the contract. It is available mainly when the subject matter is unique, so money cannot buy a substitute, such as a rare work of art, a specific business or, often, land. Courts will not order specific performance of personal service contracts, because forcing people to work together is impractical and close to servitude, nor of contracts requiring constant supervision. An injunction orders a party to do or, more commonly, not to do something, such as not to disclose confidential information or not to work for a competitor in breach of a valid covenant. Interlocutory injunctions can be granted urgently before trial when the applicant shows a serious issue to be tried (or a strong case, for some orders), irreparable harm and that the balance of convenience favours the order. Rectification corrects a written document that fails to record what the parties actually agreed.

In Semelhago v. Paramadevan (1996), the Supreme Court of Canada held that land is not automatically unique; a buyer seeking specific performance of a real estate contract must show that the property has a special value that damages cannot replace, which is harder for an investment property or a standard condominium unit.

Where one party has conferred a benefit on another without a valid contract, the law of unjust enrichment may require payment. A claimant must show an enrichment of the defendant, a corresponding deprivation of the claimant and the absence of a juristic reason for the enrichment, such as a contract or gift (Garland v. Consumers' Gas Co., 2004 SCC 25). A common business application is quantum meruit, a reasonable payment for work done at the defendant's request where the price was never agreed or the contract proved unenforceable.

Sale of goods legislation

Every common law province has a Sale of Goods Act, based on the English Sale of Goods Act of 1893, that applies to contracts in which a seller transfers or agrees to transfer the property in goods to a buyer for money. Goods are tangible movable things; land, services and, generally, intangible items such as software licences fall outside the acts, although courts sometimes treat software on a physical medium as goods. The acts supply default rules that apply unless the parties agree otherwise, and they imply conditions that protect buyers. Quebec's rules are in the Civil Code. International sales between businesses in different contracting countries are governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG), which Canada has implemented, unless the parties exclude it.

In business-to-business sales, the parties can exclude the implied conditions by clear words, although courts read exclusions strictly and apply the Tercon test. In consumer sales, provincial consumer protection legislation prevents exclusion: Ontario's Consumer Protection Act, 2002 deems the implied conditions and warranties of the Sale of Goods Act to apply to goods supplied under consumer agreements and makes any attempt to exclude them void, and other provinces have similar provisions. Saskatchewan and New Brunswick have separate consumer product warranty statutes that also give consumers rights against manufacturers.

Transfer of ownership and risk

Sale of goods acts set rules for when property, and with it the risk of loss, passes from seller to buyer, unless the parties agree otherwise. Under the first rule, in an unconditional contract for specific goods in a deliverable state, property passes when the contract is made, even if payment and delivery are postponed. If something must be done to put specific goods in a deliverable state, property passes when it is done and the buyer has notice. For goods sold on approval, property passes when the buyer signals approval or keeps the goods beyond the agreed time. For unascertained or future goods sold by description, property passes when goods of that description in a deliverable state are unconditionally appropriated to the contract, for example by delivering them to a carrier for the buyer. Because risk generally follows property, businesses should state expressly when risk passes, and international traders use Incoterms such as FCA, CIF and DDP, published by the International Chamber of Commerce, to allocate costs and risk.

Remedies in sales of goods

A seller that has not been paid has remedies against the goods as well as against the buyer: a lien allowing it to keep goods still in its possession until paid, a right to stop goods in transit if the buyer becomes insolvent and a limited right to resell. It can sue for the price if property has passed, or for damages for non-acceptance, usually the difference between the contract price and the market price at the time of refusal. A buyer whose seller fails to deliver can claim the difference between the market price and the contract price, and can reject goods for breach of a condition if it has not yet accepted them. Under federal insolvency law, an unpaid supplier can also demand the return of goods delivered to a bankrupt or receivership purchaser in the 30 days before, if they remain identifiable and in the same state.