ONTARIO – Duty of Good Faith and Honest Performance of Contract – Even where a Court finds a breach of the duty of good faith and honest performance of a contract, the claimant must prove that it suffered damages. There is no presumption of damages upon a finding of a breach of duty of honest performance. The ONCA distinguished between evidentiary issues in proving damages, which may allow the Court to draw inferences as to quantum, and a failure to tender any evidence as to damages.

ONTARIO – Standard of Appellate Review – Whether there is a presumption of damages upon an application judge’s finding of a breach of the duty of honest performance is a question of law, which is reviewable on the standard of correctness. An application judge’s finding that a party has breached the duty of honest performance is a finding of fact, which may be set aside if the application judge made a palpable and overriding error.

Bhatnagar v. Cresco Labs Inc.
2023 ONCA 401 (June 7, 2023)
Ontario Court of Appeal (Gillese, Harvison Young and George JJ.A.)

Editor’s Note: This case is an appeal from the decision of Kimmel J., Bhatnagar v. Cresco Labs Inc., 2022 ONSC 1745, which we summarized on October 27, 2022 as Case #061E. Please refer to this link for Kimmel J.’s detailed recitation of the facts.

No presumption of damages for breach of duty of honest performance

In the decision referred to above, the application judge held that the Respondent Cresco breached the duty of honest contractual performance, referred to by the Supreme Court of Canada in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, para. 116; (“Callow”) by failing to notify the Appellants of a delay in the closing of a transaction, which may have impacted whether a payment fell due to the Appellants. (2022 ONSC 1746 paras. 52-56)

However, the application judge dismissed the claim on the basis that the Appellants failed to prove that they suffered any damages. ONCA considered, as a question of law, whether the SCC decision in Callow creates a legal presumption of damages for breach of the duty of honest performance. (para. 54) ONCA dismissed the appeal, holding that the application judge was correct that there is no presumption of damages for breach of the duty of honest performance. (paras. 1, 74-75.)

Referring to Callow, ONCA (Gillese J.A., writing the unanimous decision of the ONCA), noted that the SCC’s majority decision explained generally how damages should be awarded for breach of the duty of honest performance. The decision affirms that such a breach “supports a claim for damages according to the ordinary contractual measure”. The ordinary approach is to award expectation damages that puts the aggrieved party “in the position that it would have been had the duty been performed”. (para. 80)

However, in the present case, ONCA held that there was no error in the application judge’s findings that there was no evidence to support any of the claims for damages, including:

• Expectation damages ( 81)
• Punitive damages ( 82)
• Disgorgement for breach of contract ( 83-84)
• Loss is “impossible to calculate” ( 83)
• Interest in performance is not reflected by a purely economic measure ( 83)
• Damages for loss of opportunity ( 86-87)

Cross-Appeal – Was there a breach of the duty of honest performance?

ONCA summarized the application judge’s determination that the Respondent breached its duty of good faith performance as follows: (paras. 92-94)

[92]   By October 20, 2019, Origin House was aware that Cresco was proposing a new target closing date for the Cresco Transaction of January 15, 2020, with an outside closing date of January 30, 2020. One implication of the Cresco Transaction closing in 2020, instead of 2019, was that the amount of the Unearned Milestone Payment Commitment would be reduced by the 2019 Revenue Milestone Payment. The application judge found that the new closing date was not disclosed to the Appellants until at or about the time of the closing in January 2020. Because the change in closing date left the Appellants vulnerable to losing the 2019 Revenue Milestone Payment, the application judge found the change materially impacted the Appellants’ contractual entitlements.

[93]   The application judge found that Origin House breached its duty of honest performance by “repeatedly” advising the Appellants that the Cresco Transaction would close in 2019 and not correcting or updating that advice when Cresco informed Origin House that the closing date would be pushed out to January 2020.

[94]   However, the application judge further found that this was not a case driven by a concern about a hidden agenda or hidden motives on the part of Origin House nor had Origin House intentionally misled the Appellants about the closing date.

ONCA held that the application judge made a palpable and overriding error in finding that the Appellants were unaware of the change of closing date until the Cresco Transaction closed in January 2020. (para. 100, 105) On that basis, the cross-appeal was allowed.

Editor’s Note: At paras. 28-42, the ONCA deals with the Respondent’s motion to adduce fresh evidence on appeal. We have not summarized this portion of Gillese J.A.’s decision because the motion to adduce fresh evidence was dismissed and played no role in the appeal. Despite the dismissal of the motion, the ONCA allowed the cross-appeal. ONCA’s analysis relied on the SCC’s recent decision in Barendregt v. Grebliunas, 2022 SCC 22.