2016 QCCA 1692, 2016 QCCA 1692

Electrolux Canada Corp. c. American Iron & Metal, l.p. 2016 QCCA 1692 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-025084-153 (705-17-004892-137) DATE: October 20, 2016 CORAM: THE HONOURABLE CLAUDE C. GAGNON, J.A. GENEVIÈVE MARCOTTE, J.A. MARK SCHRAGER, J.A. ELECTROLUX CANADA CORP. APPELLANT – Defendant/Cross-Plaintiff v. AMERICAN IRON & METAL P.

RESPONDENT – Plaintiff/Cross-Defendant JUDGMENT [ 1 ] On appeal from the judgment of the Superior Court, District of Joliette (the Honourable Justice Stéphane Sansfaçon), granting Respondent’s action and condemning Appellant to pay Respondent $1,679,549.43 (subject to compensation against the amount of the cross-demand). [ 2 ] For the reasons of Justice Schrager, with which Justices C. Gagnon and Marcotte concur, THE COURT : [ 3 ] GRANTS the appeal in part to reduce the condemnation to $110,795; [ 4 ] THE WHOLE without legal costs. CLAUDE C. GAGNON, J.A. GENEVIÈVE MARCOTTE, J.A. MARK SCHRAGER, J.A.

Mtre Guy Poitras GOWLING WLG (CANADA) For Appellant Mtre Karim Renno Mtre Éva M. Richard RENNO VATHILAKIS INC. For Respondent Date of hearing: September 12, 2016 REASONS OF SCHRAGER, J.A. [ 5 ] This is an appeal from the judgment of the Superior Court, District of Joliette (the Honourable Justice Stéphane Sansfaçon)

rendered on January 29, 2016, maintaining Respondent’s action and awarding it damages of $1,679,549.43 (plus interest, additional indemnity and costs) arising from Appellant’s breach of contract. The judgment also awarded $641,319.18 (plus interest, additional indemnity and costs) to Appellant in virtue of its cross-demand and ordered compensation between the aforesaid sums.

The judge’s conclusion on the cross-demand is not in issue in appeal. [ 6 ] The four issues raised in appeal all pertain to the aspect of damages; the judge’s conclusions on the breach of contract and the causal link with the damages are not questioned before us by Appellant. Moreover, two of the issues raised (dealing with permission granted to amend at the “last minute” and the admissibility of certain evidence proffered by Respondent’s finance director) do not require resolution given my conclusion that the judge erred in awarding loss of profit in the absence of evidence of such profit.

FACTS [ 7 ] Respondent is in the scrap metal business and had entered into a long term contract with Appellant whereby the former would purchase different types of metal, being the waste produced by the Appellant’s manufacturing activities. Notwithstanding its obligation to sell the metal to Respondent at the agreed prices, Appellant unilaterally breached the contract and refused to continue selling the metals in performance of its contractual obligations. Eventually, Appellant closed its plant and moved operations to the United States.

Respondent ceased making payments for the metal purchased pursuant to the contract prior to the breach by Appellant (giving rise to the cross-demand) and sued for its anticipated loss of profit arising from Appellant’s failure to honour its contractual obligations. TRIAL JUDGMENT [ 8 ] In first instance, the judge found that based on overwhelming evidence, Appellant was at fault. As stated, this part of the judgment is not questioned by Appellant. [ 9 ] In awarding damages, the judge accepted the evidence presented by Respondent.

In so doing, it is my opinion that he did not award loss of profit as required by law, but rather another figure which was the anticipated revenue under the contract less certain costs related directly to Respondent’s economic activity of acquiring the scrap metal from Appellant and reselling it to its customers. Basically, the judge awarded lost revenue net of certain expenses but not lost profit. [ 10 ] Appellant first contested the existence of any damage because Respondent was able, throughout, to continue supplying its customers with metal acquired from sources other than Appellant.

The judge rejected this argument and accepted, correctly, based on the evidence that Respondent could have sold all of the scrap on hand sourced from other suppliers as well as the metal that should have been acquired from Appellant had it honoured its contract. The judge was thus correct in concluding that Respondent suffered a prejudice due to Appellant’s breach of contract. [ 11 ] The quantification of prejudice however, suffers from an error which I consider to be palpable and overriding. DISCUSSION [ 12 ]

Article 1611 C .C.Q. , correctly invoked by the judge, provides as follows: 1611. The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived. Future injury which is certain and assessable is taken into account in awarding damages. 1611. Les dommages-intérêts dus au créancier compensent la perte qu'il subit et le gain dont il est privé.

On tient compte, pour les déterminer, du préjudice futur lorsqu'il est certain et qu'il est susceptible d'être évalué. [ 13 ] Respondent could have sought to recoup its loss by proving an increased cost in sources of supply alternate to Appellant. Instead, as was its right, Respondent sought the “profit of which it was deprived” because of Appellant’s breach. At paragraph 59 of the judgment, the judge erroneously described such profit as “…la différence entre le prix payé et le prix vendu, moins les coûts d’exploitation de l’entreprise pour cette activité”.

In other words, he equates lost profit to revenue minus certain direct costs, as stated above. [ 14 ] The judge then proceeded to analyze the proof which included cost of transporting, sorting and processing the scrap metal obtained from Appellant and shipping it to Respondent’s customers.

Noticing gaps in the proof of direct costs (such as salaries of employees directly involved in the handling of the scrap metal), the judge even went so far as to arbitrarily double the figure for handling the metal submitted by Respondent’s witness (paragraph 89). [ 15 ] The judge had sufficient evidence to forecast the quantities of metal that would, in all probability, have been received from Appellant. He was however well aware that the proof of Respondent’s costs was problematic and he underlined that Respondent chose not to call an expert witness to prove its damages.

Rather, it relied on an employee, its finance director, to adduce the direct costs referred to above and then to return to Court on the second day of trial in an apparent attempt to fill the void with unsubstantiated overall cost of $21 per ton of scrap. At no time were financial statements produced nor any overall figures to attempt a calculation of a gross profit margin for Respondent.

In such regard, there is conspicuously absent from the record any proof of Respondent’s operating costs other than those strictly and specifically related to the recovery of scrap metal from Appellant and its resale to one specific customer. [ 16 ] Appellant’s expert testified clearly and without contradiction, that loss of profit cannot be calculated without operating costs. The expert stated that there was no indication of sales’ commissions (if any), overall salaries (i.e. not merely labour costs connected

directly with the performance of this contract), costs and maintenance of machinery, depreciation and electricity. I would add to this enumeration, rent and fixed costs for mortgage, real estate tax, bank interest, utilities generally, insurance and administration. [ 17 ] Respondent’s attorney pleaded that overhead is a constant so that the proof of these cost items is unnecessary to show the loss of profit from this contract.

The position is specious since, if it were true, then the contract in question would necessarily be treated for present purposes as supporting less operating expense and thus generating a higher profit margin than the rest of the Respondent’s activities. [ 18 ] I consider the absence of the proof of Respondent’s overall costs enumerated above to be fatal to the proof of loss of profit. Respondent had the burden of proof of such loss.

The judge’s error in this regard is palpable and overriding and, given the absence of evidence, we cannot substitute our judgment for that of the trial judge by calculating a gross margin and applying it to the anticipated lost revenue as calculated by the judge to arrive at a figure of lost profit. [ 19 ]

Article 292 of the former Code of C ivil Procedure , in force at the time of the trial, permits the judge “at anytime before judgment … to draw the attention of the parties to any gap in the proof” and permits them to fill it. Certain of the decided cases have elevated this discretion to a duty [1] but other cases hold that

Article 292 C .C.P. creates a discretion. [2] In other judgments, this Court, finding that the trial judge failed to apply

Article 292 C .C.P. , has referred cases back to the trial court so that the missing evidence could be adduced. In one such case, [3] proof of expenses was made but the judge rendered judgment holding that the evidence adduced ran afoul of the best evidence rule and then dismissed the plaintiff’s action. This Court, while agreeing with the best evidence conclusion, returned the case to the Superior Court so that the plaintiff could bring the proper evidence to the fore.

In another instance, [4] on objection to the proof of damage based solely on unaudited financial statements was never adjudicated by the trial judge. In deciding that the objection was well founded, on appeal, the majority sent the case back to the Superior Court so that the plaintiff could supplement its proof given the ruling on the objection in appeal. [ 20 ] I do not think that it is appropriate in this case that the matter be sent back to the Superior Court.

The failure to demonstrate gross margin or to prove the cost elements that could have given rise to the calculation with the production of financial statements or otherwise, with or without an expert, does not appear from the record to be the result of any oversight. Respondent is evidently a sizeable undertaking with an in-house director of finance who is a professional accountant. Respondent was represented by counsel.

The failure to produce an expert’s report can hardly be qualified as an oversight nor could it be said that Respondent was taken by surprise by Appellant’s position concerning the lack of proof of damages as it was raised by Appellant’s expert at trial. It appears that the failure to produce evidence of overall costs giving rise to a calculation of gross profit margin was the result of a deliberate choice made by Respondent. In such circumstances, any invitation by the trial judge to fill gaps in the evidence pursuant to

Article 292 of the former C.C.P. would have been useless . [5] It is not presumptuous to state that a forensic accountant would have addressed the issue, though I should not be taken to posit that such proof could only be made through an expert witness. [6] After all, Appellant’s expert did address this lack of proof of costs, if not in her report, Exhibit D-25, filed well before trial, but then very specifically during her testimony. Yet, there was no attempt to reopen Respondent’s proof to adduce the evidence that would fill the gap.

The judge was cognizant of the position of Appellant’s expert and attempted to fill the gap: [88] De même, le Tribunal est convaincu que la présence ou l'absence de matériel provenant de chez Electrolux n'a eu pratiquement aucun effet sur le travail, et donc sur les coûts, de l'employé d'AI&M qui travaille à temps plein chez Ivaco afin d'y gérer le matériel livré par la demanderesse. [89]

Malgré cela, le Tribunal, afin de pallier toute carence dans l'établissement des coûts de manutention et de transbordement du matériel provenant de chez Electrolux, augmentera, en défaveur de la demanderesse puisque le fardeau de la preuve lui appartenait, de 100 % le coût calculé par Mme Gagnon à ce chapitre, arrondi à 10 $/ tonne.

Le coût total engendré est donc établi à 13 $ + 11 $ + 10 $ = 34 $ la tonne tant pour le busheling que pour le shredding. [90] Le Tribunal tient à souligner qu'il est conscient que la preuve des coûts d'exploitation de la demanderesse comporte des lacunes et qu'il aurait été préférable que celle-ci la fasse établir par un expert, du moins afin d'écarter tout risque d'erreur quant à l'exactitude du résultat.

Le Tribunal est toutefois satisfait de la preuve prépondérante présentée, laquelle permet d'évaluer ces coûts, évaluation dont la justesse, sans être certaine, est suffisante. [ 21 ] The task of assessing damages is largely factual and a great degree of deference is due to the trial judge in the exercise of his discretion in weighing the evidence. [7] However, such deference does not extend to adjudication in the absence of evidence or to speculation on what that evidence may be in order to fill a gap when the very data that is missing is withheld by the party bearing the burden of proof. [8] This constitutes a manifest error which, given the impact on quantum in this case, is overriding.

While it is recognized that a judge has discretion to “arbitrate damages”, [9] this involves an exercise of evaluating proof and choosing between contradictory evidence or determining quantum.

It includes neither the power to decide in the absence of evidence that exists but was not produced, nor the power to assume what the evidence might have been had the proof been made, [10] as the judge did in this case. [ 22 ] During the hearing, Appellant’s attorney conceded that, though there were neither damages nor loss of profit proved by Respondent, it was open to the Court to give effect to Respondent’s subsidiary position in first instance.

Respondent had pleaded in first instance (though not before us) that, as a minimum, its damages should be the equivalent of the Appellant’s profit resulting from its unilateral resiliation of the contract with Respondent. In such regard it was proved, as noted by the judge, that Appellant profited by $172,795 representing the increased price it received from a third party for the sale of its scrap metal. This profit would be reduced to $110,795 resulting from the cost ($62,000) of acquiring certain equipment needed for the new contract. [ 23 ] What could be the basis of such an award of damages?

In Bank of Montreal v. Kuet Leong Ng , Gonthier J., speaking for the Supreme Court of Canada, recognizes “the moral principle that the perpetrator of a wrongful act should not profit thereby, as that would encourage wrong doing”. [11] He reversed this Court and the Superior Court in condemning a former bank employee to remit to his employer profits derived from the abuse of his position as foreign exchange broker even though the bank did not suffer any loss of profit because the trades in question were not and would not have been made for its account.

Justice Gonthier went on to observe that “…the principle that one should not profit from one's own bad faith or wrongdoing is not exclusive to the contract of mandate.” [12] He

enumerated instances in the Civil Code of Lower Canada where the principle is given effect, none of which examples apply directly to the contract in this case. However, this Court in Uni-Sélect Inc. c. Acktion Corp . determined that

Article 1611 C .C.Q. is an instance where the principle applies. [13] In that case, the beneficiary of a restrictive covenant could not demonstrate damage caused by the breach of the clause. The obliged party profited from the business carried on in contravention of the clause but the creditor could not prove any damages or loss of business revenue.

The Court found that the profit derived by the party in breach constituted lost profit of the creditor of the obligation. [14] [ 24 ] Similarly, in this case, Respondent did not succeed in proving its loss of profit but the judge found that Appellant profited from its breach of contract.

I would add that the uncontradicted evidence indicated that the breach was blatant and can be characterized as wrongdoing and bad faith as contemplated by Justice Gonthier in the Bank of Montreal case. [ 25 ] Accordingly, and though no incidental appeal has been lodged, it falls within the conclusion sought by the Appellant to reduce the condemnation in the principal claim to the aforesaid amount of $110,795 instead of zero. [ 26 ] I recognize that the outcome I propose may appear harsh given Appellant’s blatant breach of contract, but I see no alternative given Respondent’s failure to present adequate proof of its damages. [ 27 ] Accordingly, the judgment should be reversed in part by reducing the condemnation against Appellant to $110,795 but maintaining the condemnation in its favour in the cross-demand (and obviously retaining the conclusion regarding compensation between the two amounts). [ 28 ] Given that Appellant was at fault, I would not award costs on the principal action nor on the appeal thereof.

The award of costs on the cross-demand will not be disturbed. [ 29 ] For these reasons, I propose to allow the appeal in part and to modify paragraph 97 of the judgment of the Superior Court by substituting the sum of $110,795 for the sum of $1,679,549.43, without legal costs. MARK SCHRAGER, J.A.