Construction law practitioners must keep their eyes and ears open to the evolving case law in other areas of the law. That case law may have direct application to building contract issues.

This fact is especially true for the assessment of damages. Because of the numerous contracts involved in a building project, a breach of one contract may cause the innocent party to lose a chance to recover, or avoid a loss, on another contract. But is the loss of a chance to negotiate a better deal on another contract sufficient?

This is the issue that the recently Ontario Court of Appeal addressed in Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544. While the facts arose from a franchise relationship, the principles set forth by the Ontario Court of Appeal are directly applicable to construction law due to the intersecting contractual relations in both settings.

The Background

The facts arose from economic downturn in 2008-2009 and General Motors’ efforts to save itself from bankruptcy. GM wanted to avail itself of financial assistance from the U.S. and Canadian governments, but to do so it had to shed financial liabilities and put itself on a sounder financial footing. This involved terminating many franchises with its dealers.

In this case, the trial court found that by May 2009, the law firm Cassels Brock was acting for three of the parties to this tangled web: the Canadian government, certain specific GM Canada dealers and the GM Canada dealers association. GM offered a buy-out proposal to the dealers, including payment of a termination amount to the terminated dealers. Cassels Brock told the dealers they could not act for the dealers on that proposal. After many dealers accepted a buy-out from GM Canada, they sued Cassels asserting that it had been in conflict of interest. The trial judge and the Court of Appeal found that Cassels Brock had been in breach of its retainer contract with the dealers. The question then became: what is the amount of damages to which the dealers were entitled?

The dealers asserted that, had they had independent counsel, they would have been able to negotiate a much better financial settlement with GM Canada, and that by reasons of Cassels Brock’s conflict of interest, they had lost the chance of making a better settlement with GM Canada. Cassels Brock asserted that the dealers had to show that they had suffered a loss on a balance of probabilities, not just on the basis of a loss of a chance, and that in any event, the dealers’ assertion that they would have made a better settlement with GM Canada was purely speculative and not a sufficient basis to award damages.

Judgment of the Court of Appeal

Both the trial judge and the Court of Appeal held that the dealers’ damages were to be assessed based on the loss of a chance to make a gain or avoid a loss, not on the basis of the balance of probabilities of making a gain or avoiding a loss. That is because the dealers’ claims were in contract, not tort. In contract, the existence of damage is not an element in determining liability, while it is in tort. The dealers had satisfied the evidentiary test for contractual liability – on a balance of probabilities. When it came to damages, the courts held that the loss of a chance to negotiate a better deal was a sufficient basis to assess damages.

The Court of Appeal quoted from its previous decision in Folland v. Reardon (2005), 74 O.R. (3d) 688 (C.A.) to explain its reasoning:

“Whatever the scope of the lost chance analysis in fixing liability for tort claims based on personal injuries, lost chance is well recognized as a basis for assessing damages in contract. In contract, proof of damage is not part of the liability inquiry. If a defendant breaches his contract with the plaintiff and as a result a plaintiff loses the opportunity to gain a benefit or avoid harm, that lost opportunity may be compensable. As I read the contract cases, a plaintiff can recover damages for a lost chance if four criteria are met. First, the plaintiff must establish on the balance of probabilities that but for the defendant’s wrongful conduct, the plaintiff had a chance to obtain a benefit or avoid a loss. Second, the plaintiff must show that the chance lost was sufficiently real and significant to rise above mere speculation. Third, the plaintiff must demonstrate that the outcome, that is, whether the plaintiff would have avoided the loss or made the gain, depended on someone or something other than the plaintiff himself or herself. Fourth, the plaintiff must show that the lost chance had some practical value…..” (underlining added)

The Court of Appeal then said:

“Recently, in Berry v. Pulley, 2015 ONCA 449, 335 O.A.C. 176, at para. 70, this court described a “two-step framework” for the determination of a loss of chance claim. Associate Chief Justice Hoy explained, at para. 72, that the court must first determine if the four criteria set out in Folland are met. If they are, then the court proceeds to the second step and “will award damages equal to the probability of securing the lost benefit (or avoiding the loss) multiplied by the value of the lost benefit (or the loss sustained)”.”

Having held that the loss of a chance gave rise to compensable damages for breach of contract, the Court of Appeal referred to the following facts, among many others, in holding that the opportunity of negotiating a better deal with GM Canada fell within the realm of a compensable loss of a chance:

“GMCL had a GM-approved fund of $218 million to conclude the WDAs with 290 dealers. In the end, it offered $143.5 million to 240 dealers. This gave GMCL the financial flexibility to improve the compensation offered under the WDAs….The considerable and varied risks of a CCAA filing by GMCL to both GMCL and GM itself outweighed the benefits of such a filing and would have operated to make GMCL amenable to discussions with the dealers…These factual findings, which were available on the evidence, provide compelling support for the inference that it was likely, at the end of the day, that GMCL would have negotiated with the dealers about the WDAs had the negotiation option been put on the table and had the dealers acted as an organized bloc in opposition to the offers under the WDAs……The amount of the potential chance (to which the percentage of potential chance can be applied) is the difference between what the defendant offered and what the defendant internally had been authorized to offer.”

Discussion

These conclusions are important and readily applicable to a building contract dispute.

First, since that dispute is based on a breach of contract, not a tort, then the loss of a chance, and not the probability of loss, is a sufficient basis to award damages to the plaintiff.

And second, according to this decision, the loss of a chance to negotiate a better contract with a third party falls within the loss of a chance.

The first point – that contract damages can be awarded based on a loss of a chance – has already been applied in the building contract setting. In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, the damages of the plaintiff, who was wrongly not chosen as the successful tenderer, were assessed based upon the chance of site conditions and related performance problems impacting the amount of damages. In Maritime Excavators (1994) Ltd. v. Nova Scotia (Attorney General) (2000), 183 N.S.R. (2d) 236 (N.S.S.C.), the trial judge assessed the loss of a chance of the plaintiff being awarded the tender, and awarded the plaintiff its full damages, finding that the plaintiff would have been 100% likely to have been awarded the tender if it had been properly conducted. In Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town) (2008), 262 N.S.R. (2d) 163, the Nova Scotia Court of Appeal applied a 35 percent reduction to the plaintiff’s damage for the possibility that it would not have been awarded the tender even if properly conducted.

Now, based upon the Trillium Motor decision, the opportunity to use the “loss of a chance” approach to the assessment of damages in building contract cases is, arguably, much broader. The loss of a chance of negotiating a better contract with a third party now falls within the scope of assessable damages.

There may be many contracts in a building project. A breach of any of those contracts may give rise to the opportunity to claim a loss of an opportunity to negotiate a better contract with another party to the building project. For example, a breach of contract by the owner may cause the contractor a loss of a chance to negotiate a better contract with a subcontractor or supplier. A breach of contract by a contractor may cause the loss of a subcontractor’s opportunity to negotiate a better deal, or a better settlement agreement, with a supplier or other subcontractor. The combination of factors that may give rise to a claim for recoverable loss of a chance of negotiating a better deal seems only limited by the number of contracts or potential contracts involved in the project.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, section 6(d)

Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544

Building contract – assessment of damages – loss of a chance – negotiation of contract

Thomas G. Heintzman O.C., Q.C. LL.D (Hon.), FCIArb                                         August 2, 2017

www.heintzmanadr.com

www.constructionlawcanada.com