DOES a contracting party have to act reasonably when exercising a primary contractual right? In general the answer to that is, no, there is no notion of “abuse of rights” in English law, and this is particularly helpful in commercial transactions, since this removes any uncertainty or need to worry about whether the exercise of a contractual right is reasonable or justifiable. Yet when it comes to exercising the secondary right to claim damages, the doctrine of mitigation requires a claimant to act reasonably to keep losses to a minimum. So what is the scope of the requirement of mitigation for breach of contract and does it apply when a claimant seeks specific performance? The Canadian Supreme Court considered this issue in Southcott Estates Inc. v Toronto Catholic District School Board [2012] SCC 51, [2012] 2 S.C.R. 675.

Southcott Estates Inc. (Southcott) was part of the Ballantry group of companies that specialised in property investment and development in Toronto. Southcott was a single-purpose company, without assets, created and funded by Ballantry for the sole purpose of acquiring land from the Toronto Catholic District School Board (the Board) for residential development, at a cost of over $3.4 million. The land was part of a larger school site, so “severance” permission was required from a public body before it could be developed for residential use. The contract provided that the Board would use its best efforts to obtain severance by the completion date, but the Board breached this provision, then refused Southcott's request to extend the completion date, declared the transaction to be at an end and returned Southcott's deposit. Southcott commenced an action for specific performance or, in the alternative, for damages (to compensate for its potential lost profit on the development of the site). The trial judge found that the Board was in breach of contract, but declined to award specific performance because the land was not “unique” and so damages would be an adequate remedy. Instead he awarded damages of over $1.9 million, representing a loss of a 60% chance to make the full potential profits. On the Board's appeal (Southcott did not appeal the refusal of specific performance), the Court of Appeal for Ontario held that the trial judge had erred in law, because Southcott should have mitigated its loss in full by purchasing an equivalent investment property, so reduced Southcott's damages to a nominal sum of $1. Southcott appealed to the Supreme Court, but by a majority (McLachlin C.J. dissenting) the court dismissed the appeal.

In English law, specific performance is almost invariably awarded for contracts for the sale of land, even if the land is merely purchased for investment (although of course it remains an equitable discretionary remedy, occasionally refused if, for example, it would cause very severe hardship to the defendant – see Patel v Ali [1984] Ch. 283). But in Canada, the Supreme Court decided in Semelhago v Paramadevan [1996] 2 S.C.R. 415 that, “while at one time the common law regarded every piece of real estate to be unique, with the progress of modern real estate development this is no longer the case” and so specific performance is not available to the investment purchaser. In the light of this authority, all members of the court in Southcott appeared to accept that a purchaser of land, faced with a breach of contract by the vendor, is immediately required to mitigate its loss even if he also seeks specific performance, the only live question therefore being whether he actually has mitigated, in other words whether he has acted reasonably to keep his loss to a minimum. This was supported by Asamera Oil Corp v Sea Oil & General Corp [1979] 1 S.C.R. 633, where the Supreme Court held that where “circumstances reveal a substantial and legitimate interest in seeking specific performance as opposed to damages, then a plaintiff will be able to justify his inaction and on failing in his plea for specific performance might then [be able to] recover losses which in other circumstances might be classified as avoidable and thus unrecoverable.” As Karakatsanis J., delivering the majority judgment in Southcott, explained, “This does not mean that a plaintiff with such a claim should not attempt to mitigate; rather it recognises that such a claim for specific performance informs what is reasonable behaviour for the plaintiff in mitigation.”

The disagreement between the majority and the minority was therefore confined to the interpretation of the facts: for the majority, Southcott had not acted reasonably because there were numerous other suitable development properties in the area and it could not rely on its “impecuniosity” as a single-purpose vehicle company because it had access to capital to pay the contract price. For McLachlin C.J. in dissent, Southcott had acted reasonably: it had a “fair, real and substantial justification” for seeking specific performance and, in any event, the Board had not proved that any of the other possible development properties were comparable to the contract property.

McLachlin C.J.'s dissent is compelling, while the majority's decision approach leaves an innocent purchaser, faced with a breach of contract by the vendor, caught between a rock and a hard place. As McLachlin C.J. explained:

This must surely be right, but was simply not addressed by the majority in Southcott. Although unlikely to arise in a land transaction in this jurisdiction, the majority's approach is equally problematic for other cases where a claimant is reasonably seeking specific performance, in circumstances where the court eventually exercises its discretion to refuse it, ordering damages in lieu. Even if the Canadian jurisprudence is correct that mitigation is required in such a case, how can it be reasonable to require a claimant to mitigate before the outcome of his specific performance plea is resolved?

For lawyers on this side of the Atlantic, Southcott provokes more fundamental questions of principle. First, should English law abandon its traditional view of land as invariably unique, so that specific performance is available (de facto) as of right, a move that would reduce certainty in commercial transactions and have implications for the status of a purchaser's post-contractual equitable interest (Lysaght v Edwards (1876) 2 Ch.D. 499)? On the other hand, it is difficult to argue convincingly that an investment purchaser, buying a commercial office lease just for its rental income, or a residential flat in a large block solely with a view to development then resale, should be entitled to compel the vendor to convey on the fictional assumption that the purchaser's interest in performance was other than purely financial. Moreover English law has already applied analogous reasoning to deny an injunction to a corporate landlord to protect a right of light, partly because the landlord “was interested in the property only from a money-making point of view” (Midtown Ltd. v City of London Real Property Co Ltd. [2005] 1 E.G.L.R. 65).

Secondly, and more fundamentally, Southcott is surely wrong to assume that the obligation to mitigate arises when the claimant is seeking specific performance. Mitigation is an aspect of the law of damages that has no role where specific remedies are concerned. It is clear from the majority decision of the House of Lords in White & Carter (Councils) Ltd. v McGregor [1962] A.C. 413 that a claimant need not mitigate when suing for the price (in the sense that he is not required to accept the defendant's repudiation and sue for damages, but is free, if practicable, to reject the repudiation, perform his own obligations and sue for the price). Of course the “substantial and legitimate interest” qualification in Southcott echoes Lord Reid's obiter suggestion in White & Carter that exceptionally an innocent party with “no legitimate interest, financial or otherwise, in performance” may not be free to elect to reject the repudiation, perform and sue for the contract price. The qualification is unhelpful in both situations. After all, who is best placed to judge what is in the innocent party's legitimate interest? Surely the innocent party itself, not the court viewing the matter years later at trial. Southcott, and Lord Reid's dictum in White & Carter, involve the court giving its blessing to the re-writing of the contract by the party in breach, effectively inserting a unilateral right to alter the transaction, to the detriment of the innocent party. So much for the common law's commitment to protect the contractual performance interest.