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Contracts serve as the bedrock of business relationships, especially for business shareholdings, ensuring that parties fulfill their obligations. When one party fails to uphold their end of the bargain, it can lead to significant consequences and potential litigation. This is where the concept of breach of contract comes into play, and having an understanding of the available remedies can be crucial.

In many cases, the harm caused is relatively straightforward, as the innocent party is often entitled to any combination of compensatory damages, specific performance, and injunctive relief. However, there are also cases where harm is more abstract, such as when a party breaches the duty of honest performance. In these cases, the innocent party may be entitled to damages for loss of opportunity. This blog post will provide an overview of the availability of these damages in light of recent case law decided by the Ontario Court of Appeal.

Legal Principle: Loss of Opportunity

Damages for loss of opportunity is a legal principle that allows a party to claim damages based on the loss of a specific opportunity that resulted from a breach of contract or wrongful act. It recognizes that certain breaches or wrongful acts can deprive a party of a valuable opportunity, and the injured party should be compensated for the lost chance or potential benefit.

In the decision of M. Callow Inc. v. Zollinger, the Supreme Court of Canada held that where a duty of honesty is breached, it can attract damages for loss of opportunity. However, it is important to note that the dishonesty complained of in the case was directly linked to the performance of the contract, where the lost opportunity flowed from the conduct of the infringing party.

In a recent case before the Ontario Court of Appeal, the appellants asserted that the above ruling created a legal presumption of loss where there was a breach of the duty of honesty.

Company Missed Revenue Target after Late Deal Close

The case of Bhatnagar v. Cresco Labs Inc. involved the appellants, Boris Giller, Ashutosh Jha, and Gopal Bhatnagar, who were the founders of a company conducting business as 180 Smoke, which is a retailer, wholesaler, and manufacturer of vape products. In 2019, the founders sold 180 Smoke in accordance with a share purchase agreement for $25 million to a company operating as Origin House. Per the share purchase agreement, the appellants could earn an additional $15 million if 180 Smoke achieved certain revenue milestones and $2.5 million if they acquired a cannabis licence.

Later that same year, Origin House announced that it was going to be bought out by Cresco Labs Inc. The transaction was intended to close before the end of 2019. However, it was delayed until January 8, 2020, due to poor market conditions and difficulties securing financing. In the meantime, there was little chance 180 Smoke would reach its revenue target. As a result of the late closing, Origin House only paid the appellants a portion of the amount owed under the share purchase agreement, representing the 2020 and 2021 revenue payments.

Application Judge Finds Duty of Honesty Breached; No Damages Awarded

The appellants brought an application for the 2019 payment and the cannabis licence, claiming that they missed the revenue payments due to the breaches of the share purchase agreement by Origin House, amongst those being a breach of the duty of honesty.

The judge found that Origin House had breached this duty as a result of its “failure to advise the appellants that Cresco Labs Inc. intended to delay the closing of the deal to January 8, 2020, after having advised the Appellants on numerous occasions that the closing was expected to occur in 2019.” Nevertheless, the judge did not award damages since there was little chance that 180 Smoke would meet its revenue target or force the Cresco Labs Inc. transaction to close in 2019. In effect, the judge ruled that there was no evidence of lost opportunity.

No Evidence of Lost Opportunity; Court Dismisses Appeal

The main thrust of the appellants’ argument in their appeal was that the case of M. Callow Inc. v. Zollinger establishes that even if there is no evidence of a lost opportunity, the Court must presume this loss where there is a breach of a duty of honesty. The appellants relied on the following passage:

“As the trial judge found, Baycrest “failed to provide a fair opportunity for [Callow] to protect its interests” (para. 67). Had Baycrest acted honestly in exercising its right of termination, and thus corrected Mr. Callow’s false impression, Callow would have taken proactive steps to bid on other contracts for the upcoming winter (A.F., at paras. 91-95). Indeed, there was ample evidence before the trial judge that Callow had opportunities to bid on other winter maintenance contracts in the summer of 2013 but chose to forego those opportunities due to Mr. Callow’s misapprehension as to the status of the contract with Baycrest. In any event, even 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 (see Lamb v. Kincaid (1907), 38 S.C.R. 516, at pp. 539-40).”

Although the end of the paragraph appears to create such a presumption, the Court noted that this paragraph must be read as a whole. The Court pointed out that there was “ample evidence” that the innocent party had other opportunities but chose to forego them based on the conduct of the infringing party. The Court also noted that the paragraph includes permissive words rather than mandatory words. Even so, the appellants did not provide any evidence as to what would have happened or what they would have done if they had been advised of late closing.

The Court dismissed the appeal and turned down the appellants’ argument that such a presumption must be made. In doing so, the Court reinforced the importance of forwarding evidence of a lost opportunity where claiming damages for the like and a breach of the duty of honesty does not give rise to a presumption of a lost opportunity.

The Lawyers at Bader Law Advise Clients on Contractual Disputes in Ontario

The respected business lawyers at Bader Law advise clients on a range of business matters, including start-up and reorganization, corporate transactions, shareholders agreements and more. Our advice has helped many corporate clients avoid costly disputes while ensuring that their needs are met and they are set up for success. Contact us at 289-652-9092 or complete our online form to schedule a consultation with a member of our business law team to learn how we can assist you.