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Supreme Court of Canada

Damages—Agreements concerning shares and operations of oil exploration company—Breach of contract by company’s chief officer to return shares loaned to him by another company—Appraisal of damages—Applicable principles.

These appeals arose out of a long series of agreements concerning the shares and operations of the appellant, Asamera Oil Corporation Ltd., which company was in one way or another involved in exploration for oil in Indonesia. Three separate actions were commenced by the parties.

1. Baud Corporation, N.V. v. Thomas L. Brook, (commenced on July 26, 1960) wherein Baud, a wholly owned subsidiary of Sea Oil & General Corporation (SOG), sought the return of 125,000 Asamera shares from Brook, the president and chief officer of Asamera. Baud alleged that 125,000 Asamera shares were loaned

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by it in October and November of 1957 to Brook under an agreement dated November 10, 1958, requiring their return by the end of 1959. In addition, Baud claimed damages in the sum of $150,750 representing the difference in the market value of the 125,000 shares between the date upon which they were to have been returned and the date of the writ.

2. Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation and Baud Corporation, N.V., (commenced July 27, 1960) wherein Asamera sought rescission of the basic agreement between the two groups of entrepreneurs represented by Baud on the one hand, and Brook on the other. Under the basic agreement, entered into on June 18, 1957, Baud was to receive 3,500,000 shares of Asamera, and SOG was to receive 500,000 shares in that company. In return Asamera was to receive $250,000 together with 196 shares in an Indonesian corporation known as Nusantara, which shares represented a 49 per cent interest therein.

3. Baud Corporation, N.V. v. Thomas L. Brook, (commenced December 6, 1966) wherein Baud repeated its allegations as asserted in Action No. 1, and claimed the return of 125,000 Asamera shares, which Brook was required to return under the agreements mentioned in Action No. 1. The third action arose out of the allegation by Brook that the first action was premature since the date for the return of the shares had been extended by the parties until December 31, 1960. In addition to its claim for the return of the shares, Baud claimed damages in the sum of $400,000. An amendment to the statement of claim whereby the damage claim was raised to $6,000,000 was allowed at trial. In this action, Brook counterclaimed for substantially the same relief sought by him in Action No. 2.

Held: 1. The appeal of Baud from the judgment of the Appellate Division of the Supreme Court of Alberta affirming the dismissal at trial, because premature, of its action of July 26, 1960, against Brook should be dismissed. 2. The appeal of Asamera from the judgment of the Appellate Division affirming dismissal of its action of July 27, 1960, against SOG and Baud should be dismissed. 3. The appeal of Baud from the judgment of the Appellate Division affirming the judgment of the trial judge awarding it damages of $250,000 against Brook should be allowed and there should be substituted an award of damages to the appellant of $812,500.

The first action was dismissed by the trial judge when he found that there was indeed an agreement extending the loan of the 125,000 Asamera shares beyond the

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original expiry date, December 31, 1959, until December 31, 1960. The record included considerable evidence in support of such a finding which was confirmed on appeal. There being no demonstration of any error in law in the Courts below in so disposing of Action No. 1, the appeal with reference to that action should be dismissed.

The trial judge dismissed the second action, finding that the parties had settled their differences in respect of this action by an agreement dated October 28, 1958. The evidence amply supported the finding of the trial judge relating to the scope and effect of the settlement agreement. This finding was confirmed on appeal. Accordingly, the appeal to this Court with respect to the second action and the counterclaim by the respondent in Action No. 3 should be dismissed.

As to Action No. 3, the trial judge dismissed Baud’s claims in detinue and conversion and assessed damages on the basis that Brook’s failure to deliver constituted a breach of contract. The action in substance was a simple case of breach of contract to return 125,000 Asamera shares and the claims made and the issues arising in this action should be disposed of on that basis. The circumstances were such that damages constituted an adequate remedy.

The Court approached the matter of the proper appraisal of the damages assessable in the peculiar circumstances of this case on the following basis: that the same principles of remoteness will apply to the claims made whether they sound in tort or contract subject only to special knowledge, understanding or relationship of the contracting parties or to any terms express or implied of the contractual arrangement relating to damages recoverable on breach; that Baud was under the general duty to mitigate its losses and may not escape this duty by relying interminably on an injunction obtained by it in 1960, restraining the sale of 125,000 Asamera shares held by Brook; that the specific duty to mitigate and to crystallize its claim for damages within a reasonable time of the breach of contract by bringing action seeking appropriate remedies and to prosecute such action with due diligence, was qualified or postponed by Brook’s request of Baud sometime prior to 1966 to refrain from enforcing its claims; that any postponement of such requirement to prosecute and to acquire replacement shares had come to an end at the latest on the awareness of Baud that the defaulting party was not only in breach of the duty to return the shares but had disposed of shares at least equal in

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number to those loaned by Baud; that any postponement of the duty to acquire replacement shares which may have been due to the sharp reduction in the value of the shares which occurred during the loan, was ended with the revival in values on the public market at least by the end of 1966; that a plaintiff in the position of Baud may not successfully assert throughout the years of litigation a right to specific performance of the contract to redeliver the subject-matter of the contract and at the same time seek to avoid or reduce his losses on the grounds that to do so by buying replacement shares would involve him in investing his funds in the shares of a company managed or dominated by his adversary, Brook; that having regard to the nature of a common share neither the terms of the injunction or the loan contract, nor the action by Brook in disposing of shares in number equal to those loaned, have any effect on the characterization of the rights of Baud or the obligation of Brook throughout this long and tortuous transaction; that damages are an adequate remedy and that a court in these complex and particular circumstances will not invoke the extraordinary remedies of equity.

The application of these principles and determinations to the particular circumstances in this case requires a determination of the damages payable by Brook on the assumption that Baud ought to have crystallized these damages by the acquisition of replacement shares so as to minimize the avoidable losses flowing from the deprivation by Brook of Baud’s opportunity to market the 125,000 shares. Such share purchases should have taken place within a reasonable time after the date of breach. Having regard to all the special circumstances, the time for purchase was the fall of 1966 when Baud was by its own admission free from any agreed restraint not to press its claims against Brook. It would be unreasonable to impose on Baud the burden of going into the market and acquiring replacement shares at a time when the litigation of its claims was in a dormant state at Brook’s request. Furthermore Baud acknowledged that by the fall of 1966 the fortunes of Asamera had improved and this had begun to be reflected in the market price of its shares. In short, the appellant is not entitled in law to any compensation for the loss of opportunity to sell its shares after that date. Thereafter its loss of this opportunity is of its own making. The theory of such a damage award is to provide the funds needed to replace the shares at the time the law required it to do so in order to avoid an accumulating claim. There should be an allowance of a reasonable time to permit the organization of the finances and the mechanics required for the careful acquisition of 125,000 shares either by a series of relatively small purchases or by negotiated block purchases. This would carry the matter into the fall of 1967. By

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this time the price had risen to a range of $5 to $6. Making allowance for the upward pressure on the market price which would be generated by the purchase of such a large number of shares on a relatively low volume stock, the purchase price would surely have exceeded the $6 price reached in mid-1967 without any market intervention by Baud. For this factor an allowance of $1 per share should be made. Taking into account the effect of market intervention by Baud, the median price during the period from late 1966 to mid-1967, adjusted accordingly, would be about $6.50, and the damages should be awarded to Baud on that basis; that is, the total damages for breach of agreement to return the Asamera shares should amount to $812,500. In weighing the magnitude of this award one should not lose sight of the essential fact that Brook at any time right down to trial could, if he had remained in compliance with the injunction of July 1960, have avoided this result or the risk of this award by delivering from any source 125,000 Asamera shares.

As held by the Courts below, Brook’s claim for damages in respect of the undertaking given by Baud upon the issuance of the interim injunction in July 1960 should be dismissed.

APPEALS from a judgment of the Supreme Court of Alberta, Appellate Division[1], dismissing appeals from a judgment of Kirby J. in three actions consolidated for trial. Appeals dismissed in two actions; appeal allowed in third action and cross-appeal dismissed.

P.B.C. Pepper, Q.C., and J.L. McDougall, for the plaintiffs, appellants.

R.A. MacKimmie, Q.C., for the defendants, respondents.

The judgment of the Court was delivered by

ESTEY J.—These appeals arise out of a long series of agreements concerning the shares and operations of the appellant, Asamera Oil Corporation Ltd. (hereinafter referred to as Asamera), which company was in one way or another involved in exploration for oil in Indonesia. Three separate actions were commenced by the parties.

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1. Baud Corporation, N.V. (Plaintiff) v. Thomas L. Brook (Defendant), (commenced on July 26, 1960) wherein Baud, as it shall hereinafter be called, (which is a wholly owned subsidiary of the Sea Oil & General Corporation) sought the return of 125,000 Asamera shares from the respondent, Brook (who at all material times was the president and chief officer of Asamera). Baud alleged that 125,000 Asamera shares were loaned by it in October and November of 1957 to the respondent, Brook, under an agreement dated November 10, 1958, requiring their return by the end of 1959. In addition, Baud claimed damages in the sum of $150,750 representing the difference in the market value of the 125,000 shares between the date upon which they were to have been returned and the date of the writ.

2. Asamera Oil Corporation Ltd. (Plaintiff) v. Sea Oil & General Corporation and Baud Corporation, N.V. (Defendants), (commenced on July 27, 1960). This action was instituted the day after Action No. 1. In it Asamera sought rescission of the basic agreement between the two groups of entrepreneurs represented by Baud on the one hand, and Brook on the other. The effect of rescission, if granted, would be the cancellation of treasury shares issued by Asamera to Baud and Sea Oil & General Corporation Ltd. pursuant to this agreement.

3. Baud Corporation, N.V. (Plaintiff) v. Thomas L. Brook (Defendant), (commenced on December 6, 1966). In this action, Baud repeated its allegations as asserted in Action No. 1, and claimed the return of 125,000 Asamera shares, which the respondent, Brook, was required to return under the agreements mentioned in Action No. 1. The third action arose out of the allegation by the respondent in Action No. 1 that the first action was premature since the date for the return of the shares had been extended by the parties until December 31, 1960. In addition to its claim for the return of the shares, Baud claimed damages in the sum of $400,000. An amendment of the statement of claim whereby the damage claim was raised to $6,000,000 was allowed at trial. In this action, the respondent, Brook, counterclaimed for

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substantially the same relief sought by him in Action No. 2.

It is convenient to deal first with the issues raised in Action No. 2. Under the formative agreement, of which rescission is sought by Asamera in the second action, entered into on June 18, 1957 (hereafter called the basic agreement), Baud was to receive 3,500,000 shares of Asamera, and Sea Oil & General Corporation (hereafter referred to as SOG) was to receive 500,000 shares in that company. In return, Asamera was to receive $250,000 together with 196 shares in an Indonesian corporation known as Nusantara, which shares represented a 49 per cent interest therein. The transaction was closed on September 9, 1957, when the 4,000,000 shares were issued from the treasury of Asamera and, thereafter, the sum of $250,000 was advanced to Asamera and action was taken to deposit the 196 shares in Nusantara in a repository subject to Asamera’s control. 500,-000 shares were issued to SOG. 2,000,000 of the 3,500,000 shares issued by Asamera to Baud were subject to an escrow agreement for a period of six months from September 9, 1957. On February 5, 1958, the time for holding these shares in escrow was extended to November 1958.

In Action No. 2, Asamera alleged a total failure of consideration under the basic agreement, and accordingly, claimed that the agreement was null and void ab initio. In the alternative Asamera claimed that the performance of the agreement had been frustrated, and thus that the contract was voidable at its option. The learned trial judge dismissed this action, finding that the parties had settled their differences in respect of Action No. 2 by an agreement dated October 28, 1958. The Court of Appeal of Alberta reached the same conclusion.

Counsel for Brook in this Court reasserted his submissions that there was an entire failure of consideration under the basic agreement and that Asamera “received nothing whatever of any value from Baud in exchange for…” the 1,500,000 shares which remained outstanding in Baud’s hands after the aforementioned settlement agreement of October 28, 1958. As explained earlier,

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the parties had agreed to escrow 2,000,000 of the 3,500,000 Asamera shares in order to ensure the performance by Baud of the transfer of the Nusantara shares which could not apparently be completed on September 9, 1957. Under the settlement agreement, the 2,000,000 escrowed shares were cancelled, leaving outstanding in the hands of SOG 500,000 Asamera shares, and in the hands of Baud, 1,500,000 shares.

Counsel for Brook bases his plea of total failure of consideration on two points:

(a) The Nusantara shares were never transferred to Asamera as required by the agreement of 1957; and,

(b) Baud did not deliver to Asamera, either through Nusantara or otherwise, any exploration permits for Indonesia.

The first item relating to the failure to deliver the 49 per cent interest in Nusantara is founded on what transpired after the closing under the 1957 agreement on September 9. At that time Baud delivered an irrevocable direction to the holder of the 196 shares of Nusantara to hold them thereafter for the exclusive account, and subject to the order of Asamera only. The trial judge found that the deposit of the Nusantara shares in the bank in Djakarta, which resulted in the acquisition by Asamera of an interest in four exploration licences held by Nusantara, was good consideration for Asamera’s promise to issue treasury shares to Baud and SOG. In any event it is unnecessary to determine this issue. The learned trial judge determined that any and all claims outstanding between these parties on October 28, 1958, including any claims with reference to the Nusantara shares and escrow arrangements, were mutually released pursuant to the aforementioned settlement agreement. The evidence in the record amply supports, in my respectful view, this finding of the learned trial judge relating to the scope and effect of the settlement agreement. This finding was confirmed on appeal. I would dismiss the appeal to this Court with respect to the second action and the counterclaim by the respondent in Action No. 3.

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The first action was dismissed by the learned trial judge when he found that there was indeed an agreement extending the loan of the 125,000 Asamera shares beyond the original expiry date, December 31, 1959, until December 31, 1960. The record includes considerable evidence in support of such a finding which was confirmed on appeal. There being no demonstration of any error in law in the Courts below in so disposing of Action No. 1, I would dismiss the appeal with reference to that action.

This leaves outstanding before this Court only the appeal from the disposition of Action No. 3. The issue in this action, despite the elaborate record, is very narrow. Brook raised several defences to the claim by Baud for the return of 125,000 Asamera shares. Brook took the position at trial that Baud had waived the return of the shares. The learned trial judge rejected this defence and I have discovered no error in principle which would justify appellate interference in what is a clear finding of fact on the evidence. Brook alleged also that the shares were not loaned to him by Baud but by its chief executive officer, Diamantidi, and therefore no action for recovery can be brought by Baud. The simple and short answer is that if the loan was mechanically made by Diamantidi, he did so as the agent of Baud. The option agreement itself and a prior letter agreement states that upon the expiry of the term of the option on December 31, 1959, the shares will be returned to Baud. The option agreement is signed on behalf of Baud by Diamantidi. In any event there was evidence, oral and written, of the fact that the loan of the shares had first been made by Baud to Diamantidi and then by Diamantidi to Brook. Such an arrangement (expressed to be for tax considerations) affords no defence to Brook to a demand by Baud for their return and, consequently, this defence must fail.

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The learned trial judge appears to have found that Brook was in breach of his agreement when he failed to return the shares to Diamantidi; the Court of Appeal on the other hand found the breach to be the failure by Brook to return the shares to Baud. There is ample evidence to support the conclusion reached by the Court of Appeal. Indeed all the written evidence accords with this result and I respectfully agree with that Court on this point.

This leaves outstanding only the question of the remedy or remedies open to Baud. The action apparently proceeded on the basis that Brook, by his wrongful retention of the shares, was open to an action by Baud in detinue, or alternatively, in conversion because Brook had wrongfully disposed of the shares loaned to him. Brook admitted in his statement of defence, filed on July 6, 1967, that these shares had been sold, and further admitted on examination for discovery in May of 1968 that the sale had occurred in 1958. The trial judge found that the brokers, in an effort to protect their position, had sold shares of Asamera from the Brook account in December of 1957 and in January and February of 1958.

This phase of the matter is somewhat complicated by the fact that an injunction was issued by McLaurin C.J.T.D. in the Supreme Court of Alberta on July 27, 1960, which might be construed as restraining Brook from selling the 125,-000 shares loaned to him by Baud. Brook’s interpretation of his position under the injunction order was that he remained in compliance therewith so long as he held not less than 125,000 shares. There is nothing to indicate that on this interpretation he was in breach of the injunction. Baud, on the other hand, took the position that, as regards the action of detinue or conversion, it had the right to insist that Brook make whatever arrangements may have been necessary with the broker to retain the actual certificates forwarded to him by Baud. The order itself is ambiguous as to whether some retention in specie or a mere credit balance is required for compliance by Brook. The injunction issued by Chief Justice McLaurin in 1960 enjoins Brook from voting, or disposing of or dealing with “the

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125,000 shares… referred to in paragraphs 2 and 3 of the Statement of Claim…”. Baud’s reference in its statement of claim is directed to the 125,000 shares loaned to Brook in 1957. The injunction therefore may be construed as restraining dealing by Brook with those specific 125,000 shares. But this relation of the history of the transaction does not dispose of the matter. In the course of the trial the appellant moved for an order that the shares be deposited in court by Brook. This application was dismissed by the trial judge apparently on the basis that the retention of 125,000 shares by Brook would be sufficient compliance with the order. Since all the shares of Asamera are identical in class and conditions attaching thereto, no practical consideration arises which requires retention in specie, if that be technically possible, of the actual 125,000 shares loaned to Brook. The background against which the loan of the shares was made and the subsequent option granted for their purchase lead one to the view that should a determination of this issue become necessary, Baud is protected by the order and Brook from its contravention by the retention by Brook of a like number of shares of Asamera. To other aspects of this issue I will return later.

It is trite law that under the applicable statutes and common law a certificate is not in itself a share or shares of the corporation but only evidence thereof. (Vide Solloway v. Blumberger[2], per Rinfret J. at p. 167.) These shares are intangible, incorporeal property rights represented or evidenced by share certificates. They are not in themselves capable of individual identification and isolation from all other shares of the corporation of the same class. Therefore, once these shares were pledged by Brook in fully negotiable form and placed in the name of the broker, as was the evidence here, it was not possible to determine whether some or all of these 125,000 shares had been sold even presuming that at any time a specific share of a corporation as distinct from the certificate representing the share can be isolated and given an existence separate and apart from all other shares of the same class. In any case, it

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seems almost academic to argue that Baud could assert such a position in this regard when the shares were delivered through Diamantidi in fully negotiable form to Brook after Brook had announced that the purpose of the loan was to pledge the shares with his broker as security for his marginal transactions in other Asamera shares, and this apart altogether from the fact that redelivery of 125,000 Asamera shares free of encumbrance by Brook from any source would meet his obligation of redelivery.

The learned trial judge dismissed Baud’s claims in detinue and conversion and assessed damages on the basis that Brook’s failure to deliver constituted a breach of contract. The action in substance is a simple case of breach of contract to return 125,000 Asamera shares and in my view the claims made and the issues arising in this action should be disposed of on that basis. That being so, we come to the only real issue in this appeal, namely, to what recovery is the appellant, Baud, in these circumstances entitled and, if the appropriate relief be a monetary award, the quantum of damages.

Baud has asked this Court to award specific performance of the agreement to return 125,000 Asamera shares, and in particular, in its statement of claim has requested an order directing the return or replacement of the shares. The jurisdiction to award specific performance of contractual obligations is ordinarily exercised only where damages would be inadequate to compensate a plaintiff for his losses. As the original 125,000 shares are indistinguishable from all other Asamera shares, and since there has been no suggestion that corporate control is at issue in this case, or that shares were not readily available in the stock market, an order for delivery of shares would merely be another method or form for the payment of any judgment awarded. Asamera shares are listed on the public stock exchanges and consequently some estimate of their market value can be readily ascertained from day to day. The parties themselves therefore throughout the 21 years since

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these transactions began have had the benefit of the daily assessment by the stock market of the value of these shares. It is obvious that damages are an adequate remedy and that the courts in such circumstances do not resort to the equitable remedy of specific performance.

The assessment of the quantum of damages for this breach of contract is somewhat complex. The calculation of damages relating to a breach of contract is, of course, governed by well‑established principles of common law. Losses recoverable in an action arising out of the non-performance of a contractual obligation are limited to those which will put the injured party in the same position as he would have been in had the wrongdoer performed what he promised.

Not all kinds of losses are recoverable in actions for breach of contract. The limitations on damages recoverable in contract were discussed in Victoria Laundry (Windsor) LD. v. Newman Industries LD.[3], wherein Asquith L.J. at p. 539 went to great lengths to explain such limits:

(1) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: (Sally Wertheim v. Chicoutimi Pulp Company). This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognized as too harsh a rule. Hence,

(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably forseeable as liable to result from the breach.

(3) What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach.

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Three additional rules or refinements of the above rules are thereupon enumerated by Asquith L.J. but these are not here relevant. The principle set out in paragraph 2 above was thereafter modified somewhat by the House of Lords in Koufos v. C. Czarnikow (The Heron II)[4], where it was determined that the proper test for remoteness was not the ‘reasonable foreseeability’ of the head of damages claimed as in an action in tort, but whether the probability of the occurrence of the damage in the event of breach should have been within the reasonable contemplation of the contracting parties at the time of the entry into the contract. (Vide Brown & Root Ltd. v. Chimo Shipping Ltd.[5], per Ritchie J., at p. 648.)

These principles were most recently discussed in Parsons (Livestock) Ltd. v. Uttley Ingham & Co. Ltd.[6], where subject to qualifications raised in the judgment, it was concluded by all members of the Court of Appeal that the appropriate legal rules relating to remoteness will not depend upon the classification of the action as being one of contract or tort. The case has already been the subject of comment, vide Note, (1978) 94 L.Q.R. 171. Scarman L.J. at p. 529 stated:

As to the first problem, I agree with Lord Denning M.R., in thinking that the law must be such that, in a factual situation where all have the same actual or imputed knowledge and the contract contains no term limiting the damages recoverable for breach, the amount of damages recoverable does not depend upon whether, as a matter of legal classification, the plaintiffs’ cause of. action is breach of contract or tort. It may be that the necessary reconciliation is to be found, notwithstanding the strictures of Lord Reid at pp. 446 and 389-390, in holding that the difference between “reasonably foreseeable” (the test in tort) and “reasonably contemplated”, (the test in contract) is semantic, not substantial. Certainly Lord Justice Asquith in Victoria Laundry v. Newman [1949] 2 K.B. 528 at p. 535 and Lord Pearce in Czarnikow v. Koufos thought so: and I confess I think so too.

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or more succinctly at p. 528:

…the law is not so absurd as to differentiate between contract and tort save in situations where the agreement, or the factual relationship, of the parties with each other requires it in the interests of justice.

(Leave to appeal to the House of Lords was granted by the Court of Appeal.)

In any event the damage flowing from the wrongful act of the respondent in this case, that is the loss of the opportunity to resell the shares at a profit, is recoverable under any of the tests set out above.

In cases dealing with the measure of damages for non-delivery of goods under contracts for sale, the application over the years of the above-mentioned principles has given the law some certainty, and it is now accepted that damages will be recoverable in an amount representing what the purchaser would have had to pay for the goods in the market, less the contract price, at the time of the breach. This rule which was authoritatively stated in Barrow v. Arnaud[7] may be seen as a combination of two principles. The first, as stated earlier, is the right of the plaintiff to recover all of his losses which are reasonably contemplated by the parties as liable to result from the breach. The second is the responsibility imposed on a party who has suffered from a breach of contract to take all reasonable steps to avoid losses flowing from the breach. This responsibility to mitigate was explained by Laskin C.J.C. in Red Deer College v. Michaels and Finn[8], at pp. 330-1:

It is, of course, for a wronged plaintiff to prove his damages, and there is therefore a burden upon him to establish on a balance of probabilities what his loss is. The parameters of loss are governed by legal principle. The primary rule in breach of contract cases, that a wronged plaintiff is entitled to be put in as good a position as he would have been in if there had been proper performance by the defendant, is subject to the qualification that the defendant cannot be called upon to pay for avoidable losses which would result in an increase in the quantum of damages payable to the

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plaintiff. The reference in the case law to a “duty” to mitigate should be understood in this sense.

In short, a wronged plaintiff is entitled to recover damages for the losses he has suffered but the extent of those losses may depend on whether he has taken reasonable steps to avoid their unreasonable accumulation.

and later in the judgment 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.

Thus, if one were to adopt, without reservation, in the settlement of Baud’s damage claims, the rules governing recovery for non-delivery of goods in sales contracts, the prima facie measure of damages in the case at bar would be the value of the shares on the date of breach, that is, December 31, 1960. The learned trial judge found the market price on December 31, 1960, to be 29 cents per share. The value of the 125,000 shares wrongfully retained by Brook, and thus the loss to Baud by reason of its not being in possession of those shares, on that date therefore was $36,250 assuming, for the purposes of discussion only, the market price to be constant throughout the purchase or sale of such a number of shares. To this must be added other expenses which could reasonably be said to be incidental to steps taken to mitigate the damages flowing from the breach. The most obvious of these are brokerage and commission fees which would have been incurred by Baud in purchasing replacement shares. Of greater importance is the inevitable upward pressure the purchase on the open market of such a large number of Asam-era shares would exert on the market price. The impact of forced sales or purchases of shares on market prices has been the subject of judicial comment in the past (vide Crown Reserve Consolidated Mines Ltd. v. Mackay[9]) and must be taken into account in determining the weight to be accorded to mitigation factors in an assessment of damages in circumstances such as exist here. Unhappily, Baud has led no evidence on this prob-

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lem and one is left to take note of the presence of this factor without being able precisely to quantify it. This point requires more detailed discussion at a later stage.

Assuming for the moment that the breach of contract occurred on December 31, 1960, and that the appellant’s right to damages came into being at that time; and assuming that it should then have acted to forestall the accumulation of avoidable losses, what action did the law then require of the appellant by way of mitigation of damages? A plaintiff need not take all possible steps to reduce his loss, and accordingly, it is necessary to examine some of the special circumstances here present. The appellant argues that there exist in this case clear circumstances which render the duty to purchase 125,000 Asamera shares an unreasonable one. The first of these has its foundations in the established principle that a plaintiff need not put his money to an unreasonable risk including a risk not present in the initial transaction in endeavouring to mitigate his losses. This principle was demonstrated in Lesters Leather and Skin Co. v. Home and Overseas Brokers[10] and in Jewelowski v. Propp[11], as well as in Pilkington v. Wood[12]. The appellant here was placed in the unusual position where mitigative action would require that it purchase as replacement property, shares of a company engaged in a speculative undertaking under the effective control and under the promotional management of a person in breach of contract, the respondent, Brook, who thereafter was in an adversarial position in relation to the appellant.

On the evidence adduced at trial, the market value of shares in Asamera had fallen from $3 shortly before the dates on which Baud first loaned the two blocs of shares to Brook, to between $1.62 and $1.87 in November 1958, and to 29 cents per share on December 31, 1960. Evidence of share

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values after that date indicates only that there was a relatively small recovery in value to about $1.21 a share by March 1965, when the fortunes of the company improved. The appellant argues that it could not have been expected in December of 1960 to purchase shares in mitigation of its losses where the value of these shares had fallen as rapidly as is indicated in the evidence.

A more important circumstance which might render unreasonable any requirement that Baud purchase shares in the market was the existence of the aforementioned injunction issued on July 27, 1960, restraining the respondent from selling 125,-000 Asamera shares. The appellant contends that it is inconceivable that the law should require a party, who has suffered a misappropriation of his property and who has requested and been afforded the considerable protection of an injunction granted by a Court of Equity, to ignore the force and effect of that injunction and to go out and acquire the same number of shares as Brook was required to retain, however the terms of the injunction be construed.

Even if one accepts that submission, it must be acknowledged that the right of Baud to rely on the injunction as a shield against an obligation to minimize its losses is not absolute. In the first place, Baud was informed by Brook in his pleadings of July 6, 1967, that shares which were subject to the injunction had been sold. As of that date the shares were selling at $4.30 to $4.35 and had been rising in value since April of 1965 and at a median price of $4.33 would have cost Baud $541,250. Accordingly, at least by July of 1967 it could not be said that Baud would reasonably be discouraged from replacing the 125,000 shares in the open market because of the low price of an inactive company, nor could it be said that thereafter it could reasonably refrain from prosecuting its claim for damages because of the order enjoining the disposition of the shares by Brook. It remains the case, however, that the market price for such speculative shares as those of an oil-exploration company was subject to wide price fluctuations sometimes inspired by management which itself

[Page 651]

held, as did Brook, a considerable number of shares.

The learned trial judge referred to a number of English authorities in support of the proposition that in the case of a loan of shares a plaintiff need not mitigate his losses either by purchasing shares on the market, or even by bringing a suit for recovery of damages within a reasonable time. The result under these authorities where the market value of the shares has risen or fallen between breach and trial, has been an award of damages representing the value of the shares at the time of the breach or of the trial at the election of the plaintiff. (Vide Harrison v. Harrison[13]; Shepherd v. Johnson[14]; McArthur v. Seaforth[15]; Sanders v. Kentish[16].) These cases were adopted in Canada and other jurisdictions (vide Vicary v. Foley[17]; Galigher v. Jones[18] and cases cited therein). These authorities raise no responsibility in the plaintiff to mitigate his losses. Shepherd v. Johnson, supra, per Grose J. at p. 211. The application of the principle developed in these early cases would produce damages calculated at the end of the trial or perhaps at the highest point prior to that date. The trial proceeded intermittently from June 1969 to December 1971, and final judgment was pronounced in May 1972. The latter price would be about $21 a share and the highest price attained was about $46.50 per share, allowing recovery of approximately $2,625,000 and $5,812,500 respectively.

A proper analysis of these cases is made difficult by reason of their antiquity and after serious consideration, I have concluded that they ought not to be followed by this Court. In the first place, they were decided long before modern principles of contractual remedies had been developed. Second-

[Page 652]

ly, they are not in accord with recent decisions of this Court. Thirdly, they ignore the all‑important and overriding considerations which have led to the judicial recognition of the desirability and indeed the necessity that a plaintiff mitigate his losses arising on a breach of contract. There is a fourth consideration. This old principle produces an arbitrary, albeit a readily ascertainable result because it lacks the flexibility needed to take into account the infinite range of possible circumstances in which the parties may find themselves at the time of the breach and before a trial can in practice take place. The pace of the market place and the complexities of business have changed radically since this rule or principle was developed in the early nineteenth century.

Before proceeding further with the analysis of the nature and extent of damages in the field of contract law, it will be helpful to examine briefly the principles which have evolved in analogous situations in the law of torts. In conversion, the measure of damages has been said to be the value of the shares at the date of conversion, and in addition, consequential damages represented by the loss of the opportunity to dispose of the shares at the highest price attained prior to the end of trial. (Vide McNeil v. Fultz et al.[19] per Duff J. at p. 205; The Queen in right of Alberta v. Arnold[20], per Spence J. at p. 230.) I am aware of course that these cases were for the most part dealing with the wrongful refusal of a person under the liability of a trustee to deliver property to a beneficiary, but on principle the result would be the same in simple cases of conversion. (Vide McGregor on Damages (13th ed. 1972) at p. 671.)

In detinue, the measure of damages has been said to be the value of the shares at the end of the trial, and in addition, damages for the detention. The value of the shares at the end of the trial must be awarded on the basis that the action in detinue is, in fact, a quasi-proprietary action for return of the plaintiff’s goods. If that cannot be done, then the clearest approximation of the plaintiff’s loss is

[Page 653]

the value of those goods when they would have been recovered, that is, at the end of trial. In addition, an award must compensate the plaintiff for damages flowing from the wrongful detention of his property, which it seems must be assessed on the basis of the highest value of the goods between the date at which the plaintiff ought to have recovered possession and the end of trial. In McGregor on Damages, supra, at p. 699, the case is put this way:

As with conversion there is no clear case of a market rise followed by a market fall between the time of the initial detention and the time of judgment. Although in Williams v. Peel River Co. the market appears to have risen and then fallen, it seems that the plaintiff was only claiming, as damages for detention, the value at initial default less the value at judgment. In Archer v. Williams, in detinue for scrip certificates, Cresswell J. directed the jury that “the measure of damages is the highest sum the scrip could have been sold for from the time of the detention till the time when it was returned,” but on appeal the case was argued only on whether the plaintiff was entitled to recover the amount by which the market value of the scrip certificates had fallen between the defendant’s refusal to deliver and his actual delivery. It is submitted that the highest price which the market had attained before the time when the plaintiff ought to have sued, should control here also.

One should pause here to point out that I have advisedly referred to the cut-off time as being the end of the trial. In some cases and texts, reference is made to ‘judgment’. No authority has come to my attention where a significant factual change has occurred during the gap between end of trial and judgment. Protracted difficulties could arise if the books must be kept open for a last value measurement after trial and before settlement of the final judgment. Therefore I would apply the principle as closing off valuation considerations at the end of the trial. Holland J. in Metropolitan Trust Co. of Canada et al. v. Pressure Concrete

[Page 654]

Services Ltd. et al.[21] directed the assessment officer to take into account damages incurred beyond the end of trial to the date reserved judgment was delivered. In the course I propose to follow herein, this point need not be determined.

The application of the basic principles of remoteness and causality enunciated in the leading cases mentioned earlier points to the conclusion that Baud may have, in the absence of a duty to mitigate, a right of recovery in damages for breach of contract represented by the highest value attained by the shares between the date of breach and the end of trial, that is, $46.50 or $5,812,500. That is the high-water mark attainable under the doctrines which can be gleaned from the older authorities, but as we shall see is not now properly attainable. Such authorities as I have been able to discover suggest that this highest intermediate value is the proper starting point in assessing damages arising on the wrongful detention of another’s shares, although the basis therefor is not clearly founded in the concepts of either tort or contract discussed above. (Vide Archer v. Williams[22].) Before the courts made a conscious effort to remove the distinctions between recovery in tort and recovery in contract it had been held in the case of a breach of contract that the loss of an opportunity to sell shares at the highest intervening market price was too remote to support recovery (Simmons v. London Joint Stock Bank[23], at p. 284, reversed on other grounds sub nom. London Joint Stock Bank v. Simmons[24]). The editors of Halsbury’s Laws of England (4th ed. 1975) vol. 12 at p. 467 comment on this authority:

It is not to be assumed that the plaintiff would necessarily have sold at such a value and that the loss of such a speculative increase in value is the natural or probable result of the breach of contract.

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Once a foreseeable or contemplated consequence occurs, in this case the loss of opportunity to sell the shares, all of the damages of that kind are recoverable in assessing the quantum of damages on proper principles. (Vide Cheshire & Fifoot’s Law of Contract (9th ed. 1976) at p. 593; Wroth v. Tyler[25], at pp. 60-62.)

It is very likely that Brook would have foreseen the probable loss to be suffered by Baud on the non-return of its property; particularly bearing in mind his activity as a stock broker and his own dealings in Asamera shares. In the absence of a contrary indication he may be taken to have assumed the risk of its occurrence. Such a loss is not speculative, neither is it so improbable nor so remote as to remove it from the kind of damages recoverable in an action in contract. As to quantum of damages it is not unreasonable to scale the recovery for the loss suffered by Baud by virtue of its loss of the opportunity to sell the shares to a price or prices at least approaching the median point between breach and trial, subject to the varying influences of the many relevant factors to be discussed below.

The application of another basic principle relating to the computation of contract damages, namely that the plaintiff should be, so far as money may do so, placed in the same position as he would have enjoyed had the breach not occurred, produces a like result. Had Brook returned the shares when the contract provided, Baud would then have been in a position to dispose of those shares during the period of market appreciation. The range of damages on such a basis would be from 29 cents or more realistically $2 per share to $46.50 per share. The $2 per share is more properly the baseline for computation of value because that is the option price agreed upon between the parties for the period ending at the time the breach of contract occurred. Since it is entirely unrealistic to assume that the peak price was attainable for a block sale of 125,000 Asamera shares, and as it is most unlikely that Baud or anyone else would enjoy such perspicacity, a median range of $20 to $25 for the period from mid‑1967 to the end of trial is more appropriate.

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(Vide Fales et al. v. Canada Permanent Trust Company[26], per Dickson J. at p. 322.) This would produce damages of about $3,000,000 before any consideration is given to the required mitigation.

It must be noted at once that the authorities which deny a responsibility to avoid losses in the case of the non-return of shares have been viewed somewhat harshly. (Vide Dawson v. Helicopter Exploration Co. Ltd.[27], per Sydney Smith J.A. at pp. 103, 104. The appeal to this Court was allowed for reasons not here relevant and without any comment on this point. ((1958), 12 D.L.R. (2d)1.)

The cases which establish the exceedingly technical rules relating to recovery of damages for the non-return of shares turn on the theory that only where a breach of contract gives rise to an asset in the hands of the plaintiff will the law require him to mitigate his losses by employing that asset in a reasonable manner. Thus if an employer wrongfully dismisses an employee the breach results in the employee obtaining an asset, an ability to work for another employer, or at least the opportunity to offer his services to that end, which he did not enjoy prior to the dismissal. This is no more than a philosophical explanation of the simple test of fairness and reasonableness in establishing the presence and extent of the burden to mitigate in varying circumstances.

This approach was adopted by Rand J. in Karas et al. v. Rowlett[28], at p. 8, where he said, in a case of fraud resulting in a loss of profits:

…by the default or wrong there is released a capacity to work or to earn. That capacity becomes an asset in the hands of the injured party, and he is held to a reasonable employment of it in the course of events flowing from the breach.

An analogous situation arises in the breach of a contract for the sale of goods where on the failure

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of a supplier to deliver goods, the purchaser because he is relieved of the obligation to pay, has an asset (the financial resource represented by the sums previously committed to the purchase) of which he did not have the free use prior to the breach. This is not the situation of Baud who might in mitigation of the damage suffered on the non-return of its shares of Asamera, be called upon to lay out substantial assets to replace the shares retained by Brook. Because there is no evidence of lack of funds for these purposes we need not be concerned with the relevance of the judgment in Liesbosch Dredger v. S.S. “Edison”[29]. There is of course no asset created by the breach of the contract to return shares and if that theory be the law and the creation of an asset be a necessary prerequisite of a duty to mitigate, no such duty arose in the case at hand.

It follows that a contrary result should arise where damages are recoverable for a breach of contract by a vendor on a sale of shares. There the breach would normally allow a buyer the use of his funds formerly committed to the purchase, and consequently damages should be calculated on the basis that he ought to have taken steps to avoid his losses by the purchase of shares on the market at the time of the breach. This, in fact, appears to be the law at present. (Vide Dawson v. Helicopter Exploration Co. Ltd., supra; Pitfield & Co. Ltd. v. Jomac Gold Syndicate Ltd. et al.[30], at p. 165 (Ont. C.A.); Williams and Cameron v. Keyes and Pyramid Mining Co. Ltd.[31], at p. 568 (B.C.S.C.); Shaw v. Holland[32].)

A different consideration arises where the plaintiff-buyer has prepaid the contract price and has not received delivery. As in the case of non-return of shares, the breach does not give rise to any asset in the hands of the plaintiff since he has already parted with his funds and on that basis some courts have held that the injured party need not purchase like goods in the market. This view received indirect support in Gainsford v. Carroll et

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al.[33] and in Shaw v. Holland, supra, but was rejected in Startup et al. v. Cortazzi[34]. However, when the point was raised in the Court of Appeal of England in Aronson v. Mologa Holzindustrie A/G Leningrad[35], Atkin L.J. after considering American authority, left the point open. In Peebles v. Pfeifer[36], Bigelow J. held that a purchaser of wheat who had paid for delivery was entitled to recover the market price of the wheat not at the time of breach when the price was 76 cents a bushel but at the time of trial when the price was $1.68. The same reasoning was applied by the Privy Council in Robertson v. Dumaresq[37], in assessing damages on the non-conveyance of land where the purchaser had already supplied the consideration. (Per Lord Chelmsford at p. 95; referred to in Horsnail v. Shute[38], at p. 200.)

In Hoefle v. Bongard & Company[39], this Court had to contend with facts which bear a remarkable similarity to the facts in the case at bar. Rand J. adopted the English test and denied a duty to mitigate after a breach involving the non-return of shares. The facts were simple. Hoefle had authorized the transfer of 500 shares which were held on his account by his brokers, to the account of a close friend, a Mrs. Hazel Weeks, to secure the deficit in Mrs. Weeks’ account. The brokers sold the shares to liquidate the deficit, and Hoefle sued for damages arising on the alleged unauthorized disposition of the shares. Four members of a Court of five found that the sale had in fact been authorized under the terms of the transfer, dismissed the action, and thus did not consider the damage issue.

Rand J. concluded that the sale of the shares constituted a breach of contract and had this to say regarding the assessment of damages (at p. 373):

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One consideration may be cleared away. It is not a case for any rule of mitigation. The broker is in as good a position as the owner to redeem the situation or to mitigate the consequences: Grose, J. in Shepherd v. Johnson.

The object of damages is to restore the owner as nearly as possible to the same position as if the terms of the bailment had been respected. What he would have done in the intervening time, if the security had remained, is the speculative basis from which the inferences must be drawn. We cannot say that he would have sold at the highest or at the lowest price or that he would have sold at all. But so far as the circumstances permit, they are to be the ground of conclusions of probability: Williams v. Peel River Land and Mineral Company Ltd. The case is analogous to that of a breach of covenant to re‑deliver shares and prima facie the defendants are held to have prevented the shares from remaining the property of the plaintiff up to the trial: Best C.J., in Harrison v. Harrison:

I think the fair rule is, to take the damages at the price of yesterday or to-day. When you had the money, you promised to restore the stock. Justice is not done, if you do not place the plaintiff in the same situation in which he would have been if the stock had been replaced at the stipulated time. We cannot act on the possibility of the plaintiffs not keeping it there. All we can say is,—you have effectually prevented him from doing so.

Owen v. Routh treats the rule as absolute.

Accordingly, although the shares at the date of breach were trading at $1.80 per share, Rand J. calculated Hoefle’s damages on the basis of a share value of $4 that being the value at the time of trial.

This view was not shared by the majority of the Court who in the event found it unnecessary to settle the point. The creation of an ‘asset’ on a breach of contract cannot be an invariable prerequisite to the operation of the principle that a party injured by a breach of contract must respond in mitigation to avoid an unconscionable accumulation of losses. Nor should the absence of such an ‘asset’ invariably exonerate a plaintiff from taking mitigative action. The presence or absence of such an ‘asset’ is but one of many factors which bear on the task of determining in a particular case what is

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or is not reasonable on the part of the injured party in all the circumstances. The decisions which purport to allow recovery on the basis of the increased value of the res of the action between the date of breach and the end of trial have been denied authority by the learned editors of Halsbury’s Laws of England (3rd ed. 1960) vol. 34, at p. 155. After noting the old cases, some of which are reviewed above, the editors conclude that “the measures [of damages] must vary according to the facts”.

In short it would appear that the principles of mitigation in respect of contracts for the sale of goods generally may not be applied without reservation to the determination of the duty to mitigate arising in respect of contracts for the sale of shares; and in any case differ fundamentally from the case of a breach of a contract for the return of shares. It is inappropriate in my view simply to extend the old principles applied in the detinue and conversion authorities to the non-return of shares with the result that a party whose property has not been returned to him, could sit by and await an opportune moment to institute legal proceedings, all the while imposing on a defendant the substantial risk of market fluctuations between breach and trial which might very well drive him into bankruptcy. Damages which could have been avoided by the taking of reasonable steps in all the circumstances should not, and indeed in the interests of commercial enterprise, must not be thrown onto the shoulders of a defendant by an arbitrary although neatly universal rule for the recovery of damages on breach of the contract for redelivery of property.

We start of course with the fundamental principle of mitigation authoritatively stated by Viscount Haldane L.C. in British Westinghouse Electric and Manufacturing Company, Limited v. Underground Electric Railways Company of

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London, Limited[40], at p. 689:

The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. In the words of James L.J. in Dunkirk Colliery Co. v. Lever, “The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiffs not being under any obligation to do anything otherwise that in the ordinary course of business.”

As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.

That principle has been applied in the case of conversion of shares, as well as in the case of breach of contract to sell shares, and should for the reasons developed above, be applied according to the circumstances to the case, of a breach of contract to return shares.

It is interesting that in the United States, rules essentially the same as those advanced towards the end of the nineteenth century in England were jettisoned in 1899 through the adoption of what is now commonly referred to as the “New York rule”. This rule has been applied in a variety of situations encompassing both contractual and tortious wrongs, and its justification is not easily disputed.

The leading authority for the “New York rule” is Galigher v. Jones[41], where the Supreme Court of the United States laid to rest the proposition that a plaintiff wronged by the unauthorized sale of his shares, or by the failure to purchase shares

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at his direction, may recover losses which he might have avoided. The Court was critical of the old rules which would arbitrarily award the highest intermediate value of the stock between the date of the wrong and the date of trial. The remarks of Mr. Justice Bradley at pp. 200-202 are apt to the resolution of the issues in this case:

The rule of highest intermediate value as applied to stock transactions has been adopted in England and in several of the States in this country whilst in some others it has not obtained. The form and extent of the rule have been the subject of much discussion and conflict of opinion. The cases will be found collected in Sedgwick on the Measure of Damages [479], Vol. 2, 7th ed. p. 379, note (b); Mayne, Damages, 83 (92 Law Lib.); 1 Sm. Lead. Cas. 7th Am. ed. 367. The English cases usually referred to are Cud v. Rutter, 1 P. Wms. 572, 4th ed. note (3); Owen v. Routh, 14 C.B. 327; Loder v. Kekulé, 3 C.B.N.S. 128; France v. Gaudet, L.R. 6 Q.B. 199. It is laid down in these cases that where there has been a loan of stock and a breach of the agreement to replace it, the measure of damages will be the value of the stock at its highest price on or before the day of trial.

Perhaps more transactions of this kind arise in the State of New York than in all other parts of the country. The rule of highest intermediate value up to the time of trial formerly prevailed in that State, and may be found laid down in Romaine v. Van Allen, 26 N.Y. 309, and Markham v. Jaudon, 41 N.Y. 235, and other cases,—although the rigid application of the rule was deprecated by the New York Superior Court in an able opinion by Judge Duer, in Suydam v. Jenkins, 3 Sandf. 614. The hardship which arose from estimating the damages by the highest price up to the time of trial, which might be years after the transaction occurred, was often so great that the Court of Appeals of New York was constrained to introduce a material modification in the form of the rule, and to hold the true and just measure of damages in these cases to be the highest intermediate value of the stock between the time of its conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock. This modification of the rule was very ably enforced in an opinion of the court of appeals delivered by Judge Rapallo, in the case of Baker v. Drake, 53 N.Y. 211…. It would be a herculean task to review all the various and conflicting opinions that have been delivered on this subject. On the whole, it seems to us that the New York rule, as finally settled by the court of appeals,

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has the most reasons in its favour, and we adopt it as a correct view of the law. (Emphasis added.)

(Vide Annot. 31 ALR 3d 1286; Mitchell v. Texas Gulf Sulphur Company[42].)

While the circumstances of the case prompted the Court to direct if not to confine its direction to conversion of the shares and its consequences, the broader principle is simply the right to damages arising on the breach of contract to redeliver whatever the reason for breach might have been, that is with or without a conversion. The application of such a principle to the circumstances arising herein following the breach to redeliver raises some additional considerations.

This Court in The Queen v. Arnold, supra, considered in some detail the limitations to be placed on the damages recoverable in conversion upon a failure to return securities. The majority dismissed the plaintiffs claim for reasons not here relevant. Spence J. would have allowed the claim in part and in doing so stated at p. 230:

Surely a plaintiff whose securities have been converted, cannot wait to issue process for their recovery or damages for the conversion until just before the period of limitation lapses, then be entitled to claim damages fixed at the highest value of those securities within the six-year limitation term.

Spence J. concluded that the plaintiff could not recover losses which might have been avoided by the purchase of alternate shares. The majority judgment by Martland J. as I have noted did not have to deal with damages but concluded at p. 221:

…but, if I had had to deal with that issue, I would have concurred in the views expressed by my brother Spence.

The result is in accord with the so-called New York rule in so far as it abrogates the “highest intermediate point” doctrine. The same principle was applied in assessing damages for conversion of personal property other than corporate securities

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in Sachs v. Miklos[43] There may, as already discussed, be instances where mitigation will not require a plaintiff to incur the significant risk and expense of purchasing replacement property, but in any case the plaintiff must crystallize his claim either by replacement acquisition or in some circumstances by prompt litigation expeditiously prosecuted which will enable the court to establish the damage with reference to the mitigative measures imposed by law. The failure of the appellant either to mitigate or litigate promptly makes difficult the task of applying these principles to the circumstances of this case.

In the light of the enormous hardships sometimes occasioned by the application of the old doctrine of damage assessment, and in view of the massive distortion which may follow when the principles of mitigation are, as in the older authorities, made inapplicable to non-delivery of shares, I have come to the conclusion that the authorities cited from the early 1800’s principally from the courts of England, which in effect allow recovery of “avoidable losses” ought not to be followed. Rather the lead furnished by The Queen v. Arnold, supra, should be taken. Subject always to the precise circumstances of each case, this will impose on the injured party the obligation to purchase like shares in the market on the date of breach (or knowledge thereof in the plaintiff) or more frequently within a period thereafter which is reasonable in all the circumstances. The implementation of this principle must take cognizance of the realities of market operations including the nature of the shares in question, the strength of the market when called upon to digest large orders to buy or sell, the number of shares qualified for public trading, the recent volatility of the price, the recent volume of trading, the general state of the market at the time, the susceptibility of the price of the shares to the current operation of the corporation, and similar considerations.

Some classes of property, including shares, whose value is subject to sudden and constant fluctuations of unpredictable amplitude, and

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whose purchase is not lightly entered into, call for a modification of the general rule that the value of the property on the “date of breach” be taken as the starting point for the calculation of damages. There is some authority for this view in English law as well. In Atiyah, Sale of Goods, (4th ed. 1974), at p. 294, the learned author has this to say:

Although the market price rule is now firmly established in English law it may be observed that there are cases in which it does not do full justice to the buyer. In particular it is unrealistic to suppose that a buyer will in practice be able to buy goods on the market on the very day on which the seller fails to deliver. The buyer will often wish to consider his position, or to negotiate with the seller on breach and some delay before he buys substitute goods is likely to be the rule rather than the exception.

This principle has been discussed and at least partially adopted in Hooper v. Herts[44], per Romer L.J. at p. 564; Sharpe & Co., Ltd[45]; Stewart v. Cauty[46], per Alderson B. at p. 162; Pitfield & Co. Ltd. v. Jomac Gold Syndicate Ltd. et al., supra.

It is contended by the appellant, Baud, however, that the peculiar circumstances of this case rendered the purchase of highly speculative shares in a company controlled by its adversary unreasonable in all of the circumstances, particularly the injunction obtained by the appellant restraining the sale of 125,000 Asamera shares held by Brook. Nonetheless, it remains the case that at least some of the losses claimed by the appellant could have been avoided by the taking of other reasonable steps. The most obvious of these would have been to move with reasonable speed to institute and proceed with legal action in an effort either to recover the shares, and if that was not possible, then to recover damages. It is, of course, exceedingly difficult to establish in this Court the precise point in time at which the trial in this action would have been held had the appellant moved with reasonable dispatch. The case has slowly wended its way through interlocutory stages and eventually reached trial which in turn was spread over 1½

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years. The litigation has been in the Courts now some 18 years having commenced in July 1960.

There are numerous explanations given by the appellant and indeed not seriously disputed in this Court by the respondent for these protracted proceedings. At one stage for example Brook asked Baud sometime prior to 1966 to “abstain from following up the law suit”. Baud on the other hand expressed no desire for very practical reasons either to press its suit until the end of 1966, when Asamera finally managed to produce its first oil in Sumatra, “…and the shares began to slowly get up in value,” and as the appellant put it, “we had to renew the case against him …”. In my view the law required more of Baud. It placed upon Baud the duty in the sense referred to in Red Deer College v. Michaels and Finn, supra, to mitigate its losses by acquiring shares in a company known by Baud to be far from financially sound. It might therefore be said that Baud would have hung back from any action (either the purchase of shares or the pressing of its claims in court) until Asamera struck oil, whether or not Brook had requested it to do so.

One must not become so lost in the technicalities of damages in the law of contract as to lose sight of the practical consideration of the cost of money and of the reality of the risks to be imposed on a plaintiff by a requirement of complete mitigating measures. In this case the magnitude of the operation, in the range of $800,000 to $1,000,000 if the shares were to cost $7 to $8 each, leads one to conclude that a ‘reasonable’ time for mitigative action must be allowed after the appropriate point of time in law has been isolated.

The appellant bases its contention that it has no obligation to purchase shares in the market in part on the ground that it ought to be allowed to seek specific performance of the contract to return the shares, and while relying on an injunction restraining their disposition it need not have any concern with losses occasioned by its inaction. Counsel for the appellant did not refer this Court to any cases

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in which the principle of mitigation has interacted and conflicted with recovery by way of specific performance, and such authority as I have been able to discover supports the common sense view that the principle of mitigation should, unless there is a substantial and legitimate interest represented by specific performance, prevail in such a case.

This conflict sometimes occurs on the interaction of the principle of mitigation and an award of damages in lieu of or in addition to specific performance in equity. In decisions relating to damages, the Courts of Equity have acted on the authority of Lord Cairns’ Act (more properly cited as the Chancery Amendment Act, 1858, 21 & 22 Vict. c. 27, s. 2), which empowers a Court of Equity to award damages “either in addition to or in substitution for … specific performance”. Accordingly, in a number of cases concerning contracts for the sale of land, damages calculated on the value of the land as of the date of judgment, as opposed to the date of breach, have been awarded. (Vide Wroth v. Tyler, supra; Metropolitan Trust Co. of Canada et al. v. Pressure Concrete Services Ltd. et al., supra; Calgary Hardwood & Veneer Ltd. and Foreign and Domestic Wood Ltd. v. Canadian National Railway Company[47].) The Supreme Court of New Zealand in Hickey v. Bruhns[48], had occasion to review Wroth v. Tyler, supra, and the earlier authorities and after concluding that specific performance was inappropriate, held that an award of damages in substitution for specific performance must take into account the conduct of the parties, particularly when inordinate delay has occurred thereby making critical the date selected for the computation of damages. Vide Kaunas v. Smyth et al.[49]

On principle it is clear that a plaintiff may not merely by instituting proceedings in which a request is made for specific performance and/or damages, thereby shield himself and block the

[Page 668]

court from taking into account the accumulation of losses which the plaintiff by acting with reasonable promptness in processing his claim could have avoided. Similarly, the bare institution of judicial process in circumstances where a reasonable response by the injured plaintiff would include mitigative replacement of property, will not entitle the plaintiff to the relief which would be achieved by such replacement purchase and prompt prosecution of the claim. Before a plaintiff can rely on a claim to specific performance so as to insulate himself from the consequences of failing to procure alternate property in mitigation of his losses, some fair, real, and substantial justification for his claim to performance must be found. Otherwise its effect will be to cast upon the defendant all the risk of aggravated loss by reason of delay in bringing the issue to trial. The appellant in this case contends that it ought to be allowed to rely on its claim for specific performance and the injunction issued in support of it, and thus recover avoidable losses. After serious consideration, I have concluded that this argument must fail.

It is, of course, an eminently reasonable position to take if, as Lord Reid suggests in White and Carter (Councils) Ltd. v. McGregor[50], in the case of anticipatory breach, there is a substantial and legitimate interest in looking to performance of a contractual obligation. So a plaintiff who has agreed to purchase a particular piece of real estate, or a block of shares which represent control of a company, or has entered into performance of his own obligations and where to discontinue performance might aggravate his losses, might well have sustained the position that the issuance of a writ for specific performance would hold in abeyance the obligation to avoid or reduce losses by acquisition of replacement property. Yet, even in these cases, the action for performance must be instituted and carried on with due diligence. This is but another application of the ordinary rule of mitigation which insists that the injured party act reasonably in all of the circumstances. Where those circumstances reveal a substantial and legiti-

[Page 669]

mate interest in seeking performance as opposed to damages, then a plaintiff will be able to justify his inaction and on failing in his plea for specific performance might then recover losses which in other circumstances might be classified as avoidable and thus unrecoverable; but such is not the case here.

All such principles lead back to the law enunciated in British Westinghouse Electric and Manufacturing Company, Limited v. Underground Electric Railways Company of London, Limited, supra, and in fact are merely instances of the application of the principles set out therein to unusual circumstances or unusual combinations of conditions surrounding the parties after the breach.

Counsel for the appellant, Baud, faced with the argument that Baud’s failure to mitigate its losses by the purchase of shares on the open market has exposed Brook to unreasonable claims for compensation for losses consequent upon Brook’s failure to return the Asamera shares, asserted in this Court the proposition that mitigation in such circumstances would be unreasonable in that it would require the purchase of 125,000 Asamera shares by an investment by Baud in its adversary in these proceedings at the very time when Baud was asserting that Asamera was dominated and controlled by Brook. The answer to this proposition is simply that the appellant cannot have it both ways. On the one hand, it seeks recovery of certain shares which it alleges have been and are of substantial value to it. Yet it argues that it cannot reasonably have been expected to purchase replacement shares identical in all regards. If it is correct and sincere in its submission regarding the importance and inherent value of the shares, it ought to have instructed its brokers to acquire replacement shares within a reasonable time after the breach of contract. There is no suggestion that the appellant would not have been able to do so at that time.

Apparently at some stage in this transaction the Securities Exchange Commission of the United States limited or prohibited the sale of these and

[Page 670]

perhaps other Asamera holdings of the parties. By 1959 and 1960 when Brook sold the shares in question or a like number there appeared to be no prohibition either by S.E.C. order or regulation and so that element may be disregarded in the damage assessment process.

It was argued by counsel for Brook that failure by Baud to bring its claim for damages arising from the non-return of the Asamera shares before a trial court with promptness exposed Brook improperly to a magnified claim for damages. It is said by Baud on the other hand that by reason of the geographical spread of the adversaries, their witnesses and advisors, ranging as it did from Indonesia to New York, the Netherlands and Calgary, the staging of the legal proceedings including the examination for discovery was difficult and prolonged and this is no doubt true. For example, in May 1968 Brook revealed during examination for discovery that the sale of 125,000 shares had been carried out by Brook even before the date of expiry of the initial term of his option to purchase. He did not, however, at that time, know the precise dates and prices of the sale or sales and despite an undertaking to do so these were not communicated to Baud until April 1970 when Brook gave testimony at trial to the effect that these sales took place in December of 1957 and January-February 1958. Furthermore, as already observed, Brook asked Baud some time in the interval between the institution of action in 1961 and 1966 not to press the pending court actions. As we have seen, even the trial itself went with interruptions from June 1969 to December 1970 and judgment was ultimately entered in May 1972. The learned trial judge gave his reasons for judgment in April 1971 but by reason of issues thereupon brought to the attention of the Court further submissions were made by counsel and additional reasons were issued in May 1972. What then in all these circumstances is a ‘reasonable’ period of time within which to litigate these claims? Fortunately, the outcome of these proceedings does not depend directly on the determination of what in all these circumstances was a reasonable time within which to litigate these claims. The damages as already concluded are not

[Page 671]

to be assessed on the basis of the highest price of the shares between breach and trial. The mitigation required of the appellant in law is not dependent on the date of judgment. Litigation may be an alternate procedure leading to the crystallization of losses in circumstances where actual replacement of the property would be unreasonable. In this proceeding, the damage due to delay was suffered by the appellant which thereby has deprived itself of the use of its money. In any case the damage assessment technique is derived from substantive law and not procedural law and the result should be consistent and not subject to the vagaries of litigation delays.

Having regard to the complex issues raised in all three actions (and the period devoted to this litigation must take into account more than the simple action for the recovery of shares loaned to Brook) and taking into account the other circumstances mentioned it would be unreasonable to hold the appellant to any timetable which contemplated the trial of these many issues prior to the end of 1966 or early in 1967. If litigation may represent an alternative to the investment by a plaintiff of substantial funds to avoid the accumulation of losses, the courts cannot apply in the computation of damages a principle recognizing some relevance of the fluctuating value of the res of the contract between breach and trial and not at the same time maintain a strict surveillance on the assiduity of a plaintiff in bringing his claim to judgment.

The price of these shares on the Toronto Stock Exchange was the subject of much testimony and before this Court Baud, without any objection from counsel for Brook, reduced such evidence to a series of graphs which records prices and volumes of trade on the Exchange during each year from 1955 to 1977. When Brook pleaded (on July 6, 1967) (a) his right to refuse return of the shares, and (b) the previous sale of shares by Brook, the shares were trading from $4.30 to $4.35 per share. The volume of trading was very low. By the end of 1967 the price had climbed to $7.25 but the volume of trading remained low. Unfortunately there is no evidence of the depth or strength of the market but it is reasonable to conclude from the small volume of trade over a lengthy period of

[Page 672]

time that the market was thin and probably could not have absorbed large purchases or sustained the quoted prices in the face of large sales. By the time of the examination for discovery in May 1968 the price per share had reached a range from $7.60 to $8.20. The volume of trading had increased markedly over the preceding year but was sporadic. By the end of the year the price quoted on the Exchange was $27 in comparatively active trading. The price of Asamera shares peaked at $46.50 in 1969 during the opening session of the trial. By the time of the issuance of the reasons for judgment in April 1971 as mentioned above, the price had declined to $22 per share and when final issues were disposed of and formal judgment entered in May 1972, the price of Asamera shares on the Stock Exchange was about $21.

The Courts below determined from different approaches that the critical date for assessment of damages was the date of the breach of the contract to return the shares on December 31, 1960. The price was then 29 cents on the open market. Each Court observed as well that the parties had agreed that the purchase price (if the option be exercised) on that date was $2 and accordingly damages could not be assessed at less. Furthermore, the evidence indicated that Brook on the sale of a like number of shares in 1957 and 1958 had realized prices ranging from $1.50 to $1.80 so that an award based on the market price on the date of breach would allow Brook to profit from his wrongdoing. It would appear from the judgments in the Courts below that Brook’s enrichment through his breach of contract played an important role in the assessment of damages. Accordingly damages were assessed at $2 per share or $250,-000 in gross.

It seems to me that the motives or unjust enrichment of the defendant on breach are generally of no concern in the assessment of contractual damages. Vide Treitel, The Law of Contract, (4th ed., 1975), at p. 618:

[Page 673]

In general, damages are based on loss to the plaintiff and not on gain to the defendant. They are not, in other words, based on any profit which the defendant may have made out of the breach.

An appellate tribunal in such an appeal as this is in an invidious position. The record at trial is deficient. In the result precise evidence as to market conditions, credit facilities, rates of interest, borrowing power of the appellant, effect on market price of mitigative action by it, the time reasonably required to acquire by purchase such a volume of shares on the open market, and other evidence relevant to the assessment of damages is not before this Court. On the other hand the transaction occurred 20 years ago, and the trial which was extensive and no doubt expensive, was completed 7 years ago. To direct a re-assessment of the damages would be time consuming, difficult to carry out after such a lapse of time, and expensive for the parties. Faced with these unsatisfactory alternatives, an appellate court must discern if at all possible from the record the elements necessary to permit the completion of the assessment process.

We therefore approach the matter of the proper appraisal of the damages assessable in the peculiar circumstances of this case on the following basis: that the same principles of remoteness will apply to the claims made whether they sound in tort or contract subject only to special knowledge, understanding or relationship of the contracting parties or to any terms express or implied of the contractual arrangement relating to damages recoverable on breach; that Baud was under the general duty to mitigate its losses and may not escape this duty by relying on the 1960 injunction interminably; that the specific duty to mitigate and to crystallize its claim for damages within a reasonable time of the breach of contract by bringing action seeking appropriate remedies and to prosecute such action with due diligence, was qualified or postponed by Brook’s request of Baud sometime prior to 1966 to refrain from enforcing its claims; that any postponement of such requirement to prosecute and to acquire replacement shares had come to an end at the latest on the awareness of Baud that the

[Page 674]

defaulting party was not only in breach of the duty to return the shares but had disposed of shares at least equal in number to those loaned by Baud; that any postponement of the duty to acquire replacement shares which may have been due to the sharp reduction in the value of the shares which occurred during the loan, was ended with the revival in values on the public market at least by the end of 1966; that a plaintiff in the position of Baud may not successfully assert throughout the years of litigation a right to specific performance of the contract to redeliver the subject-matter of the contract and at the same time seek to avoid or reduce his losses on the grounds that to do so by buying replacement shares would involve him in investing his funds in the shares of a company managed or dominated by his adversary, Brook; that having regard to the nature of a common share neither the terms of the injunction or the loan contract, nor the action by Brook in disposing of shares in number equal to those loaned, have any effect on the characterization of the rights of Baud or the obligation of Brook throughout this long and tortuous transaction; that damages are an adequate remedy and that a court in these complex and particular circumstances will not invoke the extraordinary remedies of equity.

The application of these principles and determinations to the particular circumstances in this case requires in my respectful view a determination of the damages payable by Brook on the assumption that Baud ought to have crystallized these damages by the acquisition of replacement shares so as to minimize the avoidable losses flowing from the deprivation by Brook of Baud’s opportunity to market the 125,000 shares. Such share purchases should have taken place within a reasonable time after the date of breach. Having regard to all the above-noted special circumstances, the time for purchase in my opinion was the fall of 1966 when Baud was by its own admission free from any agreed restraint not to press its claims against Brook. It would be unreasonable to impose on Baud the burden of going into the market and acquiring replacement shares at a time when the litigation of its claims was in a dormant state at Brook’s request. Furthermore Baud acknowledged that by the fall of 1966 the fortunes of Asamera

[Page 675]

had improved and this had begun to be reflected in the market price of its shares. In short, the appellant is not in my view entitled in law to any compensation for the loss of opportunity to sell its shares after that date. Thereafter its loss of this opportunity is of its own making. The theory of such a damage award is to provide the funds needed to replace the shares at the time the law required it to do so in order to avoid an accumulating claim. There should be an allowance of a reasonable time to permit the organization of the finances and the mechanics required for the careful acquisition of 125,000 shares either by a series of relatively small purchases or by negotiated block purchases. This would carry the matter into the fall of 1967. By this time the price had risen to a range of $5 to $6. Making allowance for the upward pressure on the market price which would be generated by the purchase of such a large number of shares on a relatively low volume stock, the purchase price would surely have exceeded the $6 price reached in mid-1967 without any market intervention by Baud. For this factor in my best consideration an allowance of $1 per share should be made. Taking into account the effect of market intervention by Baud, the median price during the period from late 1966 to mid-1967, adjusted accordingly, would be about $6.50, and in my view, the damages should be awarded to Baud on that basis; that is, the total damages for breach of agreement to return the Asamera shares should amount to $812,500. In weighing the magnitude of this award one should not lose sight of the essential fact that Brook at any time right down to trial could, if he had remained in compliance with the injunction of July 1960, have avoided this result or the risk of this award by delivering from any source 125,000 Asamera shares.

Brook has below and before this Court asserted a claim for damages in respect of the undertaking given by Baud upon the issuance of the interim injunction in July 1960. This claim was dismissed by the learned trial judge and in this dismissal the Court of Appeal of Alberta concurred. Nothing has been advanced in this Court to indicate error below and I therefore would dismiss this cross-appeal by Brook.

[Page 676]

I would therefore allow the appeal, and vary the judgment below by awarding damages payable by Brook to Baud in the amount of $812,500 together with costs to Baud throughout.

Judgment accordingly.

Solicitors for Baud Corporation, N.V. and Sea Oil & General Corporation: Fenerty, McGillivray, Robertson, Prowse, Brennan, Fraser, Bell & Hatch, Calgary.

Solicitors for Asamera Oil Corporation Ltd. and Thomas L. Brook: MacKimmie, Matthews, Calgary.

 



[1] (1973), 40 D.L.R. (3d) 418.

[2] [1933] S.C.R. 163.

[3] [1949] 2 K.B. 528.

[4] [1969] 1 A.C. 350.

[5] [1967] S.C.R. 642.

[6] [1977] 2 Lloyd’s Rep. 522, [1978] 1 All E.R. 525.

[7] (1846), 8 Q.B. 595.

[8] [1976] 2 S.C.R. 324.

[9] [1941] O.W.N. 269.

[10] (1948), 64 T.L.R. 569 (C.A.).

[11] [1944] K.B. 510.

[12] [1953] Ch. 770.

[13] (1824), 1 C. & P.412.

[14] (1802), 2 East 211.

[15] (1810), 2 Taunt. 257.

[16] (1799), 8 T.R. 162.

[17] (1891), 17 V.L.R. 407 (Australia).

[18] 129 U.S. 193 (1899).

[19] (1906), 38 S.C.R. 198.

[20] [1971] S.C.R. 209.

[21] [1973] 3 O.R. 629, aff’d (1976), 60 D.L.R. (3d.) 431 (Ont. C.A.).

[22] (1846), 2 Car. & K. 26, 175 E.R. 11.

[23] [1891] 1 Ch. 270, aff’d [1891] 1 Ch. 287.

[24] [1892] A.C. 201.

[25] [1974] Ch. 30.

[26] [1977] 2 S.C.R. 302.

[27] (1957), 8 D.L.R. (2d) 97.

[28] [1944] S.C.R. 1.

[29] [1933] A.C. 449.

[30] [1938] 3 D.L.R. 158.

[31] [1971] 5 W.W.R. 561.

[32] (1846), 15 M. & W. 136.

[33] (1824), 2 B. & C. 624.

[34] (1835), 2 Cr. M. & R. 165.

[35] (1927), 32 Com. Cas. 276.

[36] [1918] 2 W.W.R. 877 (Sask. K.B.).

[37] (1864), 11 Moore (N.S.) 66.

[38] (1922), 62 D.L.R. 199 (B.C. C.A.).

[39] [1945] S.C.R. 360.

[40] [1912] A.C. 673.

[41] 129 U.S. 193 (1899).

[42] 446 F. 2d 90 (1971).

[43] [1948] 2 K.B. 23 (C.A.).

[44] [1906] 1 Ch. 549.

[45] [1917] 2 K.B. 814.

[46] (1841), 8 M. & W. 160.

[47] [1977] 4 W.W.R. 18.

[48] [1977] 2 N.Z.L.R. 71.

[49] (1976), 75 D.L.R. (3d) 368.

[50] [1962] A.C. 413.

 

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