Date: Fri, 30 Jun 2006 11:12:54 -0400

From: John Swan

Subject: Intangible Injuries for Breach of Contract (Fidler v. Sun Life)

I should not be picky in criticising the judgment in Fidler v. Sun Life since the Supreme Court has at least appeared to limit the absurdity of its judgment in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, 209 D.L.R. (4th) 257, 20 B.L.R. (3d) 165, regarding punitive damages — though by how much is unclear. Insurers can take some comfort in the fact that merely denying a claim that is later held to be well-founded will not expose them to the risk of being liable in punitive damages.

The Supreme Court’s treatment of what Vaughan has referred to as the plaintiff’s claim for intangible injuries is, however, another matter. The Court did not follow Farley v. Skinner or, for that matter, for all that it said it did, Denning’s judgment in Jarvis v. Swan Tours, in dealing with the plaintiff’s claim for intangible injuries and has set the law of "intangible injuries" for breach of contract off on a very poor basis. The basis for the Supreme Court’s recognition of aggravated damages (or damages for mental distress) is Hadley v. Baxendale. The Court seems to believe that if a loss is foreseeable, it’s recoverable. The breadth of that risk (for defendants) is limited by the fact that the contract has to be one in which either enjoyment (Jarvis) of peace of mind (Farley & Fidler) were promised.

Wilson J. adopted the Hadley v. Baxendale analysis in Vorvis v. Insurance Corporation of British Columbia but it is an unprincipled basis for extending damages; Hadley v. Baxendale operates to limit the risk that the defendant faces by denying recovery for those losses that could not have been foreseen, i.e., the "normal" losses. With respect to the "special circumstances", Hadley v. Baxendale says — and this fact is all too frequently ignored by courts all over the common law world — that the defendant may liable for those losses but only if it accepted the increased risk involved. In other words, Hadley v. Baxendale limits recovery; it provides no basis for an argument that a loss can be recovered just because it is foreseeable. A loss has to be recoverable under the compensation principle in order for Hadley v. Baxendale to apply to it.

The compensation principle, i.e., the principle that the plaintiff is to be put in the position that he, she or it would have been in, had the contract been performed, is the only basis on which expectation damages for breach of contract can be awarded. At the date of Hadley v. Baxendale (1854), the compensation principle was narrowly limited to what can be called the losses that a stoical merchant might suffer and, even then, with no pre-judgment interest and the courts’ general scepticism of plaintiff’s claims for lost profits, etc., the idea that the plaintiff would actually receive full compensation for the losses the defendant’s breach of contract caused had to be entirely fanciful.

The significance of Jarvis v. Swan Tours was that Lord Denning M.R. extended the compensation principle to include a claim for lost enjoyment. The case is not, as some have argued, an exception to the compensation principle, but an example of it. In other words, the concept of "position" in that principle was broadened to bring within it non-pecuniary losses or damages for lost enjoyment. Denning did not refer to Hadley v. Baxendale. The basis for a plaintiff’s claim for non-pecuniary damages is made very clear in the reasons for judgment of the House of Lords in Ruxley Electronics and Construction Ltd. v. Forsyth, [1996] 1 A.C. 344, [1995] 3 All E.R. 268, [1995] 3 W.L.R. 118, and again it was the simple recognition that limiting awards to purely economic losses was unfair, particularly when the home-owner had suffered no such loss but had not received the thing that the builder had promised him. Ruxley in effect recognizes that a plaintiff can recover compensation for being pissed off and mad as hell and that freedom from those feelings is part of the "position" that he was entitled to be in when the contract was completed. (The actual damages are "conventional" in the sense that the plaintiff’s subjective anger and disappointment will probably not increase the damages he or she can recover.) Again, there’s no mention of Hadley v. Baxendale as justifying this broadening of the concept of position.

The Supreme Court refers to the judgment of the British Columbia Court of Appeal in Warrington v. Great-West Life Assurance Co., (1996), 139 D.L.R. (4th) 18, [1996] 10 W.W.R. 691, 24 B.C.L.R. (3d) 1 — a judgment that Whiten bizarrely ignores though it was referred to the court by counsel — where the majority awarded the plaintiff damages for mental distress without referring to Hadley v. Baxendale as the basis for doing so: Newbury J.A. recognized an obligation on the insurer to give its insured peace of mind and gave compensation for the breach of this undertaking. It is true that Southin J.A. referred to Hadley v. Baxendale, but she was alone.

While Fidler v. Sun Life is at least a step in the right direction in both recognizing damages for mental distress or lost enjoyment and in limiting the circumstances in which punitive damages will be awarded, the level of confusion in the Supreme Court is depressing. It’s hard to understand how McLachlin C.J.C. and Abella J. could have so misunderstood Jarvis v. Swan Tours and Farley v. Skinner; they did not refer to Ruxley.

John Swan

-----Original Message-----
From: Vaughan Black
Sent: June 29, 2006 6:52 PM
To: Jason Neyers
Subject: Re: ODG: Intangible Injuries for Breach of Contract

This is the first time the SCC has wrestled with this since the HL's decision in Farley v. Skinner, and not surprisingly they followed the approach in that case.

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