Honesty Is The Best Policy: The Court Of Appeal For Ontario On Damages And The Contractual Duty Of Honest Performance In Bhatnagar V. Cresco Labs Inc

A recent decision from the Court of Appeal for Ontario in Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401¹ clarified that damages do not automatically flow from a breach of the duty of honest performance as articulated by the Supreme Court of Canada C.M. Callow Inc. v. Zollinger^2.

Takeaways

• Damages cannot be awarded for nothing - the claimant must suffer a loss from the breach of the duty of honest performance in order to recover damages and must lead evidence to that effect.
• Expectation damages are still the default - in the context of breaches of the duty of honest performance, standard contractual damages that put the party in the position it would have been in had the duty been performed are appropriate unless there are exceptional circumstances or the damages are impossible to calculate.
• "Accidental dishonesty" counts - a court may find that a party breached its duty of honest performance even if its actions were not intentional.

Callow - a Recap

The Supreme Court of Canada in Callow affirmed that parties to a contract have a duty of honest performance as initially recognized in Bhasin v. Hrynew³. The Court found that this duty applies to the performance of all contracts and to all contractual obligations and rights. This is a duty the parties are not at liberty to contract out of.

The Court defined the duty of honest performance as meaning that parties "must not lie or knowingly mislead each other about matters directly linked to the performance of the contract."⁴ This includes half-truths, omissions, and even silence about the exercise of a particular right under a contract. While the Court did not go so far as to impose a positive obligation of disclosure, it found that if a party's silence involves actively and knowingly misleading or deceiving the other party or failing to correct a false impression that it created through its own actions, such actions will be considered dishonest.

The Court found that a breach of the duty of honest performance by the Defendant entitles the Plaintiff to the usual remedy in contract law: expectation damages that put the Plaintiff in the position that it would have been in had the duty been performed.

Facts of Bhatnagar

The Appellants sold 180 Smoke to a company called Origin House through a Share Purchase Agreement. The agreement provided for additional payments to the Appellants if 180 Smoke met certain revenue and licensing milestones.

Origin House then entered into an agreement with the Respondent, Cresco Labs, in which Cresco would purchase Origin House. This agreement affected the Appellants' potential milestone payments as a result of the delayed closing date of which the Appellants were not informed.

Origin House did not directly share the delay of the closing date with the Appellants. However, the Appellants did not meet the revenue targets required to entitle them to additional payments. The Appellants claimed that the fact that they were not informed of the delayed closing date impacted their contractual entitlements and claimed damages for lost opportunity.

Issue

The issue before the Court of Appeal was whether Callow created a legal presumption of loss once a court finds a breach of the contractual duty of honest performance. The Court upheld the ruling of the judge below, which concluded that a finding of a breach of duty does not relieve a claimant from having to show an evidentiary foundation for the damages claimed.

Decision

The Appellants argued that the Court is required to presume damages once a breach of the duty of honest performance has been found, even in the absence of evidence of an opportunity having been lost, on the basis of the following language in Callow⁵:

[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 original.]

The Court of Appeal disagreed for two reasons:

1. The use of the word "may" is permissive, and therefore the Court is not obliged to presume loss; and
2. Reading the entire paragraph from which the language is quoted as a whole reveals that the Court in Callow did find an evidentiary foundation for the claim of lost opportunity.

The Court affirmed the finding of the application judge that there was no evidence to support the Appellant's claim for lost opportunity and refused to award damages on a basis other than expectation damages, following Callow, as there were no exceptional circumstances nor was the loss impossible to calculate.

Interestingly, while the Court did not award damages, it did find a breach of the duty of honest performance. This is significant because the application judge did not find that Origin House had intentionally misled the Appellants about the closing date. It was their failure to update important information about the closing date directly to the Applicants that lead the judge to decide that there was a breach of the duty. The Court of Appeal saw no reason to disturb the decision of the application judge potentially extending the duty of honest performance further towards a positive obligation of disclosure.

Footnotes

1. Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401 [Bhatnagar].

2. C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [Callow].

3. Bhasin v. Hrynew, 2014 SCC 71.

4. Callow, at para 187.

5. Callow, at para 116.

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