In Bhatnagar v. Cresco Labs Inc. (Bhatnagar), the Court of Appeal for Ontario (Court) held that damages are not presumed where a defendant breaches the duty of honest contractual performance. Rather, according to the Court, the Supreme Court of Canada’s decision in C.M. Callow Inc. v. Zollinger (Callow) requires the plaintiff to show that the breach caused a loss before it becomes entitled to damages. (See our earlier Blakes Bulletin: Callow and the Duty of Honest Contractual Performance: What You Need to Know).
In February 2019, the shareholders of 180 Smoke (Vendors) sold their shares to Origin House. The share purchase agreement gave the Vendors an opportunity to earn additional “milestone” payments where 180 Smoke achieved annual revenue targets following the sale. The agreement also stated that, if Origin House were sold, the Vendors would be paid all future unearned milestone payments.
On April 1, 2019, Origin House announced that it was being sold to Cresco Labs Inc. (Cresco). All parties initially expected this transaction to close in 2019. In late June 2019, Origin House told the Vendors that there was no reason to believe the deal would not close.
On October 20, 2019, Origin House learned that Cresco proposed a new closing date of January 15, 2020, but did not directly share this information with the Vendors. The transaction ultimately closed on January 8, 2020. The Vendors did not meet the revenue targets in 2019.
Since the sale closed in 2020, Cresco paid the Vendors unearned milestone payments for 2020 and 2021. If the sale had closed in 2019, Cresco would also have been required to pay the Vendors the milestone payment for 2019, which would have totalled over C$4-million. The Vendors sued to recover the 2019 milestone payment.
The application judge held that Origin House breached its duty of good faith by advising the Vendors that the transaction would close in 2019 and failing to update them that the closing date was moved to January 2020. However, she did not award damages because, irrespective of the breach, the Vendors would not have been able to meet the revenue targets or ensure that the transaction would close in 2019.
The Court’s Decision
On appeal, the Vendors argued that Callow required courts to presume entitlement to damages when a party breaches its duty of honest contractual performance. The Vendors relied on the following passage from the majority decision in Callow:
[E]ven if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did, since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest.The Court rejected this argument. According to the Court, the presumption described in Callow was unique to its factual context and does not arise for every breach of the duty of honest performance. Origin House’s dishonesty did not preclude the Vendors from missing any opportunity or proving its losses. The Vendors would not have achieved the 2019 revenue targets in any case and could not have secured a 2019 closing even if Origin House had acted honestly.
Instead, the Court explained that Callow generally requires the plaintiff to show that the breach of the duty of honest performance resulted in the loss of an opportunity. If the plaintiff can provide such evidence, it is entitled to damages to place it in the same position as if the duty of honest performance had been satisfied. Here, the Vendors could not prove any loss because they would have been in the same position even if the duty of honest performance had been satisfied.
Bhatnagar clarifies an ambiguity raised by Callow about whether a breach of the duty of honest performance gives rise to a presumption of loss. The Court held that the answer is no, and that damages are an independent issue from the breach. To obtain damages, the plaintiff must prove that the breach resulted in a loss.
This approach aligns with the ordinary approach to damages in contract law, where a plaintiff must show what losses it incurred due to the other party’s breach of contract. If it can do so, then it is typically entitled to the damages that would place it in the same position as if the duty had been performed. According to the Court, the duty of honest performance should be treated in the same way.
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