John Kenneth Eaton (Suppliant)
v.
The Queen (Respondent)
Trial Division, Kerr J.—Ottawa, November 15,
1971; February 21, 1972.
Public Service—Collective agreement—Retroactive salary
not paid within statutory time limit—Right to damages—
No right to recover interest on money borrowed because of
delay—Right to recover additional income tax paid because
of delay—Public Service Staff Relations Act, R.S.C. 1970, c.
P-35, s. 56—Federal Court Act, s. 35.
On July 17, 1969, the Treasury Board entered into a
collective agreement with the bargaining agent for a group
of public servants, under which suppliant, a member of the
group, became entitled to retroactive salary of $1,671.76
for the period June 3, 1968, to June 30, 1969. Under s. 56
of the Public Service Staff Relations Act, the Crown was
obliged to implement the agreement within 90 days of
execution but suppliant was not paid any of the retroactive
salary until December 24, 1969, when he received $1,350
and the balance on January 14, 1970.
Held, suppliant was entitled to damages as follows:
1. The Crown was liable to compensate suppliant for the
additional income tax he was obliged to pay by reason of
the delay in payment of part of his retroactive salary until
the succeeding taxation year. Such additional income tax
flowed naturally from the delay in payment. Hadley v.
Baxendale (1854) 9 Ex. 341; C. Czarnikow Ltd. v. Koufos
[1969] A.C. 350, referred to.
2. In virtue of s. 35 of the Federal Court Act, however,
since there was no provision for payment of interest in the
collective agreement or in any relevant statute, the Crown
was not liable to compensate suppliant for interest paid by
him on money which he was compelled to borrow because
of the delay in payment of his retroactive salary. The King
v. Roger Miller & Sons Ltd. [1930] S.C.R. 293; Hochelaga
Shipping & Towing Co. v. The King [1944] S.C.R. 138; The
King v. Racette [1948] S.C.R. 28; The King v. Carroll
[1948] S.C.R. 126; John Bertram and Sons Co. v. The
Queen [1968] 2 Ex.C.R. 590; Nord-Deutsche v. The Queen
[1969] 1 Ex.C.R. 117, referred to.
ACTION for damages.
J. C. Hanson and J. R. M. Gautreau for
suppliant.
J. E. Smith for respondent.
KERR J.—This is a petition of right in which
the suppliant is claiming damages because of a
delay by the respondent in paying him certain
retroactive salary payable under a collective
agreement entered into between the Treasury
Board of Canada and the Professional Institute
of the Public Service of Canada.
The case was argued on an agreed statement
of facts, which reads as follows:
1. The Suppliant, who resides in the Village of Wake-
field, in the Province of Quebec, is a public servant
employed by the Respondent in the Department of Labour
as an Economist and has been so employed since June 3,
1968.
2. On July 17, 1969 the Treasury Board, on behalf of Her
Majesty entered into a collective agreement with the Profes
sional Institute of the Public Service of Canada for all the
employees of Her Majesty in the Economics, Sociology and
Statistics group in the Scientific and Professional occupa
tional category in the Public Service of Canada, the Profes
sional Institute having been duly certified as bargaining
agent for the said group under the provisions of the Public
Service Staff Relations Act, Statutes of Canada, 1967,
Chapter 72. A copy of the said collective agreement is
attached hereto and marked "Appendix A".
3. The Suppliant is, and was at all material times, a
member of the said Economics, Sociology and Statistics
group and subject to the said collective agreement.
4. On or about December 12, 1968, the Treasury Board,
pursuant to Section 7 of the Financial Administration Act,
made an order entitled "The Public Service Collective
Agreement (General) Implementation Order" a copy of
which is attached hereto and marked "Appendix B".
5. On or about the 17th day of July, 1969, the Treasury
Board issued a circular to, inter alia, the Director of Person
nel of the Department of Labour informing him that it was
in order to proceed immediately with action to implement
the provisions of the collective agreement. A copy of the
said circular is attached hereto and marked as "Appendix
C".
6. At the date on which the collective agreement was
executed, July 17, 1969, the Suppliant was receiving a gross
salary of $11,562.00 per annum. Under the terms of the
collective agreement he became entitled to retroactive
salary in accordance with the rates of pay specified in
"Appendix A" to the said collective agreement, in the
amount of $1,671.76 for the period from June 3, 1968 to
June 30, 1969.
7. On December 24, 1969 the Suppliant received a remit
tance from the Government of Canada in the amount of
$1,350.00 as part payment of the retroactive salary due him
and on January 14, 1970 he received a remittance in the net
amount of $261.04 representing the balance of the retroac
tive salary payable to him under the provisions of the said
collective agreement.
8. In September of 1969, the Suppliant engaged a con
tractor, James More, to perform certain work in winterizing
a cottage in Wakefield, at a cost of approximately $3,-
000.00, the cottage having been purchased in July of that
year. There was no written contract between the parties, but
the Suppliant paid down approximately $2,000.00 in Sep-
tember and agreed to pay the balance of the price at the
beginning of December of 1969.
9. At the beginning of December the Suppliant not having
sufficient monies on hand, borrowed $1,000.00 from the
Royal Bank of Canada, with interest at 9;% per annum, in
order to pay the balance of the monies owing the contrac
tor. The contractor had not made any demands for payment
when the Suppliant made the said loan nor did he ask for
any interest on the balance when it was paid off by the
Suppliant.
10. In purchasing the cottage and having it winterized the
Suppliant took into account the retroactive salary and
increased salary he anticipated he would be receiving under
the provisions of the said collective agreement, in assessing
his financial capacity to incur the aforesaid obligations.
11. In the event that it is adjudged that the Respondent is
liable to pay damages to the Suppliant, it is agreed that a
reasonable amount for loss of use of the monies would be
$50.00. In the event that it is adjudged that the Suppliant is
entitled to be compensated for his being required to pay
additional income tax arising from the receipt of retroactive
pay in 1970 as opposed to 1969, it is agreed that the
additional expense on account of income tax is $50.00.
12. No grievance or adjudication procedures were taken
by the Suppliant or his bargaining agent on his behalf under
the provisions of Sections 20 or 91 of the Public Service
Staff Relations Act.
13. This Statement of Facts is intended to shorten the
trial of this action, and the parties agree upon these facts
only for the purpose of this action. No evidence may be
offered inconsistent with this Statement but additional evi
dence not inconsistent with it may be offered subject to all
the usual rules at the trial of this action.
Several sections of the Public Service Staff
Relations Act, 1966-67, c. 72, are particularly
pertinent. Section 54 provides that the Treasury
Board may enter into collective agreements. It
reads as follows:
54. The Treasury Board may, in such manner as may be
provided for by any rules or procedures determined by it
pursuant to section 3 of the Financial Administration Act,
enter into a collective agreement with the bargaining agent
for a bargaining unit, other than a bargaining unit comprised
of employees of a separate employer, applicable to
employees in that bargaining unit.
Section 2(h) defines "collective agreement"
to mean:
(h) "collective agreement" means an agreement in writing
entered into under this Act between the employer, on the
one hand, and a bargaining agent, on the other hand,
containing provisions respecting terms and conditions of
employment and related matters;
Section 58 provides that a collective agree
ment is binding on the Crown, on the bargaining
agent and on the employees in the bargaining
unit. It reads as follows:
58. A collective agreement is, subject to and for the
purposes of this Act, binding on the employer, on the
bargaining agent that is a party thereto and its constituent
elements, and on the employees in the bargaining unit in
respect of which the bargaining agent has been certified,
effective on and from the day on and from which it has
effect pursuant to subsection (1) of section 57.
Section 57 provides that a collective agree
ment has effect, where an effective date is
specified, on and from that day. The collective
agreement before the Court was signed on July
17, 1969, and it provides that:
The duration of this collective agreement shall be from
the date it is signed to June 30, 1970.
Section 56 provides that the provisions of a
collective agreement shall be implemented
within a period specified in the agreement or,
where no period for implementation is speci
fied, within a period of 90 days from the date of
its execution. In the present case no period for
implementation of the provisions for payment
of retroactive pay was specified. Ninety days
from the date of execution of the agreement
was October 15, 1969. As stated in the agreed
statement of facts, the suppliant received
$1,350 on December 24, 1969, as part payment
of the retroactive salary due him, and on Janu-
ary 14, 1970, he received $261.04, representing
the balance of the retroactive salary payable to
him under the provisions of the agreement,
after deductions for income tax, superannuation
and Canada Pension Plan. The petition of right
was filed on January 8, 1970.
It seems clear that the collective agreement in
question is binding on the Crown and on the
employees covered by it. The Crown owed a
duty to the individual employee to implement
the provisions respecting payment of retroac
tive salary. The individual employee had a right
to have such provisions implemented by the
Crown. The employee is entitled as of right to
his salary. Clause 20.02 of the collective agree
ment provides that:
An employee is entitled to be paid for services rendered
at
(a) the pay specified in Appendix "A" ....
The right of employees in the public service to
their pay is also recognized in the Financial
Administration Act, R.S.C. 1970, c. F-10, sec
tion 7(1)(d), which provides that the Treasury
Board may:
(ci) determine and regulate the pay to which persons
employed in the public service are entitled for services
rendered....
At the trial counsel for the Crown did not
dispute that the suppliant has a right to sue the
Crown for his salary and for any damages that
he may have a legal right to recover as a result
of a breach by the Crown. of the provisions for
payment of the retroactive salary. In that
respect the following were cited: Young v.
C.N.R. [1931] A.C. 83 (PC); Hume and Rumble
Ltd v. International Brotherhood of Electrical
Workers [1954] 3 D.L.R. 805 (BCSC); Nelson
Laundries Ltd v. Manning (1965) 51 D.L.R.
(2d) 537 (BCSC); Re Prince Rupert Fisherman's
Cooperative Association (1968) 68 CLLC Para
14, 079 (BCSC); Adelle, The Legal Status of
Collective Agreements 1970, pages 203 to 220;
Syndicat catholique des employés de magasins
de Québec, Inc. v. Compagnie Paquet Ltée.
(1959) 18 D.L.R. (2d) 346; Crossman v. City of
Peterborough (1966) 58 D.L.R. (2d) 218; Glan-
ville L. Williams, Crown Proceedings, pp.
69-72; A Civil Servant and His Pay, D. W.
Logan (1945) 61 L.Q.R. 240; Reilly v. The King
[1934] A.C. 176 at 179-80. However, counsel
for the Crown submitted that the damages
claimed in this action are not compensable, and
I will deal with that contention later herein.
It was also agreed by counsel for the Crown
that an employee does not have to utilize or
exhaust the internal grievance procedure pro
vided in the collective agreement or the Public
Service Staff Relations Act before a court will
entertain his action to enforce payment of
arrears of salary. The following authorities were
cited in that respect: Re Grottoli v. Lock & Son
Ltd. (1963) 39 D.L.R. (2d) 128; The Hamilton
Street Railway Company v. D. Northcott [1967]
S.C.R. 3; Salmond on Torts, 12th ed., 467-69.
Moving now to consideration of what is
claimed in this action and whether it is recover
able. Paragraphs 12, 13, 14, 15, 16, 17 and 19
of the petition of right are as follows:
12. The Respondent has failed, refused and neglected to
pay the said retroactive pay increases to the Petitioner save
and except that on or about the 23rd day of December,
1969, the Respondent gave to the Petitioner a sum of
$1,350.00 as part payment of the said retroactive pay
increases but continues to fail, refuse and neglect to pay the
balance of the said retroactive pay. Her Majesty has there
fore breached the said agreement and is in violation of the
said implementation order. By reason of the said failure,
refusal and neglect, as aforesaid, the Petitioner has been put
to inconvenience, damages, loss and expense, as herein
further set out.
13. The Petitioner was forced to borrow $1,000.00 from
the Royal Bank of Canada on or about the 1st day of
December, 1969, on which interest at the rate of 9; percent
per annum is being charged in order to discharge a legal
debt incurred in the winterizing of his residence which was
completed on or about the 30th day of September, 1969.
14. The said Respondent was negligent in not paying the
Petitioner the money which was rightfully due him on and
after the signing of the said agreement namely July 17th,
1969, in as much as the Respondent knew or ought to have
known that the obligation and the entitlement would arise
'on and after that date.
15. The Petitioner says that he has been unfairly or
unjustly discriminated against by the aforesaid failure,
neglect or refusal of the Crown and that he has been
unlawfully or unjustly deprived of the enjoyment of his
property without due process of law contrary to Part I of
the CANADIAN BILL OF RIGHTS ACT, Chapter 44,
Statutes of Canada, 1960. -
16. Particulars of loss and damage
(a) Salary differential from June 3rd, 1968,
to June 30th, 1968 ...... .......... $ 59.76
(b) Salary differential from July 1st, 1968,
to June 30th, 1969 ...... ........ .... .... 1,612.00
(c) Salary differential from July 1st, 1969,
to December 31st, 1969, continuing ... .... 1,201.50
(d) Interest on Loan of $1,000.00 at 9'a%
per annum from Royal Bank of Canada
from December 1st, 1969, continuing (at
December 31st, 1969) ... ........ 7.71
(e) Loss of user of $2,873.26 at 8% per
annum from July 17th, 1969 to December
23rd, 1969 101.66
(f) Loss of user of $1,523.26 at 8% from
December 23rd, continuing .. 2.34
2,984.97
Less payment by Respondent 1,350.00
$1,634.97
17. The Petitioner says that he will be put to additional
expense and loss by additional income tax arising from the
accumulation of the said retroactive pay from one year to
the following one. The exact amount of such loss is not
known to the Petitioner at this time.
19. Although your Petitioner has constantly endeavoured
to obtain proper compensation for his said loss and dam
ages, he has been unable to arrive at any settlement with the
representatives of Her Majesty and save as described in
paragraph 12, he has received no payment whatsoever for
same.
Your suppliant therefore humbly prays that he be award
ed and paid the sum of $1,634.97 of lawful money of
Canada and his costs.
As to the particulars of loss and damage in
paragraph 16(a), (b) and (c), the retroactive
salary has by now been fully paid, as indicated
in paragraphs 6 and 7 of the agreed statement
of facts, and therefore no recovery of that
salary is now called for.
As to the particulars in paragraph 16(d), (e)
and (f), i.e., interest on bank loan and loss of
use of money, the statement of defence pleads
that the suppliant is not entitled to the amounts
there claimed as the payment thereof is not
provided for or authorized by any contract
between the suppliant and Her Majesty or by
statute; and also pleads section 47 of the Exche
quer Court Act, as it was when the action was
instituted, corresponding to section 35 of the
Federal Court Act now in effect, the relevant
portions of which read as follows:
EXCHEQUER COURT ACT
47. In adjudicating upon any claim arising out of any
contract in writing the Court shall decide in accordance with
the stipulations in such contract, and shall not allow
(b) interest on any sum of money that the court considers
to be due to the claimant, in the absence of any contract
in writing stipulating for payment of such interest or of a
statute providing in such a case for the payment of
interest by the Crown.
FEDERAL COURT ACT
35. In adjudicating upon any claim against the Crown, the
Court shall not allow interest on any sum of money that the
Court considers to be due to the claimant, in the absence of
any contract stipulating for payment of such interest or of a
statute providing in such a case for the payment of interest
by the Crown.
There is no provision for payment of interest
in the collective agreement or in any relevant
statute.
The submission made at the trial on behalf of
the Crown, as I understood it, was not that the
delay in paying the retroactive salary was not in
breach of the Crown's obligation to implement
the collective agreement and to pay the said
salary, but that the damages claimed are in
respect of interest and the expense of additional
income tax; and the Crown says (a) that in the
absence of a contract or statute providing for
payment of interest by the Crown section 35 of
the Federal Court Act prohibits the Court from
allowing the interest claimed, and (b) that the
expense of additional income tax is too remote
to be recoverable in damages.
First, as to the issue in respect of interest.
In The King v. Roger Miller & Sons Ltd.
[1930] S.C.R. 293, the claimant (respondent)
entered into a contract with the Crown for the
construction of certain public works in Toronto.
The Exchequer Court allowed an amount for
interest on payments delayed, the claim for
interest being based upon the ground that the
claimant, by reason of the delays in payment,
had to borrow money at interest. On appeal, the
Supreme Court disallowed the claim for inter
est, saying at pages 298-99:
The only other amount in question here is the item of
$10,937.71 allowed by the learned trial judge to the
respondents for interest on moneys not paid to the respond
ents at the times stipulated in the contract. The total sum
claimed by the respondents for interest was $28,700.16, of
which $17,762.45 was allowed and paid by the appellant,
voluntarily as appellant claims.
It was argued that the interest claimed should be treated
as part of the cost of the work, and therefore is payable
under the terms of the contract, but this argument seems
quite unsound. It is a mere case of moneys becoming due to
respondents at certain times and being withheld beyond the
due dates, in which case the Crown is not liable to pay
interest during default except under special circumstances
such as the existence of statutory provision or contractual
obligation.
In Hochelaga Shipping & Towing Co. Ltd. v.
The King [1944] S.C.R. 138, a ship was
damaged in collision with submerged cribwork
that had been left by the Department of Public
Works without any buoy or other warning to
indicate its presence, and the Crown was held
liable in damages. The trial judge gave judgment
for the damages, without interest. On appeal,
the Supreme Court said, at p. 142:
We also agree with the learned Judge that no interest should
be allowed on the amount awarded to the suppliant. The
Crown is not liable to pay interest, unless the statute or
contract provides for it; and such is not the case here.
In The King v. Racette [1948] S.C.R. 28,
certain Dominion of Canada bonds registered in
the name of the suppliant were transferred
without her authority, and it was held as to
interest claimed from the date of the transfer
that "interest may not be allowed against the
Crown unless there is a statute or agreement
providing for it", per Kerwin J. at page 30.
In The King v. Carroll [1948] S.C.R. 126, on
a claim for moneys withheld by the Crown
while the late Mr. Justice Carroll was Lieuten-
ant-Governor of the Province of Quebec, and
for interest thereon, the Supreme Court held
that it is settled jurisprudence that interest may
not be allowed against the Crown, unless there
is a statute or a contract providing for it.
In The John Bertram and Sons Co. Ltd. v.
The Queen [1968] 2 Ex.C.R. 590, Mr. Justice
Cattanach allowed a refund of amounts paid by
way of sales tax, but in the absence of statutory
authority for payment of interest declined to
order payment of interest.
Chapter 14 of Wayne & McGregor on Dam
ages, 12th ed., deals with the history and
modern law in England respecting the awarding
of interest, and it is there stated that the case
law upon the recovery of interest is riddled with
inconsistency, and that finally in 1934, the
legislature, by section 3 of the Law Reform
(Miscellaneous Provisions) Act of that year,
enacted a general umbrella provision allowing
the court to award in its discretion interest upon
damages in all cases. We have to date no such
statutory provision.
In Halsbury's Laws of England, 3rd ed., vol.
11, paragraph 415, it is stated that upon breach
of a contract to pay money due the amount
recoverable is normally limited to the amount of
the debt together with such interest from the
time it became due as is payable under the
contract, or by statute, or as may be allowed by
the court (under the 1934 Law Reform (Miscel-
laneous Provisions) Act (supra)), and that this
will be the measure of damages no matter what
inconvenience the plaintiff has suffered from
the failure to pay on the day payment was due;
and that the reason for the rule is, it seems, that
any further damage is too remote a conse
quence of the non-payment because not within
the contemplation of the parties, but where the
circumstances are such that a special loss is
foreseeable at the time of the contract as a
consequence of non-payment or unpunctual
payment damages may be recoverable for that
loss.
In the Dictionary of English Law by Earl
Jowitt (1959) it is stated at page 993 that inter
est is of two kinds, namely, that which is agreed
to be paid on a loan, and that payable as dam
ages for the non-payment of a debt or other
sum of money on the proper day. The word
"interest", as used in section 35 of the Federal
Court Act, is not defined in that Act, but in my
opinion it is not limited to money that is agreed
to be paid on a loan but is used in the wider
sense of damages for the non-payment of a debt
and in the sense in which it was used in The
King v. Roger Miller & Sons Ltd., Hochelaga
Shipping & Towing Co. Ltd. v. The King, The
King v. Racette and The King v. Carroll (ante).
Nord-Deutsche v. The Queen [1969] 1
Ex.C.R. 117 is a recent case, which originated
in the Province of Quebec as a result of a
collision of ships in the St. Lawrence River.
Noël J., as he then was, reviewed cases involv
ing the question of interest, some of which have
been referred to above and certain cases in
which the cause of action originated in the
Province of Quebec where the courts allowed
interest against the Crown as from the date
when the petition of right was filed, and he also
considered Art. 1056 C.C. and the Crown Lia
bility Act. At page 238 he said:
From this review of the case law it would seem that, with
the exception of sections 47 and 53 of the Exchequer Court
Act and section 18 of the Crown Liability Act the Crown
holds no special position with regard to interest and is in the
same situation as a defendant at common law and should,
therefore, in this case be in the same position as a defendant
in the province of Quebec. I would, however, go one step
further and say that even if the law was that interest can be
granted against the Crown only when authorized by statute
or accepted by agreement, section 2(d) together with section
3(1)(a) and (b) of the Crown Liability Act, would in my
view meet with the statutory requirement. If such is the
case, claims originating in Quebec, founded on tort and
governed by the Crown Liability Act, may possibly be dealt
with in a manner different from claims originating in anoth
er Province. The question is an interesting one and in view
of the large amounts involved in this case, an important one.
Having regard to the language used in the Crown Liability
Act, section 3(1)(a) and (b), it appears that the liability of
the Crown for damages caused by tort (which in Quebec
means under 2(d) delict or quasi-delict) is that of a private
person of full age and capacity.
On appeal to the Supreme Court of Canada
[1971] S.C.R. 849 Ritchie J., in giving the
majority judgment of the Court, said at page
864:
The damages should bear interest at the rate of 5 per cent
from the day of the deposit of the Petition of Right in
accordance with the provisions of art. 1056c C.C., s. 3(1)(a)
and 2(d) of the Crown Liability Act, 1952-53 (Can.), c. 30
and s. 3 of the Interest Act, R.S.C. 1952, c. 156. In this
regard I agree with the careful reasoning of the learned trial
judge at pages 232 to 240 of his reasons for judgment.
In his judgment, dissenting in certain respects,
Pigeon J. referred to Art. 1056 C.C. and said at
page 881:
The only question is whether this provision is properly
applicable to a claim against the Crown by virtue of the
Crown Liability Act. I do not find it necessary to review the
numerous authorities that were relied on, the basic principle
is, in my view, established as follows by the judgment of
this Court in The King v. Carroll [1948] S.C.R. 126 at 132:
It is settled jurisprudence that interest may not be
allowed against the Crown, unless there is a statute or a
contract providing for it.
Consequently, having regard to section 35 of
the Federal Court Act and the jurisprudence to
which I have referred, the claims in paragraph
16(d), (e) and (f) of the petition of right for
interest and loss of user of salary fail and will
not be allowed.
As to the claim in paragraph 17 of the peti
tion of right in respect of expenses incurred by
reason of additional income tax, the respondent
submits that any loss or damage of that nature
is too remote to be recoverable in damages, that
it was not in the contemplation of the Crown or
reasonably foreseeable when the agreement was
entered into, and that it does not arise out of a
breach of the agreement. In that respect counsel
for the Crown submitted that the collective
agreement covered many employees, each with
individual circumstances and variable factors
affecting income tax liability, that delay in pay
ment of the salary would not necessarily result
in a tax payable, there might have been no tax
for some of the employees, and it cannot be
said that a tax gain or loss for any employee
was in the contemplation of the Crown in enter
ing into the agreement.
The argument in this respect went back to the
leading case of Hadley v. Baxendale (1854) 9
Exch. 341, and it is not inappropriate on this
occasion to consider it once more. That case
and several other cases involving recovery of
damages for breach of contract were considered
by the Court of Appeal in Victoria Laundry
(Windsor) Ltd. v. Newman Industries Ltd.
[1949] 2 K.B. 528, in which Asquith L.J. in
delivering the judgment of the court said:
Three of the authorities call for more detailed examina
tion. First comes Hadley v. Baxendale itself. Familiar
though it is, we should first recall the memorable sentence
in which the main principles laid down in this case are
enshrined: "Where two parties have made a contract which
one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract
should be such as may fairly and reasonably be considered
as either arising naturally, i.e. according to the usual course
of things, from such breach of contract itself, or such as
may reasonably be supposed to have been in the contempla
tion of both parties, at the time they made the contract, as
the probable result of the breach of it." The limb of this
sentence prefaced by "either" embodies the so-called
"first" rule; that prefaced by "or" the "second." (Page
537.)
What propositions applicable to the present case emerge
from the authorities as a whole, including those analysed
above? We think they include the following:
(1) It is well settled that the governing purpose of dam
ages is to put the party whose rights have been violated in
the same position, so far as money can do so, as if his rights
had been observed: (Sally Wertheim v. Chicoutimi Pulp
Company [1911] A.C. 301). This purpose, if relentlessly
pursued, would provide him with a complete indemnity for
all loss de facto resulting from a particular breach, however
improbable, however unpredictable. This, in contract at
least, is recognized as too harsh a rule. Hence,
(2) In cases of breach of contract the aggrieved party is
only entitled to recover such part of the loss actually
resulting as was at the time of the contract reasonably
forseeable as liable to result from the breach.
(3) What was at that time reasonably so foreseeable
depends on the knowledge then possessed by the parties or,
at all events, by the party who later commits the breach.
(4) For this purpose, knowledge "possessed" is of two
kinds; one imputed, the other actual. Everyone, as a reason
able person, is taken to know the "ordinary course of
things" and consequently what loss is liable to result from a
breach of contract in that ordinary course. This is the
subject matter of the "first rule" in Hadley v. Baxendale.
But to this knowledge, which a contract-breaker is assumed
to possess whether he actually possesses it or not, there
may have to be added in a particular case knowledge which
he actually possesses, of special circumstances outside the
"ordinary course of things," of such a kind that a breach in
those special circumstances would be liable to cause more
loss. Such a case attracts the operation of the "second rule"
so as to make additional loss also recoverable.
(5) In order to make the contract-breaker liable under
either rule it is not necessary that he should actually have
asked himself what loss is liable to result from a breach. As
has often been pointed out, parties at the time of contract
ing contemplate not the breach of the contract, but its
performance. It suffices that, if he had considered the
question, he would as a reasonable man have concluded that
the loss in question was liable to result (see certain observa
tions of Lord du Parcq in the recent case of A/B Karl-
shamns O!jefabriker v. Monarch Steamship Co. [19491 A.C.
196).
(6) Nor, finally, to make a particular loss recoverable,
need it be proved that upon a given state of knowledge the
defendant could, as a reasonable man, foresee that a breach
must necessarily result in that loss. It is enough if he could
foresee it was likely so to result. It is indeed enough, to
borrow from the language of Lord du Parcq in the same
case, at page 158, if the loss (or some factor without which
it would not have occurred) is a "serious possibility" or a
"real danger." For short, we have used the word "liable" to
result. Possibly the colloquialism "on the cards" indicates
the shade of meaning with some approach to accuracy.
(Pages 539-540.)
In a recent case, C. Czarnikow Ltd. v. Koufos
[1969] 1 A.C. 350 (which was not cited by
counsel in the argument), the House of Lords
again considered the rule in Hadley v. Baxen-
dale in the light of the propositions enunciated
by Asquith L. J. in the Victoria Laundry case
(supra). This was a case where a vessel had
made deviations in its travels and breach of
contract and damage had been caused by the
ensuing delay. The speeches of their Lordships
should be read in their entirety to get a com
plete understanding of the various opinions
expressed, but the following extracts strike me
as being particularly pertinent in considering the
case before this Court.
Lord Reid:
In cases like Hadley v. Baxendale or the present case it is
not enough that in fact the plaintiff's loss was directly
caused by the defendant's breach of contract. It clearly was
so caused in both. The crucial question is whether, on the
information available to the defendant when the contract
was made, he should, or the reasonable man in his position
would, have realised that such loss was sufficiently likely to
result from the breach of contract to make it proper to hold
that the loss flowed naturally from the breach or that loss of
that kind should have been within his contemplation. (Page
385.)
But then it has been said that the liability of defendants
has been further extended by Victoria Laundry (Windsor)
Ltd. v. Newman Industries Ltd. ([1949] 2 K.B. 528). (Page
388.)
But what is said to create a "landmark" is the statement
of principles by Asquith L. J. ([1949] 2 K.B. 528, 539, 540).
This does to some extent go beyond the older authorities
and in so far as it does so, I do not agree with it. In
paragraph (2) it is said (ibid. 539) that the plaintiff is entitled
to recover "such part of the loss actually resulting as was at
the time of the contract reasonably foreseeable as liable to
result from the breach." To bring in reasonable foreseeabili-
ty appears to me to be confusing measure of damages in
contract with measure of damages in tort. A great many
extremely unlikely results are reasonably foreseeable: it is
true that Lord Asquith may have meant foreseeable as a
likely result, and if that is all he. meant I would not object
further than to say that I think that the phrase is liable to be
misunderstood. For the same reason I would take exception
to the phrase (ibid. 540) "liable to result" in paragraph (5).
Liable is a very vague word but I think that one would
usually say that when a person foresees a very improbable
result he foresees that it is liable to happen.
I agree with the first half of paragraph (6). For the best
part of a century it has not been required that the defendant
could have foreseen that a breach of contract must neces
sarily result in the loss which has occurred. But I cannot
agree with the second half of that paragraph. It has never
been held to be sufficient in contract that the loss was
foreseeable as "a serious possibility" or "a real danger" or
as being "on the cards." It is on the cards that one can win
£100,000 or more for a stake of a few pence—several
people have done that. And anyone who backs a hundred to
one chance regards a win as a serious possibility—many
people have won on such a chance. And the Wagon Mound
(No. 2) ([1967] 1 A.C. 617) could not have been decided as
it was unless the extremely unlikely fire should have been
foreseen by the ship's officer as a real danger. It appears to
me that in the ordinary use of language there is wide gulf
between saying that some event is not unlikely or quite
likely to happen and saying merely that it is a serious
possibility, a real danger, or on the cards. Suppose one
takes a well-shuffled pack of cards, it is quite likely or not
unlikely that the top card will prove to be a diamond: the
odds are only 3 to 1 against. But most people would not say
that it is quite likely to be the nine of diamonds for the odds
are then 51 to 1 against. On the other hand I think that most
people would say that there is a serious possibility or a real
danger of its being turned up first and of course it is on the
cards. If the tests of "real danger" or "serious possibility"
are in future to be authoritative then the Victoria Laundry
case would indeed be a landmark because it would mean
that Hadley v. Baxendale would be differently decided
today. I certainly could not understand any court deciding
that, on the information available to the carrier in that case,
the stoppage of the mill was neither a serious possibility nor
a real danger. If those tests are to prevail in future then let
us cease to pay lip service to the rule in Hadley v. Baxen-
dale. But in my judgment to adopt these tests would extend
liability for breach of contract beyond-what is reasonable or
desirable. (Pages 389-390.)
Lord Morris of Borth-Y-Gest:
When parties enter into a contract they do not ordinarily
at such time seek to work out or to calculate the exact
consequences of a breach of their contract. On the facts of
the present case it is however pertinent to pose the enquiry
as to what the natural ordinary and sensible answer of the
appellant would have been if he had asked himself what the
result for the respondents would be if he (the appellant) in
breach of contract and therefore unjustifiably caused his
ship to arrive at Basrah some nine or ten days later than it
could and should have arrived. (Page 396.)
The appellant could and should at the very least have
contemplated that if his ship was nine days later in arriving
than it could and should have arrived some financial loss to
the respondents or to an endorsee of the bill of lading might
result. I use the words "at the very least" and the word
"might" at this stage so as to point to the problem which is
highlighted in this case. It is here that words and phrases
begin to crowd in and to compete. Must the loss of the
respondents be such that the appellant could see that it was
certain to result? Or would it suffice if the loss was prob
able or was likely to result or was liable to result? In the
present context what do these words denote? If there must
be selection as between them which one is to be employed
to convey the intended meaning?
I think that it is clear that the loss need not be such that
the contract-breaker could see that it was certain to result.
The question that arises concerns the measure of prevision
which should fairly and reasonably be ascribed to him.
My Lords, in applying the guidance given in Hadley v.
Baxendale I would hope that no undue emphasis would be
placed upon any one word or phrase. If a party has suffered
some special and peculiar loss in reference to some particu
lar arrangements of his which were unknown to the other
party and were not communicated to the other party and
were not therefore in the contemplation of the parties at the
time when they made their contract, then it would be unfair
and unreasonable to charge the contract breaker with such
special and peculiar loss. If, however, there are no "special
and extraordinary circumstances beyond the reasonable
prevision of the parties" (see the speech of Lord Wright in
Monarch Steamship Co. Ltd. v. Karlshamns Oljefabriker
(Al B) [1949] A.C. 196, 221), then it becomes very largely a
question of fact as to whether in any particular case a loss
can "fairly and reasonably" be considered as arising in the
normal course of things. Though in these days commercial
cases are not tried with juries, in his speech in the Monarch
Steamship case (ibid. 232) Lord du Parcq pointed out that in
the end what has to be decided is a question of fact and
therefore a question proper for a jury and he added:
Circumstances are so infinitely various that, however
carefully general rules are framed, they must be con
strued with some liberality, and not too rigidly applied. It
was necessary to lay down principles lest juries should be
persuaded to do injustice by imposing an undue, or per
haps an inadequate, liability on a defendant. The court
must be careful, however, to see that the principles laid
down are never so narrowly interpreted as to prevent a
jury, or judge of fact, from doing justice between the
parties. So to use them would be to misuse them.
If this approach is followed then I doubt whether the
necessity arises to express a preference or any definite
preference as between words and phrases that were submit
ted for your Lordships' consideration. The result in any
particular case need not depend upon giving pride of place
to any one of such phrases as "liable to result" or "likely to
result" or "not unlikely to result." Each one of these
phrases may be of help but so may many others. (Pages
396-397.)
My Lords, the words, phrases and passages to which I
have referred are useful and helpful indications of the
application of the rule in Hadley v. Baxendale. But they
neither add to the rule nor do they modify it. I regard the
illuminating judgment of the Court of Appeal in Victoria
Laundry (Windsor) Ltd. v. Newman Industries Ltd. ([1949]
2 K.B. 528) as a most valuable analysis of the rule. It was
there pointed out that in order to make_a contract breaker
liable under what was called "either rule" in Hadley v.
Baxendale it is not necessary that he should actually have
asked himself what loss is liable to result from a breach but
that it suffices that if he had considered the question he
would as a reasonable man have concluded that the loss in
question was liable to result. Nor need it be proved, in order
to recover a particular loss, that upon a given state of
knowledge he could, as a reasonable man, foresee that a
breach must necessarily result in that loss. Certain illustra
tive phrases are employed in that case. They are valuable by
way of exposition but for my part I doubt whether the
phrase "on the cards" has a sufficiently clear meaning or
possesses such a comparable shade of meaning as to qualify
it to take its place with the various other phrases which line
up as expositions of the rule. (Page 399.)
Lord Hodson:
A close study of the rule was made by the Court of
Appeal in the case of Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd. The judgment of the court, consist
ing of Tucker, Asquith and Singleton L. JJ., was delivered
by Asquith L. J., who referred to the Monarch Steamship
case and suggested the phrase "liable to result" as appropri
ate to describe the degree of probability required. This may
be a colourless expression but I do not find it possible to
improve on it. If the word "likelihood" is used it may
convey the impression that the chances are all in favour of
the thing happening, an idea which I would reject.
I find guidance in the use of the expression "in the great
multitude of cases" which is to be found in more than one
place in the judgment in Hadley v. Baxendale and indicates
that the damages recoverable for breach of contract are
such as flow naturally in most cases from the breach,
whether under ordinary circumstances or from special cir
cumstances due to the knowledge either in the possession of
or communicated to the defendants. This expression throws
light on the whole field of damages for breach of contract
and points to a different approach from that taken in tort
cases. (Pages 410-411.)
Lord Pearce:
The underlying rule of the common law is that "where a
party sustains a loss by reason of a breach of contract, he
is, so far as money can do it, to be placed in the same
situation with respect to damages, as if the contract had
been performed" (Parke B. in Robinson v. Harman (1848) 1
Exch. 850, 855). But since so wide a principle might be too
harsh on a contract breaker in making him liable for a chain
of unforeseen and fortuitous circumstances, the law limited
the liability in ways which crystallised in the rule in Hadley
v. Baxendale. This was designed as a direction to juries but
it has become an integral part of the law.
Since an Olympian cloud shrouded any doubts, difficul
ties and border-line troubles that might arise in the jury
room and the jury could use a common sense liberality in
applying the rule to the facts, the rule worked admirably as
a general guidance for deciding facts. But when the lucubra-
tions of judges would have to give reasons superseded the
reticence of juries, there were certain matters which needed
clarification. That service was well performed by the judg
ment of the Court of Appeal in the case of Victoria Laun
dry (Windsor) Ltd. v. Newman Industries Ltd. I do not think
that there was anything startling or novel about it. In my
opinion it represented (in felicitous language) that approxi
mate view of Hadley v. Baxendale taken by many judges in
trying ordinary cases of breach of contract. (Page 414.)
Accordingly in my opinion the expressions used in the
Victoria Laundry case were right. I do not however accept
the colloquialism "on the cards" as being a useful test
because I am not sure just what nuance it has either in my
own personal vocabulary or in that of others. I suspect that
it owes its attraction, like many other colloquialisms, to the
fact that one may utter it without having the trouble of
really thinking out with precision what one means oneself or
what others will understand by it, a spurious attraction
which in general makes colloquialism unsuitable for defini
tion, though it is often useful as shorthand for a collection
of definable ideas. It was in this latter convenient sense that
the judgment uses the ambiguous words "liable to result."
They were not intended as a further or different test from
"serious possibility" or "real danger." (Page 415.)
The language of the judgment in the Victoria Laundry case
was a justifiable and valuable clarification of the principles
which Hadley v. Baxendale was intending to express. Even
if it went further than that, it was in my opinion right. (Page
417.)
Lord Upjohn:
The rule in Hadley v. Baxendale was approved in express
terms in Your Lordships' House in Banco de Portugal v.
Waterlow & Sons Ltd. ([19321 A.C. 452) and in Monarch
Steamship Co. Ltd. v. Karlshamns Oljefabriker (AIB)
([1949] A.C. 196), and has been followed in a multitude of
cases ever since it was decided. I think that apart from
some very early criticisms it would be true to say that it
stood without question until the case of Victoria Laundry
(Windsor) Ltd. v. Newman Industries Ltd. when it received
a colourful interpretation from Asquith L. J. delivering the
judgment of the court.
My Lords, in my opinion this appeal renders it necessary
to determine the following questions:
(1) Has the Victoria Laundry case purported to alter the
law and establish a somewhat different rule from that laid
down in Hadley v. Baxendale for the assessment of dam
ages in contract?
(2) What, as a practical matter, is the test to be applied in
ascertaining whether any particular consequences of a
breach of contract should lead to recoverable damages as
arising either naturally or such as may have been within
the contemplation of the parties in the special circum
stances of the case? (Page 423.)
(1) Upon the first point it is, I think, clear that on a fair
reading of the judgments of the majority of the Court of
Appeal they considered that the Victoria Laundry case did
alter the law. That case was one plainly within the second
branch of the rule, but nevertheless the observations of
Asquith L. J. were in general terms applicable to both
branches. I do not myself think that the learned Lord
Justice intended to alter the law. He was paraphrasing it and
putting it into modern language, and I shall refer to this
under the next heading. If he was doing more, I would
disagree with him. But for my part I prefer to state the
broad rule as follows: What was in the assumed contempla
tion of both parties acting as reasonable men in the light of
the general or special facts (as the case may be) known to
both parties in regard to damages as the result of a breach
of contract; (Pages 423-424.)
(2) Upon the second point, what as a practical matter is
to be taken as within the contemplation of both parties as
the result of a breach? The words "probable result" held the
field at first; they were used in the enunciation of the rule
itself and by Lord Esher M.R. in Hammond v. Bussey (20
Q.B.D. 79, 88) and adopted by Viscount Dunedin in Hall v.
Pim (33 Com. Cas. 324, 330) who, however, was careful to
add that "probable" in his view did not mean more than an
even chance. Lord Shaw of Dunfermline in that case inter
preted the word probable in the sense of the not unlikely
result. In The Monarch ([1949] A.C. 196) their Lordships
used a variety of different expressions. I will very briefly
enumerate them—likelihood; possibility must have been in
the minds of both parties; a matter commercially to be
taken into account; a serious possibility of a real danger; a
grave risk.
Asquith L.J. in Victoria Laundry (page 540) used the
words "likely to result" and he treated that as synonymous
with a serious possibility or a real danger. He went on to
equate that with the expression "on the cards" but like all
your Lordships I deprecate the use of that phrase which is
far too imprecise and to my mind is capable of denoting a
most improbable and unlikely event, such as winning a prize
on a premium bond on any given drawing.
But in my opinion Asquith L. J. was not attempting to do
more than explain the rule in the light of the observations
made in this House in The Monarch. It is curious that Hall
v. Pim seems to have escaped citation in all the later cases
until this appeal to your Lordships.
It is clear that on the one hand the test of foreseeability
as laid down in the case of tort is not the test for breach of
contract; nor on the other hand must the loser establish that
the loss was a near certainty or an odds-on probability. I am
content to adopt as the test a "real danger" or a "serious
possibility." There may be a shade of difference between
these two phrases but the assessment of damages is not an
exact science and what to one judge or jury will appear a
real danger may appear to another judge or jury to be a
serious possibility. I do not think that the application of that
test would have led to a different result in Hadley v.
Baxendale. (Pages 424-425.)
It should be borne in mind that in cases such
as Hadley v. Baxendale the courts were dealing
with commercial contracts between two
individuals, whereas here we are dealing with a
collective agreement respecting wages and
working conditions negotiated between Trea
sury Board and a bargaining agent representing
employees, to which certain statutory provi
sions and Treasury Board orders apply. How
ever, considerations common to both kinds of
contracts are whether a loss complained of
arose out of a breach of contract and whether
the loss is so remote as not to be recoverable in
damages.
The tax liability of the suppliant results from
the application of the Income Tax Act. But the
Act applies to the suppliant's taxable income
situation, which was affected by the amount of
retroactive salary and the time or times on
which it was paid.
Payment of the retroactive salary was in the
control of the Crown. No reason or excuse was
offered for the delay from July 17, 1969, to
January 14, 1970, in paying it in full. It is my
conclusion that whether the 90 days specified in
section 56 of the Public Service Staff Relations
Act for implementation of the collective agree
ment is taken as the time within which payment
was required to be made or whether all that was
required was payment within what in the cir
cumstances was a reasonable time, the delay in
payment from July 17 to January 14, a period
of 6 months, was, in the absence of a satisfacto
ry explanation, unduly long and was in breach
of the Crown's obligation to pay such retroac
tive salary. I conclude also that the said delay
led directly to additional income tax expense
for the suppliant', and that such additional
income tax expense flowed naturally from that
delay and breach. I repeat here the relevant part
of paragraph 11 of the agreed statement of
facts, as follows:
In the event that it is adjudged that the Suppliant is entitled
to be compensated for his being required to pay additional
income tax arising from the receipt of retroactive pay in
1970 as opposed to 1969, it is agreed that the additional
expense on account of income tax is $50.00.
I think that neither the bargaining agent nor
Treasury Board had in mind, when negotiating
and entering into the agreement, that there
might be a failure to pay the retroactive salary
within a reasonable time or what the conse
quences income tax-wise of a breach of the
agreement to pay salary would be. What was
contemplated was performance, not breach, of
the agreement. However, the parties certainly
knew that the Income Tax Act would apply to
retroactive salary payments and I think that if
the bargaining agent and Treasury Board had
considered what loss or expense was liable to
result from delay from July 17 to January 14 in
paying the retroactive salary, they would have
concluded that there would be a real possibility
that a loss or expense of additional income tax
for at least some of the employees would be at
least one of the results. It would have been one
of the first things that would have come into
their minds, for incidence of income tax and the
amount of the take-home-pay after income tax
are important considerations in negotiations on
behalf of public service employees with Trea
sury Board for collective agreements pertaining
to wages and working conditions.
The Crown, not the suppliant, was respon
sible for the delay in payment of the retroactive
salary. Yet the suppliant has been put to
expense as a result of that delay, namely, his
additional income tax expense. In my opinion
the expense is not too remote to be recoverable
in damages, and the suppliant should not be left
by the Court to bear that expense without a
remedy.
Consequently, I find that the suppliant is enti
tled to recover damages on his claim in respect
of his additional income tax expense, and he is
entitled to recover from Her Majesty in that
respect the sum of $50.00, being part of the
relief sought by his petition of right herein, and
costs to be taxed.
i It was my understanding at the trial that proof of addi
tional income tax expense was not made because the fact of
such expense was not being disputed, although the Crown's
liability in damages in respect of such expense was
disputed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.