Date: Sat, 8 Jul 2006 13:52:45 -0400

From: David Cheifetz

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

Adam,

Fidler claims that insurance contracts are different from some, but not necessarily all, contracts of the type the court describes as "normal" commercial contracts. See paragraphs 45 and 46.

According to the court, insurance contracts have this psychological benefits. The class of "normal" commercial contracts don't have necessarily have, but may on the evidence be found to contain, the psychological benefit. (Let's not even begin to ask how that will fit in with the other Canadian "rules" for interpreting insurance polices, which are based on the premise that, for interpretation purposes, there is nothing intrinsically unique about insurance contracts.) Or is this some sort of self-contained difference which has no effect on other rules for interpreting insurance policies?

It seems to me that what paras 45-46 assert is that, on an objective basis, there is now a presumption that this psychological benefit is an object of insurance policies. However, there is no such presumption "normal" commercial contracts: a term which the panel didn't define, "normal" so frequently used in normal commercial matters that there was no need to define it, since its the meaning is so-well settled that no qualified judge, competent lawyer, or informed lay person - or even the proverbial moron in a hurry - would have any doubt about what is or isn't a "normal" commercial contract.

Just so nobody needs to go looking for the paragraphs.

45 It does not follow, however, that all mental distress associated with a breach of contract is compensable. In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security.

46 This conclusion is supported by the policy considerations that have led the law to eschew damages for mental suffering in commercial contracts. As discussed above, this reluctance rests on two policy considerations – the minimal nature of the mental suffering and the fact that in commercial matters, mental suffering on breach is "not in the contemplation of the parties as part of the business risk of the transaction": McGregor on Damages, at p. 63. Neither applies to contracts where promised mental security or satisfaction is part of the risk for which the parties contracted.

Maybe all the panel meant is that, by definition, a "normal" commercial contract is one in which a psychological benefit isn't an object. That could be the implication of paragraph 46. So, we've now been told that any vacation contracts, indeed any contract which clearly has a peace of mind component (or some other psychological benefit) by definition isn't a "normal" contract.

In passing, who wants to start keep the list of the rules for the interpretation of "normal" contract rules of interpretation that won't apply to the interpretation of contracts which are not within the class?

Anyway, what we now have Canada is one example of a rule of interpretation for contracts such as insurance policies which aren't "normal" commercial contracts and another rule for contracts which are "normal" commercial contracts. This is an untapped field for scholarship which, coincidentally, will be analyzed in the forthcoming Canadian text book: The Law of Normal and Abnormal Contracts in Canada, "M. Python" ed. (Oz, Walamaloo Press, 2009). I gather the text is being written in association with one or more of the academics listed here. Or, at least it will be once they're weaned off the sheep-dip.

In the meantime, we practitioners will have to start keeping a checklist of what contracts are normal and what aren't. And a sub-list of what may have been normal at inception but may become something other than normal later. You may well be right that, ultimately, Fidler can be massaged into coherency. For now, though, Canadian lawyers have to deal with its incoherent aspects.

Best,

David

-----Original Message-----
From: Adam Kramer
Sent: July 8, 2006 11:30 AM
To: 'John Swan'
Subject: RE: [Fwd: RE: ODG: Intangible Injuries for Breach of Contract (Fidler v. Sun Life)]

John,

I agree that the application by the SCC of their test suggests that they are not looking much beyond foreseeability, however what they said (albeit not entirely consistently or sufficiently fleshed out) can lead to a coherent principle. The Hadley v Baxendale test does unite damages under a single principle as the single and controlling test (paragraphs 54 to 55 of the judgment) if it is understood as incorporating not just foreseeability but also acceptance of risk, which, as you rightly intimate, must be the basis of the remoteness rule. The reference to restoring the parties "to the position they contracted for" (paragraph 44 of the judgment) and the reference to the Jarvis/Farley test of psychological benefit (an ugly term that) being "an object" of the contract (paragraphs 45 and 47 of the judgment) indicates that we’re not talking about mere sine qua non causation (what position would I have been in) or foreseeability, but must also be talking about acceptance of risk (which is what I’ve always understood the "object of the contract" test to be about): see paragraph 46 and the emphasis on "the risk for which the parties contracted". The continuation of the traditional focus on "contemplation" rather than foreseeability leaves room for such a test.

I would say that this decision, properly understood, allows the rehabilitation of Hadley v Baxendale, i.e. the remoteness test, as a test of assumption of risk. The foreseeability test is the best rule of thumb, along with others (such as presumptions that in commercial dealings the only "objects" of the contract, i.e. risks accepted, are commercial ones), and all together we have the acceptance test which nicely fits under the term "reasonable contemplation", properly understood. As you already know, I do my best to make this point in an article last year which I’ve already plugged in this mailing list, last time we talked about remoteness ("An Agreement-Centred Approach to Remoteness and Contract Damage" in N Cohen and E McKendrick (editors), Comparative Remedies for Breach of Contract (Oxford, Hart Publishing, 2005) 249-286 - if my computer skills are up to it then there should be a hyperlink to the article in this sentence), and I have a go at mental distress along the above lines in there.

As for the point about individualisation, I also try to address that in my article: the gist being that when you’re dealing with a standardized vendor you know his prices and insurance are already fixed so can’t expect him to accept individualised risks, and therefore can tell him about yourself until you’re blue in the face and still his risks will not be affected (because you could not reasonably understand him to have accepted any risks when you told him). However you can also understand the vendor to have taken and spread broad types of foreseeable risk within his generally fixed price and insurance, and so many risks will have been accepted.

So I think that my view is that the SCC is getting to the right test, although spoils it somewhat by, in paragraph 56, paying only lip-service to that test. As David observes, what is special about this insurance contract? Indeed, in what commercial contract in which the other side undertakes to make payments upon the occurrence of certain events or circumstances (i.e. just about every commercial contract) is one not contracting "for benefits that are both tangible, such as payments, and intangible, such as knowledge of income security" (paragraph 56 of the judgment). Contracts are all about income security. The point is that the intangible peace of mind that comes from income security is not one of the objects of most commercial contracts, i.e. one of the risks assumed by the promisor. I’m not saying that the decision is wrong, but I think the question needed investigating a little more to tease out the special features of disability insurance etc.

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