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:

The Hostess Frito Lay Company v Ontario Farm Products Marketing Commission

The Hostess Frito Lay Company v OFPMC 2001 ONAFRAAT 52

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

November 19, 2001

DATE OF DECISION:

November 20, 2001

2001-52

NEUTRAL CITATION:

2001 ONAFRAAT 52

The Hostess Frito Lay Company v Ontario Farm Products Marketing Commission

IN THE MATTER OF THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE AND FOOD ACT.

AND IN THE MATTER OF:

An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by The Hostess Frito Lay Company, a division of Pepsi-Cola Canada Ltd., from a decision of the Ontario Farm Products Marketing Commission, dated October 23, 2001, to deny a request to re-open negotiations between two potato processors and the Ontario Potato Board, thereby not enforcing a Settlement Agreement entered into by the Hostess Frito Lay Company and the Ontario Potato Board.

AND IN THE MATTER OF:

An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Super Pufft Snacks Corp. from a decision of the Ontario Farm Products Marketing Commission, dated October 23, 2001, to deny a request to re-open negotiations between two potato processors and the Ontario Potato Board, thereby refusing to declare in force a Settlement Agreement entered into between Super Pufft Snacks Corp. and the Ontario Potato Board dated September 27, 2001.

Before: Denis O’Connor, Vice Chair; Doug Flook, Member; Andy Koopal, Member

Appearances: Anne McConville, counsel, HFL Frito Lay Robert Cosman, counsel, HFL Frito Lay Anne H. Stevens, counsel, Super Pufft Snacks Corporation Howard Borlack, counsel to Ontario Potato Board Paul McCague, counsel to Ontario Potato Board.

DECISION OF THE TRIBUNAL

These appeals were heard in Guelph, Ontario on November 19, 2001. The Hostess Frito Lay (HFL) Company and Super Pufft Snacks Corporation (Super Pufft) appealed a decision of the Ontario Farm Products Marketing Commission (the Commission) which prevented the bringing into force of settlement agreements negotiated between the companies and the Ontario Potato Board (the Board).

Documents were provided in advance of the Hearing by HFL and Super Pufft in accordance with an order of the Tribunal, and by the Commission in accordance with Subsection 16(7) of the Ministry of Agriculture, Food and Rural Affairs Act. The Commission opted not to participate in the Hearing.

Statutory Context

Subsections 16 (1), 16(7) and 16(11) of the Ministry of Agriculture, Food and Rural Affairs Act are as follows:

16(1) Subject to subsection (4), if a person is aggrieved by an order, direction, policy or decision of the Commission or Director, made under the Farm Products Marketing Act or the Milk Act, that person may appeal to the Tribunal by filing with the Tribunal and sending to the Commission or Director written notice of the appeal.

16(7) Upon receipt of a notice under subsection (1) or (2), the Tribunal shall forthwith notify the Commission, the local board, the marketing board or the Director where any such body or the Director has an interest in the subject-matter of the appeal and such body or the Director, as the case may be, shall thereupon forthwith provide the Tribunal with all relevant by-laws, documents or other materials, of any kind whatsoever, in its or his or her possession.

16(11) Upon an appeal to the Tribunal under subsection (1) or (2), the Tribunal may by order direct the Commission, the local board, the marketing board or the Director, as the case may be, to take such action as it or he or she is authorized to take under the Farm Products Marketing Act or the Milk Act and as the Tribunal considers proper, and for this purpose the Tribunal may substitute its opinion for that of the Commission, the local board, the marketing board or the Director.

The portions of the Farm Products Marketing Act pertinent to these appeals are:

7(1) The Commission may make regulations generally or with respect to any regulated product,

25. providing for the establishment in connection with any plan, of negotiating agencies that may be empowered to adopt or settle by agreement any or all of the following matters:

i. minimum prices for the regulated product or for any class, variety, grade or size of the regulated product,

ii. terms, conditions and forms of agreements relating to the producing or marketing of the regulated product,

iii. any charges, costs or expenses relating to the production or marketing of the regulated product,

iv. the minimum amount of rental to be paid by or on behalf of a person engaged in processing a regulated product to lease land from an owner or tenant for the production of the regulated product and the terms and conditions of lease that shall apply in respect of the leasing of any such land;

27. providing for the arbitration by a board of any matter not adopted or settled by agreement under paragraph 25;

7(4) Every agreement made under paragraph 25 of subsection (1) and every award made under paragraph 27 or 28 of subsection (1) and every re-negotiated agreement or award made under clause (b) of this subsection,

(a) shall be filed with the Commission forthwith after the making thereof and the Commission may, despite any defect in the establishment of the negotiating agency or the board of arbitration, as the case may be, by order declare the agreement or award or re-negotiated agreement or award or part thereof to come into force on the day it is so filed or on such other day as is named in the agreement or award or re-negotiated agreement or award, as the case may be, and, subject to clause (b), shall remain in force for one year or for such period as is provided in the agreement or award or re-negotiated agreement or award; and

(b) may at any time upon an order of the Commission be re-negotiated in whole or in part in such manner as the Commission may determine.

Ontario Regulation 247/99 under the Farm Products Marketing Act provide for the establishment of negotiating agencies in the potato industry as follows:

20. (1) In each year there shall be a negotiating agency for each group of one or more processors of a particular class of potatoes who gives written notice to the local board and the Commission of the names of the processors in the group by January 15.

(2) A negotiating agency shall be composed of not more than six members, of whom the local board and the processors in the group for which the agency is established may each appoint not more than three.

(3) The members of a negotiating agency are members for the calendar year in respect of which they are appointed.

(4) If a member dies, resigns or is unable to act, the local board or the processor who appointed the member shall appoint a replacement in accordance with subsection (2). O. Reg. 247/99, s. 20.

21. (1) If no negotiating agency is established for a processor or if the members of a negotiating agency appointed by a group of processors do not negotiate any of the matters mentioned in subsection 22 (1) with the members of the agency appointed by the local board, the local board shall determine which of the agreements made by a negotiating agency or the awards made by an arbitration board shall apply to the processor or the group of processors, as the case may be.

(2) An agreement or an award described in subsection (1) shall be deemed to be an agreement or award for the purposes of subsection 7 (4) of the Act. O. Reg. 247/99, s. 21.

22. (1) Each negotiating agency is empowered to adopt or settle by agreement in respect of the class of potatoes of the processors in the group for which the agency is established,

(a) minimum prices for the potatoes or for any variety, grade or size of the potatoes;

(b) terms, conditions and forms of agreements relating to the producing or marketing of the potatoes; and

(c) any charges, costs or expenses relating to the producing or marketing of the potatoes.

(2) Anything that a negotiating agency adopts or settles by agreement under subsection (1) is binding on the processors in the group for which the agency is established. O. Reg. 247/99, s. 22.

The Issue

The issue before the Tribunal is:

Should the settlement agreements reached between HFL and the Board and between Super Pufft and the Board for the 2001 potato crop be brought into force?

Preliminary Matters

Mr. Howard Borlack asked the Tribunal to allow the Board to participate in the Hearing as an intervenor. He said that as the Board was a signatory to the negotiated agreements and would be affected by the Tribunal’s decision, it could be helpful to the Tribunal to learn the Board’s views. Representatives of HFL and Super Pufft indicated that they had no objection to the participation of the Board. The Tribunal ruled that the Board could participate as an intervenor.

Mr. Robert Cosman asked that confidential information in the written documents submitted by the Commission be sealed. Ms. Anne Stevens joined him in his request and Mr. Borlack supported the request. The Tribunal ordered that all documents submitted by the Commission which contained proprietary information on pricing and schedules to pricing agreements be sealed.

Ms. Stevens asked that the Tribunal accept a supplemental brief by Super Pufft which contained selected documents from the Commission submission which had been rebound. Mr. Cosman asked that an attachment to a document contained in the Commission submission be included for completeness of the record. He also asked that a letter from a representative of Humpty Dumpty Snack Foods in support of the settlement process be filed with the Tribunal. There were no objections to the addition of any of these documents. The Tribunal allowed all the documents to be submitted.

Submissions

All parties chose to rely on written material and no witnesses were called to testify.

Mr. Cosman told the Tribunal that the appeal by HFL and the parallel appeal by Super Pufft were unusual as there was no respondent. He said that a decision by the Commission not to enforce a settlement agreement entered into by HFL and the Board was also unusual, in that the settlement agreement reached was supported by HFL, the Board and the contract growers for HFL. He also submitted that other stakeholders in the industry supported the process of settlement.

Mr. Cosman said the HFL appeal was not an appeal from the award of the arbitrator, or from the decision of the Commission to bring that award in place. He said it was not a review of the legal issues before the courts or a challenge of the process of negotiating/arbitrating price in the potato industry. He said the appeal was on the decision of the Commission not to re-open the arbitrated award and replace it with the settlement agreement.

Mr. Cosman submitted that the Commission was not asked to re-open negotiations, but that under the Farm Products Marketing Act (the Act) the parties did not need an order before negotiations could take place. Mr. Cosman pointed out that Section 4 of the Act contemplates the re-negotiation of negotiated agreements and arbitrated awards. He submitted that the negotiating agency that was appointed pursuant to Ontario Regulation 247/99 under the Act was in place for an entire year and it had the authority to negotiate the settlement agreement. He said there were three representatives of HFL and three representatives of the Board on the negotiating agency.

Mr. Cosman told the Tribunal that in 2001 the negotiating agency reached agreement on all issues except price and price adjustment terms and that the chronology of events that followed were:

• March 09, 2001 - HFL and Board attended an arbitration hearing.

• March 19, 2001 - The arbitrator’s award was released; the Board position was accepted.

• April 10, 2001 - HFL wrote to the Commission asking that the award not be brought into force and that the matter be re-negotiated.

• April 17, 2001- HFL initiated a court action due to concerns about the economic impact of the award and process failures. Processors affected by four other arbitrated awards in the potato industry also initiated court challenges.

• April 18, 2001 - The Commission turned down HFL’s request.

• June 04, 2001 - The Commission encouraged the parties to try to settle the matter.

• September 27, 2001 - A settlement agreement between HFL and the Board was signed by the negotiating agency.

Mr. Cosman said that the settlement agreement was a multi-year agreement which dealt with contracted volume, a storage facility and seed prices as well as potato prices. He said that it included a provision that HFL would not be disadvantaged if the Board settled with another processor on more favourable terms. He said that HFL and the Board jointly agreed that this agreement would supercede the arbitrated award, but would not be retroactive. He said everyone was taken by surprise by the Commission decision to refuse to implement the settlement agreement. Mr. Cosman asked the Tribunal to overturn the Commission decision and order that the settlement agreement be brought into force.

Mr. Cosman told the Tribunal that the Commission did not hear submissions from the parties before making its decision and he submitted that its decision was unreasonable given that it had encouraged parties to settle. He said that if the settlement agreement were not brought into force HFL and the Board would be back in court.

Mr. Cosman submitted that the Commission’s reasoning, that to bring the settlement agreement into force would undermine the original process was contrary to the statute and common sense. He said the statute provides for the re-negotiation of the award and the Commission invited parties to re-negotiate. He said that it was a matter of public policy that settlements between parties should be encouraged. He also pointed out that no party was compelled to re-negotiate and that both HFL and the Board were represented by counsel when the matter was re-negotiated. He submitted that it should not be the role of a regulatory body to interfere when parties to a dispute agreed to settle the matter.

Mr. Cosman said that the Commission’s reasoning that the settlement agreement was not in the best interests of the industry was not supported by the evidence. He said that the settlement agreement was a business arrangement reached between the parties as the result of compromise. He referenced a petition signed by potato growers and letters from other industry stakeholders who opined that the settlement agreement was in the best interests of the industry.

Mr. Cosman cited an Ontario court case (Ontario New Home Warranty Progarm v. Chevron Chemical Co., June 17, 1999) in support of the position that settlement agreements be upheld for the parties who settled, in a case where some parties settled and some did not.

Mr. Cosman told the Tribunal that HFL had entered the negotiations which led to the settlement agreement in good faith and that;

• All stakeholders affected by the arbitrated award had compromised to reach the agreement.

• Allowing the parties to resolve their differences without further court proceedings was in keeping with the Commission’s objectives.

• The Commission does not have the discretion to disregard the negotiated agreement.

• The Commission did not state the evidence supporting its decision.

• The Commission did not allow parties to make submissions to respond to its concerns.

Ms. Stevens told the Tribunal that Super Pufft was one of the smaller processors and was a newcomer to the negotiation process, as it had only been in the potato chip business since 1998. She said that the settlement agreement reached between Super Pufft and the Board covered three years and contained a clause to ensure that the company would not be disadvantaged if the Board settled with another processor on more favourable terms. She said that both parties had agreed to discontinue litigation if the settlement agreement was brought into force. She told the Tribunal that all the potato growers who supply Super Pufft had signed a petition in support of the settlement agreement.

Ms. Stevens said she would not repeat Mr. Cosman’s arguments but indicated that they applied to the Super Pufft appeal as well as the HFL appeal. She said that the parties to the Super Pufft-Board settlement agreement had no indication that the Commission would not accept the re-negotiated agreement prior to receiving its decision. She outlined the following chronology of events:

September 28, 2001 - The Board sent two settlement agreements to the Commission and sought its approval.

October 03, 2001- The Commission responded to the Board that it would consider the matter at its meeting of October 16 2001 – October 18 2001.

October 10, 2001 - An internal briefing note prepared by staff of the Commission provided information on prices in the settlement agreement and the award, and on the integrity of the negotiation process.

October 16, 2001, October 17, 2001 - Minutes of the Commission meeting reference prices.

October 23, 2001 - The Commission released its decision.

Ms. Stevens submitted that it was improper for the Commission to consider the difference in prices between the arbitrated award and the settlement agreement as the Commission had delegated the authority to negotiate price to the Board. She also questioned whether it was appropriate to consider the possibility of the settlement agreement harming the integrity of the arbitration process. She submitted that arbitration is not the substantive end in and of itself, but rather it is one means of arriving at the terms of contracts.

Ms. Stevens said it was important to examine the Commission’s discretion to refuse to bring into force the negotiated settlement agreements, under Subsection 7(4) of the Act, in the context of the entire statute. She said that the Commission only has this discretion with regard to price negotiating boards, not price setting boards. She submitted that price negotiating boards were special as they have a greater range of contractual options than the other boards. She referenced a factsheet published by the Commission and noted that it spoke to the need to bring these agreements into force before they become binding on producers and buyers. She noted that the factsheet also said “This action protects the buyers from the anti-competition aspects of federal anti-combines legislation”. She said it appeared that the Commission was given the discretion to bring negotiated agreements into force as a housekeeping matter and she submitted there was never intended to be a broad extension of the Commission’s power to use this discretion.

Mr. Cosman noted that there was nothing in the Commission’s reasons to indicate that price was a consideration in its decision to refuse to bring the settlement agreements into force, but said that he agreed that if the Commission did consider price, this was clearly improper. He also asked that the Tribunal not give undue weight to documents prepared by Commission staff, as he submitted the Commission decision accurately reflected its position.

Ms. Stevens and Mr. Cosman agreed that re-opening an award and approving settlement agreements was a two step process but that they would normally take place at the same time. Mr. Cosman said the Commission letter dated June 04, 2001 was treated as a direction to re-negotiate by HFL. He said that multi-year agreements had been undertaken in the potato industry at least once in the past. He said that the Board and HFL opted for a longer term contract with set volumes. He and Ms. Stevens agreed that there was nothing to prevent the parties from re-negotiating the three year settlement agreements in the future.

Mr. Cosman told the Tribunal there was no precedent for an appeal of a Commission decision not to bring into force a negotiated agreement when there was no opposition to the agreement by industry stakeholders.

Mr. Borlack provided the Tribunal with a brief description of the process used to reach negotiated agreements. He said that in 2001 the issue of price between the Board and both appellants was sent to arbitration. He said this industry is unusual in that an arbitrator’s award is not necessarily binding, as the Commission can allow the parties to re-open the award and put a different agreement in place.

Mr. Borlack said that the Board did not interpret the Commission’s letter of June 04, 2001 as a direction to re-negotiate the agreement, but that the Board had already agreed to compromise to try to settle the matters before the court and make other gains that were of interest to the growers. He said the Board knew the Commission had the discretion to approve, not approve or send back the settlement agreement to the parties. He stressed that the Board did not dispute the Commission’s right to review awards and negotiated agreements and that the Board did not agree that the Commission did not have the authority to make the decision it did. Mr. Borlack said that the Board still supported the settlement agreement and would abide by it for it three years if the Tribunal ruled in favour of the appellants.

Mr. Borlack said that having read the materials submitted by the Commission it was clear that it was concerned that the awards were re-negotiated in the midst of court proceedings. He said that it may also have been concerned with the provision in the settlement agreements that the companies involved would not be disadvantaged by any later settlement made with their competitors. Mr. Borlack submitted that this was a bargaining tool necessary to encourage a processor to settle before its competitors. Ms. Stevens added that in Super Pufft’s negotiations with the Board. It was the Board that suggested the inclusion of this clause.

Mr. Cosman agreed with Mr. Borlack that the Commission had the discretion to act in the public interest in regulating the relationship between growers and processors. Mr. Cosman submitted that no discretion is beyond review and he pointed out that the Tribunal had the right to reverse the Commission’s decision. He said that the Tribunal had more evidence to consider than the Commission had when it made its decision.

The Findings

At issue in these disputes is; did the Commission act properly in refusing to re-open negotiations and subsequently confirm negotiated settlement agreements reached between the appellants and the Board.

The Tribunal finds from a review of material submitted by the Commission that there were facts known to the Commission in Spring and early Summer 2001 which convinced it to refuse to re-open negotiations once the awards were challenged in court. In particular, there is evidence in the deposition of Mr. David MacKenzie concerning the conduct of parties to the negotiations that are alarming. There is also evidence in the various briefing notes prepared by Ms. Susan Leuty that there was turmoil and a lack of trust in the potato industry at that time. The Tribunal has some understanding of the Commission’s decision not to re-open negotiations on the HFL award, notwithstanding its general policy of encouraging cooperation and negotiation between buyers and sellers of farm products.

However, the situation changed during the course of late Summer and Fall 2001. Negotiations were undertaken and multi-year settlement agreements were signed by the negotiating agencies for the HFL and Super Pufft growers and the companies. Evidence filed with the Tribunal in the form of petitions and letters of support indicated the settlement agreements brought some comfort to the industry in the 2001 harvest season and the promise of more cooperation and goodwill between parties in the future. It would have been useful to the Tribunal if a representative of the Commission had attended at the Hearing to explain its rationale for determining that the settlement agreements were not in the best interest of the industry. The Tribunal finds that, given the circumstances in the industry in Fall 2001 that it would be appropriate for the settlement agreements to be brought into force.

The Tribunal does not expect any long-term impact on the process of negotiating/arbitrating the terms of marketing agreements in the potato industry from its decision. The Tribunal accepts Mr. Cosman’s argument that these appeals are not directly related to the awards of the arbitrators or the Commission’s decision to bring those awards into force. The Tribunal finds that these appeals relate to the ability of these two appellants and the Board to cooperate and reach a mutually satisfactory agreement to resolve their disputes. The Tribunal finds it has no valid reason to deny the appellants and the Board this opportunity.

Decision and Reasons

After carefully considering the evidence presented and the submissions made, the Tribunal decided to grant the appeals by HFL and Super Pufft.

The reasons for this decision are that the settlement agreements will provide a mutually agreeable and stable marketing environment for HFL and Super Pufft and the potato growers supplying them. It is the Tribunal’s view that these agreements are in the best interests of the industry.

Order of the Tribunal

The Tribunal orders the Commission to bring into force the settlement agreements negotiated between HFL and the Board, and between Super Pufft and the Board.

Dated at Guelph, Ontario this 20th day of November 2001.