In CSN Collision (Canada) Inc v. Lift Auto Group Ltd,[1] the Ontario Superior Court of Justice (the Court) recently granted a permanent injunction enjoining the respondent, Lift Auto Group Ltd. (Lift), from breaching the negative covenants in its agreement with CSN Collision (Canada) Inc. (CSN). Lift had argued that it was prepared to pay whatever damages it had caused by its deliberate breaches of the parties’ agreements. The Court found that this was not an adequate remedy.
While Justice Myers acknowledged the doctrine of efficient breach and the appropriateness of damages in certain circumstances, the court held that damages may not be a just or appropriate remedy if damages are not easily quantified and would result in complex and protracted litigation to assess the damages, especially in circumstances of anticipatory breaches.
Background
The plaintiff, CSN, operates a large network of auto collision repair shops. It licenses its name and branding to shops in exchange for royalty payments. CSN holds a right of first refusal (ROFR) over the sale of these individual repair shops.
The defendant, Lift, is in the business of owning auto repair shops and owns a number of CSN shops.
The parties’ relationship was governed by a Royalty Agreement (the Agreement). The term ran until 2045. The Agreement included a ROFR in favour of CSN should Lift attempt to sell its business to a competitor. The Agreement also contained negative covenants prohibiting Lift from acquiring additional body shops without CSN’s consent, operating its body shops under any brand other than CSN’s brand, and owning any business that would compete with the business of collision repair other than under CSN’s brand.
Lift had grown to the point of wanting to be “freed of its obligations to CSN.” It had taken on an investment from private equity funds whose investors were seeking an exit. However, CSN’s ROFR over Lift’s business would impede the sales process since no prospective buyer would be willing to invest time or money to negotiate a purchase knowing that CSN could exercise its ROFR. Lift became further concerned with an announcement by CSN that it intended to acquire body shops on its own account. Lift felt that it would lose the economic benefit of the Agreement if CSN began to compete with it. As a result, Lift sought to leave the relationship with CSN unilaterally, in breach of its obligations to CSN, but proposed to pay damages to CSN resulting from the breach.
Issue
CSN brought an application for an order for specific performance in the form of a permanent injunction restraining Lift from breaching the Agreement.
The question before the Court was therefore whether it was just to confine CSN to damages or if it should be entitled to enforce the Agreement by way of a permanent injunction.
Decision
The Court granted CSN an order for specific performance permanently enjoining Lift from breaching the negative covenants of the Agreement.
Efficient breach of contract
The Court first explained the concept of “efficient breach of contract,” which occurs when a party to a contract determines that it is better off breaching the contract and paying damages rather than continuing the contractual relationship. Efficient breach of contract is consistent with corporate managers’ fiduciary duties to act in the best interests of the corporation, and is not necessarily a breach of the duty of good faith and honest performance in Canadian contract law, even if the breach would cause a loss to the other party. Rather, efficient breach of contract may be a rational profit-maximizing decision.
Efficient breach works best for the sale of fungible property or for contracts containing liquidated damages provisions. In these cases a breaching party may simply pay the agreed upon or calculable damages to the non-breaching party.
However, in cases where damages are difficult to determine, such as where the risks and benefits of the Agreement have been allocated over many years, there would be little to no efficiency if the result of the breach would be protracted litigation.
Permanent injunctions
A party seeking a permanent injunction is required to establish its legal rights, following which the court will determine whether an injunction is an appropriate remedy. CSN’s legal rights were not in dispute in this case. The only issue was the appropriateness of a permanent injunction.
Damages are generally the default remedy and the party seeking an injunction must demonstrate that damages are an unjust or inadequate remedy in that case. Although courts are inclined to grant an injunction to restrain the breach of a negative covenant, courts are wary of granting injunctions that would require ongoing supervision from the court. This latter factor was not a concern here as the parties agreed that business would go on as usual if the court granted the injunction.
To support its request for injunctive relief, CSN led evidence that the loss of Lift’s shops would lead to a decrease in brand visibility, reduced negotiating power with suppliers on volume-based deals, and a decline in its market share and goodwill.
The Court rejected Lift’s arguments that damages were just and appropriate in this case and its argument that its stores and contributing gross revenue only comprised a relatively modest portion of CSN’s business. The economic value of a portion of the business was not a proxy for the full extent of the harm the business owner may suffer if that portion of the business was lost due to a wrongful breach.
The Court also rejected Lift’s argument that the liquidated damages provision, while not applicable, demonstrated that CSN’s damages were readily calculable. This argument ignored the fact that CSN was entitled to make an election as to whether to terminate the Agreement or insist on performance. The liquidated damages provision would not address all of CSN’s losses, including intangible losses to its branding and goodwill. Further, Lift had not provided a formula or principled basis for the assessment of CSN’s foreseeable damages; rather it had requested a trial for the assessment of CSN’s damages without being able to inform the court as to what damages would make CSN whole.
Ultimately, the Court concluded that it would not be just or appropriate to confine CSN to damages. At this stage, damages were difficult to determine since the Court was faced with anticipatory breaches, rather than an actual breach with quantifiable damages. Additionally, the period over which damages would ultimately be assessed would span many years, such that any trial for the assessment of damages would be multi-layered and complex.
Key takeaways
The Court’s decision in CSN leads to some important takeaways. First, while courts may recognize the concept of an “efficient breach of contract,” such a breach will only be considered efficient where damages are readily quantifiable. One wonders, however, whether the outcome would have been different here had there been a more sophisticated liquidated damages provision that clearly set out the damages payable upon a certain type of breach, or a formula for the calculation of damages.
Second, CSN highlights the importance of proving harm through evidence. In this case, while CSN delivered expert evidence from an economist, the Court found it too general to be useful, and neither party introduced expert evidence that specifically quantified CSN’s losses. Had Lift introduced expert evidence quantifying CSN’s losses, it may have been able to convince the Court that damages were just and appropriate in the circumstances. Parties facing an anticipatory breach should consider what evidence they will need to prove damages, the difficulty of calculating damages in their specific circumstances, and how that will affect any potential remedy sought.
For more information, please contact the authors, Chloe Snider and Janson Fu.
[1] 2026 ONSC 1396.
