Canada: Supreme Court Clarifies Requirements Of The Duty To Mitigate

Introduction

In a previous legal update, we reported on the Ontario Court of Appeal's decision in Southcott Estates Inc. v Toronto Catholic District School Board (Southcott Estates),¹ which held the defendant liable for only nominal damages due to the plaintiff's admitted failure to mitigate. The Supreme Court of Canada's recent judgment in Southcott Estates² upheld the Court of Appeal's decision, but the different reasoning employed by the majority and McLachlin C.J., dissenting, highlights the difficulty of applying the principles of the duty to mitigate in certain circumstances.

Background

The plaintiff, Southcott Estates Inc., a wholly owned subsidiary of Ballantry Homes Inc., entered into an agreement with the defendant Toronto Catholic District School Board (the School Board) to purchase certain lands. At trial, it was found that the School Board had breached the contract resulting in an aborted sale to Southcott. Although the trial judge denied Southcott's request for the remedy of specific performance, he awarded damages of $1,935,500.

At the appellate level, the primary issue before the court concerned the duty to mitigate. The plaintiff had admitted it had no intention and never attempted to mitigate as it was a "single-purpose" corporation incorporated specifically to purchase the School Board lands and it sought to force the sale through a claim of specific performance. However, the trial judge also held that evidence of alternative properties available for purchase for the purpose of mitigation was inconclusive.

The Ontario Court of Appeal held that Southcott's admission it had no intention of taking any steps to mitigate its loss shifted the evidentiary onus to Southcott to demonstrate that, even if it had attempted to mitigate, it could not have done so, and awarded nominal damages of $1 to Southcott.

Decision of the Supreme Court

The Supreme Court upheld the Ontario Court of Appeal's decision regarding damages, but reached this conclusion through different reasoning. The Supreme Court confirmed that when it is alleged the plaintiff has failed to mitigate, the burden of proof is on the defendant, who needs to prove both that the plaintiff has failed to make reasonable efforts to mitigate and that mitigation was possible.

Karakatsanis J., writing for the majority, concluded that notwithstanding the fact Southcott had no assets,  it had access to funds and was obliged to mitigate. She emphasized Southcott's admission that it never tried or even intended to mitigate its losses.  In discussing whether a single-purpose corporation is obliged to mitigate, she reasoned that, "In the absence of actual evidence of impecuniosity, finding that losses cannot be reasonably avoided, simply because it is a single-purpose corporation within a larger group of companies, would give an unfair advantage to those conducting business through single-purpose corporations."⁴

Regarding the relationship between the duty to mitigate and claims for specific performance, the majority concluded that having a "fair, real and substantial" reason for seeking specific performance does not mean a plaintiff with such a claim should not attempt to mitigate; rather, such a claim informs what is reasonable behaviour for the plaintiff in mitigation.⁵

While the Court of Appeal took the view that Southcott's admission it had no intention of mitigating had shifted the evidentiary onus to Southcott to demonstrate that, even if it had attempted to mitigate, it could not have done so, the Supreme Court was of the opinion that, "The error is best approached as an evidentiary issue rather than as one engaging the burden of proof."

The dissent

Chief Justice McLachlin's dissent found the trial judge's conclusion that the defendant had not shown that Southcott failed to take reasonable steps to mitigate was grounded in the evidence. She noted the School Board presented no evidence on the potential profitability of the properties allegedly available for mitigation, and stated that whether Southcott could have obtained financing to buy a different property was "at the very least speculative."⁶

Analysis

The Supreme Court's decision leaves open the question of the precise evidentiary impact of a plaintiff's admission that it had no intention of mitigating its losses. Furthermore, the differing opinions of the majority and the dissent regarding the evidentiary basis of the trial judge's findings show that applying the principles of the duty to mitigate often requires the finder of fact to make difficult decisions regarding what inferences may appropriately be made.

The decision in Southcott Estates is significant because it confirms that a claim for specific performance will not insulate a plaintiff from the duty to mitigate. Additionally, the decision is noteworthy because the majority as well as the dissent seem to accept by implication that impecuniosity is a defence to a failure to mitigate. This confirms a trend in both Canadian and English law going against older English authorities which had held that a party's lack of funds were not to be taken into account when determining whether it had taken reasonable steps to mitigate.⁷

Footnotes

1 Southcott Estates Inc. v. Toronto Catholic School Board, 2010 ONCA 310 ("Southcott Appeal"); allowing appeal from Southcott Estates Inc. v. Toronto Catholic District School Board, 2009 CanLII 3567 (ON SC) ("Southcott trial").

2 Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51.

3 Ibid. at para. 2.

4 Ibid. at paras. 28-29.

5 Ibid. at para. 36.

6 Ibid. at paras. 82, 96.

7 See S.M. Waddams, The Law of Damages, 2nd ed. (looseleaf) (Aurora, Ontario: Canada Law Book, 2010) at 15.330-15.390.

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