Legal Blog

Mitigation Updated

In our August 2009 newsletter (see “Mitigation”), we discussed Southcott Estates Inc. v. Toronto Catholic School Board (2009) 78 R.P.R. (4^th) 285 (Ont S.C.J.). The defendant appealed and the Court of Appeal has now rendered its decision: 2010 CarswellOnt 4721.

Summary

The Catholic School Board entered into an agreement to sell land that was surplus to its needs. The sale, which was conditional on certain municipal approvals, did not close. The trial judge found that the Board breached the agreement and this breach caused loss to the purchaser, namely the chance to close the transaction.

The purchaser was a wholly owned subsidiary of a developer. It was incorporated for one purpose: to buy and develop the lands. The purchaser did not claim a loss of bargain. It agreed that the value of the lands had not increased between the date of the agreement and the date of closing. Rather, the purchaser claimed that it had consequential damages: it lost the profit it would have made had it been able to develop the lands.

The Board argued that the purchaser had not even attempted to mitigate its damages by purchasing replacement lands. The judge agreed and stated, “The plaintiff admitted that it never had any intention and never tried to mitigate the damages. The plaintiff was a single purpose company incorporated solely for the purposes of this project with no assets other than the money advanced to it by (the parent) for the deposit. It was never intended that it would purchase other land.”

The Board’s expert witness testified that 81 sales of raw land had taken place between the closing and trial dates. The judge disregarded this evidence, stating that there was no evidence that these properties (i) were available to the public, only that they had been sold;  (ii) could be developed; and (iii) were comparable to the lands.

The judge therefore held that the Board failed to prove that the purchaser did not mitigate its damages. The judge assessed those damages at $1.9 million.

Our Take

We commented on the decision as follows:

“We have some problem with this finding. We understand that the standard for mitigation is very low and that the onus is on a defendant to prove that there was no mitigation. However, we would have thought that once the purchaser admitted that it made no effort to mitigate and had no intention of mitigating, the onus regarding mitigation should shift to the purchaser to prove that its lack of effort in mitigation did not prejudice the Board.”

On Appeal

The Court held that the trial judge made three errors, reversed the decision, and dismissed the purchaser’s action. Those errors were:

1.   The purchaser’s admission that it had no intention of taking any steps to mitigate its loss was sufficient to satisfy the Board’s onus to prove failure to mitigate and shifted the onus to the purchaser to prove that, even if it had attempted to mitigate, it could not have done so.

2.   By requiring the Board to prove the precise manner in which the 81 prior sales of raw land had taken place and the profitability of those individual parcels, the trial judge raised the bar too high for the Board’s burden of proof.

3.   The trial judge improperly ignored the fact that the purchaser’s parent company subsequently purchased raw land and knew that investment quality land was available on the market.

The Court summed up the purchaser’s problems as follows:

“The plaintiff in this case was Southcott, a distinct legal entity, and the issue is whether it took reasonable steps to mitigate its damages. Southcott cannot escape or avoid its duty to mitigate damages by arguing that it was a part of Ballantry and that Ballantry would have purchased the other lands even if this transaction had not failed. Thus, the duty to mitigate rests upon Southcott. Southcott decided not to take any steps to mitigate damages. Ballantry’s actions demonstrate that other good quality investment properties were available and that Southcott could have mitigated its losses. The controlling mind of Southcott decided not to put any assets in Southcott’s name to avoid exposing those assets to the risks associated with Southcott’s litigation against the Board. Southcott and Ballantry were certainly entitled to claim the legal benefit of limited liability by virtue of Southcott’s distinct legal personality. However, Southcott and Ballantry also have to live with the consequences of the fact that because Southcott has a distinct legal personality, it is able to assert a claim for damages and, as a party asserting that claim, it thus bears the ordinary duty of mitigating its loss.”

Costs

The Board had offered to settle the action well before trial by payment of $100,000, interest, and costs. The Court therefore awarded the purchaser $100,000 partial indemnity costs to the date of the offer and awarded the Board partial indemnity costs of $500,000.00 from the date of the offer. The Court awarded the purchaser its costs to the date of the offer because the purchaser had been successful in proving that the Board breached the agreement.