Agricultural Research Institute of Ontario v. Campbell-High

Agricultural Research Institute of Ontario v. Campbell-High Collection Decisions of the Court of Appeal Date 2002-03-14 Docket numbers C36215 Judges Abella, Rosalie Silberman; Charron, Louise Vivianne; Cronk, Eleanore Ann Subject Civil Decision Content DATE: 20020314 DOCKET: C36215 COURT OF APPEAL FOR ONTARIO ABELLA, CHARRON and CRONK JJ.A. BETWEEN: ) ) AGRICULTURAL RESEARCH INSTITUTE OF ONTARIO and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO ) ) ) ) Thomas Bell for the appellants ) Appellants ) ) Joseph M. Gottli - and - ) for the respondents ) KAREN CAMPBELL-HIGH and DANIEL DEAN HIGH ) ) ) Respondents ) ) HEARD: January 21, 2002 On appeal from an order of Justice Patrick Gravely dated February 2, 2001, reasons reported at [2001] O.J. No. 460. ABELLA J.A.: [1] The issue in this appeal is the measurement of damages for a government’s breach of a contract to purchase a restrictive covenant from landowners. [2] In 1995, the NDP government of Ontario initiated the $20 million Niagara Tender Fruit Lands Program to assist the economically fragile tender fruit industry and to protect tender fruit lands in the Niagara region. To achieve this goal, land that was uniquely able to produce tender fruit was to be protected by a restrictive covenant under an agreement between landowners and the Agricultural Research Institute of Ontario (the ARIO) on behalf of the province of Ontario. Under the terms of the restrictive covenant, landowners and future owners were prohibited from doing anything that would “significantly impair or interfere with the agricultural capability of the land as tender fruit land”. [3] The restrictive covenant was to be registered on title, binding on subsequent purchasers, and was to run with the land. The covenant also provided that if the property were expropriated or injuriously affected, and if the ARIO was not directly eligible for compensation, the ARIO was entitled to compensation from the landowners. [4] The agreement provided landowners with compensation in return for giving up the unrestricted right to use and dispose of their land. The compensation was explained in an appraisal report and was to be determined by a formula based on agricultural considerations and the possibility of conversion of the land to non-agricultural uses. The author of the appraisal report described the method for valuing the restrictive covenant as follows: We are estimating the market value of a restrictive covenant or value in exchange of a partial taking. [Emphasis in original] To value a partial taking the real property is first valued as a whole before the taking, then again valued after the taking. The difference in value before and after is the value of the taking or the value of a right or easement, the taken portion. [Emphasis added] [5] Based on the appraisal report, the value of the restrictive covenant for regions covered by the Niagara Tender Fruit Lands Program was estimated to be in the range of $3,800 to $10,400 per acre. [6] The landowners in this appeal, Karen Campbell-High and Daniel Dean High (the Highs) applied, were accepted, and entered into a contract whereby they agreed to accept $239,674 in exchange for giving the ARIO a restrictive covenant over their land. This total was based on a valuation of the Highs’ land as being in the range of $6,800 to $10,400 per acre. [7] The transaction was scheduled to close on June 15, 1995, but was extended on consent to July 13, 1995 and then to July 27, 1995. [8] Before the transaction closed, a provincial election was held, resulting in a change in government. On July 13, 1995, the newly elected Progressive Conservative government cancelled the Niagara Tender Fruit Lands Program. The ARIO advised the Highs in writing that it would not be closing the transaction. [9] On February 9, 1996, the Highs commenced an action against the ARIO and the Crown, claiming damages for breach of contract as well as special, punitive, and aggravated damages. They moved for partial summary judgment on the issue of liability. The motion was unopposed. On April 16, 1998, Lofchik J. granted the Highs a declaration that the Crown had breached and repudiated the contract. Pursuant to a provision in the contract, he directed that damages be determined by an arbitrator. [10] On November 9, 1999, the arbitrator, the Honourable J. R. Barr, Q.C., released an interim award addressing the Highs’ entitlement to the purchase price under the contract. He concluded that the Highs were entitled to $239,674, the full price under the contract, and directed that they give the promised restrictive covenant to the Crown. [11] On January 25, 2000, the arbitrator released a second award. This award addressed the Highs’ entitlement to interest incurred because of the Crown’s breach of contract, legal costs incurred in anticipation of closing, aggravated damages, punitive damages, and costs. The arbitrator awarded the Highs: · $59,500 [1] in consequential interest costs; · $3,592.01 in legal costs; · $10,000 to Karen Campbell-High in aggravated damages for nervous upset; · $110,698.67 in solicitor-client costs; and · post-judgment interest. [12] The arbitrator dismissed the claim for punitive damages on the basis that the Crown and the ARIO’s conduct, while high-handed and cavalier, did not meet the threshold of maliciousness required for such damages. [13] The Crown sought leave from the Superior Court of Justice to appeal the arbitrator’s award of $239,674 and $59,500 in consequential interest costs. The Highs did not appeal the dismissal of their claim for punitive damages. [14] On February 2, 2001, Justice Gravely granted leave, but dismissed the appeal on the merits. He varied the arbitrator’s awards, however, by deleting the requirement that the Highs provide the restrictive covenant. On April 19, 2001, this court granted the Crown and the ARIO leave to appeal Justice Gravely’s order. [15] On appeal, the Crown and the ARIO argued that the correct test for measuring damages in this case is to determine what the Highs lost when the ARIO failed to close the transaction. Although the Highs lost the proceeds they would have received in exchange for the restrictive covenant, they still have their land unencumbered by the restrictive covenant, and therefore suffered no damages. The appellants therefore assert that awarding the Highs the full purchase price under the contract amounted to double compensation. [16] The Highs, on the other hand, argued that Gravely J. applied the correct legal test in assessing their damages, namely, to place the injured party, so far as reasonably possible, in the monetary position he or she would have been in if the contract had been fulfilled. PRIOR PROCEEDINGS (a) The Arbitration [17] The arbitrator found that the Highs were entitled to the full purchase price of the restrictive covenant under the contract, which he concluded would put them in the position they would have been in if the contract had been fulfilled: … [T]here was a contract, and it was repudiated. [The Highs] are entitled in law to be restored to the position they would have been in had the contract been performed, not the position they would have been in if there had been no agreement. To accept [the Highs’] argument would mean that a purchaser under a valid contract of sale could decide at any time prior to closing that he did not want to go through with the purchase and repudiate it at his whim. His response to the Vendor’s claim would be “You still have your land. You have lost nothing, except your out-of-pocket expenses”. This would mean that all contracts of sale of land would be contingent upon the Purchaser continuing to be willing to buy up to the minute of closing. In my view, this is not the law. [18] The arbitrator also rejected the argument that if the Highs were entitled to the full purchase price under the contract, the Crown and the ARIO were entitled to a set-off equal to the value of the covenant, since the Highs had the benefit of not having to encumber their land with the restrictive covenant. The arbitrator found that the restrictive covenant had no market value, and therefore there could be no set-off: … The agreed figure of $239,674.00 is precise. The value of [the Highs’] covenant is far from clear. … [T]he statement that the appraisal is “estimating the market value” suffers from one very serious difficulty. There is no market. [The Highs] are not in the position of being able to put their restrictive covenant on the open market. It would be of no conceivable interest to any person other than the provincial government. I am not aware of any instance in which a covenant such as the one in question has ever been valued before. … I think it is clear that the value of the restrictive covenant on the open market is zero. No one would buy it. … The one thing we are certain about is that the parties agreed to a payment of $239,674.00. This is a firm figure. It is the figure that [the Highs] agreed to pay under a contract which they have repudiated without legal justification. Payment of this amount would not be a “windfall” but would be payment of a legally assumed obligation. [19] The Crown and the ARIO also argued that giving the Highs the full purchase price under the contract would constitute double compensation. The arbitrator agreed that receiving the funds without having to give the restrictive covenant would amount to double compensation. He therefore ordered that the Highs tender the restrictive covenant originally bargained for: . . .[T]here is force in the argument that for [the Highs] to be relieved of their obligation to furnish the restrictive covenant and to be paid for furnishing it, constitutes double payment. [The Crown] says the purchase price in such circumstances would be a “windfall” and that [the Highs] cannot have both their property and the purchase price. … … [The Crown and the ARIO’s] further point is that to give [the Highs] the entire purchase price without [the Highs] giving the restrictive covenant is not equitable. It would be double compensation. They would then be in a better position after the breach than they would have been if the contract had been carried out. [20] The arbitrator accordingly concluded that the Highs were entitled to the full contract price of $239,674, so long as they tendered the promised restrictive covenant to the Crown and the ARIO. (b) The Superior Court of Justice [21] On appeal to the Superior Court of Justice, the Court addressed two issues: whether the arbitrator applied the correct legal test for assessing the damages; and whether it was open to the arbitrator to make an order equivalent to specific performance when the statement of claim and reference order referred only to damages. [22] On the first issue, relying on 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd. (1978), 20 O.R. (2d) 401, Gravely J. held that the measurement of a landowner’s loss is the difference between the purchase price and the market value of the property. The market value is generally determined by resale, and the landowner must mitigate his or her damages by obtaining the best possible resale terms. However, since resale of the restrictive covenant was not feasible in this case, the covenant had no market value and the Highs were therefore unable to mitigate their damages. As a result, the Court concluded that they were entitled to the full purchase price under the contract: …Under those circumstances, there is nothing the [Highs] could do to mitigate the damages they suffered as a result of the loss of their bargain. They have always been ready, willing and able to close the transaction. That they may be no worse off now than before the agreement was entered into is irrelevant. While there would appear to be an element of unfairness in the owners receiving the full purchase price when their farm is now not diminished in value, as it might have been by the registering of the covenant, there is no other way consistent with principle to measure the loss of the value of their bargain. The [Highs] are not required to sell their farm to try and mitigate their damages or to produce evidence of its before-and-after market value. Their agreement was to sell a covenant, not the farm. Furthermore, as the Arbitrator found, the whole point of the transaction for the owners was to pay down their debt and remain tender fruit farmers forever. From their perspective, therefore, the negative impact of a registration of the restrictive covenant may not have been very significant. There was no evidence called by the [Crown] about the ultimate effect on the financial welfare of [the Highs] of the presence or absence of the registration. Conceivably, future zoning or other government regulation could even render the registration of the covenant of little consequence. In my view, the Arbitrator was correct in finding that the owners were entitled to be paid damages equivalent to the full purchase price. [23] Both counsel conceded that the requirement imposed by the arbitrator that the Highs tender the restrictive covenant was inappropriate in the circumstances. The Court accordingly deleted this condition: Both counsel suggest the Arbitrator should not have made the payment of damages contingent upon the tendering by the owners of a restrictive covenant. That directive, they suggest, was in the nature of a specific performance order. There was no claim for specific performance in the action and the Arbitrator’s only mandate in the referral order was to assess damages. When the reasons of the Arbitrator are read as a whole, it is clear the assessment of damages was made on its own. The two portions of the award are not linked and the condition may be viewed in the nature of an obiter. [Counsel for the Crown and the ARIO] makes clear his clients at this point have no interest in receiving or registering a restrictive covenant. The Niagara Tender Fruit Lands Program is at an end. This pre-condition to the payment of the damages no longer has any significance and should be removed. [25] It is a fundamental principle of damages in contract law that the innocent party to a breach of contract is entitled to compensation for the loss of his or her expectation interests. In S.M. Waddams, The Law of Damages, 2d ed. (Toronto: Canada Law Book, 1991) at para. 5.10, the principle is articulated as follows: One of the most significant of all economic interests is the benefit of a favourable contract. A person who has made a good bargain is treated by the law for many purposes as one who has a present right, the value of which is measured by the value of the promised performance. The primary manifestation of this approach is reflected in the measure of damages for breach of contract; the contract breaker is bound to make good the loss caused by the breach, a loss measured by the value of the performance promised. The notion of an enforceable contract as a present valuable right affects many other branches of the law where the measure of damages naturally reflects the primary measure for breach of contract. [26] The principle that an innocent party to a breach of contract is entitled to compensation for lost expectation interests means that the party should, insofar as is reasonably possible, be placed in the monetary position he or she would have been in if the contract had been performed. As the Privy Council held in Wertheim v. Chicoutimi Pulp Co., [1911] A.C. 301 (P.C.) at 307: [I]t is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed ... That is a ruling principle. It is a just principle. [27] The measurement of damages in contracts for the purchase and sale of interests in land flows from these general principles. In 100 Main Street Ltd., which dealt with a contract for the purchase and sale of land, Morden J.A. began his analysis by observing at pp. 414-415 that “[t]he most general principle relating to the assessment of the damages is that the plaintiff is entitled to be put in the position it would have been in if the contract had been performed, so far as money can do it”. He held that in a contract for the purchase and sale of land, the vendor is entitled to the contract price less the market value of the land. He also concluded, at pp. 422-423, that: ... The basic principle is that the onus is on the plaintiff to prove its damages on a reasonable preponderance of credible evidence. Its damages are that sum of money which would put it in the same position as if the defendant had performed. The well-established method for determining this is to give the difference between the contract price and the market value. It is basic that the plaintiff cannot have the contract price and the land. Thus, I do not think that the plaintiff has proven its case by merely proving the contract price and then the defendant’s breach, in the expectation that he will recover the full price unless the defendant proves that “the property could be sold to someone else without loss to the plaintiff”. [Emphasis added] [28] The question remains, however, whether these classic principles for assessing damages should be varied when the government is one of the contracting parties. In my view, they should not. In Wells v. Newfoundland, [1999] 3 S.C.R. 199, the Supreme Court of Canada held that a member of the Public Utilities Board was entitled to damages after the government of Newfoundland abolished his position under the Public Utilities Act. In the course of his reasons, Justice Major made the following relevant observations at pp. 216, 218-219, 221: . . . [T]here is no question that the Government of Newfoundland had the authority to restructure or eliminate the Board. There is a crucial distinction, however, between the Crown legislatively avoiding a contract, and altogether escaping the legal consequences of doing so. While the legislature may have the extraordinary power of passing a law to specifically deny compensation to an aggrieved individual with whom it has broken an agreement, clear and explicit statutory language would be required to extinguish existing rights previously conferred on that party. . . . In a nation governed by the rule of law, we assume that the government will honour its obligations unless it explicitly exercises its power not to. In the absence of a clear express intent to abrogate rights and obligations – rights of the highest importance to the individual – those rights remain in force. To argue the opposite is to say that the government is bound only by its whim, not its word. In Canada this is unacceptable, and does not accord with the nation’s understanding of the relationship between the state and its citizens. . . . The principled restriction on the Crown’s ability to breach contractual obligations without consequence was endorsed by Professor P. W. Hogg, in Liability of the Crown (2nd ed. 1989), at pp. 171-72, where he wrote: I acknowledge the possibility that, on rare occasions, the Crown may feel compelled by considerations of public policy to break a contractual undertaking. If there were no doctrines of executive necessity, the ordinary law of contract would apply, and would require the Crown to negotiate with the other party for a variation or release, or to pay damages for its breach of contract. That is surely the right result. It provides compensation for the injured contractor. It requires the public purse to bear the cost of the change of public policy. . . . The Crown had a contractual obligation to the respondent, which it breached by eliminating his position. As his right to seek damages for that breach was not taken from him by legislation, he is entitled to compensation. [29] But although the general principles for assessing damages in breach of contract cases should be applied where the government is one of the contracting parties, that does not mean that courts should ignore how uniquely disconcerting a contract breach is when it is the state that breaks a bargain with one of its citizens. The government occupies a unique – and uniquely powerful – role in its relationship with the public. This power imbalance, in turn, creates a duty on the government to act in a way that enhances public confidence in reliable fairness from the government. [30] Governments owe, and their citizens expect to receive, the benefit of a duty of good faith. When governments breach their agreements with a member of the public, they do more than violate contractual obligations; they also impair that person’s legitimate expectations that the state will respect and comply with its legal obligations. [31] But in my view any opprobrium attaching to governmental breaches of contractual obligations should not find expression by dislodging the underpinnings of the principles relating to damages. If there was no loss, none should be attributed merely because the offending party is the government. [32] There are in any event existing responsive remedies to which governments are vulnerable for breaches of contract for the purchase and sale of interests in land that provide, in my view, the requisite disincentives. They include aggravated damages, such as were awarded in this case; and punitive damages, which were not. The evidence in each case will determine whether such damages are justified, but the fact remains that they are available, where appropriate, to sanction governmental breaches and reflect public censure. [33] Applying the foregoing analysis to the facts in this case, I see the object of the exercise as to put the Highs, insofar as is reasonably possible, in the position they would have been in had the contract been performed. [34] I accept Justice Gravely’s observations that mitigation is not a realistic option for the Highs. Clearly, no one but the government would have an interest in purchasing the restrictive covenant under consideration in this case. But that, for me, does not lead inevitably to the conclusion that the appropriate measure of damages is the full purchase price of the covenant. The compensable expectation interest lost by the Highs cannot be assessed by looking only at the value of the restrictive covenant. It must be considered along with the other half of the bargain, namely, that the Highs would only get the money if they gave a covenant permanently restricting the use of their land. [35] If the contract had been fulfilled, the Highs would have received $239,674 for giving the Crown a restrictive covenant in perpetuity, preventing the land from being sold for any use other than one consistent with tender fruit farming. Since the government no longer seeks such a restrictive covenant, the Highs are free to dispose of their land to any interested purchaser and for any legal use. [36] The amount to be paid for the restrictive covenant was based on a formula designed to compensate landowners for the loss inherent in not being able to sell or use the land for other general commercial purposes. The Highs’ recovered freedom from the restricted use of their land is therefore of a value comparable to the price of the restrictive covenant. While the Highs lost the money they would have received in exchange for restricting their land use to tender fruit farming, they gained back the unrestricted right to sell their property for any authorized use, a financial ability approximating the value of relinquishing it. They have, in short, regained exactly what they would have given up had the bargain been fulfilled. In this sense, therefore, there is no loss. [37] To permit the Highs to keep both the unencumbered land and the value of the restrictive covenant amounts, in my view, to double recovery. The rationale against this form of compensation was explained in V. Di Castri, The Law of Vendor and Purchaser, vol. 2, looseleaf (Toronto: Carswell, 1989) at 17-133: While the rule against double satisfaction is one of some intricacy, its rationale is that the claimant should not be permitted to receive in compensation a total amount greater than the loss he has suffered. (See also G.H.L. Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at 788; and Laird v. Pim et al. (1841), 7 M. & W. 474, the juridical source of the principle that an innocent party to a breach of contract is not entitled to both the land and its value, cited with approval in 100 Main Street). [38] What the Highs are entitled to are their actual losses, based on their reasonable expectations flowing from the fulfilment of the contract. Had the contract been fulfilled, it is true that they would have received $239,674, but it is also true that they would have been severely restricted in their ability to sell their land. The breach has, therefore, anomalously restored their ability to sell their land freely and reversed their expectation that their land use and disposal were perpetually restricted. If the Highs in this case were to receive the full purchase price for encumbering their land, while at the same time retaining the right not to encumber their land, they would be in a better position than if the contract had been performed. [39] For all of the foregoing reasons, in my view the award of the full purchase price of the restrictive covenant is not justified in the circumstances. [40] The Crown and the ARIO also take issue with the arbitrator’s award to the Highs of $59,500 in consequential interest costs, which was upheld by Gravely J. This award was based on the uncontradicted evidence of an accountant that the landowners had sustained a loss in interest charges that would not have been incurred if the transaction had been completed. In view of the evidence that the interest costs would not have been sustained if the breach had not occurred, this was a proper award. The Crown acknowledges that if the consequential interest costs are found to have been properly awarded, the Highs are entitled to continued interest from the date of the breach to the date of the appeal, raising the amount to $81,061. CONCLUSION [41] I would allow the appeal; set aside the order of Gravely J. dismissing the appeal from the arbitrator’s award, but retain his deletion of the requirement to tender a restrictive covenant; and vary the arbitrator’s award by increasing the consequential interest costs to $81,061 but deleting the award of $239,674. [42] In the circumstances, I would order the Crown to pay the costs of this appeal. Signed: “R.S. ABELLA J.A.” “I AGREE LOUISE CHARRON J.A.” “I AGREE E.A. CRONK J.A.” RELEASED: “RSA” MARCH 14, 2002 [1] The arbitrator had originally awarded $56,500 but later amended the amount at the request of the parties.