See paragraph 46 on pages 26 and 27.
The court case was over processed eggs, so the judge did nothing about this "side issue" because it involved fresh eggs.
B E T W E E N: )
)
1248671 ONTARIO INC., c.o.b. as )
MACARTNEY FARMS and MACARTNEY )
POULTRY FARMS LIMITED )
)
Plaintiffs )
)
- and - )
)
)
MICHAEL FOODS INC., TRILOGY EGG )
PRODUCTS INC., and KARIM CRESSATY )
)
)
Defendants )
)
AND BETWEEN: )
)
)
MICHAEL FOODS INC. )
)
Plaintiff by Counterclaim )
)
- and - )
)
1248671 ONTARIO INC., c.o.b. as )
MACARTNEY FARMS and MACARTNEY )
POULTY FARMS LIMITED )
)
Defendants by Counterclaim )
)
Michael S. Hebert and Cheryl Gerhardt
McLuckie, for the Plaintiffs/Defendants by
Counterclaim
Lawrence A. Pick and Christine M. Kish, for the Defendants/Plaintiff by Counterclaim
Lawrence A. Pick and Christine M. Kish, for the Defendants/Plaintiff by Counterclaim
COURT FILE NO.: 00-CV-13453
DATE: 2005/09/16
ONTARIO SUPERIOR COURT OF JUSTICE
ONTARIO SUPERIOR COURT OF JUSTICE
-
) HEARD: April 26-29, May 3, 9-13, 16-20,
-
) 24-26, June 20-22, 2005
2005 CanLII 32926 (ON SC)
Hackland J.
Overview
-2-
REASONS FOR JUDGMENT
[1] The plaintiffs, to whom I refer to collectively as (“Macartneys”) are a successful Ottawa
based group of companies in the business of the sale and distribution of eggs, produce and other
food products, primarily in Eastern Ontario and Western Quebec. Macartneys is a family owned
business and at the material times was run by James Macartney. The business was founded by
Mr. Macartney’s grandfather, and has grown to the point where it currently has gross sales in
excess of thirty million dollars annually. The defendant Michael Foods Inc. (“Michael Foods”)
is a Minnesota based producer of a wide range of food products with annual sales throughout the
United States and internationally in excess of one billion dollars.
[2] Michael Foods is the patent holder and manufacturer of a product known as Easy Eggs. This is an extended shelf life processed liquid egg product. This innovative and high quality product has a lengthy shelf life of 8 to12 weeks, is highly resistant to bacterial contamination and is thus very safe. It is now in wide use in commercial settings such as hotel kitchens, cafeterias in educational institutions, and in the fast food industry. This case is a dispute between the parties over the termination of a Canadian distributorship agreement concerning the Easy Eggs product. From 1992 until the end of 1999, Macartneys imported, distributed and sold Easy Eggs in the Canadian market under a verbal agreement or arrangement with Michael Foods, the terms of which are in dispute.
[2] Michael Foods is the patent holder and manufacturer of a product known as Easy Eggs. This is an extended shelf life processed liquid egg product. This innovative and high quality product has a lengthy shelf life of 8 to12 weeks, is highly resistant to bacterial contamination and is thus very safe. It is now in wide use in commercial settings such as hotel kitchens, cafeterias in educational institutions, and in the fast food industry. This case is a dispute between the parties over the termination of a Canadian distributorship agreement concerning the Easy Eggs product. From 1992 until the end of 1999, Macartneys imported, distributed and sold Easy Eggs in the Canadian market under a verbal agreement or arrangement with Michael Foods, the terms of which are in dispute.
2005 CanLII 32926 (ON SC)
-3-
[3] The parties contemplated an arrangement whereby the market for Easy Eggs in Canada
would grow to the point where a Canadian manufacturing facility would be established, thus
ending the need for the complicated arrangements required to import the product into Canada. In
1999, the defendant Trilogy Egg Products Inc. (“Trilogy”) was incorporated to set up a
manufacturing facility in Canada to process Easy Eggs and to control the distribution of the
product. Trilogy’s president was the defendant Karim Cressaty. Trilogy was a joint venture
consisting of three equal partners; (1) Michael Foods Inc.; (2) Inovatech Inc.; and (3) the
Manitoba Egg Producers Marketing Board. Macartneys was not an investor or partner in the
Trilogy joint venture. Over the course of 1999, Macartneys attempted to come to an agreement
with Michael Foods and subsequently with Trilogy as to its role in the future of the Easy Egg
business in Canada. These negotiations turned acrimonious, in circumstances hereinafter
described, leading to the termination of the distribution agreement and the subsequent
commencement of this action in April of 2000.
[4] The plaintiffs have consented to judgment on the counterclaim of Michael Foods in the sum of $128,548.40 which represents the value of several shipments of Easy Eggs which were shipped to Macartneys and not paid for in 1999. The plaintiffs have also agreed to withdraw their claim for compensation for loss of their business with a customer Sodexho-Marriott (hereinafter “Marriott”) in the year 2000, based on the evidence at trial from an executive of that firm (Carmelle Grenier), which confirmed that the loss of this business was the result of a competitive bid. Further, there was no evidence at trial of any wrongdoing or actionable conduct against the defendant Karim Cressaty and, accordingly, the action against him is dismissed.
[4] The plaintiffs have consented to judgment on the counterclaim of Michael Foods in the sum of $128,548.40 which represents the value of several shipments of Easy Eggs which were shipped to Macartneys and not paid for in 1999. The plaintiffs have also agreed to withdraw their claim for compensation for loss of their business with a customer Sodexho-Marriott (hereinafter “Marriott”) in the year 2000, based on the evidence at trial from an executive of that firm (Carmelle Grenier), which confirmed that the loss of this business was the result of a competitive bid. Further, there was no evidence at trial of any wrongdoing or actionable conduct against the defendant Karim Cressaty and, accordingly, the action against him is dismissed.
2005 CanLII 32926 (ON SC)
-4-
[5] In the circumstances noted, and having regard to the pleadings, there are essentially three
issues before the court as follows:
[6] In late 1990, consultants working for Michael Foods invited Macartneys to become Michael Foods’ “Canadian business partner” in order to introduce Easy Eggs to the Canadian market and to supply their major customer Marriott with the product. The concept was summarized in a Memorandum, dated November 22, 1990, from the consultants to the then president of Michael Foods, as follows:
-
(1) Was it a term of the verbal distributorship agreement between Macartneys and
Michael Foods, that Macartneys were the exclusive distributors of Easy Eggs in
Canada or that Macartneys would be entitled to compensation for “seed money”
invested in the Easy Eggs distributorship?
-
(2) Was it an implied term of the distributorship agreement that in the event of
termination by Michael Foods, Macartneys would receive reasonable notice or
compensation in lieu thereof?
-
(3) In any event, is Macartneys entitled to quantum meruit compensation from the
Defendants for their costs and losses, if any, incurred in establishing a market for
Easy Eggs in Canada?
[6] In late 1990, consultants working for Michael Foods invited Macartneys to become Michael Foods’ “Canadian business partner” in order to introduce Easy Eggs to the Canadian market and to supply their major customer Marriott with the product. The concept was summarized in a Memorandum, dated November 22, 1990, from the consultants to the then president of Michael Foods, as follows:
2005 CanLII 32926 (ON SC)
-5-
... You will need a Canadian business partner in order to obtain the necessary
import permits. Jim Macartney of Macartney Poultry Farms Limited (613) 521-
1711) in Ramsayville, Ontario will be calling you next week to discuss further.
We have been in contact with this distributor who has the contract for the major
Ontario and Quebec markets to supply Marriott with all its egg products. We can
work with him and the necessary agencies to submit to the appropriate
government agencies the necessary information to obtain approval to ship product
to Marriott.
As well, we believe he may be the appropriate party to work with to explore some of the other considerations in exploiting the Canadian market on a more long-term basis.
...
[7] In early 1991, James Macartney attended a meeting at Michael Foods’ head office in Minnesota with Russ Mentzer, a senior executive of Michael Foods, and their consultant Don Jarvis. Also in attendance was Robert de Valk, an Ottawa based consultant with expertise in import/export issues and marketing boards. At various times throughout the parties’ subsequent business dealings, Mr. de Valk worked for Macartneys or Michael Foods, or both, to put together a deal for the importation of Easy Eggs into Canada and later for a distribution agreement in 1999, which unfortunately was never concluded. Mr. Macartney was introduced to the Easy Egg products and was immediately impressed. He described Easy Eggs as “an excellent product, years ahead of anything currently available in the Canadian market” and confirmed his interest in importing and distributing the product. Mr. de Valk and Mr. Macartney also briefed Mr. Mentzer on the requirements for obtaining Canadian government approval for the import of liquid eggs and on the operation of Canadian and Provincial Egg Marketing Boards. It was discussed that Michael Foods supplied Easy Eggs to Marriott throughout the United States and they and Marriott wanted the product used throughout their Canadian operations as well. It was
As well, we believe he may be the appropriate party to work with to explore some of the other considerations in exploiting the Canadian market on a more long-term basis.
...
[7] In early 1991, James Macartney attended a meeting at Michael Foods’ head office in Minnesota with Russ Mentzer, a senior executive of Michael Foods, and their consultant Don Jarvis. Also in attendance was Robert de Valk, an Ottawa based consultant with expertise in import/export issues and marketing boards. At various times throughout the parties’ subsequent business dealings, Mr. de Valk worked for Macartneys or Michael Foods, or both, to put together a deal for the importation of Easy Eggs into Canada and later for a distribution agreement in 1999, which unfortunately was never concluded. Mr. Macartney was introduced to the Easy Egg products and was immediately impressed. He described Easy Eggs as “an excellent product, years ahead of anything currently available in the Canadian market” and confirmed his interest in importing and distributing the product. Mr. de Valk and Mr. Macartney also briefed Mr. Mentzer on the requirements for obtaining Canadian government approval for the import of liquid eggs and on the operation of Canadian and Provincial Egg Marketing Boards. It was discussed that Michael Foods supplied Easy Eggs to Marriott throughout the United States and they and Marriott wanted the product used throughout their Canadian operations as well. It was
2005 CanLII 32926 (ON SC)
-6-
the food safety/long shelf life aspect of the product that was of particular interest to Marriott and
would be a strong selling point to other potential customers.
[8] No distribution agreement or other contract was signed by the parties then, or at any subsequent time. At trial, former Michael Foods’ executives, Kevin Kelly and Jeff Shapiro, testified that Macartneys was simply a customer or distributor of theirs, no different from their many U.S. distributors. They said that at all material times there existed only a buyer/seller relationship with sales to Macartneys being on a load-by-load basis.
[9] Following the initial meeting some time passed without further discussions. Then Macartneys’ Ottawa operation was visited by a senior buyer from the Marriott U.S. chain and Mr. Macartney was later contacted and asked to meet with Mark Steepe, the head buyer for Marriott Canada, to negotiate pricing and to work out a marketing strategy to get Easy Eggs into Marriott’s Canadian operations. While Marriott’s head office had directed that Easy Eggs were to be used in Marriott’s Canadian operations, the practicalities, as Mr. Steepe acknowledged in his evidence, were that it was necessary for Macartneys, as the Easy Egg distributor, to visit the chefs in the various Marriott locations to introduce Easy Eggs and to persuade them to use the product. At the urging of Mr. Steepe, Macartneys hired Gordon Dowd as a salesperson dedicated to Easy Eggs sales. A large part of his work was devoted to visiting the Marriott operations for that purpose.
[10] Mr. Macartney and Mr. de Valk then undertook the significant challenge of obtaining the approval of the Department of Foreign Affairs and International Trade (“DFAIT”) for the import of Easy Eggs. The initial project was to put together and obtain DFAIT approval for “a test
[8] No distribution agreement or other contract was signed by the parties then, or at any subsequent time. At trial, former Michael Foods’ executives, Kevin Kelly and Jeff Shapiro, testified that Macartneys was simply a customer or distributor of theirs, no different from their many U.S. distributors. They said that at all material times there existed only a buyer/seller relationship with sales to Macartneys being on a load-by-load basis.
[9] Following the initial meeting some time passed without further discussions. Then Macartneys’ Ottawa operation was visited by a senior buyer from the Marriott U.S. chain and Mr. Macartney was later contacted and asked to meet with Mark Steepe, the head buyer for Marriott Canada, to negotiate pricing and to work out a marketing strategy to get Easy Eggs into Marriott’s Canadian operations. While Marriott’s head office had directed that Easy Eggs were to be used in Marriott’s Canadian operations, the practicalities, as Mr. Steepe acknowledged in his evidence, were that it was necessary for Macartneys, as the Easy Egg distributor, to visit the chefs in the various Marriott locations to introduce Easy Eggs and to persuade them to use the product. At the urging of Mr. Steepe, Macartneys hired Gordon Dowd as a salesperson dedicated to Easy Eggs sales. A large part of his work was devoted to visiting the Marriott operations for that purpose.
[10] Mr. Macartney and Mr. de Valk then undertook the significant challenge of obtaining the approval of the Department of Foreign Affairs and International Trade (“DFAIT”) for the import of Easy Eggs. The initial project was to put together and obtain DFAIT approval for “a test
2005 CanLII 32926 (ON SC)
-7-
market”. This involved using Marriott and certain other companies in the food business to test
the product. From DFAIT’s perspective, a test market was a temporary arrangement wherein
special import quotas were allowed, for the purpose of allowing the parties to assess the viability
of having a manufacturing operation for the product established in Canada. In order to obtain
import quota under this program, Michael Foods was required to represent to DFAIT their
intention to establish a manufacturing facility in Canada and to describe the anticipated role of
other players in the proposed enterprise. In this context, Michael Foods provided information to
DFAIT, describing their relationship with Macartneys. Macartneys wishes to rely on these
representations in this action. All of the submissions to DFAIT were prepared by Mr. de Valk
and signed off by Mr. Kelly, or other executives, at Michael Foods, apparently without much
discussion or attention or, indeed, commitment.
[11] The test market proposal submitted to DFAIT in October of 1991 was entitled “MACARTNEY POULTY FARM & MICHAEL FOOD’S PROPOSAL to test EASY EGGS in Canada”. Paragraph 10 of the document refers to Macartney having “...exclusive rights to distribute EASY EGGS in Canada”:
10. WHY MACARTNEY POULTRY FARM
10.1 Macartney Poultry Farms Ltd. is a wholesale/grader with an extensive distributing network to the foodservice sector in Eastern Ontario and Quebec. The firm supplies a range of products to all types of foodservice operators from small family restaurants to major fastfood chains and cafeteria operators. A number of customers served by Macartney have requested processed egg product with characteristics similar to those offered by the EASY EGG product. Macartney has been unable to find a Canadian product that meets the specifications set down by some major customers. As a result, Macartney investigated the EASY EGG product by setting up direct consultations with exclusive rights to distribute EASY
[11] The test market proposal submitted to DFAIT in October of 1991 was entitled “MACARTNEY POULTY FARM & MICHAEL FOOD’S PROPOSAL to test EASY EGGS in Canada”. Paragraph 10 of the document refers to Macartney having “...exclusive rights to distribute EASY EGGS in Canada”:
10. WHY MACARTNEY POULTRY FARM
10.1 Macartney Poultry Farms Ltd. is a wholesale/grader with an extensive distributing network to the foodservice sector in Eastern Ontario and Quebec. The firm supplies a range of products to all types of foodservice operators from small family restaurants to major fastfood chains and cafeteria operators. A number of customers served by Macartney have requested processed egg product with characteristics similar to those offered by the EASY EGG product. Macartney has been unable to find a Canadian product that meets the specifications set down by some major customers. As a result, Macartney investigated the EASY EGG product by setting up direct consultations with exclusive rights to distribute EASY
2005 CanLII 32926 (ON SC)
-8-
EGGS in Canada. Macartney is well-suited to take on this wholesaling
and distributing function since it will require refrigerated trucks to ensure
the temperature conditions during the distribution phase are met.
(underlining added)
[12] Mr. Macartney testified that at a meeting in March 1993 it was confirmed to him, by Gregg Ostrander, President and CEO of Michael Foods, that Macartneys would be the exclusive distributor of Easy Eggs in Canada. Mr. Ostrander did not testify at trial. Mr. Kelly and Mr. Shapiro, who directly managed the relationship with Macartney Farms, stated that they had no knowledge of any representations and, as noted, seemed largely unaware of the submissions and communications with DFAIT, which Mr. de Valk had prepared and submitted for them.
[13] The plaintiffs also rely on a letter dated June 3, 1996, from Kevin Kelly of Michael Foods to DFAIT in which Macartneys is referred to as its “Canadian distribution partner”. Further, Mr. de Valk describes Macartneys as an “exclusive Canadian distributor” in a business plan prepared in 1997 for Global Eggs who, at that time, were considering the establishment of a Canadian manufacturing facility for Easy Eggs in partnership with Michael Foods. A copy of this document was sent to Mr. Kelly and no objection was received. Finally, Macartneys was referred to as the “master broker” for Trilogy Egg Products in its initial five-year financial plan. This reference is perhaps of particular significance because the document was not prepared by Mr. de Valk, who was a loyal advocate of Macartneys’ interests. Rather, it was a recognition by the Trilogy partners (one of whom was Michael Foods) of the type of distribution role Macartneys should have in the new Canadian operation which was being set up in conjunction with the establishment of a Canadian manufacturing facility.
[12] Mr. Macartney testified that at a meeting in March 1993 it was confirmed to him, by Gregg Ostrander, President and CEO of Michael Foods, that Macartneys would be the exclusive distributor of Easy Eggs in Canada. Mr. Ostrander did not testify at trial. Mr. Kelly and Mr. Shapiro, who directly managed the relationship with Macartney Farms, stated that they had no knowledge of any representations and, as noted, seemed largely unaware of the submissions and communications with DFAIT, which Mr. de Valk had prepared and submitted for them.
[13] The plaintiffs also rely on a letter dated June 3, 1996, from Kevin Kelly of Michael Foods to DFAIT in which Macartneys is referred to as its “Canadian distribution partner”. Further, Mr. de Valk describes Macartneys as an “exclusive Canadian distributor” in a business plan prepared in 1997 for Global Eggs who, at that time, were considering the establishment of a Canadian manufacturing facility for Easy Eggs in partnership with Michael Foods. A copy of this document was sent to Mr. Kelly and no objection was received. Finally, Macartneys was referred to as the “master broker” for Trilogy Egg Products in its initial five-year financial plan. This reference is perhaps of particular significance because the document was not prepared by Mr. de Valk, who was a loyal advocate of Macartneys’ interests. Rather, it was a recognition by the Trilogy partners (one of whom was Michael Foods) of the type of distribution role Macartneys should have in the new Canadian operation which was being set up in conjunction with the establishment of a Canadian manufacturing facility.
2005 CanLII 32926 (ON SC)
-9-
[14] I find on the balance of probabilities that the defendant Michael Foods Inc. was bound by
a contractual obligation to treat the plaintiffs as their Canadian distribution partner. Senior
Executives of Michael Foods made or acquiesced in the making of representations to this effect
to the Canadian government which were at least initially relied on by DFAIT and by Macartneys.
A circumstance of considerable importance is the fact that, at all material times, Macartneys was
in fact the exclusive distributor of Easy Eggs in Canada. However, in my opinion, this
obligation was not a guarantee of exclusivity, rather it was a promise of significant or leading
involvement in a distributorship capacity. The master broker concept appropriately captured the
contractual obligation. However, this contract or agreement between the parties was not for any
fixed term and certainly did not impose obligations in perpetuity. Rather, on established
contractual principles, the parties’ obligations or their contractual relationship itself could be
varied or terminated on reasonable notice. (See Treen Gloves & Safety Products Ltd. v. Degil
Safety Products (1989) Inc. (1990), 33 C.P.R. (3d) 74 (B.C.S.C.))
[15] In coming to the conclusion that a reasonable notice requirement is to be implied in this contractual relationship, I give due weight to the defendants’ arguments that Easy Eggs in fact never amounted to more than about 4% of total sales of Macartneys’ product line, and the whole project was a work in progress over the 8-year relationship, involving different strategic issues, different import arrangements utilizing various suppliers of import quota, and various proposed partners in the joint venture to be assembled to establish the Canadian manufacturing facility. For example, the original concept was that Macartneys was to be one of the principal investors in the proposed Canadian facility, but Mr. Macartney summarily notified Michael Foods in October 1996 that he was withdrawing due to internal financial issues. Thereafter, Macartneys never
[15] In coming to the conclusion that a reasonable notice requirement is to be implied in this contractual relationship, I give due weight to the defendants’ arguments that Easy Eggs in fact never amounted to more than about 4% of total sales of Macartneys’ product line, and the whole project was a work in progress over the 8-year relationship, involving different strategic issues, different import arrangements utilizing various suppliers of import quota, and various proposed partners in the joint venture to be assembled to establish the Canadian manufacturing facility. For example, the original concept was that Macartneys was to be one of the principal investors in the proposed Canadian facility, but Mr. Macartney summarily notified Michael Foods in October 1996 that he was withdrawing due to internal financial issues. Thereafter, Macartneys never
2005 CanLII 32926 (ON SC)
- 10 -
again sought to be an investor in the project. I accept the argument that Macartneys’ relationship
with Michael Foods and the other players in this enterprise was evolving significantly throughout
the relationship.
[16] On balance however, the reasonable notice obligation is justified because in reliance on the promise of a continuing principal distributorship role, Macartneys invested time and corporate resources well in excess of what would be expected from an ordinary distributor. In particular, Mr. Macartney’s efforts to organize the importation of Easy Eggs, to deal with DFAIT in conjunction with various consultants, finding sources of import quota through his own extensive personal contacts throughout the country, and the efforts to service the Marriott chain and to expand the market to other similar customers (often termed “mass feeders”) with his dedicated salesperson Mr. Dowd, are all the functions of an importer/broker. In contrast to this, a distributor normally transports goods from one location to another, for a percentage markup. For the remuneration normally paid to a distributor, Macartneys acted as a broker, importer and distributor. Michael Foods acknowledged that they paid brokers and distributors separately in the U.S. market and that establishing a market for Easy Eggs in the U.S. had been a major and very expensive undertaking. For his part, Mr. Macartney never tired of campaigning with Michael Foods’ executives and Marriott, to pay him more generously in recognition of his companies multiple roles in developing the Canadian Easy Egg market.
[17] I find on the evidence that Mr. Macartney’s efforts to secure a commitment to pay more than what he was actually receiving were never accepted by Michael Foods, and at no time did Michael Foods agree to Mr. Macartney’s request to reimburse “seed money” or start up costs
[16] On balance however, the reasonable notice obligation is justified because in reliance on the promise of a continuing principal distributorship role, Macartneys invested time and corporate resources well in excess of what would be expected from an ordinary distributor. In particular, Mr. Macartney’s efforts to organize the importation of Easy Eggs, to deal with DFAIT in conjunction with various consultants, finding sources of import quota through his own extensive personal contacts throughout the country, and the efforts to service the Marriott chain and to expand the market to other similar customers (often termed “mass feeders”) with his dedicated salesperson Mr. Dowd, are all the functions of an importer/broker. In contrast to this, a distributor normally transports goods from one location to another, for a percentage markup. For the remuneration normally paid to a distributor, Macartneys acted as a broker, importer and distributor. Michael Foods acknowledged that they paid brokers and distributors separately in the U.S. market and that establishing a market for Easy Eggs in the U.S. had been a major and very expensive undertaking. For his part, Mr. Macartney never tired of campaigning with Michael Foods’ executives and Marriott, to pay him more generously in recognition of his companies multiple roles in developing the Canadian Easy Egg market.
[17] I find on the evidence that Mr. Macartney’s efforts to secure a commitment to pay more than what he was actually receiving were never accepted by Michael Foods, and at no time did Michael Foods agree to Mr. Macartney’s request to reimburse “seed money” or start up costs
2005 CanLII 32926 (ON SC)
- 11 -
notwithstanding Mr. Macartney’s repeated efforts to secure such a commitment. The response
Mr. Macartney always received from Michael Foods, particularly from Mr. Kelly and Mr.
Shapiro, was that he should look forward to focus his efforts on expanding the Easy Egg market
in Canada so that a manufacturing facility could be established here and at that point everyone
would benefit financially. This is a scenario in which an implied obligation of reasonable notice
is fair and appropriate. I find that if Michael Foods or the defendant Trilogy (through whom
Michael Foods dealt with Macartneys in late 1999) had chosen to terminate the distributorship of
the plaintiffs, they were required to provide twelve months’ notice or compensation in lieu
thereof in an amount measured by the profits Macartneys would reasonably expect to have made
in that period.
[18] The period 1996-1998 was one in which there were several failed attempts to put together a joint venture to establish a plant to process Easy Eggs in Canada. Prior to that, Michael Foods had been preoccupied with patent litigation involving Easy Eggs in the U.S. and was in no hurry to establish a Canadian operation. Macartneys continued to market Easy Eggs in Canada with moderate success and with good potential for sales to some other national distributors, besides Marriott. The roll out of Easy Eggs through the various Marriott outlets had been substantially advanced through the efforts of Mr. Dowd. On a less encouraging note, Macartneys’ sales volumes were reasonably flat, which did not bode well for the goal of growing the Canadian market to the point where a manufacturing operation could be considered viable. It was the thought that a sales volume of some 5 million pounds of Easy Eggs in Canada was the level needed to sustain a Canadian plant. Macartneys’ sales of Easy Eggs averaged $975,000 annually during the years 1997-1999 and never exceeded a volume of 1 million pounds.
[18] The period 1996-1998 was one in which there were several failed attempts to put together a joint venture to establish a plant to process Easy Eggs in Canada. Prior to that, Michael Foods had been preoccupied with patent litigation involving Easy Eggs in the U.S. and was in no hurry to establish a Canadian operation. Macartneys continued to market Easy Eggs in Canada with moderate success and with good potential for sales to some other national distributors, besides Marriott. The roll out of Easy Eggs through the various Marriott outlets had been substantially advanced through the efforts of Mr. Dowd. On a less encouraging note, Macartneys’ sales volumes were reasonably flat, which did not bode well for the goal of growing the Canadian market to the point where a manufacturing operation could be considered viable. It was the thought that a sales volume of some 5 million pounds of Easy Eggs in Canada was the level needed to sustain a Canadian plant. Macartneys’ sales of Easy Eggs averaged $975,000 annually during the years 1997-1999 and never exceeded a volume of 1 million pounds.
2005 CanLII 32926 (ON SC)
- 12 -
[19] Further, on the importation front, DFAIT had tired of waiting to secure a commitment to
build a Canadian manufacturing facility and gave notice that they were terminating the export to
re-import program which allowed Easy Eggs into Canada at the end of 1996. This left the parties
to try and assemble or purchase so called “global import quota” from Canadian egg importers. It
also had the effect of adding urgency to the plans of Michael Foods to put together a joint
venture to build a Canadian plant. As noted, by this time Macartneys was no longer a potential
investor in this project. Further, Macartneys was not prepared to allow their large shell egg
import quota (which could be converted to liquid egg quota) to be used to import Easy Eggs and
they ceased to be a major player in Michael Foods’ plans.
[20] In January of 1999, Macartneys were given by their consultant Mr. de Valk a confidential copy of a letter of intent, dated January 18, 1999, which disclosed that a joint venture had been established to build a manufacturing facility in Canada. It was subsequently named Trilogy Egg Products Inc. It consisted of Michael Foods Inc., which was to license the Easy Egg product, the Manitoba Egg Producers Co-op, which would be the primary source of egg supply, Canadian Inovatech Inc., an egg products producer who would supply (and at that time was supplying) the required import quotas, and another firm Global Egg, which subsequently withdrew from the venture. The parties were to be equal owners and would put up the required capital equally. The recital to the letter of intent outlined the project as follows:
The purpose of this letter of intent is to set forth a general outline of a mutually beneficial enterprise between and among Michael, Manitoba, Inovatech and Global for the commercialization in Canada of certain further processed egg products which initially shall include “Easy Egg” products, precooked egg products and egg substitute products. The project will include the acquisition of a processing facility, equipping the facility, securing an appropriate egg supply
[20] In January of 1999, Macartneys were given by their consultant Mr. de Valk a confidential copy of a letter of intent, dated January 18, 1999, which disclosed that a joint venture had been established to build a manufacturing facility in Canada. It was subsequently named Trilogy Egg Products Inc. It consisted of Michael Foods Inc., which was to license the Easy Egg product, the Manitoba Egg Producers Co-op, which would be the primary source of egg supply, Canadian Inovatech Inc., an egg products producer who would supply (and at that time was supplying) the required import quotas, and another firm Global Egg, which subsequently withdrew from the venture. The parties were to be equal owners and would put up the required capital equally. The recital to the letter of intent outlined the project as follows:
The purpose of this letter of intent is to set forth a general outline of a mutually beneficial enterprise between and among Michael, Manitoba, Inovatech and Global for the commercialization in Canada of certain further processed egg products which initially shall include “Easy Egg” products, precooked egg products and egg substitute products. The project will include the acquisition of a processing facility, equipping the facility, securing an appropriate egg supply
2005 CanLII 32926 (ON SC)
- 13 -
arrangement, and the sale and distribution of further processed egg products in
Canada. The parties acknowledge their mutual intent to proceed with the
enterprise based on the parameters described below, but will be bound only by
execution and delivery of the definitive agreements hereinafter described. The
parties will endeavor to negotiate and execute the agreements and other
documents for the proposed joint enterprise by January 31, 1999.
...
[21] Clause 7 of the letter of intent referred to the “Distribution Agreement” and referred to Macartneys as “...the primary sales agent of extended shelf life products...” and, significantly, said that Macartneys sales territory was to be “...the provinces of Ontario (east of the eastern boundary of Thunder Bay), Quebec, New Brunswick, Labrador, Newfoundland and Nova Scotia.” Clause 7 stated:
7. Distribution Agreement. Upon execution of all of the other agreements described herein, Newco will enter into an agreement with MacCartney Poultry Farm whereby MacCartney Poultry Farm will become the primary sales agent of extended shelf life products on behalf of Newco in the provinces of Ontario (east of the eastern boundary of Thunder Bay), Quebec, New Brunswick, Labrador, Newfoundland and Nova Scotia. The Distribution Agreement may be terminated or amended if the Shareholders agree that MacCartney Poultry Farm is not performing adequately as a distributor of Newco Products.
...
[22] Mr. Macartney testified that he was “dismayed” to see that he had lost Western Canada in the new arrangement. However, in cross-examination he acknowledged that he had indicated his willingness or acquiescence to giving up the Western Canadian market in conversations with Aaron Kwinter, President of Global Eggs, so it was not a surprise to see this reflected in the letter of intent. In any event, Macartneys’ marketing activities, while national in scope, were significantly concentrated in Ontario. Mr. Macartney was reluctant to acknowledge this in his
...
[21] Clause 7 of the letter of intent referred to the “Distribution Agreement” and referred to Macartneys as “...the primary sales agent of extended shelf life products...” and, significantly, said that Macartneys sales territory was to be “...the provinces of Ontario (east of the eastern boundary of Thunder Bay), Quebec, New Brunswick, Labrador, Newfoundland and Nova Scotia.” Clause 7 stated:
7. Distribution Agreement. Upon execution of all of the other agreements described herein, Newco will enter into an agreement with MacCartney Poultry Farm whereby MacCartney Poultry Farm will become the primary sales agent of extended shelf life products on behalf of Newco in the provinces of Ontario (east of the eastern boundary of Thunder Bay), Quebec, New Brunswick, Labrador, Newfoundland and Nova Scotia. The Distribution Agreement may be terminated or amended if the Shareholders agree that MacCartney Poultry Farm is not performing adequately as a distributor of Newco Products.
...
[22] Mr. Macartney testified that he was “dismayed” to see that he had lost Western Canada in the new arrangement. However, in cross-examination he acknowledged that he had indicated his willingness or acquiescence to giving up the Western Canadian market in conversations with Aaron Kwinter, President of Global Eggs, so it was not a surprise to see this reflected in the letter of intent. In any event, Macartneys’ marketing activities, while national in scope, were significantly concentrated in Ontario. Mr. Macartney was reluctant to acknowledge this in his
2005 CanLII 32926 (ON SC)
- 14 -
evidence yet this reality seems to be admitted in paragraph 9 of the Statement of Claim which
states:
9. ...The plaintiffs state that their marketing and distribution efforts were performed predominantly in Ontario. ...
In any event, he acknowledged in cross-examination that he appreciated in January 1999 that Macartneys’ representation of Easy Eggs in Western Canada was about to end.
[23] Mr. Macartney and Mr. de Valk traveled to Michael Foods’ head office in Minnesota on May 5, 1999, for a meeting with Dean Sprinkle who had recently replaced Kevin Kelly as the Executive Vice-President of sales and Jeff Shapiro, Executive Vice-President and General Counsel, who specialized in mergers and acquisitions and had the mandate to oversee the establishment of the Canadian manufacturing facility and the Canadian distributorship arrangements for Easy Eggs. Both Mr. Kelly and Mr. Shapiro testified at trial, although both had since left Michael Foods. I found them to be honest and credible witnesses. However, they had to testify from memory because there were virtually no documents produced in this proceeding by Michael Foods for virtually the entire period of the relationship with Macartneys. This extraordinary circumstance was never satisfactorily explained and I recognize the possibility that Macartneys may have been prejudiced in presenting its case as a result.
[24] The purpose of the May 5, 1999 meeting was for Mr. Macartney and the two Michael Foods’ executives to meet each other to review the parties’ past relationship and to get discussions on track as to Macartneys’ role in the new Canadian operation. When asked if he raised his concern about the reduced territory for Macartneys Easy Egg distributorship in
9. ...The plaintiffs state that their marketing and distribution efforts were performed predominantly in Ontario. ...
In any event, he acknowledged in cross-examination that he appreciated in January 1999 that Macartneys’ representation of Easy Eggs in Western Canada was about to end.
[23] Mr. Macartney and Mr. de Valk traveled to Michael Foods’ head office in Minnesota on May 5, 1999, for a meeting with Dean Sprinkle who had recently replaced Kevin Kelly as the Executive Vice-President of sales and Jeff Shapiro, Executive Vice-President and General Counsel, who specialized in mergers and acquisitions and had the mandate to oversee the establishment of the Canadian manufacturing facility and the Canadian distributorship arrangements for Easy Eggs. Both Mr. Kelly and Mr. Shapiro testified at trial, although both had since left Michael Foods. I found them to be honest and credible witnesses. However, they had to testify from memory because there were virtually no documents produced in this proceeding by Michael Foods for virtually the entire period of the relationship with Macartneys. This extraordinary circumstance was never satisfactorily explained and I recognize the possibility that Macartneys may have been prejudiced in presenting its case as a result.
[24] The purpose of the May 5, 1999 meeting was for Mr. Macartney and the two Michael Foods’ executives to meet each other to review the parties’ past relationship and to get discussions on track as to Macartneys’ role in the new Canadian operation. When asked if he raised his concern about the reduced territory for Macartneys Easy Egg distributorship in
2005 CanLII 32926 (ON SC)
- 15 -
Canada, Mr. Macartney testified “I think it was a given I’d lost it...don’t even go there”. Mr.
Macartney did propose an arrangement whereby he would establish a company (which was
subsequently called Jakenewco) to act as a broker and distributor for Easy Eggs in Eastern
Canada.
[25] Mr. Macartney testified that he made his position clear that if no deal could be worked out, he would insist on being compensated for handing over the market which Macartneys had developed for Easy Eggs in Canada. He said, “They owed me for the start up costs”. He suggested $500,000 would be a reasonable number to reflect Macartneys’ eight years of work in developing this market. He said that Mr. Shapiro seemed to be “floored” at this suggestion. It was Mr. Shapiro’s evidence that Michael Foods’ perspective at the time was that Macartneys was simply a customer with whom they had a customer/supplier relationship. He acknowledged that Canadian buyers of Easy Eggs were in fact customers of Macartneys and that Macartneys owned the Canadian customer base. Mr. Shapiro testified that Michael Foods was not impressed with the size of the market Macartneys had developed in Canada, which at that time was less than 1 million pounds of Easy Eggs sales annually (this compared with the sales volumes of several hundred million pounds in an expanding U.S. market). Michael Foods’ Canadian partners in the Trilogy joint venture had expressed a negative view of Macartneys’ ability to market Easy Eggs nationally in Canada. Mr. Shapiro testified that the consensus of Michael Foods and their Canadian partners was that they had better re-direct the sales effort in Canada, but at the same time they wished to “allow Macartneys to make good on their claims, but in a more limited and focused way and to not have them in major parts of the Canadian market.”
[25] Mr. Macartney testified that he made his position clear that if no deal could be worked out, he would insist on being compensated for handing over the market which Macartneys had developed for Easy Eggs in Canada. He said, “They owed me for the start up costs”. He suggested $500,000 would be a reasonable number to reflect Macartneys’ eight years of work in developing this market. He said that Mr. Shapiro seemed to be “floored” at this suggestion. It was Mr. Shapiro’s evidence that Michael Foods’ perspective at the time was that Macartneys was simply a customer with whom they had a customer/supplier relationship. He acknowledged that Canadian buyers of Easy Eggs were in fact customers of Macartneys and that Macartneys owned the Canadian customer base. Mr. Shapiro testified that Michael Foods was not impressed with the size of the market Macartneys had developed in Canada, which at that time was less than 1 million pounds of Easy Eggs sales annually (this compared with the sales volumes of several hundred million pounds in an expanding U.S. market). Michael Foods’ Canadian partners in the Trilogy joint venture had expressed a negative view of Macartneys’ ability to market Easy Eggs nationally in Canada. Mr. Shapiro testified that the consensus of Michael Foods and their Canadian partners was that they had better re-direct the sales effort in Canada, but at the same time they wished to “allow Macartneys to make good on their claims, but in a more limited and focused way and to not have them in major parts of the Canadian market.”
2005 CanLII 32926 (ON SC)
- 16 -
From Mr. Shapiro’s point of view, there needed to be an in depth assessment of Macartneys’ real
sales capability. The May 5, 1999 meeting was in effect the second stage of that assessment.
[26] The first stage of the assessment had been Dean Sprinkle’s April 8, 1999 visit to Ottawa. Mr. Sprinkle testified that he met with James Macartney and his son Jason, and Mr. de Valk, with a view to assessing Macartneys Easy Egg distributorship capabilities and to better understand the potential for growth in the current Canadian market. A listing of prospective new accounts was put together at a meeting which took place during this visit. The list came to be referred to as “Jimmy’s Guarantee”. This document, later relied on in the sales’ projections of the Trilogy joint venture, estimated a potential growth of Easy Eggs sales in Canada in the short term future, and once the Easy Eggs processing plant was up and running, of up to 10,450,000 pounds – i.e., about ten times the current volume. Mr. Sprinkle testified at trial that he appreciated that this estimate was very ambitious and that 3 to 5 million pounds was in fact the more realistic short-term market potential. Mr. Shapiro also testified that it had been reported back to him by Mr. Sprinkle and the Canadian joint venture partners that Macartneys’ operation was “disorganized, unfocused, very entrepreneurial and very scattered...everyone does everything...with a lack of consistency”.
[27] Mr. Shapiro formed a somewhat negative impression of Mr. Macartney at the May 5, 1999 meeting noting that “he went on and on about the need for him to be compensated for his past marketing efforts”. Mr. Shapiro said that his response was that Michael Foods and Trilogy would like Macartneys to be part of the Canadian venture as a distributor in a defined area with performance targets and that they would insist on the same quality of representation as if
[26] The first stage of the assessment had been Dean Sprinkle’s April 8, 1999 visit to Ottawa. Mr. Sprinkle testified that he met with James Macartney and his son Jason, and Mr. de Valk, with a view to assessing Macartneys Easy Egg distributorship capabilities and to better understand the potential for growth in the current Canadian market. A listing of prospective new accounts was put together at a meeting which took place during this visit. The list came to be referred to as “Jimmy’s Guarantee”. This document, later relied on in the sales’ projections of the Trilogy joint venture, estimated a potential growth of Easy Eggs sales in Canada in the short term future, and once the Easy Eggs processing plant was up and running, of up to 10,450,000 pounds – i.e., about ten times the current volume. Mr. Sprinkle testified at trial that he appreciated that this estimate was very ambitious and that 3 to 5 million pounds was in fact the more realistic short-term market potential. Mr. Shapiro also testified that it had been reported back to him by Mr. Sprinkle and the Canadian joint venture partners that Macartneys’ operation was “disorganized, unfocused, very entrepreneurial and very scattered...everyone does everything...with a lack of consistency”.
[27] Mr. Shapiro formed a somewhat negative impression of Mr. Macartney at the May 5, 1999 meeting noting that “he went on and on about the need for him to be compensated for his past marketing efforts”. Mr. Shapiro said that his response was that Michael Foods and Trilogy would like Macartneys to be part of the Canadian venture as a distributor in a defined area with performance targets and that they would insist on the same quality of representation as if
2005 CanLII 32926 (ON SC)
- 17 -
Michael Foods was directly marketing the product. His parting message was “let’s go forward
and we’ll work out our differences.” The evidence indicates that following this meeting Mr. de
Valk put together and sent to Michael Foods some draft agreements to advance the discussions.
This documentation reflected the parties’ discussions in very general terms, and was intended to
generate negotiations. It suggested a sales territory for Macartneys of all of Canada, and it
introduced the concept of performance guarantees. The documents were not acted on.
[28] Two subsequent strained meetings followed. On August 18, 1999, a meeting took place at Dorval Airport in Montreal. In attendance were Mr. Shapiro, Mr. Wiebe (President of Inovatech), Mr. de Valk, Mr. Macartney and his son Jason, and Mr. Dowd. This meeting started with a bitter argument between Mr. Macartney and Mr. Wiebe, who had apparently disliked and distrusted each other from previous business dealings. This started when Mr. Wiebe challenged Mr. Macartney’s assertion that he was losing money on Easy Eggs sales. Mr. Shapiro felt that Mr. Macartney was “very verbally abusive to Mr. Wiebe” and insisted that Mr. Macartney apologize. He described Mr. Macartney’s remarks as an “emotional rant” about what he wanted and what Mr. Macartney was owed. Mr. Shapiro tried to end the meeting on a positive note with a “let’s go forward and prosper together” message.
[29] A later meeting occurred at an Ottawa restaurant in September of 1999, which Mr. Shapiro described as “considerably less tumultuous” than the Dorval meeting. This was attended by Mr. Macartney, with his son Jason and Mr. Dowd. Also in attendance were Mr. Shapiro and Mr. Sprinkle of Michael Foods and Karim Cressaty. Mr. Shapiro testified that the joint venture
[28] Two subsequent strained meetings followed. On August 18, 1999, a meeting took place at Dorval Airport in Montreal. In attendance were Mr. Shapiro, Mr. Wiebe (President of Inovatech), Mr. de Valk, Mr. Macartney and his son Jason, and Mr. Dowd. This meeting started with a bitter argument between Mr. Macartney and Mr. Wiebe, who had apparently disliked and distrusted each other from previous business dealings. This started when Mr. Wiebe challenged Mr. Macartney’s assertion that he was losing money on Easy Eggs sales. Mr. Shapiro felt that Mr. Macartney was “very verbally abusive to Mr. Wiebe” and insisted that Mr. Macartney apologize. He described Mr. Macartney’s remarks as an “emotional rant” about what he wanted and what Mr. Macartney was owed. Mr. Shapiro tried to end the meeting on a positive note with a “let’s go forward and prosper together” message.
[29] A later meeting occurred at an Ottawa restaurant in September of 1999, which Mr. Shapiro described as “considerably less tumultuous” than the Dorval meeting. This was attended by Mr. Macartney, with his son Jason and Mr. Dowd. Also in attendance were Mr. Shapiro and Mr. Sprinkle of Michael Foods and Karim Cressaty. Mr. Shapiro testified that the joint venture
2005 CanLII 32926 (ON SC)
- 18 -
partners had concluded by this point that they needed to control their own sales and marketing
and that this would include supervising the activities of Macartneys.
[30] Mr. Shapiro introduced Mr. Cressaty as the newly recruited president of Trilogy. Mr. Cressaty had extensive background in sales and marketing in the food industry in Quebec, although not in the egg industry. Mr. Macartney made it clear in his evidence that he strongly resented being supervised by anyone, particularly someone such as Mr. Cressaty who was not “an egg man” and who knew nothing of the liquid egg market in Canada. Mr. Shapiro advised Macartneys at this meeting that Mr. Cressaty would henceforth be handling the negotiations of a distributorship agreement with Macartneys on behalf of Michael Foods and the Trilogy joint venture. I find that at all material times in the ensuing negotiations Mr. Cressaty was acting on behalf of and within his duties as an officer of Trilogy, and Trilogy in turn was the agent of Michael Foods in the negotiations for a distributorship agreement for Easy Eggs.
[31] The following week, Macartneys wrote to Jeff Shapiro listing “notes and ideas” they would be looking for in any agreement with Trilogy. This included a claim to handle all sales in Ontario and Quebec with a 5% commission on such sales, a 2% commission on sales by brokers elsewhere in Canada, and a request for compensation “for work done for the past 8 years”. This proposal was an attempt to go around Mr. Cressaty. Mr. Shapiro did not respond.
[32] Mr. Cressaty testified that following the October 4, 1999 start date of his new position as president of Trilogy, his first mandate was to make a “broker-rep” deal with Macartneys in regard to Trilogy’s extended shelf life products. He viewed the recent Ottawa meeting in a positive light and felt all parties had left the meeting with a “gung ho” attitude. He appreciated
[30] Mr. Shapiro introduced Mr. Cressaty as the newly recruited president of Trilogy. Mr. Cressaty had extensive background in sales and marketing in the food industry in Quebec, although not in the egg industry. Mr. Macartney made it clear in his evidence that he strongly resented being supervised by anyone, particularly someone such as Mr. Cressaty who was not “an egg man” and who knew nothing of the liquid egg market in Canada. Mr. Shapiro advised Macartneys at this meeting that Mr. Cressaty would henceforth be handling the negotiations of a distributorship agreement with Macartneys on behalf of Michael Foods and the Trilogy joint venture. I find that at all material times in the ensuing negotiations Mr. Cressaty was acting on behalf of and within his duties as an officer of Trilogy, and Trilogy in turn was the agent of Michael Foods in the negotiations for a distributorship agreement for Easy Eggs.
[31] The following week, Macartneys wrote to Jeff Shapiro listing “notes and ideas” they would be looking for in any agreement with Trilogy. This included a claim to handle all sales in Ontario and Quebec with a 5% commission on such sales, a 2% commission on sales by brokers elsewhere in Canada, and a request for compensation “for work done for the past 8 years”. This proposal was an attempt to go around Mr. Cressaty. Mr. Shapiro did not respond.
[32] Mr. Cressaty testified that following the October 4, 1999 start date of his new position as president of Trilogy, his first mandate was to make a “broker-rep” deal with Macartneys in regard to Trilogy’s extended shelf life products. He viewed the recent Ottawa meeting in a positive light and felt all parties had left the meeting with a “gung ho” attitude. He appreciated
2005 CanLII 32926 (ON SC)
- 19 -
from the discussions at the Ottawa meeting that key issues for negotiations included Macartneys
sales territory, the length of the agreement, performance guarantees (sales quotas) and
Macartneys demand for compensation for their marketing efforts over the last 8 years. Mr.
Shapiro had instructed Mr. Cressaty that there were to be no payments to Macartneys for past
services, particularly in light of the fact that (in the view of Michael Foods), they had handed to
Macartneys their major national customer, Marriott Canada. Mr. Cressaty was also given the
“Jimmy’s Guarantee” data and certain other information that had been in the possession of
Michael Foods dealing with the potential for market growth for Easy Eggs.
[33] Mr. Cressaty subsequently met with Macartneys in Ottawa on October 18, 1999, to get a better feel for the history of Macartneys’ role in the Easy Egg market and to start negotiations. Macartneys told Mr. Cressaty that in the absence of a concluded deal they were not handing over to Trilogy their customer information, and that they were insisting on a 5-year deal. It was agreed in principle that in the new arrangement Trilogy would handle the sales and invoicing for the products and that the territory for Macartneys was to be limited to Ontario, which was then about 60% of the Canadian Easy Egg market. It was not disputed that the greatest growth potential was through sales to the Toronto based head offices of the national food chains. Mr. Cressaty said that he reluctantly accepted what he termed the unusual concept of a 5-year distributorship agreement, but only if appropriate performance guarantees from Macartneys could be agreed upon.
[34] The most difficult issue in the negotiations turned out to be the guaranteed sales quotas to be required of Macartneys over each of the 5 years of the proposed agreement. This was of
[33] Mr. Cressaty subsequently met with Macartneys in Ottawa on October 18, 1999, to get a better feel for the history of Macartneys’ role in the Easy Egg market and to start negotiations. Macartneys told Mr. Cressaty that in the absence of a concluded deal they were not handing over to Trilogy their customer information, and that they were insisting on a 5-year deal. It was agreed in principle that in the new arrangement Trilogy would handle the sales and invoicing for the products and that the territory for Macartneys was to be limited to Ontario, which was then about 60% of the Canadian Easy Egg market. It was not disputed that the greatest growth potential was through sales to the Toronto based head offices of the national food chains. Mr. Cressaty said that he reluctantly accepted what he termed the unusual concept of a 5-year distributorship agreement, but only if appropriate performance guarantees from Macartneys could be agreed upon.
[34] The most difficult issue in the negotiations turned out to be the guaranteed sales quotas to be required of Macartneys over each of the 5 years of the proposed agreement. This was of
2005 CanLII 32926 (ON SC)
- 20 -
particular importance because the agreement was to provide that failure to achieve the
guaranteed sales quota would allow Trilogy to terminate the agreement on thirty days’ notice
without compensation. This was what Mr. Shapiro felt was required to motivate Macartneys,
and he called it his “carrot and stick” approach in his evidence. Mr. Macartney testified that he
felt that Macartneys was being set up in the sense that Trilogy wanted agreement on a large
quota that Macartneys could not possibly meet, so as to entitle Trilogy to terminate the
agreement without compensation.
[35] On my view of the evidence, Mr. Cressaty genuinely wanted Macartneys as Trilogy’s Ontario distributor with aggressive quotas that could be met. On the other hand, I find that Macartneys had every reason to fear that the suggested quotas were unreasonably large and could not be met. It should be recalled that in 1999, Macartneys was selling slightly less than 1 million pounds of Easy Eggs across Canada, and their sales had been relatively flat for the previous three years. Their sales territory was now to be Ontario only. The sales potential of some 10,450,000 pounds discussed with Mr. Sprinkle of Michael Foods, as outlined in “Jimmy’s Guarantee”, was a wish list for the entire Canadian market and was based on a development period of at least several years and assumed a processing plant up and running in Canada. As noted, Mr. Sprinkle’s expectation coming away from the meeting, where he formulated the “Jimmy’s Guarantee” with Macartneys, was that sales of 3 to 5 million pounds (for all of Canada) was the realistic short term market potential. Understandably, Macartneys was shocked at Mr. Cressaty’s initial suggested performance guarantee of 4 million pounds in year one for Macartneys proposed Ontario distributorship.
[35] On my view of the evidence, Mr. Cressaty genuinely wanted Macartneys as Trilogy’s Ontario distributor with aggressive quotas that could be met. On the other hand, I find that Macartneys had every reason to fear that the suggested quotas were unreasonably large and could not be met. It should be recalled that in 1999, Macartneys was selling slightly less than 1 million pounds of Easy Eggs across Canada, and their sales had been relatively flat for the previous three years. Their sales territory was now to be Ontario only. The sales potential of some 10,450,000 pounds discussed with Mr. Sprinkle of Michael Foods, as outlined in “Jimmy’s Guarantee”, was a wish list for the entire Canadian market and was based on a development period of at least several years and assumed a processing plant up and running in Canada. As noted, Mr. Sprinkle’s expectation coming away from the meeting, where he formulated the “Jimmy’s Guarantee” with Macartneys, was that sales of 3 to 5 million pounds (for all of Canada) was the realistic short term market potential. Understandably, Macartneys was shocked at Mr. Cressaty’s initial suggested performance guarantee of 4 million pounds in year one for Macartneys proposed Ontario distributorship.
2005 CanLII 32926 (ON SC)
- 21 -
[36] Jason Macartney, who was now handling the communications, but always following his
father’s instructions, followed up in a November 1, 1999 letter offering that Macartneys would
give a guarantee of 1 million pounds in year one, 2 million pounds in year 2, and a sliding scale
of up to 16 million pounds in year 5, with a 90% achievement required in the first 3 years. Mr.
Cressaty testified that he thought this was “much too low”. There were further negotiations and
a further significant meeting between Jason Macartney and Mr. Cressaty at Macartneys’ offices
in Ottawa on November 29, 1999. By this time, Trilogy had considerably improved its offer
without securing Macartneys’ agreement. In particular, Trilogy offered to hire a salesman at
Trilogy’s own expense to work with Mr. Dowd in Ontario, to add the Micro-Fresh line of
products to the deal, and to lower the required sales quotas. Mr. Cressaty testified that finally out
of a sense of frustration and to try and exert some pressure to get an agreement finalized, he sent
a letter to Macartneys on November 30, 1999, with Trilogy’s “last and final offer” and requested
an immediate response. This letter contained the noted “improvements”. It also contained the
following key term:
6) Any agreement reached by both parties shall be for a five (5) year term, assuming that both parties conform to the pre set goals and terms set forth. Failing to meet these objectives, Trilogy Egg Products Inc will have the right to annul this contract on a 30 days notice.
...
[37] The sales guarantees required of Macartneys in their territory (Ontario), failing achievement of which would allow termination of their distributorship on thirty days’ notice, were as follows:
Year 1 2,250,000 pounds Year 2 5,250,000 pounds
6) Any agreement reached by both parties shall be for a five (5) year term, assuming that both parties conform to the pre set goals and terms set forth. Failing to meet these objectives, Trilogy Egg Products Inc will have the right to annul this contract on a 30 days notice.
...
[37] The sales guarantees required of Macartneys in their territory (Ontario), failing achievement of which would allow termination of their distributorship on thirty days’ notice, were as follows:
Year 1 2,250,000 pounds Year 2 5,250,000 pounds
2005 CanLII 32926 (ON SC)
Year 3
Year 4
Year 5
7,875,000 pounds
10,125,000 pounds
12,375,000 pounds
- 22 -
[38] Mr. Cressaty’s last proposal resulted in a response written by Jason Macartney in a letter
dated December 4, 1999, in which he noted that “one issue only” stood in the way of a deal,
being the required quotas. He made a counter proposal wherein the year 1 quota was the same as
requested by Mr. Cressaty, but the volumes escalated to year 5 to a maximum quota of 6,750,000
pounds. Jason Macartney ended this letter by stating “we want this agreement to succeed,
Macartney family has been exclusively representing Easy Egg in Canada for the past 9 years and
would like to continue too [sic] far into the future.” This resulted in a further offer from Trilogy,
which in effect removed the quota for years 3, 4 and 5, and proposed a “good faith” renegotiation
for those years when “...both parties will be in a better position to accurately evaluate the
potential market.” It is not disputed, and I find as a fact that Jason Macartney then informed Mr.
Cressaty that he and his father were in agreement with this final revised proposal from Trilogy
and that they had a deal. Mr. Cressaty enthusiastically conveyed that information to Trilogy’s
Board in a fax saying simply “WE HAVE A DEAL WITH JIMMY!!!!” He advised
Macartneys that Trilogy would now have their (Trilogy’s) lawyers draw up the requisite
contractual documentation.
[39] The contracts prepared by Trilogy’s solicitors were sent to Macartneys on December 24, 1999, and Macartneys advised that their solicitors would be asked to review the documentation. James and Jason Macartney admitted in evidence that they did not in fact review these documents nor did they send them to their solicitors.
[39] The contracts prepared by Trilogy’s solicitors were sent to Macartneys on December 24, 1999, and Macartneys advised that their solicitors would be asked to review the documentation. James and Jason Macartney admitted in evidence that they did not in fact review these documents nor did they send them to their solicitors.
2005 CanLII 32926 (ON SC)
- 23 -
[40] Macartneys, in reality, had no intention of making a deal with Trilogy. James Macartney,
apparently out of a sense of resentment and betrayal, but for reasons never fully explained at
trial, instructed his son Jason to “string them along”, as Jason put it, i.e., to dupe Mr. Cressaty
into thinking that a deal had been made. Jason Macartney’s December 4, 1999 letter noted
above, suggesting “...one issue only” needed to be resolved, was part of the “string them along”
subterfuge as were Jason Macartney’s subsequent assurances that they had concluded a deal.
[41] On January 10, 2000, Trilogy learned from a major customer that they had been contacted by Mr. Dowd to advise that Macartneys was no longer distributing Easy Eggs and suggesting that the products of a competitor, Burnbrae Farms, be substituted for Easy Eggs. Mr. Cressaty called Jason Macartney, who strongly denied that this had occurred. Jason Macartney followed up with a letter to Mr. Cressaty offering misleading assurances. His letter said:
Further to our telephone conversation all accusations are incorrect and I think you are, or your sources are mixing our brokering business with our restaurant distribution business.
As of right now we have not formalized any negotiation to date into a written contract. My lawyer is reviewing the documents forwarded to us by you and should be back to me in a few days.
Hopefully when a deal is signed all this talk will subside.
[42] In early January 2002, Macartneys circulated a “To whom it may concern” letter to many of their major Easy Egg customers, including Marriott, which announced that Macartneys was switching to Burnbrae’s extended shelf life products and affirming as the reason for the change, the false assertions that the supply of Easy Eggs was at risk, that there was unlikely to be a
[41] On January 10, 2000, Trilogy learned from a major customer that they had been contacted by Mr. Dowd to advise that Macartneys was no longer distributing Easy Eggs and suggesting that the products of a competitor, Burnbrae Farms, be substituted for Easy Eggs. Mr. Cressaty called Jason Macartney, who strongly denied that this had occurred. Jason Macartney followed up with a letter to Mr. Cressaty offering misleading assurances. His letter said:
Further to our telephone conversation all accusations are incorrect and I think you are, or your sources are mixing our brokering business with our restaurant distribution business.
As of right now we have not formalized any negotiation to date into a written contract. My lawyer is reviewing the documents forwarded to us by you and should be back to me in a few days.
Hopefully when a deal is signed all this talk will subside.
[42] In early January 2002, Macartneys circulated a “To whom it may concern” letter to many of their major Easy Egg customers, including Marriott, which announced that Macartneys was switching to Burnbrae’s extended shelf life products and affirming as the reason for the change, the false assertions that the supply of Easy Eggs was at risk, that there was unlikely to be a
2005 CanLII 32926 (ON SC)
- 24 -
Canadian plant for a minimum of 5 years, and that the importation of Easy Eggs was in violation
of Canadian anti dumping laws. James Macartney stated in the letter:
In order to maintain a trusting relationship with our customers we find it hard to continue doing business with Easy Eggs. For these reasons we opened up talks with the largest egg producer in Canada (Burnbrae Farms) to ensure that continuous supply was in place. Yes, this is detrimental to Macartney’s Easy Egg program, but at this point the product is not Canadian and not for the foreseeable future, as well the product is vulnerable to the Canadian import program and from my legal advice even to a charge of anti dumping.
For eight years there was no ESL (Extended Shelf Life) liquid egg product that was Canadian. This is not true today. Burnbrae Farms has made great efforts to close the gap. They have unlimited supply (largest producer), they are 100% Canadian and can produce the product in Quebec and Manitoba (cutting freight costs). I have enough supply to last to the last week of January. Gord Dowd will be acting as an intermediary between you and Burnbrae Farms. Regretfully the decision had to be made but it is paramount that the interests of our customers be addressed.
Hopefully at the end of the day we will all come out benefiting.
[43] Mr. Cressaty soon obtained a copy of this letter and learned that Jason Macartney’s denials were untrue and that Macartneys was attempting to switch customers to the competing Burnbrae product. By letter dated January 11, 2000, Trilogy terminated negotiations and the Easy Egg distributorship, effective immediately. Their letter stated:
We wish to advise that we are no longer prepared to proceed with the appointment of Jakenew Co. Ltd. as a sales agent for our products or with the proposed warehouse and order assembly arrangements with Macartney Farms.
The materials prepared and forwarded to you on December 24, 1999 were forwarded on the basis that Jakenew was associated with Macartney Farms and had acquired a customer list from Macartney Farms and was in a position to promote the sale of food products to such customers in the Province of Ontario. Trilogy would require any sales agent to use its best efforts in promoting the sale
In order to maintain a trusting relationship with our customers we find it hard to continue doing business with Easy Eggs. For these reasons we opened up talks with the largest egg producer in Canada (Burnbrae Farms) to ensure that continuous supply was in place. Yes, this is detrimental to Macartney’s Easy Egg program, but at this point the product is not Canadian and not for the foreseeable future, as well the product is vulnerable to the Canadian import program and from my legal advice even to a charge of anti dumping.
For eight years there was no ESL (Extended Shelf Life) liquid egg product that was Canadian. This is not true today. Burnbrae Farms has made great efforts to close the gap. They have unlimited supply (largest producer), they are 100% Canadian and can produce the product in Quebec and Manitoba (cutting freight costs). I have enough supply to last to the last week of January. Gord Dowd will be acting as an intermediary between you and Burnbrae Farms. Regretfully the decision had to be made but it is paramount that the interests of our customers be addressed.
Hopefully at the end of the day we will all come out benefiting.
[43] Mr. Cressaty soon obtained a copy of this letter and learned that Jason Macartney’s denials were untrue and that Macartneys was attempting to switch customers to the competing Burnbrae product. By letter dated January 11, 2000, Trilogy terminated negotiations and the Easy Egg distributorship, effective immediately. Their letter stated:
We wish to advise that we are no longer prepared to proceed with the appointment of Jakenew Co. Ltd. as a sales agent for our products or with the proposed warehouse and order assembly arrangements with Macartney Farms.
The materials prepared and forwarded to you on December 24, 1999 were forwarded on the basis that Jakenew was associated with Macartney Farms and had acquired a customer list from Macartney Farms and was in a position to promote the sale of food products to such customers in the Province of Ontario. Trilogy would require any sales agent to use its best efforts in promoting the sale
2005 CanLII 32926 (ON SC)
- 25 -
of its products; to keep Trilogy’s proprietary information confidential; and to not
compete directly or indirectly in the market place with Trilogy.
We now understand that either Jakenew or Macartney Farms have contacted our potential customers and have indicated to such potential customers that they are representing a product which competes with Trilogy’s extended shelf-life liquid egg products. This is inconsistent with the level of commitment we require from a sales agent and its principals and associates.
This letter serves notice that Trilogy is now discontinuing all discussions with Jakenew and/or Macartney Farms with respect to the proposed arrangements and any and all negotiations are now terminated.
Secondly, it has come to our attention that your representatives of Jakenew and/or Macartney Farms are providing inaccurate information with respect to Trilogy, our affairs, and our products. This activity must cease immediately. Please conduct your affairs in accordance with the law.
[44] Jason Macartney was unable to explain the rationale for Macartneys’ course of action. He testified that he was told at the time by his father to mind his own business. He stated that his father never turned over the negotiating process to him, and that during this period his father was “physically and mentally exhausted”.
[45] James Macartney admitted in his evidence that from late October, prior to his final meeting with Mr. Cressaty, he was actively considering getting out of the Easy Egg business. He admits that he instructed Jason to give Mr. Cressaty the impression that negotiations were going on. His evidence at trial as to the deal he made with Burnbrae differed from his evidence on discovery. He admitted in cross-examination that his discovery evidence in fact was true, and I accept as factual his discovery evidence, which is summarized below.
[46] Mr. Macartney arranged a meeting in early December 1999 with Joe Hudson, President of Burnbrae Farms. Mr. Macartney testified that he discussed with Mr. Hudson “that I was no
We now understand that either Jakenew or Macartney Farms have contacted our potential customers and have indicated to such potential customers that they are representing a product which competes with Trilogy’s extended shelf-life liquid egg products. This is inconsistent with the level of commitment we require from a sales agent and its principals and associates.
This letter serves notice that Trilogy is now discontinuing all discussions with Jakenew and/or Macartney Farms with respect to the proposed arrangements and any and all negotiations are now terminated.
Secondly, it has come to our attention that your representatives of Jakenew and/or Macartney Farms are providing inaccurate information with respect to Trilogy, our affairs, and our products. This activity must cease immediately. Please conduct your affairs in accordance with the law.
[44] Jason Macartney was unable to explain the rationale for Macartneys’ course of action. He testified that he was told at the time by his father to mind his own business. He stated that his father never turned over the negotiating process to him, and that during this period his father was “physically and mentally exhausted”.
[45] James Macartney admitted in his evidence that from late October, prior to his final meeting with Mr. Cressaty, he was actively considering getting out of the Easy Egg business. He admits that he instructed Jason to give Mr. Cressaty the impression that negotiations were going on. His evidence at trial as to the deal he made with Burnbrae differed from his evidence on discovery. He admitted in cross-examination that his discovery evidence in fact was true, and I accept as factual his discovery evidence, which is summarized below.
[46] Mr. Macartney arranged a meeting in early December 1999 with Joe Hudson, President of Burnbrae Farms. Mr. Macartney testified that he discussed with Mr. Hudson “that I was no
2005 CanLII 32926 (ON SC)
- 26 -
longer going to handle Easy Egg, and that there was no way out of it. I was quite willing to turn
over all my customer records to him and distribution of how it was handled, and he take over
Gordy, what could he offer me?”... “so he ended up saying, I will make you a deal. I tell you
what, I know you are negotiating right now with Giant Tiger, it’s you and I are quoting on it. I
will make sure my quote ‘is above yours’, you make sure Gord comes here with all the records
and all the customers. We shook hands, that was it.” Mr. Macartney explained that he expected
to lose to Burnbrae an important competitive bid that was pending with Giant Tiger stores, and
that essentially Mr. Hudson agreed that he would see that this did not happen. He, (Mr. Hudson),
said “I am telling you that for the next 5 years I will call you up and find out what your quote is
and I will quote above it, which he had done.” It was part of this arrangement that Macartneys
Easy Eggs salesman Gordon Dowd would transfer his employment to Burnbrae, as well as his
car lease, and that confidential customer information would be supplied to Burnbrae. I quote
question 881 from the discovery evidence of James Macartney:
Q. So, what was the package of papers then that was sent over to Burnbrae?
A. It would be Gordy’s notes on the customers we had, who to call, but with Gordy going over everything was in his head anyway, but he wanted the documentation as to, Gordy wasn’t coming empty handed. He knew how much Fairmont buys, he knew who to contact. Gordy knew everyone of the people involved.
[47] Later (at question 964) Mr. Macartney stated:
A. ...what happened was – I made it very plain to Joe, whether they buy or not Joe let’s get this straight, our deal stands, I keep Giant Tiger. What I do is, go to them – I’m not pitching for you, Gord does the pitching, I’m the guy that comes in and does the golden handshake, puts my foot in the door, lets Gord through the door. Once he goes through the door then you are on your own. I
Q. So, what was the package of papers then that was sent over to Burnbrae?
A. It would be Gordy’s notes on the customers we had, who to call, but with Gordy going over everything was in his head anyway, but he wanted the documentation as to, Gordy wasn’t coming empty handed. He knew how much Fairmont buys, he knew who to contact. Gordy knew everyone of the people involved.
[47] Later (at question 964) Mr. Macartney stated:
A. ...what happened was – I made it very plain to Joe, whether they buy or not Joe let’s get this straight, our deal stands, I keep Giant Tiger. What I do is, go to them – I’m not pitching for you, Gord does the pitching, I’m the guy that comes in and does the golden handshake, puts my foot in the door, lets Gord through the door. Once he goes through the door then you are on your own. I
2005 CanLII 32926 (ON SC)
- 27 -
give everyone a logical explanation of why I am leaving and that’s it boys
goodnight Dick. Don’t call me back and ask me to go through the door because
I’m not, that’s not what we are doing here. I am not handling the product – and
he had the distribution network anyway, so it didn’t matter.
[48] The evidence also establishes that Mr. Macartney continued to order product from Michael Foods up until December 22, 1999, after he had made his agreement with Mr. Hudson and apparently not intending to pay for it. He admitted that he had not been paying Michael Foods’ invoices for approximately a month, knowing that he intended to withdraw from the Easy Eggs distributorship. These invoices are the subject of the counter-claim which, as noted, was admitted to be due and owing.
[49] Following the termination of the distributorship, both parties were faced with some initial challenges which they handled successfully. Macartneys secured a renewal and a major expansion of their business with Giant Tiger, in the absence of a competitive bid from Burnbrae. This resulted in over $2 million dollars in business from Giant Tiger over the next two years. Macartneys embarked on a vigorous campaign to expand their produce business, which resulted in significant growth. Trilogy, which has never received Macartneys’ customer contacts, or other proprietary information, was forced to immediately assume the role of distributor for Michael Foods’ Easy Eggs product. They secured the Marriott account through a competitive bid. In the two years following termination of the distributorship, most Trilogy sales were not to customers or potential customers of Macartneys on the “Jimmy’s Guarantee” list. The exceptions were, Marriott as noted, Fairmont Hotels who were contracted with through their head office, and Compass which was a customer secured jointly by Trilogy and Macartneys prior to the termination of the relationship.
[48] The evidence also establishes that Mr. Macartney continued to order product from Michael Foods up until December 22, 1999, after he had made his agreement with Mr. Hudson and apparently not intending to pay for it. He admitted that he had not been paying Michael Foods’ invoices for approximately a month, knowing that he intended to withdraw from the Easy Eggs distributorship. These invoices are the subject of the counter-claim which, as noted, was admitted to be due and owing.
[49] Following the termination of the distributorship, both parties were faced with some initial challenges which they handled successfully. Macartneys secured a renewal and a major expansion of their business with Giant Tiger, in the absence of a competitive bid from Burnbrae. This resulted in over $2 million dollars in business from Giant Tiger over the next two years. Macartneys embarked on a vigorous campaign to expand their produce business, which resulted in significant growth. Trilogy, which has never received Macartneys’ customer contacts, or other proprietary information, was forced to immediately assume the role of distributor for Michael Foods’ Easy Eggs product. They secured the Marriott account through a competitive bid. In the two years following termination of the distributorship, most Trilogy sales were not to customers or potential customers of Macartneys on the “Jimmy’s Guarantee” list. The exceptions were, Marriott as noted, Fairmont Hotels who were contracted with through their head office, and Compass which was a customer secured jointly by Trilogy and Macartneys prior to the termination of the relationship.
2005 CanLII 32926 (ON SC)
- 28 -
[50] I find as a fact that Trilogy did not appropriate or use the confidential marketing
information of Macartneys. Rather, they salvaged much of the Easy Eggs’ customer base
utilizing their own knowledge of the market place.
Analysis
[51] As noted in paragraphs 14 and 17 of these reasons, I have found that the 8-year distribution arrangement between Macartneys and Michael Foods was subject to an implied term requiring reasonable notice of termination. The period of reasonable notice, I have found to be one year.
[52] I cannot view Trilogy’s “last and final offer” dated November 30, 1999, as a constructive termination of the relationship, per se. By that date the parties were close to agreement. Further negotiations took place and based on Mr. Macartney’s representations, Trilogy reasonably believed they had an agreement. If Mr. Macartney chose to reject the offer made by Trilogy, it was incumbent on him to advise Trilogy accordingly. Instead, Mr. Macartney abandoned the Easy Eggs distributorship and surreptitiously sought to have Macartneys’ customers switch to the competing liquid egg product of a major competitor. In doing so, he breached his obligations under the distribution agreement and the implied obligation of good faith which has been recognized as an inherent obligation in contractual negotiations. While the concept of good faith in contractual negotiations is at a formative stage, I think that the duty to bargain honestly is well supported by the analysis of the duty of good faith in such cases as Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.) and TSP-INTL LTD. v. Mills 2005 Can. L11 3945 (Ont. S.C.).
Analysis
[51] As noted in paragraphs 14 and 17 of these reasons, I have found that the 8-year distribution arrangement between Macartneys and Michael Foods was subject to an implied term requiring reasonable notice of termination. The period of reasonable notice, I have found to be one year.
[52] I cannot view Trilogy’s “last and final offer” dated November 30, 1999, as a constructive termination of the relationship, per se. By that date the parties were close to agreement. Further negotiations took place and based on Mr. Macartney’s representations, Trilogy reasonably believed they had an agreement. If Mr. Macartney chose to reject the offer made by Trilogy, it was incumbent on him to advise Trilogy accordingly. Instead, Mr. Macartney abandoned the Easy Eggs distributorship and surreptitiously sought to have Macartneys’ customers switch to the competing liquid egg product of a major competitor. In doing so, he breached his obligations under the distribution agreement and the implied obligation of good faith which has been recognized as an inherent obligation in contractual negotiations. While the concept of good faith in contractual negotiations is at a formative stage, I think that the duty to bargain honestly is well supported by the analysis of the duty of good faith in such cases as Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.) and TSP-INTL LTD. v. Mills 2005 Can. L11 3945 (Ont. S.C.).
2005 CanLII 32926 (ON SC)
- 29 -
[53] I find that Mr. Macartney’s conduct in purporting to finally negotiate and accept a
lowered quota for Easy Eggs sales was in fact a subterfuge designed to buy Macartneys time to
switch their liquid egg business to a competitor. In these circumstances, it cannot be said that
Michael Foods, through their agent Trilogy, constructively terminated the distributorship
agreement so as to trigger the reasonable notice obligation. I further find that when on January
11, 2000 Trilogy terminated the distributorship agreement, they did so for cause and, in the
circumstances then existing, were under no obligation to provide reasonable notice or
compensation in lieu. In summary, I find that the operative reason for the termination of the
distributorship agreement was the actions of James Macartney. Therefore, the obligation to pay
compensation in lieu of reasonable notice, which Macartneys would have been entitled to invoke
if Michael Foods or their agent Trilogy had terminated the existing distributorship contract, did
not arise.
[54] I do not accept the defendants’ alternative argument that in order to reasonably mitigate their damages, Macartneys should have accepted the defendants’ last offer at least for the one or two year period following December 1999, on the reasonable mitigation concept described in Mifsud v. MacMillan (1989), 70 O.R. (2d) 701 (C.A.). If Macartneys had chosen not to accept Trilogy’s final offer due to their legitimate concerns about the attainability of the guaranteed sales quota, they would have been acting reasonably and within their rights. There are significant differences between employment relationships (as in Mifsud) and commercial business dealings between companies. The law will not impose contractual relationships on arms length business entities, nor will it make deals for parties who cannot agree. I see no application for the Mifsud principle in circumstances such as these.
[54] I do not accept the defendants’ alternative argument that in order to reasonably mitigate their damages, Macartneys should have accepted the defendants’ last offer at least for the one or two year period following December 1999, on the reasonable mitigation concept described in Mifsud v. MacMillan (1989), 70 O.R. (2d) 701 (C.A.). If Macartneys had chosen not to accept Trilogy’s final offer due to their legitimate concerns about the attainability of the guaranteed sales quota, they would have been acting reasonably and within their rights. There are significant differences between employment relationships (as in Mifsud) and commercial business dealings between companies. The law will not impose contractual relationships on arms length business entities, nor will it make deals for parties who cannot agree. I see no application for the Mifsud principle in circumstances such as these.
2005 CanLII 32926 (ON SC)
- 30 -
[55] The plaintiffs advance an alternative basis for liability. They argue that they are entitled
to quantum meruit compensation for their investment and their losses in relation to establishing
the Easy Eggs market in Canada. The argument is essentially that Trilogy has acquired
Macartneys’ customer base for Easy Egg products, which is in effect an asset built by and owned
by Macartneys over the course of the distributorship agreement, without any compensation to
Macartneys. This is said to constitute an unjust enrichment on the part of Trilogy.
[56] The cause of action for unjust enrichment has three elements: (See Garland v. Consumers Gas Co., [2004] 1 S.C.R. 629).
The law does not compensate a plaintiff simply because his or her acts have benefited another. A fundamental concern about whether there should be a restitutionary remedy is the reasonable expectation of the parties in the broad range of situations where a claim for restitution may arise. As McLachlin J. noted in Peter v. Beblow, the factors that are relevant to determining whether an enrichment is unjust will vary from case to case. Thus, the factors may be different in a case involving a claim against a family member than in a case involving a claim against a public authority.
[56] The cause of action for unjust enrichment has three elements: (See Garland v. Consumers Gas Co., [2004] 1 S.C.R. 629).
-
(a) An enrichment of the defendants;
-
(b) A corresponding deprivation of the plaintiffs;
-
(c) An absence of juristic reason for the defendants’ enrichment.
The law does not compensate a plaintiff simply because his or her acts have benefited another. A fundamental concern about whether there should be a restitutionary remedy is the reasonable expectation of the parties in the broad range of situations where a claim for restitution may arise. As McLachlin J. noted in Peter v. Beblow, the factors that are relevant to determining whether an enrichment is unjust will vary from case to case. Thus, the factors may be different in a case involving a claim against a family member than in a case involving a claim against a public authority.
2005 CanLII 32926 (ON SC)
- 31 -
[58] In my opinion, the plaintiffs’ claim for quantum meruit recovery must be decided in
reference to the question of whether there is an absence of juristic reason for the defendants’
enrichment. In other words, was there a lawful justification for the benefit Trilogy received in
acquiring the Easy Eggs market in Canada?
[59] This third element of absence of juristic reason for the enrichment, is clearly explained in Mr. Perell’s article at p. 464:
The third element, an absence of juristic reason for the defendant’s enrichment, is the ethical and legal heart of the unjust enrichment claim because in the third element rests the issue of whether as a matter of law it is just or unjust, fair or unfair for the defendant to keep the benefit. It is at this stage that the court considers the moral and policy questions of whether there has been an unjust enrichment.
[60] Mr. Perell goes on to comment on the third element in the following words, with which I respectfully agree:
To establish the third element, the plaintiff must negate that there is any common law or equitable or statutory justification for the defendant keeping the benefit, which is to say that the plaintiff must negate that there is a legal justification for the defendant keeping the benefit. In this somewhat awkward way, the third element ensures that restitution is not available for every enrichment at the plaintiff’s expense. Further, the third element aims to ensure that there must be a reason for reversing the transfer of wealth; that the reason must be juristic – which is to say, rooted in law and not mere sentiment; and that there must be something unjust or against good conscience if the defendant were to keep the benefit. In Canada (Attorney General) v. Confederation Life Insurance Co., Blair J. stated: “In short, a ‘juristic reason’ simply means some underlying justification, grounded in a legal or equitable base, for the circumstances that have arisen, notwithstanding that the benefit/detriment equilibrium has since become unbalanced.” In Peel (Regional Municipality) v. Canada, speaking about the notion of injustice in the law of restitution, McLachlin J. stated:
[59] This third element of absence of juristic reason for the enrichment, is clearly explained in Mr. Perell’s article at p. 464:
The third element, an absence of juristic reason for the defendant’s enrichment, is the ethical and legal heart of the unjust enrichment claim because in the third element rests the issue of whether as a matter of law it is just or unjust, fair or unfair for the defendant to keep the benefit. It is at this stage that the court considers the moral and policy questions of whether there has been an unjust enrichment.
[60] Mr. Perell goes on to comment on the third element in the following words, with which I respectfully agree:
To establish the third element, the plaintiff must negate that there is any common law or equitable or statutory justification for the defendant keeping the benefit, which is to say that the plaintiff must negate that there is a legal justification for the defendant keeping the benefit. In this somewhat awkward way, the third element ensures that restitution is not available for every enrichment at the plaintiff’s expense. Further, the third element aims to ensure that there must be a reason for reversing the transfer of wealth; that the reason must be juristic – which is to say, rooted in law and not mere sentiment; and that there must be something unjust or against good conscience if the defendant were to keep the benefit. In Canada (Attorney General) v. Confederation Life Insurance Co., Blair J. stated: “In short, a ‘juristic reason’ simply means some underlying justification, grounded in a legal or equitable base, for the circumstances that have arisen, notwithstanding that the benefit/detriment equilibrium has since become unbalanced.” In Peel (Regional Municipality) v. Canada, speaking about the notion of injustice in the law of restitution, McLachlin J. stated:
2005 CanLII 32926 (ON SC)
- 32 -
First, the injustice lies in one person’s retaining something which he or she ought
not to retain, requiring that the scales be righted. Second, the required injustice
must take into account not only what is fair to the plaintiff; it must also consider
what is fair to the defendant. It is not enough that the plaintiff has made a
payment or rendered services which it was not obliged to make or render; it must
also be shown that the defendant as a consequence is in possession of a benefit,
and it is fair and just for the defendant to disgorge that benefit.
[61] Finally, Mr. Perell makes the following observation which, in my view, also pertains to the facts of this case:
An unjust enrichment claim being equitable in its nature, a defendant may keep his or her unjust enrichment if there is an equitable defence to the plaintiff’s claim. These defences include laches, acquiescence, and the clean hands doctrine.
[62] I am unable to conclude that Trilogy was unjustly enriched in their acquisition of the Easy Eggs customer base in Canada. The third element of unjust enrichment is missing, that is the absence of a juridical reason to justify the enrichment. Here, Trilogy acquired the Easy Eggs customer base in January of 2000 and following months, in the context of an emergency transitional effort to salvage this market which, as I have found, Macartneys had abandoned in favour of an attempt to hand the customers over to a major competitor. I hold that a good faith attempt to salvage one’s economic interest or to mitigate one’s losses, provided that no proprietary or confidential information is appropriated or misused, is a proper juridical reason to justify such benefit or enrichment as may have occurred in this case. Further, James and Jason Macartney chose to negotiate in bad faith in December 1999, and Macartneys attempted to transfer their customers to a competitor’s product in breach of the existing distributorship contract. In the circumstances, the clean hands doctrine also precludes the relief claimed. The plaintiffs are therefore disentitled to damages on a quantum meruit basis.
[61] Finally, Mr. Perell makes the following observation which, in my view, also pertains to the facts of this case:
An unjust enrichment claim being equitable in its nature, a defendant may keep his or her unjust enrichment if there is an equitable defence to the plaintiff’s claim. These defences include laches, acquiescence, and the clean hands doctrine.
[62] I am unable to conclude that Trilogy was unjustly enriched in their acquisition of the Easy Eggs customer base in Canada. The third element of unjust enrichment is missing, that is the absence of a juridical reason to justify the enrichment. Here, Trilogy acquired the Easy Eggs customer base in January of 2000 and following months, in the context of an emergency transitional effort to salvage this market which, as I have found, Macartneys had abandoned in favour of an attempt to hand the customers over to a major competitor. I hold that a good faith attempt to salvage one’s economic interest or to mitigate one’s losses, provided that no proprietary or confidential information is appropriated or misused, is a proper juridical reason to justify such benefit or enrichment as may have occurred in this case. Further, James and Jason Macartney chose to negotiate in bad faith in December 1999, and Macartneys attempted to transfer their customers to a competitor’s product in breach of the existing distributorship contract. In the circumstances, the clean hands doctrine also precludes the relief claimed. The plaintiffs are therefore disentitled to damages on a quantum meruit basis.
2005 CanLII 32926 (ON SC)
- 33 -
Damages
[63] In the event that contrary to my findings, the plaintiffs are entitled to recovery, I will assess the damages proven at trial on both a reasonable notice and quantum meruit basis.
[64] The accounting experts for each side offer differing methods of calculating Macartneys’ projected loss of profit from Easy Eggs sales in the years 2000 and 2001, although they arrive at virtually the same amount, being $110,000. I have found that the reasonable notice period would be one year and I therefore find that Macartneys’ loss of profit in that period is $55,000.
[65] I do not accept the argument that Macartneys mitigated any loss of profit by the revenue earned from the agreement with Giant Tiger, which in turn followed from the arrangement between Mr. Macartney and Mr. Hudson of Burnbrae. The subject of this litigation is the distributorship of a liquid egg product. The deal made with Giant Tiger did not involve the supply of liquid eggs. It should not be considered in mitigation of the losses from the Easy Eggs product. The Giant Tiger deal is not unlike Macartneys’ concerted efforts to expand their produce business after the loss of Easy Eggs sales. Revenue from this activity does not constitute a set off in mitigation of lost profits for Macartneys’ Easy Eggs business.
[66] In the alternative to a loss of future profits claim based on reasonable notice of termination of the agreement, Macartneys claims, presumably on an unjust enrichment rationale, compensation for the “seed money” they invested in developing the Easy Eggs market in Canada during the years 1993-1999. In addition, Macartneys claims the difference between the gross margins achieved on Easy Eggs sales (10.4%) and the average 15% gross margins Macartneys
[63] In the event that contrary to my findings, the plaintiffs are entitled to recovery, I will assess the damages proven at trial on both a reasonable notice and quantum meruit basis.
[64] The accounting experts for each side offer differing methods of calculating Macartneys’ projected loss of profit from Easy Eggs sales in the years 2000 and 2001, although they arrive at virtually the same amount, being $110,000. I have found that the reasonable notice period would be one year and I therefore find that Macartneys’ loss of profit in that period is $55,000.
[65] I do not accept the argument that Macartneys mitigated any loss of profit by the revenue earned from the agreement with Giant Tiger, which in turn followed from the arrangement between Mr. Macartney and Mr. Hudson of Burnbrae. The subject of this litigation is the distributorship of a liquid egg product. The deal made with Giant Tiger did not involve the supply of liquid eggs. It should not be considered in mitigation of the losses from the Easy Eggs product. The Giant Tiger deal is not unlike Macartneys’ concerted efforts to expand their produce business after the loss of Easy Eggs sales. Revenue from this activity does not constitute a set off in mitigation of lost profits for Macartneys’ Easy Eggs business.
[66] In the alternative to a loss of future profits claim based on reasonable notice of termination of the agreement, Macartneys claims, presumably on an unjust enrichment rationale, compensation for the “seed money” they invested in developing the Easy Eggs market in Canada during the years 1993-1999. In addition, Macartneys claims the difference between the gross margins achieved on Easy Eggs sales (10.4%) and the average 15% gross margins Macartneys
2005 CanLII 32926 (ON SC)
- 34 -
requires to break even on their operations. The experts agree and I find that it would be “double
counting” to award both the shortfall in average margins, and the expenses incurred to support
Easy Eggs sales.
[67] Macartneys sales of Easy Eggs amounted to about $975,000 in each of 1997, 1998 and 1999. This resulted in an annual shortfall from the 15% gross margin, which Macartneys required as an average return on their sales in order to break even on their overall operation. The total shortfall for the period of the distribution agreement was approximately $382,658 according to the evidence of the plaintiffs’ accounting expert, Brian Scott, C.A., which I accept on this point. In particular, I accept as proven that this was a loss that was established and which would be properly claimed if liability was established on a quantum meruit basis.
[68] As an alternative to claiming their shortfall on gross margin, Macartneys claims the actual expenses (the “seed money”), incurred for the sale of Easy Eggs. Macartneys’ accounting expert calculated the sum of $403,660, as the total of the claimed expenses which included:
[67] Macartneys sales of Easy Eggs amounted to about $975,000 in each of 1997, 1998 and 1999. This resulted in an annual shortfall from the 15% gross margin, which Macartneys required as an average return on their sales in order to break even on their overall operation. The total shortfall for the period of the distribution agreement was approximately $382,658 according to the evidence of the plaintiffs’ accounting expert, Brian Scott, C.A., which I accept on this point. In particular, I accept as proven that this was a loss that was established and which would be properly claimed if liability was established on a quantum meruit basis.
[68] As an alternative to claiming their shortfall on gross margin, Macartneys claims the actual expenses (the “seed money”), incurred for the sale of Easy Eggs. Macartneys’ accounting expert calculated the sum of $403,660, as the total of the claimed expenses which included:
-
Salary and other compensation to Gord Dowd;
-
An allocation of 25% of James Macartney’s salary;
-
An allocation of 15% of James Macartney’s assistant’s salary;
-
An overhead allocation of 65% of the sum of the above; and
-
Travel expenses.
It was admitted that if one were to identify only the claimed expenses for Mr. Dowd, (including travel expenses), Macartneys in fact achieved a gross profit over the entire period of Easy Eggs sales. The evidence reveals that this conclusion was conveyed to the plaintiffs in their review of
2005 CanLII 32926 (ON SC)
- 35 -
their accounting expert’s preliminary calculations, which followed the examination for
discovery. The plaintiffs’ expert subsequently provided a further report in which a gross up of
the Easy Egg expenses was added to include the above-noted portions of the salaries of Mr.
Macartney and his assistant, and a further amount equivalent to 65% of the total of the salary
expenses, as an “overhead allocation”. Only when these additional amounts were added to Mr.
Dowd’s compensation did it appear that Easy Eggs was being sold by Macartneys at a loss.
[69] I do not consider it reasonable to allocate 25% of Mr. Macartneys’ salary and 15% of his assistant’s salary to a product (Easy Eggs) that represented only 4% of Macartneys’ product line. Further, these salary costs would have been incurred quite irrespective of what product mix Macartneys was selling. These are not extraordinary expenses properly allocable to Easy Eggs sales and I accept the position of the defendants’ accounting expert that this allocation of costs to Easy Egg sales is not justified. I also reject the “overhead” allocation of 65%. Macartneys’ accounting expert asserted that this overhead claim is analogous to Canada Revenue Agency’s practice of accepting 65% as “administrative costs when claims are made for Scientific Research and Experimental Development”.
[70] I prefer the opinion of the defendants’ accounting expert Mr. Davidson, who stated that the policy referred to dealing with scientific research and development is quite irrelevant to the Easy Egg distributorship, particularly when no research costs nor indeed any significant capital costs were incurred. More importantly, this overhead allocation is not appropriate as it includes overhead costs that would have been incurred by Macartneys in any event, irrespective of
[69] I do not consider it reasonable to allocate 25% of Mr. Macartneys’ salary and 15% of his assistant’s salary to a product (Easy Eggs) that represented only 4% of Macartneys’ product line. Further, these salary costs would have been incurred quite irrespective of what product mix Macartneys was selling. These are not extraordinary expenses properly allocable to Easy Eggs sales and I accept the position of the defendants’ accounting expert that this allocation of costs to Easy Egg sales is not justified. I also reject the “overhead” allocation of 65%. Macartneys’ accounting expert asserted that this overhead claim is analogous to Canada Revenue Agency’s practice of accepting 65% as “administrative costs when claims are made for Scientific Research and Experimental Development”.
[70] I prefer the opinion of the defendants’ accounting expert Mr. Davidson, who stated that the policy referred to dealing with scientific research and development is quite irrelevant to the Easy Egg distributorship, particularly when no research costs nor indeed any significant capital costs were incurred. More importantly, this overhead allocation is not appropriate as it includes overhead costs that would have been incurred by Macartneys in any event, irrespective of
2005 CanLII 32926 (ON SC)
- 36 -
Macartneys having the Easy Eggs business (i.e., these overhead costs were not incurred
incrementally with the Easy Eggs business).
[71] Macartneys had claimed that the remuneration paid to Mr. Dowd, their salesperson dedicated to Easy Eggs, was $382,000 over the course of the distributorship, and travel expenses related to Easy Eggs amounted to the sum of $150,000. The total of these sums had they been fully proven, is still less than the gross profits on the sale of Easy Eggs over this period, which was in the amount of $595,000. Therefore, I find that Macartneys fully recovered all expenditures properly attributed to Easy Eggs sales and indeed generated a profit. It is difficult to ascertain the exact profit, because the remuneration paid for Mr. Dowd was only partially supported by any documentary evidence. Prior to 1997, Mr. Dowd did not appear in Macartneys’ books because Mr. Macartney and Mr. Dowd operated on a cash basis during that period, the purpose of which was to assist Mr. Dowd in avoiding his family support obligations.
[72] There was also a claim for loss of opportunity costs on the basis that had Mr. Macartney known that he would never achieve the long term role for Macartneys which he sought, he would have devoted his firm’s efforts to developing one of their higher margin product lines, such as their produce business. I do not consider this to be a proper restitutionary claim and, in any event, it is speculative and is not proven. Easy Eggs did not require a significant commitment of the company’s capital. It did not require Macartneys to commit all or even part of their shell egg quota, and the 4% of Macartneys’ business committed to Easy Eggs did not stand in the way of the companies’ expansion in any other product line.
[71] Macartneys had claimed that the remuneration paid to Mr. Dowd, their salesperson dedicated to Easy Eggs, was $382,000 over the course of the distributorship, and travel expenses related to Easy Eggs amounted to the sum of $150,000. The total of these sums had they been fully proven, is still less than the gross profits on the sale of Easy Eggs over this period, which was in the amount of $595,000. Therefore, I find that Macartneys fully recovered all expenditures properly attributed to Easy Eggs sales and indeed generated a profit. It is difficult to ascertain the exact profit, because the remuneration paid for Mr. Dowd was only partially supported by any documentary evidence. Prior to 1997, Mr. Dowd did not appear in Macartneys’ books because Mr. Macartney and Mr. Dowd operated on a cash basis during that period, the purpose of which was to assist Mr. Dowd in avoiding his family support obligations.
[72] There was also a claim for loss of opportunity costs on the basis that had Mr. Macartney known that he would never achieve the long term role for Macartneys which he sought, he would have devoted his firm’s efforts to developing one of their higher margin product lines, such as their produce business. I do not consider this to be a proper restitutionary claim and, in any event, it is speculative and is not proven. Easy Eggs did not require a significant commitment of the company’s capital. It did not require Macartneys to commit all or even part of their shell egg quota, and the 4% of Macartneys’ business committed to Easy Eggs did not stand in the way of the companies’ expansion in any other product line.
2005 CanLII 32926 (ON SC)
- 37 -
[73] In summary, had there been a finding of liability, I would have awarded to the plaintiffs
the sum of $382,658 representing the difference between the gross margins achieved on the sale
of Easy Eggs and Macartneys required average gross margin to break even. This award would
be in the alternative to, and not in addition to damages for reasonable notice.
Disposition
[74] The plaintiffs’ claim is dismissed as against all defendants. The defendant Michael Foods Inc. will have judgment on its counter-claim against the plaintiffs in the sum of $128,548.40 (Can.) plus pre-judgment interest calculated from January 10, 2000.
[75] The defendants are requested to provide me with their written submission on costs within thirty (30) days hereof, and the plaintiffs with their response thereto within thirty (30) days of receiving the defendants’ submission.
Disposition
[74] The plaintiffs’ claim is dismissed as against all defendants. The defendant Michael Foods Inc. will have judgment on its counter-claim against the plaintiffs in the sum of $128,548.40 (Can.) plus pre-judgment interest calculated from January 10, 2000.
[75] The defendants are requested to provide me with their written submission on costs within thirty (30) days hereof, and the plaintiffs with their response thereto within thirty (30) days of receiving the defendants’ submission.
Released: September 16, 2005
___________________________
Hackland J.
2005 CanLII 32926 (ON SC)
COURT FILE NO.: 00-CV-13453
DATE: 2005/09/16
ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
1248671 ONTARIO INC., c.o.b. as MACARTNEY FARMS and MACARTNEY POULTRY FARMS LIMITED
Plaintiffs
- and–
MICHAEL FOODS INC., TRILOGY EGG PRODUCTS INC., and KARIM CRESSATY
Defendants
REASONS FOR JUDGMENT
Hackland J.
ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
1248671 ONTARIO INC., c.o.b. as MACARTNEY FARMS and MACARTNEY POULTRY FARMS LIMITED
Plaintiffs
- and–
MICHAEL FOODS INC., TRILOGY EGG PRODUCTS INC., and KARIM CRESSATY
Defendants
REASONS FOR JUDGMENT
Hackland J.
Released:
September 16, 2005
2005 CanLII 32926 (ON SC)
