Commercial disputes: the notion of lost profits

Loss of profits is one of the elements that can give rise to compensation, both in the contractual and extra-contractual fields. However, lost profits and the resulting damages must be assessed in light of Article 1611 of the Civil Code of Quebec:

1611. The damages due to the creditor compensate for the loss he suffers and the gain of which he is deprived.
In determining them, account is taken of future loss when it is certain and can be assessed.”

In Electrolux Canada Corp. v. American Iron & Metal, l.p.[1], the Court of Appeal, reversing the trial judgment, reiterated certain principles that should guide the assessment of damages for lost profits. In this case, Electrolux and American Iron had signed a contract under which Electrolux was to sell scrap metal to American Iron for a fixed price. Following Electrolux’s unilateral termination of the contract, the Superior Court (at first instance) awarded American Iron $1,679,549.43 for loss of profits, on the grounds that the termination constituted a breach of contract. American Iron argued that by unilaterally terminating the contract, Electrolux had prevented it from making sales, and therefore profits, with its customers. In upholding this judgment, the Court of Appeal turned to the assessment of damages for loss of profits. The trial judge had defined lost profits as “the difference between the price paid and the price sold, less the company’s operating costs for this activity”, and had calculated damages accordingly. However, for the Court of Appeal, general operating costs, such as salaries, machinery maintenance costs, rent and administrative expenses, also had to be taken into account when assessing damages for loss of profits. In the Court of Appeal’s view, the lack of evidence regarding these costs made the assessment of lost profits unfeasible. Consequently, the Court of Appeal significantly reduced the damages from $1,679,549.43 to $110,795, while reiterating the usefulness of expert evidence in establishing lost profits. American Iron’s application for leave to appeal was dismissed by the Supreme Court of Canada.

 

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

 

By Mathieu Tremblay

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