Court File and Parties

COURT FILE NO.: CV-21-00655999-00CL DATE: 20220321 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Gopal Bhatnagar, Ashutosh JHA, Boris Giller, 2529808 Ontario Inc. and 2198914 Ontario Inc. Applicants – and – Cresco Labs Inc. Respondent

Counsel: Eli Lederman and Samantha Hale, for the Applicants elederman@litigate.com / shale@litigate.com Ted Frankel and Meghan Rourke, for the Respondent tfrankel@cassels.com / mtrourke@cassels.com

HEARD: March 1, 2022

Application under 14.05(3)(d) and 14.05(3)(h) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194

Reasons for Decision

Kimmel J.

[1] The applicants (“vendors”) seek damages representing amounts that they claim are still owed to them under a share purchase agreement dated February 19, 2019 (the “SPA”), by which they sold their interests in a vape products company, 2360149 Ontario Inc. d/b/a 180 Smoke (“180 Smoke [1] ”), to CannaRoyalty Corp. d/b/a Origin House (“Origin House” or “purchaser”), a publicly traded company operating in the cannabis sector in the United States.

[2] The outstanding shares of Origin House were subsequently acquired by the respondent Cresco Labs Inc. (“Cresco”), a large cannabis operator in the United States, pursuant to an arrangement agreement dated April 1, 2019 (the “Arrangement Agreement”). This arrangement transaction (the “Arrangement Transaction”) closed on January 8, 2020. As the successor company, it is not disputed that any amounts found owing to the applicants are payable by Cresco who has stepped into the shoes of the “purchaser” under the SPA.

[3] The issues raised on this application require the court to (1) interpret various provisions of the SPA to determine the applicants’ entitlement to certain revenue milestone payments (the “Revenue Milestone Payments”) and a license milestone payment (the “License Milestone Payment”); and (2) to determine whether the purchaser has breached its obligations under the SPA, including its duty of good faith and honest performance of its contractual obligations and/or its duty of good faith and honesty in the exercise of its discretion under the provisions of the SPA.

[4] The respondent denies that the vendors are contractually entitled to the claimed Revenue and License Milestone Payments and denies the alleged breaches. The respondent also argued in its factum and at the return of the application that, while the application can be dismissed based on the written record, there are material issues that would require a trial for the court to find in favour of the applicant.

[5] There is a further dispute, unrelated to the Revenue and License Milestone Payments, about whether consultant’s fees should be deducted from certain tax credits (the “SR&ED credits”) that 180 Smoke received in 2020 and that are acknowledged to be payable to the vendors under the SPA as working capital, purchase price, adjustment.

[6] The respondent had made a counter-application for monies alleged to be owing to it for certain other consultants’ fees, totalling $71,619.62, but advised at the hearing of this application that the counter-application claims were being withdrawn.

Summary of Disposition

[7] For the reasons that follow, the applicants’ claims for breach of contract are dismissed. The respondent is ordered to pay to the applicants a purchase price adjustment equal to the SR&ED tax credits for 2017 and 2018, without any deduction for consultant’s fees, in the adjusted amount of $142,775.50 (net of amounts previously accrued).

[8] The issues raised on this application can be decided based on the evidence filed. There are no material facts in dispute that require a trial for their determination. The factual findings necessary to determine the alleged breaches and claimed damages, in the context of the SPA and the relevant contractual dealings between the parties, do not depend upon credibility assessments or complex factual determinations.

Findings of Fact

[9] I have reviewed the evidence that the parties have presented for the court’s consideration through their written and oral submissions, with reference to the affidavits and exhibits filed and the transcripts of cross-examinations. The court makes the following findings of fact based on the uncontested or common evidence of the parties:

a. On September 27, 2018, 180 Smoke and Origin House entered into a binding term sheet (“Term Sheet”), the terms of which were announced in a press release of the same date, by which 100% of 180 Smoke and its affiliates would be acquired by Origin House, for total consideration of $25 million, as well as an additional $15 million upon the completion of certain post-closing milestones including a revenue target. This Term Sheet specified that there would be Revenue Milestone Payments to be capped at $12.5 million and the possibility of a further License Milestone Payment of $2.5 million if a Standard Processing License for cannabis products was obtained within a specified period.

b. The Revenue Milestone Payments were tied in the Term Sheet to 180 Smoke obtaining additional retail licenses and opening new (or to be acquired) stores, with financial support to be provided by the purchaser.

c. After entering into the Term Sheet, 180 Smoke prepared an expansion plan, which involved the hiring of new staff and the opening of new stores in 2019 (and beyond) for the sale of both vape and cannabis products (the “Expansion Plan”).

d. The vendors became aware of the potential for Origin House to be acquired in a post-SPA-closing change of control transaction sometime after the Term Sheet was signed and before the SPA was signed. By mid-February, the principals of 180 Smoke (the vendors) began to raise concerns that the acquiror might not support the expansion vision for 180 Smoke and that their financial interests might not be aligned with the acquiror.

e. The SPA was executed on February 19, 2019 and the acquisition closed on February 20, 2019.

f. The Revenue Milestone Payments ultimately agreed to in the SPA are calculated (as set out in Exhibit E to the SPA) based on revenue, not the number of new (or acquired) cannabis and vape stores as they had been in the Term Sheet. Three Earn-Out Periods are specified in Exhibit E to the SPA for the Revenue Milestone Payments for the calendar years 2019, 2020 and 2021. Each year had an Annual Target Payment of $4,166,667 (totalling the $12,500,000 “Milestone Payment Cap,” aggregated over the three years), with specified minimum and target revenue thresholds (the “Minimum and Target Revenue Thresholds” or “Revenue Thresholds”) that were to be used to determine the Revenue Milestone Payment for each Earn-Out Period.

g. Exhibit E also confirms the vendors’ entitlement to be paid a License Milestone Payment of $2.5 million upon 180 Smoke obtaining a Standard Processing License prior to December 31, 2020.

h. Provisions were added to the SPA to address what would happen to the Revenue and License Milestone Payments in the event of a change of control of the purchaser. Section 2.04(k) deals with a change of control by an Indirect Sale Transaction (acquisition of all of the assets or change in the voting control of the purchaser). It provides for an “Unearned Milestone Payment Commitment” to be calculated and paid as of the date of the closing of any Indirect Sale Transaction (the “Indirect Sale Milestone Payment Buyout”). This is specified to be a one- time payment to be made in exchange for the cancellation of all unpaid entitlements to “Milestone Payments” (defined to include both Revenue and License Milestone Payments).

i. The Unearned Milestone Payment Commitment is an amount that is calculated in accordance with a formula detailed in Exhibit E to the SPA. That formula starts with the total aggregate Milestone Payment Cap and deducts any Revenue Milestone Payments already received in prior Earn-Out Periods, or that the vendors would have been eligible to receive in prior Earn-Out Periods upon 180 Smoke meeting the prescribed Revenue Thresholds.

j. The vendors and purchaser both understood, and agree for purposes of this proceeding, that the purpose of adding s. 2.04(k) and the Indirect Sale Milestone Payment Buyout to the SPA was to allow the vendors to receive Unearned Milestone Payments that they were prevented from earning due to an Indirect Sale Transaction.

k. Exhibit F to the SPA required Origin House to provide $4.15 million to 180 Smoke in 2019 to support 180 Smoke’s efforts to achieve the Milestones and a further $1 million in 2020 (the “Milestone Budget”). The Milestone Budget contained suggested categories of expenses, including a portion that was earmarked for new stores, but the vendors were given the discretion to decide how to spend it.

l. Representatives of both the 180 Smoke and Origin House understood that the receipt of the funds under the Milestone Budget was important and material to the ability of 180 Smoke to achieve the Milestones.

m. There was no identified “expansion plan” in the SPA, but the Expansion Plan that had been developed by the vendors after the Term Sheet was signed continued to be a point of reference. Representatives of both 180 Smoke and Origin House understood that the ability of the vendors to carry out the Expansion Plan would significantly impact their ability to achieve the Revenue Thresholds.

n. The purchaser made advances under the Milestone Budget in 2019 totalling just over $4.8 million, as follows: (i) Q1 - $855,030; (ii) Q2 - $800,060; (iii) Q3 - $850,000; (iv) Q4 - $2,300,030.

o. Origin House provided additional financial support to 180 Smoke through a $650,000 promissory note issued just prior to closing in January 2019 and $2,104,149 of debt forgiveness granted in February 2019.

p. The principal shareholders of 180 Smoke were asked, and agreed, to sign a voting support agreement and lock-up in connection with a potential acquisition of Origin House on or about March 31, 2019. They were told at that time that signing this agreement could assist in them obtaining the Unearned Milestone Payment under the SPA.

q. On April 1, 2019, Origin House announced that it had entered into the Arrangement Agreement with Cresco that was expected to close at the end of June 2019.

r. In anticipation of the closing of the Arrangement Agreement, Origin House issued a memo on April 3, 2019 that applied to all of its affiliated companies, including 180 Smoke (the “Pre-closing Restrictions Memo”). That memo imposed restrictions upon transactions outside of the normal course, including entering into any new leases, making any capital expenditures in excess of $250,000, entering into any new material contracts, or entering into new employment agreements, without consent from senior management at Origin House.

s. Origin House, in turn, required the consent of Cresco to approve any such restricted activities.

t. After April 2019, 180 Smoke did not receive approval from Origin House for any of the new leases that it proposed. Nor did it receive approval from Origin House for a proposed new hire in April 2019 in time to offer them a position before they became employed elsewhere.

u. 180 Smoke did not succeed in its efforts to secure new retail cannabis licenses in Ontario through the lottery process. Efforts to secure new retail licenses in Alberta were complicated by the Alberta Gaming and Lottery Corporation suspending its review of any new applications for retail cannabis licenses.

v. As of June 13, 2019, it was known that there was going to be at least a several month delay in the closing of the Arrangement Agreement.

w. When asked in a June 24, 2019 email what would happen to the Milestone Payments if the Arrangement Agreement did not close, Origin House indicated to the vendors that it did not agree that any Milestone Payments would be paid for the First Earn-Out Period (in 2019) if the Revenue Thresholds were not met, but offered the assurance that there was, at that time, no reason to believe that the Arrangement Agreement would not close.

x. Concerns were raised in or around early July 2019 by the vendors about the resistance and/or delayed responses from Origin House to proposed new leases and to proposed new hires, and the lack of early significant funding advances under the Milestones Budget. The vendors claimed that these factors were having a negative impact on the ability of 180 Smoke to achieve the Revenue Thresholds in the First Earn-Out Period.

y. The vendors acknowledge that they were operating on the assumption that the Arrangement Agreement might not close and, in that event, they would still have to reach their Revenue Thresholds to receive their Revenue Milestone Payments.

z. On or about August 13, 2019, Origin House confirmed that new leases were on freeze and should not be entertained by 180 Smoke.

aa. In late September 2019 Origin House adjusted its accounting reserve for the Revenue Milestone Payments, which was confirmed in a September 24, 2019 email to reflect a scenario in which the Arrangement Agreement 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.”

bb. In or about September and October of 2019, two former principals of 180 Smoke, and vendors under the SPA (Ashutosh JHA, Boris Giller) resigned their positions. They cited, among other things, the impediments on their ability to achieve the Milestones, which resulted from the proposed Arrangement Transaction. They acknowledge that, by this time, they did not believe that 180 Smoke would be able to achieve the Minimum or Target Revenue Thresholds for the First Earn-Out Period.

cc. By October 20, 2019, Origin House was made aware that, as a result of weakness in the M&A market and challenges to raising capital, Cresco was proposing a new target closing date for the Arrangement Agreement of January 15, 2020, with an outside closing date of January 30, 2020.

dd. The new targeted closing date and outside closing date, which fell within the Second Milestone Earn-Out Period, were not disclosed to the vendors until at or about the time of the closing.

ee. Litigation counsel became involved and various positions were asserted in December 2019. The positions asserted on behalf of Origin House did not involve disclosure of the target and outside closing dates in January 2020. Origin House also did not disclose that it considered that one of the implications of the Arrangement Transaction closing in 2020 instead of 2019 would be that the Unearned Milestone Payment would be reduced by the Annual Target Payment amount of $4,166,667 for the First Earn-Out Period (2019).

ff. The $13 million in revenue earned by 180 Smoke in 2019 did not meet the Minimum Revenue Threshold for 2019, which was $18 million. It is agreed that the vendors would have been eligible to receive the Annual Target Payment for the 2019 Earn-Out Period if 180 Smoke had met the prescribed Revenue Thresholds for that year.

gg. The Arrangement Agreement closed on January 8, 2020. All parties agree that this constituted an Indirect Sale Transaction within the meaning of s. 2.04(k) of the SPA.

hh. On closing, the vendors were paid an Indirect Sale Milestone Buyout Price of $8,333,814.51, representing the Unearned Milestone Payment Commitment. It was calculated based on the Annual Target Payment amounts for the Second and Third Earn-Out Periods (the Milestone Payment Cap less the Annual Target Payment amount for the First Earn-Out Period).

ii. The first time that Origin House clearly asserted that a closing in January 2020 (as opposed to 2019) disentitled the vendors to the Milestone Payment for the 2019 Earn-Out Period was when the 2019 Annual Target Payment Amount of $4.1667 million was deducted from the Sale Milestone Buyout Price. [2]

jj. The respondent concedes that if the Arrangement Transaction had closed in 2019, the Indirect Sale Milestone Buyout Price would have been $12.5 million, representing the full Milestone Payment Cap without deduction.

kk. The License Milestone Payment was dependent upon 180 Smoke obtaining a Standard Processing License by December 2020.

ll. Applications for cannabis processing licenses in 2019 were not supported or consistent with the Pre-Closing Restrictions Memo.

mm. After the closing of the SPA, 180 Smoke retained consultants who assisted in the eventual recovery from the Canada Revenue Agency of SR&ED tax credits in 2020, for fiscal years 2017 and 2018. 180 Smoke incurred consulting fees of $21,565.62 in its efforts to obtain these tax credit reimbursements.

nn. The respondent seeks to deduct those consulting fees from the tax credits that it remits to the vendors. The respondent acknowledges that the applicants are owed payments for SR&ED credits in the net amount of CAD $121,215.88.

A Further Focus on Key Contractual Provisions

A. The Unearned Milestone Payment Commitment

[10] The relevant provisions of the SPA and its schedules have been referenced in the factual determinations above. Some of these key contractual provisions and relevant facts upon which the determination of the issues in this application turns are highlighted below.

[11] The dispute turns, in first instance, on the calculation of the “Unearned Milestone Payment Commitment,” which is set out in Exhibit E to the SPA.

[12] Section 2.04 of the SPA requires Milestone Payments be made by Origin House to the applicants upon 180 Smoke and its subsidiaries (defined as the "Corporations") achieving the Revenue Milestones, as defined in Exhibit "E" to the SPA. Provided that certain Minimum or Target Revenue Thresholds are met, 180 Smoke is entitled to an Annual Target Payment of $4,166,667, plus any Acceleration Payment (as defined in Exhibit "E" of the SPA), for each of the three Earn-Out Periods. The Milestone Payments were, at all times, subject to an aggregate maximum Milestone Payment Cap of $12,500,000.

[13] Section 2.04(k) of the SPA provides:

If, during the First Earn-Out Period, the Second Earn-Out Period, or the Third Earn-Out Period, there is an acquisition of all the assets or a change in the voting control of the Purchaser (an "Indirect Sale Transaction"), then the Vendors shall be paid a one-time payment in exchange for the cancellation of all future entitlements to Milestone Payments for a price equal to 100% of the Unearned Milestone Payment Commitment as of the date of closing of the Indirect Sale Transaction (the "Indirect Sale Milestone Payment Buyout Price"). The Indirect Sale Milestone Payment Buyout Price, if applicable, shall be payable to the Vendors upon the closing of the Indirect Sale Transaction.

[14] The Unearned Milestone Payment Commitment is defined as "an amount to be calculated on any given date as the Milestone Payment Cap less the greater of: (i) the sum of the First Payment and the Second Payment, if any; and (ii) the sum of all Annual Target Payments that the Vendors would have been eligible to receive upon the Corporations meeting the prescribed thresholds in Exhibit E, as of the date of calculation."

[15] Pursuant to Article 2.04(b), achievement of the Milestones is to be reviewed by Origin House on December 31 of each year, beginning with the First Earn-Out Period on December 31, 2019. The Arrangement Transaction (Indirect Sale Transaction) closed on January 8, 2020 during the Second Earn-Out Period. No Annual Target Payments had been made.

[16] The respondent argues that the vendors would have been eligible to receive the 2019 Annual Target Payment if 180 Smoke had met the prescribed Minimum or Target Revenue Thresholds in Exhibit E for the First Earn-Out Period. On that basis, the respondent maintains that the Annual Target Payment for 2019 was properly deducted from the Indirect Sale Transaction Buyout Price.

[17] The vendors argue that their eligibility to receive those payments cannot be divorced from the reason why 180 Smoke did not achieve the Minimum or Target Revenue Thresholds in 2019, which they attribute to the pending Arrangement Transaction. They argue that the purpose and intent of s. 2.04(k) was to compensate them for Revenue Milestone Payments that could not be earned as a result of an Indirect Sale Transaction.

[18] The issues associated with these contractual provisions turn on whether the parties agreed to deduct payments that could not be earned as a result of a “pending” Indirect Sale Transaction, or only a completed and closed Indirect Sale Transaction, and on whether it matters why the Minimum and Target Revenue Thresholds were not achieved in the First Earn-Out Period.

B. The Milestone Budget

[19] Under s. 2.04(d), the purchaser agreed to provide funds to the Corporations in accordance with the budget set out in Exhibit F to enable the Corporations to achieve the Revenue Milestones. Exhibit F contains no timeline for payments to be made by the purchaser under the Milestone Budget within each year.

[20] Under ss. 2.04(f) and (g) of the SPA, the vendors had the right to accelerate the payment of the total Milestone Payment Cap of $12.5 million, less any Milestone Payments already received, if the purchaser failed to make funds available to 180 Smoke to meet the Milestone Budget on or around the times set forth in Exhibit F, after a 30-day written default notice. No written notice of default was ever delivered by the vendors under these provisions of the SPA.

[21] The issue associated with these contractual provisions turns on whether the purchaser was obligated to make advances under the Milestone Budget earlier in the First Earn-Out Period.

C. The License Milestone Payment

[22] In addition to the Revenue Milestones, Exhibit "E" to the SPA provides for the License Milestone Payment, whereupon the purchaser was required to make an additional payment of $2.5 million if 180 Smoke obtained a Standard Processing License issued by Health Canada pursuant to the Cannabis Regulations (SOR/2018-144) prior to December 31, 2020. No such license was issued at the time that the vendors were paid the Indirect Sale Milestone Buyout Price, which, pursuant to s. 2.04(k), was to be a “…one-time payment in exchange for the cancellation of all future entitlements to Milestone Payments [which term includes both Revenue and License Milestone Payments].”

[23] The issue associated with this contractual provision is whether it matters why the Standard Processing License was not obtained prior to January 8 (or December 31), 2020.

D. The Working Capital Adjustment for SR&ED Tax Credits

[24] Section 2.8 of the SPA provides for a working capital adjustment, based on a preliminary net working capital statement to be prepared by the purchaser and subject to a process of objections and eventual submission to an accountant for determination. The parties agree that the SR&ED tax credits for 2017 and 2018 come within this adjustment provision.

[25] The issue associated with this contractual provision is whether the working capital adjustment is to be paid net of consultant’s fees incurred by 180 Smoke to apply for these tax credits.

E. The Entire Agreement Clause

[26] Section 8.07 of the SPA contains the following “entire agreement clause,” which may have some bearing on some of the contract interpretation questions:

This Agreement and the other Transaction Documents constitute the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein and therein and supersedes all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. In the event of any inconsistency between the statements in the body of this Agreement and those in the other Transaction Documents, the Exhibits and Disclosure Schedules (other than an exception expressly set forth as such in the Disclosure Schedules), the statements in the body of this Agreement will control to the extent of such inconsistency.

The Issues to be Decided

[27] The issues to be decided on this application are as follows:

a. Are the applicants entitled to be paid the Revenue Milestone Payment in the amount of $4,166,185.49 for the 2019 Earn-Out Period? i. Under the terms of the SPA; or ii. As expectation damages for the purchaser’s breach of its duties to act honestly and in good faith in the performance of its contractual obligations and/or in the exercise of its contractual discretion?

b. Are the applicants entitled to the License Milestone Payment in the amount of $2,500,000 as expectation damages for the purchaser’s breach of its duty to act honestly and in good faith in the performance of its contractual obligations and/or in the exercise of its contractual discretion?

c. Can the respondent challenge the vendors’ claims for damages or is it estopped from doing so?

d. Are the vendors entitled to be paid the SR&ED tax credits for 2017 and 2018 received in 2020 (net of acknowledged amounts accounted before the closing of the SPA), or are the amounts owing subject to deduction for the consultant’s fees?

e. Is a trial required to determine any of the issues raised?

Analysis

A. Are the vendors entitled to receive the Revenue Milestone Payment for the 2019 Earn-Out Period?

i. Based on the strict interpretation of the SPA?

[28] Under the terms of the SPA there are two ways in which the vendors could be entitled to receive Revenue Milestone Payments. Either (i) by earning them through the achievement of the Minimum and Target Revenue Thresholds for each Earn-Out Period (in 2019, 2020, and 2021) as provided for in s. 2.04 and Exhibit “E” to the SPA; or (ii) in the event of an Indirect Sales Transaction (as occurred when Cresco acquired Origin House through the Arrangement Agreement), through the Indirect Sale Milestone Payment Buyout of any Unearned Milestone Payment Commitment, as provided for in s. 2.04(k) and Exhibit “E” to the SPA.

[29] The vendors have received the Unearned Milestone Payment Commitment for the 2020 and 2021 Earn-Out Periods through the Indirect Sale Milestone Payment Buyout Price that was paid to them, calculated as at the date of the closing of the Arrangement Agreement on January 8, 2020.

[30] There is no question that the Minimum and Target Revenue Thresholds the First Earn-Out Period were not achieved in 2019. The issue that remains to be determined is whether the Annual Target Payment for 2019 should have been deducted from the Milestone Payment Cap to arrive at the Indirect Sale Milestone Payment Buyout Price that the vendors received upon the January 8, 2020 closing of the Indirect Sale Transaction (the Arrangement Transaction).

[31] Since this issue turns on the definition of the Unearned Milestone Payment Commitment, it is worth repeating. It is "an amount to be calculated on any given date [which, for purposes of calculating the Indirect Sale Milestone Payment Buyout Price in this case is the January 8, 2020 closing date of the Arrangement Transaction per s. 2.04(k)] as the Milestone Payment Cap [$12.5 million] less the greater of: (i) the sum of the First Payment and the Second Payment, if any [there were none in this case]; and (ii) the sum of all Annual Target Payments that the Vendors would have been eligible to receive upon the Corporations meeting the prescribed thresholds in Exhibit E, as of the date of calculation ." [Emphasis added.]

[32] The goal of contract interpretation is to determine the objective intent of the parties and the scope of their understanding at the time the contract was made. To do this, legal principles are applied to the words of the contract, considered in light of the factual matrix or circumstances: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47 and 50.

[33] The parties agree that the Revenue Milestone Payments were included in Exhibit E to the SPA to bridge a significant valuation gap between 180 Smoke and Origin House when they were determining the purchase price to be paid to the vendors. 180 Smoke valued the company at $40 million and Origin House valued it at only $25 million. The Revenue Milestone Payments were a way to allow the vendors the opportunity to demonstrate that the revenue earning potential of 180 Smoke was greater than what its most recent financial statements suggested, justifying a higher purchase price.

[34] The parties also agree that the general purpose behind the inclusion of s. 2.04(k) in the SPA was to address the possibility of an Indirect Sale Transaction and the recognition that, were such a transaction to occur, the introduction of another entity with different priorities could impact the ability of 180 Smoke to meet its Minimum and Target Revenue Thresholds. This, in turn, could impact the receipt of the Milestone Payments that the vendors had bargained for the opportunity to justify.

[35] The formula contained in the definition of the Unearned Milestone Payment Commitment provides for the deduction of the greater of: (i) any Revenue Milestone Payments already made in respect of Earn-Out Periods prior to the one in which the Indirect Sale Transaction closed; or (ii) Revenue Milestone Payments that were not paid in those earlier Earn-Out Periods, but which the vendors would have been eligible to receive if the minimum revenue and target thresholds had been met in those earlier Earn-Out Periods.

[36] Section 2.04(k) of the SPA provides that the Unearned Milestone Payment Commitment is to be calculated as of the closing date and payable upon the closing of the Indirect Sale Transaction.

[37] The words of the SPA, when read in a manner consistent with the factual matrix, including the acknowledged purpose for which s. 2.04(k), are clearly tied to the closing of an Indirect Sale Transaction. The Revenue Milestone Payments for any Earn-Out Period that ends after the closing of an Indirect Sale Transaction are clearly required to be paid as at the closing. This compensates the vendors for the anticipated inability of 180 Smoke to achieve the Minimum or Target Revenue Thresholds in the post-closing Earn-Out Periods, in which the vendors would be thus unable to “earn” their Revenue Milestone Payments. Instead, they are replaced with an “Unearned Milestone Payment Commitment.”

[38] The SPA does not provide for the vendors to receive Revenue Milestone Payments for Earn-Out Periods that ended prior to the closing; to the contrary, amounts paid, or that would have been paid if the Minimum or Target Revenue Thresholds had been met, are to be deducted from the Target Milestone Cap. There is no presumption in the SPA that a “pending” Indirect Sale Transaction would interfere with the ability of 180 Smoke to achieve the Minimum or Target Revenue Thresholds during the Earn-Out Periods ending prior to an Indirect Sale Transaction, and no allowance for an adjustment based on actual interference.

[39] The formula for calculating the Unearned Milestone Payment Commitment, and in turn the Indirect Sale Milestone Payment Buyout Price, is not based on whether or not an Indirect Sale Transaction actually did interfere with the ability of 180 Smoke to achieve the Minimum or Target Revenue Thresholds in a given Earn-Out Period. The adjustments provided for, while purposeful, are also arbitrary at some level. Another example of this is the payment for the License Milestone, another Milestone Payment provided for in Exhibit E to the SPA, which appears to be extinguished by the payment of the Indirect Sale Milestone Payment Buyout Price, even if the payment for the achievement of that milestone has not yet been received by the vendors.

[40] One of the cardinal rules of contract interpretation is that the parties are presumed to have intended what they included, and what they did not include, in the contract. Contractual certainty depends on this. It is objectively reasonable in this case that the parties chose not to introduce into the formula for the acceleration of the Annual Milestone Payment Amounts a fact-based determination of whether, and to what extent, an Indirect Sale Transaction actually interfered with the achievement of the Revenue Milestones or the License Milestone.

[41] It may well be that the parties did not expressly turn their minds in the drafting of the SPA and its schedules to the specific situation that transpired, in which the Arrangement Agreement was signed early in the First Earn-Out Period but did not close until the Second Earn-Out Period. However, drafters of contracts are not expected to anticipate every circumstance that might arise and expressly provide for it. The contract interpretation exercise nonetheless considers whether the words of the contract, on their face, can be readily applied to the situation at hand. They can be in this case, albeit in a manner that the vendors are displeased about.

[42] The vendors are not asserting, and have never taken the position, that they would not have been eligible to receive the 2019 Annual Target Payment upon 180 Smoke meeting the prescribed thresholds for 2019 under Schedule “E”. Consistent with that position, 180 Smoke (and the individual vendors until they resigned) continued to work towards the achievement of the Revenue Thresholds, despite the obstacles that they say they faced.

[43] However, the vendors contend that finding them to have been “eligible to receive” the 2019 Milestone Payment if 180 Smoke had achieved the Revenue Thresholds for the 2019 Earn-Out Period, when their ability to achieve those thresholds in 2019 was impeded by steps taken in furtherance of the Arrangement Agreement (for example, by the Pre-Closing Restrictions Memo) is not fair or commercially reasonable interpretation of the SPA. They thus ask the court to read or interpret the words “eligible to receive” the 2019 Milestone Payment as being qualified by some assessment of the ability to achieve it and the reasons for why it was not achieved.

[44] Even if it could be shown that the purchaser’s Arrangement Agreement with Cresco did, in fact, interfere with the attainment of the prescribed thresholds for the 2019 Earn-Out Period, and even if this is, in theory, an unanticipated scenario that, if adverted to at the time of drafting of the SPA might have been considered to be within the intended objectives of s. 2.04(k) of the SPA, the words of s. 2.04(k) are clear and do not create an exception for this scenario. The Unearned Milestone Commitment Payment and the Indirect Sale Milestone Buyout Price that it determines are only addressing unearned Revenue Milestone Payments in future Earn-Out Periods, not payments that were made, or not made, in respect of Prior Earn-Out Periods.

[45] Whether the specific consequence was contemplated and addressed or not, there is no context or purpose that can change the unambiguous meaning of the words of the SPA. To do what the applicants ask in this case to avoid the deduction of the 2019 Annual Target Payment would not be consistent with the words of the contract, which dictate the opposite result. Here, the applicants are asking the court to do something that is beyond the scope of permissible contract interpretation and look behind the words of a contract and effectively imply a further or expanded exception: see Sattva Capital Corp. v. Creston Moly Corp., at para. 57; High Tower Homes Corporation v. Stevens, 2014 ONCA 911, at para. 39.

[46] The SPA contains a formula that covers the generalities of what might be expected to occur using a specific formula that draws lines in the sand, which may work to the advantage of one or the other party depending on the precise circumstances. The fact that the closing occurred in January 2020 instead of before the end of 2019 has given an apparent advantage to the purchaser, in that it is acknowledged that a closing in 2019 would not have resulted in the deduction of the 2019 Annual Target Payment. Conversely, the purchaser argues that the entire Indirect Sale Milestone Payment Buyout Price (even with the deduction) is a windfall to the vendors who might have never achieved the Revenue Targets in any of the Earn-Out Periods. These are the prescribed outcomes under the contract, however.

[47] As at the date of calculation [the January 8, 2020 closing date], the vendors would have been eligible to receive $4,166,185.49, representing the Milestone Payment for the First Earn-Out Period, which ended December 31, 2019, if 180 Smoke had achieved the prescribed Minimum or Target Revenue Thresholds for 2019. Under the prescribed SPA formula, that is the sum that is to be deducted from the Milestone Payment Cap to determine the Indirect Milestone Payment Buyout Price.

ii. Based on the organizing principle of good faith in contractual dealings?

[48] As a matter of strict interpretation of the SPA, the vendors have been found not to be entitled to receive the portion of the Unearned Milestone Payment Commitment for the 2019 Earn-Out Period. It is not disputed that they would have received it if the Arrangement Agreement had closed in 2019. In that circumstance, they would not have been eligible for an Annual Target Payment because it is only calculated at year end, so there would have been no deduction from the Milestone Payment Cap.

[49] There is no suggestion or contention that the delay in the closing of the Arrangement Transaction into 2020 was intentional or the fault of any action or inaction on the part of the purchaser. If there had been, the analysis of the alleged breach of the duty of good faith in the performance of the purchaser’s obligations and/or in the exercise of its discretion under the SPA would be different.

[50] In the circumstances of this case, the vendors contend that 180 Smoke was hindered in its efforts to implement its Expansion Plan and from achieving the 2019 Minimum and Target Thresholds, which in turn prevented the vendors from receiving their Revenue Milestone Payment in 2019, as a result of:

a. alleged representations (outside of the SPA) about the level of discretion and autonomy that the vendors would continue to have in the operation of 180 Smoke and about the timing of the financial support to be provided under the Milestone Budget, which were not honoured after the closing of the SPA;

b. Origin House’s failure to approve leases and new hires in a timely manner or at all, to support the application for a Standard Processing License, to release funds under the Milestone Budget in a timely manner, and the imposition of other restrictions under the Pre-Closing Restrictions Memo; and/or

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

all of which the vendors say can be attributed to the Arrangement Agreement with Cresco.

[51] The vendors argue that, by virtue of these actions or inactions, the purchaser was not performing its contractual obligations to the vendors or exercising its contractual discretion under the SPA honestly and in good faith.

[52] In these circumstances, the vendors further argue that the court can and should presume that at least the Minimum if not the Target Threshold for 2019 revenue would have been achieved if 180 Smoke had been able to open new stores and hire new management personnel as envisioned by its Expansion Plan. This measure of damages does not require proof of loss or proof that the stores would have opened and that sufficient additional revenue would have been generated. This only requires proof that 180 Smoke was deprived of the opportunity to attempt to generate this revenue because of the purchaser’s failure to perform its contractual obligations and its failure to exercise its contractual discretion in good faith and in furtherance of the objectives of the SPA. See C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, at para. 116.

[53] The importance of the organizing duty of good faith in contractual performance was affirmed by the Supreme Court of Canada in the case of Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. It requires that parties "generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily." A contracting party must have "appropriate regard" for the "legitimate contractual interests" of the contracting partner: see Bhasin, at paras. 60, 63, and 65.

[54] The Supreme Court further clarified in the case of Callow (at paras. 80, 81 and 83) that, while the duty to act honestly does not impose a duty of loyalty or of disclosure or require a party to forego advantages following from a contract, it can give rise to a duty to speak up (or make disclosure) to correct a misapprehension that the other party is operating under in respect of a matter that is directly linked to the performance of the contract.

[55] In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1, at para. 70, the Supreme Court further considered the good faith obligation in the exercise of a contractual discretion. The Court concluded that the duty to exercise contractual discretion is breached where the discretion is exercised unreasonably, which means in a manner unconnected to the purposes underlying the discretion.

[56] In Bhasin, although not directly at issue in that case, the Supreme Court also affirmed (at para. 49) the previously recognized duty of parties to co-operate in good faith to achieve the objects of the contract (citing Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072).

a. Alleged (mis) representations outside of the SPA

[57] The alleged assurances about autonomy to implement the Expansion Plan and early advances under the Milestone Budget were not the focus of the written or oral submissions. While these may add some colour, the vendors have note advanced a misrepresentation claim and the duty of good faith and honest performance of contractual obligations is not a way around the requirements for proving such a claim in the contractual context.

[58] An application predicated on the interpretation of a contract that contains an entire agreement clause is not the appropriate forum or legal analytic framework in which to dive into these sorts of allegations and I do not propose to do so.

b. Delayed approvals and other restrictions associated with the Arrangement Transaction

[59] The alleged breaches by Origin House of the duty of good faith in the exercise of its discretion with respect to the timing of release of the Milestone Budget, the timeliness and willingness to approve new leases and new hires, and its general reluctance to support the advancement of 180 Smoke’s Expansion Plan are tied up with the Arrangement Transaction.

[60] The Pre-Closing Restrictions Memo is the obvious starting point for these assertions, as it very clearly does indicate a level of restraint and caution towards spending pending the closing of the Arrangement Transaction, which was at the time expected to happen within three months. 180 Smoke would require approval from Origin House for any expenditure over $250,000, even if explicitly contemplated by the Milestone Budget, and a freeze on new leases was imposed and reconfirmed in August of 2019. These sorts of restrictions would not have been acceptable in a world without a change of control transaction.

[61] However, by April 2019 the parties were operating in a world that anticipated an Indirect Sale Transaction, the potential implications of such were both contemplated by and provided for in the SPA. It would be objectively reasonable for these commercial parties to have expected that Origin House would have to agree to the sorts of restrictions imposed under the Pre-Closing Restrictions Memo, essentially requiring 180 Smoke to carry on business in the normal course and not to enter into any new material transactions or contracts outside of the normal course without approval, upon the signing an agreement for a change of control transaction and pending its closing.

[62] With the potential for such a transaction in mind, the parties turned their minds specifically to concerns that it might interfere with the ability of 180 Smoke to achieve its Revenue Thresholds, and the Earn-Out Payments, when they negotiated the inclusion of s. 2.04(k) into the SPA. They provided for the Indirect Sale Milestone Buyout Price, to compensate for the lost opportunity to “earn” the additional Milestone Payments, and be paid instead for “unearned” equivalent amounts but only after, not before, the closing of the transaction. This is addressed in more detail in the previous section of these reasons. Having addressed and provided for consequences associated with a change of control transaction, it is difficult to find the foreseeable real-world and practical implications of such that were born out in the Pre-Closing Restrictions Memo to be a breach of the purchaser’s duty of good faith and honest performance under the SPA.

[63] Further, it is difficult to find that the purchaser acted with a lack of good faith, or breached a duty to co-operate, in the timing of its release of funds under the Milestone Budget in 2019 when there were no specified deadlines in the SPA or its schedules for how that budget would be funded over the course of the year. Nor did the vendors give notice of any complaint under s. 2.04(f) and (g) of the SPA regarding the timing of the advances of funds, which was a recourse available to them if they felt that the purchaser was not adhering to the express or implied terms of the agreement for the timing for the release of funds. Approximately half the budget was advanced in tranches throughout Q1, Q2, and Q3, and the other half was advanced in Q4.

[64] Within this contractual context, after acquiring 180 Smoke, Origin House was entitled to enter into an Indirect Sales Transaction to maximize the value of its asset — 180 Smoke. It was entitled to pursue its legitimate "economic self-interest" that the Supreme Court refers to in Bhasin (at para. 70) and Wastech (at para. 112). With the negotiated contractual protection that was provided for the vendors, there was nothing untoward or dishonest about Origin House pursuing a further change of control transaction, especially one that was specifically contemplated by the SPA.

[65] In this context, the court does not consider any restrictions on 180 Smoke’s ability to pursue its Expansion Plan that arose from the Arrangement Agreement and the Pre-Closing Restrictions Memo to constitute a breach of the duty of good faith in the manner in which Origin House performed its obligations under the SPA. They were not imposed arbitrarily or capriciously or without regard for the legitimate contractual interests of the vendors (see Bhasin, at paras. 60, 63, and 65).

[66] Nor did the exercise of discretion by Origin House in decisions made about the timing of funds advanced under the Milestone Budget or about the granting of approvals for new leases, new hires or new license applications pending the closing of the Arrangement Transaction constitute a breach of the duty of good faith. These decisions were made with regard to the purpose of the Revenue Thresholds and of Milestone Payments, as modified in the context of a change of control transaction and the acknowledged potential consequences provided for under the SPA (see Wastech, at para. 70).

c. The failure to disclose the extension of the closing date to January 2020

The breach of the duty of good faith and honest performance

[67] The duty of honesty is alleged to have been engaged by the statements made to the vendors up until October 2019 by representatives of Origin House that the Arrangement Agreement was expected to close in 2019. If this had occurred, the Indirect Sale Milestone Buyout Price would have been the full Milestone Cap, without any deductions, irrespective of whether or not the Revenue Milestones were achieved.

[68] After becoming aware in late October of 2019 that Cresco was moving the target and outside closing dates to January of 2020, the vendors argue that the duty of good faith and honest contractual performance required Origin House to disclose this new target closing date to the vendors. According to the purchaser, as evidenced by its position in this litigation, a delay of the closing even by just a few weeks into the following year had a material impact on the vendors’ financial interests and entitlements under the SPA.

[69] The vendors had been told that if the Arrangement Transaction did not close at all, the purchaser’s position was that they would not receive the Revenue Milestone Payment for the First Earn-Out Period (2019) unless the Revenue Milestones were achieved by 180 Smoke in 2019. Although this is not formally conceded by the vendors, I find on the evidence (including admissions to that effect by two of the vendors 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.

[70] By that time, 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, nor had 180 Smoke obtained a Standard Processing License, despite having received half the Milestone Budget. Furthermore, the two vendor representatives had by that time resigned.

[71] Thus, the reality of the situation for the vendors at this point was that the only way that they stood to receive the 2019 Earn-Out Payment was if the Arrangement Agreement closed in 2019. Their contractual rights under the SPA were directly impacted by the timing of that closing. They had been told repeatedly up until October 2019 that the closing was going to take place in 2019. There is no question that this change in the closing date materially impacted the vendors’ contractual entitlements by virtue of operation of the terms of the SPA, as the court has now found.

[72] This is said by the vendors to be the very type of situation in which there is a duty to speak up (or make disclosure) to correct a misapprehension that the other contracting party was operating under, that the Arrangement Transaction would be closing in 2019. The duty to correct the vendors’ understanding about the anticipated closing date requires the court to consider whether this undisclosed information was directly linked to the performance of the SPA: see Callow, at paras. 81 and 83.

[73] When the purchaser failed to tell the vendors about the proposed new target and outside closing date after the new date was suggested by Cresco, the vendors were, unbeknownst to them, left vulnerable to losing the 2019 Annual Target Payment that they would have received if the Arrangement Transaction had closed in 2019 despite not having achieved the Minimum or Target Revenue Thresholds.

[74] The vendors eggs were by this time all in the basket of a 2019 closing in order to obtain the purchase price adjustments that they had maintained throughout that they should receive. This establishes a sufficient link between the undisclosed information about the change in the closing date to 2020 and the performance of the SPA.

[75] I find that Origin House breached its duty of good faith and honest performance of the SPA by having advised the vendors repeatedly until October 2019 that the Arrangement Agreement 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. The obligation was not greater than one of disclosure to correct the misinformation. I agree with the purchaser that the duty in this case would not extend to explaining to the vendors the effects and implications for the vendors of the Arrangement Transaction closing in 2020 as opposed to 2019. That is something the court can reasonably presume the vendors could (and would) have figured out on their own.

[76] The court is mindful of the Supreme Court’s caution from Bhasin, at para. 70, that:

The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest . . . . The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or "palm tree" justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

[77] This is not a case that is being driven by a concern about a hidden agenda or hidden motives of the purchaser. There has been no finding that they intentionally misled the vendors about the closing date. But they did fail to update important information about the closing date that they had previously provided, and it is that failure that leads to the finding that they breached their duty of good faith and honesty in this case.

Proof of Loss

[78] Causation and damages are an integral part of a breach of contract claim. That does not change just because the alleged breach is of the duty of good faith and honest performance of the contract.

[79] The vendors place significant reliance upon a legal presumption that they ask the court to draw, based on the authority of the Callow decision, that they lost an opportunity to do something that might have led to a different outcome for them as a result of the non-disclosure of the postponement of the closing date to January 2020. In determining the appropriate measure of damages, the Supreme Court in Callow noted (at paras. 114 – 116) that the injured party in such circumstances should be compensated for the lost opportunity to protect themselves, even if there may not be clear evidence regarding the specifics of what was lost (para. 116):

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).

[80] In the Lamb case referred to by the Supreme Court in this passage, the defendants had taken gold from the plaintiff’s adjacent mine and intermixed their gold supplies so that it was unclear which gold belonged to the plaintiff. The Supreme Court stated that the defendants by their own wrongful acts made it impossible to ascertain the expenses at issue. The Court relied upon English authorities for the principle that “if a man by his deliberately tortious act destroys the evidence necessary to ascertain the extent of the injury he has inflicted, he must suffer all the inconvenience which is the result of his own wrong.” The Court was not willing to speculate “for the benefit of deliberate wrongdoers” and the defendants were held accountable for the value of any gold that they did not strictly prove to have come from their own mine.

[81] In Callow, the Supreme Court similarly found that Baycrest’s intentional withholding of information about the non-renewal of their contract prevented the defendant from “conclusively proving” what other contracts it might have been able to secure and the value of those contracts. However, the presumption at law that the Supreme Court referred to in Callow was premised on evidence of other available opportunities. This is evident from the following passage in paragraph 116 that preceded the quoted passage that the applicants seek to rely upon:

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. [Emphasis added.]

[82] Given the history of dealings between the parties in this case and the importance to the vendors of receiving the Revenue Milestone Payments, it is reasonable to infer that, if the vendors had been told about the changed closing date, they would have taken all steps available to them to protect their entitlement to the full Indirect Sale Milestone Buyout Price, without any deduction. That was the theoretical opportunity that was lost.

[83] However, the court still must consider in this case whether the vendors have met at least a minimum evidentiary threshold of establishing that there were opportunities or avenues that might have been pursued by the vendors if they had received the undisclosed information about the closing date in October 2019, through which they could have avoided the deduction of the Annual Target Payment for 2019 from the Milestone Payment Cap in the calculation of the Indirect Sale Milestone Payment Buyout Price under s 2.04(k) and Schedule “E” of the SPA.

[84] The presumption that the Supreme Court refers to in Lamb and Callow is one that deals with evidentiary difficulties, but it still requires an evidentiary premise. The injured party has an onus to prove the facts upon which damages are estimated, but where the assessment is difficult because of the nature of the damages proved, that will not be a ground for refusing substantial damages. See Borrelli v. Chan, 2018 ONSC 1429, at para. 935, leave to appeal refused, 2019 ONCA 525.

[85] It is not open to the vendors to argue that there was anything they could have done in October 2019 to enable 180 Smoke to achieve its Minimum or Target Revenue Thresholds for the First Earn-Out Period when their representatives conceded on cross-examination that by the time they resigned (which was before the closing date was moved to 2020), and despite their efforts made until then, there was little or no chance of those Revenue Thresholds being achieved in 2019.

[86] Under this contract and in these circumstances, the only way to avoid the deduction of the Annual Target Payment for 2019 from the Milestone Payment Cap in the calculation of the Indirect Sale Milestone Payment Buyout Price under s. 2.04(k) and Schedule “E” of the SPA would have been to ensure the Amalgamation Transaction closed in 2019. To the extent that the vendors had any rights or recourse or leverage to influence the timing of the closing, they should have been afforded the opportunity to exercise them. However, they have not put forward evidence of any concrete rights or recourses that could plausibly be 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.

[87] During oral argument, it was postulated by counsel that they might have had dissent rights, rights under the lock up and voting agreement, or some other influence or leverage over Cresco and Origin House to force a change in the closing date (or some other negotiated outcome). Nothing concrete was identified. None of the specific rights identified can be linked to the closing date. The prospect of the vendors giving a notice under s. 2.04(f) and (g) of the SPA (that would have accelerated the Milestone Payment Cap on different grounds) was also postulated, but that would require some evidence of a failure to meet a funding date provided for in the Milestone Budget at Exhibit “F” to the SPA. However, there were no specified dates within the 2019 calendar year that were missed.

[88] Damages in a claim for breach of contract are supposed to put the vendors in the position they would have been if they had been told in October 2019 that the closing date had been moved to January 2020. The court does not need to know precisely what the vendors would have done and whether they would have succeeded, but there needs to be 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.

[89] Inferences must be made based on facts that reasonably support them. There is in this case an absence of facts from which the court can reasonably infer that there were steps that the vendors could have taken to influence the parties to move the closing date to December 2019. That is not something that the court can infer lightly in a situation where minority shareholders who have signed a voting and lock-up agreement would be trying to influence the timing of a large cross-border public company Arrangement Transaction. The suggestion that they could have been “a fly in the ointment” in the context of the Arrangement Transaction is not a sufficient evidentiary threshold in these circumstances.

[90] This leaves the vendors with a pyrrhic victory, in that they were wronged and should have been told about the move of the closing date, but it has not been established by inference or otherwise that there was any reasonable opportunity that they could have availed themselves of to change the calculation of the Indirect Sale Milestone Payment Buyout Price to include the 2019 Annual Target Payment that they claim to have lost.

[91] Thus, there are no damages inferred or proven that flow from this breach, subject to the estoppel argument addressed below.

B. Are the vendors entitled to receive the License Milestone Payment?

[92] Exhibit E to the SPA provides for a License Milestone Payment, as follows:

…upon the Corporations obtaining a License [defined to be a Standard Processing License issues by Health Canada pursuant to the Cannabis Regulations (SOR/018-144)] prior to December 31, 2020, the Vendors shall be entitled to a payment from the Purchaser of $2,500,000 (the "License Milestone", together with the Revenue Milestones, the "Milestones").

[93] No steps had been taken to obtain a Standard Processing License as of the date of the closing of the arrangement transaction with Cresco. The court was not directed to any evidence establishing that a Standard Processing License was obtained at any time prior to December 31, 2020.

[94] Origin House admits that it did not take, or provide funding or authorize 180 Smoke to take, any steps to obtain a Standard Processing License because it was under the (possibly mistaken) belief that 180 Smoke (or its affiliates) could not own a Standard Processing License while also holding retail cannabis licenses. While 180 Smoke did not succeed in the lottery to be granted additional retail cannabis licenses in Ontario and there was a suspension of the government’s review of applications for new retail cannabis licenses in Alberta, 180 Smoke did already hold some retail cannabis licenses.

[95] The vendors appear to have understood that the proposed change of control transaction with Cresco prevented 180 Smoke from obtaining the Standard Processing License.

[96] The deadline for obtaining the Standard Processing License was not until December 31, 2020. There is no evidence to suggest the fact that the application for the Processing License may have been stalled in 2019, whether due to the erroneous belief about eligibility to apply for such license or due to the pending closing of the arrangement transaction with Cresco, impacted the probability of a Standard Processing License being obtained before the end of 2020.

[97] Furthermore, the Unearned Milestone Payment Commitment to be paid pursuant to s. 2.04(k) is stated to be in exchange for the cancellation of all future entitlements to Milestone Payments. Those Milestone Payments are defined in s. 2.04(a) to be the additional payments in the amounts on the terms set forth in Exhibit “E.” The License Milestone Payment is defined independently in Exhibit E from the Revenue Milestones, but they are defined collectively to be the “Milestones”. The consequences were negotiated and expressly provided for in the formula for the Indirect Sale Milestone Payment Buyout Price, which accelerated the payment of certain Revenue Milestones (up to the Milestone Payment Cap). The formula specifically did not provide for the acceleration of the License Milestone, and to the contrary, it extinguished the vendors’ entitlement to receive that $2.5 million. The change in the closing date had no impact on this outcome.

[98] Even if there is an argument that the entitlement to the License Milestone Payment was not extinguished by the payment of the Indirect Sale Milestone Payment Buyout Price under s. 2.04(k), if the change of control transaction was itself an impediment to attaining such a license in 2019, that would not be a breach by the purchaser, for the same reasons that the other impediments that the change of control transaction introduced were not found to be breaches of the contractual provisions dealing with the Revenue Milestone Payments (discussed earlier in these reasons).

[99] The arguments that Origin House breached its duty of good faith and honesty in the performance of its contractual obligations, by failing to co-operate in, or make itself, the application for the Standard Processing License and the exercise of its discretion regarding funding and approvals to enable 180 Smoke to apply for the license similarly fail on the same analysis. These actions must be viewed within the context of the SPA and the recognition that the parties contemplated and provided for what would be done in a situation where a change of control transaction arose, recognizing that it might impact their performance under the SPA.

C. Can the respondent challenge the amounts claimed or is it estopped from doing so?

[100] The applicants rely upon estoppel by convention and estoppel by representation. Their reliance on these doctrines appears to be a means to address possible concerns about their inability to “prove” that they have suffered damages as a result of any breach of the purchaser’s contractual obligations and duties that the court may find in their favour. This estoppel argument was tied predominantly to the assertion made by the vendors about the impediments to 180 Smoke’s achievement of the Revenue Thresholds attributed to the Pre-Closing Restrictions Memo (and other actions or inactions tied to the Arrangement Agreement) that were said to be breaches of the purchaser’s duty of good faith.

[101] In that context, it is alleged by the vendors that they relied upon Origin House's purported "assurances" that the Cresco Labs Transaction would close in 2019 by altering the efforts undertaken towards the achievement of 2019 Minimum or Target Revenue Threshold such that it would be inequitable to deprive 180 Smoke of the 2019 Milestone Payment: see Ryan v. Moore, 2005 SCC 38, [2005] 2 S.C.R. 53, paras. 5 and 59.

[102] In their factum, the vendors assert as follows:

The assurances from the Respondent regarding the closing date were intended to be relied on by the Applicants - and they were relied on by the Applicants - as comfort that they did not need to be concerned or take any further steps to protect themselves because the change in control transaction was going to close in 2019.

[103] However, the alleged breaches associated with the Arrangement Transaction, and the impediments it created for the achievement of the Minimum or Target Revenue Thresholds, were not established in this case (so the estoppel arguments cannot assist in the proof of those claims). More importantly in the context of the estoppel arguments, even if these breaches had been established, the vendors’ representatives have admitted in this case that they did not rely on the assurances about the 2019 closing of the Arrangement Transaction in the manner in which they have asserted. To the contrary, they acknowledge that they always conducted themselves (until they effectively abandoned those efforts altogether and resigned) on the assumption that the Arrangement Transaction might not close and that the Revenue Thresholds would have to be achieved.

[104] Therefore, even if it had been established that the ability to achieve the Minimum or Target Revenue Thresholds was impeded by alleged breaches by the purchaser while the Arrangement Transaction was pending (which, for reasons outlined earlier in this endorsement, it has not been), the vendors’ inability to prove their damages would not be remediated by recourse to the estoppel doctrines, which doctrines are unquestionably dependent upon proof of detrimental reliance: see H.S.C. Aggregates Ltd. v. McCallum, 2014 ONSC 6214, at para. 105 and Ryan at para. 59.

[105] The estoppel arguments were not directly argued in the context of the finding that has been made in the vendors favour, that the purchaser breached its duty of good faith contractual performance by failing to disclose the change in the closing date from 2019 to 2020. The estoppel arguments do not operate independently in the context of this particular breach. They are, rather, merged in the damages analysis under the principles enunciated in Callow, which allow the court to presume as a matter of law that the harmed party would have availed itself of opportunities to protect its interests in circumstances where the breach by the other contracting party precludes it from conclusively proving what would have happened if the breach had not occurred.

[106] The vendors cannot avoid meeting the basic requirements to raise the presumption that the Supreme Court of Canada affords in Callow by an estoppel argument. The evidentiary foundation for the presumption still must exist, and the court has found in this case that it has not been established. The estoppel arguments cannot remedy this threshold evidentiary problem.

D. Are the vendors entitled to receive the gross total SR&ED tax credits, or only net of consultant’s fees?

[107] The respondent acknowledges that the applicants are owed payments for SR&ED tax credits that were received after closing by 180 Smoke. These fall under the working capital adjustment to be made under s. 2.08 of the SPA. This adjustment is based on a final net working capital calculation.

[108] These credits, that were not received by 180 Smoke until 2020, totalled CAD $188,000.49 ($90,437 for 2017 and $97,557 for 2018). The parties agree to an initial reduction from the total credits received to account for half of the 2017 credit that had been recorded as a receivable by 180 Smoke prior to closing, so that brings the total down to $142,775.50. The parties also agree that subject to the deduction for consultancy fees that the purchaser wishes to make in the amount of $21,565.62, these SR&ED credits are payable by the purchaser to the vendors as a purchase price adjustment.

[109] According to the purchaser, a consultant was retained in 2020 to assist in the process of applying for these credits and dealing with the Canada Revenue Agency. The consultant was paid $21,565.62 by 180 Smoke. These facts are not disputed. The parties disagree about whether or not this consultancy fee should be deducted from the amount of the adjusted SR&ED credits in the amount of $142,775.50. Neither has provided any guidance on the basis on which they should, or should not, be deducted for purposes of calculating this aspect of the purchase price adjustment under s. 2.08.

[110] While there is some basic logic to the idea that an expense incurred to obtain the tax credit, even if in a different tax year, should be netted against the credit to the extent it forms part of a final net working capital calculation, no assistance has been provided to the court in this case about why or how that calculation could or should be done, whether from an accounting or other perspective. In the absence of any guidance as to how or why the consultancy fees should be deducted in the final accounting to determine the working capital adjustment to the purchase price under s. 2.08 of the SPA, the purchaser has not met its onus to establish that anything further should be deducted from the acknowledged amount of the post-closing SR&ED tax credits received in the amount of $142,775.50.

[111] The acknowledged amount of $142,775.50 should thus be paid by the purchaser to the vendors.

E. Are there any issues that require a trial for their determination?

[112] A dispute that depends upon the interpretation of a contract may be brought as an application pursuant to r. 14.05(3)(d) of the Rules of Civil Procedure. Rule 14.05(3)(h) also permits a proceeding to be brought by application in respect of any matter where it is unlikely that there will be any material facts in dispute requiring a trial. While questions of contract interpretation may presumptively be raised by way of application, if the essence of the dispute, or the determination of whether there has been a breach and/or the damages payable, require the determination of disputed material facts or credibility issues that require a trial, some or all of the issues may need to proceed by way of trial. Depending on the particular circumstances, that may be as simple as a trial of an issue, or it may first entail the conversion of the application to an action.

[113] The 2010 amendments to the summary judgment rule have been interpreted to give the application judge discretion to resolve disputed facts where it is possible and considered to be in the interests of justice to do so based on the paper record in an application. In so doing, courts can, if considered appropriate, weigh the evidence, evaluate the credibility of a deponent, and draw any reasonable inference from the evidence: see 10381187 Canada Inc. v. Cherny, 2020 ONSC 4325, at para. 14, citing Rubner v. Bistricer, 2018 ONSC 1934.

[114] As Myers J. concluded in Rubner, at para. 108:

…I am satisfied that it is in the interest of justice to resolve these proceedings summarily. All of the parties’ evidence is before the court. Detailed cross-examinations were conducted. I have read thoroughly all of the transcripts. There is no purpose in a trial. In the few instances where drawing inferences, weighing evidence, or credibility findings are required, I am satisfied that the record allows me to find the facts and apply the relevant law. This process has been under way for many months. The family parties intended to and did put their best cases forward. They are entitled to a decision determining the ownership of the one-third interest as that will drive several other issues and unlock the logjam that has prevented the Mattamy Homes litigation from proceeding. In all, I am satisfied that resolving these applications summarily is the most proportionate and fair process.

[115] After having regard to the SPA and its proper interpretation, the only material fact in dispute that the court had to make a finding about was whether the vendors could have done something to protect their Unearned Revenue Milestone Payment for the First Earn-Out Period in 2019 if they had been told in October 2019 that Cresco intended to push the closing of the Arrangement Transaction into the Second Earn-Out Period. This is a disputed fact. It could have been determined primarily based on a presumption if the foundational facts had been established. It was ultimately decided based on an absence of facts.

[116] This is precisely the type of factual determination that is conducive to a written record. The court had no difficulty making the findings of fact set out at the outset of this endorsement based on the written record. A summary resolution of this application is the most proportionate and fair manner of proceeding.

Final Disposition and Costs

[117] The applicants’ claims for damages for breach of contract in amounts equal to the 2019 Revenue Milestone Payment ($4,166,185.49) and the License Milestone Payment ($2,000,000.00) are dismissed. The applicants are entitled to be paid a purchase price adjustment under s. 2.08 of the SPA in the amount of $142,775.50, plus pre-judgment interest calculated pursuant to s. 128 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended.

[118] The parties agreed during the hearing of this application to exchange cost outlines and try to reach an agreement on costs prior to receiving the court’s decision. They were to advise the court by March 11, 2022 if an agreement had been reached. The court has not been advised of any agreement having been reached on the issue of costs. The parties are encouraged to try to reach agreement now that the outcome is known. If an agreement on costs is reached, they shall advise the court of such by April 1, 2022.

[119] If there is no agreement on costs, each party may deliver to the other and file with the court by no later than April 14, 2022 a brief written cost submission (not to exceed 5 pages double spaced), attaching their own Bill of Costs and any relevant settlement offers that are referred to. Each party may deliver to the other and file with the court a brief written reply cost submission (not to exceed 2.5 pages double spaced) by no later than April 21, 2022. All cost submissions and attachments should also be sent by email to my judicial assistant at: linda.bunoza@ontario.ca

[120] These Reasons for Decision and the orders and directions contained herein shall have immediate effect as a court order without the necessity of the formal entry of a court order. A formal order may be taken out by either party.

Kimmel J.

Released: March 21, 2022

Footnotes

[1] 180 Smoke, as purchaser and in the context of the SPA and other transactions, is defined to include other affiliated corporations. The distinction has not been drawn by the parties, or the court, between 180 Smoke and any of its affiliated corporations for purposes of this application. The purchaser/180 Smoke will be singularly referred to throughout for ease of reference.

[2] The suggestion by one of the respondent’s affiants, Thomas Finch, that he had discussed this assertion (that the Annual Target Payment for the First Earn-Out Period in 2019 might not be paid in the context of the arrangement transaction) was refuted on his cross-examination.