Duty to Mitigate When Seeking Specific Performance: The Supreme Court’s Catch-22

Catch-22

Catch-22 (Photo credit: Wikipedia)

There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.

“That’s some catch, that Catch-22,” he observed.

“It’s the best there is,” Doc Daneeka agreed.

~Joseph Heller, Catch-22

Today’s Supreme Court of Canada decision in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51 (SCC)  marginalizes the doctrine of specific performance and imposes on a plaintiff a strict duty to mitigate, except in very narrow circumstances.

 The appellant,  a single-purpose real estate investment shell company whose only asset was the deposit advanced to purchase from a parent company, entered into an agreement of purchase and sale for a specific property with the respondent.  When the respondent failed to satisfy a condition and refused to extend the closing date, the appellant sought specific performance of the contract.  At trial, the appellant argued that it had not duty to mitigate its losses.  The trial judge refused to award specific performance but awarded damages of $1,935,500 to the appellant.  The Court of Appeal for Ontario concluded that the respondent had breached its contractual obligations but that the appellant had failed to take available steps to mitigate its losses, reducing the award to nominal damages.

 The Court, by a majority of 6-1  (McLachlin C.J. dissenting) dismissed the appeal and cross-appeal. Karakatsanis J. ( LeBel, Deschamps, Abella, Rothstein, Cromwell, JJ concurring) focused on mitigation as a doctrine based on fairness and common sense, seeking to do justice between the parties in the particular circumstances.  Citing the leading authorities on the duty to mitigate, the Court emphasizes that “Mitigation is a doctrine based on fairness and common sense, which seeks to do justice between the parties in the particular circumstances of the case.” (at para. 25).   The duty to mitigate is summed up by the majority opinion as follows:

[30]                          The trial judge found that the purchases of development land by other corporations within the Ballantry Group did not in fact mitigate Southcott’s loss; that finding is not challenged here.  As noted above, he found that the other properties purchased by other members of the Ballantry group were “collateral” in the sense that the purchases would have occurred whether or not the defendant had breached its contract with Southcott (para. 143).  However, because Southcott is a separate legal entity, purchases by other Ballantry corporations of other comparable property did not make those properties “unavailable” for mitigation.  As a separate legal entity, Southcott was required to mitigate by making diligent efforts to find a substitute property.  Those who choose the benefits of incorporation must bear the corresponding burdens:  Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2, at pp. 10-12.  Southcott is entitled to the benefits of limited liability, but it is also saddled with the responsibilities that all legal entities have.  The requirement to take steps to mitigate losses is one such responsibility.  A plaintiff cannot recover losses that could reasonably have been avoided.  The overriding issue here is whether Southcott’s inaction was reasonable, and if not, whether it could have reasonably mitigated if it had tried to do so.

The majority then asks: “When can a plaintiff seeking specific performance justify inaction and recover losses which may otherwise have been classified as avoidable?” and answers, thusly:

 [41]                          A plaintiff deprived of an investment property does not have a “fair, real, and substantial justification” or a “substantial and legitimate” interest in specific performance (Asamera, at pp. 668-69) unless he can show that money is not a complete remedy because the land has “a peculiar and special value” to him (Semelhago, at para. 21, citing Adderley, at p. 240).  Southcott could not make such a claim.  It was engaged in a commercial transaction for the purpose of making a profit.  The property’s particular qualities were only of value due to their ability to further profitability.  Southcott cannot therefore justify its inaction.

Justice Karakatsanis concludes that the trial judge made palpable and overriding errors of fact that justified the Court of Appeal to consider the evidence de novo:

[61]                          [The trial judge] failed to take into account in his analysis of the mitigation issue that Southcott had simply refused to take any mitigatory action.  He failed to consider the evidence of Ballantry’s purchases as supporting the inference that alternative parcels were available and that their development was sufficiently profitable to meet Ballantry’s requirements.  He conflated a lack of evidence regarding the marketing of parcels with a lack of evidence that any of the parcels had been available for sale.  He failed to consider whether the fact that all of the properties the Board’s expert testified were development properties capable of being brought to development in a year could support an inference that their development was profitable.  Finally, he failed to consider the fact that Southcott did not lead evidence to challenge the Board’s evidence regarding alternative development opportunities.

[62]                          In these circumstances, the Court of Appeal was entitled to look at the record and conclude that the trial judge’s findings regarding mitigation were not available to him on the evidence.  The evidence of the Ballantry purchases, in the context of Southcott’s refusal to mitigate, established that there were opportunities to mitigate by purchasing other development land in the GTA.  Failure to mitigate reduces damages.  The Court of Appeal concluded that, based upon the investment properties purchased by Ballantry, and in the absence of evidence to the contrary, the Board discharged the burden of showing that other investment properties were available in the relevant time period to mitigate the losses and that the trial judge’s finding that there were no comparable properties was not open to him on the evidence.  I agree.

The Chief Justice’s dissent is, in my view, far more persuasive and reflects commercial reality.

McLachlin C.J. recognizes the Catch-22 in imposing on the plaintiff a duty to mitigate throughout the litigation, while still concurrently specific performance of the contract.  In a nutshell:

[93]                          The act of filing a claim for specific performance is inconsistent with the act of acquiring a substitute property. A plaintiff, acting reasonably, cannot pursue specific performance and mitigate its loss at the same time.  It makes no sense for a reasonable plaintiff seeking specific performance to effectively concede defeat and buy a substitute property.  The plaintiff could end up with two properties — one it wanted and one it did not.  Furthermore, an action for specific performance is often motivated by the unavailability of substitutes in the marketplace.  A plaintiff’s reasonable claim that substitutes are unavailable is inconsistent with the ability to acquire a substitute in the marketplace (E. Yorio, “A Defense of Equitable Defenses” (1990), 51 Ohio St. L.J. 1201).

Unfortunately, in this instance, the Chief Justice is  lone voice in the  contract law wilderness.

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