The Role of Punitive Damages in Contract Disputes

In recent years, courts across Canada have seen a notable increase in the awarding of punitive damages in commercial contract disputes. While punitive damages have traditionally been reserved for egregious conduct, such as fraud or oppression, their application in commercial settings is evolving. This blog post will delve into the factors contributing to this trend, examine the relevant legal principles, and discuss the implications for businesses operating in Alberta.

Distinguishing Between Punitive, Aggravated, and Compensatory Damages

Punitive, aggravated, and compensatory damages are all types of damages that can be awarded in a legal case. While they serve different purposes, they can sometimes be awarded together in a contract dispute depending on the circumstances. It is therefore important to be able to distinguish between the purposes of each one to understand how they might work in tandem with each other.

Punitive Damages

Punitive damages are awarded to punish the defendant for their wrongful conduct and to deter similar behaviour in the future. They are not intended to compensate the plaintiff for their losses but rather to punish the defendant and set an example. In the context of contract disputes, punitive damages have typically been awarded in cases of fraud, misrepresentation, or other egregious contract breaches involving intentional or reckless conduct.

Aggravated Damages

Aggravated damages are awarded to compensate the plaintiff for intangible losses, such as mental distress, resulting from the defendant’s conduct. They are awarded when the defendant’s actions are particularly egregious.

Compensatory Damages

Compensatory damages are the most common type of damages awarded in contract disputes. The purpose is to compensate the plaintiff for the actual loss suffered due to the breach of contract. Compensatory damages aim to put the injured party in the position they would have been in if the contract had been properly performed.

The Evolving Landscape of Punitive Damages in Commercial Contracts

Several factors have contributed to the increased awarding of punitive damages in commercial contract disputes in Alberta:

The Emergence of Bad Faith Conduct

In recent years, courts have shown a marked increase in recognizing bad faith conduct in commercial contract disputes. This trend reflects a growing judicial awareness of the need to deter and punish egregious behaviour that undermines the integrity of contractual relationships. In Whiten v. Pilot Insurance Co., the Supreme Court of Canada awarded punitive damages to the plaintiffs after Pilot Insurance Company wrongfully denied their claim for fire damage to their home. The court concluded that the insurer’s actions were malicious, oppressive, and in bad faith.

Bad faith conduct involves a deliberate and unjustified failure to fulfill contractual obligations, often motivated by self-interest, malice, or a desire to gain an unfair advantage. This can manifest in various ways, such as unreasonable delay or refusal to perform, misrepresentation or concealment of material facts, abuse of legal process, breach of fiduciary duty, or failure to cooperate in contracts requiring cooperation.

The Need for Deterrence in High-Stakes Industries

In industries characterized by significant financial stakes, such as oil and gas, there is a heightened need to deter egregious conduct that can harm the public interest. Punitive damages can serve as a powerful deterrent in such cases, particularly when the offending party’s conduct has a broader societal impact.

For example, suppose an oil and gas company engages in fraudulent or reckless behaviour that leads to environmental damage or harm to public health. In that case, punitive damages can be used to punish the company and deter similar behaviour in the future. In 321665 Alberta Ltd. v. Husky Oil Operations Ltd. for instance, the Alberta Court of Appeal dealt with allegations of anti-competitive behaviour in the oil and gas industry. The court awarded punitive damages to the plaintiff because Husky’s conduct was found to be particularly egregious. Additionally, in industries with high levels of market concentration, punitive damages can be used to discourage anti-competitive behaviour and promote fair competition.

The Influence of Tort Law Principles

Alberta courts have increasingly applied tort law principles to contract disputes, particularly in cases involving intentional or reckless conduct. This convergence of tort and contract law has broadened the scope of potential punitive damage awards. For example, suppose a party’s conduct is so egregious that it amounts to a tort, such as intentional interference with contractual relations. In that case, the court may award punitive damages in addition to compensatory damages.

Key Relevant Legal Principles Governing Punitive Damages

Certain legal principles must be satisfied to successfully pursue punitive damages in an Alberta commercial contract dispute. These principles ensure that punitive damages are awarded judiciously and serve their intended purpose of punishment and deterrence.

The Purpose of Punitive Damages

Punitive damages are not intended to compensate the plaintiff for their losses but rather to punish the defendant for their wrongful conduct and deter future misconduct. They serve as a powerful tool to deter egregious behaviour and uphold the legal system’s integrity.

The Standard of Proof

To justify an award of punitive damages, the plaintiff must demonstrate that the defendant’s conduct was intentional, reckless, or malicious. This requires a higher standard of proof than that typically required for ordinary damages. The plaintiff must present clear and convincing evidence that the defendant’s conduct was egregious and deserving of punishment.

The Cap on Punitive Damages

While there is no specific cap on punitive damages in Alberta, courts must consider factors such as the nature of the defendant’s conduct, the harm caused, and the need for deterrence when determining the appropriate amount of punitive damages. The court must ensure that the award is proportionate to the defendant’s wrongdoing and serves the purpose of punishment and deterrence, without being excessive or disproportionate. For example, in Boucher v. Wal-Mart Canada Corp., the court reduced a $1 million punitive damages award to $100,000, emphasizing the need for proportionality.

Implications for Businesses Operating in Alberta

The increasing trend of awarding punitive damages in commercial contract disputes has significant implications for businesses operating in Alberta. To mitigate the risk of punitive damages, businesses should take the following steps:

• Draft Clear and Enforceable Contracts: Well-drafted contracts can help to minimize disputes and reduce the risk of punitive damages. Contracts should clearly define the parties’ obligations and remedies.
• Act in Good Faith: Businesses should always act in good faith and comply with their contractual obligations. This includes fulfilling promises, avoiding unreasonable delays, and communicating openly and honestly with the other party.
• Document Everything: It is important to document all communications, meetings, and decisions related to a contract. This documentation can be helpful in defending against claims of bad faith conduct.
• Seek Legal Advice: If a dispute arises, it is important to seek legal advice from an experienced commercial litigator. A lawyer can help to assess the risks and develop a strategy to minimize liability.

Evolving Area of Punitive Damages

The awarding of punitive damages in commercial contract disputes is a complex and evolving area of law in Alberta. While punitive damages have traditionally been reserved for egregious conduct, their application in commercial settings is expanding. Businesses operating in Alberta should be aware of this trend and take steps to mitigate the risk of punitive damages. By drafting clear and enforceable contracts, acting in good faith, and seeking legal advice, businesses can protect themselves from liability and minimize the potential for costly litigation.

DBB Law Provides Comprehensive Litigation Solutions in Calgary

At DBB Law, our skilled litigators provide innovative and effective legal services to clients across Alberta. Whether you are seeking appropriate damages for your claim, or have a separate litigation matter goal, our team is prepared to work closely with you to understand your unique situation and ensure that your legal needs are met. Our expert team offers tailored legal solutions and skilled advocacy across a wide range of practice areas, including business and commercial law, family law, and property law. To speak with a member of our responsive, experienced team or to schedule a confidential consultation, contact us today online or call us at 403-265-7777.