Allocating Risk for Breach or Termination of Contracts

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I was reading the Ontario Reports recently. These are weekly reports that contain information and advertising directed to lawyers, and recent judgments from the Ontario courts. A case that might be of interest to business people is the Ontario Court of Appeal judgment in Agribrands Purina Canada Inc. v Kasamekas [2011] ONCA 460.

It is a case where Purina entered into an agreement with a company called Raywalt (which was a corporation owned by Kasamekas and his family) for a dealership in selling Purina feed. The dealership agreement between Purina and Raywalt was for 2 years, with automatic renewal. Either had the right to terminate the agreement on 60 days’ prior notice. The trial judge found that as a result of Purina’s actions Raywalt failed to succeed (and in fact went bankrupt). The trial judge assessed damages against Purina in excess of $2 million, plus he found Purina’s actions were not in good faith and assessed punitive damages in the amount of $30,000.

On appeal, the Ontario Court of Appeal was asked to consider the amount of damages. It found that “where there are several ways in which a contract might be performed, for the purposes of assessing damages, the mode that is the least profitable to the plaintiff and the least burdensome to the defendant should be adopted”.

In regular language, the Ontario Court of Appeal found that the appropriate amount of damages to Raywalt was to restore it to the position it would have been had the contract been performed. Purina’s maximum exposure under the contract was 60 days’ notice so the Court held that this was the basis for calculating damages for the breach of contract by Purina.  Kasamekas damages were reduced from $2 million to approximately $200,000. The fact that Purina had acted in bad faith was dealt with by the punitive damages award which was affirmed at $30,000.

So if you enter into an agreement (that has Ontario as its governing law), in the event of a dispute the method for assessing damages may be the one that is least profitable for one and least burdensome for the other. If you have fixed the notice period in the contact so that either party is able to terminate the contract on a specific number of days’ notice to the other, this case provides some guidance that (where you have acted in good faith and there are no other actionable claims), your risk and the amount that you may be liable for (or have to accept in payment) may be calculated based on the notice period.

You may wish to consider this in determining your risk and potential liability inherent in current and future contracts.

-Eve

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