Moran’s Farm Supplies Ltd. v New Holland Canada Ltd., 2000 ONAFRAAT 13

Agriculture, Food and Rural Affairs Appeal Tribunal 1 Stone Road West

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales 1 Stone Road West

Guelph, (Ontario) N1G 4Y2 Tel: (519) 826-3433, Fax: (519) 826-4232 Email: AFRAAT@ontario.ca

Guelph (Ontario) N1G 4Y2 Tél.: (519) 826-3433, Téléc.: (519) 826-4232 Email: AFRAAT@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

Moran’s Farm Supplies Ltd. v New Holland Canada Ltd.

Moran’s Farm Supplies Ltd. v NHC 2000 ONAFRAAT 13

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

June 8, 2000

DATE OF DECISION:

June 30, 2000

2000-13

NEUTRAL CITATION:

2000 ONAFRAAT 13

Moran’s Farm Supplies Ltd. v New Holland Canada Ltd.

IN THE MATTER OF THE FARM IMPLEMENTS ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRS ACT.

AND IN THE MATTER OF:

An Application to the Agriculture, Food and Rural Affairs Appeal Tribunal by Moran’s Farm Supplies Ltd. to resolve a dispute with New Holland Canada Ltd. arising from the application the Farm Implements Act. Moran’s Farm Supplies Ltd. seeks a ruling on the return of new parts after termination of its dealership agreement.

Before:

James Rickard, Chair; Andrew Osyany, Vice-Chair; Anna Andres, Member.

Appearances:

Tim Moran, on behalf of the applicant, Moran’s Farm Supplies Ltd. Mark Barranger, on behalf of the applicant, Moran’s Farm Supplies Ltd. Pat Moran, on behalf of the applicant, Moran’s Farm Supplies Ltd. Simon Wilson, on behalf of the respondent, New Holland Canada Ltd. Rory Chisholm, on behalf of the respondent, New Holland Canada Ltd. Roy Barron, on behalf of the respondent, New Holland Canada Ltd. Doug Arnott, on behalf of the Ontario Retail Farm Equipment Dealers Association (ORFEDA). Beverley Leavitt, on behalf of the Ontario Retail Farm Equipment Dealers Association (ORFEDA). Erik Skjaveland, on behalf of the Ontario Wholesale Farm Equipment Association (OWFEA).

DECISION OF THE TRIBUNAL

This application was heard in Guelph, Ontario on June 8, 2000. Moran’s Farm Supplies Ltd. (Moran) applied to the Agriculture, Food and Rural Affairs Appeal Tribunal (the Tribunal) to resolve a dispute with New Holland Canada Ltd. (New Holland) arising from the application the Farm Implements Act (the Act). Moran’s Farm Supplies Ltd. seeks a ruling on the return of new parts after termination of its dealership agreement.

The pertinent sections of the Act are as follows:

23(1) For the purposes of sections 24 to 30,

“agreement” means an agreement between a dealer and a distributor under which the dealer is required by the distributor to maintain an inventory of new farm implements and new parts supplied by the distributor;

“current net price” means the price listed in the distributor’s price list or catalogue in effect at the time the agreement is terminated;

“invoice price” means the price actually paid by the dealer for the new farm implement and, in respect of a new farm implement that has been rented pursuant to a written rental program approved by the distributor, means the price actually paid by the dealer for the new farm implement less the amount of any rental payments submitted to the distributor;

“new farm implement” means a farm implement that is not a used farm implement and includes,

(a) a farm implement that has been operated by or on behalf of a dealer pursuant to a written demonstration program sponsored by the distributor, and

(b) a farm implement that has been rented pursuant to a written rental program approved by the distributor;

“new part” means a part or parts assembly that has not been used and has not been removed from a complete farm implement;

“used farm implement” means a farm implement that has been operated for a distance or for a period of time in excess of that required to deliver it to the dealer and to enable the dealer to service, prepare and operate it for the purposes of sale. 1988, c. 61, s. 23(1), revised.

23(2) Sections 24 to 30 apply to an agreement that is in effect on or after January 1, 1990.

23(3) Subject to subsection (4), sections 24 to 30 apply to an agreement despite any agreement or waiver to the contrary.

23(4) A distributor and a dealer may agree in writing to repurchase terms that are more favourable to the dealer than the provisions of sections 24 to 30. 1988, c. 61, s. 23(2-4).

24(1) Within ninety days after an agreement has expired or is terminated, a dealer may by written notice require the distributor to repurchase all or any new farm implements and new parts supplied by the distributor under the agreement.

24(2) The notice to repurchase shall state whether the dealer intends to rely on,

(a) the provisions of this section and sections 25 to 30; or

(b) the terms of an agreement with the distributor under subsection 23(4). 24(3) If the dealer fails to make the election under subsection (2), the dealer shall be deemed to have

elected to rely on the provisions of this section and sections 25 to 30. 1988, c. 61, s. 24. 25(1) The distributor shall pay a repurchase amount to the dealer equal to,

(a) 100 per cent of the invoice price for each new farm implement; and

(b) 85 per cent of the current net price for each new part, plus transportation costs paid by the dealer for delivery of the new farm implement to the dealer’s place of business. 25(2) In addition to the amount payable under subsection (1), the distributor shall pay any other

amount owing to the dealer by the distributor. 1988, c. 61, s. 25. 26(1) The repurchase amount payable to the dealer by the distributor is due on the earlier of,

(a) the ninety-first day after the distributor receives the notice of repurchase; and

(b) the thirtieth day after the distributor takes possession of the new farm implements and new parts that are the subject of the notice. 1988, c. 61, s. 26(1), revised.

26(2) Interest at the prescribed rate shall be payable on any part of the repurchase amount that is unpaid after the due date.

26(3) The dealer and distributor may agree to extend the time for payment.

26(4) A distributor may deduct from the repurchase amount any amount owing to the distributor by the dealer.

26(5) A distributor may deduct from the repurchase amount the current net price, including a reasonable installation charge, for the replacement of any part of a new farm implement that is missing or damaged. 1988, c. 61, s. 26(2-5).

27 A distributor is not required to repurchase,

(a) a new part that is broken or damaged;

(b) a new parts assembly that is incomplete and cannot be completed at reasonable expense;

(c) a new part or parts assembly that has been removed from a farm implement and replaced at no cost to the dealer under a modification or warranty substitution program;

(d) a new part that is a seal or hose made of rubber, a gasket made of cork or a composition of materials, a seal made of leather, a liquid chemical that has deteriorated and is of limited use, or paint;

(e) a new part that is not clearly identified, or that is not resaleable as a new part without repackaging or reconditioning;

(f) a new part that is not listed in the distributor’s current parts record-keeping system;

(g) a new farm implement that is an attachment that,

(i) is not identifiable by a whole goods’ invoice,

(ii) is not resaleable as a new attachment without repackaging or reconditioning, or

(iii) does not fit a current new farm implement;

(h) a new farm implement or new part that has not been adequately prepared for shipment by the dealer within the ninety day period or extension of that period referred to in subsection 28(2);

(i) a new farm implement that was shipped to the dealer more than thirty-six months before the distributor receives the notice of repurchase. 1988, c. 61, s. 27.

28(1) The dealer is responsible for the care of a new farm implement or new part until the earlier of,

(a) the ninety-first day after the distributor receives the notice to repurchase; and

(b) the day the distributor takes possession of the new farm implements and new parts, and thereafter the distributor is responsible.

28(2) Despite clause (1 )(a), the dealer and distributor may agree to extend the time during which the dealer is responsible.

28(3) The dealer is responsible for preparing or packaging all new farm implements and all new parts so that they are acceptable by a carrier for shipment at the distributor’s expense from the dealer’s place of business. 1988, c. 61, s. 28.

The Evidence

Mr. Barranger, speaking for Moran told the Tribunal that:

• Moran surrendered its New Holland dealership in August of 1998.
• Notice of termination was given and Moran began returning parts to New Holland. There was no election under Section 24(3) therefore the repurchase of new parts returned is covered by the provisions of the Act.
• The parts return ran well over the 90 day limit in the Act and New Holland agreed to the extension of time to return the parts.
• When a dealer sends parts back the dealer inputs information into a computer which communicates with the New Holland computer system. The New Holland computer generates reports showing which parts are returnable, which are not returnable and generates “picking slips” for returnable parts. New Holland then sends a listing of returnable parts and packing slips to the dealer. The dealer packs the parts and returns the parts to New Holland.
• New Holland rejected returned parts with a value in excess of $100,000.
• An additional $60,000 in parts were identified as not returnable and were not sent. These parts are also part of the dispute with New Holland.
• New Holland’s Dealer Policy Manual allows dealers to place bulk part orders twice per year and monthly stock orders. 10% of the stock orders can be returned. Dealers can also order Direct Ship parts which are non-returnable. As a result of this policy there is a build up of parts at dealerships.
• The policy manual was changed sometime after Moran surrendered its dealership and dealers can now return more parts. Moran was unable to take advantage of this change.
• When New Holland rejects a returned part it tells the dealer why the part was rejected. For Moran most of the rejected parts were refused because New Holland claimed the original label ID was missing or the label was altered.
• Moran has sold some of the rejected parts to other New Holland dealers, and to the public. This proves that these parts which were rejected returns by New Holland are saleable both to the public and other New Holland dealers.
• The rejected parts are original New Holland parts, but because the original packaging had become “tired” Moran undertook, on his own initiative, to repackage the parts in original New Holland retail packaging.
• The Act states that a distributor is not required to repurchase a new part that is not clearly identified, or that is not resaleable as a new part without repackaging or reconditioning. By putting the parts into new packaging Moran sought to comply with this section of the Act.
• New Holland refused to supply Moran with original New Holland packaging.
• Moran placed the parts in New Holland packaging that New Holland provides to dealers for retail sales to the public and, using a computer, generated duplicates of the original New Holland labels and placed these labels on the package and then returned the parts to New Holland. The Act does not refer to labels and that is the primary reason New Holland provided for rejecting these parts.

Mr. Pat Moran told the Tribunal that:

• New Holland has refused to take the parts back under their policy.
• The packaging provided by Moran is packaging New Holland intended dealers to use as packaging to sell new parts to end users. Clearly packaging that meets the requirement of the policy, “saleable as a new part” is covered by the Act.
• The new parts that were identified by New Holland as not returnable are listed on the distributors part record keeping system, PAL, but are marked in that system as not returnable.
• Section 27 (f) refers to a new part in the distributor’s current parts record-keeping system. PAL is that system and these parts are listed, therefore, by the clear language of the Act, New Holland is required to take them back.
• These parts were returned to New Holland and rejected as not returnable. Moran is asking for interest on the cost of the parts for the past year at 15% as well as the cost of re-picking these parts from Moran’s inventory and packing the parts for return to New Holland. Moran absorbed this cost once and should not have to incur the cost twice. He estimated this cost at $7,000.00. He argued that the Tribunal has jurisdiction to deal with these issues under Section 5 (2)(e).

In response to questions from New Holland Mr. Tim Moran said:

• If a package is damaged he takes the part out of the original packaging and puts it in a new package used for retail sales. This makes the part look new and in good shape for the customer. When the dealership agreement was terminated he put those parts that had been opened in a new package used for retail sales, and then put a new sticker on the package so that the part went back to New Holland in a clean condition.
• The PAL system is mandatory for dealers and is updated throughout the year by New Holland. It is the only parts system he had from New Holland.
• When parts come from New Holland there is no uniformity in packaging. All parts have a tag but some have one label for multiple parts, for example tines. Dealers may have to buy ten or twelve tines with one label for the package but retail them in singles. Moran can not return nine of ten tines with an original New Holland label on each when only one label is provided from New Holland.
• There were four large parts that were been repainted by Moran because the finish was damaged. These parts were rejected by New Holland because they were repainted and when returned to Moran the paint was once again scuffed and damaged in transit.
• Moran does order parts from distributors other than New Holland however those genuine New Holland parts are easily identifiable. For example New Holland shear bolts have the name on each bolt while shear bolts from other suppliers do not.

Mr. Simon Wilson, New Holland Territory Sales Manager, addressed the Tribunal on behalf of New Holland. He told the Tribunal that:

• After termination of the dealership Moran indicated it wanted to return new parts. Parts return started in 1998 and continued to May 1999.
• After the first shipment of parts was evaluated Moran sent a letter to Mr. Stolee, a representative of New Holland, indicating concern about amount of parts rejected by New Holland. At that time discussions centered on labels and repackaging of parts.
• The parts return practices of New Holland comply with the Act and protect the integrity of the parts being returned as being a genuine New Holland part.
• The PAL system, is a parts automated library, a reference tool, that allows a dealership to look up historical parts, it is not the parts inventory system used in orders or returns. The North American Service Parts System (NASPS) is used for parts inventory and parts ordering.
• The NASPS can check inventory, location, price, etc and order parts for delivery to dealerships.
• A part identified on PAL as not returnable is an obsolete part. Once a part is obsolete, it is coded as such, dealers are notified and have one year to return the part for credit. When New Holland knows a part is being changed New Holland advises the dealers and dealers can return the part at that time or they have one year after it is marked obsolete to return it. The parts from Moran that were marked as non-returnable are obsolete and the year has passed.
• Representatives of the farm implement industry organizations in Ontario met on April 20, 2000, to develop a consensus on two parts buy-back issues. New Holland supports this industry report and solution for these issues as follows:

Incomplete packages of multiple items are returnable on the following conditions:

• the items are individually packaged within the multiple packages;
• the items have individual part numbers;
• proof of purchase is provided if requested;
• a 15% restocking charge is applied, based on the price paid for the original package,

in proportion to the number of items remaining from the package.

Items repackaged by the dealer are returnable only if the repackaging material was

supplied by the distributor:

• for parts return to the distributor; or

• to replace damaged packaging.

• New Holland repackages parts. Once it is determined that new packaging is required e.g. the part has a Ford or Versatile label, then New Holland puts the part in new packaging and seals the package and puts a new label on it. This process ensures that the part is a genuine New Holland part.

• New Holland does not supply materials for dealers to repackage parts. Once a part is out of the original package New Holland has no way of telling if it is a New Holland part or an off brand or “will-fit” part.

• To grow its parts business, New Holland makes parts that fit other manufacturer’s equipment, John Deere for example. The part may be identical in appearance but may not be identical in quality. The original New Holland package and label on a part is the assurance New Holland needs to ensure that what is being returned is in fact a part that New Holland sold to the dealer.

Roy Barron, North American Parts Manager for New Holland, told the Tribunal that:

• PAL is used by dealers to look up parts, identify where they fit, what they look like and that the part shown is the part required by their customer. PAL is updated on a quarterly basis from the data in the NASPS. PAL is not a part ordering system.
• Once a part is totally obsolete New Holland scraps any inventory but historical information on the part is maintained in the PAL for dealers to reference.
• New Holland provides original parts identification labels. These labels contain information on country of origin to satisfy customs regulations, codes so the parts can be sold in Europe and other countries where New Holland operates, package quantity and other like information. It was never envisioned that a dealer would manufacture his own labels identifying parts as genuine New Holland parts.
• New Holland requires packaging of parts to meet specifications. For example New Holland may require packaging to contain rust inhibitors to protect parts and provide shelf life. Once a dealer removes the part from the original packaging it becomes non-returnable as New Holland has lost control of the quality of this part.
• New Holland has various styles of parts identification and labels as well as a wide range of historical and current information on parts. If parts are returned in original Ford packaging, a predecessor company, New Holland would accept it back and repackage it into new packaging.
• On the issue of repainting parts New Holland has no way to determine how the part was painted, the quality of the paint, or whether the part was disassembled from whole goods and repainted to cover up the fact that it has been mounted on another part.
• Direct ship parts are sent directly from the supplier or manufacturer to the dealer. Those parts are returnable to New Holland on termination of a dealership if they meet the rest of the requirements,

e.g. the part is not obsolete and has original packaging and labels.

• On termination of a dealership New Holland takes back some parts it would not normally take back from a dealer– e.g. direct ship parts or parts with abused packaging that would be rejected on monthly returns. However, New Holland needs positive identification on the parts it accepts for return.

Rory Chisholm, Team Leader, Guelph Commercial Business Unit, spoke on behalf of New Holland. He told the Tribunal that:

• For some parts New Holland is the sole manufacturer. They are captive parts, something specific to New Holland. Other parts are more general in nature and can be easily duplicated. These parts will fit the machine but may not be manufactured to the same specifications. A person cannot verify that a part is a genuine New Holland part just by looking at it. That is why the original packaging and labels become important in parts return.
• If the package has been damaged the dealer has the right to refuse that part on delivery. These parts are returned to the depot where they are either repaired or scrapped.
• In this case, there have been price increases since Moran terminated its dealership agreement. New Holland has paid for the returned parts on the basis of current price lists as opposed to the prices in effect on termination. The price increases average four to five percent across all of the parts but certain parts increased more than others.

In response to questions the representatives from New Holland said:

• New Holland does not ensure that when a dealer buys packages to put parts in for retail that the dealer buys the equivalent number of parts to correspond to the number of packages. The package will say it contains a New Holland part but New Holland does not control what the dealership puts into the package.
• When an order is placed it is run on the NASPS. PAL cannot be used to order parts.
• “Part not returnable” means the part is in the obsolete category. A dealer could not place an order

for that part number in NASPS. The order would either be rejected or would supersede to a new

part number.

• Not returnable means not purchasable from New Holland either.
• A bundle of ten tines with the original label may be returned. A single tine returned would not be

acceptable. But 10 individual tines with their original label is an acceptable return if 10 years ago

they were sold as individual units to the dealer.

Beverley Leavitt, spoke to the Tribunal on behalf of the Ontario Retail Farm Equipment Dealers Association (ORFEDA). She said that the Act is predicated on common sense and fair business. It is not a tool to benefit a dealer or distributor. What occurs with parts return on a day to day basis is not the issue at this hearing. She urged the Tribunal to look at the wording of Section 27 (e) and (f). These sections require a distributor to repurchase a new part listed in the parts system if it is clearly identified and re-saleable as a new part. There is no qualification in the Act on whose identification or packaging must be used. The primary consideration is the return of parts. She said that if the part is not compromised by the dealer, or is not a danger to the other dealers or end users and is listed in the current parts list it should be returnable. That is the intent of the Act.

Erik Skjaveland spoke to the Tribunal on behalf of the Ontario Wholesale Farm Equipment Association (OWFEA). He told the Tribunal that he feels the dealer has the burden of proof to confirm that parts were purchased from the distributor. For example, New Holland does not make bearings they buy them. It is important to prove that the bearing was sold to that dealer by that distributor. Packaging is part of that proof, but only part. He said that, in the operation of his business, if a part does not show in his records as being sold by him to a dealer then he does not take the part back.

The Issue

There are two issues before the Tribunal:

What is the proper interpretation of Section 27(e) of the Act?

What is the proper interpretation of Section 27(f) of the Act?

The Findings

The Act is remedial legislation. It provides a system intended to distribute the inevitable losses involved in a dealership termination in an equitable way between the two parties. The objective of this part of the Act is to provide for the maximum inventory repurchase, while safeguarding the legitimate interests of the distributor and the general public that only genuine saleable new articles are being repurchased by the distributor. In the ideal situation, where a termination of a dealership occurs, there needs to be discussion between the dealer and the distributor on parts return to ensure that errors are not made in handling the parts. Parties should not assume to know the requirements of the opposite party and attempt to meet these assumptions. The Act requires the co-operation of both sides if equity is to be achieved. In some circumstances this may mean that knowledgeable representatives of the parties must meet to look at the parts situation. If this occurs, then a party failing to co-operate may invite adverse inferences from the Tribunal in the case of an appeal.

If the system is working well, then the expectation would be that a high percentage of inventoried parts, say about 80%, would be repurchased. The percentage could go quite a bit lower in a long-time relationship where there may be a lot of obsolete parts in the dealer's inventory. If the relationship was very short, and the dealer dealt exclusively with this manufacturer/distributor, then the repurchase percentage could go quite a bit higher..

Section 27 of the Act states:

27. A distributor is not required to repurchase,

(e) a new part that is not clearly identified, or that is not resaleable as a new part without repackaging or reconditioning;

(f) a new part that is not listed in the distributor’s current parts record-keeping system;

Clause 27(e) has to be applied having regard to all the circumstances of the particular situation in order to achieve the Act’s objectives. Technological, packaging, purchasing, shipping and marketing changes all impact, as do the circumstances of the parties, the length of their dealings with each other, and sometimes even the circumstances of the termination.

“New part that is not clearly identified” addresses the concern that the distributor, acting reasonably and fairly, can identify the part as new and being of the distributor's own production and not a “will fit” part from some other source. In some circumstances, such as computers, that may mean the part must be in the original sealed package. In some circumstances, the part may be so identified even in the absence of all packaging or manufacturer's labeling. An example would be a part delivered by the distributor's representative, the part then being taken to a customer, taken out of the packaging which then is discarded, and the customer changing his mind so that the distributor's representative would personally take the part back to the distributor. Another example would be where the part is proprietary and only available from the distributor.

“Not resaleable as a new part without repackaging or reconditioning” addresses the concern that the part should be marketable in substantially the same manner as other inventory coming in to the distributor. If the distributor customarily repackages parts (whether because the packaging of multiple sets may have become damaged, or because a change in parts counts in multiple sets, or to simply change the style of packaging to conform to current packaging styles), so long as the items can be handled in the same fashion, they are to be repurchased.

Clause 27(f) can only mean that if the part can not be purchased from the current parts list it is not returnable.

The Tribunal finds that when a dealership is terminated it is the dealer who has to be able to provide clear identification of the part either through the original packaging or a credible proof of purchase for the part. If the part is not on the current parts list as purchasable at the time of termination then the distributor is nor required to repurchase it.

The distributor has to have control over the quality of the parts it distributes. The Tribunal understands that there is some repackaging of returned parts by distributors. The Tribunal finds it is the responsibility of the distributor to control and direct any repackaging or refurbishing of any parts that are acceptable for repurchase.

The tests to be applied on parts return in this particular case are:

1If the part is in the original packaging with original labels intact then it is returnable.

2If the packaging and labels are not intact and the item could be a “will fit” part available for purchase from sources other than the distributor then it is not returnable. The onus is on the distributor to show that the part is available for purchase from other sources.

3If the part is a custom or captive part and the packaging and labels are not intact and the dealer can provide invoices to show that the quantity to be returned has been purchased from the distributor and an inspection of the part by the distributor shows the part is likely one that it sold to the dealer, it is returnable. The onus is on the dealer to provide the proof of purchase from the distributor.

4If the part is a portion of a multi- pack and it is being returned in a quantity that is the normal number sold to the end user then it is returnable provided the part is in an individual package within the multi-pack and has an individual part number on its package.

With respect to this specific case, New Holland admitted that at least one of the parts displayed at the hearing may have been rejected in error. Moran may review the rejected parts and resubmit to New Holland for reconsideration those parts that Moran thinks will fit the criteria. While Moran may be entitled to interest for any parts that are made returnable by this decision, since this is the first instance of this type of dispute to be decided by the Tribunal, no interest is payable for the time that has passed between the original rejection by New Holland and the final acceptance. If there are parts that are made returnable as a result of this decision then these parts are to be paid for in accordance with Section 26 of the Act. New Holland is directed to review any parts returned by Moran against the four tests listed above and accept those parts that pass the tests.

It is clear from the evidence in this case that some parts repackaging occurs at New Holland. Therefore, the interpretation of the Act in the context of this case must mean extraordinary repackaging by New Holland. Therefore, in this case New Holland is to accept parts returned in original but “tired” packaging and repackage it.

It is the responsibility of Moran to prepare the parts for return to New Holland.

In future disputes on parts return, one possibility for dealing with the issue may be that the Tribunal and the parties meet at the dealership and decide which of the parts in stock are returnable. In such cases the Tribunal would have to use its authority to direct the cost of the process, including the expenses of the Tribunal, be paid by the parties.

The reasons for these decisions are:

1 New Holland admitted that parts may have been rejected in error and therefore at least some of the parts could be reconsidered.

2 The Tribunal agrees with the position that the distributor has responsibility for the parts it sells and therefore has to be able to maintain integrity in the system used for parts return.

3 Since New Holland stated that it does repackage new parts, those parts that Moran can document as being original New Holland parts should be accepted as returnable in this case.