Supreme Court of Canada
H.F. Clarke Limited v. Thermidaire Corp. Ltd., [1976] 1 S.C.R. 319
Date: 1974-10-01
H.F. Clarke Limited (Plaintiff) Appellant;
and
Thermidaire Corporation Limited (Defendant) Respondent.
1974: January 28, 29, 30; 1974: October 1.
Present: Laskin C.J. and Martland, Judson, Spence and Dickson JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Contract—Restrictive covenant—Measure of liquidated damages—Whether formula reasonable or penalty—Construction of covenant in restraint of trade—Scope of covenant—Limitation of operation of covenant by construction or rectification.
In January 1966, the parties entered into a written contract constituting the appellant as from January 1, 1966, the exclusive distributor of the respondent’s products (as defined) in a specified area of Canada comprising the larger part of the country. This contract which replaced an earlier one under which there were two restrictive covenants, one respecting competition during the currency of the contract and the second respecting competition during the three year period after termination or cancellation, showed one marked variation in the successor covenants in that the 1966 covenant dealing with sale of competitive products omitted the references to the three year period and to the territory. The covenant dealing with Termination of Agreement by Clarke in neither case made reference to territory but provided for liquidated damages payable by Clarke to Thermidaire of an amount equal to the gross trading profit realised through the sale of competitive products. The contract was terminated by Thermidaire and it was the appellant which initiated suit claiming damages for wrongful termination of the contract. Thermidaire counter-claimed for damages under the covenants against competition. The appellant discontinued its action and the trial of the counter-claim began well after the expiry of the three-year period within which the post-contract covenant was effective. The appellant had continued to sell competitive products contrary to the terms of the covenant and put itself at risk of having to account under the formula for post-contract damages. The respondent however did not seek an interim injunction and while the prayer for relief in the counter-claim did ask for an injunction by the time the action came on for trial there was no longer any basis for one.
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Both the trial judge and the Court of Appeal found the contracts, either as rectified or as limited by construction as to territory, reasonable inter partes and consonant with the public interest. The trial judge also found and the Court of Appeal affirmed that Clarke had broken the contract during its currency by selling competitive products (other than those of the respondent) and had also broken the covenant against post-contract competition. These findings and the finding that the respondent was entitled to terminate the contract were not contested thereafter.
As to damages, the trial judge found that the contractual formula of gross trading profit as a measure was business-like and reasonable, as did the Court of Appeal, despite the fact that it was accepted in the Court of Appeal that the damages would reach $200,000.
Held (Martland and Dickson JJ. dissenting): The appeal should be allowed with costs.
Per Laskin C.J. and Judson and Spence JJ.: Three points were in issue, first, the validity of the convenants by reason of their alleged unlimited scope, second, the main issue of whether the formula fixing damages for breach of covenant in the post-contract period establishes a measure of liquidated damages or is a penalty against which relief must be given, and, third, whether certain products should not be taken into account in assessing damages.
Neither of the covenants against competition referred to a territorial limitation and rectification was sought on the ground of mutual mistake, and, while the trial judge found them enforcable without granting rectification, the Court of Appeal allowed the cross-appeal as to rectification and qualified their operation by including therein the words “in the territory”. Without interfering with the view taken by the Court of Appeal, reasonable construction of the covenants would, in the absence of indication to the contrary, have limited them to that territory in any event. The covenants having been by construction or rectification limited as to territory the appellants failed also in any challenge to the covenants as being in unreasonable restraint of trade.
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As to whether the formula fixing damages was in the circumstances a penalty, while it is always open to parties to make such a pre-determination of damages or their measure this must yield to judicial appraisal of its reasonableness. The doctrine that a sum will be held to be a penalty if extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach is well established and does not lose its force in cases where exact calculation or pre-estimation is difficult. In the present case the stipulation for liquidated damages (of which the estimated loss of net profits of respondent is only 40 per cent) was disproportionate and unreasonable. The respondent was however entitled to recover its provable damages for breach of convenant.
The submission by the appellant that sales of certain products ought not to be taken into account should be rejected as it was in the courts below.
Per Martland and Dickson JJ. dissenting: The appeal should be dismissed with costs for the unanimous reasons given by the Court of Appeal.
[Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd., [1915] A.C. 79; Clydebank Engineering & Shipbuilding Co. Ltd. et al. v. Don José Ramos Yzquierdo y Castaneda et al. [1905] A.C. 6 appld.]
APPEAL from a judgment of the Court of Appeal for Ontario[1], dismissing an appeal from a judgment of Wilson J. at trial. Appeal allowed with costs, Martland and Dickson JJ. dissenting.
J.J. Fitzpatrick, Q.C., and H. Ross, for the appellant.
C.E. Woollcombe, Q.C., and D.H. Sandler, for the respondent.
The judgment of Laskin C.J. and Judson and Spence JJ. was delivered by
THE CHIEF JUSTICE—There are three points in this appeal, which concerns the enforceability, under an exclusive distributorship contract, of covenants against competition during the currency of the contract and for three years after its lawful
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termination. The first point relates to the validity of the covenants by reason of their alleged unlimited scope. Secondly, there is an important issue, which in my opinion is the main issue, whether the formula fixing damages for breach of the covenant in the specified post-contract period establishes the measure of liquidated damages or is in reality a penalty against which relief must be given. The third point relates to certain products which, on the appellant’s contention, should not be taken into account in assessing damages. Although the appellant also questioned the reference as to damages, directed by the trial judge and affirmed by the Court of Appeal, it being its contention that the assessment should be by a judge of the Supreme Court of Ontario, I would not interfere with this direction if the right to damages should be confirmed by this Court.
The contract which is the subject of this litigation was dated January 14, 1966, and as amended shortly thereafter, it constituted the appellant, as from January 1, 1966, the exclusive distributor of the respondent’s products (as defined) in a specified area of Canada, embracing the larger part of Canada from Ontario to the west coast and including the North West Territories and part of Quebec but excluding the eastern part of Quebec and the four Atlantic provinces. This contract replaced an earlier one under which the two covenants against competition, one respecting competition during the currency of the contract, and the second respecting competition during the three year period after termination or cancellation of the contract showed one marked variation from the successor covenants. Article 7 of the first contract of January 20, 1964, provided as follows:
7. Sale of Competitive Products
Distributor undertakes and agrees that during the currency of this Agreement and for a period of three (3) years after the termination hereof, as herein provided, neither it nor any company
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affiliated or associated with it shall sell competitive products in the Territory.
In the contract out of which this litigation arises, the references to the three year period and to the territory were left out, and the paragraph, numbered 7 as before, was in these words:
7. Sale of Competitive Products
Clarke undertakes and agrees that during the currency of this Agreement, neither it nor any company associated or affiliated with it shall manufacture, sell, cause to be manufactured or sold, products competitive to Thermidaire products.
Neither Article 14 of the first contract nor its successor Article 15 of the second contract, in restraining competition for three years after termination or cancellation made any reference to its operation in the territory of the distributorship. The two articles were substantially the same in their relevant particulars, and it is enough to reproduce the one that is in issue here. It reads as follows:
15. Termination of Agreement by Clarke: In the event of the termination or cancellation of this Agreement by, or caused by, Clarke, either by reason of its non-renewal by Clarke or by reason of any default on the part of Clarke or by reason of any violation or non-fulfilment of the conditions of this contract by Clarke and not remedied by Clarke as laid down in Section 12, including the grounds for termination specified in paragraph 19 hereof, Clarke further undertakes and agrees that neither it nor any company affiliated or associated with it will produce, sell or cause to be produced or sold, directly or indirectly, products competitive with Thermidaire Products for a period of three (3) years after the date of termination or cancellation. In the event of breach by Clarke of this convenant pertaining to competitive products, Clarke shall pay to Thermidaire by way of liquidated damages an amount equal to the gross trading profit realized through the sale of such competitive products.
Although neither of the covenants against competition referred to a territorial limitation on their ambit and rectification was sought on the ground of mutual mistake, the trial judge found them enforceable without granting rectification, it being
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his view that there was no mutual mistake. In the Court of Appeal, whose reasons were delivered by Brooke J.A., the cross-appeal as to rectification was allowed and the operation of the two covenants was qualified by including therein the words “in the Territory”.
I am not disposed to interfere with the view on rectification taken by the Court of Appeal, but I do not think that the relief was necessary in view of the definition in the contract of the territory within which the distributorship was to operate. It seems to me that, in the absence of any indications in the convenants against competition that they were to operate outside the distributorship territory, reasonable construction would limit them to that territory. I do not find it compelling today to view the covenants against competition as if they were detached provisions and to seek thereby a basis of invalidation, especially when no claim was made by the covenantee for a wider application than the distributorship territory.
I need not embark here on any discussion of whether the two convenants, either as rectified or as limited by construction to operation only in the distributorship territory, are invalid as in unreasonable restraint of trade. Both the trial judge and the Court of Appeal found them to be reasonable inter partes and consonant with the public interest, and this conclusion was not questioned by the appellant save by reading the convenants as being unlimited in territorial ambit. In failing on this point they fail also in any challenge to the covenants as being in unreasonable restraint of trade.
This brings me to the second and, as I said, the main point in the appeal. The trial judge found, and the Court of Appeal confirmed, that the appellant Clarke had broken the contract during its currency by selling competitive products other than those of the respondent and that it had also broken the covenant against post-contract competition. These findings, and as well a finding that
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the respondent was entitled to terminate the contract before it had run its five-year period, were not contested in this Court by the appellant.
At the time the parties hereto commenced their business relationship the appellant was in the business of selling boilers in western Canada. The respondent from 1958 on concentrated on the manufacture and sale of water treatment products; and in agreeing to give the appellant the exclusive distributorship of its products in the defined territory it necessarily excluded itself from sales therein and thus depended on the appellant to keep its name and its reputation before the public in the territory. The appellant was not only precluded by the contract between the parties from selling products in the territory competitive to those of the respondent but was also subject to other supporting contractual obligations, such as being required to give the respondent upon request its list of customers, and various provisions respecting advertising and packaging.
It was the appellant which initiated suit, claiming damages for wrongful termination of the contract on January 19, 1967, by the respondent and the latter counterclaimed for damages under the covenants against competition. The action was brought on March 9, 1967, the statement of claim was delivered on April 10, 1967, and the defence and counterclaim on April 25, 1967. The appellant discontinued its action on April 29, 1968, and the trial of the counterclaim began on September 19, 1971, well after the expiry of the three-year period within which the post-contract covenant against competition was effective. The respondent did not seek an interim or interlocutory injunction, which it might have done promptly and thus avoided the running of some of the damages which it claimed in its suit. Its explanation, which is far from satisfactory, was that there was a serious question whether there was a breach of the agreement by the appellant and, even if there was a breach, whether it was not remedied. The prayer for relief in the counterclaim did ask for an injunction but, of course, by the time the action came on for trial
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there was no longer any basis for one. Nonetheless, it was obvious from the record that the appellant continued to sell competitive products other than those of the respondent after the contract was terminated and thus put itself at the risk, which indeed materialized, of being called to account under the formula for post-contract damages. Notwithstanding this, no interlocutory injunction was sought by the respondent.
No question arises here as to the entitlement of the respondent to damages for breach of the covenant against competition during the currency of the contract (the covenant in this respect being enforceable), such damages being the loss suffered by the respondent by reason of sales by the appellant of products competitive with those of the respondent and not purchased from the respondent. The formula for assessing damages for breach of Article 15, the post-contract covenant, was however attacked as constituting a penalty rather than a measure of liquidated damages. It was accepted by counsel for the respective parties that the damages under the prescribed formula, namely, the gross trading profit realized by the covenantor on the sale of competitive products, would be about $200,000. Counsel for the appellant pointed to the very modest, almost inconsequential, profits of the respondent for the ten‑year period 1961 to 1970 inclusive. Indeed, it was contended that were it not for an interest free loan to the respondent by its president, there would have been a loss over the ten-year period of some $86,000 if a realistic rate of interest had to be paid for the loan. To support its contention of the extravagance of the formula as a measure of liquidated damages, counsel for the appellant noted (although not accepting the sum as properly based) that the respondent had, in the alternative, claimed some $92,000 as the amount of its actual loss of net profit over the three-year post-contract period.
The trial judge concluded that the formula of gross trading profit as the measure of liquidated
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damages was a business-like and reasonable one, but this conclusion was associated with an apparent belief that the damages according to this formula would be small. The Court of Appeal accepted, as did counsel, that they would reach $200,000, but it held nonetheless that the formula, in the circumstances, was “one designed for the determination of liquidated damages in the truest sense and...therefore enforceable”.
Although there was only brief consideration in the reasons of the trial judge of the issue whether the provision for liquidated damages (so termed by the parties in their contract) was not in substance a penalty and hence unenforceable, the Court of Appeal addressed itself to this issue at some length. I think it important to appreciate that we are dealing here with a not very usual case (so far as reported decisions go) where the pre-estimate of damages was not a fixed sum (as was the situation in the leading English case of Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.[2]) but was based upon a formula which when applied necessarily yielded a result far in excess of loss of net profits. Gross trading profit, in the words of the trial judge, “means the difference between the net selling prices of the goods and their laid down cost”, the laid down cost being the seller’s invoice price plus transportation charges to put the goods on the purchaser’s shelves. In the words of the Court of Appeal, “the term ‘gross trading profit’ is profit after cost of sales but before costs customarily deducted to determine net profit”.
The contract in this case was lawfully terminated by the respondent on January 19, 1967, and the three‑year post-contract covenant against competition ran from that date. The appellant admitted in a letter from its president, dated January 16, 1967,
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that as late as June, 1966, it had sold competitive products covered by the agreement and not purchased from the respondent, and it promised to desist from this “hereafter”. The trial judge, obviously by inadvertent error, referred to June 30, 1967 (instead of to June, 1966) as the end period to which the admission referred. In fact, the appellant did not desist after termination of the contract, and there is evidence that from January 1, 1967, to January 31, 1969, the gross trading profit of the appellant was $177,161.20, consisting of $78,739.80 for 1967, $93,609.25 for 1968 and $4,812.15 for the one month of 1969, the appellant having in 1969 changed its year end from December 31 to January 31.
I take the judgment of the Ontario Court of Appeal to be based on the fact that the parties had fixed the formula of gross trading profit after a mutual consideration of the difficulty of establishing compensation for a probably substantial loss, having regard to the factors to be considered, if there was a breach of the post-contract covenant not to compete. The extent of the loss, by reason of the formula, would vary directly with the length of time, up to the three year limit, over which the breach would continue. In his reasons in the Court of Appeal, Brooke J.A. assessed the matter as follows:
The disproportion of gross trading profit and net profit and financial position of Thermidaire were known by the parties when this agreement was struck. No doubt net profit was considered inappropriate as a measure of damage or loss since its application would involve charging all the costs of advertising, promotion and administration used to put down Thermidaire in a prohibited competitive venture. As to the true object of the provision, Mr. Deeks stated that the formula was used because of the serious difficulties involved in calculating not only simple loss of profit through the prohibited competition, but also the loss of things of value, of real value, which the parties well understood. This included such matters as the loss of the past value of previous years of advertising by Clarke of the Thermidaire products, the loss of present and future worth of advertising by Thermidaire by reason of Clarke’s active competition
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and, of course, the loss of the value of product identification, product integrity and the loss of customers and, of importance, the name and reputation of the product in the marketplace. If the effect in terms of loss of present and future sales because of adverse advertising and competitive sales suffered by a company which had placed its entire reliance upon the conduct of its exclusive agent was properly a part of the parties’ consideration, perhaps the difficulty encountered by the witness Anderson in his attempt to establish the loss limited to Thermidaire’s net profit reflects the difficulties which the parties foresaw in any effort to assess the real loss which would be sustained by Thermidaire in the event of a breach. It is clear to me that the learned trial judge accepted the evidence of Mr. Deeks as worthy of belief and entirely reasonable in these circumstances.
Does the formula represent a genuine attempt by the parties to pre-estimate the loss as best they could within their special knowledge of the circumstances? It is true that the amount that may eventually be assessed may be large, but this was foreseeable when the contract was entered upon. Equally clear was the fact that the loss in terms of both profits and value, as above‑mentioned, would also be large. Indeed, the longer the competition was carried on within the prohibited period the greater would be the loss, and the more successful the competition, the greater was the probability that Thermidaire would suffer substantial and permanent damage in the light of the various factors above-mentioned. Losses such as loss of product identification, loss of the benefits of advertising through the operations of its exclusive agent throughout a large territory are among the imponderables for the appraisal which this clause was intended to provide. To have fixed a lump sum as a measure of Thermidaire’s damages would have been a haphazard measure at best and, in all the circumstances, the employment of a formula geared to sales of competitive products during the prohibited period was adopted by two keen business firms as the best method of determining the loss resulting from a breach of the covenant—a covenant into which they entered with their eyes open.
When is the amount of recovery in such circumstances extravagant as opposed to actual probable loss? The fact that the estimated loss of net profit,
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$92,000.00, is something a little less than half of the possible recovery of $200,000.00 in circumstances like these is not by itself proof of extravagance. The figures may be large, but I am not persuaded that they are unrealistic or extravagant. The parties knew and appreciated these factors and chose this method to establish compensation for a loss, the amount of which was difficult to determine and, no doubt, very costly to establish. I am convinced that they agreed upon a method which they both regarded as one which would lead to a fair and just determination of Thermidaire’s damages and losses in the event of a breach of the covenant.
If all that was involved in determining whether the parties had agreed on a measure of liquidated damages or on a penalty was the intention of those parties, there could be no quarrel with the result reached at trial and on appeal. Indeed, if that was the case it is difficult to conceive how any penalty conclusion could ever be reached when business men or business corporations, with relatively equal bargaining power, entered into a contract which provided for payment of a fixed sum or for payment pursuant to a formula for determining damages, in case of a breach of specified covenants, including a covenant not to compete. The law has not, however, developed in this way in common law jurisdictions; and the power to relieve against what a court may decide is a penalty is a recognized head of equity jurisdiction. Of course, the court will begin by construing the contract in which the parties have objectively manifested their intentions, and will consider the surrounding circumstances so far as they can illuminate the contract and thus aid in its construction. It seems to me, however, that if, in the face of the parties’ assertion in their contract that they were fixing liquidated damages, the court concludes that a penalty was provided, it would be patently absurd to say that the court was giving effect to the real intention of the parties when the court’s conclusion was in disregard of that intention as expressed by the parties.
What the court does in this class of case, as it does in other contract situations, is to refuse to
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enforce a promise in strict conformity with its terms. The court exercises a dispensing power (which is unknown to the civil law of Quebec) because the parties’ intentions, directed at the time to the performance of their contract, will not alone be allowed to determine how the prescribed sum or the loss formula will be characterized. The primary concern in breach of contract cases (as it is in tort cases, albeit in a different context) is compensation, and judicial interference with the enforcement of what the courts regard as penalty clauses is simply a manifestation of a concern for fairness and reasonableness, rising above contractual stipulation, whenever the parties seek to remove from the courts their ordinary authority to determine not only whether there has been a breach but what damages may be recovered as a result thereof.
The courts may be quite content to have the parties fix the damages in advance and relieve the courts of this burden in cases where the nature of the obligation upon the breach of which damages will arise, the losses that may reasonably be expected to flow from a breach and their unsusceptibility to ready determination upon the occurrence of a breach provide a base upon which a pre-estimation may be made. But this is only the lesser half of the problem. The interference of the courts does not follow because they conclude that no attempt should have been made to predetermine the damages or their measure. It is always open to the parties to make the predetermination, but it must yield to judicial appraisal of its reasonableness in the circumstances. This becomes a difficult question of judgment, especially in a case like the present one involving a covenant not to compete which engages the reputation and the vicarious presence of the covenantee in the territorial area of the covenant as well as the products which are the subject of the covenant.
In the present case the formula of gross trading profit was not defined, but in the general under-
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standing of the term as adopted by the courts below it departs markedly from any reasonable approach to recoverable loss or actual loss since all the elements of costs and expenses which would be taken into account to arrive at net profit are excluded from consideration. It is of considerable significance on this aspect of the matter to note how the respondent, in putting its best foot forward to show its actual loss, made up its estimated loss of net profits of $92,017, which is less than half of the sum, in fact about 40 per cent. which would be its recoverable damages under the contract formula of gross trading profits.
Evidence of the estimated loss of net profits over the three-year period in question was given on behalf of the respondent by one Anderson, a chartered accountant and member of a firm which was auditor for the respondent. His calculations are set out in an exhibit, Exhibit 72, which shows sales for each of the three years 1967 to 1969 inclusive and cost of sales. The difference between these sums was the gross profit in an amount of $110,270 from which were deducted expenses of warehousing (a minor expense), commissions, office and travel expenses, leaving a net of $92,017 as the loss of profit. Anderson agreed, when cross‑examined on his calculations, that they were based on four assumptions put to him by counsel for the appellant, as follows:
Q. Then the validity of your figures as estimates depends on four assumptions: the first, that Thermidaire would have sold all that Clarke did; the second, that Clarke’s sales figures for water chemical treatment material are the correct sales figures; that your figures for Thermidaire’s cost of sales are correct; and that your estimate as to how selling and administrative expenses would have increased with the increased sales.
A. That is correct.
Anderson’s evidence was that Clarke’s gross trading profit for the three-year period amounted to $239,449.05, consisting of $78,739.80 in 1967,
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$93,609.25 in 1968 and $67,100 in 1969. By contrast, the appellant’s net profit for the three‑year period in respect of sales of competitive products appears to have been insignificant, if indeed there was any at all. There was a net loss of over $17,000 in 1967 and a net gain of some $18,000 in 1968. There was no net gain figure for 1969, but taking $67,100 as the gross trading profit for that year (as Anderson’s evidence showed) the net profit, on any reasonable assessment of deductible expenses, could not have been very large. The respondent Thermidaire’s gross trading profit during this period, if it had sold the units or products that Clarke had sold in the same period would have been $110,270, and this is the sum shown on Exhibit 72. The reason for the disparity between the gross trading profits of the appellant and of the respondent, referable to the same and to the same number of items, was that the respondent was a wholesaler selling through a distributor, the appellant, which sold direct to the consumer at retail prices. There could be no affinity between the respective profits of the two firms in respect of products which the appellant did in fact sell and those that the respondent might have sold in the same market during the three-year period because the respondent would be selling at wholesale prices and the appellant at retail prices which would involve a considerable distributor’s or resale markup, as, for example, a 47 per cent mark-up in 1968 as noted by Anderson in his evidence. (The markups for 1967 and 1969, estimated by Anderson, were 52 per cent and 45 per cent respectively, and he regarded the mark-ups for the three years as reasonable.) Thus, their respective costs were different and their respective selling and administrative expenses were different.
Anderson’s figures for Thermidaire’s projected sales for 1967 to 1969 inclusive were the figures for Clarke’s actual retail sales in that period less the resale mark-up. To take 1967 by way of illustration, Clarke’s retail sales in that year of Thermidaire products had a value of $159,667.83,
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which less the mark-up left the sum of $102,154. From this sum Anderson deducted Thermidaire’s cost of sales to arrive at gross profit and then deducted expenses to arrive at net profit for the year. His formula for determining cost of sales was based on an examination of the respondent’s financial statements for the years 1967 to 1969 and a finding that the cost was a certain percentage of the selling price, namely 30.37 per cent for 1967 and until September 1968 and 24.65 per cent for the remainder of 1968 and for all of 1969. The lower percentage was because the respondent began to sell its own manufactured products in October 1968. The percentages were applied to the retail sale figures of the appellant’s sales (not deducting the resale mark-up) and thus a figure was obtained of the estimated cost of sales.
The estimated net profit loss of $92,017 was vigorously attacked by the appellant, and with some justification. For example, there appears to have been some dispute as to whether Anderson’s calculations were based solely on so-called competitive products or included others that were not differentiated in the appellant’s financial statements. I need say no more about it here other than that it represented an estimate that was as favourable as such an exercise could be to the party that commissioned it. Because of the views of the courts below that gross trading profits were recoverable it was unnecessary for them to inquire into the merit of the sum put forward as the estimated loss of net profits.
I think it well to emphasize that the estimated actual loss of $92,017 and the estimated loss of gross trading profits of $239,449.05 are sums which relate to the entire three-year post‑contract period during which the covenant not to compete was operative. Had the court been called upon to deal with the question of liquidated damages or penalty at or shortly after the time that the con-
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tract was lawfully terminated neither the actual loss nor the gross trading profits would have been in any substantial figure, a result that would be fortified, and indeed secured, if an interlocutory injunction had been sought and granted. No such injunction was, however, even sought, and hence the continuation of the breach to the end of the post-contract covenant period yielded the high figures to which reference has been made.
Had a single sum been fixed as a pre-estimate in the amount of some $200,000, it is impossible to think that the court would not have concluded that an in terrorem penalty had been fixed at the time of the contract. Moreover, to regard that sum as being equally claimable for a breach that lasted for a short time as well as for a breach which continued over the entire covenant period would be an unreasonable conclusion. The question that arises here however is whether the same appreciation should prevail in a case where the quantum of damages, actually suffered or claimable, depends on the length of time over which the covenantor continues to be in breach of its covenant.
Should the respondent here be faulted then because it did not seek an interim injunction when it filed its counterclaim on April 25, 1967, some three months after it terminated the contract, or because it did not thereafter seek an interlocutory injunction until trial through which to stanch the flow of damages measured by gross trading profits? There is no doubt that a covenantee cannot have both an injunction during the covenant period and damages based on a breach of covenant for the entire period where they are based on a formula. There is case law holding that where a fixed sum is stipulated as the liquidated damages upon a breach, the covenantee cannot have both the damages and an injunction but must elect between the two remedies: see General Accident Assurance Corp. v. Noel[3]‘, Wirth and Hamid Booking Inc. v. Wirth[4]; I do not however read these cases as excluding damages for past loss by reason of the breach, but only as precluding recovery of the
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liquidated amount referable to breach in the future which that amount was designed to cover and against which an injunction has been granted. By not seeking an interim or interlocutory injunction, the respondent gives some support to the proposition that it was more profitable to it to let the default of the appellant continue. On the other hand, the appellant accepted the risk of being held liable for gross trading profits by continuing to be in breach for the entire post-contract period of the covenant’s operation.
In this state of affairs, I think the proper course is to look at the situation (as in fact it was at the time of the trial) as one where each party was content to have the issue of liquidated damages or penalty determined according to the consequences of a breach over the entire period of the covenant. The appellant cannot, of course, escape liability for at least the damages which a court would fix if called upon to do so. Should it be so called upon in this case by a holding that to allow recovery of gross trading profits would be to impose a penalty and not to give compensation in a situation where calculation of damages is difficult and incapable of precise determination? I would answer this question (and I do it after anxious consideration) in the affirmative.
I do not ignore a factor or factors in connection with breach of a covenant not to compete that are not as easily measured in dollars as are gross trading profits and net profits but which nonetheless have a value. These entered into the consideration of the Ontario Court of Appeal, and they were mentioned in Anderson’s evidence, as follows:
Q. Now I want you to make two assumptions before answering the question I am going to put to you. The first assumption is, assume that Thermidaire
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properly terminated Exhibit 3 for cause, and secondly, assume that Clarke sold products competitive with Thermidaire products during the three year period. In your opinion what harm would Thermidaire suffer as a result of Clarke’s competition during that three year period, assuming he did compete?
A. During the three year period he would suffer lost profits, because without that competition presumably he would have had more sales, with very few additional costs, inasmuch as he would have had access to an established market, that had been vacated. Now after the three year period the loss would continue because he doesn’t have a group of customers that he might otherwise have had, and this loss is virtually incalculable—it would be very, very difficult to calculate without having more information.
Q. Well, what additional information would assist you in making such a calculation?
A. Information out of the books of H.F. Clarke Co. Ltd., product analysis, customer analysis—this type of information—so that we would know perhaps where we would be selling where we are not now, or where Thermidaire would be selling where it is not now—so that profit margin and so on could be actually computed; these factors would help.
Q. Well, with this information, even with this information, how would you describe the task of calculating the dollar value of the harm done as you have described it?
A. Very, very difficult.
Q. Are there any intangibles in such a calculation?
A. Yes, there are. The basic intangibles are, what harm has been done to Thermidaire for the lack of its name being before the public, its stature in the market place—this type of injury. I would say it would be an exceedingly difficult task to arrive with any degree of certainty at a figure.
When regard is had, on the one hand, to the market situation with which the respondent had to contend before the appellant became its distributor, and, on the other hand, to the position of the
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distributor as itself an already known firm in that market, the respondent is undoubtedly entitled to an allowance for what it has termed loss of product identification and goodwill and for depreciation of its customer and trade relations during the three-year period of unlawful competition by the appellant. This allowance cannot, however, be assessed on the basis that ignores completely the existence of the appellant. Whatever it may turn out to be, as related to and as in addition to the estimated net profit loss of $92,017, in my opinion it cannot, because of the difficulty of putting a figure on it, lend the necessary support to make the gross trading profits of $239,449.05 an acceptable measure of liquidated damages.
I regard the exaction of gross trading profits as a penalty in this case because it is, in my opinion, a grossly excessive and punitive response to the problem to which it was addressed; and the fact that the appellant subscribed to it, and may have been foolish to do so, does not mean that it should be left to rue its unwisdom. Snell’s Principles of Equity (27th ed. 1973), at p. 535 states the applicable doctrine as follows:
The sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
This proposition comes from a statement by Lord Halsbury in the House of Lords in Clydebank Engineering and Shipbuilding Co. Ltd. v. Don José Ramos Yzquierdo y Castaneda[5], at p. 10, and was reiterated by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.[6], at p. 87. I do not think that it loses its force in cases where there is difficulty of exact calculation or pre-estimation when the stipulation for liquidated damages, as in this case, is disproportionate and unreasonable when compared with the damages sustained or which would be recoverable through an action in the courts for breach of the covenant in question: see 25 Corpus
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Juris Secundum, s. 108, pp. 1051ff. The fact that the highest amount put forward by the respondent as its actual loss was $92,017 is plainly indicative of the disproportion that resides in the exaction of gross trading profits of $239,449.05.
I would characterize the exaction of gross trading profits for a three-year period as a penalty and not as giving rise to a sum claimable as compensation by way of liquidated damages. The respondent is, however, entitled to recover its provable damages for the breach of covenant, and I would direct a reference to the Master at Toronto, Ontario to enable it to make its proof of all elements entering into such damages.
The appellant urged in this Court, as it did below, that sales of certain products ought not to be taken into account because they were not Thermidaire products within the terms of the contract. On this point I am in agreement with the courts below which rejected this submission.
In the result, I would allow the appeal on what I have called the main issue, set aside the judgments below and in their place I would direct judgment for the respondent for damages for breach of the covenants not to compete with a reference to the Master at Toronto, Ontario, to ascertain the damages. The appellant should have its costs in this Court and in the Ontario Court of Appeal. The respondent should have the costs of the trial and of the reference as ordered by the trial judge.
The judgment of Martland and Dickson JJ. was delivered by
MARTLAND J. (dissenting)—I am in agreement with the unanimous reasons of the Court of Appeal for Ontario delivered by Brooke J.A. and, accordingly, I would dismiss the appeal with costs.
Appeal allowed with costs, MARTLAND and DICKSON J.J. dissenting.
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Solicitors for the appellant: Gardiner, Roberts, Toronto.
Solicitors for the respondent: Day, Wilson, Campbell, Toronto.
1974: December 16; 1975: January 28.
Present: Laskin C.J. and Martland, Judson, Ritchie, and Spence JJ.
MOTION ON COSTS
The judgment of the Court was delivered by
SPENCE J.—I am in favour of granting the applicant's, Thermidaire's, motion to provide that there should be no costs to either party in this Court or in the Court of Appeal for Ontario.
Application allowed.
NOTE: A motion to vary the order as to costs and the reference as to damages was subsequently allowed by the Court (coram: Laskin C.J. and Martland, Judson, Ritchie and Spence JJ.) on March 26, 1975. The order of the Court was as follows:
The motion to vary the order as to costs of the trial and costs of the reference as to damages is allowed without costs, and there will be an order directing that if the damages of the respondent are assessed at more than the amount paid in by the appellant in satisfaction thereof the respondent shall have the costs of the trial but if the damages are assessed at no more than the payment in the respondent shall have the costs of the trial to the date of payment in and the appellant shall have the costs of the trial thereafter. The costs of the reference as to damages shall be in the discretion of the Master.
David H. Sandler, for the motion.
John J. Fitzpatrick, Q.C., contra.