Canada: Injunctions To Restrain Breach Of Contract

First published in the Advocates' Quarterly volume 45, Number 4 - Reproduced by permission of Thomson Reuters Canada Limited. This is a condensed version. For the full article please download the pdf. Part 2 of 2 of condensed version - See part I.

The issues that were before the court in 1465152 Ontario Limited v Amexon Development Inc.1 are substantial and far-reaching, particularly for the commercial real estate leasing industry.

The Landlord in Amexon wished to demolish a large commercial building in which the Tenant occupied leased premises, and redevelop the property. The premises constituted approximately 3% of the rentable area of the building. All of the other tenants had left as a result of agreements made with the Landlord, which offered to relocate the Tenant into similar premises in an adjoining building, and to pay compensation. After some bargaining, the Tenant refused to move.

It was the Landlord's position that the only reason for the Tenant's refusal to relocate was its desire to extract as much money from the Landlord as possible. There was nothing unique or special about the leased premises, nor any other reason why the Tenant had any need or compelling interest to remain there. The Landlord argued that damages were an adequate and suitable remedy for the Tenant, and that an injunction was an unreasonable and grossly disproportionate remedy.

General Principles Regarding theCircumstances in Which an Equitable Remedy, Such as an Injunction, Will beIssued

It is a general rule that an injunction will not be granted where damages are an adequate remedy.2 On a higher level, the approach that is taken is reflected in the following comment:3

The Court has often emphasized the flexibility of equitable remedies and the need to fashion remedies that respond to various situations in principled and realistic ways

...Similarly, in the context of the constructive trust, McLachlin J. (as she then was) noted that "[e]quitable remedies are flexible; their award is based on what is just in all the circumstances of the case".

As it ought to be in most aspects of the law, reasonableness should be a necessary criterion when selecting the remedy suitable to the facts and circumstances of the case, as should proportionality, which is, in reality, merely an aspect of reasonableness.4 As an injunction is an equitable and discretionary remedy, equitable considerations are at the forefront of the matters taken into consideration by the court.

Conflict With Semelhago5

The SCC decision in Semelhago involved the issue of specific performance of an agreement of purchase and sale of land. The following comments were made:6

While at one time the common law regarded every piece of real estate to be unique, with the progress of modern real estate development this is no longer the case. Both residential, business and industrial properties are mass produced much in the same way as other consumer products. If a deal falls through for one property, another is frequently, though not always, readily available.

It is no longer appropriate, therefore, to maintain a distinction in the approach to specific performance as between realty and personalty. It cannot be assumed that damages for breach of contract for the purchase and sale of real estate will be an inadequate remedy in all cases.

...

Specific performance should, therefore, not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available.

As the evidence in Amexon itself showed, commercial rental properties are at least as fungible as are properties for sale. In addition, there is a high degree of similarity between the equitable remedies of specific performance and injunction. An injunction granted to a tenant corresponds to the remedy of specific performance granted to a purchaser of property. In the circumstances of Amexon, the permanent injunction was the functional equivalent of an order for specific performance by the Landlord of the lease agreement. It is therefore equally inappropriate "to maintain a distinction in the approach to [injunctions] as between realty and personalty".

If a purchaser has no automatic entitlement to the remedy of specific performance where the purchased property is not proved to be unique,7 then why should a tenant have that entitlement to the remedy of an injunction where the leased premises are not shown to be unique? There is no basis for affording greater protection for a tenant's property rights than for those of a purchaser.

Semelhago has reversed the presumption that all properties are unique. Instead, there is now a presumption that damages are an adequate remedy; to rebut that presumption, there must be evidence that the property is unique or, if that cannot be proved, that damages, for some reason other than the absence of uniqueness of the property, would not be an adequate remedy. A tenant should have the same onus.

In addition to Semelhago, the SCC decision in Highway Properties8shows that the view that property rights deserve special treatment is now merely a historical anomaly for which there is no longer any persuasive justification:9

It is no longer sensible to pretend that a commercial lease, such as the one before this Court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land.

The SCC decisions referenced above have established the principle that where an equitable remedy is sought in the context of a property right (including a leasehold interest), the principles to be applied are no different than if the remedy were sought in a non-property context. More particularly, the applicant has an obligation to show that damages would not be an adequate remedy, and the normal (although not the only) way to do that is to prove that the property is unique.

There is little to recommend adherence to an outdated principle which is based on archaic conditions. Rahawanji directs that an injunction ought to be granted only in an exceptional case where the applicant has clearly demonstrated that forfeiture would be inequitable and unjust in all the circumstances. Rahawanji states, in fact, that that test is particularly appropriate where a commercial lease is involved.

Are Damages an Adequate Remedy?

The normal process where an owner wishes to redevelop is the negotiation of termination agreements with the tenants. The consideration provided to the tenant may vary. One or more of the tenants may, however, seek to take advantage of the situation by demanding compensation far greater than any true loss they would sustain through early surrender of possession. This is what I characterize as a demand for a windfall benefit, one which bears no relationship to the actual loss that would be suffered. Just as disgorgement is "an exceptional remedy that should not be invoked unless all other remedies are inadequate",10 so too is an injunction. In the circumstances of Amexon, the Tenant would have sustained no loss that could not have been monetized and recovered in the form of damages.

Equitable Extortion

The evidence in Amexon indicated that the Tenant had no business need to remain in the leased premises. It was argued by the Landlord that the true reason for the Tenant's position that it wished to remain in those premises was to employ that as a lever to obtain a windfall gain at the Landlord's expense. The Landlord submitted that that amounted in equity to extortionate pricing or conduct, as characterized in certain passages which were reproduced with approval in the Santarsieri decision.11

Abuse of Process

It is not the purpose of an injunction to provide a tool to be employed for purposes that are inequitable, or to enable a plaintiff to circumvent the requirement to prove entitlement to a remedy such as disgorgement of profits. To seek an injunction for either of those purposes amounts to an abuse of the court's process.

It was the Tenant's position in Amexon that it had no obligation to identify any purpose for its request for an injunction, for the simple reason that it had a right to remain in the premises, and an injunction was merely the mechanism for enforcing that right. The Landlord argued that the evidence showed that there was a purpose for the requested injunction, and that was to "hold up" the Landlord for more money in exchange for vacating the premises. Whether that was so or not, the mere fact that the Tenant had a contractual right to remain in the premises was no more a sufficient ground for the grant of an injunction than the fact that the purchaser in Semelhago had a contractual right to receive title to the purchased property was a sufficient ground for a grant of specific performance.

Negotiating Advantage

The appellate decisions in Denovan and Allard are in direct conflict with Amexon, as reflected in the following statements:

...I am of the opinion that damages, including the availability of possible punitive damages, provides an adequate remedy for any loss or inconvenience experienced by the [tenant] as a result of the landlord's alleged wrongful acts. I do not consider the negotiating advantage afforded to the [tenant] by the presence of the injunction is a justification for its continuation.12

...

The court can withhold [an injunction] in the interests of fairness…So for example an injunction will not be given which would give the plaintiff no substantive useful benefit, except a negotiating advantage because of the harm done by the injunction to the person enjoined.13

One of the ordinary objectives, and one of the reasonable expectations, of a purchaser of real property is to reap the reward of any increase in the value of the property. That would not, however, be a normal or usual objective or expectation of a lessee, particularly a lessee of a small part of a large commercial building. The important point, however, is not whether the Tenant in Amexon was entitled to receive or share in the profit from redevelopment, but rather that the question whether the Tenant had that entitlement was a matter to be determined through a claim for damages. Regardless of the strength or weakness of the Tenant's claim for profits, this was an issue to be raised and determined in the context of a claim for damages. The Tenant had no need for an injunction to advance that claim, nor should it have been permitted to metaphorically put a gun to the Landlord's head by way of an injunction.

Breach of Contract on the Basis ofEconomic Efficiency

If the early termination of the lease in Amexon, wrongful though it was, caused no loss or harm for which the Tenant could not have been compensated through an award of damages, then the situation would fall into the category of breaches of contract that are permissible on the basis of economic efficiency. In accordance with the definition of that concept in the Bank of America decision,14the Tenant would have been fully compensated and the Landlord would have been better off than if it had performed the contract. The court in Bank of America said:15

Efficient breach is what economists describe as a Pareto optimal outcome where one party may be better off but no one is worse off, or expressed differently, nobody loses. Efficient breach should not be discouraged by the courts. This lack of disapproval emphasizes that a court will usually award money damages for breach of a contract equal to the value of the bargain to the plaintiff.

In the SCC decision in Bhasin, the court said:16

In commerce, a party may sometimes cause loss to another – even intentionally – in the legitimate pursuit of self-interest: Bram Enterprises Ltd. v A.I. Enterprises Ltd. 2014 SCC 12 at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v Mutual Trust Co. 2002 SCC 43 at para. 31.

Amexon is a classic example of a breach of contract that should be permissible (and, despite the right to recover damages, not characterized as wrongful conduct) on the basis of economic efficiency. The Tenant would have recovered money damages for whatever loss or harm it could show that it would have sustained from having to relocate, and for whatever value (if any) the bargain associated with its remaining leasehold interest might have had for it. The Landlord, for its part, would have been able to proceed with its redevelopment plan. This would have furthered the economic interests not just of the Landlord but of the general public. It would have encouraged, rather than hindered, the advancement of commerce.

Instead, the result in Amexon was disproportionately one-sided and wasteful. This is an example of a case where the emerging principle of economic efficiency ought to have been applied. An injunction ought not to be available where not only does the applicant sustain no loss or harm for which it cannot be compensated by way of damages, but the conduct of the respondent is actually to be encouraged because the societal economic consequences are beneficial.

Rewarding an Intentional Breach ofContract?

The argument can certainly be made that to deny an injunction in circumstances such as those in Amexon would be to condone, and perhaps even promote, intentional breaches of contract. That argument, however, applies equally in the case of a vendor who unilaterally refuses to transfer title to a purchaser, and the SCC in Semelhago demonstrated no qualms about disregarding that concern. That decision makes it clear that the focus of the court's attention should be directed at the test for granting an equitable remedy, not on whether the breach was intentional. The spotlight in circumstances such as those that existed in Amexon should be on the following matters:

  1. whether damages would be an adequate remedy;
  2. the true purpose for which the equitable remedy is being sought;
  3. the principle of proportionality;
  4. whether the breach of contract was permissible on the basis of economic efficiency; and (perhaps most importantly)
  5. whether granting the equitable remedy would lead to a reasonable and sensible result.

The following comment in another high court decision supports that view:17

It is true that the defendant has, by his own breach of contract, put himself in such an unfortunate position. But the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust. From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation. It is not only a waste of resources but yokes the parties together in a continuing hostile relationship.

Footnotes

1. 2015 ONCA 86, affirming an unreported decision delivered by handwritten endorsement. A separate costs endorsement is reported at 2014 ONSC 4384. An application for leave to appeal to the SCC was dismissed (2015 CanLII 38341, 2015 CarswellOnt 10072), although a settlement had been made between the parties shortly prior to the release of that dismissal.

2. Pointe East Windsor Limited v Windsor (City) 2014 ONCA 467, at para. 17; Denovan v Lee (1989) 65 D.L.R. (4th) 103, B.C.C.A. , at paras. 11-12; 472448 B.C. Ltd. v 343554 B.C. Ltd. 2006 BCSC 1075 at paras. 22-23 and 30.

3. Kerr v Baranow 2011 SCC 10 at para. 71.

4. As indicated in the following comment in Ruxley Electronics and Construction Ltd. v Forsyth [1996] 1 A.C. 344 (at p. 369): "[M]itigation is not the only area in which the concept of reasonableness has an impact on the law of damages. If the court takes the view that it would be unreasonable for the plaintiff to insist on reinstatement, as where, for example, the expense of the work involved would be out of all proportion to the benefit to be obtained, then the plaintiff will be confined to the difference in value. "

5. Semelhago v Paramadevan [1996] 2 S.C.R. 415.

6. At paras. 20-21 and 22.

7. In addition to Semelhago, see on this point Co-operative Insurance Society v Argyll Stores [1998] A.C. 1, at p. 11.

8. Highway Properties Limited v Kelly, Douglas and Company Limited [1971] S.C.R. 562.

9. At para. 27. That passage was quoted with approval by the High Court of Australia in Progressive Mailing House Pty. Ltd. v Tabali Pty. Ltd. (1985) 157 CLR 17, at p. 28, and the following was said (at p. 29): "The decisions in Australia and Canada, and the speeches in Panalpina, reflect the point made by William O. Douglas and Jerome Frank in Landlords' Claims in Reorganizations, Yale Law Journal, vol. 42 (1933), p. 1003, in footnote 6, that, as the law of landlord and tenant had outgrown its origins in feudal tenure, it was more appropriate in the light of the essential elements of the bargain, the modern money economy and the modern development of contract law that leases should be regulated by the principles of the law of contract. "

10. Apotex Inc. v Eli Lilly and Company 2015 ONCA 305, at para. 56.

11. Michael Santarsieri Inc. v Unicity Mall Ltd. (1999) 181 D.L.R. (4th) 136, Man. C.A.

12. Denovan, at para. 12.

13. Allard, at paras. 29-30.

14. Bank of America v Mutual Trust Co. 2002 SCC 43 at para. 31.

15. At para. 31.

16. Bhasin v Hrynew 2014 SCC 71, at para. 70.

17. Co-operative Insurance Society, at pp. 15-16.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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