Mitigation of Damages in a Disrupted Marketplace

By Matthew Law and Carter Liebzeit, Lax O'Sullivan Lisus Gottlieb LLP

INTRODUCTION

In 2020, we saw significant disruptions to the retail, travel, entertainment, and real estate industries, among others. Employees across the country were temporarily or permanently laid off or asked to work from home. It is not yet clear what 2021 has in store, but it is clear the legal fallout from 2020 will continue for several years at least. Courts have already seen a marked increase in claims dealing with breached contracts, force majeure clauses, negligence claims, wrongful dismissals, insolvencies, and insurance disputes.

The typical remedy for these cases is of course a damages award. It is widely understood that damages aim to restore a wronged party to the position they would have been in, if not for the commission of a tort or a breach of contract. The calculation of damages awards is always highly fact-specific. But there are critical principles that inform the analysis, including the duty to mitigate one’s damages.

Mitigation refers to the well-established rule that a party cannot sit back and allow its losses to accumulate when reasonable steps were available to prevent or minimize those losses. While the duty to mitigate can often have a significant impact on the damages a Court awards, the principle does not attract much judicial ink. It is rarely the focal point of a judgment and is not well understood in the general legal community.

What does it mean to “mitigate” damages? What does mitigation look like in specific areas of law such as goods and services, real estate, commercial leasing, and employment? And what can parties do to pro-actively address mitigation concerns?

This article provides an overview of the key principles of mitigation, how those apply in different areas of the law, and practical guidance on what steps to take (for both sides to a dispute). In each case, evidence about industry standards and market conditions will be important to inform the scope of the duty to mitigate and to ultimately inform the court’s calculation of its damages award—the most important issue from a client’s perspective.

GUIDING PRINCIPLES

Chief Justice Laskin, writing for the Supreme Court, explained that a plaintiff’s ability to recover damages “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 plaintiff.”1

There are several rationales for the duty to mitigate. First, it complements the principle of causation: if you could have avoided damages, in a sense the other party did not cause those damages. Second, it is also a matter of fairness and common sense—one of the countless areas where the law imposes a duty on parties to act reasonably. Third, mitigation is good policy: it encourages employees and companies to get back on their feet, contributing to the economy instead of sitting back and letting their losses pile up.

Mitigation applies in both breach of contract and tort cases. The onus is always on the defendant to show, on a balance of probabilities, that the plaintiff failed to mitigate its damages. The defendant must show that if the plaintiff had taken the appropriate efforts to mitigate, there would have been opportunities available to do so—for example, an alternative supplier of goods, or alternative employment.

The adequacy of mitigation efforts is a question of fact, taking into account all of the circumstances. Defendants do not need to show a specific opportunity that would have allowed the plaintiff to mitigate its damages. As an example, a defendant does not need to show that a terminated employee seeking 24 months’ pay in lieu of notice could have been hired at a specific alternative employer; it is enough to show that on a balance of probabilities the employee would have found a job had he or she attempted to do so.

Courts have noted that “[t]he duty to mitigate is cloaked in reasonableness.”2 The plaintiff is not held to a standard of perfection and Courts recognize that the plaintiff is only faced with the dilemma of how to mitigate because of the defendant’s breach.

Plaintiffs are not required to spend unreasonable amounts of their own money in order to mitigate. Nor are they expected to jeopardize their reputation or long-term interests, which is made especially clear in the employment context (discussed below).

Typically, damages are assessed at the date of the breach of contract. Courts, however, have a “general discretion” when assessing damages including with respect to the length of time the plaintiff had to reasonably mitigate. Mitigation is focused on market value, and the concept of market value presumes both reasonable time for exposure to the market and reasonable marketing efforts. The question is whether there was an “unreasonably missed” opportunity.3

The costs and expenses incurred in taking steps to mitigate may be claimed, but only where those costs and expenses were reasonable and truly incurred in mitigation of damages.4 If a plaintiff expends reasonable amounts of money in an ultimately unsuccessful attempt to mitigate, it can recover those amounts as additional damages notwithstanding the fact that the damages would have been lower had the plaintiff not attempted to mitigate at all.

Where amounts are earned in mitigation they will reduce the amount of damages owed to the plaintiff. Often in commercial disputes a plaintiff will have entered into subsequent contracts or pursued subsequent opportunities, and the defendant will argue that these opportunities should be taken into account for mitigation purposes. For post-breach benefits to be deducted from the damages award on the basis that they were amounts in “mitigation”, there must be a sufficient link to the original breach.

In Windmill Place, the Supreme Court cited British Westinghouse for the principle that “the subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business”. In Windmill Place, a subsequent lease for another portion of a commercial complex could have proceeded with or without the prior tenant, so the amounts received from the subsequent lease were not deducted from the damages owed by the prior tenant for breach of contract.5

MITIGATION IN SPECIFIC CONTEXTS

Sale of Goods and Services

The sale of replaceable goods or services is a straightforward scenario for mitigation purposes.

For a seller of goods not accepted by the buyer, the amount of damages is the difference between the contract price and the market price at the time of the buyer’s refusal to accept, or the time the goods ought to have been accepted. For a buyer of goods, the amount of damages is the difference between the contract price and the market price when the goods ought to have been delivered or at the time of the refusal to deliver. The same analysis applies in the case of services, though what constitutes an equivalent or adequate replacement is typically more fraught than in the case of goods.

This formula is codified in sections 48(3) and 49(3) of Ontario’s Sale of Goods Act and similar legislation in other provinces. As an example, in John Ziner the contract value of plywood was approximately $180,000 and the market value at the time of the non-delivery was about $200,000, so the $20,000 difference was awarded to the innocent buyer.6

Sections 48(3) and 49(3) are both limited by the words “where there is an available market for the goods in question.” If goods or services are irreplaceable, a claim for specific performance may be more appropriate (discussed below). Assuming there is an available market, the claimant should enter that market at the time of the breach or as soon as practical.

In the current pandemic, it may not be possible to mitigate immediately by finding a new buyer or seller, but the requirement is not to act perfectly; it is to act reasonably. If there is no replacement buyer in a specific market, opportunities in alternative markets might be factored into the mitigation equation. For example, a seller might turn to distressed markets to unload their product, or a ship owner might replace a single long-term charter with several short journeys on the spot market.7 Both examples represent reasonable attempts to mitigate, though not eliminate, the plaintiff’s loss, notwithstanding they may be outside the plaintiff’s ordinary course of business.

If a party announces its intention not to perform the contract ahead of the performance date, known as “anticipatory repudiation”, the innocent party has an option to accept the repudiation (in which case the contract is terminated and the innocent party must mitigate) or reject the repudiation (in which case the contract subsists and the duty to mitigate may only arise on the date of non-performance).8

Sale of Real Estate

The principles applicable to real estate transactions are similar to those for goods and services.

Sellers have a duty to mitigate by re-listing the property. Best practices include posting a sign in the window of the premises, hiring a real estate agent, and using the Multiple Listing Service to promote the property, though none of these steps is determinative. If a property is widely advertised and sold on the open market within a reasonable window, it will be difficult for the defendant to argue the plaintiff should have done more or less to mitigate.

Holding onto the property is another option, but in this case the seller’s damages are the difference between the contract value and the market value when the vendor “should have gone into the market” to re-sell.9 In recent years, Ontario courts have developed an expectation that data regarding mitigation in real estate markets is to be presented through experts.10

The 2019 Ontario Court of Appeal case of Azzarello showed policy considerations will inform the duty to mitigate. The court held that when a purchaser refuses to close a transaction due to a decline in the market and later asks to close the transaction at a reduced price, the seller is not required to accept a reduced offer from that purchaser in the name of mitigation, as it would “encourage purchasers to default, particularly in a falling market, and to offer a lower price for the same property, leaving vendors with the risk and expense of recovering the balance of the original contract price in an action. The duty to mitigate does not go that far”.11

A key caveat is that mitigation obligations only arise when there is a claim for damages. In real estate cases, buyers often seek specific performance instead of damages. If the claim for specific performance is justified, the buyer need not mitigate its losses by seeking an alternative property. But whether the claim is justified can be difficult to assess.

Specific performance is an equitable remedy requiring the parties to perform the contract. It is only available if damages would not fully compensate for the loss; typically, where the property is “unique” in some way.

The Supreme Court in Southcott clarified the law surrounding specific performance. It acknowledged that even if a claim for specific performance is rejected, if there was some “fair, real and substantial justification” for pursuing the claim, then the decision not to mitigate may be reasonable.

In Southcott, the Court concluded that claiming specific performance without taking any steps to mitigate was not justified. The case concerned a parcel of vacant land that the buyer intended to use for a medium-density residential development. Expert evidence showed there were 81 parcels of vacant development land in the Greater Toronto Area which were suitable for this purpose. The Court narrowed the scope of specific performance in real estate cases, noting “residential, business and industrial properties are all mass produced much in the same way as other consumer products”—in other words, they are replaceable. The Court therefore concluded it was unreasonable to do nothing to mitigate damages after the deal fell through.

Southcott also grappled with the scope of a single purpose corporation’s duty to mitigate. The single purpose corporation took no steps to mitigate after the failure to close, yet other entities within the larger Ballantry family of companies pursued various redevelopment opportunities after the breach. The Court concluded that using single purpose corporations comes with benefits (such as the corporate veil) but also the duty to mitigate: “If single purpose corporations were not required to mitigate their losses, this could expose defendants contracting with such corporations to higher damage awards.” Given the abundance of other real estate opportunities, Southcott failed to mitigate. The Supreme Court upheld the Ontario Court of Appeal’s decision to award $1 in nominal damages.

Plaintiffs should also be aware of adverse inferences if they are unwilling to disclose where funds devoted to a specific transaction were later spent. For example in Akelius the plaintiff buyer was going to devote $240 million to 7 investment properties, but the defendant sellers failed to close the transaction. Toronto real estate values skyrocketed over the following years, and the plaintiff eventually claimed $50 million in damages for lost opportunity. The plaintiff’s failure to disclose details of how it used the funds earmarked for the transaction led the court to draw an adverse inference that the plaintiff had, in fact, mitigated its damage elsewhere with other opportunities. Damages were limited to $775,000, reflecting costs thrown away.12

Commercial Leasing

In commercial leasing situations the calculation is generally similar to cases involving the sale of land. If there were two years left on a lease at $3,000 per month when the tenant repudiated the lease and the landlord accepted the repudiation, if the landlord (acting reasonably) is able to find a new tenant to take over the premises for $2,000 per month, then the landlord can sue the tenant for the $1,000 per month difference for the remainder of the lease term. If a landlord does not make a reasonable effort to re-let the premises, it may be awarded only nominal damages.

The key qualifier on the paragraph above is that the landlord must have accepted the repudiation, bringing the lease to an end. The Supreme Court in Highway Properties gives the landlord the option to instead “hold the tenant to the lease”. In this case there is arguably no duty of mitigation and the commercial tenant remains responsible for rent until the end of the lease term.13 Justice Perell in Pet Valu noted that when this scenario arises courts generally hold that the landlord has no duty to mitigate if the landlord chooses to keep the lease alive. However, he added that “the point of when, if at all, a landlord must accept a termination and mitigate, rarely arises because unlike the case at bar, most defaulting tenants have no financial means to pay accruing rent and so there is no advantage to the landlord in keeping the lease alive.”14

Some recent commentary calls into question whether it is good policy to allow a plaintiff landlord to sit back and let its losses accrue until the expiry of a commercial lease. In Panther Sports Justice Woolley of the Alberta Court of Queen’s Bench refused to grant summary judgment in favour of a landlord who sought rent in full after the tenant vacated the premises. The landlord argued it could insist upon payment under the lease without a requirement to attempt to re-let. The tenant argued there was a duty to mitigate. Justice Woolley cited commentary from academics and the BC Law Reform Commission suggesting the area is ripe for reform. She suggested the Supreme Court’s approach to specific performance and mitigation in Southcott makes this area amenable to change, noting “I am troubled by the idea that the law would permit a landlord to sit back and allow losses to accumulate, when the landlord through reasonable steps could avoid them”.15

A likely increase in the number of repudiations by commercial tenants during COVID-19 might force courts to confront this issue and it is an area worth monitoring.

Employment Law

Employment contracts are a unique breed. The employer-employee relationship is one of imbalance; courts tend to recognize this by forgiving imperfect employee mitigation attempts. Courts also tend to respect the employee’s long-term interests and do not expect them to accept positions that might hamper their careers solely for the purpose of mitigation.

A trio of Ontario Court of Appeal decisions from the past decade clarifies a number of situations in which there is no obligation for the employee to mitigate.

In Brake, the Court confirmed that statutory entitlements, including minimum notice periods under the Employment Standards Act as well as Employment Insurance benefits, are not damages. These amounts are thus not subject to mitigation—they are entitlements, and that does not change just because there is active litigation.16 In the case of EI benefits, which are becoming increasingly prevalent during the pandemic, courts do not want to reward employers by deducting them from damages awards. They are not considered amounts earned in mitigation. Instead the government now requires that the employee return EI benefits to the government after receiving damages for the wrongful dismissal.

In Bowes, the Court noted that where there is a liquidated damages clause in a contract (such as a fixed notice period upon termination) there is no duty to mitigate unless the contract features clear language to the contrary.17 The idea is that these are not damages for wrongful dismissal, but instead for a contractually specified sum. The parties contracted for certainty and demanding mitigation would be inconsistent with this bargain. Howard similarly confirmed that fixed-term employment contracts are not subject to mitigation.18

Mitigation is a well-established concept in the employment law world. In recognition of the disruption inherent in termination, courts typically find it is reasonable for an employee to wait a month or two before starting their job search. Employees are also not required to take alternative jobs that come with far lower pay and prestige. The job must be similar in “status, hours and remuneration”.19

The question of whether employees need to look outside their narrow field of expertise will be highly fact-specific, but in the current pandemic it is at least arguable that terminated employees should be casting a wider net in their job search. The context will also be important. For instance, the Alberta Court of Appeal has held that sending a resume and a few job applications without any broader plan or list of potential employers “might suffice in a small town” but was “totally inadequate” in the larger city of Edmonton, and the employee therefore failed to mitigate.20

With many employers imposing temporary layoffs or reductions in work quality or conditions, there may be a rise in constructive dismissal claims, which raise difficult questions of mitigation. Although employees generally do not have an obligation to mitigate by accepting a lesser job with the same employer, they may have a duty to do so if the conditions for the return to work following a constructive dismissal are not objectively unreasonable.21

The 2019 Ontario case of Gent shows the pitfalls of ignoring mitigation in these settings. An employer temporarily laid off an employee. He sued for constructive dismissal. The employee was recalled to work shortly thereafter but declined to return. The Court reduced his damages award to just 3.5 weeks' pay for the layoff period.22

An Ontario court in Devlin took the notable approach of retaining jurisdiction over mitigation going forward. The case reached the court while the reasonable notice period was still in effect. There was a live issue as to whether the employee was properly mitigating. The Court held that “if he makes insufficient efforts to mitigate or if he does succeed in at least partial mitigation, either party can apply to me to vary this order”. This type of approach might be well-suited to a case arising during the pandemic, when circumstances are constantly changing.23

BEST PRACTICES TO PREPARE FOR MITIGATION ISSUES

For the Innocent Party—Potential Plaintiff

For potential plaintiffs, the first priority is identifying whether there is a duty to mitigate. Review contractual language and the overall circumstances to determine whether there is a strong claim to specific performance, in which case attempting to mitigate may be neither necessary nor beneficial for the claim. A plaintiff can claim damages and specific performance as alternative remedies and elect one or the other prior to trial, but the actions the plaintiff takes will necessarily be influenced by whether there is a stronger claim to one or the other.

If there is a duty to mitigate, documenting efforts to do so is key. Businesses should keep records and meeting minutes when they discuss potential mitigation opportunities. They should also document attempts to find alternative buyers/sellers, and fluctuations in the relevant markets. Employees should create a plan for their job search, document their applications, and carefully consider any job offers.

If an apparent mitigation opportunity is not pursued or realized, there should be a record supporting this decision. Further, in the case of a business that receives benefits or new contracts subsequent to the breach of contract, documentation that supports the position that those benefits/contracts are independent of the breach and would have occurred in any event is essential.

For the Breaching Party—Potential Defendant

For potential defendants, the best course of action is to emphasize the other party’s duty to mitigate early and often. Reasonable “with prejudice” suggestions on how to mitigate will help point the plaintiff to substitute opportunities, which will reduce the defendant’s potential exposure, whether or not the plaintiff actually pursues those opportunities.

When courts dismiss a defendant’s mitigation argument they often note that it was vague or that mitigation was not raised on discoveries and cross-examination. Just as a plaintiff should document its attempts at mitigation, a defendant should document opportunities that were available to the plaintiff, to the extent it is aware of them. It is well worth making enquiries in this regard, particularly at or as close to the time of the breach as possible. And in the case of an investment opportunity, the defendant should ask what the plaintiff did with the funds earmarked for the transaction.

Finally, all parties should avoid generalized assertions about the impact of the pandemic. While many industries have been disrupted, others are thriving and there may well be mitigation opportunities in any event. It is not enough for a plaintiff to point to the pandemic as excusing its duty to mitigate. Courts will be flexible and the pandemic may well have a significant impact, but concrete evidence will still be required.


  1. Red Deer College v. Michaels, [1976] 2 SCR 324 at 331.
  2. North Pacific Properties Ltd v. Bethel United Churches of Jesus Christ Apostolic of Edmonton, 2020 ABQB 791 at para 370.
  3. Marshall v. Meirik, 2019 ONSC 6215.
  4. Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 SCR 675.
  5. Apeco of Canada, Ltd. v. Windmill Place, [1978] 2 SCR 385.
  6. John Ziner Lumber Ltd. v. Canwell Distribution Ltd., [2000] OJ 5996 (Sup. Ct.).
  7. McCain Produce Co. v. Christy Crops Ltd., 33 NSR (2d) 546; Glory Wealth Shipping PTE Limited v. Korea Line Corporation, [2011] EWHC 1819 (Comm).
  8. 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd., 1978 CanLII 1630 (Ont. C.A.).
  9. 956126 Alberta Ltd v JMS Alberta Co Ltd, 2020 ABQB 718.
  10. See for e.g. Marshall v. Meirik, supra note 4 at para 43; Spiridakis v. Li, 2020 ONSC 2173 at para 105.
  11. Azzarello v. Shawqi, 2019 ONCA 820.
  12. Akelius Canada Inc. v. 2436196 Ontario Inc., 2020 ONSC 6182.
  13. Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971] SCR 562.
  14. 7Marli Limited v Pet Valu Canada Inc., 2017 ONSC 1796 at para 27.
  15. Panther Sports Medicine and Rehabilitation Centres Inc v. Adrian G Anderton Professional Corporation, 2019 ABQB 973 at para 63.
  16. Brake v. PJ-M2R Restaurant Inc., 2017 ONCA 402.
  17. Bowes v. Goss Power Products Ltd., 2012 ONCA 425.
  18. Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256.
  19. Hickey v. Christie & Walther Communications Limited, 2020 ONSC 7214.
  20. Deputat v. Edmonton School District No. 7, 2008 ABCA 13 at para 30.
  21. Evans v. Teamsters Local Union No. 31, 2008 SCC 20, [2008] 1 SCR 661.
  22. Gent v. Strone Inc., 2019 ONSC 155.
  23. Devlin v. High Liner Foods Incorporated, 2019 ONSC 6897.