When parties enter a contract, they often have an idea of what they expect to gain from the contract. In some cases, what a party expects to gain is readily ascertainable or obvious. For example, if a bank agrees to lend a borrower $100 for a year at an interest rate of 10% per year, the bank will expect to receive the loan of $100 and a $10 profit at the end of the year. If the borrower does not pay back $110, the bank has a legitimate basis to file a lawsuit in order to recover what it expected to receive pursuant to the contract.
In other cases, it is not always easy to determine what a party expects to obtain pursuant to a contract and what their damages will be if the counterparty breaches the contract. It is common for the court to determine damages by assessing what the party who is wrong reasonably expected the other side’s losses to be as a result of the breach of contract. In the example above, the borrower would reasonably foresee that the bank expects to receive $110 in a year.
Determining damages becomes much more complex in commercial agreements between businesses. For example, imagine a situation where a manufacturer of paint breaches a contract with a car manufacturer and did not provide the needed paint and, as a result, the manufacturer was not able to finish and sell its cars. In this scenario, it may be reasonable for the car manufacturer to sue the paint supplier for the lost profit it expected to earn on the cars. This is a relatively straight forward calculation. However, this example could be made more complex by determining what the lost profits should be if the price of these painted cars significantly increased or decreased due to a subsequent external event, such as the COVID-19 pandemic.
When calculating damages, the date on which one chooses to calculate is relevant. In most cases, damages are assessed from the date that the breach of a contract occurred, not at some later date (for example, after the effects of a health pandemic on a given market). The Court of Appeal in Maple Leaf Foods Inc. v Ryanview Farms, 2022 ONCA 532 confirmed that in certain cases, the Court may consider an alternate date and post-breach events to calculate damages if it would more fairly reflect the innocent party’s loss. The Court of Appeal also determined that events that occurred after the breach of contract may be considered if the parties could reasonably foresee that the post-breach event would have an impact on the innocent party’s damages.
It is doubtful that businesses could have anticipated that the cost of materials and products would increase as a result of the COVID-19 pandemic and that the pandemic would modify contractual damages. Despite this, the Maple Leaf Foods v Ryanview Farms case suggests that businesses should be mindful of industry trends and patterns that can result in inflated damages after a breach of contract occurs. If inflated damages due to post-breach of contract events are reasonably foreseeable, parties who breach a contract may find themselves liable for more than the initial value of the contract.
This article is intended for information purposes only. It is not intended to provide legal advice. If you have questions, please contact a lawyer.