Damage Figure Agreed
It is a clear that a court will not blindly validate a sum set by contract which purports to represent the losses to be suffered by the employer in the event of a breach. To avoid the expected plea of a penalty clause, the employer must present some rational basis for determining the loss number set out in the contract.
The Alberta Queen’s Bench did just that in The Travel Company v Keeling in which it did not uphold the covenant but nonetheless provided its views on the “damage” sum fixed by contract. Germain J. stated as follows:
[36] Irrespective of my determination on the enforceability of the restrictive covenant, a discussion of damages is necessary. It is clear that the plaintiff relied heavily on the $60,000 liquidated damage claim set out in the restrictive covenant to circumvent the difficulties in proving damages. I conclude, however, that even if the restrictive covenant were enforceable, the assertion that $60,000 is a pre-estimate of damages is not sustainable as this amount is a penalty and not a true measurement of liquidated damages.
[37] In making this decision I take into account all of the following facts. First, Ms. Stewart very fairly indicated that the number was dreamed up by her lawyer and she did not supply it, she conceded that the statement in the agreement that it represented an agreed pre-estimate of damages was simply not true as no pre-estimate of damages had been calculated.
[38] The $60,000 of notional damages is effectively a penalty of 30 months of Ms. Keeling’s wages, out of four years of employment. It represents 100% of one year’s travel commissions generated by Ms. Keeling for Travel Plus, without any offset for salary and other expenses that would have reduced that amount. In the corporate year ending on September 30, 2004 Travel Plus earned $20,421.00, net of expenses. Thus, on a net-income basis, based on the 2004 year end, the alleged pre-estimate compensates Travel Plus for approximately three years of their total annual profit from the entire operation.
[39] Finally, the $60,000 pre-estimate bears absolutely no reality to those sales that Uniglobe would have got from hiring Ms. Keeling, even assuming that every single client of Uniglobe’s top 40 customer list who was also a customer of Travel Plus , had migrated to Uniglobe because of Ms. Keeling. The factual evidence is to the contrary, as many travel agent clients, such as the larger institutions, were spreading their business around. Thus, the $60,000 amount of liquidated damages is not sustainable, nor is it an accurate or reasonable pre-estimate of liquidated damages. It is a penalty and as such is not enforceable. Damages for breach of contract are to place the injured party in the position they would have been, but for the breach.
To the same consequence is the decision of Graesser J. of the Alberta Queen’s Bench in Evans v The Sports Corporation in which the court refused to apply the contractual term defining the damages to be paid as it bore no connection to reality:
At the outset, I am of the view that while the interpretation of paragraph 7(j) of the Employment Agreement as being a liquidated damages provision is a reasonable interpretation of that paragraph, the deeming of “all revenues generated by Evans’ activities which contravene” the Employment Agreement as an unjust enrichment and deemed trust in favour of TSC is not a genuine pre-estimate of liquidated damages. Mr. Evans’ gross revenues do not reflect the measure of TSC’s losses, or Mr. Evans’ profits. There is no consideration of expenses in 7(j), such that enforcement of that paragraph would result in a windfall to TSC: all of Mr. Evans’ revenues without any reduction for TSC’s saved costs.
[304] I recognize that Mr. Winter and Mr. Kotlowitz testified that they had the capacity to service the clients who ultimately signed with Mr. Evans, and that they would not have had to hire someone to take his place. That ignores any costs of travel related to the specific players (such as travel to negotiate new player contracts), and the costs of maintaining the relationships with the players, let alone the cost of the Eastern European pipeline through Mr. Henys and Mr. Kadlecek.. I cannot ignore the calculations Mr. Winter prepared for contract negotiations with Mr. Evans which showed that the Czech-Slovak connection was not very profitable.
[305] There would undoubtedly have been significant costs, and I do not think it can be said, therefore, that the provisions of 7(j) are not punitive and are instead a genuine pre-estimate of damages.
[306] As such, the deeming provision regarding the quantification of damages in 7(j) is unenforceable, and damages must be assessed in the “ordinary” way.
The covenant was upheld at trial. The decision was unsuccessfully appealed by the plaintiff. The above issue did not arise on appeal.
The corollary to these cases is that an agreement which does determine a fair sum as liquidated damages which can be supported by a reasonable construction of reasonable sunk costs such as training expenses, even though not labelled as such, or a fair estimate of expected losses as in Rhebergen, will likely be enforced.