IBM Canada Limited v. Waterman

IBM Canada Limited v. Waterman
Collection
Supreme Court Judgments
Date
2013-12-13
Neutral citation
2013 SCC 70
Report
[2013] 3 SCR 985
Case number
34472
Judges
McLachlin, Beverley; LeBel, Louis; Fish, Morris J.; Abella, Rosalie Silberman; Rothstein, Marshall; Cromwell, Thomas Albert; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard
On appeal from
British Columbia
Subjects
Labour law
Notes
SCC Case Information: 34472
Decision Content
SUPREME COURT OF CANADA
Citation: IBM Canada Limited v. Waterman, 2013 SCC 70, [2013] 3 S.C.R. 985
Date: 20131213
Docket: 34472
Between:
IBM Canada Limited
Appellant
and
Richard Waterman
Respondent
Coram: McLachlin C.J. and LeBel, Fish, Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ.
Reasons for Judgment:
(paras. 1 to 99)
Dissenting Reasons:
(paras. 100 to 155)
Cromwell J. (LeBel, Fish, Abella, Moldaver, Karakatsanis and Wagner JJ. concurring)
Rothstein J. (McLachlin C.J. concurring)
IBM Canada Limited v. Waterman, 2013 SCC 70, [2013] 3 S.C.R. 985
IBM Canada Limited Appellant
v.
Richard Waterman Respondent
Indexed as: IBM Canada Limited v. Waterman
2013 SCC 70
File No.: 34472.
2012: December 14; 2013: December 13.
Present: McLachlin C.J. and LeBel, Fish, Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ.
on appeal from the court of appeal for british columbia
Employment law — Wrongful dismissal — Damages — Compensating advantage — Dismissed employee drawing pension benefits upon dismissal — Trial judge establishing appropriate notice period at 20 months without deduction for pension benefits — Whether pension benefits constitute compensating advantage — Whether pension benefits should be deducted from damages for wrongful dismissal.
IBM dismissed W without cause on two months’ notice. W was 65 years old, had 42 years of service, and had a vested interest in IBM’s defined benefit pension plan. Under the plan, IBM contributed a percentage of W’s salary to the plan on his behalf. Upon termination, W was entitled to a full pension, and his termination had no impact on the amount of his pension benefits.
W sued to enforce his contractual right to reasonable notice. The trial judge set the appropriate period of notice at 20 month and declined to deduct the pension benefits paid to W during the notice period in calculating his damages. The Court of Appeal dismissed the appeal.
Held (McLachlin C.J. and Rothstein J. dissenting): The appeal should be dismissed.
Per LeBel, Fish, Abella, Cromwell, Moldaver, Karakatsanis and Wagner JJ.: The rule that damages are measured by the plaintiff’s actual loss does not cover all cases. The law has long recognized that applying the general rule of damages — the compensation principle — strictly and inflexibly sometimes leads to unsatisfactory results. Employee pension payments, including payments from a defined benefit plan, should generally not reduce the damages otherwise payable for wrongful dismissal. Pension benefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings. They are not intended to be an indemnity for wage loss due to unemployment.
A compensating advantage arises if a source other than the damages payable by the defendant ameliorates the loss suffered by the plaintiff as a result of the defendant’s breach of a legal duty. However, not all benefits received by a plaintiff raise a compensating advantages problem. A problem only arises with a compensating advantage when the advantage is one that (a) would not have accrued to the plaintiff but for the breach, or (b) was intended to indemnify the plaintiff for the sort of loss resulting from the breach.
The question is whether the compensation principle should be strictly applied and the compensating advantage should be deducted. Considerations other than the extent of the plaintiff’s actual loss shape the way the compensation principle is applied. The deductibility of compensating advantages also depends on justice, reasonableness and public policy.
Benefits received by a plaintiff through private insurance are generally not deductible from damages awards. While there is no single marker to sort which benefits fall within the private insurance exception, the more closely the benefit is, in nature and purpose, an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. Whether the plaintiff has contributed to the benefit also remains a relevant consideration, although the basis for this is debatable. In general, a benefit will not be deducted if it is not an indemnity for the loss caused by the breach and the plaintiff has contributed in order to obtain entitlement to it. Finally, there is room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatment of those in similar situations, the possibility of providing incentives for socially desirable conduct, and the need for clear rules that are easy to apply. While this exception is called the private insurance exception, it has been applied by analogy to a variety of payments that do not originate in a contract of insurance.
Although the courts have not relied on any broad “single contract” rule, where a cause of action and a benefit arise under the contract of employment, the terms of a contract and the dealings between the parties will inform the analysis.
A compensating advantage issue arises in this case: W received his full pension benefits and the salary he would have earned had he worked during the period of reasonable notice; had IBM given him working notice, he would have received only his salary during that period. However, the private insurance exception applies to benefits such as pension payments to which an employee has contributed and which were not intended to be an indemnity for the type of loss suffered as a result of the defendant’s breach. As such, the compensation principle should not be applied strictly in this case.
In this case, the factors clearly support not deducting the retirement pension benefits from wrongful dismissal damages. W’s contract of employment is silent on this issue, but it does not have any general bar against receiving full pension entitlement and employment income. W’s retirement pension is not an indemnity for wage loss, but rather a form of retirement savings. While IBM made all of the contributions to fund the plan, W earned his entitlement to benefits through his years of service, as the plan’s primary purpose is to provide periodic pension payments to eligible employees after retirement in respect of their service as employees. Thus, this case falls into the category of cases in which the insurance exception has always been applied — the benefit is not an indemnity and W contributed to the benefit.
Although Sylvester v. British Columbia, [1997] 2 S.C.R. 315, is distinguishable on the facts, the factors it sets out support the conclusion that W’s benefits should not be deducted from his wrongful dismissal damages. The pension benefits were clearly not an indemnity benefit for loss of salary due to inability to work, and W’s interest in the pension bears many of the hallmarks of a property right. Looking at the contract as a whole, it is not a fair implication that the parties agreed that pension entitlements should be deducted from wrongful dismissal damages.
Finally, the broader policy concerns in this case support not deducting the pension benefits. The law should not provide an economic incentive to dismiss pensionable employees rather than other employees. The other policy concerns raised by Justice Rothstein or present in Sylvester either do not arise here or are highly speculative.
Per McLachlin C.J. and Rothstein J. (dissenting): This case requires an assessment of W’s loss under the terms of a single contract which gave rise to both a right to reasonable notice and a right to pension benefits. The private insurance exception has no application to such a case. Where a court is called upon to assess loss under a single contract, the plaintiff’s entitlement turns on the ordinary governing principle that he should be put in the position he would have been in had the contract been performed. In this case, that means that the pension benefits W received must be deducted in calculating his damages for wrongful dismissal; not deducting would give W more than he bargained for and would charge IBM more than it agreed to pay.
The governing principle for damages upon breach of contract is that the non‑breaching party should be provided with the financial equivalent of performance. Employer‑provided benefits are integral components of the employment contract, so deductibility turns on the terms of the employment contract and the intention of the parties. Under the terms of W’s employment contract, he would have been eligible to receive pension benefits only upon being terminated or retiring. Therefore, as in Sylvester, W’s contractual right to wrongful dismissal damages and his contractual right to his pension are based on opposite assumptions about his availability to work. Damages cannot be paid on the assumption that he could have earned both.
This conclusion is necessitated by the fact that the pension plan at issue here is a defined benefit plan. Unlike a defined contribution plan, a defined benefit plan guarantees the employee fixed predetermined payments upon retirement for life. Deducting the benefits would provide the wrongfully terminated employee with exactly what he would have received had the employment contract been performed: an amount equal to his salary during the reasonable notice period and thereafter defined benefits for the rest of his life.
This is materially different from a defined contribution plan, which provides an employee with a finite total amount or lump sum of retirement benefits. Deducting benefits that a wrongfully terminated employee receives from a defined contribution plan would leave the employee in a worse position that he would have been in had his employment contract not been breached.
In this case, W’s wrongful dismissal had no impact on his pension entitlement, and he could not have received both his salary and his pension benefits had he continued to work for IBM through the reasonable notice period. Whether the benefit is non‑indemnity or contributory does not answer the question of whether the plaintiff will be provided with the financial equivalent of performance or will receive excess recovery under the governing principle of contract damages.
Furthermore, the private insurance exception is not applicable to cases that involve a single contract that is the source of both the plaintiff’s cause of action and his right to a particular benefit. In such circumstances, there is no justification for resorting to the private insurance exception because the plaintiff’s entitlement to the benefits is established based on the terms of his contract. If the plaintiff is entitled to the benefits under his contract, he will receive the benefits based on the ordinary governing principle that he should be placed in the position he would have been in had the contract been performed. There will be no need to reach the collateral benefit exception. A straightforward reading of Sylvester demonstrates that it is a fully applicable authority supporting the proposition that, under a single contract of employment, barring contractual provisions to the contrary, an individual cannot receive salary as if he is working and pension benefits as if he is retired. These are opposite, incompatible assumptions. Thus, applying Sylvester to this case, salary and pension income are not payable at the same time.
Cases Cited
By Cromwell J.
Distinguished: Sylvester v. British Columbia, [1997] 2 S.C.R. 315; Ratych v. Bloomer, [1990] 1 S.C.R. 940; discussed: Cunningham v. Wheeler, [1994] 1 S.C.R. 359; referred to: Phillips v. Western Company of North America, 953 F.2d 923 (1992); United States v. Price, 288 F.2d 448 (1961); Sloas v. CSX Transportation, Inc., 616 F.3d 380 (2010); Parry v. Cleaver, [1970] A.C. 1; Attorney General v. Blake, [2001] 1 A.C. 268; Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601; Redpath v. Belfast and County Down Railway (1947), N.I. 167; Jack Cewe Ltd. v. Jorgenson, [1980] 1 S.C.R. 812; Canadian Pacific Ltd. v. Gill, [1973] S.C.R. 654; Grand Trunk Railway v. Beckett (1887), 16 S.C.R. 713; Quebec Workmen’s Compensation Commission v. Lachance, [1973] S.C.R. 428; Guy v. Trizec Equities Ltd., [1979] 2 S.C.R. 756; Chandler v. Ball Packaging Products Canada Ltd. (1992), 2 C.C.P.B. 101, aff’d (1993), 2 C.C.P.B. 99; Emery v. Royal Oak Mines Inc. (1995), 24 O.R. (3d) 302; Canadian Human Rights Commission v. Canada (Attorney General), 2003 FCA 86, 301 N.R. 321; Bradburn v. Great Western Railway Co. (1874), L.R. 10 Ex. 1; National Insurance Co. of New Zealand Ltd. v. Espagne (1961), 105 C.L.R. 569; Graham v. Baker (1961), 106 C.L.R. 340; Smoker v. London Fire and Civil Defence Authority, [1991] 2 A.C. 502; Hopkins v. Norcross plc, [1993] 1 All E.R. 565; Knapton v. ECC Card Clothing Ltd., [2006] I.C.R. 1084; Gilbert v. Attorney‑General, [2010] NZCA 421, 8 N.Z.E.L.R. 72.
By Rothstein J. (dissenting)
Girling v. Crown Cork & Seal Canada Inc. (1995), 9 B.C.L.R. (3d) 1; Sylvester v. British Columbia, [1997] 2 S.C.R. 315; Cunningham v. Wheeler, [1994] 1 S.C.R. 359; Chandler v. Ball Packaging Products Canada Ltd. (1992), 2 C.C.P.B. 101; Parry v. Cleaver, [1970] A.C. 1; Guy v. Trizec Equities Ltd., [1979] 2 S.C.R. 756; Canadian Pacific Ltd. v. Gill, [1973] S.C.R. 654; Jack Cewe Ltd. v. Jorgenson, [1980] 1 S.C.R. 812; United States v. Price, 288 F.2d 448 (1961); Phillips v. Western Company of North America, 953 F.2d 923 (1992); Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601.
Statutes and Regulations Cited
Canadian Forces Superannuation Act, R.S.C. 1985, c. C‑17 .
Employment Insurance Act, S.C. 1996, c. 23, s. 45 .
Authors Cited
Burrows, Andrew. Remedies for Torts and Breach of Contract, 3rd ed. Oxford: Oxford University Press, 2004.
Cassels, Jamie, and Elizabeth Adjin‑Tettey. Remedies: The Law of Damages, 2nd ed. Toronto: Irwin Law, 2008.
Fleming, John G. “The Collateral Source Rule and Contract Damages” (1983), 71 Cal. L. Rev. 56.
Kaplan, Ari, and Mitch Frazer. Pension Law, 2nd ed. Toronto: Irwin Law, 2013.
Marks, John. “Symmetrical Use of Universal Damages Principles — Such as the Principles Underlying the Doctrine of Proximate Cause — to Distinguish Breach‑Induced Benefits That Offset Liability From Those That Do Not” (2009), 55 Wayne L. Rev. 1387.
McCamus, John D. The Law of Contracts, 2nd ed. Toronto: Irwin Law, 2012.
Ogus, A. I. The Law of Damages. London: Butterworths, 1973.
Perillo, Joseph M. “The Collateral Source Rule in Contract Cases” (2009), 46 San Diego L. Rev. 705.
Sproat, John R. Wrongful Dismissal Handbook, 6th ed. Toronto: Carswell, 2012.
Swan, Angela, and Jakub Adamski. Canadian Contract Law, 3rd ed. Markham, Ont.: LexisNexis, 2012.
Waddams, S. M. The Law of Damages, 5th ed. Toronto: Canada Law Book, 2012.
APPEAL from a judgment of the British Columbia Court of Appeal (Finch C.J. and Prowse and Levine JJ.A.), 2011 BCCA 337, 20 B.C.L.R. (5th) 241, 308 B.C.A.C. 304, 521 W.A.C. 304, 336 D.L.R. (4th) 481, [2011] 10 W.W.R. 425, 91 C.C.P.B. 60, 92 C.C.E.L. (3d) 289, [2011] B.C.J. No. 1453 (QL), 2011 CarswellBC 2023, affirming a decision of Goepel J., 2010 BCSC 376, 2010 CLLC ¶210‑021, [2010] B.C.J. No. 510 (QL), 2010 CarswellBC 679. Appeal dismissed, McLachlin C.J. and Rothstein J. dissenting.
D. Geoffrey Cowper, Q.C., and Lorene A. Novakowski, for the appellant.
Christopher J. Watson and Matthew G. Siren, for the respondent.
The judgment of LeBel, Fish, Abella, Cromwell, Moldaver, Karakatsanis and Wagner JJ. was delivered by
Cromwell J. —
I. Introduction
[1] When IBM Canada Ltd. wrongfully dismissed its long-time employee, Richard Waterman, he had to start drawing his pension. The question before the Court is whether his receipt of those pension benefits reduces the damages otherwise payable by IBM for wrongful dismissal. The British Columbia courts decided not to deduct the pension benefits and IBM appeals.
[2] The question looks straightforward enough at first glance. The general rule is that contract damages should place the plaintiff in the economic position that he or she would have been in had the defendant performed the contract. IBM’s obligation was to give Mr. Waterman reasonable notice of dismissal or pay in lieu of it. Had it given him reasonable working notice, he would have received only his regular salary and benefits during the period of notice. As it is, he in effect has received both his regular salary and his pension for that period. It therefore seems clear, under the general rule of contract damages, that the pension benefits should be deducted. Otherwise, Mr. Waterman is in a better economic position than he would have been in had there been no breach of contract.
[3] On closer study, however, the question raised on appeal is not as simple as that. The case in fact raises one of the most difficult topics in the law of damages, namely when a “collateral benefit” or a “compensating advantage” received by a plaintiff should reduce the damages otherwise payable by a defendant. The law has long recognized that applying the general rule of damages strictly and inflexibly sometimes leads to unsatisfactory results. The question is how to identify the situations in which that is the case.
[4] In my view, employee pension payments, including payments from a defined benefit plan as in this case, are a type of benefit that should generally not reduce the damages otherwise payable for wrongful dismissal. Both the nature of the benefit and the intention of the parties support this conclusion. Pension benefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings. They are not intended to be an indemnity for wage loss due to unemployment. The parties could not have intended that the employee’s retirement savings would be used to subsidize his or her wrongful dismissal. There is no decision of this Court in which a non-indemnity benefit to which the plaintiff has contributed, such as the pension benefits in issue here, has ever been deducted from a damages award.
[5] I would dismiss IBM’s appeal and affirm the result arrived at by the British Columbia courts.
II. Overview of Facts and Proceedings
[6] When IBM dismissed Mr. Waterman without cause on March 23, 2009, he was 65 years old and had 42 years of service. He was a long-standing member of IBM’s defined benefit pension plan, which I will refer to simply as “the plan”. IBM contributed a percentage of his salary to the plan on his behalf and the plan guaranteed specific benefits, which became vested over time, upon retirement.
[7] At the time of the termination, there was no longer a mandatory retirement policy in place for IBM employees. However, Mr. Waterman was entitled to a full pension under the plan and his termination had no impact on the amount of his pension benefits. IBM told Mr. Waterman that on termination, he would be treated as a retiree and that he must begin receiving monthly pension payments as of that date.
[8] An employee like Mr. Waterman, who is entitled to retire with his full pension but has not reached the age of 71, cannot receive both pension and employment income from IBM at the same time. That changes at age 71, when he or she must start drawing benefits and may continue working and earning employment income from IBM. We have not been referred to any provision in the plan that would prevent a retiree, regardless of age, from receiving benefits under the plan and employment income from a different employer.
[9] Mr. Waterman sued for wrongful dismissal and the matter proceeded to summary trial in the Supreme Court of British Columbia. The trial judge, Goepel J., found that the appropriate period of notice was 20 months. IBM’s position was (and is) that Mr. Waterman’s pension benefits (approximately $2,124 per month starting June 1, 2009) should be deducted from the salary and benefits otherwise payable during this period. The trial judge rejected this position: 2010 BCSC 376, 2010 CLLC ¶210-021.
[10] IBM’s appeal from this decision was dismissed by the British Columbia Court of Appeal. Writing for the court, Prowse J.A. relied on this Court’s judgment in Sylvester v. British Columbia, [1997] 2 S.C.R. 315. However, she concluded that the distinctions between the benefits and the intentions of the parties in the two cases led to a different conclusion in this case: 2011 BCCA 337, 20 B.C.L.R. (5th) 241.
III. Positions of the Parties
[11] On its appeal to this Court, IBM makes two main points. It submits, first, that the result reached by the British Columbia courts is at odds with the compensatory goal of damages for wrongful dismissal. IBM points out that even if it had given Mr. Waterman adequate working notice of his termination, he would not have received both his employment income and his pension benefits during the notice period. By awarding him damages for the full notice period without deduction of the pension benefits received during that period, the British Columbia courts have placed him in a better economic position than he would have been in had IBM performed the contract. Second, IBM maintains that the Court in Sylvester held that these sorts of benefits are part of an integrated employment relationship and, unless deducted, the employee collecting them would receive greater compensation than would an employee lawfully dismissed with working notice.
[12] Mr. Waterman urges us to reject IBM’s position. He submits that the pension is the property of the employee that is earned through work and consists of a benefit that is part of the employee’s remuneration package. The pension is like a “nest egg”, RRSP or savings account, which IBM could not take advantage of to offset the damages awarded. Mr. Waterman could have transferred the value of his pension to another vehicle if he had left employment with IBM before reaching the age of 65 and his retirement savings would consequently have been out of reach. As for the intention of the parties, there is no provision in the pension plan expressly prohibiting concurrent reception of salary and pension benefits. It was therefore up to the courts to determine the parties’ intention, which the Court of Appeal correctly did in its decision.
IV. Analysis
[13] In my respectful view, both of IBM’s main arguments must be rejected. The general principle of compensation is not a full answer to the issue. The question is whether this case falls within an exception to it and in my view it does. The Court’s decision in Sylvester is distinguishable and, in fact, its reasoning supports the conclusion that the pension benefits should not be deducted.
[14] There are three key matters that need to be considered in order to answer the question posed by the appeal. I will set them out here with a summary of my conclusions.
A. Why is there a “collateral benefit” problem in this case?
[15] A collateral benefit is a gain or advantage that flows to the plaintiff and is connected to the defendant’s breach. This connection may exist either because there is a “but for” causal link between the breach and the receipt of the benefit or because the benefit was intended to provide the plaintiff with an indemnity for the type of loss caused by the breach. The problem raised by collateral benefits is the question of whether they should be deducted from the damages otherwise payable by the defendant on account of the breach. This case raises a collateral benefit problem because there is a “but for” causal link between the IBM’s breach of contract and Mr. Waterman’s receipt of the benefit. He would not have received the pension benefits and full salary in lieu of working notice “but for” the dismissal.
B. Is the compensation principle the answer to the problem?
[16] The principle that the defendant should compensate the plaintiff only for his or her actual loss is not, on its own, an answer to the problem. There are exceptions to the strict application of this principle, the most important of which is the exception for private insurance and other benefits which, for this purpose, are considered analogous to private insurance. That exception applies not only to insurance benefits in the strict sense, but also to other benefits such as pension payments to which an employee has contributed and which were not intended to be an indemnity for the type of loss suffered as a result of the defendant’s breach.
C. Does the Court’s decision in Sylvester support IBM’s position that the pension benefits must be deducted?
[17] In my view, it does not. Sylvester is distinguishable. The reasoning in Sylvester in fact supports the conclusion that Mr. Waterman’s pension benefits should not be deducted from the wrongful dismissal damages otherwise payable by IBM.
[18] My more detailed analysis follows.
A. Why Is There a Collateral Benefit Problem in This Case?
[19] It will be helpful to start by explaining what a collateral benefit problem is and why we have one here.
(1) What Is a Collateral Benefit Problem?
[20] In general terms, there is a collateral benefit when a source other than the damages payable by the defendant ameliorates the loss suffered by the plaintiffs as a result of the defendant’s breach of legal duty: J. Cassels and E. Adjin-Tettey, Remedies: The Law of Damages (2nd ed. 2008), at p. 416. For example, if an employee is wrongfully dismissed, but receives employment insurance benefits, those benefits are a collateral benefit. The problem is whether they should be deducted from the damages the defendant will pay for wrongful dismissal.
[21] If we simply apply the compensation principle — that the plaintiff should recover his or her actual economic loss but not more — the answer is straightforward. If we do not deduct the collateral benefit, the plaintiff will be in a better position than he or she would have been in had the employment contract been performed. To apply the compensation principle, we should consider not only the plaintiff’s losses but also any gains that flow from the defendant’s breach. The collateral benefit problem asks whether we should apply the compensation principle and deduct or depart from it and not deduct.
[22] There is considerable overlap between the collateral benefit problem and the questions of mitigation. The main distinction is this: mitigation is concerned with whether the plaintiff acted reasonably after the defendant’s breach in order to reduce losses. The collateral benefit question, in contrast, is concerned with whether some compensating advantage that was in fact received by the plaintiff, most often as a result of arrangements made before the breach, should be taken into account in assessing the plaintiff’s damages: see A. I. Ogus, The Law of Damages (1973), at pp. 87-88.
(2) When Does a Collateral Benefit Problem Arise?
[23] Not all benefits received by a plaintiff raise a collateral benefit problem. Before there is any question of deduction, the receipt of the benefit must constitute some form of excess recovery for the plaintiff’s loss and it must be sufficiently connected to the defendant’s breach of legal duty.
[24] For example, there is no excess recovery if the party supplying the benefit is subrogated to — that is, steps into the place of — the plaintiff and recovers the value of the benefit. In those circumstances, the defendant pays the damages he or she has caused, the party who supplied the benefit is reimbursed out of the damages and the plaintiff retains compensation only to the extent that he or she has actually suffered a loss: see, e.g., Cunningham v. Wheeler, [1994] 1 S.C.R. 359, at pp. 386-88, per McLachlin J., as she then was, dissenting in part. (The employment insurance example that I mentioned earlier is now resolved in this way by statute: see below, at para. 44.)
[25] Even if there is some form of excess recovery, however, there is only a collateral benefit problem if the benefit is sufficiently connected to the defendant’s breach. This requirement of sufficient connection serves a purpose with respect to collateral benefits that is analogous to that served by rules of causation and remoteness with respect to damages. Just as plaintiffs cannot recover all losses, no matter how loosely related to the defendant’s breach or how far beyond the parties’ reasonable contemplation, so too the defendant does not get credit for all benefits accruing to the plaintiff, no matter how loosely connected to the defendant’s wrongful conduct.
[26] Before turning to the nature of the required link, I note that scholars have objected to the term “collateral benefit” because it assumes the answer to the question. The word “collateral” suggests that the benefit should not be taken into account. But of course the legal problem is whether or not the benefit should be deducted. Scholars have suggested that the term “compensating advantages” is a better one and that is the term I will use in my reasons: see, e.g., Ogus, at pp. 93-94; A. Burrows, Remedies for Torts and Breach of Contract (3rd ed. 2004), at p. 156; S. M. Waddams, The Law of Damages (5th ed. 2012), at para. 15.700.
[27] Another problem with the terms “collateral benefit” or “collateral source” is that they suggest that the test for whether a benefit is deductible is whether it is “collateral”, that is, independent of the relation between the plaintiff and the defendant. Some of the American jurisprudence, for example, has recognized that this “independence” test is an oversimplification which does not explain the treatment of benefit in the cases: see, e.g., Phillips v. Western Company of North America, 953 F.2d 923 (5th Cir. 1992), at pp. 931-33. Moreover, it can lead to fruitless semantic debates about whether a benefit is or is not “collateral” or “independent” rather than furthering principled analysis. As one court put it, that a benefit “comes from the defendant tortfeasor does not itself preclude the possibility that it is from a collateral source. The plaintiff may receive benefits from the defendant himself which, because of their nature, are not considered double compensation”: United States v. Price, 288 F.2d 448 (4th Cir. 1961), at p. 450; Sloas v. CSX Transportation, Inc., 616 F.3d 380 (4th Cir. 2010), at p. 389. As we shall see, several factors other than the source of the benefit may be considered in order to determine whether it should be deducted.
[28] Returning to the issue of connection between the benefit and the breach, the question is what sort of link is required before the issue about deduction arises. The cases suggest two answers. The advantage must either be one that (a) would not have accrued to the plaintiff “but for” the defendant’s breach or (b) was intended to indemnify the plaintiff for the sort of loss resulting from it. If neither of these conditions is present, there is no issue about deduction. If either of these conditions is present, there is.
[29] In relation to the “but for” connection between the breach and the advantage, consider this example. A plaintiff who has been injured by a defendant’s negligence buys a lottery ticket, as is his usual practice, and wins a large sum of money. No one would argue that the amount of the winnings should be deducted from the damages payable by the defendant. There is no “but for” causal connection between the defendant’s negligence and the plaintiff’s purchase of the winning ticket: see Burrows, at p. 156.
[30] Even if there is no “but for” causal link between a benefit and the breach, there may still be a problem about whether a benefit should be deducted. This will occur where the benefit and the breach are connected in the sense that the benefit is intended to indemnify the type of loss caused by the breach — Sylvester is an example. Mr. Sylvester was unable to work and receiving disability payments under his employment contract when he was wrongfully dismissed. There was clearly no causal link between the employer’s failure to give reasonable notice of termination (or payment in lieu of notice) and the receipt of the disability benefits. Nonetheless, the Court found that there was a compensating advantages problem. As Major J. pointed out, the disability benefits were intended to be a substitute for Mr. Sylvester’s regular salary: para. 14. In other words, the benefit was intended to be an indemnity for the loss of the regular salary, precisely the sort of loss that resulted from the defendant’s breach of the employment contract.
[31] The existence of these sorts of links between the breach and the benefit identifies whether there is a compensating advantage problem. But the existence of such a link is not a reliable marker of whether a particular benefit should be deducted. Relying on strict principles of causation, for example, often conceals unarticulated policy concerns: see, e.g., Parry v. Cleaver, [1970] A.C. 1 (H.L.), at pp. 34-35, per Lord Pearce; Ogus, at pp. 225-26; Ratych v. Bloomer, [1990] 1 S.C.R. 940, at pp. 965-66. Similarly, the indemnity factor is not a reliable marker of which benefits are or are not deductible. This is clear, for example, from the Court’s decision in Cunningham. In issue were disability benefits provided for under collective agreements. They were clearly intended to provide an indemnity for wage loss arising from an inability to work. Nonetheless, the Court held that the benefits should not be deducted.
[32] To sum up, a potential compensating advantage problem exists if the plaintiff receives a benefit that would result in compensation of the plaintiff beyond his or her actual loss and either (a) the plaintiff would not have received the benefit but for the defendant’s breach, or (b) the benefit is intended to be an indemnity for the sort of loss resulting from the defendant’s breach. These factors identify a potential problem with a compensating advantage, but do not decide how it should be resolved.
(3) Why Is There a Problem About Deduction in This Case?
[33] A compensating advantage issue arises in this case. First, there is an element of excess compensation. Mr. Waterman has received his full pension benefits and, in addition, the salary he would have earned had he worked during the period of reasonable notice (less an allowance for his earnings from other employment). Had IBM not breached the contract of employment and instead given him working notice, he would have received only his salary during that period and not his pension. Second, there is a “but for” causal relationship between IBM’s breach of contract and Mr. Waterman’s receipt of the pension benefits. One could say that it was the pension plan rather than IBM’s breach of contract that gave rise to the benefit, but it is artificial to suggest that there is no “but for” causal link between IBM’s breach of contract and Mr. Waterman’s receipt of his pension benefits: “but for” the breach, there would have been no termination and, “but for” the termination, Mr. Waterman would not have started to collect his pension. Given that there was double recovery and that the benefit would not have arisen but for IBM’s breach, we must decide whether the benefit should or should not be deducted from damages otherwise payable by IBM.
B. Is the Compensation Principle the Answer to the Problem?
[34] IBM’s first main point is that the compensation principle requires the pension benefits to be deducted. Mr. Waterman is better off as a result of the damage award than he would have been if IBM had given reasonable working notice. It follows, in IBM’s submission, that the pension benefits must be deducted so that the damage award places Mr. Waterman in the economic position he would have been in had IBM given him reasonable working notice. This is essentially the position adopted by my colleague Rothstein J.
[35] While I agree that the damage award is a departure from the compensation principle, this in itself is not an answer to the problem posed by the appeal. As I will explain, the compensation principle cannot be, and is not, applied strictly or inflexibly in a manner that is divorced from other considerations. The question is whether the compensation principle should be strictly applied in this case. In my view, it should not. To explain why, it is helpful to look first at why the compensation principle is not applied strictly, or at all, in various situations.
(1) When Does the Compensation Principle Not Apply Strictly?
[36] Considerations other than the extent of the plaintiff’s actual loss shape the way the compensation principle is applied and there are well-established exceptions to it. For example, the rule that contract damages compensate only the plaintiff’s actual loss is not the only rule that applies to assessing contract damages. As a leading English case put it, “Damages are measured by the plaintiff’s loss, not the defendant’s gain. But the common law, pragmatic as ever, has long recognised that there are many commonplace situations where a strict application of this principle would not do justice between the parties. Then compensation for the wrong done to the plaintiff is measured by a different yardstick” : Attorney General v. Blake, [2001] 1 A.C. 268 (H.L.), at p. 278. In some cases, for example, an award of damages in contract may be based on the advantage gained by the defendant as a result of the breach rather than the loss suffered by the plaintiff: see, e.g., Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 25. The rule that damages are measured by the plaintiff’s actual loss, while the general rule, does not cover all cases. In addition, through the doctrines of remoteness and mitigation, the compensation principle gives way to considerations of reasonableness in relation to whether the plaintiff’s expectations of the contract and his or her conduct in response to the breach of it were reasonable.
[37] Finally, there are well-recognized exceptions in which benefits flowing to plaintiffs are not taken into account even though the result is that they are better off, economically speaking, after the breach than they would have been had there been no breach. These exceptions are ultimately based on factors other than strict compensatory considerations. As Lord Reid put it in Parry, “[t]he common law has treated [the deductibility of compensating advantages] as one depending on justice, reasonableness and public policy”: p. 13. Or, as McLachlin J. wrote, this issue raises a question of “basic policy”: Ratych, at p. 959.
(2) What Factors Help to Identify When Compensating Advantages Are Not Deducted?
[38] What are some of these considerations of justice, reasonableness and policy? An answer may be found by looking at the two well-established situations in which compensating advantages are not deducted: charitable gifts and private insurance.
(a) Charitable Gifts
[39] The first is the less controversial. The rule is that charitable gifts made to the plaintiff are generally not deductible from the plaintiff’s damages even though they were made as a result of and in response to the injury or loss caused by the defendant’s wrong: see, e.g., Waddams, at paras. 3.1550-3.1560; Cassels and Adjin-Tettey, at pp. 420-21. Two concerns explain the exception: first, that if these charitable gifts were deducted, “the springs of private charity would be found to be largely, if not entirely, dried up” and, second, that it rarely makes practical sense to spend the time and effort required to take these sorts of gifts into account: Redpath v. Belfast and County Down Rail