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Duty to Mitigate Confirmed In Specific Performance Case

The recent Supreme Court of Canada decision in Southcott Estates Inc. v. Toronto Catholic District School Board confirmed that a “single-purpose company” (i.e. one incorporated for the sole purpose of buying a specific piece of property) still had a duty to mitigate in a failed real estate transaction.

The buyer was a company that had been incorporated for the sole purpose of purchasing a particular piece of property. It had no assets whatsoever, other than money advanced to it by the parent company specifically for the land deal.

When the seller breached the negotiated agreement to sell, the buyer asked the court to force the sale through an order for specific performance. It also contended that – as a single-purpose company – it did not have the usual obligation to mitigate its losses prior to coming to court, and in any case it was impecunious and did not have the financial resources available to take steps in mitigation.

Both at trial and appeal, the buyer’s request for specific performance was dismissed; moreover the Court of Appeal reduced the buyer’s damages in light of its lack of mitigation efforts.

The subsequent appeal to the Supreme Court of Canada was also dismissed. Mitigation is a doctrine based in fairness and common sense; it is an obligation imposed on an innocent party in order to do justice in the circumstances. As a general rule, when one party breaches a contract, the other party will not be able to recover those losses that could have been avoided through reasonable efforts to stem them.

As a single-purpose company, the buyer in this case was not relieved of the usual duty in this regard. Nor was the obligation eliminated merely because the buyer was claiming specific performance. Rather, in such cases the key question is whether there is a substantial and legitimate justification for seeking specific performance – for example where the property is unique – and if so whether it is reasonable for an innocent buyer not to mitigate in the circumstances.

In this case - aside from being a good investment opportunity – there was nothing unique about the property in question and the buyer’s normal duty to mitigate damages was not alleviated.

Moreover, the buyer’s claims that it did not have funds to mitigate were without merit: the alleged breach did not impair the buyer’s ability to obtain capital; indeed the funds ear-marked for the aborted sale were still on-hand. The appeal was therefore dismissed; the seller had breached the agreement but in light of the buyer’s failure to mitigate, the damages awarded were nominal.