Fidler: Expanding the Reach of Contractual Damages, or Developing a New Model of Compensation?

In last year’s Fidler v. Sun Life Insurance Co. of Canada, the Supreme Court outlined the current state of compensation for mental distress under contract law, and also explained the appropriate circumstances in which punitive damages may be awarded. While the SCC overturned the B.C. Court of Appeal’s award of punitive damages – an argument that will not be addressed here – it also found that mental distress in this case was compensable. This aspect of the case is notable for the Supreme Court’s expansion of the Hadley v. Baxendale principle of contract law, as emotional distress upon contract breach is now recognized to be within reasonable contemplation of both parties in a disability insurance contract. This finding also suggests that the Hadley principle may be stretched even further in future cases, with potentially problematic results.

Connie Fidler, an employee of the Royal Bank of Canada, was covered by Sun Life Insurance under a group policy that included long-term disability benefits. She became ill with a kidney infection, leading to chronic fatigue syndrome and fibromyalgia. According to the policy, Ms. Fidler was entitled to receive long-term disability benefits for two years if she was unable to do her present job. After two years she was only entitled to such benefits if she was unable to perform any job at all. She began receiving benefits in 1991. Six years later, Sun Life informed Ms. Fidler that a non-medical investigation had revealed that her activities were “incompatible with [her] alleged disability” and benefit payments were terminated (para. 8).

Over the next two years, medical assessments were completed by Ms. Fidler’s doctor, Sun Life’s medical consultant, and an independent examiner. Although all three reports conflicted, Sun Life confirmed its decision to terminate benefits. Consequently, Ms. Fidler commenced an action against Sun Life in 1999. One week prior to trial, Sun Life offered to reinstate her benefits and pay all outstanding amounts. As a result, the trial and the following appeals only dealt with the question of Ms. Fidler’s entitlement to aggravated and punitive damages.

All three courts awarded Ms. Fidler aggravated damages. At trial, Ms. Fidler was awarded $20,000 in aggravated damages after the trial judge applied Warrington v. Great-West Life Assurance Co. (1996), in which the judge held that aggravated damages may be awarded without separately actionable conduct if the contract is one for “peace of mind.” In the judge’s view, a long-term disability insurance contract fell under this category. The Court of Appeal upheld the trial judge’s finding. Sun Life then sought to have these damages set aside in its appeal to the Supreme Court, where an analysis of this issue was separated into two parts: the SCC first outlined how damages for mental distress came to be included within the range of remedies for breach of contract, and then analyzed whether the facts of this case allowed for such an award.

The SCC described how damages for mental distress have not been consistently embraced as a remedy for breach of contract, but argued that this rejection is not warranted in ultimately awarding these damages to Ms. Fidler. In Hadley v. Baxendale (1854), the Court of the Exchequer stated that damages should reflect what was reasonably within the contemplation of both parties at the time they made the contract (para. 29). While this seminal case makes no distinction between the types of losses that are recoverable from a breached contract, subsequent cases demonstrated that damages for mental distress tend to be ruled out, except in defined situations. The common judicial treatment of damages for mental distress utilizes a restrictive interpretation derived from Addis v. Gramophone Co. [1909], which required that a claim for compensation for mental distress be grounded in independently actionable conduct (para. 37). That is, mental distress would not be compensated if it resulted from the contract breach alone.

The SCC then demonstrated how this narrow concept widened during the 1970s, and damages began to be awarded when the contract was one for pleasure, relaxation or peace of mind. The ever-innovative Lord Denning spearheaded this movement, essentially arguing for a “peace of mind exception” to the general rule against recovery for mental distress in light of a contract breach (para. 39). This principle has grown to include damages for breach of vacation contracts, contracts for wedding services, and eventually disability insurance contracts.

Another notable case in this development is Vorvis v. Insurance Corp. of British Columbia [1989]. The Supreme Court awarded damages for mental distress, finding that contracting parties had contemplated mental distress as a potential result of a breach at the time the contract was made (para. 42). Vorvis, among other analogous cases, clarifies that an independent actionable wrong is not always required for emotional damages. Damages for mental distress are now often awarded under the Hadley principle, as mental distress has been found to be compensable as long as it was reasonably considered at the time the parties created the contract.

There remain limits, however, to the compensable types of mental distress. While the law does not award damages for frustration over a breach of contract in, for example, a commercial context, if a contract was created to secure a psychological benefit, damages should be recoverable if they are shown to be within the reasonable contemplation of both parties. The Supreme Court concluded, after elucidating this judicial history, that the basic principles of contract damages now encompass intangible promises such as mental security.

Once the SCC established that damages for mental distress may be awarded, it summarized its findings in a two-step test designed to discover whether such damages are recoverable in a given case. The SCC must be satisfied (1) that an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and (2) that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation (para. 47).

In Fidler, the Supreme Court found that the aim of the disability insurance contract was to secure a psychological benefit, and this contract brought the prospect of mental distress upon breach within the parties’ reasonable contemplation. As disability insurance contracts are created to protect individuals from financial and emotional insecurity, a delay or denial of such protection may very well cause acute mental distress. The SCC determined that Ms. Fidler’s damages for mental distress flowed directly from Sun Life’s breach of contract. The second question, regarding whether the mental distress at issue was of a degree sufficient to warrant compensation, was also answered in the affirmative. The trial judge found that Ms. Fidler suffered significant distress and discomfort as a result of the loss of her coverage. Extensive medical evidence of Ms. Fidler’s anxiety supported this finding (para. 59), and mere payment of the arrears did not compensate for the stressful years she lived without her benefits. Thus, the trial judge’s award of $20,000 to compensate for the psychological damages of Sun Life’s breach – damages that are reasonably in the contemplation of parties to a contract for benefits – was upheld by the Supreme Court.

Fidler therefore widens the scope of compensable damages upon breach of contract, further confirming that mental distress is reasonably contemplated during the creation of disability insurance contracts. Future judicial treatment of compensable damages under the Hadley principle, in light of its expansion within cases such as Fidler, will prove to be quite compelling indeed. If Hadley is to remain a foundational principle of contract law, it cannot be stretched beyond recognition. Such a consequence may occur if too many situations are found to be contemplated at the time of the contract, allowing the principle to deviate so sharply from its original intentions as to become undiscriminating. Alternatively, modern contractual dealings often give rise to considerations that were not contemplated in Hadley’s nineteenth-century context, and many new situations may still comfortably fall within its general parameters. Only time, and further litigation, will tell if this principle will remain applicable in determining remedies for breach of contract, or be stretched to unrecognizable proportions.