Case Comment:
Atos IT Solutions v Sapient Canada Inc.
By Andrew J. Heal
This 2018 case is worth revisiting in 2019, as the Supreme Court of Canada dismissed an application for leave to appeal to the Supreme Court on March, 2019, without reasons and with cost as set out in paragraph 68 s. By refusing leave, the Supreme Court endorsed the minimum performance principle set out in Hamilton v Open Window Bakery Ltd,1 which essentially holds that a plaintiff has to mitigate damages and is only entitled to those damages.
Although this case arose in an IT industry contract, the principles are equally applicable to construction contracts.
Brief Facts of Atos
Atos dealt with a contract dispute between the defendant and its subcontractor, the plaintiff. The trial judge held that both parties had breached the subcontract. The defendant was awarded $746,000 in damages for the breach; however, the plaintiff was awarded over $6 million for wrongful termination. Over half of that amount was for lost profits, notwithstanding a limitation of liability clause, which excluded “loss of profits”.
On appeal, the Ontario Court of Appeal affirmed the “minimum performance principle” where the Court is required, when assessing damages for breach of contract, to assume that a contract-breaker, who has alternative modes of performing the contract, will perform in the way least profitable to the non-breaching party and least burdensome to itself. As a result, the damages for the wrongful termination should have been calculated using the formula in the “termination for convenience clause” thereby reducing the award by $1.4 million. Had the termination happened correctly, the termination for convenience damages would be the minimum performance expected.
Applicability to Construction Law
A “termination for convenience clause” in a construction contract typically defines the upper limit of liability for damages in respect of a termination of a contract or subcontract, and the Ontario Court of Appeal in Atos accepted this argument. A termination for convenience clause is often present in a construction contractors’ sub-contract which entitles the counterparty to terminate the agreement without cause, and typically also limits the entitlement to damages.1
The Ontario Court of Appeal also had to grapple in Atos with the argument by the plaintiff that the minimum performance principle was somehow constrained or had to be read in light of the overarching duty of good faith and honest performance, recognized as well by the Supreme Court of Canada in the Bhasin v Hrynew2. At the Ontario Court of Appeal in Atos it was the defaulting party who was expected to pay damages to the non-defaulting party, but on the basis of the mode of performance least burdensome to the defaulting party and least profitable to the non-breaching party.
Standard of Review
In Atos, the Ontario Court of Appeal affirmed that the minimum performance principle in its proper application in a wrongful termination case involving a termination for convenience clause gives rise to an error of law subject to review on a correctness standard (decision at paragraph 50).
The standard of review applicable to contractual interpretation issues are set out by Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, [2014] 2 SCR 633 and subsequent decisions. This standard holds the interpretation of non-standard form contracts involves issues of mixed fact and law that are subject to deferential review on appeal, and in respect of which Appellate Courts may not intervene in the absence of a palpable and overriding error. Although extricable questions of law can be found in a contractual interpretation dispute, the Court should be cautious about identifying such questions because of the close relationship between the selection and application of principles of contractual interpretation.
Circumstances in which a question of law can be extricated from the interpretation process will be rare. While the defaulting defendant was successful in establishing the minimum performance principal, that defendant had less success in urging an interpretation of the “limitation of liability to preclude recovery for loss profits” as set out in paragraph 68 of the Court of Appeal decision:
For greater certainty, subject to section 18.6.2, neither subcontractor nor sapient will be liable to the other for indirect, special, consequential or punitive damages or for loss of profits (collectively, “excluded damages”), even if the party has been advised of the possibility of such damages.
18.6.3 This section 18.6 will apply irrespective of the nature of the cause of action, demand or claim, including but not limited to, breach of contract (including fundamental breach), negligence, tort or any other legal theory, and will survive a fundamental breach or breaches and/or failure of essential purpose of this agreement or of any remedy contained herein.
[70] The trial judge did not accept Sapient’s position. He started his analysis by considering the first step in the test set out in Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), 2010 SCC 4 (CanLII), [2010] 1 S.C.R. 69, at para. 122. Under the first step, a court must ask whether the exclusion clause would even apply in the circumstances of the case.
[71] The trial judge applied the principles of contractual interpretation discussed in Sattva and concluded, at para. 354, that “when the words in Section 18.6.1 are read both on their own and in the context of the Subcontract as a whole, the limitation of liability set out in Section 18.6.1 does not apply to Siemens damage claim for loss of profits in respect of AMS.”
The SCC effectively endorsed what the Court said at paragraph 85: “reasonable people can disagree about the meaning of some contractual provisions” but a reviewing court should defer to the Trial Judge’s interpretation of the clause – just because another interpretation might reasonably be available does not provide a basis for appellate intervention.
Two other Ontario Court of Appeal cases (one of which preceded, and other of which came after Atos) are also worth noting: CM Callow Inc v Zollinger, 2018 ONCA 896 and Mohamed v Information Systems Architects Inc, 2018 ONCA 428. The Ontario Court of Appeal found in the case of Mohamed that a termination of a fixed term contract (albeit this one was almost an employment contract) was not a good faith termination and broader damages flowed. Whereas in CM Callow Inc., a different panel of the same Ontario Court of Appeal found that there was no breach of the duty of the good faith when the defendant terminated an independent contractor’s winter maintenance contract. Appropriate notice of termination was provided and that was all the appellant in CM Callow was entitled to.
This a continued food for thought for construction lawyers, and should give all parties good reason to look at the anticipated damages, and whether the minimum performance principle is at play in any particular termination situation.
2 A discussion of a limitation of liability clause or exclusions of liability have been the subject matter of many cases, some of which were cited in the Atos decision including Tercon Contractors v. British Columbia [2010] SCC 4, and other cases and commentary have made the point that limitation of liability clauses or exclusion clauses are often interpreted contra proferentem and can often turn on whether the damages are direct damages or indirect damages, and how the clause is to be interpreted in context.
3 2014 SCC 71, [2014] 3 SCR 494