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Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440

 

Eric Langille and Paul Langille                                                         Appellants

 

v.

 

Keneric Tractor Sales Limited                                                          Respondent

 

indexed as: keneric tractor sales ltd. v. langille

 

File No.: 19450.

 

1987: May 13; 1987: October 15.

 


Present: Dickson C.J. and Beetz, McIntyre, Wilson and La Forest JJ.

 

 

on appeal from the court of appeal for nova scotia

 

                   Contracts ‑‑ Damages ‑‑ Chattel lease ‑‑ Breach by lessee ‑‑ Proper method of determining damages ‑‑ Whether general principles of assessment of damages for breach of contract applicable or whether lessor's remedies limited to proceeds of resale plus rental payments due at time of seizure.

 

                   Leases ‑‑ Chattel lease ‑‑ Breach by lessee ‑‑ Proper method of determining damages ‑‑ Whether general principles of assessment of damages for breach of contract applicable or whether lessor's remedies limited to proceeds of resale plus rental payments due at time of seizure.

 

                   Respondent leased farm equipment to appellants on a hire‑purchase basis and then assigned the leases in order to finance the purchase of the equipment from the manufacturer. Respondent guaranteed appellants' performance under the leasing agreements and agreed to act as manufacturer's agent for the recovery of amounts due under them. The appellants defaulted under the leases and respondent seized the equipment. After due notice, respondent sold the seized equipment and commenced this action claiming damages resulting from breach of the leases. The trial judge found appellants to be in breach of their leasing agreements, assessed damages using a formula that gave effect to the general principles of assessment of damages for breach of contract, and found that respondent had taken reasonable steps to mitigate damages. The Court of Appeal upheld that decision but was divided as to the proper method of assessing damages. The principal issue here is how damages are to be calculated for breach of a chattel lease.

 

                   Held: The appeal should be dismissed.

 

                   The damages flowing from breach of a chattel lease should be calculated in accordance with general contract principles in the same way as damages flowing from breach of a land lease. It made no sense to view the lease as "simply a conveyance and not a contract" and this anomaly could only be corrected by assessing damages on general contract principles. Practicality supported this approach as well since it avoided the potential for multiplicity of actions inherent in the old approach. The need for consistency within the law also militated in favour of this change. There is no essential difference material to the ascertainment of damages on breach between a lease of land and a lease of chattels. They are both contracts.

 

                   The assessment of damages in a case of termination based on breach of a term of the contract should not be any different from the assessment of damages in a case of termination based on repudiation. The breach and the repudiation are merely subdivisions within a general category of conduct, i.e., conduct which gives the innocent party the right to treat the contract as terminated. General contract principles should be applied in both instances.

 

                   Appellants' default constituted a breach of lease that gave respondent the right to terminate. Respondent accepted the breach and terminated the leases. It was not necessary to determine whether appellants also repudiated the leases for such a finding would make no difference to the assessment of damages. The contract is not rescinded in the true legal sense, i.e., in the sense of being voided ab initio by some vitiating element. The parties are discharged of their prospective obligations under the contract as from the date of termination but the prospective obligations embodied in the contract are relevant to the assessment of damages.

 

                   The general rule for the assessment of damages for breach of contract is that the award should put the plaintiff in the position he would have been in had the defendant fully performed his contractual obligations. This principle is qualified by the doctrine of remoteness and by the injured party's duty to mitigate its damages. Here, appellants were aware that they were buying equipment from respondent which was purchasing the equipment from Allis‑Chalmers using the appellants' rental payments under the leases as security for the purchase price. They knew or ought reasonably to have known that the measure of damages which would be suffered by respondent on their breach of the leases would be the measure of the liability of respondent to Allis‑Chalmers.

 

                   The defendant has the burden of proving that plaintiff did not take reasonable steps to mitigate its damages. The appellants (defendants) did not discharge that burden here. In the absence of evidence concerning the economics of reletting, it was impossible to say whether reletting would have been preferable to resale or not.

 

Cases Cited

 

                   Applied: Highway Properties Ltd. v. Kelly, Douglas and Co., [1971] S.C.R. 562, 17 D.L.R. (3d) 710; distinguished: Canadian Acceptance Corp. v. Regent Park Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304; referred to: Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145; Victoria Laundry (Windsor) Ltd. v. Newman Industry Ltd., [1949] 2 K.B. 528, [1949] 1 All E.R. 997; Humphrey Motors Ltd. v. Ells, [1935] S.C.R. 249; Financings, Ltd. v. Baldock, [1963] 1 All E.R. 443; Buchanan v. Byrnes (1906), 3 C.L.R. 704; Hughes v. N.L.S. Pty. Ltd., [1966] W.A.R. 100; Pigott Construction Co. v. W. J. Crowe Ltd. (1961), 27 D.L.R. (2d) 258; Alkok v. Grymek, [1968] S.C.R. 452; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26; Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., the "Hansa Nord", [1976] Q.B. 44; Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883; Moschi v. Lep Air Services Ltd., [1973] A.C. 331, [1972] 2 All E.R. 393; Red Deer College v. Michaels, [1976] 2 S.C.R. 324.

 

Statutes and Regulations Cited

 

Conditional Sales Act, R.S.N.S. 1967, c. 48, s. 1(b)(ii).

 

 

Authors Cited

 

Anson, Sir W. R. Anson's Law of Contract, 26th ed. By A. G. Guest. Oxford: Clarendon Press, 1984.

 

Cheshire, G. C., C. H. S. Fifoot and M. P. Furmston. Law of Contract, 11th ed. 1986.

 

Halsbury's Laws of England, vol. 12, 4th ed. London: Butterworths, 1975.

 

 

                   APPEAL from a judgment of the Nova Scotia Court of Appeal (1985), 67 N.S.R. (2d) 404, 155 A.P.R. 404, 19 D.L.R. (4th) 652, dismissing an appeal from a judgment of Glube J. Appeal dismissed.

 

                   R. A. Cluney, Q.C., and M. E. Reid, for the appellants.

 

                   R. Malcolm MacLeod and R. M. Purdy, for the respondent.

 

                   The judgment of the Court was delivered by

 

 

1.                Wilson J.‑‑The issue in this appeal is how damages are to be calculated for breach of a lease of chattels. Central to this issue is whether the reasoning of this Court in Highway Properties Ltd. v. Kelly, Douglas and Co., [1971] S.C.R. 562, 17 D.L.R. (3d) 710, a case dealing with the method of calculation of damages for breach of a lease of land, should be extended to cover leases of chattels.

 

1. The Facts

 

2.                The appellants, Eric and Paul Langille are farmers. During the summers of 1981 and 1982 the respondent Keneric Tractor Sales Limited ("Keneric") leased ten pieces of farm equipment to the Langilles. The 1981 leases called for ten semi‑annual payments over a five‑year period. The sum of these semi‑annual payments was equal to 120% of the original purchase price. A separate agreement gave the Langilles an option to purchase the equipment for 25% of the original purchase price. The option was exercisable at the end of the five‑year period. If the option was not exercised the equipment would revert back to Keneric. The 1982 leases were structured the same way but the semi‑annual payments were higher and the option to purchase was set at 30% of the original purchase price.

 

3.                Keneric had bought the farm equipment in question from Allis‑Chalmers Canada Inc., the manufacturer. In order to finance the purchases the leases taken from the Langilles were assigned to Allis‑Chalmers Credit Corporation of Canada, Ltd. Keneric guaranteed the Langilles' performance under the leasing agreements and agreed to act as agent for the recovery of amounts due to Allis‑Chalmers Credit Corporation.

 

4.                In March 1983 the Langilles advised Keneric that they would have trouble making the lease payments. Negotiations failed to resolve the problem. The Langilles defaulted under the leases and Keneric seized the equipment. After due notice Keneric sold the seized equipment. Keneric then commenced the present action claiming damages resulting from breach of the leases.

 

2. The Courts Below

 

5.                On September 4, 1984 Justice Glube, Chief Justice of the Nova Scotia Supreme Court (Trial Division), found the Langilles to be in breach of their leasing agreements (unreported judgment). She assessed the damages for breach of lease at $132,272.90 plus pre‑judgment interest. The way in which she arrived at this figure is well summarized by Hart J.A. writing for the majority of the Court of Appeal (1985), 67 N.S.R. (2d) 404, 155 A.P.R. 404, at p. 407:

 

. . . [Keneric] chose to seek only the amount for which it would be liable to the financing agent, Allis‑Chalmers Credit Corporation of Canada Ltd., to whom the leases had been assigned. Under the arrangements between the respondent and Allis‑Chalmers the respondent was ultimately responsible to pay to them the amounts due under the leases in the event of default.

 

                   The evidence revealed that the amount due by the respondent to Allis‑Chalmers under each lease was calculated by taking the original purchase price and deducting therefrom the first year's rental payment, which had been made in advance, and then adding the margin based upon the rate of 20%. From this figure was subtracted all moneys received from the sale of repossessed equipment, less the costs of repossession, repair and reselling of the equipment. The difference between the amount due to Allis‑Chalmers and the amount recovered from the equipment then became the deficiency for which the respondent was responsible.

 

6.                Glube J. concluded that this formula gave effect to the general principles of assessment of damages for breach of contract. It corresponded to what "a person could anticipate arising naturally from the breach or which might reasonably have been in the contemplation of both parties at the time the contract was made". In other words she adopted the principles set forth in Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145, and Victoria Laundry (Windsor) Ltd. v. Newman Industry Ltd., [1949] 2 K.B. 528, [1949] 1 All E.R. 997 (C.A.) Further, she held that by reselling the seized equipment Keneric had taken reasonable steps to mitigate its damages.

 

7.                On May 16, 1985 the Nova Scotia Court of Appeal (Jones J.A. dissenting) upheld the decision of Glube J. The only issue on the appeal was the proper method of assessing damages. Hart J.A., writing for the majority, noted that in Canadian Acceptance Corp. v. Regent Park Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304 (Man. C.A.), it was held that, in the case of a lease of chattels where the lessee defaults and the lessor repossesses and resells the items, the lessor is limited in his remedies to the proceeds of resale plus the rental payments due at the time of seizure. Thus, if Regent Park were to be followed in this case, the Langilles would win their appeal.

 

8.                Hart J.A. suggested, however, that Regent Park had been overtaken by the decision of this Court in Highway Properties Ltd. v. Kelly, Douglas and Co., supra. In that case the Court held that damages for breach of a covenant in a lease of land are to be measured according to general principles of contract law. Since there is no reason why a lessee of chattels should be in a stronger position than a lessee of land, Hart J.A. concluded that the principle in Highway Properties should be extended to chattel lease cases.

 

9.                Hart J.A. went on to distinguish pure lease situations from security lease situations. If a lease is a pure lease, he stated, with neither an option to purchase nor a nominal renewal provision, then the Regent Park formula may accord with normal contractual damages principles. In a case such as the present, however, where the lease was being used as a "method of financing the purchase of the chattel", the appropriate contractual measure of damages will generally equal the value of the purchase price less the amount received upon resale. On this basis Hart J.A. affirmed the decision at trial.

 

10.              Jones J.A. (dissenting) agreed that the assessment of the damages suffered by Keneric should be governed by general contract principles but he reached this conclusion by a more circuitous route. He began by noting that the leases in question constituted conditional sales under the Conditional Sales Act, R.S.N.S. 1967, c. 48. Clause 1(b)(ii) of that Act provides:

 

1. In this Act,

 

                                                                    ...

 

                   (b) "conditional sale" means

 

                                                                    ...

 

(ii) any contract for the hiring of goods by which it is agreed that the hirer shall become, or have the option of becoming, the owner of the goods upon full compliance with the terms of the contract;

 

The leases coupled with options, he found, fell within the terms of this statute.

 

11.              The Conditional Sales Act, however, proved to be something of a blind alley for Jones J.A. as that Act is largely concerned with the imposition of notice requirements in order to protect third parties. It serves to regulate the exercise of remedial rights created elsewhere. Jones J.A. therefore turned to Humphrey Motors Ltd. v. Ells, [1935] S.C.R. 249, a case in which the method of assessing damages under a conditional sales agreement governed by similar legislation was discussed by this Court. The Court held that since the Conditional Sales Act was not determinative of remedial issues, the Court was free to apply the common law of damages. Applying the common law the Court found that the repossession and resale of the chattel had the effect of "rescinding" the contract. The seller, therefore, could not recover damages based on payments falling due after the repossession.

 

12.              Jones J.A., however, did not see Humphrey Motors as determinative of the issue in the present case. Humphrey Motors, he suggested, dealt with sales but did not extend to situations where the parties had chosen to create "true leases". In the present case completion of the rental payments did not entitle the lessees to a transfer of ownership. It only entitled them to an option. The leases, therefore, were not sales but "true leases" and general contract principles should be used to assess the damages.

 

13.              Jones J.A. did not accept that general contract principles pointed to the formula adopted by the trial judge and the majority of the Court of Appeal. The Langilles' liability, he felt, must be determined without reference to the Keneric/Allis‑Chalmers contract to which the Langilles were not privy. He concluded at p. 429 that the Langilles' liability should equal:

 

. . . the value of the unpaid rental payments due under each lease, less (i) the actual rental value of the equipment for the unexpired period of each lease, (ii) the sum realized on the sale of the equipment after deducting reasonable expenses, and (iii) a discount in respect of the earlier return of the capital.

 

14.              On June 19, 1985 the Nova Scotia Court of Appeal granted the Langilles leave to appeal to this Court.

 

3. The Issue

 

15.              Counsel for the appellants submit that the Nova Scotia Court of Appeal erred as to the proper method of assessing damages for default under the equipment rental agreements. Two sub‑issues must be examined in order to determine the principal issue. These are (a) what are the general rules governing damages for breach of a lease of chattels? and (b) did the resale by Keneric satisfy its duty to mitigate its damages?

 

(a) The General Rules

 

16.              The most recent discussion of the relevant law is found in the Manitoba Court of Appeal's decision in Canadian Acceptance Corp. v. Regent Park Butcher Shop Ltd., supra. That case involved the lease of a cash register. After the lessee failed to make several payments the lessor repossessed and sold the cash register. A clause in the leasing contract stipulated a particular level of damages payable upon breach. The Court of Appeal held that the sum stipulated in the clause was not a genuine pre‑estimate of liquidated damages and therefore the clause was a penalty and unenforceable. The court then examined the case law dealing with the damages recoverable for breach of a chattel lease.

 

17.              Dickson J. (as he then was) speaking for the Court examined the Canadian case law on the subject and concluded at p. 314:

 

                   There being no uniform pattern emerging from the Canadian decisions we feel free to approach the matter afresh according to our best judgment. It is our considered opinion that the rationale of the series of cases beginning with Bridge v. Campbell Discount Co., Ltd., [1962] 1 All E.R. 385, provides the proper approach and we propose to apply it. In one of the cases of that series, Financings, Ltd. v. Baldock, [1963] 1 All E.R. 443, Lord Denning, M.R., said at p. 445:

 

It seems to me that, when an agreement of hiring is terminated by virtue of a power contained in it and the owner retakes the vehicle, he can recover damages for any breach up to the date of termination, but not for any breach thereafter, for the simple reason that there are no breaches thereafter. I see no difference in this respect between the letting of a vehicle on hire and the letting of land on a lease. If a lessor, under a proviso for re‑entry, re‑enters on the ground of non‑payment of rent or of disrepair, he gets the arrears of rent up to date of re‑entry and damages for want of repair at that date, but he does not get damages for loss of rent thereafter or for breaches of repair thereafter.

 

                                                                    ...

 

And at p. 446:

 

In applying this principle, I asked counsel for the plaintiffs: What were the breaches by the hirer up to the termination of the hiring? He could only point to the simple failure to pay the two instalments of rent. In these circumstances, the only moneys which the plaintiffs can recover are those two instalments which are in arrear and unpaid with the interest thereon. If the plaintiff [sic] could prove damages for breach of contract to repair, they could recover them, but no more ....

 

If, however, there is no repudiation, but simply, as here, a failure to pay one or two instalments (the failure not going to the root of the contract and only giving a right to terminate by virtue of an express stipulation in the contract), the owners can recover only the instalments in arrear, with interest, and nothing else; for there was no other breach in existence at the termination of the hiring.

 

Thus, a lessor who terminates a chattel lease by virtue of a provision in the lease allowing him to do so is limited in his remedies to the rent due at the time of the termination plus any proceeds from resale.

 

18.              Both Regent Park and Financings, Ltd. v. Baldock, [1963] 1 All E.R. 443, on which Dickson J.A. relied proceed by analogy to the common law of damages for breach of a lease of land. As Dickson J. pointed out at p. 315 of his reasons:

 

If a landlord re‑enters land for non‑payment of rent he may bring an action for arrears of rent on the express or implied covenant to pay rent but he cannot recover rent falling due after the date of re‑entry. No authority has been given us to show why the position of a lessor of a chattel should be stronger than that of a lessor of land.

 

Indeed, if the law in this area is to be coherent and principled it would make good sense to abolish artificial legal distinctions between leases of land and leases of chattels. However, the pursuit of consistency today mandates a different result in this case because the decision of this Court in Highway Properties has intervened and shifted the jurisprudential foundation upon which the Regent Park decision was based.

 

19.              In Highway Properties the Court addressed the issue of the landlord's right to damages flowing from the repudiation of a lease of shopping centre space by a tenant. The landlord claimed both for the loss suffered to the date of repudiation and for the prospective loss resulting from the tenant's failure to carry on business in the shopping centre for the full term of the lease. An application of the traditional approach reflected in Regent Park would have defeated the second half of the landlord's claim. Laskin J., speaking for the whole Court, noted at p. 570 that up until that point:

 

                   The developed case law has recognized three mutually exclusive courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely, as was the case here. He may do nothing to alter the relationship of landlord and tenant, but simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force. Second, he may elect to terminate the lease, retaining of course the right to sue for rent accrued due, or for damages to the date of termination for previous breaches of covenant. Third, he may advise the tenant that he proposes to re‑let the property on the tenant's account and enter into possession on that basis.

 

What was not possible at common law before Highway Properties was for the landlord to terminate the lease, relet the property, and make a claim for damages that included a claim for unpaid future rent less the actual rental value of the unexpired period.

 

20.              Highway Properties changed this. Laskin J. examined the applicable English, Australian and American authorities. He paid particular attention to the decision in Buchanan v. Byrnes (1906), 3 C.L.R. 704 (H.C. Aust.) In that case the tenant, in breach of covenant, abandoned hotel property which he had leased. The landlord succeeded in a claim for damages over the unexpired term of the lease despite the surrender. The approach to the damages issue taken by the High Court is summarized in two passages from the judgment (the first from the reasons of Griffith C.J. at p. 715 and the second from the reasons of Barton J. at p. 719):

 

                   Then the question arises ‑‑ to what damages is he entitled? There is a covenant the performance of which will extend over a term of l5 years, and it is unequivocally broken. The natural damage is the loss likely to be sustained by the plaintiff during the period for which the covenant ought to be kept; just as in the case of a contract to engage a servant for a term of years, paying him monthly wages. If the contract is unequivocally broken by the employer, the servant can bring an action at once. He cannot, of course, recover anything in the form of wages; he recovers damages, which are assessed usually upon the basis of the wages that he would have received; but he must on the other hand give credit, and the jury must give the employer credit, for whatever the servant might reasonably be expected to have earned during the period for which the contract would have been in existence. Prima facie, the damages, therefore, would be the value of the term to the lessor, that is, the difference between the benefit which he would have derived from the premises being kept as a going hotel for 15 years at the agreed rent, being kept in repair, and so on, and the value of the premises as they were thrown on his hands.

 

                                                                    ...

 

                   But it is said that the conduct of the plaintiff in resuming possession under the circumstances estops him from suing upon the covenants. I must not be taken to hold that it has that effect as to the covenant to pay rent. But, however that may be, can it estop him as to the other covenants which relate to the keeping the premises as an inn throughout the term, and the doing of the other things necessary for that purpose? Conduct, to constitute an estoppel, must have caused another to believe in the existence of a certain state of things, and have induced him to act on that belief so as to alter his own position. How can that be said to be the effect of the plaintiff's conduct, when the act of the defendant, so far from having been induced by it, has preceded it? In my judgment the doctrine of estoppel cannot be applied against the plaintiff . . . .

 

Laskin J. noted that Buchanan v. Byrnes was applied by the Supreme Court of Australia in Hughes v. N.L.S. Pty. Ltd., [1966] W.A.R. 100. He concluded at pp. 575‑76:

 

                   The approach of the High Court of Australia commends itself to me, cutting through, as it does, artificial barriers to relief that have resulted from overextension of the doctrine of surrender in its relation to rent. Although it is correct to say that repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time a right of action for damages then arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. I see no logic in a conclusion that, by electing to terminate, the landlord has limited the damages that he may then claim to the same scale that would result if he had elected to keep the lease alive.

 

Laskin J. then expressly adopted the Australian approach.

 

21.              The Court in Highway Properties justified its decision by an appeal to both principle and practicality. In principle it made no sense to regard a commercial lease of land as "simply a conveyance and not a contract". This historical anomaly could only be corrected by assessing damages in breach of land lease cases on general contract principles. Practicality supported the change as well since the new approach avoided the potential for multiplicity of actions inherent in the old approach. Both these factors suggest that the same change should be made in the law applicable to breaches of chattel leases.

 

22.              In addition to these two considerations the need for consistency within the law militates in favour of a change in the rules relating to breach of chattel leases. As was noted in both Baldock and Regent Park there is no essential difference between a lease of land and a lease of chattels that is material to the ascertainment of damages on breach. They are both contracts. Thus, the spirit of Regent Park‑‑the harmonizing of the law relating to the leasing of chattels with the law relating to the leasing of land ‑‑ is best given effect today by a different result in a chattel lease case. The damages flowing from the breach of a chattel lease, like the damages flowing from the breach of a land lease, should be calculated in accordance with general contract principles. To the extent that Regent Park reflects a different approach it should not be followed.

 

23.              Counsel for the appellants, however, point out that Highway Properties was a case of express repudiation by the lessee. The present case, they argue, is distinguishable in that there was no express repudiation. Assuming that the appellants could establish the factual basis for this distinction, is there any reason why the rule laid down in Highway Properties should not logically extend to all cases involving a lawful termination by the lessor?

 

24.              In order to answer this question we must go back to first principles in the law of contract. If a party to a contract breaches a term of sufficient importance the other party has the right to treat the contract as terminated and consider himself discharged from any future obligations under it: Pigott Construction Co. v. W. J. Crowe Ltd. (1961), 27 D.L.R. (2d) 258 (Ont. C.A.), at pp. 269‑72; Alkok v. Grymek, [1968] S.C.R. 452, at p. 456; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1962] 2 Q.B. 26 (C.A.), per Diplock L.J., at pp. 65‑66, 71; Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., the "Hansa Nord", [1976] Q.B. 44 (C.A.) An identical right arises where one party to a contract by words or conduct indicates to the other party that he does not intend to perform his contractual obligations. In the latter instance the first party is said to have repudiated the contract: see Sir W. R. Anson, Anson's Law of Contract (26th ed. by A. G. Guest), pp. 470‑84; G. C. Cheshire, C. H. S. Fifoot and M. P. Furmston, Law of Contract (11th ed. 1986), pp. 521‑33. The question at hand is whether the assessment of damages in a case of termination based on breach of a term of the contract should be any different from the assessment of damages in a case of termination based on repudiation.

 

25.              Laskin J. in Highway Properties seemed to assume that the answer to this question was no. His analysis in that case focussed on the "courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely". I would respectfully agree with Laskin J. that damages should be assessed in the same way in both cases. Repudiation may be triggered by either the inability or the unwillingness of a party to perform his contractual obligations. The same is true of a breach of contract that gives rise to a right to terminate; it may be the result of inability or unwillingness to perform. The breach and the repudiation are merely subdivisions within a general category of conduct, i.e., conduct which gives the innocent party the right to treat the contract as terminated. Thus, there is no conceptual difference between a breach of contract that gives the innocent party the right to terminate and the repudiation of a contract so as to justify a different assessment of damages when termination flows from the former rather than the latter. General contract principles should be applied in both instances.

 

26.              The trial judge in this case correctly found that the Langilles' default constituted a breach of lease that gave Keneric the right to terminate. Keneric accepted the breach and terminated the leases. It is not necessary to determine whether the Langilles also repudiated the leases. For the reasons given above such a finding would make no difference to the assessment of damages.

 

27.              Before returning to the particular facts of this case it might be useful to comment on Humphrey Motors, supra, which was referred to by Jones J.A. in his dissenting opinion in the Court of Appeal. As noted above, this case involved a conditional sale. The buyer defaulted and the vendor repossessed the truck and resold it. This Court held that the resale by the vendor had "rescinded" the contract and the vendor therefore had no claim for the deficiency on the resale. In my opinion this case is not good law today as it relies on an out‑moded concept of rescission.

 

28.              The modern view is that when one party repudiates the contract and the other party accepts the repudiation the contract is at this point terminated or brought to an end. The contract is not, however, rescinded in the true legal sense, i.e., in the sense of being voided ab initio by some vitiating element. The parties are discharged of their prospective obligations under the contract as from the date of termination but the prospective obligations embodied in the contract are relevant to the assessment of damages: see Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883 (H.L.), and Moschi v. Lep Air Services Ltd, [1973] A.C. 331, [1972] 2 All E.R. 393 (H.L.) Such is the law for contracts generally and it is this law which should apply equally to breaches of chattel leases.

 

29.              I return now to the facts of the present case in order to determine whether the damages were properly assessed. The general rule for the assessment of damages for breach of contract is that the award should put the plaintiff in the position he would have been in had the defendant fully performed his contractual obligations. This principle is qualified by the doctrine of remoteness. As Baron Alderson stated in Hadley v. Baxendale, supra, at p. 354 (9 Ex.) and at p. 151 (156 E.R.):

 

. . . Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

 

The general rule is, of course, further qualified by the injured party's duty to mitigate its damages.

 

30.              One of the difficulties this appeal raises, and it is crucial to the dissent of Jones J.A. from the other two judges of the Court of Appeal, is the precise nature of the arrangement by which the Langilles were ultimately to end up as purchasers of the leased equipment. Were the Langilles aware that they were buying equipment from Keneric which was purchasing the equipment from Allis‑Chalmers using the Langilles' rental payments under the leases as security for the purchase price? If they were, then under the rule in Hadley v. Baxendale the Langilles knew or ought reasonably to have known that the measure of damages which would be suffered by Keneric on their breach of the leases would be the measure of the liability of Keneric to Allis‑Chalmers. On the other hand, if they knew nothing of the arrangement between Keneric and Allis‑Chalmers and there was no basis on which they ought reasonably to have known of it, then the measure of damages for which they should be liable to Keneric would be confined to the terms of the leases themselves. In the first circumstance it seems to me that the trial judge and the majority of the Court of Appeal were correct in their method of assessing damages. But in the second circumstance they would have been incorrect in that Keneric's liability to Allis‑Chalmers would be outside the Langilles' reasonable foreseeability under Hadley v. Baxendale and accordingly too remote. The Langilles' liability to Keneric in that circumstance would simply be the value of the unpaid rentals under the leases (discounted for early receipt) minus the proceeds of sale plus the expenses of repossession, repair and resale.

 

31.              There seems little doubt that the trial judge proceeded on the basis that the Langilles were aware that Keneric did not own the equipment but was purchasing it from Allis‑Chalmers using the rental payments as security. The majority of the Court of Appeal seem to have so construed the trial judge's reasons although at no point is a specific finding of fact made by her in this regard. Jones J.A., on the other hand, takes the lease agreements at their face value and assesses Keneric's damages on the basis of the leases alone, emphasizing that the Langilles were not parties to the arrangement between Keneric and Allis‑Chalmers.

 

32.              It seems to me that there is an evidentiary basis on which knowledge could properly be attributed to the Langilles of the existence of the arrangement between Keneric and Allis‑Chalmers. As the trial judge points out, the Langilles knew that Keneric was an Allis‑Chalmers dealer because Keneric had taken over one of the Langilles' earlier deals with another Allis‑Chalmers' dealer when that dealer went out of business. It was through that transaction that Keneric first made contact with the Langilles. The evidence also discloses that the Langilles actually received the leases after they had been signed by Keneric from Allis‑Chalmers. Indeed, they seem from some of their correspondence with Keneric to have treated the leases as if Allis‑Chalmers were the lessor and Keneric simply an agent for Allis‑Chalmers in receiving the rental payments. In a letter to Mr. Ken Smith, President of Keneric, they state baldly that they leased all of the equipment from Allis‑Chalmers and had decided to lease from Allis‑Chalmers rather than buy from them because Keneric had told them that Allis‑Chalmers would permit them to terminate the leases and return the equipment to Allis‑Chalmers at any time. While the trial judge did not accept that Keneric had made such a representation, she seems to have inferred from the Langilles' evidence that they were fully aware that the leases had been assigned by Keneric to Allis‑Chalmers as security for the purchase of the equipment by Keneric. Accepting that the trial judge was correct in drawing this inference, and I think that she was, then the formula adopted by her in assessing damages and affirmed by the majority of the Court of Appeal represented a correct application of the rule in Hadley v. Baxendale.

 

(b) Mitigation

 

33.              It is submitted by counsel for the appellants that Keneric did not take reasonable steps to mitigate its damages. On this issue the trial judge held that Keneric attempted to get the best price possible when reselling the equipment. The appellant's argument, however, is that Keneric should have relet the equipment rather than reselling it.

 

34.              The difficulty I have with this argument is that no evidence was led at trial concerning the economics of reletting. In the absence of such evidence it is impossible to say whether reletting would have been preferable to resale or not. Obviously the burden of proof here is of critical importance.

 

35.              It seems quite clear that the burden of proof falls on the defendant. As Laskin J., speaking for the Court in Red Deer College v. Michaels, [1976] 2 S.C.R. 324, noted at p. 331:

 

If it is the defendant's position that the plaintiff could reasonably have avoided some part of the loss claimed, it is for the defendant to carry the burden of that issue, subject to the defendant being content to allow the matter to be disposed of on the trial judge's assessment of the plaintiff's evidence on avoidable consequences.

 

This proposition finds support in the English case law and from learned writers: see Halsbury's Laws of England, vol. 12, 4th ed., para. 1193; G. C. Cheshire, C. H. S. Fifoot and M. P. Furmston, Law of Contract, supra, at p. 598. The Langilles did not discharge the burden of proving that Keneric's resale constituted inadequate mitigation.

 

4. Conclusion

 

36.              The trial judge and the majority of the Court of Appeal were correct in applying general principles of contract law in assessing Keneric's damages. They were correct also in applying the rule in Hadley v. Baxendale.

 

37.              No attack was made on the trial judge's award of damages on the "separate parts" account and it is accordingly not interfered with. The appeal is dismissed with costs.

 

                   Appeal dismissed with costs.

 

                   Solicitor for the appellants: R. A. Cluney, Halifax.

 

                   Solicitor for the respondent: R. Malcolm MacLeod, Halifax.  

 

 

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