Wronged party must prove damages in contract breach: OCA

A presumption of damages for loss of opportunity does not necessarily follow a finding of breach of the contractual duty of honest performance, the Ontario Court of Appeal has found.

In Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, the appellants were unsuccessful in their argument that a recent Supreme Court of Canada decision had created a legal presumption of loss where there has been a duty of honest performance breach. Appeal court Justices Eileen Gillese, Alison Harvison Young, and Jonathon George dismissed the appeal, finding the argument ignored the evidentiary foundation that C.M. Callow Inc. had of its opportunity loss.

“The main takeaway here is that, whereas the Supreme Court had directed in [C.M. Callow Inc. v. Zollinger, 2020 SCC 45] that a loss of opportunity is to be presumed of law, the Court of Appeal has imposed a qualification to that presumption by requiring the wronged party to nevertheless prove what it could have done if its contractual partner had complied with its obligations of good faith,” says Eli Lederman, counsel for the appellants and a partner at Lenczner Slaght.

“This appears to me to be a shift of the burden in a way that is at odds with what the Supreme Court of Canada held in Callow and in other cases from long ago dealing with principles of contract law where damages are difficult or impossible to prove as a result of the defendant’s conduct.”

In Bhatnagar v. Cresco Labs Inc., the appellants were founders of 180 Smoke, the vape product manufacturer and seller. They sold 180 Smoke to the public US cannabis company Origin House in 2019 through a share purchase agreement. In addition to $25 million at closing, the deal included an opportunity for the appellants to get another $12.5 million if 180 Smoke met annual revenue milestones of around $4.1 million for the first three years after the sale, and $2.5 million if it secured a standard cannabis-product processing license within a specific timeframe.

Later in 2019, Cresco Labs bought Origin House. The appellants had negotiated a term in their agreement that if a change of control occurred at Origin House during their three-year earn-out period, they would be paid an amount totalling all the future unearned milestone payments.

The deal was meant to close in 2019, but a weak M&A market and capital-raising issues caused a delay, and it was ultimately finalized on Jan. 8, 2020. Had it closed in 2019, the appellants would be owed all three revenue-milestone payments. Because the deal did not close until the new year, and 180 Smoke did not hit its revenue target, Origin House only paid them revenue-milestone payments for 2020 and 2021, totalling $8,333,814.51.

The appellants brought an application for the 2019 payment and the $2.5 million for the cannabis license. Because Origin House had not told the appellants that the Cresco Labs deal would be delayed into 2020, the application judge found it had breached its duty of honest performance of the agreement with 180 Smoke. But the judge awarded the appellants no damages because she concluded that 180 Smoke would not have made its revenue targets, nor would it be able to force the Cresco Labs transaction to close. Despite the breach, there was no evidence of lost opportunity, said the judge.

At the Court of Appeal, among other grounds, the appellants argued that the judge had erred by failing to presume loss due to Origin House’s breach of the duty of honest performance.

In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, a condo corporation decided to terminate a two-year contract for winter and summer maintenance work after the first winter. The contract had winter and summer agreements, and a clause in the winter agreement gave the condo corporation, Baycrest, the right to terminate the contract for any reason with ten days written notice. After deciding to terminate the contract in the spring, Baycrest did not inform the maintenance provider, C.M. Callow, until September.

Baycrest communicated with Callow during the spring and summer, suggesting the winter contract’s renewal was likely, and having him believe that extra work he was doing for free would boost the chances of renewal. Callow gave evidence at trial that he typically used the summer to bid on winter contracts, and the termination notice came too late for him to find replacement work. He also said that he had opportunities to bid on other contracts but chose to pass them up for his work for Baycrest.

The trial judge found Baycrest breached its duty of honest performance and awarded Callow damages to account for the profit it lost from the winter contract’s termination.

In Bhatnagar v. Cresco, the appellants’ submission emphasized SCC Justice Nicholas Kasirer’s statement in Callow that:

[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 appellants argued Callow provided that where there is a breach of the duty of honest performance, even where there is no evidence of a lost opportunity, the court is required to “presume damages.”

But the idea that a court must presume lost opportunity ignores permissive language and qualifying language in Callow, said Justice Gillese, who wrote the reasons for the appeal court. Kasirer had noted that there was “ample evidence” that Callow chose to forgo opportunities to bid on other winter maintenance contracts, which means Kasirer “explicitly found an evidentiary foundation for Callow’s claim of lost opportunity,” she said.

Despite the appellant’s argument that Kasirer’s words meant that once the court found a breach of the duty of honest performance, it had to presume a lost opportunity, Gillese notes that Kasirer used the words “it may be presumed” rather than “it must be presumed.”

Following the emphasized statement, Kasirer also made two qualifications that do not apply to Bhatnagar v. Cresco, said Gillese. In Callow, it might have been presumed in law that Callow lost an opportunity because Baycrest’s dishonesty prevented him from proving conclusively what would have happened if Baycrest had alerted him sooner of the termination.

It was not because Origin House failed to advise the appellants of the delayed closing date that they could not prove what would have happened if they had been advised, said Gillese. The application judge had found that there was “little or no chance” that the appellants would achieve their 2019 revenue targets or be able to force a closing-date change.

While there was an evidentiary foundation for the lost opportunity claim in Callow, in Bhatnagar v. Cresco there was not, she said.

Cresco was successful in its cross-appeal, arguing that the application judge had erred in concluding that Origin House breached its duty of honest performance.