To tell the truth: Damages in breach of duty of honest performance
As set out in the 2020 Supreme Court of Canada (SCC) case of C.M. Callow Inc. v Zollinger (“Callow”), the duty of honest performance of a contract requires that parties must not lie or otherwise misled each other about matters directly linked to the performance of the contract.[1]
This article will review the method by which damages were determined in the Court of Appeal and SCC decisions in Callow, as well as in the recent Court of Appeal decision in Bhatnagar v. Cresco Labs Inc[2] (“Bhatnagar”).
Callow v. Zollinger
In the case of Callow[3], a group of condominium corporations located at Baycrest Gardens (“Baycrest”) entered into a two-year maintenance contract and into a separate summer maintenance contract with Callow. Baycrest was entitled to terminate the agreement if Callow did not provide satisfactory service. The agreement also provided that if, for any other reason, Callow’s services were no longer required, Baycrest could terminate the contract upon providing 10 days written notice.
Baycrest advised Callow of its decision to terminate the winter maintenance agreement in September 2013. However, Callow filed a claim alleging that Baycrest did not act in good faith. The trial judge held that Baycrest actively deceived Callow from the time the termination decision was made to September 2013 and found that Baycrest acted in bad faith by withholding that information. The court was satisfied that Baycrest deceived Callow in order to ensure the summer maintenance agreement would be performed and that Baycrest continued to represent that termination of the winter contract was not at risk. Accordingly, the trial judge awarded damages to Callow.
The case was appealed.[4] The Court of Appeal set aside the judgment, deciding that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement. Further, it held that although communications between the parties in the summer of 2013 may have led Mr. Callow to believe that there would be a new contract, those communications did not preclude Baycrest from exercising its right to terminate the winter contract, then in effect.
In summary, the Court of Appeal concluded that while the facts may suggest a failure of Baycrest to act honourably, they do not rise to the high level required to establish a breach of the duty of honest performance.
The case was appealed to the Supreme Court of Canada. The appeal was allowed, and the judgment of the trial judge was reinstated. The SCC held that the duty to act honestly in the performance of the contract precluded the active deception by which Baycrest knowingly misled Callow into believing that the winter maintenance agreement would not be terminated. Further, by exercising the termination clause dishonestly, it breached the duty of honesty on a matter directly linked to the performance of the contract, even if the 10-day notice period was satisfied.
Damages
The trial judge awarded expectation damages (discussed in further detail below) to place Callow in the same position it would have been in had the breach not occurred. The award was based on the profit Callow would have made from performing the remaining period of the winter agreement. In addition, the trial judge awarded Callow’s expenses it incurred in leasing machinery for one year to perform the winter contract and the amount of an unpaid invoice.
Bhatnagar v. Cresco
The Bhatnagar case dealt with an application for an order directing Cresco (which had purchased the business of Open House) to pay certain milestone payments pursuant to revenue targets set out in a Share Purchase Agreement (SPA). Alternatively, any failure on Bhatnagar’s part to achieve the targets for the earnout was a result of breaches of contract of Open House.
After addressing the Appellants’ breach of contract claims based on the SPA, the application judge considered the Appellants’ claims based on alleged breaches of Origin House’s duty of honest performance in contractual dealings. The application judge found that Origin House had breached its duty of honest performance of the SPA by repeatedly advising the Appellants until October 2019 that the Cresco acquisition transaction would close in 2019 and not correcting or updating that advice when Origin House was informed by Cresco that the closing date would take place in January 2020. Failing to notify the Appellants of a delay in closing of the Cresco transaction may have impacted whether a milestone payment would be due to the Appellants.
The application judge stated that she made no finding that Origin House had intentionally misled the Appellants about the closing date. Rather, it was Origin House’s failure to update important information about the closing date that it previously provided which led to the finding that Origin House had breached its duty of honest performance.
The application judge made no award of damages for breach of duty of honest performance. This was based on the court’s conclusion that had the Appellants had been promptly advised of the change in the closing date in October 2019, they would not have been able to meet the revenue targets or take steps to force the Cresco transaction to close by the end of 2019. Accordingly, despite finding a duty had been breached, because there was no evidence of lost opportunity, the Applicants were not entitled to damages.
The Court of Appeal dismissed the appeal on its conclusion that there was no error in the application judge’s findings that there was no evidence to support any claim for damages. In addition, the Court of Appeal amended the judgment by adding an order declaring that Origin House did not breach its duty of honest performance through a failure to disclose to the Appellants that the Cresco transaction closing date would be delayed to January 2020.
Methods of determining damage
In the Bhatnagar case, had liability been proven, i.e., that the Appellants’ position would have changed if Origin House had been informed of the revised closing date, the Appellants may have been able to succeed in a claim for damages. The types of damages include:
Expectation damages
Expectation damages are calculated based on the difference between the “but-for position” vs the “actual position”.
Expectation damages result in the plaintiff being put in the same financial position it would have been in had the contract been performed.
For example, in the Bhatnagar case, the expectation damages may have been calculated as the but-for position (receipt of the milestone payment that would have been earned in 2019) less the actual position (no milestone payment received).
Reliance damages
Reliance damages are calculated as the plaintiff’s loss of cash flows based on its reliance on the performance of the contract. This results in the plaintiff being put in the position it would have been in had the contract never been entered into.
Reliance damages relate to expenses that the plaintiff incurred in reliance on the contract but would not have been incurred had they known the contract would be breached.
Punitive damages – In the Bhatnagar case, the Court of Appeal held that Origin was not dishonest by pursuing the Cresco change of control transaction as this had been specifically contemplated in the SPA. There was no finding that Origin House had misled the Appellants about the closing date. Further, there was no suggestion that the delay in the Cresco transaction was intentional or the fault of any action or inaction on the part of Origin House or Cresco. Accordingly, there was no basis to award punitive damages.
Disgorgement – In the Bhatnagar case, the Court of Appeal stated that this type of damages may be appropriate in exception cases but, at a minimum, only where other remedies are inadequate, and the circumstances warrant such an award. This may occur where the nature of the claimant’s interest cannot be remedied by other forms of relief, for example, where the plaintiff’s loss is impossible to calculate or where the plaintiff’s interest in performance is not reflected by a purely economic measure.[5] In the Bhatnagar case, there were no exceptional circumstances, and the loss was possible to calculate as the Appellants proposed damages were $4,166,185.
These cases remind us that an award of damages is dependent on the evidence led in the case and the plaintiff must prove that the breach resulted in a loss.
About the author
Bruce Roher is a Senior Advisor in the Valuations group. He can be reached at broher@fullerllp.com or 416-645-6526.