What’s loss got to do with it? No presumption of damages for breach of duty of honest performance

The Ontario Court of Appeal has clarified that the Supreme Court’s decision in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (discussed further here) has not created a legal presumption of damages for breach of the duty of honest contractual performance. In its decision in Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, the Court of Appeal confirmed that the party claiming breach of the duty of honest performance must demonstrate some evidentiary basis that the breach of the duty resulted in a tangible loss.

What you need to know

• There is no automatic entitlement to damages arising from breach of the duty of honest performance.
• The Court clarified that Callow places the burden on the claimant to show some evidence that the breach of the duty of honest performance resulted in the claimant failing to have a fair opportunity to protect its interests or caused it to lose an opportunity.

Background

The shareholders of 180 Smoke (the Vendors) sold their shares to Origin House. In addition to the purchase price of $25 million, the share purchase agreement provided for an earnout of $15 million dollars, if certain revenue and license milestones were met over three years, starting in 2019.

The share purchase agreement also provided that if Origin House was sold during the earn-out period, the Vendors would be paid for all future unearned milestone payments.

On April 1, 2019, Origin House announced that it had entered an agreement to be sold to Cresco. This transaction was expected to close in 2019, which would have triggered all three years of the Vendors’ earn-out. In June, the 180 Smoke Vendors asked Origin House what would happen if the deal did not close in time; Origin House replied that there was no reason to believe that the deal would not close.

On October 20, 2019, Origin House learned that Cresco was proposing a new target date of January 2020. Origin House did not share this info directly with the Vendors. The transaction closed in 2020 and the Vendors were only paid for the 2020 and 2021 milestones, as 180 Smoke did not meet its revenue targets for the 2019 earn-out.

The application judge found that Origin House breached its duty of honest performance of the share purchase agreement by failing to update the Vendors on the revised closing date¹. However, despite holding that Origin House breached its duty of honest performance, the judge awarded no damages. The judge concluded that there was no causal relationship between the breach and any losses: even if the Vendors had been promptly advised of the change in closing date, they could not have met the revenue targets or forced the Cresco transaction to close earlier. So, there was no evidence of lost opportunity, and the judge concluded that no such evidence could be presumed.

Court of Appeal clarifies that no presumption of damages arises from Callow

On appeal, the Vendors argued that loss must be presumed when there is a breach of the duty of honest performance. The basis for this argument was the language in paragraph 116 of Callow, which reads in part:

[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 of Appeal rejected this argument. It concluded that the presumption mentioned by the Supreme Court in Callow is permissive not mandatory. Rather, Callow must be read in the context of the facts of that case: the defendant’s dishonesty prevented the plaintiff from conclusively proving its losses, though the plaintiff established what steps he would have taken to avoid his losses but for the defendant’s deceit. Whether damages are awarded in other cases will depend on the evidentiary record.

In the Court’s view, Callow places the burden on the claimant to show some evidence on which the court can find that the breach of the duty of honest performance resulted in the claimant failing to have a fair opportunity to protect its interests or cause it to lose an opportunity.

The Court of Appeal also found no error in the refusal to award an alternative remedy for ordinary contractual damages (i.e., the amount that would put the plaintiff in the position it would have been in had the contract been honestly performed), frequently called “expectation damages”. The Court concluded that alternative remedies are appropriate when the Court cannot quantify expectation damages—but the problem in this case was the Vendors’ inability to prove any damages at all.

Implications

Callow created uncertainty by referring to a presumption of loss. This is particularly significant because Callow’s embrace of expectations damages for breach of a duty of honest performance raised the spectre of large damage awards. A robust presumption of loss would have expanded the cause of action and raised the consequences of the lack of good faith and honest performance, potentially making them more than the loss actually suffered by the plaintiff.

Cresco Labs constrains the potential remedies for a breach of the duty of honest performance. Having to prove losses will make it more difficult for plaintiffs to pursue meaningful and material remedies, and also reduces the risk on defendants whose contractual breach may not meet with the Court’s approval.