Connie Fidler, a receptionist with the Royal Bank in Burnaby, British Columbia, suffered from chronic pain and fatigue that left her unable to work in her mid-30s. She never could have predicted that her illness and 9-year legal battle for disability benefits would knock longstanding Canadian contract law principles on their collective ear.

But the Supreme Court of Canada's June 2006 judgment in Fidler v. Sun Life did precisely that. A unanimous court found that Royal Bank's insurer, Sun Life Assurance Co. of Canada, was liable for the mental distress Fidler suffered when the insurer wrongfully withheld disability benefits for five years–even though the company's conduct didn't amount to a breach of its duty of good faith.

“Fidler is an incredibly wide decision that applies not just to insurance but also to a host of consumer contracts, particularly those involving warranties,” says Craig Brown, a law professor at University of Western Ontario. “It might also apply to all employment contracts.”

The decision is a sharp departure from Canadian courts' long-standing tradition of refusing to award damages for mental distress in contract cases. Surprisingly, it followed on what appeared to be an unremarkable dispute over an insured's disability.

Unpaid Benefits

At the age of 36 Fidler developed an acute kidney infection in 1990 that brought on a diagnosis of chronic fatigue syndrome and fibromyalgia, a syndrome characterized by chronic pain in the muscles and soft tissues surrounding joints. Her condition left her unable to work. The benefits package Royal Bank provided, however, included a group disability insurance policy issued by Sun Life Assurance Co. of Canada. The policy provided for payments starting six months after she became totally disabled.

Despite some initial disputes, Sun Life began paying the benefits in January 1991. Sun Life continued the benefits until May 1997, when the insurer terminated them based on video surveillance that the company felt proved Fidler was capable of working. Sun Life, however, had no medical evidence to support Fidler's termination.

Over the next two years, Fidler underwent a series of medical examinations that established she was unable to work. Sun Life, however, refused to reinstate the benefits.

Fidler sued in February 1999. More than three years later–one week before the date set for trial–Sun Life offered to reinstate Fidler's benefits and pay all outstanding amounts with pre-judgment interest, a total of $40,500. Consequently the trial dealt only with damages for mental distress and punitives.

As the judge saw it, Canadian courts awarded damages for mental distress only in contract cases where “peace of mind” was an object of the contract. Typically, these involved vacation, relaxation or luxury goods. But in the trial court's view, a long term-disability contract intended to indemnify an insured for loss of income also had an important “peace of mind” component. Because Sun Life's conduct had impacted Fidler's peace of mind, the judge ordered a $17,000 award for mental distress, which he characterized as “aggravated damages.”

The judge also ruled that Sun Life hadn't acted in bad faith and therefore punitive damages weren't appropriate.

The Court of Appeal upheld the aggravated damages award for mental distress, but also found that Sun Life had acted in bad faith, and awarded Fidler $88,000 in punitive damages.

The Supreme Court, however, gave the issue a much broader reading.

High Court Decides

The “peace of mind” exception to awarding damages for mental distress, the Court noted, was merely an expression of the general principle of compensatory damages articulated in the leading case of Hadley v. Baxendale.

“Damages for breach of contract should, as far as money can do it, place the plaintiff in the same position as if the contract had been performed,” wrote Chief Justice Beverly McLachlin and Justice Rosalie Abella in a joint judgment for the Fidler court.

“However, at least since the 1854 decision [in Hadley v. Baxendale], it has been the law that these damages must be 'such as may fairly and reasonably be considered either arising naturally from such breach of contract itself, or such as may reasonably have been supposed to have been in the contemplation of the parties.'”

Hadley, the court noted, made no distinction between the types of loss recoverable for breach of contract. “We conclude that damages for mental distress for breach of contract may, in appropriate cases, be awarded as an application of the principle in Hadley v. Baxendale,” the court wrote.

“The court should ask 'what did the contract promise?' and provide compensation for those promises.”

While the law doesn't provide damages for “incidental frustration” arising, for example, from a commercial contract, the considerations are different when the express or implied objective of the contract was to secure a psychological benefit.

“In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made,” the court stated.

In other words, bad faith is not a precondition to an award for mental distress. “The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security,” the court stated.

However, Brown maintains the court “doesn't seem to have grasped the implications” of its ruling.

Fidler's Impact

What concerns Brown and other observers is that the Court awarded Fidler mental distress despite its finding that Sun Life's didn't breach its duty of good faith.

“Fidler means that companies will have to think hard where they deny or postpone benefits to their customers for any reason,” Brown says.

Perhaps even more significantly, the Court did not confine its analysis to disability insurance contracts or insurance cases generally.

“There is no strong reason in principle why the Fidler principles would not apply to an employment contract,” says Mary Gleason, a partner at Ogilvy Renault.

Not everyone, though, is so worried about Fidler's impact.

“Insurers will notice this case, but the plaintiff's bar won't be able to get them excited over it,” says Avon Mersey, a partner at Fasken Martineau Dumoulin. “Practically speaking, I don't consider Fidler a win for the plaintiff's bar.” Mersey may be in the minority, though.

Sally Gomery, chair of Ogilvy Renault's Ottawa litigation group, believes Fidler is of greater significance than Whiten v. Pilot Insurance Co., the seminal case on punitive damages in Canada.

“Fidler is worse than Whiten because Whiten confines punitives to cases of egregious behavior, where Fidler imposes no such criteria,” Gomery says. “So it's Fidler that strikes fear in my heart.”

Connie Fidler, a receptionist with the Royal Bank in Burnaby, British Columbia, suffered from chronic pain and fatigue that left her unable to work in her mid-30s. She never could have predicted that her illness and 9-year legal battle for disability benefits would knock longstanding Canadian contract law principles on their collective ear.

But the Supreme Court of Canada's June 2006 judgment in Fidler v. Sun Life did precisely that. A unanimous court found that Royal Bank's insurer, Sun Life Assurance Co. of Canada, was liable for the mental distress Fidler suffered when the insurer wrongfully withheld disability benefits for five years–even though the company's conduct didn't amount to a breach of its duty of good faith.

“Fidler is an incredibly wide decision that applies not just to insurance but also to a host of consumer contracts, particularly those involving warranties,” says Craig Brown, a law professor at University of Western Ontario. “It might also apply to all employment contracts.”

The decision is a sharp departure from Canadian courts' long-standing tradition of refusing to award damages for mental distress in contract cases. Surprisingly, it followed on what appeared to be an unremarkable dispute over an insured's disability.

Unpaid Benefits

At the age of 36 Fidler developed an acute kidney infection in 1990 that brought on a diagnosis of chronic fatigue syndrome and fibromyalgia, a syndrome characterized by chronic pain in the muscles and soft tissues surrounding joints. Her condition left her unable to work. The benefits package Royal Bank provided, however, included a group disability insurance policy issued by Sun Life Assurance Co. of Canada. The policy provided for payments starting six months after she became totally disabled.

Despite some initial disputes, Sun Life began paying the benefits in January 1991. Sun Life continued the benefits until May 1997, when the insurer terminated them based on video surveillance that the company felt proved Fidler was capable of working. Sun Life, however, had no medical evidence to support Fidler's termination.

Over the next two years, Fidler underwent a series of medical examinations that established she was unable to work. Sun Life, however, refused to reinstate the benefits.

Fidler sued in February 1999. More than three years later–one week before the date set for trial–Sun Life offered to reinstate Fidler's benefits and pay all outstanding amounts with pre-judgment interest, a total of $40,500. Consequently the trial dealt only with damages for mental distress and punitives.

As the judge saw it, Canadian courts awarded damages for mental distress only in contract cases where “peace of mind” was an object of the contract. Typically, these involved vacation, relaxation or luxury goods. But in the trial court's view, a long term-disability contract intended to indemnify an insured for loss of income also had an important “peace of mind” component. Because Sun Life's conduct had impacted Fidler's peace of mind, the judge ordered a $17,000 award for mental distress, which he characterized as “aggravated damages.”

The judge also ruled that Sun Life hadn't acted in bad faith and therefore punitive damages weren't appropriate.

The Court of Appeal upheld the aggravated damages award for mental distress, but also found that Sun Life had acted in bad faith, and awarded Fidler $88,000 in punitive damages.

The Supreme Court, however, gave the issue a much broader reading.

High Court Decides

The “peace of mind” exception to awarding damages for mental distress, the Court noted, was merely an expression of the general principle of compensatory damages articulated in the leading case of Hadley v. Baxendale.

“Damages for breach of contract should, as far as money can do it, place the plaintiff in the same position as if the contract had been performed,” wrote Chief Justice Beverly McLachlin and Justice Rosalie Abella in a joint judgment for the Fidler court.

“However, at least since the 1854 decision [in Hadley v. Baxendale], it has been the law that these damages must be 'such as may fairly and reasonably be considered either arising naturally from such breach of contract itself, or such as may reasonably have been supposed to have been in the contemplation of the parties.'”

Hadley, the court noted, made no distinction between the types of loss recoverable for breach of contract. “We conclude that damages for mental distress for breach of contract may, in appropriate cases, be awarded as an application of the principle in Hadley v. Baxendale,” the court wrote.

“The court should ask 'what did the contract promise?' and provide compensation for those promises.”

While the law doesn't provide damages for “incidental frustration” arising, for example, from a commercial contract, the considerations are different when the express or implied objective of the contract was to secure a psychological benefit.

“In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made,” the court stated.

In other words, bad faith is not a precondition to an award for mental distress. “The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security,” the court stated.

However, Brown maintains the court “doesn't seem to have grasped the implications” of its ruling.

Fidler's Impact

What concerns Brown and other observers is that the Court awarded Fidler mental distress despite its finding that Sun Life's didn't breach its duty of good faith.

“Fidler means that companies will have to think hard where they deny or postpone benefits to their customers for any reason,” Brown says.

Perhaps even more significantly, the Court did not confine its analysis to disability insurance contracts or insurance cases generally.

“There is no strong reason in principle why the Fidler principles would not apply to an employment contract,” says Mary Gleason, a partner at Ogilvy Renault.

Not everyone, though, is so worried about Fidler's impact.

“Insurers will notice this case, but the plaintiff's bar won't be able to get them excited over it,” says Avon Mersey, a partner at Fasken Martineau Dumoulin. “Practically speaking, I don't consider Fidler a win for the plaintiff's bar.” Mersey may be in the minority, though.

Sally Gomery, chair of Ogilvy Renault's Ottawa litigation group, believes Fidler is of greater significance than Whiten v. Pilot Insurance Co., the seminal case on punitive damages in Canada.

“Fidler is worse than Whiten because Whiten confines punitives to cases of egregious behavior, where Fidler imposes no such criteria,” Gomery says. “So it's Fidler that strikes fear in my heart.”