Sep 14, 2017

AREAS OF LAW: Contracts; Wrongful termination of agreement; Damages; Loss mitigation

Cellular Baby Cell Phones Accessories Specialist Ltd. v. Fido Solutions Inc., 2017 BCCA 50 (CanLII)

The duty to mitigate losses does not require a party to release claims it may have against a wrongdoer.~

BACKGROUND: The Appellant, Cellular Baby Cell Phones Accessories Specialist Ltd., had a dealership agreement with the Respondent, Fido Solutions Inc. The agreement authorized the Respondent to unilaterally set quarterly performance criteria for dealers, including sales quotas. If a dealer failed to meet these criteria, the Respondent could unilaterally terminate the agreement. The Appellant operated 12 retail outlets in BC and Alberta. In 2010 the Appellant did not meet its performance quotas. The Respondent sent the Appellant an email after each unmet quota, but did not suggest remedial action or warn the Appellant that its failure to achieve its quarterly quota was jeopardizing its dealer status. The Respondent took no steps at the end of 2010 to terminate the agreement, and continued to operate under its terms in 2011. The Appellant achieved its quota for Q1 in 2011, just failed to meet it for Q2, and was trending to achieve it for Q3. In September 2011, the Appellant informed the Respondent that it was terminating the agreement. The termination letter incorrectly said that the Appellant had fallen below acceptable standards in all key areas and that it had failed for the last six quarters to meet its performance requirements. The Respondent offered to take over all of the Appellant’s leases and pay its residual payment as a lump sum. The Appellant declined. In November 2011, the Appellant commenced proceedings against the Respondent. The Respondent set the agreement termination date at April 4, 2012. The Respondent reserved the right to approve any sale of the Appellant’s locations and as a condition of sale, it advised the Appellant that it would have to provide the Respondent with a full release from any future claims against it. The Appellant negotiated a sale with a company called Yappy, but the Respondent did not approve it. The Respondent did indicate it would approve a sale to a company called Pepper, which was offering $1.6 million for the locations, but the Appellant wanted $2 million and the sale did not proceed. At trial, the judge found that the Respondent did not act reasonably toward the Appellant in the way it terminated the agreement. The judge also found the Respondent breached the agreement by failing to terminate “immediately” upon learning of the Appellant’s breach. The judge awarded damages totalling $1,222,000, including $655,000 for one year’s residuals, but found that the Appellant did not act reasonably in failing to conclude the sale of its locations to Pepper at $1.6 million. As the Appellant could have mitigated its entire loss, the judge found it was only entitled to nominal damages.

APPELLATE DECISION: The appeal was allowed and the cross-appeal dismissed. The Appellant argued that the trial judge could have assessed damages based on the potential sale to Yappy at $2.15 million. It also argued that the trial judge erred in finding it failed to mitigate its losses. The Respondent cross-appealed, arguing that it did not wrongfully terminate the agreement and that it was not obligated to terminate the contract immediately upon the Appellant’s breach. The Court of Appeal disagreed, finding it unreasonable to allow eight months to pass between learning of the breach and deciding to terminate the agreement. The Court of Appeal went on to find that the trial judge did not apply the correct legal standard to the Appellant’s claim for damages. The wrongful termination deprived the Appellant of the opportunity to sell its business as a going concern when the agreement term ended in June 2013. Although it is impossible to say with certainty what would have happened had the Respondent not wrongfully terminated the agreement, the Court of Appeal found any deduction for contingencies would be low. The Appellant was one of the Respondent’s largest dealers, with several premium lease locations and a profitable operation. It would have been in the Respondent’s best interests to maintain the Appellant’s revenues, and it would likely have actively encouraged such a sale. The Court of Appeal reduced the sale price by 25% to account for contingencies, and substituted an award of $1,617,000 for loss of opportunity in place of the trial judge’s award of $655,000 for residual payments. This brought the total damages to $2,184,000. The Court of Appeal noted that the duty to mitigate is limited, and is based on fairness and common sense. A claimant need not sacrifice her own rights or property in the name of mitigation. The Appellant chose to forgo the sale and instead continue with the business. The fact that the venture did not prove successful is not determinative of whether the Appellant mitigated its losses. The sale to Pepper would require the Appellant to release the Respondent from all claims. The trial judge erred in principle when he found that the Appellant should have foregone its claim for loss of profits and for the increased selling price that likely would have been available in 2013, to mitigate its losses.