What is the most common remedy for breach of contract in Ontario?

Whether you’re in a contract dispute, or about to sign your next agreement, you should know, what are the remedies for breach of contract?

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*Disclaimer: this guide is for informational purposes only. It does not constitute legal advice nor create a solicitor-client relationship between the author and reader. As with all legal matters, a lawyer should be properly retained and consulted where legal advice may reasonably be considered necessary.

This blog post will cover the remedies for breach of contract, including:

1. When is a contract breached?
a) Where to start?
b) How to interpret the contract?
c) What is an entire agreement clause?
d) What are express and implied contract terms?
e) What is the duty of good faith?
f) What is the difference between a condition and warranty?
2. What are the remedies for breach of contract?
g) What damages can you claim for breach of contract?
h) What does it mean to mitigate your damages?
i) What is specific performance?
j) what is an injunction?

Ready? Here we go!

1. When Is a Contract Breached?

a) Start With the Agreement

The first place to start in a breach of contract scenario is determining whether you have a valid agreement (See When is a Contract Legally Binding). After you’ve determined there is a valid contract, you’ll start by looking at the wording of the agreement to determine if there has been a breach. Often the breach will be clear and obvious. For instance, where the seller in a real estate transaction agrees to convey title to the purchaser on an agreed upon closing date (but fails to do so when the closing date arrives). In that case, the remedies available to the purchaser are to enforce the agreement by asking for specific performance, or sue the seller for damages caused by the breach. But rarely is breach of contract this simple (even in routine real estate transactions).

b) How to Interpret a Contract?

Most contractual disputes arise over the interpretation of the agreement, that is to say, the objective meaning of the words the parties chose to govern their relationship. Words have different meanings in different contexts, and in the minds of different people (this simple principle is what keeps contract lawyers like Supply Law in business). When the meaning of the words are in dispute, the current practice is for the courts to look at the plain wording of the agreement and, where necessary and appropriate, the circumstances surrounding the agreement when the contract was formed (or what is know as the “factual matrix” amongst contract lawyers). By looking at the agreement and the factual matrix, the goal of the courts is to tease out the parties’ true intentions.

The courts try to give effect to the parties intentions as a way of promoting certainty (and avoiding absurdity) in a commercial environment. In interpreting a contract, the courts will not rewrite the agreement, and will not generally intervene to save a party from a bad bargain. The ultimate question for the courts is what would a reasonable person in the shoes of the contracting parties understand the words to mean?

There are many rules and principals governing contractual interpretation. These rules can become more or less relevant depending on the circumstances. For instance, where there is an ambiguity that cannot be resolved by looking at the factual matrix, the rule of contra proferentem holds that the ambiguity should be construed against the drafter. This is a concept often in play where an employment contract or insurance policy is at issue. Due to the wide variety of relationships and scenarios that are governed by contracts, there are an abundance of rules of interpretation and therefore many grounds for debate.

c) What Is an Entire Agreement Clause?

The parties may attempt to limit the evidence the courts will review in the event of a contract dispute, by inserting an “entire agreement clause” into the contract. Entire agreement clauses usually look something like this,

1. Entire Agreement
This agreement forms the full agreement governing the relationship between the parties.

By agreeing to this term, the parties are instructing the courts that only the words written in the contract should govern their relationship (keeping the analysis within the four corners of the contract). By limiting the court’s analysis to the agreement itself, the goal is to prevent supplementary documents or oral representations from being presented as evidence in a breach of contract claim. It should be noted, these clauses can only suggest the court should refrain from reviewing documents or statements that may have been exchanged before the agreement was executed. It will not prevent a party from presenting evidence to show there was no valid contract, to resolve ambiguity, or to argue the contract should be void for uncertainty or illegality. The effectiveness of this technique is open for debate. The clause is more effective at preventing a party from arguing additional terms (not specifically included in the contract) can actually be found in a secondary contract that is collateral to the main agreement.

d. What Are Express and Implied Contract Terms?

Breach of contract can occur when a party breaches either the express or implied terms of an agreement. Express terms are those written directly in the contract. However, there are numerous instances where the courts will deem a party has breached an implied term of the agreement. Implied terms are terms so fundamental to the agreement they are included in the contract whether or not they are written into the agreement. For instance, if you sign a contract to buy a car, an implied term may be that the car comes with a marketable title, meaning free of any ownership defect that would prevent you from putting the vehicle in your name and selling the vehicle to another person further down the road.

e) What Is the Duty of Good Faith?

In Bhasin v. Hrynew (2014), the Supreme Court affirmed the duty of good faith and honesty in contractual performance is an implied term included in every contract governed by the laws of Canada. While the entire scope of this duty is not yet clear (the case having only been decided in 2014), good faith and honesty are founded on the principal that parties to a contract may not disregard the legitimate contractual interests of the other, nor act in bad faith, lie, or otherwise deceive or mislead the other party. It should be noted, this duty only applies to the performance of the contract as there is no corresponding duty of good faith applicable to the negotiation stage (but note, there are other remedies available in this situation, for instance by bringing a claim for negligent or fraudulent misrepresentation).

Good faith breaches can arise where the contract allows for a party to exercise discretion. In such case, the party exercising its discretion must do so with good faith and, in some instances, provide adequate reasons for its decision (a lesser known remedy under the principals of natural justice often at issue in the governance of voluntary associations) While the implied duty of good faith is a powerful remedy, there are may other situations where the courts will find implied terms to supplement a written agreement.

f) What Is the Difference Between a Condition and Warranty?

Contractual terms can generally be subdivided into conditions and warranties and to determine what remedies are available for breach of contract, you need to assess whether the breach can be classified as a breach of warranty or a breach of condition.

Conditions are essential terms going to the root of the contract. For instance, in the case of the sale of a new car, a condition would be that that the car is in fact new. In this scenario, where the condition is breached (for instance by the seller delivering a used car) the purchaser may regard the seller as in breach of a material condition and be relieved from continuing with the transaction. However, in this case, the purchaser also has the option of accepting the car and suing for damages.

Warranties on the other hand, allow the innocent party to sue for damages. But in contrast to conditions, the innocent party will still be compelled to perform its obligations even in the face of the other’s default. Using the sale of a used car as an example, a warranty given by the seller could be that the car is in a good state of repair. If the vehicle’s transmission fails shortly after being driven, the purchaser may be able to sue for the seller’s breach of warranty to cover the costs of the repairs, but the purchaser cannot repudiate the contract and return the vehicle.

Where conditions and warranties are hard to distinguish, the fundamental question to ask is whether the breach was of sufficient importance as to substantially deprive the innocent party of what was bargained for. Whether a breach of the contract is in fact a breach of a condition or warranty will often depend on the facts and interpretation of the agreement.

2. What Are the Remedies for Breach of Contract?

The standard remedy for breach of contract is a monetary award for damages. The amount of the award is determined by performing calculations under specific heads of damages (which will be described below). Other remedies include specific performance, meaning a court order that the defendant perform its contractual obligations, or an injunction (an order to prohibit the party from continuing to breach the agreement). These remedies, while not exhaustive, will be examined below in turn.

g) What Damages Can You Claim for Breach of Contract?

The purpose of damages in a breach of contract claim is to put the innocent party in the position they would have been in, had the contract been performed as agreed. These compensatory damages can take the form of lost profits, interest, and or additional expenses required to fulfill the contract, but is ultimately a complex and fact driven analysis. In addition to damages that serve to compensate the plaintiff for the defendant’s failure to strictly perform the contract, damages can include awards for loss of enjoyment, peace of mind, and mental distress, if they result from the breach. Punitive damages can also be awarded, if the breaching party’s conduct is severe enough to warrant them.

The party claiming damages has the onus of showing the breach lead to the losses they suffered. Generally, this means establishing that the damages being claimed were reasonably foreseeable as result of the breach (meaning within the contemplation of the parties at the time they entered they contract). For instance, if the plaintiff makes clear to the defendant that a shipment of goods must arrive by a specific date or they will lose a contract with their customer, a court may find the defendant liable for those lost profits as they would reasonably be within the contemplation of the parties.

h) What Does It Mean to Mitigate Your Damages?

The plaintiff has a duty to mitigate the extent of the damages they suffer. This means they have a positive obligation to reduce their losses. For instance, in the case of a tenant’s breach of a commercial lease and subsequent eviction, the landlord cannot simply let the premises sit vacant and attempt to recover the full amount of rent remaining under the lease. Instead, the landlord has a duty to mitigate their damages by re-leasing the premises (at a reduced rent if necessary) and claiming against the defaulting tenant for the difference. Damages will be reduced where the plaintiff fails to reasonably mitigate.

i) What Is Specific Performance?

In lieu of (or in some cases in addition to) an award of damages, the plaintiff may seek an order for specific performance under the agreement. This remedy is available where damages alone would do little to adequately compensate the plaintiff in a breach of contract claim. For instance, where the vendor of a specific parcel of land fails to close the transaction and no suitable replacement exists for the purchaser’s development project, the court may order the vendor to abide by the agreement and convey title of the property to the purchaser.

j) What Is an Injunction?

In contrast to specific performance, where you want to stop someone from continuing to breach an agreement, an injunction may be obtained from the courts. An injunction can be a useful remedy where for instance, an agreement for the sale of a business includes a non-compete clause where the vendor agrees not to operate a similar business within 5km after the agreement closes. In this case, if the vendor is breaching that term by opening and operating a competing business following the sale, the purchaser may obtain a court ordered injunction to stop the defendant from acting contrary to the agreement. If the vendor fails to cease in defiance of the injunction, they may be held in contempt of court and subject to fines or even imprisonment.

Conclusion

When a valid enforceable contract is found, a highly fact driven analysis must be taken to determine the applicable legal principals and remedies available in the event of a breach. If a contract dispute arises, legal advice should be sought early to determine the appropriate remedy and minimize the expenses involved in resolving the dispute.