In Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, the Ontario Court of Appeal elaborated on the Supreme Court’s decision in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”) and clarified that a breach of the contractual duty of honest performance does not create an automatic presumption of loss. The court found that there must be evidence supporting a loss of opportunity to support an award for damages.

Background

On February 19, 2019, an OBCA corporation in the vape products business was acquired by a U.S. public company buyer. Under the share purchase agreement (the “SPA”), the U.S. company paid the shareholders $25M on closing, with an earnout that could have entitled them to up to an additional $15M if the target corporation met certain revenue and license milestones in each of the first three years post-acquisition. Before the SPA was executed, the shareholders became aware of a potential acquisition of the buyer. They had a provision added to the SPA providing that a change of control of the buyer during the three year earn-out period would trigger the shareholders’ entitlement to the full amount of the earnout for the year of the change of control and for any following years that remained in the three-year earnout period. Such change of control payment was referred to as the “Unearned Milestone Payment”.

On April 1, 2019, the buyer announced that it had entered into an agreement with the respondent, by which the respondent would purchase the buyer. It was initially expected that the transaction would close by the end of 2019; however, by June 13, 2019, it was known that there would be at least a several months closing delay. The shareholders asked what would happen if the transaction did not close, to which the buyer responded that there was no reason to believe that the transaction would not close. By October 20, 2019, the respondent informed the buyer that they were proposing a new closing date in January 2020. When the transaction ultimately closed in January 2020, (a) the revenue and license milestone had not been met by the target for the 2019 year, and (b) since the closing date was in 2020, the Unearned Milestone Payment was paid for 2020 and 2021 only.

The shareholders claimed that the buyer breached the duty of honest performance by not informing them of the delayed closing date, and brought an application seeking payment of the 2019 revenue milestone pursuant to the terms of the SPA as damages, or alternatively, that any failure on their part to achieve the 2019 revenue and license milestones was a result of breaches of contract by the buyer.

The Parties’ Positions

In Callow, the Supreme Court confirmed the contractual duty of honest performance, but in doing so it did not confirm whether a finding of a breach of that duty would result in an automatic presumption that the injured party suffered a lost opportunity (Callow discussed further here). The shareholders submitted that, if the court found that the U.S. company had breached its duty of honest performance, the court was required to presume damages, and its only task was to quantify those damages. Specifically, the shareholders relied on paragraph 116 of Callow that states:

[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. [Emphasis added]

In response, the respondent submitted that there was no evidentiary foundation for the shareholders’ damages claim and that, even if a lost opportunity could be presumed, the evidentiary record needed to establish what was lost and support the claim that it was lost because of the breach of contract.

The Application Decision

The Application Judge found that the buyer had breached its duty of honest performance by repeatedly advising the shareholders that the transaction would close in 2019, and neither correcting nor updating that information once the buyer was informed that the closing date would be pushed to January 2020. However, no damages were awarded because the Application Judge concluded that, even if the shareholders had been informed of the change of closing date in October 2019, they would not have been able to meet their revenue or license milestones or force the transaction to close. Furthermore, the Application Judge would not presume that there had been a lost opportunity that should result in damages since no evidence of such an opportunity was presented.

The Ontario Court of Appeal Decision

The shareholders were unsuccessful on appeal. The Ontario Court of Appeal rejected the proposition that Callow created an automatic legal presumption of loss where a breach of the contractual duty of honest performance is found. The Court of Appeal held that evidence must be presented by the claimant to establish there has been a lost opportunity resulting from that breach.

No Legal Presumption of Loss

The shareholders again relied on para. 116 of Callow to support their proposition that Callow established a presumption of loss where there has been a breach of the duty of honest performance. However, the Court of Appeal pointed to the use of the word “may” in Callow, noting that there is no legal obligation for a court to presume that a loss has been suffered.

The Court of Appeal also held that the Application Judge did not err in refusing to award damages on a basis other than expectation damages. The Court of Appeal drew on Callow, where Justice Kasirer explained that the ordinary approach to a breach of the duty of honest performance should result in expectation damages, which return the injured party to the position it would have been in had the duty been performed.

Key Takeaways

The decision of the Court of Appeal:

• elaborates on Callow and clarifies that there is no automatic presumption of loss when there has been a breach of honest performance;
• underscores that a claimant must bring evidence of the loss they suffered because of the breach of honest performance; and
• highlights that parties ought to carefully consider what evidence is available to support a claim of lost opportunity when bringing a claim for damages resulting from a breach of honest performance.

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