COMMERCIAL LITIGATION: CONCEPT OF LOSS OF PROFITS

Loss of profits is among the elements that can give rise to damages, both contractual and extra-contractual. However, loss of profits and damages resulting therefrom must be assessed in the light of article 1611 of the Civil code of Quebec:

“1611. The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived.

Future injury which is certain and assessable is taken into account in awarding damages.”

In Electrolux Canada Corp. vs. American Iron & Metal, l.p.[1], the Court of Appeal reversed the judgment of first instance and restated certain principles that should guide the assessment of damages related to loss of profits.

In this case, Electrolux and American Iron had signed a contract under which Electrolux engaged to sell metal scrap to American Iron for a fixed price. Electrolux then unilaterally resiliated the contract.

In the decision of first instance, the Superior Court awarded $1,679,549.43 to American Iron, for loss of profits, on the grounds that Electrolux’s resiliation of the contract constituted a breach thereof. The Superior Court accepted the position put forth by American Iron that by unilaterally resiliating the contract, Electrolux had prevented American Iron from making its sales to its customers, and therefore making profits.

On appeal, the Court of Appeal reversed the Superior Court’s decision. In its reasoning, the Court of Appeal addressed the evaluation of damages resulting from loss of profits. At first instance, the Superior Court defined loss of profits as the difference between the price paid and the price sold, minus the operating costs of the company for this activity and calculated the damages accordingly. Nonetheless, in the Court of Appeal’s view, general operating costs, such as overall salaries, costs and maintenance of machinery, rents and fixed costs for administration, also had to be taken into account in assessing damages related to loss of profits. The Court of Appeal ruled that the lack of evidence regarding these costs made the assessment of loss of profits impossible.

As a result, the Court of Appeal significantly reduced the Superior Court’s calculation of the damages, from $1,679,549.43 to $110,795.00, and recalled the utility of the expert evidence in the assessment of loss of profits.

The Supreme Court of Canada dismissed the application for leave to appeal filed by American Iron.

 

[1] Electrolux Canada Corp. c. American Iron & Metal, l.p., 2016 QCCA 1692.

 

By Mathieu Tremblay