How is the value of a disclaimed contract determined?
In February 2021, Laurentian University applied for and obtained protection from its creditors under the CCAA. On April 1, 2021, Laurentian delivered a Notice of Disclaimer of the Federation Agreement to the Appellant, Thorneloe, pursuant to s. 32(1) of the CCAA. In May 2021, Laurentian commenced a claims process for the claims of its creditors, and Thorneloe submitted disclaimer-related claims under s. 32(7) of the CCAA.
The court-appointed Monitor for Laurentian disallowed certain aspects of Thorneloe’s disclaimer-related claims, two of which were then determined by a Claims Officer at a hearing conducted in writing: (a) the claim for Thorneloe’s loss of commercial value; and (b) professional costs that Thorneloe had to incur in respect of the disclaimers. The Claims Officer concluded that, in the case of an unprofitable contract, where the non-breaching party makes a claim based on the expectation measure of damages, if the breaching party can show that the non-breaching party would have incurred a loss if it completed the contract, only nominal damages are owed. The Claims Officer stated that there cannot be a claim for lost profits where the non-breaching party would not have earned any profits. Contract damages are limited by the principle that the non-breaching party is not entitled to be put into a better position than it would have been in had the contract been performed.
Thorneloe appealed from the Claims Officer’s disallowance of its loss of commercial value claim, which it claimed amounted to $9,800,000. Thorneloe argued that it is well accepted under business valuation principles that there are two approaches that can be used to measure the loss of value of an entity: (a) the loss of business approach; and (b) the loss of cash flow or loss of profit approach. The approach to use depends on the circumstances. Thorneloe argued that when an entity has been destroyed by the actions of another, such as by a breach of contract, the required approach to assess damages is the loss of commercial value. According to Thornloe, the Claims Officer erred in law by holding that a claim by Thorneloe for loss of value can only be for “lost profits” and “according to the principles regarding unprofitable contracts, the claimant is not entitled to damages for lost profits.”
The Monitor argued that a closer review of the performance of Thorneloe’s general operations (excluding investment income) from the last four years revealed that it had remained unprofitable in all four of those years. As such, the Monitor contended that any suggestion that Thorneloe would have incurred profits in the future was highly speculative and could not form the basis of a claim for lost profits.
The Court held that the assessment of damages, including the appropriate loss quantification theory in any given case, is within the sole jurisdiction of the trier of fact. The Claims Officer, as the trier of fact, made a factual finding that the evidence demonstrated that Thorneloe was not profitable and was not likely to be profitable in the future if the Federation Agreement continued. The Claims Officer’s assessment was an evidentiary determination and, therefore, entitled to significant deference on appeal.
The report on which Thornloe had relied was based on assumptions that did not reflect Thorneloe’s financial reality or the damages it suffered because of the disclaimer. The report implied that Thorneloe was a profitable entity, which did not reflect reality. The report ascribed value to Thorneloe’s business based on a revenue multiplier, but did not consider Thorneloe’s net cash flows (i.e. revenues net of expenses). The Claims Officer accepted the Monitor’s opinion that any valuation of Thorneloe should be based on net cash flow. Since Thorneloe’s net cash flow was reasonably expected to continue to be negative, it was not entitled to claim the loss of academic and commercial value.
The Court dismissed Thorneloe’s appeal and denied its claim to loss of commercial value.
Judge: Chief Justice Morawetz
Counsel: Andrew Hatnay and Demetrios Yiokaris of Koskie MInksy for Thorneloe University; Maria Konyukhova and Ben Muller of Stikeman Elliott for EY as Monitor; and Andrew Hanrahan of TGF for Laurentian University
By Matilda Lici