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Mental distress, yes, punitive damages, no
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July 14, 2006
BY CRISTIN SCHMITZ
Joe Arvay, in front of Vancouver's historic Marine Building; photo by Alistair Eagle |
VANCOUVER • In a mixed victory for insured and insurers, the Supreme Court of Canada has jettisoned the more-than-century-old general principle that damages for mental distress are not available for commercial breaches of contract.
The court's 8-0 decision June 29 upholds a $20,000 mental distress award to respondent Connie Fidler, a B.C. bank worker totally disabled by chronic fatigue and fibromyalgia who was unjustifiably cut off for more than five years from her long-term disability payments by her insurer after it covertly spied on her activities.
"The law on damages for mental distress, and the law on aggravated damages, has been clarified and made more coherent by the court and that part of the decision is extremely important," said Fidler's counsel, Joe Arvay of Arvay Finlay.
To the relief of the insurance industry, however, the top court also overturned a $100,000 punitive damages award by a majority of the B.C. Court of Appeal against the appellant Sun Life Assurance Company.
The SCC ruled that the appeal court should not have interfered with the trial judge's conclusion that the insurer's "rather zealous" conduct against Fidler did not amount to the bad faith required for punitive damages.
"I think there is some comfort to that," observed Sun Life's appellate counsel Avon Mersey of Vancouver's Fasken Martineau DuMoulin. "I think that demonstrates that there has got to be substantial egregious conduct before any award for punitive damages will lie. [Insurance companies] have to be able to test the claims, and to deal with it, and they are not going to be faulted for doing that unless they cross a very high threshold, it seems to me."
Mersey added that it "would have been disastrous to the industry" if the B.C. Court of Appeal's majority had been affirmed on that point "because it would mean effectively that you really couldn't challenge cases easily because every time you did you would run the risk of getting a substantial punitive award, and it would add to the costs."
The co-written reasons of Chief Justice Beverley McLachlin and Justice Rosalie Abella amplify the common law on mental distress damages far beyond the sphere of insurance law.
For example, the decision draws an important conceptual distinction between (1) "aggravated damages" for mental distress, which arise out of aggravating circumstances connected to a breach of contract, and (2) compensatory damages for mental distress which arise out of the contractual breach itself.
The top court makes clear that it is only in the first type of case that the plaintiff needs to show that his or her mental suffering is grounded in separate, independently actionable conduct - usually a tort like defamation, oppression or fraud.
But in the second type of case, including Fidler , where the losses flow from the breach of contract itself, damages will be determined according to what was in the reasonable contemplation of the parties at the time of contract formation and no separate actionable conduct is required.
Damages for mental distress for breach of contract may in appropriate cases, such as those involving contracts for pleasure, relaxation, or peace of mind, be awarded as an application of the reasonable foreseeability principle in Hadley v. Baxendale (1854), 9 Ex. 341, ruled Justices McLachlin and Abella.
They explained, "The aim of compensatory damages is to restore the wronged party to the position he or she would have been in had the contract not been broken. There is no reason why this should not include damages for mental distress, where such damages were in the reasonable contemplation of the parties at the time the contract was made ... The law's task is simply to provide the benefits contracted for, whatever their nature, if they were in the reasonable contemplation of the parties."
The court emphasized, however, that not all mental distress associated with a breach of contract will be compensable. "In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties," reasoned Justices McLachlin and Abella. "It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made."
The court noted that the common law's reluctance to award damages for mental suffering was based on two policy considerations - the minimal nature of the mental suffering and the fact that in commercial matters, mental suffering on breach is not within the parties' contemplation as part of the business risk of the transaction.
But neither policy consideration applies to contracts where promised mental security or satisfaction is part of the risk for which the parties contracted, observed Justices McLachlin and Abella. Moreover while mental distress as result of a contract breach must be reasonably contemplated by the parties in order to attract damages, "we see no basis for requiring it to be the dominant aspect or the 'very essence' of the bargain," they elaborated. "This is to state neither more nor less than the rule in Hadley v. Baxendale ."
Accordingly the availability of damages for mental distress in cases of breaches of contracts which promise an element of "peace of mind" should "not be viewed as an exception to the general rule of the non-availability of damages for mental distress in contract law, but rather as an application of the reasonable contemplation or foreseeability principle that applies generally to determine the availability of damages for breach of contract," said the court.
"Ms. Fidler's damages for mental distress flowed from Sun Life's breach of contract. To accept Sun Life's argument that an independent actionable wrong is a precondition would be to sanction the 'conceptual incongruity of asking a plaintiff to show more than just that mental distress damages were a reasonably foreseeable consequence of breach'."
