Breach of good faith in business contracts: Proof of loss

Commercial contracts across Canada are bound by a duty of good faith. This includes the duty to perform the contract honestly and exercise any discretion under the contract reasonably: see C.M. Callow Inc. v. Zollinger, 2020 sec 45 and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 sec 7. 

Parties cannot contract out these responsibilities. They are imposed by the courts on all Canadian contracts. 

One of the issues arising from the Supreme Court of Canada's decisions on contractual good faith is how damages should be proven following a successful claim for breach of contract. 

Does dishonest contractual performance require proof of loss or can the court presume the plaintiff's damages arising from the breach? In other words, does the defendant's bad faith conduct result in a legal conclusion that the plaintiff was obviously deprived of an opportunity under the contract? 

A recent decision of the Ontario Court of Appeal, Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401, addresses this question head-on - effectively ruling that, like other breaches of contract, the plaintiff has the onus of proving actual damages flowing from the breach. 

A deal that went up in smoke 

Bhatnagar involved a share purchase agreement (the SPA) in which the appellants sold their vaping products business to an American cannabis company (the buyer). 

Under the SPA, the buyer paid the appellants an amount on closing. However, the appellants had the right to earn an additional $15 million if they met certain preconditions, including a revenue milestone (the revenue milestone payment). 

The buyer was ultimately acquired by the respondent, an eventuality the parties had contemplated in the SPA (the acquisition). 

When the appellants inquired of the buyer what would happen to the revenue milestone payments if the buyer were acquired by the respondent, the buyer indicated there was no reason to believe the acquisition of the buyer by the respondent would not close. It was clear, however, even at the time of the appellants' inquiry, that the appellants would not achieve the necessary revenue targets in 2019 so as to meet the precondition of the payment of the revenue milestone payment. 

The acquisition of the buyer by the respondent eventually transpired, but the appellants were not paid the revenue milestone payment for 2019 because the acquisition took place in 2020. 

In any event, the appellants did not meet the revenue targets for 2019. 

The appellants brought an application seeking remittance of the 2019 revenue milestone payment. 

The application judge held, among other things, that the buyer had breached its duty of honest contractual performance by advising the appellants repeatedly that the acquisition would close in 2019 and in failing to advise that the closing date would be pushed to 2020. However, the application judge refused to award any damages for that breach. 

The application judge held that even if the appellants had been notified of the change in closing date, it was clear that they would not have met their revenue targets in 2019. 
On appeal, the appellants argued that the application judge erred by not presuming damages to the appellant as a result of the buyer's breach of good faith. The Court of Appeal rejected this position and upheld the application judge's ruling on damages. 

Can damages be presumed for dishonest contractual breaches? 

The appellants' argument about the presumption of damages was based on a passage in the Supreme Court of Canada's leading decision on honest contractual performance, Callow, supra. In Callow, the court appeared to suggest that damages for breach of good faith could be presumed as a matter of law: 

[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 (see Lamb v. Kincaid (1907), 38 S.C.R. 516, at pp. 539-40).

The appellants argued that the statement above established a legal presumption of loss once a breach of honest performance had been found by the court. According to the appellants, the application judge erred by placing an evidentiary onus on the appellants to show what damages it suffered as a result of the buyer's dishonest conduct under the contract. 

In rejecting the appellants' position, the Court of Appeal dismissed the idea that Callow established that a court must presume damages for breach of good faith in the "absence of an evidentiary foundation of a lost opportunity." 

The Court of Appeal noted that, in Callow, there was "ample evidence" before the trial judge about the opportunities the plaintiff had lost as a result of the defendants' dishonest conduct. In other words, there was an explicit "evidentiary foundation for Callow's claim of lost opportunity." In Bhatnagar, there was not. 

Further, the language from the passage in Callow was, in the Court of Appeal's view, permissive: it does not require a court to presume damages flowing from a breach of good faith: 

The [passage from Callow is] permissive, not mandatory: [it states] that it "may" be presumed in law that a loss occurred. The use of the word "may" runs contrary to the Appellants' submission that once the court found a breach of the duty of honest performance, it was obliged to presume that they had suffered a loss of opportunity. 

In this case, there was "little to no chance" of the appellants achieving their 2019 milestone revenue target, such that they failed to show they suffered any loss as a result of the buyer's dishonest conduct. Simply put, the appellants failed to prove their damages for breach of contract. 

Contract damages need to be proven 

The lesson of Bhatnagar is clear: the onus is on a plaintiff to show it suffered a loss as a result of the defendant's breach of contract. The fact that the defendant's breach may be the result of dishonest conduct for a breach of good faith has no bearing on the need for an evidentiary foundation to prove the plaintiff's loss. In other words, there is nothing special about good faith that absolves the plaintiff of the requirement at law to prove its damages. 

Like any breach of contract, bad faith still requires the plaintiff to show it suffered a loss, even a hypothetical lost opportunity. Without evidence of damages, the plaintiff's claim remains unsubstantiated. 

This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.