Damages for Breach of Contract – Avoided or Reduced #64

By Gerry Neely
B.A. LL.B.

Usually a judge will not assist a person who is in breach of contract, to avoid the consequences of that person's default. One would expect this to be particularly true where the contracting parties agreed that the default of one party would result in "pre-estimated" damages becoming payable to the other party. However, the interpretation of a statute or the application of a rule of law may help the defaulting party to avoid or to reduce the damages he agreed to pay.

In one case, a mortgagor signed a mortgage that provided that if default occurred, the mortgagee was not required to accept the principal sum unless "bonus of three months' interest was paid on the principal money in default". The mortgage was not paid at its date of maturity and the mortgagee refused to accept from the mortgagor the principal sum plus a per diem rate of interest at the mortgage rate, to the date of payment. Instead the mortgagee demanded an additional $30,000.00, an amount equivalent to three months' interest under the mortgage. Section 8 of the Interest Act of Canada prohibits a penalty on arrears of principal secured by a mortgage of real estate, that has the effect of increasing the charge on such arrears beyond the rate of interest payable on principal monies not in arrears. The mortgagee argued that the Section could not be applied in this circumstance because all of the principal monies were in default and therefore there was no principal money not in arrears. The British Columbia Court of Appeal rejected this argument and found that notwithstanding the agreement by the mortgagor to pay the bonus, the mortgagee could not collect it because that would be a breach of the Interest Act.¹

In a second case, a developer paid a mortgage broker $30,750.00 and a life insurance company $61,500.00 as a fee for obtaining the mortgage loan and as a stand-by fee respectively. When the developer decided to sell rather than to build, it sued for the return of the stand-by fee. The agreement with the insurance company provided that the sum of $61,500.00 was to be retained by it as liquidated damages and not as a penalty, "it being agreed by all parties the $61,500.00 represents a fair estimate of such estimated damages". However, on the evidence presented by the insurance company, the Judge held that a generous allowance for costs of the insurance personnel involved in the approval of the loan, which were thrown away as a result of the developer's default, would be $15,000.00. The insurance company did try to prove that it had incurred a substantial loss of investment income as a result of setting aside the mortgage monies in short term investments which earned less interest than the long-term investments that would otherwise have been made. This evidence was too inconclusive to be accepted, but had it been, the additional investment loss would have established the pre-estimate of damages as being reasonable. However, the pre-estimate was "so extravagant, exorbitant or unconscionable" in relation to the actual loss suffered by the insurance company that it could only recover its actual loss.

During the course of cross-examinations, the developer discovered for the first time that the mortgage broker had also received a fee from the insurance company. The developer argued that the mortgage broker was its agent and that since the interests of the insurance company were adverse to those of the developer, the mortgage broker could not act for both without first obtaining the consent or waiver of the developer. The Judge agreed with the developer that the mortgage broker was in breach of its fiduciary duty to its principal, and ordered repayment to the developer of the sum of $30,750.00.

Therefore, in spite of the written contracts with both the mortgage broker and the life insurance company, the developer was reimbursed for substantially all of the money it had agreed to pay.²

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