COURT OF APPEAL FOR ONTARIO

CITATION: Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401

DATE: 20230607

DOCKET: C70535

Gillese, Harvison Young and George JJ.A.

BETWEEN

Gopal Bhatnagar, Ashutosh Jha, Boris Giller,

2529808 Ontario Inc. and 2198914 Ontario Inc.

Applicants

(Appellants/Respondents

by way of cross-appeal)

and

Cresco Labs Inc.

Respondent

(Respondent/Appellant

by way of cross-appeal)

Eli S. Lederman and Samantha Hale, for the appellants/respondents by way of cross‑appeal

Ted Frankel and Meghan Rourke, for the respondent/appellant by way of cross‑appeal

Heard: February 8, 2023

On appeal from the judgment of Justice Jessica Kimmel of the Superior Court of Justice, dated March 21, 2022, with reasons reported at 2022 ONSC 1745.

Gillese J.A.:

     I.        OVERVIEW

[1]          Does the Supreme Court decision in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, create a legal presumption of loss once the court finds a breach of the contractual duty of honest performance? The judge below concluded that finding such a breach does not relieve a claimant from having to show an evidentiary foundation on which the court can conclude there was a loss of opportunity. A central issue on this appeal is whether she erred in that conclusion. In my view, she did not.

[2]          I am also of the view that the application judge made none of the other errors as alleged by the appellants. However, by way of cross-appeal, the respondent submits that the application judge erred in finding that its predecessor had breached its duty of honest performance. I accept that submission.

[3]          As a result, I would dismiss the appeal and allow the cross-appeal.

    II.        BACKGROUND

[4]          2360149 Ontario Inc., operating as 180 Smoke (“180 Smoke”), was a retailer, wholesaler, and manufacturer of vape products. 180 Smoke was founded in 2013 by the appellants Boris Giller, Ashutosh Jha, and Gopal Bhatnagar. Those appellants and the two numbered companies are the former shareholders of 180 Smoke (the “Appellants”).

[5]          Through a share purchase agreement dated February 19, 2019 (the “SPA”), the Appellants sold 180 Smoke and its affiliates to CannaRoyalty Corp., operating as Origin House (“Origin House”), a publicly traded company operating in the cannabis sector in the United States.

[6]          Pursuant to the SPA, Origin House paid the Appellants $25 million on closing. However, the SPA gave the Appellants the opportunity to earn an additional $15 million if 180 Smoke met certain milestones: $12.5 million if 180 Smoke achieved revenue milestones over the first three years after the SPA was entered into (the “Revenue Milestone Payments”); and $2.5 million if 180 Smoke obtained a standard processing license for cannabis products within a specified period (the “License Milestone Payment”). The three earn-out periods for the Revenue Milestone Payments were the 2019, 2020, and 2021 calendar years. Each of the three years had a target payment of $4,166,667, for a total of $12.5 million.

[7]          Before the SPA was executed, the Appellants became aware of a potential acquisition of Origin House. The parties negotiated a term in the SPA to govern such an event. If there were a change of control of Origin House in the three year earn-out period, s. 2.04(k) of the SPA provided that the Appellants would be paid an “Unearned Milestone Payment Commitment” totalling the amount of all future entitlements to unearned milestone payments.

[8]          A change of control at Origin House did take place. On April 1, 2019, Origin House announced it had entered into an agreement with Cresco Labs Inc. (“Cresco”) under which Cresco would purchase Origin House (the “Cresco Transaction”).

[9]          It was initially expected that the Cresco Transaction would close before the end of 2019. As of June 13, 2019, it was known that there would be at least a several month delay in the closing.

[10]       When asked in a June 24, 2019 email about what would happen to the milestone payments if the Cresco Transaction did not close, Origin House indicated that it did not agree that any such payments would be paid automatically for the first earn-out year but said there was “no reason to believe [the Cresco Transaction] will not close”.

[11]       The Appellants acknowledged that they were operating on the assumption that the Cresco Transaction might not close and, in that event, they had to reach their revenue targets to receive their Revenue Milestone Payments.

[12]       Mssrs. Giller and Jha, the key principals of 180 Smoke, resigned in August 2019 and September 2019, respectively.[1] They acknowledged that, by the time they resigned, there was little or no chance that 180 Smoke could achieve the revenue targets in 2019.

[13]       On October 20, 2019, Origin House learned that, due to weakness in the M&A market and challenges to raising capital, Cresco was proposing a new target closing date of January 15, 2020, with an outside closing date of January 30, 2020. Origin House did not directly share this information with the Appellants at that time.

[14]       Ultimately, the Cresco Transaction closed on January 8, 2020. Because that date fell within the second earn-out period, the Appellants were paid the Unearned Milestone Payment Commitment of $8,333,814.51. Cresco concedes that if the Cresco Transaction had closed in 2019, the Appellants would have been entitled to an additional payment of approximately $4.166 million, the amount of the Revenue Milestone Payment for the first earn-out period (January 1 to December 31, 2019).

[15]       The Appellants did not meet the revenue targets in 2019.

[16]       The Appellants brought an application (the “Application”) seeking, among other things, an order directing Cresco to pay the 2019 Revenue Milestone Payment and the License Milestone Payment of $2.5 million. They maintained that they were entitled to the 2019 Revenue Milestone Payment pursuant to the terms of the SPA or, alternatively, that any failure on their part to achieve the 2019 revenue targets was a result of breaches of contract by Origin House. The Appellants also claimed that they were denied the opportunity to receive the License Milestone Payment because of Origin House’s breaches of contract.

[17]       In reasons dated March 21, 2022 (the “Reasons”), the application judge found the Appellants were not entitled to the claimed payments. She carefully and thoroughly dealt with each issue raised on the Application, setting out the applicable legal principles, making comprehensive findings of fact, and fully explaining how she applied the law to them.

[18]       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 good faith in contractual dealings:

i)        alleged representations (outside of the SPA) about the level of discretion and autonomy the Appellants would continue to have in the operation of 180 Smoke and the timing of the financial support to be provided under the milestone budget, which were allegedly not honoured after the closing of the SPA;

 

ii)       Origin House’s failure to approve leases and new hires in a timely manner or at all, failure to support the application for a standard processing license, failure to release funds under the milestone budget in a timely manner, and imposition of other restrictions under the pre-closing restrictions memo; and

 

iii)      Origin House’s failure to advise the Appellants in October 2019 that Cresco was proposing to (and eventually did) move the closing of the Cresco Transaction to January of 2020, after having advised the Appellants on numerous occasions that the closing was expected to occur in 2019.

[19]       With the exception of the third alleged breach, the application judge rejected the Appellants’ claims that Origin House had hindered 180 Smoke’s efforts to implement its expansion plan and achieve their revenue targets in 2019 in a manner that constituted a breach of the duty of good faith.

[20]       In terms of the third alleged breach, the application judge found that Origin House had breached its duty of honest performance of the SPA “by having advised the [Appellants] repeatedly until October 2019 that the [Cresco Transaction] would close in 2019 and not correcting or updating that advice when Origin House was informed by Cresco that the closing date would be pushed out to January of 2020”.

[21]       The application judge observed that this was not a case being driven by a concern about a hidden agenda or hidden motives on the part of Origin House and stated that she made no finding Origin House had intentionally misled the Appellants about the closing date. It was Origin House’s failure to update important information about the closing date that it had previously provided which led to the finding that Origin House had breached its duty of honest performance.

[22]       However, the application judge made no award of damages for that breach. She concluded that, even if 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. Thus, despite having found the breach, because there was no evidence of lost opportunity on the part of the Appellants and she would not presume one, the Appellants were not entitled to damages.

[23]       An amplification of the application judge’s analysis is contained in the analysis of the relevant issues below.

  III.        THE ISSUES

[24]       The Appellants submit that the application judge erred:

1.    by failing to presume loss by the Appellants as a result of Origin House’s breach of the duty of honest performance;

2.    by misapprehending the evidence of lost opportunity;

3.    in failing to award damages on a basis other than expectation damages; and

4.    by failing to find that Origin House breached its contractual duty of good faith by impeding the Appellants from achieving the milestones during the first earn-out period.

[25]       On the cross-appeal, Cresco submits that the application judge erred in concluding that Origin House breached its duty of honest performance by not advising the Appellants, in October 2019, that the Cresco Transaction’s closing date was extended to 2020.

[26]       Cresco also brought a fresh evidence motion.

[27]       I will address the fresh evidence motion and the standard of review before turning to the issues raised on the appeal and cross-appeal.

 IV.        THE FRESH EVIDENCE MOTION

The Parties’ Positions

[28]       Cresco seeks to introduce the affidavit of Gina McCabe, sworn October 14, 2022, as evidence on the appeal and cross-appeal. The McCabe affidavit includes several publicly available press releases and other documents in which Origin House and Cresco communicated the delayed closing date to the market beginning in November 2019. This information was not before the application judge.

[29]       The information in the fresh evidence relates to the application judge’s conclusion that Origin House breached its duty of honest performance by advising the Appellants that the Cresco Transaction would close in 2019, and then failing to update that advice in October 2019 when it learned the closing would be in January 2020.

[30]       Cresco submits that the fresh evidence meets the criteria for admission established in Palmer v. The Queen, [1980] 1 S.C.R. 759. Cresco says that the fresh evidence demonstrates that, while Origin House may not have advised the Appellants directly of the delayed closing date, both it and Origin House repeatedly communicated that information to the market through press releases and other documents. All of the documents were publicly available on the System for Electronic Document Analysis and Retrieval (“SEDAR”).

[31]       Relying on this court’s decision in Katokakis v. William R. Waters Ltd. (2005), 194 O.A.C. 353 (C.A.), Cresco argues, in the alternative, that the fresh evidence should be admitted because it is necessary to provide this court with the full picture of the background and commercial realities regarding Origin House and Cresco’s public disclosure of the delayed closing date.

[32]       Cresco took the position that if the fresh evidence were admitted, for the purposes of the appeal and cross-appeal, it was prepared to stipulate to the fact that the Appellants did not ascertain the new closing date by way of the publicly available press releases and related documents (the “Stipulation”). It made the Stipulation so that it was unnecessary for the Appellants to respond with evidence and obviated the need for further cross-examinations.

[33]       The Appellants concede the fresh evidence is credible but submit that it does not satisfy the Palmer test. They argue that the motion should be dismissed because the proposed fresh evidence was available to Cresco before the Application was heard and there is no adequate explanation for why it could not have been introduced below. They say the fresh evidence motion is but a “thinly veiled effort” to have a “do-over” for a decision made below for strategic reasons.

Analysis

[34]       In Barendregt v. Grebliunas, 2022 SCC 22, 469 D.L.R. (4th) 1, the Supreme Court firmly and clearly settled the legal principles governing an appellate court’s power to admit additional evidence to supplement the record in civil appeals. Regardless of whether the evidence relates to facts that occurred before the trial (“fresh evidence”) or after trial (“new evidence”)[2], the Palmer test governs the admission of additional evidence on appeal adduced for the purpose of reviewing the decision below: Barendregt, at para. 27. Appellate courts are to apply the Palmer criteria to determine whether finality and order in the administration of justice must yield in service of a just outcome. The overarching consideration is the interests of justice, regardless of when the evidence, or fact, came into existence: Barendregt, at para. 3.

[35]       In my view, the fresh evidence does not satisfy the first of the Palmer criteria. For that reason, I would dismiss the motion and refuse to admit the fresh evidence.

[36]       The Palmer criteria dictate that additional evidence:

1.     should generally not be admitted if, by due diligence, it could have been adduced at trial;

2.     must be relevant, in the sense that it bears on a decisive or potentially decisive issue in the trial;

3.     must be credible, in the sense that it is reasonably capable of belief; and

4.     if believed and when taken with the other evidence adduced at trial, could reasonably be expected to have affected the result.

[37]       The fresh evidence in this case fails on the first criterion. It was available at the time of the Application and there is no suggestion that it could not have been obtained by the exercise of due diligence. Cresco says that the Application was originally framed as a dispute over the interpretation of the earnout provision in the SPA. It claims that it was only in their Application factum that the Appellants alleged that Origin House breached its duty of good faith in various ways, including by failing to inform them in October 2019 that the Cresco Transaction was going to close in 2020.

[38]       On my review of the record, including the affidavits and cross‑examinations of affiants for both parties, it appears the question of good faith was in play in the proceedings well before the Appellants served their factum on the Application. However, even if it was not, there could have been no doubt about the centrality of that allegation when Cresco received the Appellants’ factum. Had Cresco wished to introduce the fresh evidence, it should have taken the necessary steps to introduce that evidence at the Application. It did not do that.

[39]       The admission of fresh evidence on civil appeals will be rare: Barendregt, at para. 31. In my view, in this case, the interests of justice are best served by reference to the foundational principle of finality and order. The fresh evidence was readily available before the Application was heard. It was clearly relevant to the question of when the Appellants became aware that the Cresco Transaction would close in 2020, rather than 2019. Had it been introduced below, the Appellants would have had the opportunity to respond and the application judge could have made the necessary findings. To admit the fresh evidence on appeal would undermine the finality principle and give rise to unfairness.

[40]       Further, I do not accept Cresco’s argument, based on Katokakis, that the fresh evidence is necessary to provide this court with the full picture of the background and commercial realities regarding Origin House and Cresco’s public disclosure of the delayed closing date.

[41]       It is not clear to me that Katokakis is good law, following Barendregt, for two reasons. First, there is nothing in Barendregt to suggest that additional evidence should be admitted by an appellate court so it has a full picture of the background and commercial realities of a matter. Second, this court stated in Katokakis, at para. 5, that the fresh evidence had little relevance to the issues the court had to decide. The reasoning in Barendregt and, particularly, the second of the Palmer criteria, do not appear consonant with the admission of additional evidence that has little relevance to the issues to be decided.

[42]       Accordingly, I would dismiss the fresh evidence motion. The Stipulation was made as part of the fresh evidence motion. As I would dismiss that motion, in my view, the Stipulation falls away. Accordingly, it is not relevant to my consideration of either the appeal or the cross-appeal.

   V.        THE STANDARD OF REVIEW

[43]       The following principles govern this court’s review of the application judge’s decision.

[44]       On questions of law, the standard is correctness. On questions of fact, the standard is palpable and overriding error. With respect to questions of mixed fact and law, there is a spectrum. Where there is an extricable legal error, the standard of review is correctness. However, with respect to the application of the correct legal principles to the evidence, the standard is palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 10, 26-37. Interpretation of a contract is considered a question of mixed fact and law, absent an extricable legal error: Corner Brook (City) v. Bailey, 2021 SCC 29, 460 D.L.R. (4th) 169, at para. 44.

 VI.        THE APPEAL

ISSUE 1: The application judge did not err in refusing to presume loss as a result of the breach of the duty of honest performance

The Application Judge’s Reasons

[45]       On the Application, the Appellants submitted that, if the court found that Origin House had breached its duty of honest performance, the court was required to presume damages – its only task was to quantify those damages. Their submission was based on para. 116 of Callow, which reads, in part, as follows:

[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 added.]

[46]       The application judge rejected the Appellants’ submission that the emphasized words in para. 116 of Callow (the “Emphasized Words”) create a legal presumption of loss once a breach of the duty of honest performance has been found: at paras. 83, 88 of the Reasons.

[47]       The application judge accepted that, in the circumstances of this case: (1) it was reasonable to infer that, if the Appellants had been told about the delayed closing date of the Cresco Transaction, they would have taken all steps available to them to protect their entitlement to the full Unearned Milestone Payment Commitment; and (2) the Appellants lost that theoretical opportunity: at para. 82.

[48]       However, she stated, the Appellants had to establish that if they had received the undisclosed information in October 2019, there was “some evidentiary foundation upon which the court can conclude that there was a credible opportunity that could have resulted in the closing date being changed, or some other outcome could have been achieved to make up for their loss of the Revenue Milestone Payment for the First Earn-Out Period”: at para. 88.

[49]       The application judge said that, in light of concessions during cross-examination, it was not open to the Appellants to argue that there was anything they could have done, as of October 2019, to achieve the 2019 revenue targets: at para. 85. She also rejected the Appellants’ argument that through dissent rights, rights under the lock up and voting agreement, or some other influence or leverage over Origin House and Cresco, they could have forced a change in the closing date. She said that “nothing concrete” had been identified and none of the specific rights identified could be linked to the closing date: at para. 87.

[50]       The application judge noted that inferences must be made based on facts that reasonably support them and found an “absence of facts” from which the court could reasonably infer there were steps the Appellants could have taken to influence the parties to move the closing date to December 2019: at para. 89.

[51]       She concluded by observing that the Appellants had a “pyrrhic victory” because, while they should have been told about the move of the closing date, it had not been established by inference or otherwise that there was any reasonable opportunity of which the Appellants could have availed themselves to change the outcome: at para. 90. Thus, there were no damages inferred or proven that flowed from the breach: at para. 91.

The Parties’ Positions

[52]       On appeal, the Appellants renew their submission that, based on the Emphasized Words in para. 116 of Callow, the court is required to presume damages when there is a breach of the duty of honest performance, even absent evidence of an opportunity having been lost. They submit that the application judge erred in law by requiring “an evidentiary premise … [to] prove the facts upon which damages are estimated”. They contend that applying the presumption as required by Callow, the application judge should have presumed that the Appellants lost the opportunity of reaching the milestones and it is that loss which should be compensated in damages.

[53]       Cresco submits that the application judge correctly found the Appellants had no evidentiary foundation for their damages claim and, therefore, correctly dismissed that claim. Cresco contends that even if a lost opportunity is “presumed” or inferred, the evidentiary record must establish what was lost, to a reasonable degree, and show it was lost due to a breach of contract. They say that dispensing with these requirements would take the duty of good faith out of the realm of breach of contract and open the floodgates to all manner of speculative, flimsy claims.

Standard of Review

[54]       In my view, whether Callow creates a legal presumption of damages for breach of the duty of honest performance is a question of law reviewable on a correctness standard.

Analysis

[55]       I do not accept that Callow stands for the proposition that, where a party is found to have breached its duty of honest performance, the court must presume the aggrieved party is entitled to damages in the absence of an evidentiary foundation of a lost opportunity. I understand the majority decision in Callow to place the burden on the claimant to show some evidence on which the court can find that the breach of the duty of honest performance resulted in the claimant failing to have a fair opportunity to protect its interests or caused it to lose an opportunity.

[56]       Before addressing para. 116 of Callow, it is useful to recall its facts. In that case, a group of condominium corporations (“Baycrest”) entered into two contracts with C.M. Callow Inc. (“Callow”), a corporation owned and operated by Christopher Callow. The contracts consisted of a winter maintenance agreement with a two-year term and a summer maintenance agreement. A clause in the winter contract gave Baycrest the right to terminate the contract, for any reason, upon giving ten days’ notice in writing. Baycrest decided to terminate the winter contract after the first winter. Callow was not informed of that decision and proceeded to fulfill its contractual obligations. During the spring and summer, Baycrest then engaged in a series of “active communications” with Mr. Callow that (a) suggested that a renewal of the winter contract was likely; and (b) deceived him into thinking that his “freebie” work would both improve his chances of earning a renewal and ensuring the contract would not be terminated. Callow was ultimately informed the contract was terminated in September of that year.

[57]       At trial, Mr. Callow gave evidence that he typically bid on winter contracts during the summer and, thus, it was too late to find replacement work by the time he was notified of the termination. There was also evidence that Mr. Callow had opportunities to bid on other winter contracts but chose to forgo them due to his misapprehension about the status of the contract with Baycrest. After finding Baycrest breached the duty of honest performance, the trial judge awarded Callow damages equal to the profit lost under the winter contract. The Supreme Court upheld that damages award.

[58]       I now return to the Appellants’ submission based on the Emphasized Words in para. 116 of Callow.

[59]       The Emphasized Words are part of one sentence in para. 116. They must be read within para. 116 as a whole. In para. 116, Kasirer J. began by referring to the trial judge’s finding that Baycrest failed to provide Callow with a fair opportunity to protect its interest. He then stated that, had Baycrest acted honestly and corrected Mr. Callow’s false impression, he would have taken proactive steps to bid on other contracts for the upcoming winter. Next, Kasirer J. observed there was “ample evidence” before the trial judge that Callow had opportunities to bid on other winter maintenance contracts but chose to forego those opportunities due to its misapprehension about the status of its contract with Baycrest.

[60]       Thus, it can be seen, in the sentences leading up to the one that contains the Emphasized Words, Kasirer J. explicitly found an evidentiary foundation for Callow’s claim of lost opportunity. This is significant when considering the full sentence in which the Emphasized Words are found. For ease of reference, I set it out again:

[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 added.]

[61]       The Appellants’ submission that lost opportunity must be presumed fails to account for both the permissive language in the Emphasized Words and the qualifying language that immediately follows them.

[62]       The Emphasized Words are permissive, not mandatory: they state 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.

[63]       Further, and in any event, the Appellants’ submission fails to recognize that the Emphasized Words are followed by two qualifications: it might be presumed in law that Callow lost an opportunity (1) since it was Baycrest’s own dishonesty that precluded Callow from (2) conclusively proving what would have happened. In this case, neither qualifier applies.

[64]       In terms of the first qualifier, it was not Origin House’s failure to advise the Appellants of the delayed closing date that precluded the Appellants from proving what would have happened had they been so advised. On the findings of the application judge, there was “little or no chance” of the Appellants achieving the 2019 revenue targets and nothing the Appellants could have done to force a change in the closing date.

[65]       In terms of the second qualifier, as I have explained, in Callow there was an evidentiary foundation for the claim of lost opportunity and Baycrest’s dishonesty precluded Callow from “conclusively proving” lost opportunity. That was not this case: the Appellants had no evidentiary foundation for their claim of loss of opportunity.

[66]       Accordingly, in my view, this ground of appeal fails.

ISSUE 2:     The application judge did not misapprehend the evidence relating to lost opportunity

The Application Judge’s Reasons

[67]       This issue arises largely from the application judge’s statement at para. 69 of the Reasons (the “Statement”):

I find on the evidence (including admissions to that effect by two of the [Appellants’] representatives on cross-examination) that by October 2019 there was a low probability that 180 Smoke would have been able to achieve either the Minimum or Target Revenue Thresholds for 2019 regardless of what was accomplished between then and the end of the year. [Emphasis added.]

The Parties’ Positions

[68]       The Appellants submit that, even if a minimum evidentiary threshold must be met to demonstrate a lost opportunity, the application judge erred in failing to find that threshold had been met. They contend that the emphasized words in the Statement demonstrate they met the minimum evidentiary threshold to justify the legal presumption. They also argue that the application judge was incorrect in finding that the resignations of Mssrs. Giller and Jha meant it would have been impossible for 180 Smoke to reach its milestones.

[69]       Cresco submits that there is no palpable and overriding error in the application judge’s findings on which she relied to conclude there was no evidence of a loss of opportunity. Consequently, they say, there is no basis for appellate intervention on this issue.

Analysis

[70]       I do not accept that the application judge misapprehended the evidence relating to loss of opportunity. When the Statement is read in context, it is clear that the application judge found there was no evidence to support the Appellants’ claim of lost opportunity. I see no palpable and overriding error in that finding.

[71]       Immediately after making the Statement, the application judge listed several findings underlying her determination that 180 Smoke could not have met the 2019 revenue targets even if the Appellants had known of the changed date for the Cresco Transaction. She found that by October 2019: no new leases had been approved; no new stores had been opened; no new managers had been hired; no new retail cannabis licenses had been granted; 180 Smoke had not obtained a standard processing license; and, the two key principals of 180 Smoke had resigned: at para. 70 of the Reasons.

[72]       At para. 85, the application judge explained it was “not open” to the Appellants to argue there was anything they could have done in October 2019 to enable 180 Smoke to achieve its 2019 revenue targets when Mssrs. Giller and Jha admitted that by the time they resigned – which was before the closing date had been moved to 2020 – and despite their best efforts, there was “little or no chance” of the targets being achieved.

[73]       In light of these findings, the application judge concluded the “only way that [the Appellants] stood to receive the 2019 earn-out payment was if the [Cresco Transaction] closed in 2019”: at para. 71. She explained, at para. 86, that the Appellants had “not put forward evidence of any concrete rights or recourses that could plausibly [have been] inferred to have had the ability to influence Cresco and Origin House to move back the closing date of what was by all accounts a complicated cross-border transaction involving public companies and regulatory approvals”.

[74]       In the following paragraph, the application judge addressed the Appellants’ submission, made in oral argument, that they might have had dissent rights, rights under the lock up and voting agreement, or some other influence or leverage over Origin House to force a change in the closing date. She rejected that submission, finding “[n]othing concrete was identified” and “[n]one of the specific rights identified can be linked to the closing date”.

[75]       In short, the application judge found no evidence to support the Appellants’ claim that because Origin House failed to inform them in October 2019 that the Cresco Transaction closing date would be delayed until January 2020, they lost the opportunity to do something that might have led to a different outcome for them. She did not misapprehend the evidence in reaching that conclusion.

[76]       There is no basis for appellate intervention with the application judge’s determination of this matter.

ISSUE 3:     The application judge did not err in refusing to award damages on a basis other than expectation damages

The Parties’ Positions

[77]       The Appellants submit that, having found a breach of the duty of honest performance, the application judge erred in not awarding a remedy in damages. They say the courts have recognized the necessity of departing from the ordinary measure of damages in cases where expectation damages are difficult or impossible to calculate or where expectation damages would effectively allow the breaching party immunity, notwithstanding the breach.

[78]       Cresco submits that the application judge correctly held that no damages flowed from Origin House’s failure to inform the Appellants of the delayed closing because the Appellants adduced no evidence to show what they could, or would, have done differently had they been given that information.

Analysis

[79]       I see no error in the application judge’s determination that, despite having found Origin House had breached its duty of honest performance, the Appellants were not entitled to damages.

[80]       At para. 106 of Callow, the majority decision explained generally how damages should be awarded for breach of the duty of honest performance. It 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”: at para. 107.

[81]       In this case, there is no evidence to show that the Appellants’ position would have changed if Origin House had informed them, in October 2019, that the Cresco Transaction would close in January 2020. This is because the application judge found, as I explain above, the Appellants could not have forced the Cresco Transaction to close in 2019 nor could they have met the 2019 revenue targets. Thus, the Appellants were not entitled to expectation damages. Indeed, they do not argue entitlement to such damages. Instead, they argue that damages should be awarded on a different basis.

[82]       There was no basis to award punitive damages given the application judge’s explicit findings that: i) there was nothing untoward or dishonest about Origin House pursuing a change of control transaction, especially as that had been specifically contemplated by the SPA; ii) there was no finding that Origin House misled the Appellants about the closing date; and iii) there was no suggestion or contention that the delay in the Cresco Transaction was intentional or the fault of any action or inaction on the part of Origin House and/or Cresco.

[83]       Disgorgement for breach of contract may be appropriate in exceptional circumstances but, at a minimum, only where other remedies are inadequate and the circumstances warrant such an award: Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, [2020] 2 S.C.R. 420, at paras. 52-53. Circumstances of inadequacy arise when the nature of the claimant’s interest is such that it cannot be vindicated by other forms of relief as, 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: Atlantic Lottery, at para. 59.

[84]       In the present case, there are no exceptional circumstances nor is the Appellants’ loss “impossible to calculate”. To the contrary, the Appellants propose the specific figure of $4,166,185.49.

ISSUE 4:     The application judge did not err in failing to find that Origin House breached its duty of good faith by impeding the Appellants from achieving the milestones

The Parties’ Positions

[85]       The Appellants submit that the application judge made a number of errors in her analysis of the evidence of Origin House’s conduct with respect to the duty of good faith in contractual performance. They say that Origin House could not “jettison and abandon” the Appellants’ legitimate interests and expectations simply because a better opportunity presented itself.

[86]       Cresco submits that the application judge found that Origin House’s actions were objectively reasonable in the context of a change of control transaction specifically contemplated by the parties in the SPA. Further, it says the Appellants’ submission fails to acknowledge that the Cresco Transaction was a better opportunity for them too. Even though the Appellants’ business was floundering, as a result of the Cresco Transaction, they received an Unearned Milestone Payment of $8.3 million.

Analysis

[87]       I see no merit to this issue: it is fully met by the terms of the SPA. Origin House cannot be said to have “jettisoned and abandoned” the Appellants’ legitimate expectations by entering into the Cresco Transaction when the parties themselves expressly contemplated such a transaction in the SPA.

[88]       In terms of the Appellants’ allegation that the timing of the milestone budget funds was a breach of the duty of good faith, I point to the application judge’s finding that the SPA did not specify any timing for the flow of funds.

[89]       Further, the terms of the SPA are relevant to a determination of the alleged breaches of the duty of good faith because they aid in determining the parties’ reasonable expectations on the matters in question. The application judge found the Appellants never availed themselves of ss. 2.04(f) and (g) of the SPA, which allowed them to give notice of any complaint. As the application judge noted, if the Appellants had felt that Origin House was not adhering to the express or implied terms of the SPA regarding the timing of the flow of funds, they could have had recourse to those provisions. They did not.

[90]       In challenging the application judge’s determinations of the various alleged breaches of the duty of good faith, the Appellants make many of the same arguments they raised below. Those determinations are on matters of mixed fact and law that are subject to appellate review on the palpable and overriding standard. The application judge made no errors in the legal principles that she applied and the factual findings she made were fully open to her. The Appellants have failed to point to any palpable and overriding error that would warrant this court’s intervention.

[91]       Accordingly, I reject the Appellants’ submission that the application judge erred in her good faith analysis and determinations.

VII.        THE CROSS-APPEAL

ISSUE 5:     The application judge erred in concluding that Origin House breached its duty of honest performance

The Application Judge’s Reasons

[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.

The Parties’ Positions

[95]       Cresco makes two arguments in support of its submission that the application judge erred in concluding that Origin House breached its duty of honest performance.

[96]       First, Cresco says that the application judge made a palpable and overriding error in finding that Origin House “repeatedly” advised the Appellants the Cresco Transaction would close in 2019 (the “First Alleged Error”) because, in the Reasons, she referred to only two occasions in which that occurred. Those two occasions were in June and late September of 2019.

[97]       When asked in a June 24, 2019 email about what would happen to the milestone payment if the Cresco Transaction did not close, Origin House answered that the 2019 Revenue Milestone Payment would not be made if the revenue targets were not met but added there was, at that time, no reason to believe it would not close. In late September 2019, Origin House adjusted its accounting reserve for the Revenue Milestone Payments. In a September 24, 2019 email, Origin House confirmed the adjustment was made to reflect a scenario in which the Cresco Transaction did not close. However, in that same email, Origin House advised: “Nothing has changed on our end and expect to close in the coming weeks”.

[98]       Second, during oral argument on appeal, Cresco asserted that correspondence from the Appellants’ lawyer in November 2019 proved the Appellants were aware the closing date was delayed to January 2020 and the application judge made a palpable and overriding error in finding otherwise (the “Second Alleged Error”).

[99]       The Appellants submit that, in concluding Origin House breached its duty of honest performance, the application judge stated the law correctly and applied it properly to uncontradicted factual findings. As such, her conclusion is a question of mixed fact and law that is owed deference on the palpable and overriding error standard and Cresco has failed to identify any such error.

Analysis

[100]   I would allow the cross-appeal. Applying the palpable and overriding standard of review, I do not accept that the application judge made the First Alleged Error. However, in my view, she did make 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.

a.    The First Alleged Error

[101]   I acknowledge that the application judge referred to only two occasions in which Origin House advised the Appellants that the Cresco Transaction would close by the end of 2019. I accept that two occasions may not amount to Origin House having “repeatedly” advised the Appellants of that matter.

[102]   However, judges need not discuss every item of evidence in their reasons. In this case, Mr. Giller’s affidavit evidence, and his cross-examination on it, provide support for the application judge’s finding that Origin House “repeatedly” advised the Appellants that the Cresco Transaction would close by the end of 2019.

[103]   For that reason, I do not accept that the application judge made a palpable and overriding error in finding that before October 2019, Origin House repeatedly advised the Appellants that the Cresco Transaction would close in 2019.

b.   The Second Alleged Error

[104]   The record before the application judge included a letter from the Appellants’ counsel, dated November 18, 2019, that was sent to counsel for Origin House (the “Letter”). In the Letter, counsel for the Appellants stated:

The [Appellants] are nevertheless prepared to refrain from taking legal action to enforce their rights under the [SPA] upon receiving your confirmation that in the event that the [Cresco Transaction] fails to close by January 30, 2020, the [Appellants] will receive the Milestone Payments in the total amount of $12,500,000 and the License Milestone payment in the amount of $2,500,000 to be deposited into their account no later than the close of business on January 31, 2020. [Emphasis added.]

[105]   The Letter shows that the Appellants were aware, in November 2019, that the Cresco Transaction could close in January 2020. Accordingly, the application judge erred in finding that the Appellants were unaware in 2019 that there would be a delay in the closing of the Cresco Transaction. The error is both palpable and overriding. It is palpable because the Letter shows that the finding the Appellants were unaware in 2019 of the delay in closing was “not reasonably supported on the evidence” and it is overriding because it impacts on the application judge’s determination that Origin House breached its duty of honest performance: Farsi v. Da Rocha, 2020 ONCA 92, 444 D.L.R. (4th) 197, at para. 35.

[106]   As a result, in my view, the application judge’s finding that Origin House breached its duty of honest performance must be set aside and a finding that Origin House did not breach its duty of honest performance be substituted.

VIII.        DISPOSITION

[107]   For these reasons, I would dismiss the fresh evidence motion, dismiss the appeal, allow the cross-appeal, and vary 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.

[108]   If the parties are unable to agree on costs of the appeal, cross-appeal, and fresh evidence motion, they may file written submissions on those matters, to a maximum of three pages, within ten days of the date of the release of these reasons. Such submissions shall include the party’s bills of costs.

Released: June 7, 2023 “E.E.G”

“E.E. Gillese J.A.”

“I agree. A. Harvison Young J.A.”

“I agree. J. George J.A.”