Canada: Agricultural Law Netletter - December 7, 2016 Issue 361

HIGHLIGHTS

* A Justice of the Ontario Superior Court of Justice has reviewed and explained the basic principles of contract with respect to whether individual farmers, or their corporation, are liable for a supplier's debt, and the basis upon which interest can be claimed by a supplier. Credit applications completed by the farmers were hopelessly ambiguous, however they did refer to a corporate name. The Court found that this was sufficient to bring home to the supplier that it was dealing with a corporation. The Court also found that a contract to pay interest had been established based on the provisions of a credit application and numerous invoices. The case contains a discussion of the case law and a number of principles involved in resolving both issues. (Huron Bay Co-operative Inc. v. Needham, CALN/2016-029, [2016] O.J. No. 6170, Ontario Superior Court of Justice)

NEW CASE LAW

Huron Bay Co-operative Inc. v. Needham;

CALN/2016-029,

Full text: [2016] O.J. No. 6170;

2016 ONSC 7296,

Ontario Superior Court of Justice,

C. Conlan J.,

Debtor and Creditor -- Whether it has been brought home to a Creditor that the Creditor is Dealing with a Corporation -- Express or Implied Agreement to Pay Interest.

Huron Bay Co-operative Inc. ("the Cooperative") sued two Ontario farmers, Andrew Needham and Michael Needham (collectively, the "Needhams") and Mar-Bo Farms Inc. ("Mar-Bo"), a trucking and farming corporation used by the Needhams, for an outstanding debt claimed for seed, fertilizer, spray and other agricultural supplies supplied by the Cooperative.

The primary issue was whether the debt for outstanding invoices of $75,392.77 and interest of $98,297.75 (total $173,690.52) was payable by the Needhams or Mar-Bo.

Credit was provided pursuant to a line of credit provided by Farm Credit Canada ("FCC").

The procedure to obtain credit required farmers who wanted to purchase supplies from the Cooperative to make a credit application to FCC. The purchased items were then charged to the FCC credit line. In the event of a default by the farmer, the Cooperative was obliged to reimburse FCC for the farmer's default.

Default was made on the FCC line of credit utilized to pay for the supplies purchased for the Defendants' farm operation. The Cooperative paid the unpaid balance due to FCC. FCC assigned its right to collect the debt to the Cooperative.

The Needhams took the position that if there was a debt owing, it was owed by Mar-Bo and not the Needhams.

The Needhams also took the position that the debt should be reduced as a result of a number of set-off claims regarding alleged deficiencies related to the seed, herbicide and spray provided by the Cooperative.

The Needhams also challenged the Cooperative's right to seek interest on the debt.

Decision: Conlan, J. dismissed the Cooperative's action for judgment against the Needhams personally, dismissed the Defendants' claim for set-off, and granted the Cooperative judgment against Mar-Bo for the full amount of the debt, including interest [at para. 117 to 119].

Conlan, J. considered the following issues:

1. Whether Mar-Bo, or the Needhams, were liable for the debt.

Conlan, J. observed that the FCC credit application, and related documents, were ambiguous:

  • The first piece of information on the credit application refers to a corporation "Mar-Bo Ltd." [at para. 56].
  • Another portion of the same document checked off the word "partnership" rather than "corporation" [at para. 60].
  • The form was signed by Mike Needham personally, with no reference to Mar-Bo, however the form did not provide a blank for a corporate name, but only asked for the legal surname and name [at para. 67].

Conlan, J. concluded that the two contracts involved were ambiguous, confusing and contained information that made them "reasonably susceptible to multiple interpretations" [at para. 75] including the interpretation that Mar-Bo alone was the debtor, and that either or both of the Needhams were the debtor, individually or jointly and severally [at para. 76 to 84].

Conlan, J. also observed that the parties gave contradictory evidence as to what their intentions were as to whether Mar-Bo or the Needhams were to be liable and that the extrinsic evidence was inconclusive.

Conlan, J. concluded that the burden was on the Cooperative to prove that its contractual relationship was with the Needhams personally, and that the most important issue was whether it was brought home to the Cooperative that it was dealing with a corporation, stating at para. 36 and 37:

[36] The burden is on the Plaintiff, HBC, to prove on balance that its contractual relationship was with the Needhams personally, or either of them. Kobes Nurseries Inc. v. Convery, 2010 ONSC 6499, 2010 CarswellOnt 8850 (S.C.J. - Justice Lauwers, as His Honour then was), at paragraph 22.

[37] In determining whether HBC has met that burden, it is important to consider whether the Needhams, or either of them, brought home to HBC the fact that the Plaintiff was dealing with a corporation. In other words, the responsibility was on the Needhams to do or say something to, at a minimum, cause this Court to conclude that HBC must be imputed with the knowledge of the existence of the corporation, Mar-Bo. Kobes Nurseries, supra, at paragraph 17.

Conlan, J. observed that in determining whether the Cooperative had sufficient notice, the totality of the circumstances must be considered and that no one factor is determinative. The fact that Mar-Bo, and not the Needhams, paid the Cooperative by cheque, would not by itself be conclusive: Morse Electro Products (Can.) Corp. v. Central Discount House Ltd., 1978 CarswellBC 21 (County Court).

With respect to whether a debtor must provide "clear and unambiguous" notice that the creditor is dealing with a corporation, Conlan, J. concluded that it was sufficient to say that the notice must be sufficient to bring home to the Cooperative that it was dealing with a corporation [at para. 48].

Conlan, J. concluded [at para. 74] that the Cooperative "had clear notice, or ought to have had clear notice, of the existence of a corporation, Mar-Bo, and that the credit applicant was the corporation" [at para. 74] and that it did not matter that the credit application provided an incorrect corporate name - "Mar-Bo Ltd.", rather than "Mar-Bo Farms Inc."..."the precise name of the corporation is less important, however, than the clear notice of a corporation as the business entity and as the applicant for credit" [at para. 64].

Conlan, J. also observed that the doctrine of contra proferentem described by the Supreme Court of Canada in Eli Lilly & Co. v. Novapharm Ltd.; Eli Lilly & Co. v. Apotex Inc., [1998] 2 S.C.R. 129 (SCC), [1998] 2 S.C.R. 129 would only be applied as a rule of last resort, when all other rules of construction fail [at para. 50 and 51].

Conlan, J. concluded that the ambiguities in the documents could not be resolved, and that as a last resort, the Court would have to apply the principle of contra proferentem stating [at par. 94]:

[94] ...As none of the documents in question were drafted by the Defendants, the confusion and the ambiguity would have to be resolved against [the Cooperative].

Conlan, J. concluded that the Cooperative had failed to prove on a balance that it and FCC had contracted with the Needhams personally, as opposed to their corporation [at para. 97].

The Cooperative argued that the Court should pierce the corporate veil, relying on the decision of Kosmopoulos v. Constitution Ins. Co. of Canada, 1987 CarswellOnt 132 (SCC), in which it held that the doctrine of separate legal entity is not enforced when it would yield a result that is "flagrantly unjust" in the light of the suffering that would result to innocent third parties.

Conlan, J. stated [at para. 97]:

[97] It was clearly brought home to HBC such that it knew, or ought to have known, that it was dealing with a corporation. Having made that determination, as much as it is difficult to make, I observe that there is nothing flagrantly unjust about the result in the sense alluded to by the Supreme Court of Canada in Kosmopoulos, supra.

2. What interest rate should prevail?

The interest at the rate claimed by the Cooperative was set out in the credit applications and monthly invoices.

Conlan, J. accepted the Defendants' proposition that an agreement to pay the interest claimed was required, stating at para. 111:

[111] The Defendants are correct that "the mere presence of a statement on an invoice that interest is claimed at a particular rate, standing alone, is an insufficient basis to warrant a finding that interest is owed". An agreement to pay the intereset rate being claimed, whether express or implied from a course of conduct by the parties, must be found. Accent Metals Inc. v. Stelfab Niagara Ltd., [2010] O.J. No. 237 (S.C.J. - Justice Harris).

Conlan, J. then held that if Mike Needham had taken time to read the credit applications he would have seen and understood the interest rate provisions, and that the interest rates were clearly stated on all of the Cooperative invoices, which the Needhams received[at para. 112 and 113].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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