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Damages - Contrast Between Liquidated Damages and Penalty Clauses

In Ottawa Community Housing Corporation v. Foustanellas (Argos Carpets) (Ont CA, 2015) the Court of Appeal commented on the issue of whether some contractual clauses were both penalty clauses and reflected liquidated damages:
[32] In my opinion, the trial judge correctly held that clause 1.6.3 is neither a penalty nor a liquidated damages clause as those clauses are recognized under the established case law.

[33] The authorities relied on by the appellants themselves compel this interpretive conclusion. For example, in Canadian General Electric Co. v. Canadian Rubber Co. (1915), 1915 CanLII 45 (SCC), 52 S.C.R. 349, cited by the appellants, Sir Charles Fitzpatrick C.J. noted, at p. 351: “A penalty is the payment of a stipulated sum on breach of the contract, irrespective of the damage sustained. The essence of liquidated damages is a genuine covenanted pre-estimate of damage.” In Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916, Dickson J. (as he then was), writing for a unanimous Supreme Court, explained that, where liquidated damages are stipulated in a contract, the injured party may elect to take the sum stipulated without regard to his or her actual loss. Where, however, the stipulated sum is properly to be seen as a penalty, the injured party may only recover proven damages and the amount recoverable may not exceed the sum stipulated: at p. 938.

[34] Under these authorities, the critical common element is that both penalty and liquidated damages clauses specify a stipulated sum agreed on by the parties at the time of contract formation.

[35] Clause 1.6.3 of the Carpet Contract makes no mention of a stipulated or agreed sum recoverable on breach, whether as a penalty or otherwise. In other words, it does not stipulate a sum, whether as the amount payable on breach or as the maximum amount recoverable upon proof of actual damage arising from a contractual breach. Instead, the clause contemplates that, on breach of the Carpet Contract by the contractor, the owner’s damages and losses require assessment and the owner may cease payments to the contractor pending quantification of those damages and losses. As the trial judge aptly observed, at para. 69 of his reasons, the amount of the owner’s losses and damages “on jobs completed under the contract at any given time could vary widely”. Further, the fact that the amount of outstanding invoices owed to the contractor may eventually be set off against the quantified amount of the owner’s losses and damages does not convert clause 1.6.3 into a penalty or liquidated damages provision.


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Last modified: 03-01-23
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