Stigma Claims in Canada

May 1, 2003
Author: Charles M.K. Loopstra, Q.C.

Increasingly, stigma claims are being pleaded and considered by the Canadian courts. Such claims have a potential for upsetting the traditional way of measuring damages. The proliferation of environmental law claims brought to court has caused new attention to be paid to this head of damages. However, stigma claims are by no means limited to environmental claims.

What is a stigma claim?

"Stigma" is generally defined as affecting someone’s or something’s reputation. In the context of damages to property, it is really a component of damages for diminution in value with respect to the expectation of some loss of future value, whether it be as a result of an eventual sale, the inability to obtain mortgage financing, or as a result of partial rectification (as opposed to complete rectification). In effect, a stigma claim is intended to compensate the innocent party for damages that that party may incur some time in the future as a result of the loss of reputation to the property.

Traditional approach: Diminution in value vs. Rectification

Traditionally, where damage to property has been inflicted, whether it be in contract or tort, the plaintiff must consider whether or not it should recover by way of diminution in value or rectification. The traditional rule was that a plaintiff could only recover the lesser of the two. This rule was intended to avoid windfall results. For example, in a breach of contct case for a relatively minor construction deficiency which would cost millions of dollars to rectify, the defendant could avoid an award for substantial damages by establishing that diminution in value as a result of the deficiency was negligible or non-existent. On the other hand, if the cost of rectification is equal to or less than the diminution in value, the rectification cost is always recoverable, even if the plaintiff does not actually incur the cost.1

How do you measure diminution in value?

The plaintiff’s remedy is based on the complaint that, but for the defendant’s wrong, the plaintiff would have been in possession of a property superior than what he now in fact has. What if the property after undergoing repair would still be of less value than it was originally? Can the owner recover for the residual deficiency?

It is this classification that leads to stigma claims. The argument is that the damages for rectification have not fully compensated the injured party for the likelihood of suffering future losses as a result of the stigma associated with the damage. It is, of course, especially true in cases of partial rectification or rectification to standards that are less than what the contract calls for, or in an environmental case, to standards that are less than pristine standards. It is my submission that stigma damages are really a component of damages for diminution in value. As the Court of Appeal has pointed out in the Tridan case:2

Where a product that may cause mischief escapes to a neighbour’s property, there is responsibility "for all the damage which is the natural consequence of its escape". See Rylands v. Fletcher (1866), [1861-73] All E.R. Rep. 1 at p. 7, L.R. 1 Exch. 265 (Ex. Ch.), cited with approval at p. 13 All E.R. Rep. (H.L.). Of course, they must be reasonable. On all the evidence, it is fair to conclude that the damages would not be eliminated by reparations to the point of the MOE guidelines. There would be residual loss of value, referred to as stigma, which would be reduced, as the trial judge found, or eliminated, as I am about to find, by remediation to the pristine level.

Can you advance a stigma claim when you have partial rectification?

If the defendant offers partial rectification and you can establish that there is ongoing diminution in value, then clearly the rule with respect to the plaintiff being entitled to the lesser of damages for rectification or diminution in value does not apply. As suggested above, a stigma claim can be a component of diminution in value in these circumstances. For example, where a building was constructed with uneven and unlevel floors, and applying topping would have only partially rectified the problem, the owner was awarded substantial damages for diminution in value, including stigma damages.3 In the Woodbine case, the future expectation of loss was based on a sophisticated purchaser, exercising due diligence, discovering the deficiencies and offering a lower price for the property. In the Tridan case, the Court of Appeal held that had the trial judge awarded damages on the basis of a cleanup to 1997 MOE guidelines, representing a reasonable standard to apply to commercial lands that are contaminated but unaffected for the purpose being served, then the court may have upheld the award for stigma damages:4

If the trial judge’s assessment of stigma damage at $350,000 is taken as the diminution in value at cleanup to the guideline standard, then the more economical route is to proceed to the pristine level at an additional cleanup cost of $250,000 with no stigma damage.

In the Tridan case, the court also reiterated the MOE guidelines setting cleanup standards do not "supplant the common law standard of compensation for injury to land". This statement suggests that where you can prove diminution in value to the property beyond the applicable cleanup standard, the same is recoverable in common law. As suggested above, the diminution in value could include stigma damages.

Can you advance a stigma claim when you have full rectification?

In order to advance a stigma claim when you have full rectification, you would have to first establish that notwithstanding full rectification, there is ongoing diminution in value. This presents some difficulty, since the traditional rule was that damages were to be awarded on the basis of the lesser of full rectification or diminution in value. This also leads to a number of scenarios, each of which presents a different challenge for the plaintiff:

i. At the time of trial, a plaintiff has not rectified, nor sold the property.

This plaintiff is now faced with the burden of proving two hypotheticals, namely, that had he completed full rectification, it would have cost a certain sum but that also had rectification occurred, the property would still have suffered diminution in value as a result of a hypothetical sale. This double hypothetical makes it more difficult for a judge to quantify damages. The court is totally dependent on opinion evidence. Although this should not be a basis for refusing to quantify damages, the defendant should be able to advance the argument that the plaintiff could collect a windfall by being awarded compensation for future damages that may never be realized if the plaintiff does not sell. The court may not find a stigma claim reasonable under the circumstances.

ii. At the time of trial, the plaintiff has completed full rectification but not sold the property.

In this scenario, the plaintiff’s rectification damages can easily be assessed. The plaintiff is also seeking damages for diminution in value on the basis that the property has not fully recovered in value, possibly due to stigma. The plaintiff is now attempting to prove that damages for rectification were insufficient. He has the hard evidence and only needs an expert opinion on the basis of what the market would pay for the building in its current (i.e. fully rectified) condition as opposed to a building that suffered no damage. One example where the court may award stigma damages would be an environmental contamination case where the property has been cleaned to a pristine standard but there is ongoing risk from further migration of contamination from the wrongdoer’s property. Although certain measures may have been taken to prevent such migration, the stigma or risk associated with the contamination on the adjoining lands may justify a further award of damages under the law of nuisance or pursuant to the Rylands and Fletcherprinciple.

iii. The plaintiff has fully rectified and, notwithstanding full rectification, suffered a decrease in market value as a result of an actual sale.

The plaintiff wishes to recover at trial the full cost of rectification plus the diminution in value suffered, which is actual and not speculative. I would submit that if the plaintiff has acted reasonably and can establish a clear link between the diminished sale price and the tortious conduct of the wrongdoer, there may be grounds for additional recovery. However, even in that scenario there are numerous collateral reasons for a reduced sale price such as change in market conditions, lack of exposure time or the plaintiff’s failure to give reasonable warranties with respect to the rectification.

How do you defend a stigma claim?

As a defendant, you must make a practical assessment of the problems as quickly as possible. In an environmental case, you need to determine what is an appropriate standard for remediation. At the very least, you should plead that the Ministry’s standard for a cleanup is a reasonable standard and that a cleanup to a pristine standard is excessive and would result in betterment. This would almost certainly apply to an existing industrial or commercial property which is rarely found to be in pristine condition.

If a stigma claim is being advanced with respect to building deficiencies, you need to investigate immediately whether or not these deficiencies constitute health or safety hazards. If they amount to minor deficiencies, which do not present a probable health or safety hazard, then you may wish to obtain a report on the potential diminution in value to the property. In considering diminution in value, your expert should examine any diminution in value as a result of stigma, regardless of whether it has been pleaded. As pointed out above, stigma does not need to be separately pleaded, since it is a component of diminution in value.

Where there has been no physical damage to the plaintiff’s property, if the action is pleaded in negligence, it should be defended on the basis that there is no compensation for pure economic loss.

This defence should be evaluated in the context of the current tests applied by the Supreme Court of Canada in determining liability for pure economic loss.5 One of the five categories of cases that may permit recovery in tort for pure economic loss is the independent liability of statutory public authorities. However, that does not mean liability in all cases. Recovery in those circumstances is still subject to the two part test in the Anns decision in England adopted by the Supreme Court of Canada in Kamloops (City) v. Nielsen 6 and in Rothfield v. Manolakos.7 This test can be summarized as follows:

i. is there a sufficiently close relationship between the parties so that, in the reasonable contemplation of the defendant, carelessness on its part might cause damage to the plaintiff?

ii. if so, are there any policy considerations that should negate or limit the scope of the prima facie duty of care, the class of persons to whom it is owed or the damage to which a breach of it might give rise?

This defence would, of course, not be available in actions based on nuisance. However, it may be more difficult for the defendant to prove the nuisance than the negligence and hence this defence should not be overlooked.

In applying the defence, counsel acting for the public authority must plead material facts which clearly allow for the two part Anns test to take the claim out of the liability net. For example, in claims involving negligent Building Code inspections, the municipality would plead that the alleged defects (assuming no personal injury has occurred) pose no real and substantial danger to the occupants of the building. More importantly, a stigma claim is not based on any actual or potential harm to property, but only to the reputation of the property.

Another defence that should be pleaded is that the plaintiff has not mitigated his damages.

The question of what is reasonable for a plaintiff to do in mitigation of his damages is not a question of law, but one of fact in the circumstances of each particular case, the burden of proof being upon the defendant.8

It would be hard to sustain a stigma claim if the plaintiff has acted unreasonably in mitigating his damages. However, it is up to the defendant to plead and prove these relevant facts.

When it comes to measuring damages, the stigma claim in a strong market would be less of a factor than in a weak market. Where there is an abundance of supply, a purchaser is inclined to choose the best property, i.e. free of any stigma claim, and either discount those properties where you can find reason to do so, or avoid them altogether. Where there is a shortage of supply, a purchaser is inclined to buy what he can get taking into consideration all the other factors. In such a case, you may find that there is little inclination to discount for stigma.

Accordingly, when you are preparing your defence damages report, the date of valuation becomes extremely important. If the owner has held on to the property and not sold it before trial, the plaintiff can quantify his damages when the damage claim arose or at the date of trial. If on the date the claim for damage arose the market was weak, and at the date of trial the market was strong, the plaintiff is going to attempt to quantify his stigma claim as of the date the claim for damages arose. Although generally the plaintiff has the right to choose the date for the calculation of damages, the defendant may wish to advance the argument that since the stigma claim is based on prospective damages and not actual damages, fluctuations in the market should be taken into consideration. On that basis, the trial judge may very well be persuaded to assess a percentage of value quantifying the stigma claim at a midway point between a strong market and a weak market, thereby reducing the overall potential claim for damages for stigma. The defendant may also be able to establish that the plaintiff had ample opportunity to sell (and therefore mitigate his damages) in a strong market, and therefore should not be compensated for stigma damages at all.

Pre-judgment interest: When does it amount to double recovery?

The date for the calculation of pre-judgment interest is extremely significant when it comes to stigma claims. If the stigma claim is advanced as of the date of trial, i.e. the experts give their opinion as to the stigma damage as of the date of trial as opposed to the date the claim for damages arose, then the plaintiff is disentitled to pre-judgment interest on that amount.9 The defendant should always be diligent in ensuring that there is no double recovery for pre-judgment interest.

______________________________________________________

Waddams, The Law of Damages, looseleaf edition, p.1.2310
Tridan Developments Limited et al. v. Shell Canada Products Limited et al., [2002] 57 O.R. (3d) 503 at p. 507 (Ont. C.A.); leave to appeal to the Supreme Court of Canada refused [2002] S.C.C.A. No. 98
McAlpine v. Woodbine Place Inc. (1998), 37 C.L.R. (2d) 38 (Ont. Ct. Gen. Div.); varied on appeal (2001), 7 C.L.R. (3d) 155
Tridan, supra, at p. 509
Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021
[1984] 2 S.C.R. 2
[1989] 2 S.C.R. 1259
Condominium Plan No. 782 1326 v. Jodoin Developments Ltd. (1984), 32 R.P.R. 1 at pp. 7-8 (Alta. Q.B.)
Tridan, supra, at p. 510