No Presumption of Damages for Breach of Duty of Honest Performance

Introduction

In the world of contract law, the duty of honest performance plays a vital role in ensuring that parties to a contract act in good faith and deal with each other honestly. Breach of this duty can lead to significant consequences, including potential damages. However, a recent case has highlighted a crucial aspect of this duty: the absence of a presumption for damages in cases of its breach. In this blog post, we will delve into the case where the court found that there is no presumption for breach of damages for a breach of the duty of honest performance.

The Case in Question

Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, revolves around a breach of the duty of honest performance by Origin House and the subsequent appeal. The central issue at hand was whether the application judge erred in refusing to presume loss as a result of the breach of the duty of honest performance.

In the case at hand, 2360149 Ontario Inc., operating as 180 Smoke, a company specializing in vape products, was founded by appellants Boris Giller, Ashutosh Jha, and Gopal Bhatnagar. They sold 180 Smoke to CannaRoyalty Corp., operating as Origin House, through a share purchase agreement in 2019. The agreement included provisions for additional payments to the vendors if certain milestones were met over the following three years. The 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.

A change of control occurred at Origin House when it was acquired by Cresco Labs Inc. The transaction was expected to close in 2019 which would have triggered the payment of three years of unearned milestone payments to the Vendor. The closing was delayed, and the transaction did not close until 2020, thereby providing the Vendors with only the 2020 and 2021 milestone payments, since 180 Smoke did not meet revenue targets for the 2019 earn-out.

The appellants claimed that Origin House’s failure to promptly update them on the new closing date constituted a breach of the duty of honest performance. Despite finding this breach, the court did not award damages due to a lack of evidence demonstrating a lost opportunity on the appellants’ part. Even if the Vendors were promptly informed of the change in the closing date, they would not have been able to achieve the revenue targets or expedite the Cresco transaction’s closure. As a result, there was no indication of a missed opportunity, and the judge determined that no such evidence could be presumed.

The Application Judge’s Reasoning

The application judge rejected the notion that a breach of the duty of honest performance automatically triggers a presumption of damages. The key argument put forth by the appellants was based on a passage from a previous case, C.M. Callow Inc. v. Zollinger, 2020 SCC 45, which seemed to suggest that such a presumption existed. However, the application judge found that this interpretation was flawed.

In Callow, the court stated, “[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 application judge concluded that while the appellants had indeed suffered harm, they had failed to establish a clear causal link between the breach and the loss. Therefore, there were no damages inferred or proven that flowed directly from the breach.

The Parties’ Positions on Appeal

On appeal, the appellants argued that the court should presume damages once a breach of the duty of honest performance is established, regardless of whether there is concrete evidence of a lost opportunity. They believed that the application judge had erred in demanding an evidentiary foundation to prove the facts on which damages were estimated.

Conversely, Cresco, the opposing party, contended that the application judge had correctly found that there was no evidentiary basis for the damages claim. They argued that even if a lost opportunity could be presumed or inferred, the evidence should still establish what was lost and demonstrate that it was lost due to a breach of the duty.

Analysis of the Case

The reviewing court ultimately rejected the appellants’ argument and upheld the application judge’s decision. It emphasized that Callow did not establish an automatic presumption of damages for breach of the duty of honest performance. Instead, the majority decision in Callow placed the burden on the claimant to provide some evidence on which the court could conclude that the breach precluded the claimant from an opportunity to protect their interests or caused a loss of an opportunity.

Crucially, the court noted that the Callow case had specific facts and evidence that supported the damages claim. In Callow, Mr. Callow had opportunities to bid on other contracts but chose not to due to a misapprehension caused by Baycrest’s deception. The Defendant’s deception prevented the Plaintiff from definitively establishing its losses, but the Plaintiff did successfully demonstrate the actions it would have pursued to avoid its losses, had it not been for the Defendant’s lack of honesty.  This evidentiary foundation was absent in the current case to presume a loss of an opportunity.

Furthermore, the court pointed out that the Emphasized Words in Callow were permissive, using the word “may” rather than “must.” This permissive language indicated that a presumption of loss is not mandatory but subject to the presence of certain conditions.

Conclusion

The case in question serves as a reminder that while the duty of honest performance is a crucial aspect of contract law, it does not automatically lead to a presumption of damages upon its breach. Instead, claimants must provide some evidence linking the breach to their losses, and the court will carefully consider the facts and evidence in each case. This nuanced approach ensures that the duty of honest performance remains a meaningful legal concept while preventing unwarranted claims based on speculation or flimsy evidence.