On October 17, 2012, the Supreme Court of Canada released its decision in Southcott Estates Inc. v. Toronto Catholic District School Board (2012 SCC 51). This decision has significant implications on a purchaser's duty to mitigate its losses when a transaction fails due to the vendor's breach, particularly when the purchaser is a single purpose corporation.
Southcott Estates Inc. ("Southcott") is a single purpose corporation, without assets, created solely to purchase and develop the specific property at issue in the action. Southcott entered into an agreement of purchase and sale with the Toronto Catholic District School Board (the "Vendor"). The Vendor subsequently breached this agreement and failed to complete the sale. Southcott consequently sought specific performance of the agreement and argued that it was not required to mitigate its losses by seeking to purchase a reasonable alternative property.
Under the doctrine of mitigation, a plaintiff has a duty to take all reasonable steps to mitigate losses caused by the defendant's breach. A plaintiff will not be able to recover those losses that could have been avoided by taking reasonable steps to mitigate after the breach. In cases where it is alleged that the plaintiff failed to mitigate, the onus is on the defendant to prove first, that mitigation was possible and second, that the plaintiff failed to make reasonable efforts to mitigate.
The trial judge and the Court of Appeal both found that while the Vendor had breached the agreement, Southcott's claim for specific performance was not justified as the property was not unique and damages were an adequate remedy. Unlike the trial judge however, the Court of Appeal found that Southcott had unreasonably failed to take steps to mitigate its losses, and therefore reduced the damages award to a nominal sum.
On appeal to the Supreme Court, the following three issues were raised:
- Should a single purpose company mitigate its losses?
- To what extent must a plaintiff mitigate where the plaintiff has made a claim for specific performance?
- Did the trial judge err in concluding that there was no evidence of comparable profitable properties available for mitigation?
Southcott argued that as a single purpose corporation, created solely to purchase a specific property, it was impecunious and unable to mitigate its losses by seeking an alternative property without any capital investment from its parent company, and without the corporate mandate to do so. The Court rejected Southcott's reasoning, and concluded that a single purpose corporation cannot avoid the duty to mitigate by simply asserting that it lacks the funds to pursue alternative opportunities or that it is prevented from doing so due to its limited corporate mandate. The Court found that to hold otherwise would give an unfair advantage to those conducting business through single purpose corporations. To not require single purpose corporations to mitigate their losses would expose defendants contracting with such corporations to higher damage awards than those reasonably claimed by other plaintiffs, based solely on the single purpose corporation's limited assets.
Southcott also argued that it acted reasonably by not attempting to mitigate its losses as it was pursuing a claim for specific performance. The Court held that while a claim for specific performance can be difficult to reconcile with the doctrine of mitigation, a plaintiff's inaction in seeking a substitute property is only justified where the circumstances reveal "some fair, real, and substantial justification" for the claim or "a substantial and legitimate interest" in seeking specific performance. The Court found that Southcott could not justify its inaction and could not reasonably refuse to mitigate. The property's unique qualities related only to the profitability of the land for development, and for this, damages were seen as an adequate remedy.
Although Southcott admitted that it did not make any efforts to mitigate, the Vendor still had the burden of proving that mitigation was possible. The Court found that there were other comparable, profitable development properties available to Southcott. This finding was based on expert evidence regarding land suitable for development sold during the relevant time period in the same area, the other investment properties purchased by Southcott's parent company and the absence of any evidence to the contrary.
Ultimately, in a 6‐1 decision (with McLachlin C.J. dissenting), the Court dismissed Southcott's appeal, finding that it failed to satisfy its duty to mitigate by pursuing opportunities to purchase a comparable property after the Vendor's breach.
The decision in Southcott is significant as it requires a purchaser acquiring land for development purposes (and hence, for profit) to attempt to mitigate its losses in the event the transaction is not completed due to a vendor's breach. The duty to mitigate will apply regardless of whether specific performance is pursued (except in limited circumstances), and will continue to apply even if the purchaser is a single purpose corporation with no assets. The Court's reasoning suggests that plaintiffs seeking specific performance on a contract for the sale of an investment property may have more difficulty establishing that the property is unique, and therefore that specific performance is warranted. This decision is also significant because in determining whether a single purpose corporation could have mitigated its losses by pursuing comparable properties, courts are not restricted to looking at the actions of the corporation alone, but may also look to the actions of the corporation's parent company.
It is interesting to note that in McLachlin C.J.'s dissenting opinion, she agreed with the trial judge's finding that the Vendor failed to prove that Southcott had the opportunity to mitigate, and concluded that this was sufficient to dispose of the appeal. Contrary to the views of the majority, McLachlin C.J. found that Southcott did not act unreasonably in failing to take advantage of any mitigation opportunities. She expressed the view that a plaintiff cannot pursue specific performance and mitigate its losses at the same time. If the plaintiff does so, the plaintiff could potentially end up with two properties – the one that it initially wanted and the one that it bought in order to mitigate its damages. As a result, McLachlin C.J. concluded that "demanding that losses be mitigated unless success in obtaining specific performance is assured would deter valid claims for specific performance and hold plaintiffs to an impossible standard".
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