Supreme Court of Canada clarifies law on specific performance and mitigation.
17, October 17, 2012 - Filed in: Court Cases
This decision has significant implications on a purchaser's duty to mitigate its losses when a transaction fails due to the vendor's breach, particularly when the purchaser is a single purpose corporation.
In Southcott Estates Inc. v. Toronto Catholic District School Board, the Appellant was a single purpose corporation, without assets, created solely to purchase and develop a specific property. The Vendor breached the sale agreement and failed to complete the sale. The Purchaser sought specific performance of the agreement and argued that it was not required to mitigate its losses by seeking to purchase a reasonable alternative property.
Under the doctrine of mitigation, a Plaintiff has a duty to take all reasonable steps to mitigate losses caused by the defendant's breach. A plaintiff will not be able to recover those losses that could have been avoided by taking reasonable steps to mitigate after the breach. In cases where it is alleged that the plaintiff failed to mitigate, the onus is on the defendant to prove first, that mitigation was possible and second, that the Plaintiff failed to make reasonable efforts to mitigate.
The trial judge and the Court of Appeal both found that while the Vendor had breached the agreement, the Purchaser’s claim for specific performance was not justified as the property was not unique and damages were an adequate remedy. Unlike the trial judge however, the Court of Appeal found that the Purchaser had unreasonably failed to take steps to mitigate its losses, and therefore reduced the damages award to a nominal sum.
On appeal , the following three issues were raised:
1. Should a single purpose company mitigate its losses?
2. To what extent must a Plaintiff mitigate where the Plaintiff has made a claim for specific performance?
3. Did the trial judge err in concluding that there was no evidence of comparable profitable properties available for mitigation?
The Purchaser argued that as a single purpose corporation, created solely to purchase a specific property, it was impecunious and unable to mitigate its losses by seeking an alternative property without any capital investment from its parent company, and without the corporate mandate to do so. The Court rejected the Purchaser’s reasoning, and concluded that a single purpose corporation cannot avoid the duty to mitigate by simply asserting that it lacks the funds to pursue alternative opportunities or that it is prevented from doing so due to its limited corporate mandate. The Court found that to hold otherwise would give an unfair advantage to those conducting business through single purpose corporations. To not require single purpose corporations to mitigate their losses would expose defendants contracting with such corporations to higher damage awards than those reasonably claimed by other Plaintiffs, based solely on the single purpose corporation's limited assets.
The Purchaser also argued that it acted reasonably by not attempting to mitigate its losses as it was pursuing a claim for specific performance. The Court held that while a claim for specific performance can be difficult to reconcile with the doctrine of mitigation, a Plaintiff's inaction in seeking a substitute property is only justified where the circumstances reveal "some fair, real, and substantial justification" for the claim or "a substantial and legitimate interest" in seeking specific performance. The Court found that the Purchaser could not justify its inaction and could not reasonably refuse to mitigate. The property's unique qualities related only to the profitability of the land for development, and for this, damages were seen as an adequate remedy.
Although the Purchaser admitted that it did not make any efforts to mitigate, the Vendor still had the burden of proving that mitigation was possible. The Court found that there were other comparable, profitable development properties available to the Purchaser. This finding was based on expert evidence regarding land suitable for development sold during the relevant time period in the same area, the other investment properties purchased by the Purchaser's parent company and the absence of any evidence to the contrary.
Ultimately, the Court dismissed the Purchaser's appeal, finding that it failed to satisfy its duty to mitigate by pursuing opportunities to purchase a comparable property after the Vendor's breach.
This decision is significant as it requires a pPurchaser acquiring land for development purposes (and hence, for profit) to attempt to mitigate its losses in the event the transaction is not completed due to a vendor's breach. The duty to mitigate will apply regardless of whether specific performance is pursued (except in limited circumstances), and will continue to apply even if the purchaser is a single purpose corporation with no assets. The Court's reasoning suggests that Plaintiffs seeking specific performance on a contract for the sale of an investment property may have more difficulty establishing that the property is unique, and therefore that specific performance is warranted. This decision is also significant because in determining whether a single purpose corporation could have mitigated its losses by pursuing comparable properties, courts are not restricted to looking at the actions of the corporation alone, but may also look to the actions of the corporation's parent company.
Note: This summary is taken from a case comment by Janet J. MacNeil and Harkiran Bain of FMC Law