Executive Summary: Key Legal and Evidentiary Issues

• Dispute arose over whether FPS could claim both lost profits (expectation damages) and incurred costs (reliance damages) for a breached industrial equipment contract.

• The trial court erred by requiring FPS to choose between the two types of damages, despite no risk of double recovery.

• A legal mistake occurred when the trial judge imposed a duty to mitigate costs on FPS without establishing that a repudiation had occurred and been accepted.

• FPS’s claim for lost profits was improperly dismissed for lacking “accuracy,” even though the law allows estimation of damages if loss is proven.

• The court failed to consider key evidence that could have supported an estimation of FPS’s profit loss.

• Appeal was allowed and the matter remitted for a new trial on both the main action and the counterclaim.

Facts and outcome of the case

Background of the dispute

FPS Food Process Solutions Corporation, a British Columbia-based manufacturer of industrial food processing equipment, entered into a contract with XTL Inc., a Pennsylvania logistics company, for the manufacture and installation of a custom industrial freezer. The agreed purchase price was USD $3,050,000. FPS subcontracted key design and engineering work to Freezing Solutions Ltd. of New Zealand for NZD $2,204,673.

XTL made two partial payments totaling USD $762,500, but failed to make the required progress payments thereafter. Despite numerous follow-ups and updated pricing from FPS, XTL never secured financing. In June 2018, XTL informed FPS it would not proceed with the purchase. XTL subsequently filed a claim in 2019 to recover the partial payments.

Proceedings in the trial court

In response, FPS admitted that XTL could recover the partial payments but claimed a set-off for costs already incurred and counterclaimed for lost profits. At trial, the key issues were whether FPS was entitled to the set-off and whether it could recover lost profits in addition.

The trial court ruled that FPS had a duty to mitigate damages starting January 5, 2016, and limited the set-off to costs incurred before that date. The court also dismissed FPS’s counterclaim for lost profits, finding that it could not claim both reliance and expectation damages and that the profit loss was not established with sufficient accuracy.

Issues on appeal

FPS appealed on two main grounds: first, that the trial judge erred in law by finding a duty to mitigate without determining if the contract had been repudiated and the repudiation accepted; and second, that it was wrong to force an election between lost profits and incurred costs where no double recovery was at risk. FPS also argued the trial court incorrectly applied a high standard of proof in assessing its lost profit claim.

Court of Appeal’s findings

The court allowed the appeal. It held that the trial judge made a legal error by imposing a duty to mitigate without making findings of repudiation and acceptance. It emphasized that such a duty only arises after a contract has ended, which had not been established in this case.

On the second issue, the court found that the judge misapplied the law regarding expectation and reliance damages. A party may claim both types where the lost profits are calculated net of incurred costs, and there is no duplication. In this case, FPS’s claims were not inconsistent, and no double recovery would result.

Regarding damages, the court clarified that a loss of profit does not need to be proved with certainty. Once some loss is established, the court must attempt to estimate it using available evidence. The trial judge erred by requiring precision and by failing to assess alternative evidence that could support an estimate of lost profits.

Outcome and remedy

The appeal was allowed, and the case was remitted for a new trial to reconsider both FPS’s entitlement to a set-off and its counterclaim for lost profits. The appellate court declined to issue a fresh ruling on the set-off amount, noting that factual findings would be needed on key disputed matters, such as the terms of the subcontract and the timing of repudiation.

No damages were awarded at this stage, and no mention was made of costs.