Contracts - Disgorgement. Bhatnagar v. Cresco Labs Inc.
In Bhatnagar v. Cresco Labs Inc. (Ont CA, 2023) the Court of Appeal considered the calculation of damages in an 'honest performance' contract case. In this quote the court considers when 'disgorgement' damages may be awarded in contract cases:
 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,  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.. Atlantic Lottery Corp. Inc. v. Babstock
In Atlantic Lottery Corp. Inc. v. Babstock (SCC, 2020) the Supreme Court of Canada considered whether disgorgement (and restitutionary remedies generally) were available as a remedy for breach of contract. It agreed that disgorgement was, though in 'exceptional' circumstances:
(1) Disgorgement for Breach of Contract
 The ordinary form of monetary relief for breach of contract is an award of damages, measured according to the position which the plaintiff would have occupied had the contract been performed (Bank of America, at para. 25). Correspondingly, the orthodox position maintained that disgorgement of the defendant’s profits was not an available remedy for breach of contract (H. D. Pitch and R. M. Snyder, Damages for Breach of Contract (2nd ed. (loose‑leaf)), at pp. 1-36 to 1-39; S. Watterson, “Gain-Based Remedies for Civil Wrongs in England and Wales”, in E. Hondius and A. Janssen, eds., Disgorgement of Profits: Gain-Based Remedies throughout the World, 29, at p. 55; see also Asamera Oil Corp. Ltd. v. Sea Oil & General Corp., 1978 CanLII 16 (SCC),  1 S.C.R. 633, at p. 673).
 More recently, courts have accepted that disgorgement may be available for breach of contract in certain exceptional circumstances (Attorney General v. Blake,  1 A.C. 268 (H.L.); Bank of America, at paras. 25 and 30-31). In Blake, the defendant was a former member of the British secret intelligence service who had defected to become an agent for the Soviet Union. He was discovered and sentenced to 42 years’ imprisonment, but escaped prison and fled the country. Blake later entered into a contract to publish his memoirs, in contravention of the confidentiality undertaking in his employment agreement with the intelligence service. The information in his memoirs was, however, “no longer confidential, nor was its disclosure damaging to the public interest” (p. 275). Further, Blake’s fiduciary obligations ceased to exist when he was dismissed from his post. The sole question was, therefore, whether the Crown could pursue disgorgement for his breach of contract.
 Lord Nicholls, for a majority of the House, held that disgorgement for breach of contract may be appropriate in exceptional circumstances, but only where, at a minimum, the remedies of damages, specific performance, and injunction are inadequate (Blake, at p. 285; One Step (Support) Ltd. v. Morris-Garner,  UKSC 20,  3 All E.R. 649, at para. 64; see also Watterson, at p. 55). As to the types of circumstances that should be considered exceptional, Lord Nicholls concluded:
No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit‑making activity and, hence, in depriving him of his profit. [Emphasis added; p. 285.] Nothing in the law of Canada contradicts the “exceptional” standard articulated by Lord Nicholls in Blake. Indeed, this Court’s statement in Bank of America, at para. 31 — that “[c]ourts generally avoid [the restitution] measure of damage” — affirms this Court’s view, like that expressed by the House of Lords in Blake, that disgorgement awards are not generally available. In particular, and again as was held in Blake, disgorgement for breach of contract is available only where other remedies are inadequate and only where the circumstances warrant such an award. As to those circumstances, courts should in particular consider whether the plaintiff had a legitimate interest in preventing the defendant’s profit‑making activity.
 Ultimately, Lord Nicholls concluded in Blake that the circumstances before him were indeed “exceptional”. The ordinary measure of expectation damages could not have vindicated the Crown’s interest, as no economic loss resulted from the publication of Blake’s memoirs. Further, in Lord Nicholls view, the Crown had a legitimate interest in Blake’s profits because his confidentiality undertaking was “closely akin to a fiduciary obligation” (p. 287). I pause here because, I respectfully differ on this latter point. The imposition of “quasi‑fiduciary” relationships by operation of law is a concept foreign to Canadian law (RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54,  3 S.C.R. 79, at paras. 51‑54, per Abella J. (dissenting)). I therefore prefer the view of Professor McInnes, who states:
To . . . impose relief in a contractual context on the basis of an undefined notion of quasi‑fiduciary duty dangerously ignores Justice Sopinka’s warning that such obligations “should not be imposed . . . simply to improve the nature or extent of the remedy”. It is not merely that Lord Nicholls’ approach fails to reveal a sound basis for liability; it also implicitly invites lower courts to similarly manipulate equitable doctrine for instrumental purposes. Such an exercise is inimical to the development of coherent principle. As to what circumstances will create a legitimate interest in the defendant’s profit‑making activity, I agree with Lord Nicholls that the boundaries of this remedy are “best hammered out on the anvil of concrete cases” (Blake, at p. 291). I can, however, offer some observations.
(“Gain-Based Relief for Breach of Contract: Attorney General v. Blake” (2001), 35 Can. Bus. L.J. 72, at p. 85, citing Norberg v. Wynrib, 1992 CanLII 65 (SCC),  2 S.C.R. 226, at p. 312)
 Many scholars have recognized that it is difficult to reconcile disgorgement for breach of contract with private law principles (see e.g. E. J. Weinrib, “Punishment and Disgorgement as Contract Remedies” (2003), 78 Chi.‑Kent L. Rev. 55; at p. 70; D. Winterton, “Contract Theory and Gain‑Based Recovery” (2013), 76 M.L.R. 1129; McInnes (2001)). This Court has gone even further, cautioning that disgorgement awards may have the undesirable effect of deterring “efficient breach[es] of contract” (Bank of America, at paras. 30‑31, Weinrib (2003), at p. 73). More importantly, it is difficult to explain disgorgement for breach of contract from the standpoint of corrective justice (Weinrib (2003), at p. 57). Granted, some attempts have been made to articulate a corrective justice rationale, but those accounts have been met with substantial criticism (see P. Benson, “Contract as a Transfer of Ownership” (2007), 48 Wm. & Mary L. Rev. 1673; A. Botterell, “Contractual Performance, Corrective Justice, and Disgorgement for Breach of Contract” (2010), 16 Legal Theory 135; and A. R. Sangiuliano, “A Corrective Justice Account of Disgorgement for Breach of Contract by Analogy to Fiduciary Remedies” (2016), 29 Can. J.L. & Jur. 149, at pp. 160‑74).
 In my view, the key to developing principles for gain‑based recovery in breach of contract is to consider what legitimate interest a gain‑based award serves to vindicate. A coherent approach that reconciles the relief awarded with the structure of breach of contract as a cause of action should be preferred (McInnes (2001), at pp. 88‑93; see also N. W. Sage, “Disgorgement: From Property to Contract” (2016), 66 U.T.L.J. 244). To that end, it is useful to recall that courts have, in some exceptional circumstances, long awarded monetary amounts departing from the ordinary measure of expectation damages. That is to say, while disgorgement awards quantified solely by reference to the defendant’s profit are a relatively recent development, other gain‑based awards are nothing new. For example, this Court has awarded damages quantified by the amount a defendant saved through deficient performance, though the plaintiff would have been no better off had the contract been performed (Sunshine Exploration Ltd. v. Dolly Varden Mines Ltd. (N.P.L.), 1969 CanLII 41 (SCC),  S.C.R. 2). The Court of Appeal of Nunavut suggested a similar measure of relief in circumstances where the damage caused by the defendant’s deficient performance was simply too difficult to quantify (Nunavut Tunngavik Inc. v. Canada (Attorney General), 2014 NUCA 2, 580 A.R. 75, at para. 88 (“Inuit of Nunavut”)). And courts have also granted what might be termed “negotiating damages” to prevent a defendant from obtaining for free an advantage for which it did not bargain (Wrotham Park Estate Co. v. Parkside Homes Ltd.,  2 All E.R. 321 (Ch. D.); Smith v. Landstar Properties Inc., 2011 BCCA 44, 14 B.C.L.R. (4th) 48, at paras. 39‑44; see also Morris‑Garner, at paras. 91‑100). As the Supreme Court of the United Kingdom recently explained in Morris‑Garner, at para. 95:
Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset . . . . The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment. [Emphasis added.] As these various examples demonstrate, an award that appears to be measured by a defendant’s gain might arguably, in certain circumstances, serve a compensatory purpose that distinguishes it from disgorgement and which therefore tends to support recovery (McInnes (2001), at pp. 76‑80; Weinrib (2003), at pp. 71‑72; see also Morris‑Garner, at paras. 39‑40). Whether viewed as compensatory or not, these cases are indicative of the types of circumstances where a plaintiff is entitled to receive a monetary award that goes beyond the economic position that it would have occupied had its contract been performed (see Burrows, at pp. 672‑77; McInnes (2014), at p. 285). While the circumstances in which a gain‑based award will be appropriate cannot be clearly delineated in advance (Blake, at p. 285; Morris‑Garner, at para. 94), one would expect future legitimate interests protected by a gain‑based award to resemble those interests that have been protected in the past.
 Disgorgement for breach of contract is exceptional relief; it is not available at the plaintiff’s election to obviate matters of proof. And there is nothing exceptional about the breach of contract the plaintiffs allege. ....