Evidence Of Loss Of Profits: Is Expertise Necessary?

March 31, 2017

On March 16, 2017, the Supreme Court of Canada dismissed the application by American Iron & Metal, l.p. (“American Iron”) for leave to appeal the Court of Appeal’s decision in Electrolux Canada Corp. v. American Iron & Metal, l.p., 2016 QCCA 1692, rendered on October 20, 2016.

The Court of Appeal allowed in part the appeal by Electrolux Canada Corp. (“Electrolux”) from the Superior Court decision by Justice Stéphane Sansfaçon rendered on January 29, 2016. The ruling substantially reduced the amount owing by Electrolux from $1,679,549.43 to $110,795. The Court of Appeal held that American Iron’s failure to adduce evidence on its costs was fatal to its claim for loss of profits.

A party that claims loss of profits must act diligently to satisfy its burden of proof and cannot rely on the court to adjudicate the quantum of its damages in the absence of evidence without risking dismissal of the claim. Even though the Court of Appeal did not make it a rule, using an expert witness to establish the loss of profits may often prove to be a very wise choice.

The Evidence Adduced On Loss Of Profits And The Trial Decision

At trial, Justice Stéphane Sansfaçon concluded that Electrolux was at fault for unilaterally and unlawfully terminating the contract under which it was bound to sell all its scrap metal to American Iron at an agreed price (the “Contract”). American Iron sought compensation for the lost profits related to the sales it would have made to its client Ivaco Rolling Mills 2004 LP (“Ivaco”) had it been able to continue buying scrap metal from Electrolux.

The amounts of scrap metal of which American Iron was deprived and the price it would have had to pay to buy the metal from Electrolux could be established with sufficient detail. There were, however, gaps in the evidence adduced by American Iron to establish the costs it would have incurred to sell the scrap metal to Ivaco.

Indeed, American Iron opted not to retain an expert to establish evidence of its loss of profits. Instead, the evidence was based on the testimony of an American Iron employee, its finance director. This testimony was not supported by financial statements or calculations on the overall costs or American Iron’s gross profit margin. The calculations entered by American Iron were limited to the costs of recovering scrap metal from Electrolux and the costs related to reselling it to one specific customer, Ivaco.

Despite these gaps, Justice Sansfaçon found that the evidence adduced by American Iron was sufficient to assess the operating costs and, therefore, the lost profits sustained by American Iron after Electrolux unilaterally terminated the Contract. In his assessment, Justice Sansfaçon even doubled the figure for handling the metal submitted by American Iron [translation] “in order to palliate any deficiencies in establishing the costs of shipping and handling the material”.

At the end of the trial, Electrolux was condemned to pay $1,679,549.43 plus interest and the additional indemnity to compensate for the loss of profits sustained by American Iron, and American Iron was condemned to pay $641,319.18 to Electrolux under its cross-demand.

The Appeal

Electrolux’s appeal did not question the trial judge’s conclusions with respect to its fault, but rather the quantum of damages.

Note that under article 1611 (the “C.C.Q.”), “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”.

At the outset, the Court of Appeal stated that the trial judge erred in the manner of calculating lost profit:

“[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.” (Emphasis added)

After describing the various gaps in American Iron’s evidence on its lost profits, the Court of Appeal found that there was an absence of evidence on American Iron’s operating costs, with the result that it was impossible to calculate the loss of profits:

“[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.”

Although the Court of Appeal could have returned the case to trial court so that the missing evidence could be adduced, it decided that such a measure was inappropriate in the case at bar because the gaps in American Iron’s evidence of its loss of profits was not a mere error, but a deliberate choice.

It is interesting to note that although the Court of Appeal observed that recourse to a forensic accountant would have filled in the gaps in American Iron’s evidence, it did not go so far as to state that loss of profits must always be established with an expert witness:

“[20] […] 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.” (Emphasis added)

Last, while recognizing the trial judge’s discretion to adjudicate damages, the Court of Appeal teaches us that such discretion has serious limits:

“[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.[References omitted] 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.[References omitted] 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”[References omitted], 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,[References omitted] as the judge did in this case.” (Emphasis added)

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