IBM Canada Limited Appellant v. Richard Waterman, 2013 SCC 70

SUPREME COURT OF CANADA Citation: IBM Canada Limited v. Waterman, 2013 SCC 70, [2013] 3 S.C.R. 985 Date: 20131213 Docket: 34472 Between: IBM Canada Limited Appellant and Richard Waterman Respondent Coram: McLachlin C.J. and LeBel, Fish, Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ. Reasons for Judgment: (paras. 1 to 99) Dissenting Reasons: (paras. 100 to 155) Cromwell J. (LeBel, Fish, Abella, Moldaver, Karakatsanis and Wagner JJ. concurring) Rothstein J. (McLachlin C.J. concurring) IBM Canada Limited v. Waterman, 2013 SCC 70, [2013] 3 S.C.R. 985 IBM Canada Limited Appellant v.

Richard Waterman Respondent Indexed as: IBM Canada Limited v. Waterman 2013 SCC 70 File No.: 34472. 2012: December 14; 2013: December 13. Present: McLachlin C.J. and LeBel, Fish, Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ. on appeal from the court of appeal for british columbia Employment law — Wrongful dismissal — Damages — Compensating advantage — Dismissed employee drawing pension

benefits upon dismissal — Trial judge establishing appropriate notice period at 20 months without deduction for pension benefits —Whether pension benefits constitute compensating advantage — Whether pension benefits should be deducted from damages forwrongful dismissal. IBM dismissed W without cause on two months’ notice. W was 65 years old, had 42 years of service, and had a vestedinterest in IBM’s defined benefit pension plan. Under the plan, IBM contributed a percentage of W’s salary to the plan on his behalf.

Upon termination, W was entitled to a full pension, and his termination had no impact on the amount of his pension benefits. W sued to enforce his contractual right to reasonable notice. The trial judge set the appropriate period of notice at 20 monthand declined to deduct the pension benefits paid to W during the notice period in calculating his damages. The Court of Appealdismissed the appeal. Held (McLachlin C.J. and Rothstein J. dissenting): The appeal should be dismissed.

Per LeBel, Fish, Abella, Cromwell, Moldaver, Karakatsanis and Wagner JJ.: The rule that damages are measured by theplaintiff’s actual loss does not cover all cases. The law has long recognized that applying the general rule of damages — thecompensation principle — strictly and inflexibly sometimes leads to unsatisfactory results. Employee pension payments, includingpayments from a defined benefit plan, should generally not reduce the damages otherwise payable for wrongful dismissal. Pensionbenefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings.

They are notintended to be an indemnity for wage loss due to unemployment. A compensating advantage arises if a source other than the damages payable by the defendant ameliorates the loss sufferedby the plaintiff as a result of the defendant’s breach of a legal duty. However, not all benefits received by a plaintiff raise acompensating advantages problem. A problem only arises with a compensating advantage when the advantage is one that (

a) would nothave accrued to the plaintiff but for the breach, or (

b) was intended to indemnify the plaintiff for the sort of loss resulting from thebreach. The question is whether the compensation principle should be strictly applied and the compensating advantage should bededucted. Considerations other than the extent of the plaintiff’s actual loss shape the way the compensation principle is applied. Thedeductibility of compensating advantages also depends on justice, reasonableness and public policy. Benefits received by a plaintiff through private insurance are generally not deductible from damages awards.

While there isno single marker to sort which benefits fall within the private insurance exception, the more closely the benefit is, in nature and purpose,an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. Whether the plaintiff hascontributed to the benefit also remains a relevant consideration, although the basis for this is debatable. In general, a benefit will not bededucted if it is not an indemnity for the loss caused by the breach and the plaintiff has contributed in order to obtain entitlement to it.

Finally, there is room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatmentof those in similar situations, the possibility of providing incentives for socially desirable conduct, and the need for clear rules that areeasy to apply. While this exception is called the private insurance exception, it has been applied by analogy to a variety of payments thatdo not originate in a contract of insurance.

Although the courts have not relied on any broad “single contract” rule, where a cause of action and a benefit arise under thecontract of employment, the terms of a contract and the dealings between the parties will inform the analysis. A compensating advantage issue arises in this case: W received his full pension benefits and the salary he would haveearned had he worked during the period of reasonable notice; had IBM given him working notice, he would have received only his salaryduring that period.

However, the private insurance exception applies to benefits such as pension payments to which an employee hascontributed and which were not intended to be an indemnity for the type of loss suffered as a result of the defendant’s breach. As such,the compensation principle should not be applied strictly in this case. In this case, the factors clearly support not deducting the retirement pension benefits from wrongful dismissal damages. W’s contract of employment is silent on this issue, but it does not have any general bar against receiving full pension entitlement andemployment income.

W’s retirement pension is not an indemnity for wage loss, but rather a form of retirement savings. While IBMmade all of the contributions to fund the plan, W earned his entitlement to benefits through his years of service, as the plan’s primarypurpose is to provide periodic pension payments to eligible employees after retirement in respect of their service as employees. Thus,this case falls into the category of cases in which the insurance exception has always been applied — the benefit is not an indemnity andW contributed to the benefit. Although Sylvester v.

British Columbia, (SCC), [1997] 2 S.C.R. 315, is distinguishable on the facts, thefactors it sets out support the conclusion that W’s benefits should not be deducted from his wrongful dismissal damages. The pensionbenefits were clearly not an indemnity benefit for loss of salary due to inability to work, and W’s interest in the pension bears many ofthe hallmarks of a property right. Looking at the contract as a whole, it is not a fair implication that the parties agreed that pensionentitlements should be deducted from wrongful dismissal damages.

Finally, the broader policy concerns in this case support not deducting the pension benefits. The law should not provide aneconomic incentive to dismiss pensionable employees rather than other employees. The other policy concerns raised by JusticeRothstein or present in Sylvester either do not arise here or are highly speculative. Per McLachlin C.J. and Rothstein J. (dissenting): This case requires an assessment of W’s loss under the terms of a singlecontract which gave rise to both a right to reasonable notice and a right to pension benefits. The private insurance exception has noapplication to such a case.

Where a court is called upon to assess loss under a single contract, the plaintiff’s entitlement turns on theordinary governing principle that he should be put in the position he would have been in had the contract been performed. In this case,that means that the pension benefits W received must be deducted in calculating his damages for wrongful dismissal; not deductingwould give W more than he bargained for and would charge IBM more than it agreed to pay.

The governing principle for damages upon breach of contract is that the non-breaching party should be provided with thefinancial equivalent of performance. Employer-provided benefits are integral components of the employment contract, so deductibilityturns on the terms of the employment contract and the intention of the parties. Under the terms of W’s employment contract, he wouldhave been eligible to receive pension benefits only upon being terminated or retiring.

Therefore, as in Sylvester, W’s contractual right towrongful dismissal damages and his contractual right to his pension are based on opposite assumptions about his availability to work. Damages cannot be paid on the assumption that he could have earned both. This conclusion is necessitated by the fact that the pension plan at issue here is a defined benefit plan. Unlike a definedcontribution plan, a defined benefit plan guarantees the employee fixed predetermined payments upon retirement for life.

Deducting thebenefits would provide the wrongfully terminated employee with exactly what he would have received had the employment contractbeen performed: an amount equal to his salary during the reasonable notice period and thereafter defined benefits for the rest of his life. This is materially different from a defined contribution plan, which provides an employee with a finite total amount or lumpsum of retirement benefits.

Deducting benefits that a wrongfully terminated employee receives from a defined contribution plan wouldleave the employee in a worse position that he would have been in had his employment contract not been breached. In this case, W’s wrongful dismissal had no impact on his pension entitlement, and he could not have received both hissalary and his pension benefits had he continued to work for IBM through the reasonable notice period.

Whether the benefit isnon-indemnity or contributory does not answer the question of whether the plaintiff will be provided with the financial equivalent ofperformance or will receive excess recovery under the governing principle of contract damages. Furthermore, the private insurance exception is not applicable to cases that involve a single contract that is the source of boththe plaintiff’s cause of action and his right to a particular benefit.

In such circumstances, there is no justification for resorting to theprivate insurance exception because the plaintiff’s entitlement to the benefits is established based on the terms of his contract. If theplaintiff is entitled to the benefits under his contract, he will receive the benefits based on the ordinary governing principle that he shouldbe placed in the position he would have been in had the contract been performed. There will be no need to reach the collateral benefitexception.

A straightforward reading of Sylvester demonstrates that it is a fully applicable authority supporting the proposition that,under a single contract of employment, barring contractual provisions to the contrary, an individual cannot receive salary as if he isworking and pension benefits as if he is retired. These are opposite, incompatible assumptions. Thus, applying Sylvester to this case,salary and pension income are not payable at the same time. Cases Cited By Cromwell J. Distinguished: Sylvester v. British Columbia, (SCC), [1997] 2 S.C.R. 315; Ratych v.

Bloomer, (SCC), [1990] 1 S.C.R. 940; discussed: Cunningham v. Wheeler, (SCC), [1994] 1 S.C.R. 359; referred to: Phillips v. Western Company of North America, 953 F.2d 923 (1992); United States v. Price, 288 F.2d 448 (1961); Sloas v. CSXTransportation, Inc., 616 F.3d 380 (2010); Parry v. Cleaver, [1970] A.C. 1; Attorney General v. Blake, [2001] 1 A.C. 268; Bank ofAmerica Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601; Redpath v. Belfast and County Down Railway (1947), N.I.167; Jack Cewe Ltd. v. Jorgenson, (SCC), [1980] 1 S.C.R. 812; Canadian Pacific Ltd. v.

Gill, (SCC),[1973] S.C.R. 654; Grand Trunk Railway v. Beckett (1887), 16 S.C.R. 713; Quebec Workmen’s Compensation Commission v. Lachance, (SCC), [1973] S.C.R. 428; Guy v. Trizec Equities Ltd., (SCC), [1979] 2 S.C.R. 756; Chandler v. BallPackaging Products Canada Ltd. (1992), 2 C.C.P.B. 101, aff’d (1993), 2 C.C.P.B. 99; Emery v. Royal Oak Mines Inc. (1995), (ON SC), 24 O.R. (3d) 302; Canadian Human Rights Commission v. Canada (Attorney General), 2003 FCA 86, 301 N.R.321; Bradburn v. Great Western Railway Co. (1874), L.R. 10 Ex. 1; National Insurance Co. of New Zealand Ltd. v.

Espagne (1961), 105C.L.R. 569; Graham v. Baker (1961), 106 C.L.R. 340; Smoker v. London Fire and Civil Defence Authority, [1991] 2 A.C. 502; Hopkinsv. Norcross plc, [1993] 1 All E.R. 565; Knapton v. ECC Card Clothing Ltd., [2006] I.C.R. 1084; Gilbert v. Attorney-General, [2010]NZCA 421, 8 N.Z.E.L.R. 72. By Rothstein J. (dissenting) Girling v. Crown Cork & Seal Canada Inc. (1995), (BC CA), 9 B.C.L.R. (3d) 1; Sylvester v. BritishColumbia, (SCC), [1997] 2 S.C.R. 315; Cunningham v. Wheeler, (SCC), [1994] 1 S.C.R. 359;Chandler v. Ball Packaging Products Canada Ltd. (1992), 2 C.C.P.B. 101; Parry v.

Cleaver, [1970] A.C. 1; Guy v. Trizec Equities Ltd., (SCC), [1979] 2 S.C.R. 756; Canadian Pacific Ltd. v. Gill, (SCC), [1973] S.C.R. 654; Jack Cewe Ltd. v.Jorgenson, (SCC), [1980] 1 S.C.R. 812; United States v. Price, 288 F.2d 448 (1961); Phillips v. Western Company ofNorth America, 953 F.2d 923 (1992); Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601. Statutes and Regulations Cited Canadian Forces Superannuation Act, R.S.C. 1985, c. C-17. Employment Insurance Act, S.C. 1996, c. 23, s. 45. Authors Cited Burrows, Andrew. Remedies for Torts and Breach of Contract, 3rd ed.

Oxford: Oxford University Press, 2004. Cassels, Jamie, and Elizabeth Adjin-Tettey. Remedies: The Law of Damages, 2nd ed. Toronto: Irwin Law, 2008. Fleming, John G. “The Collateral Source Rule and Contract Damages” (1983), 71 Cal. L. Rev. 56. Kaplan, Ari, and Mitch Frazer. Pension Law, 2nd ed. Toronto: Irwin Law, 2013.

Marks, John. “Symmetrical Use of Universal Damages Principles — Such as the Principles Underlying the Doctrine of Proximate Cause — to Distinguish Breach-Induced Benefits That Offset Liability From Those That Do Not” (2009), 55 Wayne L. Rev. 1387. McCamus, John D. The Law of Contracts , 2nd ed. Toronto: Irwin Law, 2012. Ogus, A. I. The Law of Damages . London: Butterworths, 1973. Perillo, Joseph M. “The Collateral Source Rule in Contract Cases” (2009), 46 San Diego L. Rev. 705. Sproat, John R. Wrongful Dismissal Handbook , 6th ed. Toronto: Carswell, 2012. Swan, Angela, and Jakub Adamski.

Canadian Contract Law , 3rd ed. Markham, Ont.: LexisNexis, 2012. Waddams, S. M. The Law of Damages , 5th ed. Toronto: Canada Law Book, 2012. APPEAL from a judgment of the British Columbia Court of Appeal (Finch C.J. and Prowse and Levine JJ.A.), 2011 BCCA 337 , 20 B.C.L.R. (5th) 241, 308 B.C.A.C. 304, 521 W.A.C. 304, 336 D.L.R. (4th) 481, [2011] 10 W.W.R. 425, 91 C.C.P.B. 60, 92 C.C.E.L. (3d) 289, [2011] B.C.J. No. 1453 (QL), 2011 CarswellBC 2023, affirming a decision of Goepel J., 2010 BCSC 376 , 2010 CLLC ¶210-021, [2010] B.C.J. No. 510 (QL), 2010 CarswellBC 679 .

Appeal dismissed, McLachlin C.J. and Rothstein J. dissenting. D. Geoffrey Cowper , Q.C. , and Lorene A. Novakowski , for the appellant. Christopher J. Watson and Matthew G. Siren , for the respondent. The judgment of LeBel, Fish, Abella, Cromwell, Moldaver, Karakatsanis and Wagner JJ. was delivered by Cromwell J. — I. Introduction [ 1 ] When IBM Canada Ltd. wrongfully dismissed its long-time employee, Richard Waterman, he had to start drawing his pension. The question before the Court is whether his receipt of those pension benefits reduces the damages otherwise payable by IBM for wrongful dismissal.

The British Columbia courts decided not to deduct the pension benefits and IBM appeals. [ 2 ] The question looks straightforward enough at first glance. The general rule is that contract damages should place the plaintiff in the economic position that he or she would have been in had the defendant performed the contract. IBM’s obligation was to give Mr. Waterman reasonable notice of dismissal or pay in lieu of it. Had it given him reasonable working notice, he would have received only his regular salary and benefits during the period of notice.

As it is, he in effect has received both his regular salary and his pension for that period. It therefore seems clear, under the general rule of contract damages, that the pension benefits should be deducted. Otherwise, Mr. Waterman is in a better economic position than he would have been in had there been no breach of contract. [ 3 ] On closer study, however, the question raised on appeal is not as simple as that.

The case in fact raises one of the most difficult topics in the law of damages, namely when a “collateral benefit” or a “compensating advantage” received by a plaintiff should reduce the damages otherwise payable by a defendant. The law has long recognized that applying the general rule of damages strictly and inflexibly sometimes leads to unsatisfactory results.

The question is how to identify the situations in which that is the case. [ 4 ] In my view, employee pension payments, including payments from a defined benefit plan as in this case, are a type of benefit that should generally not reduce the damages otherwise payable for wrongful dismissal. Both the nature of the benefit and the intention of the parties support this conclusion. Pension benefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings. They are not intended to be an indemnity for wage loss due to unemployment.

The parties could not have intended that the employee’s retirement savings would be used to subsidize his or her wrongful dismissal. There is no decision of this Court in which a non-indemnity benefit to which the plaintiff has contributed, such as the pension benefits in issue here, has ever been deducted from a damages award. [ 5 ] I would dismiss IBM’s appeal and affirm the result arrived at by the British Columbia courts. II. Overview of Facts and Proceedings [ 6 ] When IBM dismissed Mr. Waterman without cause on March 23, 2009, he was 65 years old and had 42 years of service.

He was a long-standing member of IBM’s defined benefit pension plan, which I will refer to simply as “the plan”. IBM contributed a percentage of his salary to the plan on his behalf and the plan guaranteed specific benefits, which became vested over time, upon retirement. [ 7 ] At the time of the termination, there was no longer a mandatory retirement policy in place for IBM employees. However, Mr. Waterman was entitled to a full pension under the plan and his termination had no impact on the amount of his pension benefits. IBM told Mr.

Waterman that on termination, he would be treated as a retiree and that he must begin receiving monthly pension payments as of that date. [ 8 ] An employee like Mr. Waterman, who is entitled to retire with his full pension but has not reached the age of 71, cannot receive both pension and employment income from IBM at the same time. That changes at age 71, when he or she must start drawing benefits and may continue working and earning employment income from IBM.

We have not been referred to any provision in the plan that would prevent a retiree, regardless of age, from receiving benefits under the plan and employment income from a different employer. [ 9 ] Mr. Waterman sued for wrongful dismissal and the matter proceeded to

summary trial in the Supreme Court of

British Columbia. The trial judge, Goepel J., found that the appropriate period of notice was 20 months. IBM’s position was (and is) thatMr. Waterman’s pension benefits (approximately $2,124 per month starting June 1, 2009) should be deducted from the salary andbenefits otherwise payable during this period. The trial judge rejected this position: 2010 BCSC 376, 2010 CLLC ¶210-021. [10] IBM’s appeal from this decision was dismissed by the British Columbia Court of Appeal. Writing for the court,Prowse J.A. relied on this Court’s judgment in Sylvester v. British Columbia, (SCC), [1997] 2 S.C.R. 315.

However,she concluded that the distinctions between the benefits and the intentions of the parties in the two cases led to a different conclusion inthis case: 2011 BCCA 337, 20 B.C.L.R. (5th) 241. III. Positions of the Parties [11] On its appeal to this Court, IBM makes two main points. It submits, first, that the result reached by the BritishColumbia courts is at odds with the compensatory goal of damages for wrongful dismissal.

IBM points out that even if it had given Mr.Waterman adequate working notice of his termination, he would not have received both his employment income and his pension benefitsduring the notice period. By awarding him damages for the full notice period without deduction of the pension benefits received duringthat period, the British Columbia courts have placed him in a better economic position than he would have been in had IBM performedthe contract.

Second, IBM maintains that the Court in Sylvester held that these sorts of benefits are part of an integrated employmentrelationship and, unless deducted, the employee collecting them would receive greater compensation than would an employee lawfullydismissed with working notice. [12] Mr. Waterman urges us to reject IBM’s position. He submits that the pension is the property of the employee that isearned through work and consists of a benefit that is part of the employee’s remuneration package.

The pension is like a “nest egg”,RRSP or savings account, which IBM could not take advantage of to offset the damages awarded. Mr. Waterman could have transferredthe value of his pension to another vehicle if he had left employment with IBM before reaching the age of 65 and his retirement savingswould consequently have been out of reach. As for the intention of the parties, there is no provision in the pension plan expresslyprohibiting concurrent reception of salary and pension benefits. It was therefore up to the courts to determine the parties’ intention,which the Court of Appeal correctly did in its decision.

IV. Analysis [13] In my respectful view, both of IBM’s main arguments must be rejected. The general principle of compensation is nota full answer to the issue. The question is whether this case falls within an exception to it and in my view it does. The Court’s decision inSylvester is distinguishable and, in fact, its reasoning supports the conclusion that the pension benefits should not be deducted. [14] There are three key matters that need to be considered in order to answer the question posed by the appeal. I will setthem out here with a

summary of my conclusions. A. Why is there a “collateral benefit” problem in this case? [15] A collateral benefit is a gain or advantage that flows to the plaintiff and is connected to the defendant’s breach. Thisconnection may exist either because there is a “but for” causal link between the breach and the receipt of the benefit or because thebenefit was intended to provide the plaintiff with an indemnity for the type of loss caused by the breach.

The problem raised by collateralbenefits is the question of whether they should be deducted from the damages otherwise payable by the defendant on account of thebreach. This case raises a collateral benefit problem because there is a “but for” causal link between the IBM’s breach of contract andMr. Waterman’s receipt of the benefit. He would not have received the pension benefits and full salary in lieu of working notice “butfor” the dismissal. B.

Is the compensation principle the answer to the problem? [16] The principle that the defendant should compensate the plaintiff only for his or her actual loss is not, on its own, ananswer to the problem. There are exceptions to the strict application of this principle, the most important of which is the exception forprivate insurance and other benefits which, for this purpose, are considered analogous to private insurance.

That exception applies notonly to insurance benefits in the strict sense, but also to other benefits such as pension payments to which an employee has contributedand which were not intended to be an indemnity for the type of loss suffered as a result of the defendant’s breach. C. Does the Court’s decision in Sylvester support IBM’s position that the pension benefits must be deducted? [17] In my view, it does not. Sylvester is distinguishable. The reasoning in Sylvester in fact supports the conclusion thatMr.

Waterman’s pension benefits should not be deducted from the wrongful dismissal damages otherwise payable by IBM. [18] My more detailed analysis follows. A. Why Is There a Collateral Benefit Problem in This Case? [19] It will be helpful to start by explaining what a collateral benefit problem is and why we have one here.

(1) What Is a Collateral Benefit Problem? [20] In general terms, there is a collateral benefit when a source other than the damages payable by the defendantameliorates the loss suffered by the plaintiffs as a result of the defendant’s breach of legal duty: J. Cassels and E. Adjin-Tettey,Remedies: The Law of Damages (2nd ed. 2008), at p. 416. For example, if an employee is wrongfully dismissed, but receivesemployment insurance benefits, those benefits are a collateral benefit. The problem is whether they should be deducted from thedamages the defendant will pay for wrongful dismissal.

[21] If we simply apply the compensation principle — that the plaintiff should recover his or her actual economic lossbut not more — the answer is straightforward. If we do not deduct the collateral benefit, the plaintiff will be in a better position than heor she would have been in had the employment contract been performed. To apply the compensation principle, we should consider notonly the plaintiff’s losses but also any gains that flow from the defendant’s breach.

The collateral benefit problem asks whether weshould apply the compensation principle and deduct or depart from it and not deduct. [22] There is considerable overlap between the collateral benefit problem and the questions of mitigation. The maindistinction is this: mitigation is concerned with whether the plaintiff acted reasonably after the defendant’s breach in order to reducelosses.

The collateral benefit question, in contrast, is concerned with whether some compensating advantage that was in fact received bythe plaintiff, most often as a result of arrangements made before the breach, should be taken into account in assessing the plaintiff’sdamages: see A. I. Ogus, The Law of Damages (1973), at pp. 87-88.

(2) When Does a Collateral Benefit Problem Arise? [23] Not all benefits received by a plaintiff raise a collateral benefit problem. Before there is any question of deduction,the receipt of the benefit must constitute some form of excess recovery for the plaintiff’s loss and it must be sufficiently connected to thedefendant’s breach of legal duty. [24] For example, there is no excess recovery if the party supplying the benefit is subrogated to — that is, steps into theplace of — the plaintiff and recovers the value of the benefit.

In those circumstances, the defendant pays the damages he or she hascaused, the party who supplied the benefit is reimbursed out of the damages and the plaintiff retains compensation only to the extent thathe or she has actually suffered a loss: see, e.g., Cunningham v.

Wheeler, (SCC), [1994] 1 S.C.R. 359, at pp. 386-88, perMcLachlin J., as she then was, dissenting in part. (The employment insurance example that I mentioned earlier is now resolved in thisway by statute: see below, at para. 44.) [25] Even if there is some form of excess recovery, however, there is only a collateral benefit problem if the benefit issufficiently connected to the defendant’s breach. This requirement of sufficient connection serves a purpose with respect to collateralbenefits that is analogous to that served by rules of causation and remoteness with respect to damages.

Just as plaintiffs cannot recover alllosses, no matter how loosely related to the defendant’s breach or how far beyond the parties’ reasonable contemplation, so too thedefendant does not get credit for all benefits accruing to the plaintiff, no matter how loosely connected to the defendant’s wrongfulconduct. [26] Before turning to the nature of the required link, I note that scholars have objected to the term “collateral benefit”because it assumes the answer to the question. The word “collateral” suggests that the benefit should not be taken into account.

But ofcourse the legal problem is whether or not the benefit should be deducted. Scholars have suggested that the term “compensatingadvantages” is a better one and that is the term I will use in my reasons: see, e.g., Ogus, at pp. 93-94; A. Burrows, Remedies for Tortsand Breach of Contract (3rd ed. 2004), at p. 156; S. M.

Waddams, The Law of Damages (5th ed. 2012), at para. 15.700. [27] Another problem with the terms “collateral benefit” or “collateral source” is that they suggest that the test forwhether a benefit is deductible is whether it is “collateral”, that is, independent of the relation between the plaintiff and the defendant.Some of the American jurisprudence, for example, has recognized that this “independence” test is an oversimplification which does notexplain the treatment of benefit in the cases: see, e.g., Phillips v. Western Company of North America, 953 F.2d 923 (5th Cir. 1992), atpp. 931-33.

Moreover, it can lead to fruitless semantic debates about whether a benefit is or is not “collateral” or “independent” ratherthan furthering principled analysis. As one court put it, that a benefit “comes from the defendant tortfeasor does not itself preclude thepossibility that it is from a collateral source. The plaintiff may receive benefits from the defendant himself which, because of theirnature, are not considered double compensation”: United States v. Price, 288 F.2d 448 (4th Cir. 1961), at p. 450; Sloas v. CSXTransportation, Inc., 616 F.3d 380 (4th Cir. 2010), at p. 389.

As we shall see, several factors other than the source of the benefit may beconsidered in order to determine whether it should be deducted. [28] Returning to the issue of connection between the benefit and the breach, the question is what sort of link is requiredbefore the issue about deduction arises. The cases suggest two answers. The advantage must either be one that (

a) would not haveaccrued to the plaintiff “but for” the defendant’s breach or (

b) was intended to indemnify the plaintiff for the sort of loss resulting fromit. If neither of these conditions is present, there is no issue about deduction. If either of these conditions is present, there is. [29] In relation to the “but for” connection between the breach and the advantage, consider this example. A plaintiff whohas been injured by a defendant’s negligence buys a lottery ticket, as is his usual practice, and wins a large sum of money. No one wouldargue that the amount of the winnings should be deducted from the damages payable by the defendant.

There is no “but for” causalconnection between the defendant’s negligence and the plaintiff’s purchase of the winning ticket: see Burrows, at p. 156. [30] Even if there is no “but for” causal link between a benefit and the breach, there may still be a problem about whethera benefit should be deducted. This will occur where the benefit and the breach are connected in the sense that the benefit is intended toindemnify the type of loss caused by the breach — Sylvester is an example. Mr. Sylvester was unable to work and receiving disabilitypayments under his employment contract when he was wrongfully dismissed.

There was clearly no causal link between the employer’sfailure to give reasonable notice of termination (or payment in lieu of notice) and the receipt of the disability benefits. Nonetheless, theCourt found that there was a compensating advantages problem. As Major J. pointed out, the disability benefits were intended to be asubstitute for Mr. Sylvester’s regular salary: para. 14.

In other words, the benefit was intended to be an indemnity for the loss of theregular salary, precisely the sort of loss that resulted from the defendant’s breach of the employment contract. [31] The existence of these sorts of links between the breach and the benefit identifies whether there is a compensatingadvantage problem. But the existence of such a link is not a reliable marker of whether a particular benefit should be deducted. Relyingon strict principles of causation, for example, often conceals unarticulated policy concerns: see, e.g., Parry v.

Cleaver, [1970] A.C. 1(H.L.), at pp. 34-35, per Lord Pearce; Ogus, at pp. 225-26; Ratych v. Bloomer, (SCC), [1990] 1 S.C.R. 940, at pp. 965-66. Similarly, the indemnity factor is not a reliable marker of which benefits are or are not deductible. This is clear, for example, from

the Court’s decision in Cunningham . In issue were disability benefits provided for under collective agreements. They were clearly intended to provide an indemnity for wage loss arising from an inability to work. Nonetheless, the Court held that the benefits should not be deducted. [ 32 ] To sum up, a potential compensating advantage problem exists if the plaintiff receives a benefit that would result in compensation of the plaintiff beyond his or her actual loss and either (

a) the plaintiff would not have received the benefit but for the defendant’s breach, or (

b) the benefit is intended to be an indemnity for the sort of loss resulting from the defendant’s breach. These factors identify a potential problem with a compensating advantage, but do not decide how it should be resolved.

(3) Why Is There a Problem About Deduction in This Case? [ 33 ] A compensating advantage issue arises in this case. First, there is an element of excess compensation. Mr. Waterman has received his full pension benefits and, in addition, the salary he would have earned had he worked during the period of reasonable notice (less an allowance for his earnings from other employment). Had IBM not breached the contract of employment and instead given him working notice, he would have received only his salary during that period and not his pension.

Second, there is a “but for” causal relationship between IBM’s breach of contract and Mr. Waterman’s receipt of the pension benefits. One could say that it was the pension plan rather than IBM’s breach of contract that gave rise to the benefit, but it is artificial to suggest that there is no “but for” causal link between IBM’s breach of contract and Mr. Waterman’s receipt of his pension benefits: “but for” the breach, there would have been no termination and, “but for” the termination, Mr. Waterman would not have started to collect his pension.

Given that there was double recovery and that the benefit would not have arisen but for IBM’s breach, we must decide whether the benefit should or should not be deducted from damages otherwise payable by IBM. B. Is the Compensation Principle the Answer to the Problem? [ 34 ] IBM’s first main point is that the compensation principle requires the pension benefits to be deducted. Mr. Waterman is better off as a result of the damage award than he would have been if IBM had given reasonable working notice. It follows, in IBM’s submission, that the pension benefits must be deducted so that the damage award places Mr.

Waterman in the economic position he would have been in had IBM given him reasonable working notice. This is essentially the position adopted by my colleague Rothstein J. [ 35 ] While I agree that the damage award is a departure from the compensation principle, this in itself is not an answer to the problem posed by the appeal. As I will explain, the compensation principle cannot be, and is not, applied strictly or inflexibly in a manner that is divorced from other considerations. The question is whether the compensation principle should be strictly applied in this case. In my view, it should not.

To explain why, it is helpful to look first at why the compensation principle is not applied strictly, or at all, in various situations.

(1) When Does the Compensation Principle Not Apply Strictly? [ 36 ] Considerations other than the extent of the plaintiff’s actual loss shape the way the compensation principle is applied and there are well-established exceptions to it. For example, the rule that contract damages compensate only the plaintiff’s actual loss is not the only rule that applies to assessing contract damages. As a leading English case put it, “Damages are measured by the plaintiff’s loss, not the defendant’s gain.

But the common law, pragmatic as ever, has long recognised that there are many commonplace situations where a strict application of this principle would not do justice between the parties. Then compensation for the wrong done to the plaintiff is measured by a different yardstick” : Attorney General v. Blake , [2001] 1 A.C. 268 (H.L.), at p. 278 . In some cases, for example, an award of damages in contract may be based on the advantage gained by the defendant as a result of the breach rather than the loss suffered by the plaintiff: see, e.g., Bank of America Canada v.

Mutual Trust Co. , 2002 SCC 43 , [2002] 2 S.C.R. 601, at para. 25 . The rule that damages are measured by the plaintiff’s actual loss, while the general rule, does not cover all cases.

In addition, through the doctrines of remoteness and mitigation, the compensation principle gives way to considerations of reasonableness in relation to whether the plaintiff’s expectations of the contract and his or her conduct in response to the breach of it were reasonable. [ 37 ] Finally, there are well-recognized exceptions in which benefits flowing to plaintiffs are not taken into account even though the result is that they are better off, economically speaking, after the breach than they would have been had there been no breach.

These exceptions are ultimately based on factors other than strict compensatory considerations. As Lord Reid put it in Parry , “[t]he common law has treated [the deductibility of compensating advantages] as one depending on justice, reasonableness and public policy”: p. 13. Or, as McLachlin J. wrote, this issue raises a question of “basic policy”: Ratych , at p. 959.

(2) What Factors Help to Identify When Compensating Advantages Are Not Deducted? [ 38 ] What are some of these considerations of justice, reasonableness and policy? An answer may be found by looking at the two well-established situations in which compensating advantages are not deducted: charitable gifts and private insurance. (

a) Charitable Gifts [ 39 ] The first is the less controversial. The rule is that charitable gifts made to the plaintiff are generally not deductible from the plaintiff’s damages even though they were made as a result of and in response to the injury or loss caused by the defendant’s wrong: see, e.g., Waddams, at paras. 3.1550-3.1560; Cassels and Adjin-Tettey, at pp. 420-21.

Two concerns explain the exception: first, that if these charitable gifts were deducted, “the springs of private charity would be found to be largely, if not entirely, dried up” and, second, that it rarely makes practical sense to spend the time and effort required to take these sorts of gifts into account: Redpath v. Belfast and County Down Railway (1947), N.I. 167 (K.B.), at p. 170.

See also Ogus, at p. 223; Waddams, at para. 3.1550; Cassels and Adjin-Tettey, at pp. 420-21; Cunningham , at p. 370. [ 40 ] These explanations of the exception suggest we may take into account the broader incentives created by deducting or not deducting a benefit as well as pragmatic considerations relating to whether the applicable rule is clear, coherent and easy to apply: Cunningham , at p. 388, per McLachlin J.

(

b) Private Insurance [41] A second and more controversial exception relates to payments from the plaintiff’s private insurance. The core of theexception is well established: benefits received by a plaintiff through private insurance are not deductible from damage awards.However, both the precise scope and the rationale of the exception have been the subject of judicial and scholarly debate. Its practicalimportance is limited given the widespread use of subrogation, which avoids the compensating advantage issue altogether.

While theexception more typically arises in tort cases, it has also been applied in contract actions, including actions for wrongful dismissal: JackCewe Ltd. v. Jorgenson, (SCC), [1980] 1 S.C.R. 812. The approach in both areas of law is the same in principle,although the terms of the contract and the dealings between the parties will inform the analysis in contract cases. [42] One area of controversy relates to the sorts of benefits which fall within the private insurance exception. Does itapply to both indemnity and non-indemnity insurance?

Does it extend to disability benefits, employment insurance or pensions payableon retirement? The Court has held that the answer to all of these questions is yes, but not, as we shall see, without well-reasoned dissent.In short, the so-called private insurance exception has been applied by analogy to a variety of payments that do not originate in a contractof insurance. [43] In Canadian Pacific Ltd. v.

Gill, (SCC), [1973] S.C.R. 654, the Court applied the insurance exceptionto prevent deduction of the present value of Canada Pension Plan benefits available to surviving dependents from the damages awardedin a fatal injuries claim. Spence J., for the Court, held that the payments were “so much of the same nature as contracts of insurance thatthey also should be excluded from consideration when assessing damages under the provisions of that statute”: p. 670; see also GrandTrunk Railway v. Beckett (1887), 16 S.C.R. 713, at p. 714, and Quebec Workmen’s Compensation Commission v.

Lachance, (SCC), [1973] S.C.R. 428, at pp. 433-34. [44] In Guy v. Trizec Equities Ltd., (SCC), [1979] 2 S.C.R. 756, Mr. Guy’s injury led to his retirementand receipt of pension benefits. They were not deducted from damages for loss of earnings. Ritchie J., for the Court, viewed pensions,whether contributory or non-contributory, as flowing from the employee’s work and part of what the employer was prepared to pay forthe employee’s services.

He agreed with Lord Reid’s conclusion, in Parry, as quoted by Spence J., in Gill, that “[t]he fact that they flowfrom past work equates them to rights which flow from an insurance privately effected by [the employee]”: Guy, at p. 763.

Similarly, inJack Cewe, the Court did not deduct a dismissed employee’s unemployment insurance benefits from his wrongful dismissal damages.The benefits, wrote Pigeon J., for the Court, were a consequence of the contract of employment making them similar to contributorypension benefits: p. 818. (The collateral benefit issue that arose in Jack Cewe is now addressed by s. 45 of the Employment InsuranceAct, S.C. 1996, c. 23, which states that a claimant who receives benefits and is subsequently awarded damages for the same period,“shall pay to the Receiver General as repayment of an overpayment of benefits an amount equal to the benefits that would not have beenpaid if the earnings had been paid or payable at the time the benefits were paid”.) [45] In Ratych, the Court found that sick leave benefits should be deducted from damages otherwise payable for loss ofearning by the party whose negligence was responsible for the injuries.

For the majority, McLachlin J. wrote that it may well beappropriate not to deduct benefits where the employee can show a contribution equivalent to payment of an insurance premium. In otherwords, benefits may not be deductible when they come about because the plaintiff has prudently obtained and paid for insurance.However, that was not the case in Ratych, making it a different situation than one in which the benefits flow from theemployer/employee relationship: pp. 973-74.

In Cunningham, disability insurance benefits payable under the terms of collectiveagreements were held not to be deductible because there was evidence that the plaintiffs had paid for these disability plans throughreduced wages. The Court’s earlier decision in Ratych was distinguished on this basis. [46] Finally, in Sylvester, non-contributory disability benefits received during the notice period were deducted fromwrongful dismissal damages otherwise payable.

The benefits were intended to be an indemnity for lost wages while the plaintiff wasunable to work, the plaintiff had not contributed to acquire the benefit, and policy considerations favoured deduction. [47] The two cases in which the private insurance exception was not applied (Ratych and Sylvester) involved benefits thatwere intended to be an indemnity for the type of loss that resulted from the defendant’s breach and to which the plaintiff had notcontributed.

Retirement pension benefits, which are not an indemnity for loss of wages resulting from inability to work and to which theemployee contributes directly or indirectly, have been held by this Court and others to fall within the private insurance exception: Guy;Gill; Chandler v. Ball Packaging Products Canada Ltd. (1992), 2 C.C.P.B. 101 (Ont. Ct. J. (Gen. Div.)), aff’d (1993), 2 C.C.P.B. 99(Ont. Ct. J. (Div. Ct.)); Emery v. Royal Oak Mines Inc. (1995), (ON SC), 24 O.R. (3d) 302 (Gen. Div.); Parry. [48] IBM relies on Canadian Human Rights Commission v.

Canada (Attorney General), 2003 FCA 86, 301 N.R. 321,but, in my view, this reliance is misplaced. The human rights complainant in that case, Master Corporal (retired) Carter, complained thathis release from the Canadian Forces by virtue of his age constituted discrimination; in other words, his claim was not that his employerhad failed to give him reasonable notice of termination, but that it could not lawfully terminate him. Following his release from service,a proper legislative basis for compulsory retirement was put in place, thus ending the discrimination.

The question was whether thecompensation awarded by the Human Rights Tribunal for lost wages during the period of discrimination should be reduced by theamount of pension benefits received during that period. The Federal Court of Appeal held that they should. However, it specificallydeclined to decide the case on the basis of the private insurance exception: para. 20. Instead, it reasoned that Master Corporal Cartershould be treated as a member of the regular force during the period of discrimination. But, by virtue of the applicable provisions of theCanadian Forces Superannuation Act, R.S.C. 1985, c.

C-17, a person may either be a member of the regular armed forces contributing tothe superannuation account or a person who has ceased to be a member and entitled to benefits, but not both at the same time. On thatbasis, his claim for both pension benefits and his full salary was inconsistent with the nature of his claim and the governing legislation.This reasoning cannot apply to this case, however. The private insurance exception applies to wrongful dismissal actions: Jack Cewe.

Inaddition, the contractual provisions here, unlike the statute that governed Master Corporal Carter’s case, do not have any general baragainst receiving full pension entitlement and employment income. [49] A second area of controversy concerns the basis of the private insurance exception. It has been explained on variousgrounds, which may be grouped under three main headings. One is concerned with the strength of the causal connection between receipt

of the benefit and the defendant’s breach, a second relates to the nature of the benefit, and a third concerns a variety of policy considerations that may be served by either deducting or not deducting the benefit. [ 50 ] Before turning to those issues, however, I must address a contention advanced by my colleague Rothstein J. He maintains that application of the collateral benefit or private insurance exception is not appropriate where the plaintiff’s cause of action and his right to a particular benefit arise from the same contract.

I respectfully do not accept that there is or should be any such categorical “single contract” rule in relation to compensating advantages. This proposition is not consistent with this Court’s jurisprudence. [ 51 ] In Jack Cewe , unemployment insurance benefits were not deducted from wrongful dismissal damages. The Court held that the benefits were the “consequence of the contract of employment”, making them similar to contributory pension benefits: p. 818.

Thus, although the Court considered that the benefits and the claim for damages arose as a consequence of the same contract, the benefits were not deducted from the wrongful dismissal damages. Thus, my colleague’s proposition is contradicted by a leading authority from this Court on the deduction of benefits from wrongful dismissal damages. [ 52 ] The Sylvester case, from this Court, does not lay down any such broad “single contract” rule. If that had been the Court’s view, it would have provided a much simpler solution to the issue in Sylvester than the one it unanimously adopted.

Of course, in Sylvester , the sick leave benefits and the claim for wrongful dismissal damages both arose from the contract of employment, but the Court did not rely on, or even mention, the broad “single contract” rule advanced by my colleague. On the contrary, Major J., writing for the Court, was careful not to articulate any broad “single contract” rule in relation to compensating advantages.

He stated that [t]here may be cases where an employee will seek benefits in addition to damages for wrongful dismissal on the basis that the disability benefits are akin to benefits from a private insurance plan for which the employee has provided consideration. This is not the case here. . . .

The issue whether disability benefits should be deducted from damages for wrongful dismissal where the employee has contributed to the disability benefits plan was not before the Court. [Emphasis added; para. 22.] Of course, whether the employee contributes to the benefits or not, they equally arise under the employment contract. The fact that the Court explicitly left this point open is inconsistent with the Court intending to adopt the broad “single contract” rule espoused by Rothstein J.

Sylvester teaches that, where a cause of action and a benefit arise under the contract of employment, we must look first to that contract to determine the issue of whether an employment benefit should be deducted from wrongful dismissal damages. As in Sylvester , Mr. Waterman’s contract of employment is silent on this issue, so we must attempt to discern the parties’ intentions in light of the express terms of the contract of employment. [ 53 ] I return to the three areas of controversy in relation to the basis of the private insurance exception . (

i) Strength of Connection to the Defendant’s Breach [ 54 ] The strength-of-connection factor has often been referred to in the cases. The argument is that private insurance benefits (and benefits considered analogous to them) should not be deducted because they result from the plaintiff’s contract of insurance, not from the defendant’s wrongful act. This was part of the reasoning in Bradburn v. Great Western Railway Co. (1874), L.R. 10 Ex. 1 , but at the distance of 140 years, this analysis seems artificial.

Moreover, scholars have pointed out that decisions about legal as opposed to factual causation often simply disguise the true policy reasons underlying the decisions: see, e.g., Ogus, at p. 94; Burrows, at p. 162. In the leading English case on the private insurance exception, Parry , Lord Pearce commented that strict principles of causation do not provide a “satisfactory line of demarcation” between benefits that are and are not deductible: p. 34.

While, as discussed, considering the connection between the breach and the benefit helps to identify that there is an issue about whether the benefit should be deducted, principles of causation do not provide reliable markers of whether a benefit should be deducted or not. (ii) The Nature and Purpose of the Benefit [ 55 ] The nature and purpose of the benefit, on the other hand, is often a better explanation of why private insurance benefits should or should not be deducted.

Two factors relating to the nature of the benefit have been particularly important: whether the benefit is an indemnity for the loss caused by the defendant’s breach and whether the plaintiff has directly or indirectly paid for the benefit. [ 56 ] I will not attempt to lay down general principles that will cover all possible types of benefits. However, as we shall see, a review of this Court’s jurisprudence supports the following general propositions (subject, of course, to statutory or contractual provisions to the contrary). • Benefits have not been deducted if (

a) they are not intended to be an indemnity for the sort of loss caused by the breach and (

b) the plaintiff has contributed to the entitlement to the benefit: Gill ; Guy. • Benefits have not been deducted where the plaintiff has contributed to an indemnity benefit: Jack Cewe ; Cunningham . • Benefits have been deducted when they are intended to be an indemnity for the sort of loss caused by the breach but the plaintiff has not contributed in order to obtain entitlement to the benefit: Sylvester ; Ratych . [ 57 ] The pension benefit in this case was not intended to be an indemnity for lost wages and Mr. Waterman contributed to the acquisition of his pension through his years of service.

This, no doubt, is why it has never been argued that the benefits should be deducted under the principle of mitigation. The pension benefit, therefore, is the type of benefit which should not be deducted. The reasoning leading me to this conclusion follows. [ 58 ] I begin my review with the decision of the House of Lords in Parry , which is the foundation of much of the Canadian jurisprudence.

Lord Reid ultimately based his conclusion that the benefit (a pension) should not be deducted based on its “intrinsic nature”: “A pension is intrinsically of a different kind from wages. . . . [W]ages are a reward for contemporaneous work, but . .

. a pension is the fruit, through insurance, of all the money which was set aside in the past in respect of his past work. They are different in kind”: p. 16. Lord Pearce also considered the nature and purpose of the benefit when he asked: “Is there anything else in the nature of these pension rights derived from work which puts them into a different class from pension rights derived from private insurance? Their ‘character’ is the same”: p. 37.

Lord Wilberforce also focused on the nature of the pension benefit, noting that it did not prevent the injured officer from taking other paid employment, whether it be for a wage that was less, equal to or more than his police officer’s salary: p. 42. [ 59 ] The nature and purpose of the benefit was central to the minority’s reasoning in Cunningham . While the majority was concerned with authority, fairness and deterrence, the minority refocused the analysis on the nature of the benefit, distinguishing between “indemnity” and “non-indemnity” insurance.

The former should be deductible, while the latter should not: This distinction is critical to a discussion of collateral benefits. If the insurance money is not paid to indemnify the plaintiff for a pecuniary loss, but simply as a matter of contract on a contingency, then the plaintiff has not been compensated for any loss.

He may claim his entire loss from the negligent defendant without violating the rule against double recovery. [pp. 371-72] [ 60 ] Importantly, the minority judges accepted that the dominant tide of the jurisprudence in the common law world is that non-indemnity pension benefits should not be deducted: Cunningham , at p. 376.

Although they mostly do not rely on the private insurance exception, Commonwealth decisions conclude that pension benefits should not be deducted from a damages award because pension benefits are not meant to compensate the plaintiff for the injury or breach of contract or to act as wage replacement. See for example: National Insurance Co. of New Zealand Ltd. v. Espagne (1961), 105 C.L.R. 569 ; Graham v. Baker (1961), 106 C.L.R. 340 ; Parry ; Smoker v. London Fire and Civil Defence Authority , [1991] 2 A.C. 502 (H.L.) . In Hopkins v.

Norcross plc , [1993] 1 All E.R. 565 (Q.B.) , the High Court applied this reasoning to the deductibility of pension benefits in a wrongful dismissal suit. The reasoning is also consistent with the decision of the U.K. Employment Appeal Tribunal in Knapton v. ECC Card Clothing Ltd. , [2006] I.C.R. 1084. The non-deductibility of pension benefits was affirmed by the New Zealand Court of Appeal in Gilbert v. Attorney-General , [2010] NZCA 421, 8 N.Z.E.L.R. 72.

This is consistent with the approach in Guy , discussed earlier, which concerned pension benefits that were clearly not intended to be an indemnity for loss of earnings due to an inability to work. They were held not to be deductible from damages for loss of earnings payable by those responsible for the plaintiff’s inability to work. [ 61 ] The nature of the benefit was also an important factor in the Court’s decision to deduct employer-funded disability payments from wrongful dismissal damages in Sylvester .

The Court’s analysis looked first to the nature and purpose of the benefit and, in particular, to the question of whether the benefit is in the nature of an indemnity for the sort of loss caused by the defendant’s breach of contract. The fact that the benefit was intended to be an indemnity for wage loss was one of the reasons for the Court’s conclusion that the benefit should be deducted. [ 62 ] Reliance on the distinction between indemnity and non-indemnity benefits is sound in principle.

As McLachlin J. pointed out in her dissenting reasons in Cunningham , if the benefit “is not paid to indemnify the plaintiff for a pecuniary loss, but simply as a matter of contract on a contingency”, the benefit cannot be seen as having compensated the plaintiff for that pecuniary loss: pp. 371- 72. If that is the case, the arguments in favour of deducting the benefit are weaker in the sense that IBM is asking to deduct apples from oranges. [ 63 ] The fact that Mr.

Waterman’s pension comes from a defined benefit plan does not change its nature as a non- indemnity benefit. [ 64 ] The Court in Sylvester also considered another factor — that the plaintiff had not contributed to obtain the benefit by paying for it directly or indirectly — in support of its conclusion that the benefit should be deducted from the damages. This factor has often been mentioned and relied on in the cases. [ 65 ] For example, the Court first applied Parry in the 1973 case of Gill , and reaffirmed it in Guy .

In both cases, the Court emphasized that the plaintiff had directly or indirectly paid for the benefit in question. As Ritchie J., writing for the Court, put it in Guy : . . . this contributory pension is derived from the appellant’s contract with his employer and . . . the payments made pursuant to it are akin to payments under an insurance policy. This view is in accord with the judgment of the House of Lords in Parry v. Cleaver , which was expressly approved in this Court in the reasons for judgment of Mr. Justice Spence in Canadian Pacific Ltd. v.

Gill . . . . [p. 762] [ 66 ] This line of reasoning was repeated in Jack Cewe , which held that contributory unemployment insurance benefits were not deductible from wrongful dismissal damages. This factor was also an important one in Cunningham . As Cory J. put it, on behalf of the majority: “The application of the insurance exception to benefits received under a contract of employment should not be limited to cases where the plaintiff is a member of a union and bargains collectively.

Benefits received under the employment contracts of non-unionized employees will also be non-deductible if proof is provided of payment in some manner by the employee for the benefits ”: p. 408 (emphasis added). The majority found that there was evidence of such payment and held that the benefit should not be deducted. [ 67 ] While the cases from this Court have referred to whether the plaintiff has directly or indirectly contributed to the benefit, there are strong arguments against giving this consideration much weight as an explanation of why particular benefits should or should not be deducted.

As McLachlin J. pointed out in her partial dissent in Cunningham , reliance on this factor may be seen as inconsistent with legal principle and logic. With respect to legal principle, the defendant takes the plaintiff as he or she is and the plaintiff is compensated for his or her actual loss and no more.

As a matter of logic, it does not seem right to say that deducting the benefits deprives the plaintiff of the contributions made to gain entitlement to those benefits — whether deducted from damages or not, the plaintiff receives the benefits: Cunningham , at pp. 381-83; for a critique of reliance on this factor, see also Ogus, at pp. 226-27. [ 68 ] The pension benefits in issue in this case are not an indemnity for loss of wages and, as we shall see, pension benefits earned through years of service are invariably found to be contributory. The fact that the pension plan here is a defined benefit

plan does not detract from that conclusion. As a result, the problem highlighted in the difference between the majority and the dissent in Cunningham , i.e. how to treat indemnity benefits to which the plaintiff contributed, does not arise in this case. [ 69 ] I conclude from this review that whether the benefit is in the nature of an indemnity for the loss caused by the defendant’s breach and whether the plaintiff has directly or indirectly paid for the benefit have been important explanations of why particular benefits fall, or do not fall, within the private insurance exception.

The Court has been sharply and closely divided on the issue of the deduction for an indemnity benefit to which the plaintiff has contributed.

However, there is no decision of the Court of which I am aware that has required deduction of a non-indemnity benefit to which the plaintiff has contributed, like the pension benefits in this case. (iii) Broader Policy Considerations [ 70 ] Three main policy considerations have often been advanced to explain why a benefit should or should not be deducted: punishment, deterrence, and the provision of incentives for socially responsible behaviour. [ 71 ] The private insurance exception has often been justified on the basis that deducting the benefit from the damages reduces their punitive and deterrent value.

However, the notion that the exception was intended to have a punitive and deterrent value has been widely, and, in my view, soundly, criticized. Authors agree that punitive and deterrent value ought not to be relied on to explain why a benefit is or is not deducted: see J. G. Fleming, “The Collateral Source Rule and Contract Damages” (1983), 71 Cal. L. Rev. 56, at pp. 58-59; J. Marks, “Symmetrical Use of Universal Damages Principles — Such as the Principles Underlying the Doctrine of Proximate Cause — to Distinguish Breach-Induced Benefits That Offset Liability From Those That Do Not” (2009), 55 Wayne L.

Rev. 1387, at p. 1420; J. M. Perillo, “The Collateral Source Rule in Contract Cases” (2009), 46 San Diego L. Rev. 705, at p. 716; Ogus, at p. 225; Burrows, at pp. 162-63. This view is supported by both the High Court of Australia and the House of Lords: see National Insurance Co. , at p. 571, per Dixon C.J., and Parry , at p. 33. In Parry , Lord Pearce put it this way at p. 33: “The word ‘punitive’ gives no help.

It is simply a word used when a court thinks it unfair that a defendant should be saddled with liability for a particular item.” I would add that it is hard to defend punishment and deterrence as rationales against the incisive critique advanced by McLachlin J. in her dissenting reasons in Cunningham , at pp. 383-84.

I conclude that it is unsound to rely on a punitive or deterrent justification for the private insurance exception, particularly in breach of contract cases where fault is not an operating concept. [ 72 ] This is not to say, however, that the approach to damages does or should ignore the underlying purposes of the substantive obligations the breach of which they seek to remedy.

If, for example, an important purpose of the law of contracts is to protect the reasonable expectations of the parties to a contract, it is appropriate to consider how well the award of damages furthers that purpose in a particular case: see, e.g., A. Swan and J. Adamski, Canadian Contract Law (3rd ed. 2012), at §1.27. This consideration may be taken into account along with the other principles of damages law in order to ensure that there is a good “remedial fit” between the breach of obligation and the remedy. [ 73 ] The private insurance exception has also been justified by the incentives it may provide.

For example, deducting benefits that plaintiffs have provided for themselves might discourage plaintiffs from acting prudently in obtaining that sort of protection. This, however, has been a controversial explanation. The majority relied on it in Cunningham , but it was trenchantly criticized by the dissent and a similar critique has been made by scholars: see, e.g., Ogus, at pp. 226-27. [ 74 ] In my view, we should be cautious about relying too heavily on the incentives that may result from deducting or not deducting.

There will sometimes be little basis in fact for supposing that either deducting or not deducting certain benefits will have any impact on people’s behaviour. For example, do we think it likely that deducting insurance benefits will discourage people from buying insurance? The coverage is not limited to situations in which there will be legal recourse against a defendant. Even when legal recourse is available, it will likely require a longer and more expensive process, as compared to making an insurance claim.

Nor is it likely that people will be less ready to buy insurance if they are not doubly compensated in cases in which fault can be established. It seems to me that we should generally rely on these broader policy concerns only when they are directly related to the particular benefit in issue and when there is some reasonable basis in fact or experience to suppose that deducting or not deducting will actually serve the policy objective. [ 75 ] Sylvester provides an example of grounding policy considerations in the facts of the case.

The result in that case was supported by the fact that deducting the disability benefits from wrongful dismissal damages ensured that all affected employees would receive equal damages: if the benefits were not deducted, a dismissed employee collecting disability benefits would receive more compensation than would the employee who is dismissed while working (para. 21).

In the same paragraph, the Court considered the incentives created by the deduction or non-deduction of the disability benefits: failing to deduct the disability benefits could be an undesirable deterrent to employers establishing disability benefit plans. These concerns are directly related to the benefits in question and have a reasonable basis in fact. [ 76 ] From this review of the authorities, I reach these conclusions: (

a) There is no single marker to sort which benefits fall within the private insurance exception. (

b) One widely accepted factor relates to the nature and purpose of the benefit. The more closely the benefit is, in nature and purpose, an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. The converse is also true. (

c) Whether the plaintiff has contributed to the benefit remains a relevant consideration, although the basis for this is debatable. (

d) In general, a benefit will not be deducted if it is not an indemnity for the loss caused by the breach and the plaintiff has contributed in order to obtain entitlement to it. (

e) There is room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatment of those in similar situations, the possibility of providing incentives for socially desirable conduct, and the need for clear rules that are

easy to apply.

(3) Application to This Case [ 77 ] Where would these factors lead us in this case? In my view, they clearly support not deducting the retirement pension benefits from wrongful dismissal damages. The retirement pension is not an indemnity for wage loss, but rather a form of retirement savings. While the employer made all of the contributions to fund the plan, Mr. Waterman earned his entitlement to benefits through his years of service.

As the plan states, its primary purpose is “to provide periodic pension payments to eligible employees . . . after retirement . . . in respect of their service as employees”: art. 1.01, A.R., at p. 117. Thus, it seems to me that this case falls into the category of cases in which the insurance exception has always been applied: the benefit is not an indemnity and the employee contributed to the benefit.

This result is consistent with the dominant view in the case law and among legal scholars: Guy ; Gill ; Chandler ; Emery ; Parry ; Ogus, at p. 223. [ 78 ] To conclude, the compensation principle should not be applied strictly in this case because the pension benefits fall within the private insurance exception and should not be deducted from the wrongful dismissal damages. C.

Does the Court’s Decision in Sylvester Support IBM’s Position That the Pension Benefits Must Be Deducted? [ 79 ] I turn to IBM’s second main argument, that the Court’s decision in Sylvester supports its position that the pension benefits must be deducted here. In my view Sylvester does not support that result. [ 80 ] The issue in Sylvester was whether damages for wrongful dismissal should be reduced by the amount of disability benefits paid during the notice period from an employer-funded plan.

The Court’s analysis addressed three factors: the nature of the benefit, the intentions of the parties as reflected in the employment contract, and some broader policy considerations. When these factors are considered in light of the facts of this case, they lead to the opposite conclusion than they did in Sylvester . [ 81 ] The Court in Sylvester began by looking at the nature of the benefit. Was it intended to be a substitute (i.e. an indemnity) for wages payable during the period of reasonable notice? For two reasons, the Court determined that they were.

First, the disability benefits were a wage replacement benefit. It was clear from the terms of the plans that the benefits were intended to continue the employee’s earnings in the event the employee was unable to work due to illness or injury. Second, the disability benefits would be reduced by other income received by the employee, including other disability income, wage continuation plan benefits, pension benefits, workers’ compensation benefits and salary from other employment: para. 14.

They were therefore not freestanding entitlements — they were linked to and defined by the extent of actual income loss. (As I have already noted, the Court was also careful not to opine on whether the result would be the same if the employee had contributed money or money’s worth in order to obtain the benefit. The Court specifically left open the question of whether “disability benefits should be deducted from damages for wrongful dismissal where the employee has contributed to the disability benefits plan”: para. 22.) [ 82 ] The benefit in issue in this case is of an entirely different nature.

Unlike the disability benefits in Sylvester , the pension benefit is clearly not an indemnity benefit for loss of salary due to inability to work. The purpose of the pension benefits, as expressed in the plan documents, “is to provide periodic pension payments to eligible employees . . . after retirement and until death in respect of their service as employees”: art. 1.01, A.R., at p. 117. The pension plan is, in essence, a retirement savings vehicle to which an employee earns an absolute entitlement over time. Benefits are determined by years of service and salary level.

An employee who leaves employment after 10 or more years of service receives either a deferred pension or a transfer of the lump sum commuted value of the pension entitlement to a locked-in retirement vehicle. Pensionable earnings are credited at 100 percent of salary while on approved unpaid leave or short-term disability. Moreover, unlike the disability payments in Sylvester , pension payments or entitlements are not in general reduced by other income or benefits received by the recipient. Mr. Waterman could have retired, drawn his full pension, and drawn a full salary from another employer.

Pension benefits are clearly not intended to provide an indemnity for loss of income. [ 83 ] There is an even more fundamental difference. As Prowse J.A. points out in her reasons in the Court of Appeal, pension benefits like those in issue here bear many of the hallmarks of a property right. They, as she put it, are regarded as belonging to the employee: . . . although the payments under the [Defined Benefit Pension] Plan are made wholly by IBM, they are made “on behalf of” the employee.

This is also reflected in IBM’s [Defined Contribution] Plan, where employer contributions are attributed to a fund in the name of the employee. In both instances, the pension benefits are regarded as belonging to the employee . They have the right to designate beneficiaries of the benefit; they can elect to transfer their pension account to another locked-in RRSP or to another employer after 10 years of service upon leaving IBM; there is a provision for a lump-sum pay-out on retirement in the case of “small pensions” (of lesser magnitude than that enjoyed by Mr.

Waterman (Article 10.08)); and, in many jurisdictions, their pension rights are divisible between spouses on marriage breakdown. [Emphasis added; para. 60.] [ 84 ] This view is supported by basic principles of pension law. Mr. Waterman’s pension was vested. As A. Kaplan and M. Frazer explain in Pension Law (2nd ed. 2013), at p. 203: Vesting is the “foundation stone” of employee protections upon which pension regulation is based . . . .

An employee who is vested has an enforceable statutory right to the accrued value of his or her pension benefit earned to date, even if the employee terminates employment and plan membership prior to retirement age. It is the vesting of pension benefits that shift our perception of pensions from purely contractual entitlements to quasi-proprietary interests. [ 85 ] Pension benefits have consistently been viewed as an entitlement earned by the employee. As Lord Reid put it in Parry , at p. 16: “The products of the sums paid into the pension fund are in fact delayed remuneration for [the employee’s] current work.

That is why pensions are regarded as earned income.” The pension is therefore a form of retirement savings earned over the years of employment to which the employee acquires specific and enforceable rights. This is no less the case because the pension benefits were

not reduced by the wrongful dismissal; had they been, there would be no collateral benefit problem and no question of deduction. It is useful to ask this question: In light of the contract of employment, would the parties have intended to use an employee’s vested pension entitlements to subsidize his or her wrongful dismissal? In my view, the answer must be no. As Joseph M. Perillo writes: Suppose an employer fires an employee without justification, breaching a contract of employment, and the employee turns to his or her savings account for living expenses.

No one would argue that the employee’s recovery against the employer should be diminished by the employee’s withdrawals from savings. The savings account is a collateral source. To the extent that another collateral source resembles a savings account, the plaintiff should be able to recover damages without a deduction for the amount received from the collateral source. [Emphasis added; p. 706.] [ 86 ] My colleague Rothstein J. does not accept that the different nature of the benefits in issue here and in Sylvester is a relevant distinction between the two cases.

However, Major J., writing for a unanimous Court in Sylvester , clearly thought it was. His first reason for deciding that the benefits ought to be deducted was that “the disability benefits were intended to be a substitute for the respondent’s regular salary”: para. 14. In other words, it was a key aspect of the Court’s reasoning in Sylvester that the benefit in issue was intended to be an indemnity for wage loss. I find it impossible to dismiss the first reason the Court in Sylvester gave for its decision as irrelevant. [ 87 ] The Court in Sylvester then turned to the contract of employment.

The goal was to see if it shed any light on the parties’ intentions with respect to the receipt of both damages for wrongful dismissal and disability benefits. Contrary to the view of my colleague Rothstein J., the relevant question was not what Mr. Sylvester was entitled to under his contract in the event that his employer had not breached it. The question was whether the contract expressly or impliedly provided for him to receive both disability benefits and damages for wrongful dismissal: para. 13.

Although the employment contract in Sylvester (as in this case) did not expressly address that question, it did so by implication. The receipt of both disability benefits and wages was not possible in any circumstances under the contract of employment. Moreover, other income of any nature had to be deducted from the amount of the disability payments. This suggested that the parties did not intend Mr. Sylvester to receive both disability benefits and damages representing lost wages during the notice period.

As Major J. put it: The respondent’s contractual right to damages for wrongful dismissal and his contractual right to disability benefits are based on opposite assumptions about his ability to work and it is incompatible with the employment contract for the respondent to receive both amounts . The damages are based on the premise that he would have worked during the notice period. The disability payments are only payable because he could not work. It makes no sense to pay damages based on the assumption that he would have worked in addition to disability benefits which arose solely because he could not work.

This suggests that the parties did not intend the respondent to receive both damages and disability benefits. [Emphasis added; para. 17.] [ 88 ] As I read Sylvester , this analysis does not suggest that we should focus narrowly on the precise provisions of the employment contract, unless of course they deal expressly with the issue of whether pension benefits should be deducted from wrongful dismissal damages. In the absence of such an explicit provision — and, as in Sylvester

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