Canada: Ontario Court Of Appeal Applies Minimum Performance Principle For Damage Costs In Breach Of Contract

The Ontario Court of Appeal has ruled on the relationship between termination for convenience clauses and damages for wrongfully terminating a commercial agreement for cause in its decision in Atos IT Solutions v. Sapient Canada Inc.1 (Atos). It also confirmed the interpretation of "lost profits" in limitation of liability clauses.

What You Need To Know

  • Termination for convenience clauses may serve to define the upper limit of liability for damages for the wrongful termination of services under a contract, even where the terminating party does not rely on the termination for convenience provision.
  • The presence of a termination for convenience fee in respect of one set of services under an agreement will not generally be relevant to assessing damages for the wrongful termination of services for which no termination for convenience rights or fees are set out in the agreement.
  • The Open Window Bakery minimum performance principle can apply to the calculation of damages for breach of contract despite termination in bad faith.
  • Standard limitation of liability clauses excluding "lost profits" are likely to continue being interpreted as referring to indirect lost profits and will not exclude lost profits on the contract that result directly from its breach.

Basis of Decision

In its decision, the Court of Appeal applied the Open Window Bakery principle in quantifying damages for the termination of a subcontract between two technology companies: where there are several ways in which a contract may be performed, breach of contract damages should be calculated based on the mode of performance "least burdensome to the defaulting party and least profitable to the non-breaching party."2

The Court held that where there is a termination for convenience fee set out in the agreement but the terminating party claims it has terminated "for cause," damages should be quantified using the termination fee as an upper limit on liability. The Court also suggested the minimum performance principle operated in conjunction with the organizing principle of good faith contractual performance recognized in Bhasin v. Hrynew3 (Bhasin), and that the principle could act as a limit on damages regardless of whether the terminating party had acted in bad faith.

Atos IT Solutions v. Sapient Canada Inc.

On September 30, 2006, the appellant, Sapient, outsourced work on a legacy software replacement project for Enbridge to the respondent, Atos (formerly Siemens). The subcontract agreement required Atos to provide two services: data conversion (DC services) and application management support (AMS services). The agreement provided Sapient the right to terminate the entire agreement "for cause," with a more limited right (including a separate damages calculation formula) to terminate the DC services agreement for convenience.

On June 29, 2009, Sapient terminated the entire subcontract for cause and immediately entered into a new agreement with Enbridge to provide the AMS services itself. Atos sued for wrongful termination, and Sapient counterclaimed for damages related to delays.

At trial, the judge found that Sapient had terminated the contract in bad faith, awarding Atos damages of $2.4 million for the balance owing for the DC services and $3.6 million for the estimated gross profits Atos would have earned from the provision of the AMS services.

On appeal, Sapient argued that the Open Window Bakery minimum performance principle entitled it to the benefit of the less burdensome mode of performance in respect of any damages relating to the DC services portion of the subcontract (payment of the termination for convenience fee), even though it had relied on the termination for cause provision when it terminated the entire agreement.

Sapient also appealed the $3.6 million lost profits award related to the termination of the AMS services, arguing the agreement's limitation of liability clause limited Atos's claim to its costs to retain staff to provide the AMS services, in the amount of $550,000. The limitation of liability clause provided:

... [Atos] nor sapient will be liable to the other for indirect, special, consequential or punitive damages or for loss of profits ... even if the party has been advised of the possibility of such damages...

Sapient claimed this clause meant Atos could not claim damages for lost profits arising from the breach of the AMS portion of the subcontract.

Atos responded and said the termination for convenience clause was not an alternative mode of performance for the entire subcontract, and therefore it was not entitled to have damages for its termination of the DC services calculated using the termination for convenience clause.

Atos also argued the over-arching duty of good faith and honest performance of contracts recognized in Bhasin precluded the application of the minimum performance principle in cases where the termination was in bad faith. Finally, Atos argued that expectation damages, which are direct damages, include loss of profits and it was therefore entitled to recover the $3.6 million damages figure in respect of the AMS services.

Court Decision

The Court of Appeal held that the correct application of the Open Window Bakery minimum performance principle required that Atos's award for damages pursuant to the termination of the DC services should be recalculated using the formula in the termination for convenience clause. As a result, the award was reduced from $2.4 million to $1 million.

In addressing whether the termination for convenience clause constituted an alternative mode of performance, the Court of Appeal found that the language of the subcontract allowed Sapient to use the termination for convenience clause to terminate the DC services portion only, while relying on the termination for cause provision to terminate the rest of the contract.

The fact Sapient did not actually rely on the termination for convenience provision in its termination letter and could not justify the termination of the subcontract for cause had no bearing on Atos's reasonable expectations of recoverable damages for termination of the DC services. The termination for convenience clause "effectively defined the upper limit of Sapient's liability for damages in respect of DC services."

The Court also rejected Atos's argument that the minimum performance principle should not apply because Sapient had breached its common law duties of good faith. Atos claimed Sapient's bad faith conduct in terminating the subcontract meant Sapient was not entitled to take advantage of the less burdensome damages calculation formula.

The Court found that Bhasin focused on the issue of the performance of contracts and "did not purport to alter the existing principles concerning the proper measure of expectation damages in the event of a breach of contract." The Court suggested that the minimum performance principle could operate in conjunction with the general organizing principle of good faith.

With respect to Sapient's appeal of the damages award in respect of the AMS services, the Court affirmed the trial judge's reasons regarding the interpretation of the limitation of liability clause, holding that the lost profits exclusion applied only to consequential or indirect lost profits. The Court upheld the trial judge's reasonable interpretation that parties who enter into a fixed price commercial contract would rely on the fact that they would receive the loss of profit component of the price in the event of a breach.

Analysis

Atos should lead recipients of services under commercial agreements to consider their strategy in negotiating and relying on termination for convenience clauses. It also confirms that typical excluded damages clauses will continue to be interpreted narrowly.

The ruling suggests a fee for termination for convenience can serve as an upper limit on a customer's liability in the event they choose to terminate services, and will be used by courts as a tool for determining liability for wrongfully terminating services.

Service providers may consider delineating "no fault" circumstances giving rise to termination rights in order to appease customers who rely on broad termination for convenience clauses to manage factors outside of the parties' control (shifts in economic conditions or directions from regulators), or service providers may continue to accept termination for convenience provisions but may take a harder line in negotiating termination fees.

Recipients of services will still likely push for termination of convenience rights and will want to be careful not to "buy" the right to terminate for convenience at too high a cost, at the risk of skewing a court's calculation of damages in the event they wrongfully exercise a "for cause" termination right. Atos does, however, suggest even a high termination may be better than no termination fee at all, as the inclusion of a termination for convenience fee—even one which seems unfavourable—will help remove one of the key impediments to taking decisive action in respect of a contractual relationship: indeterminate liability.

Footnotes

1 2018 ONCA 374.

2 Hamilton v. Open Window Bakery 2004 SCC 9 (Open Window Bakery).

3 2014 SCC 71.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions