Agriculture, Food and Rural Affairs Appeal Tribunal
1Stone 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 Courriel: AFRAAT@ontario.ca
AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL
APPEAL:
Skotidakis Goat Farm (1048547 Ontario Inc.) v Dairy Farmers of Ontario (RE)
[MOTION ON STAY]
Skotidakis Goat Farm (1048547 Ontario Inc.) v Dairy Farmers of Ontario (RE)
[MOTION ON STAY]
STATUTE:
Ministry of Agriculture, Food and Rural Affairs Act
HEARING:
November 15, 2019
DATE OF DECISION:
December 16, 2019
002Skotidakis19
NEUTRAL CITATION:
2019 ONAFRAAT 21
IN THE MATTER OF THE Ministry of Agriculture, Food and Rural Affairs Act, R.S.O. 1990, CHAPTER M.16, AS AMENDED.
AND IN THE MATTER OF: An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Skotidakis Goat Farm (1048547 Ontario Inc.) John Skotidakis, and Skotidakis Dairy, from decisions of the Dairy Farmers of Ontario, including retroactive assessments, pricing, fines, and milk delivery reduction/cessation decisions.
AND IN THE MATTER OF: A Motion by the Dairy Farmers of Ontario dated October 29, 2019 for an order relating to the terms of the stay in this matter.
Before: John O’Kane, Vice-Chair; Harold McNeely, Vice-Chair; and Peter Koroneos, Member.
Appearances:
David Wilson, counsel for Dairy Farmers of Ontario
Ben Grant, counsel for Dairy Farmers of Ontario
James McIlroy, counsel for Skotidakis Goat Farm (1048547 Ontario Inc.) John Skotidakis, and Skotidakis Dairy
DECISION
The Appellant(s), which include 1048547 Ontario Inc., Skotidakis Goat Farm, Skotidakis Dairy and John Skotidakis, have appealed to the Tribunal under section 16 of the Ministry of Agriculture, Food and Rural Affairs Act (the “Act”) from decisions taken by Dairy Farmers of Ontario (“DFO”).
Under subsection 16(6) of the Act, an appeal operates as a stay, subject to the Tribunal’s discretion to limit or define the stay.
DFO moved under Rule 33.07 of the Tribunal’s Rules of Procedure asking the Tribunal to define the stay.
The Tribunal is satisfied that defining the stay is appropriate and will clarify for the parties the framework for the ongoing business relationship until the substantive appeal issues have been resolved.
OVERVIEW
DFO is a local marketing board established under a marketing plan set out in Regulation 760 titled “Milk and Farm-Separated Cream – Plan” which regulation was made under the Milk Act, R.S.O. 1990, chapter M.12. Under that marketing “Plan”, “milk” is defined as milk from cows and it applies to the control and regulation of “producing and marketing within Ontario of milk and farm-separated cream”. Under the “Plan” a “producer” is engaged in the production of milk or cream which is more commonly understood to be a dairy farmer.
The meaning of “marketing” is found in the Milk Act and includes many activities beyond what would commonly be considered marketing such as: advertising, assembling, buying, distributing, financing, offering for sale, packing, processing, selling, shipping, storing and transporting” (bold emphasis added). The bold emphasis has been added to the words buying and selling because those words, and the transactions they describe, are central to this case.
DFO receives delegated authority from the Ontario Farm Products Marketing Commission (“Commission”) under several provisions of the Milk Act. The general scheme of the delegation relevant in this appeal, from legislation through regulation includes:
“3(5) The Commission may delegate to a marketing board those of its powers under subsection (2), other than clause (2) (f.1), that it considers necessary and may at any time terminate the delegation.”
The Commission’s powers capable of delegation to DFO include: the power to require persons engaged in marketing milk “to furnish such information” related to “marketing” as the “marketing board determines”; the power to “appoint person to inspect the books, records, documents” of persons engaged in marketing milk; the power to “take such action and make such orders and issue such directions” as are necessary to carry out the Act, regulations or the marketing plan.
“7(1) The Commission may make regulations with respect to the regulated products generally or to any regulated product, and without limiting the generality of the foregoing, may make regulations,”
Section 7 contains fifty subsections where the Legislature authorized specific regulation making authority to the Commission, including authorizing a marketing board by regulation to set prices for the regulated product.
“7(1) 19. authorizing a marketing board to determine from time to time the price or prices that shall be paid for the regulated product or any class, variety, grade or size of the regulated product, and to determine different prices for different parts of Ontario;”
Section 7 also authorizes the Commission to delegate, by regulation, to a marketing board the regulation-making authority set out in those fifty subsections and directed that where the Commission so authorizes a marketing board, the marketing board can exercise that delegated authority through instruments that include regulations, orders, policies, decisions or directives.
“7(8) The Commission may delegate to a marketing board such of its powers under subsection (1) as it considers necessary, and may at any time terminate such delegation.”
“7(9) Where the Commission authorizes a marketing board to exercise any of the powers mentioned in subsection (1), the marketing board, in the exercise of such powers, may make regulations, orders, policies and decisions or issue directions.”
Under that legislative authority, the Commission enacted Regulation 354/95 and delegated powers to the DFO.
“4. The Commission delegates to the marketing board the power,”
“(b) to require persons engaged in the producing or marketing of milk or cream to furnish the information relating to the producing or marketing that the marketing board determines;”
“(c) to appoint persons to inspect the books, records, documents and premises of persons engaged in producing or marketing milk or cream;”
“(f) to take such action, make such orders and issue such directions as are necessary to enforce the due observance and carrying out of this Act, the regulations, the plan or an agreement or award.”
“6. The Commission authorizes the marketing board,
(a) To determine from time to time the price or prices that shall be paid to producers or the marketing board for milk or a class or grade of milk, and to determine different prices for different parts of Ontario;
(f) to require the price or prices of milk and cream to be paid to or through the marketing board, and to recover the price or prices by action in a court of competent jurisdiction;”
The Appellants purchase cow milk from the DFO and process that milk with other ingredients into a variety of dairy products.
DFO is the sole source of milk for processors such as the Appellants. DFO is a producer-controlled marketing board created by the Legislature and granted delegated regulatory authority over the production and marketing of milk. DFO’s regulatory role is subject to oversight by the Commission and DFO’s decisions, orders, policies and directives are subject to appeal to the Tribunal.
DFO uses a variable pricing structure for the sale of its milk to processors. The price paid is based on how the milk is used. As a simple example, if a processor buys two kilograms of milk from DFO and process one kilogram into yogurt and one kilogram into milk products for the confectionary sector, the processor will pay a different price for each kilogram of milk.
The DFO pricing structure is based on processors self-reporting to DFO on their milk utilization. The DFO pricing structure uses thirty-four classes/sub-classes for milk utilization. For example, milk used in yogurt is class 2(a) and milk processed into milk products for the confectionary sector is class 5(c). The price differential between the milk classes can be significant. Using the same products from above, the differential in the price for a kilogram of milk is reflected on the following table, based on the DFO pricing structure as of September 26, 2019.
Class
Butterfat Price ($/kg)
Protein Price ($/kg)
Other Solids Price ($/kg)
2(a)
9.1107
6.2355
6.2355
5(c)
6.8702
1.7228
1.7228
Processors input how they have used the milk via an electronic program known as the Milk Utilization Verification system (“MUV”) and that information is communicated to DFO, who uses that information to invoice the processors for the purchased milk.
The issue in this appeal and to a lesser extent the issue on this motion, relates to the reach of DFO’s regulatory authority. The Appellant argues that DFO’s regulatory reach does not extend into the Appellant’s processing operation. For DFO, the appeal issues include the efficacy of its regulatory authority to independently verify processors self-reported utilizations to ensure fair pricing among processor competitors and a fair return to the milk producers.
THE IMPUGNED DFO DECISION
The DFO decision under appeal is dated November 26, 2018 and was based on three sets of audit findings that reported incomplete and unreliable record keeping related to the Appellants’ reported milk utilizations. DFO’s decision imposed four consequences flowing from those audit reports:
Treating all milk deliveries to the Appellants as utilized at Class 2(a);
Issuing a new invoice to the Appellants at Class 2(a) pricing for milk utilization during the time the audits were being conducted;
Demanding payment of $1,820,529.93, being an amount compromised by DFO in earlier litigation with the Appellants and the subject of June 24, 2016 Minutes of Settlement; and,
Meeting with DFO to be satisfied that the Appellants’ record keeping and milk utilization declarations comply with DFO’s requirements.
The Appellants’ notice of appeal from that decision is expansive. Included in the notice of appeal are issues of the limitations on DFO’s delegated authority, DFO’s treatment of other milk processors, the independence of the three audits, the independence of DFO decision makers, the decision(s) were not authorized, and the decision(s) are contrary to the requirements of procedural fairness.
The essence of the Appellants’ position is that DFO’s authority as a regulator of milk producers does not authorize DFO to regulate milk processors such as the Appellant.
In this appeal the arguments focus on interpreting the word “marketing”, whether the sale of milk by DFO is a regulated transaction, and the reach of DFO’s authority into DFO’s milk sales to the Appellants. Those arguments pervade both the substantive appeal and this motion to define the stay. Deciding those arguments one way or the other on this motion could render the substantive appeal academic. Because of that, the Tribunal underscores it is not making any final determination about those appeal issues as the full evidentiary record is not presently before the Tribunal and full argument has not yet been heard.
GENESIS OF THIS MOTION TO DEFINE THE STAY
On July 9, 2019, DFO notified the Appellants it intended to audit the Appellants’ milk utilization for the period August 1, 2018 to June 30, 2019. That period post-dated the previous three audits that had informed the DFO’s decision of November 26, 2018.
The Appellants resisted the DFO’s overtures to audit its processing facility claiming that the statutory stay provisions precluded such an audit.
TRIBUNAL AUTHORITY IN RESPECT OF THE STATUTORY STAY
Subsection 16(6) of the Act sets out the effect of an appeal:
Where, by virtue of subsection 25(1) of the Statutory Powers Procedure Act, an appeal under subsection (1) or (2) operates as a stay in the matter, the Tribunal may limit or define the scope of the stay.
Subsection 25(1) of the Statutory Powers Procedure Act provides,
An appeal from a decision of a tribunal to a court or other appellate body operates as a stay in the matter unless,
(a) another Act or a regulation that applies to the proceeding expressly provides to the contrary; or
(b) the tribunal or the court or other appellate body orders otherwise.
Apparent from a combined reading of those provisions the Tribunal is given wide discretionary authority to appropriately tailor the statutory stay.
The statutory authority granted the Tribunal is animated in Rule 33.07 of the Tribunal’s
Rules of Procedure:
Unless otherwise specified in the Act governing the matter under appeal, an appeal to the Tribunal operates as a stay in the matter under appeal subject to the right of the Tribunal to limit or define the scope of the stay.
In Denby v. Ontario (Agriculture, Food and Rural Affairs Appeal Tribunal) 2006 CanLII 63736 (ON SCDC), the Divisional Court dealt with the statutory stay in a judicial review from a decision of the Tribunal related to an appeal from a DFO decision. The underlying issue related to milk producers selling milk other than to DFO contrary to DFO Regulation 08/03, resulting in DFO imposing financial sanctions and revoking quota rights. The Denby Applicants argued that the impugned Regulation 08/03 had no force or effect because their appeal created a stay.
The Divisional Court disagreed with the Denby Applicants’ argument. The Court concluded that a “stay in the matter” under the Act does not render a validly enacted regulation suddenly inoperative simply by an appeal as that would lead to the patently illogical situation of a legal vacuum where a litigant could operate with impunity in violation of a statute or regulation. The Court reinforced that the statutory stay preserves the “status quo that existed before the hearing by the DFO”.
The Divisional Court’s decision in Denby is not only apposite the present case, but as a decision of the law courts, it is a binding authority on the Tribunal.
THE STATUTORY STAY
The stay arises when the Appellants initiate their appeal. The stay arises automatically by statute. The statute gives the Tribunal discretion to limit or define the stay. That discretion would include the authority to lift a stay entirely. In that respect, the stay is distinct and unlike the discretionary stay of execution of a judgment that appellate court judges may grant. An example of that distinction is found in the Supreme Court of Canada’s decision in RJR-MacDonald Inc. v. Canada (Attorney General) 1994 CanLII 117 (SCC), [1994] 1 SCR 311 (“RJR-MacDonald”). That case will feature more prominently later in these reasons, but the distinction is illustrated by the current statutory and rule framework.
RJR-MacDonald arose under federal legislation governing tobacco product packaging. Tobacco companies challenged the legislation as violating the right of freedom of expression guaranteed in the Charter of Rights and Freedoms and succeeded at first instance in Quebec Superior Court and was then unsuccessful in the Quebec Court of Appeal. The tobacco companies appealed to the Supreme Court and moved seeking a stay under the Supreme Court Act and the Rules of the Supreme Court of Canada.
The Court explained the stay request as “the applicants ask to be released from any obligation to comply with the new packaging requirements until the disposition of the main action”. The evidence before the court was that complying with those packaging requirements would cost the industry approximately $30 million annually.
The relevant statutory provision and Rule in RJR-MacDonald are:
Supreme Court Act
65.1 The Court or a judge may, on the request of a party who has filed a notice of application for leave to appeal, order that proceedings be stayed with respect to the judgment from which leave to appeal is being sought, on such terms as to the Court or the judge seem just.
Rules of the Supreme Court of Canada
- Any party against whom judgment has been given, or an order made, by the Court or any other court, may apply to the Court for a stay of execution or other relief against such a judgment or order, and the Court may give such relief upon such terms as may be just.
As seen in the statutory and rule framework in the Supreme Court of Canada, there was no automatic stay of the lower court’s judgment arising when those tobacco companies started their appeal. A stay of the effect of the judgment had to be obtained on motion to the court, and within that context the Supreme Court of Canada endorsed the RJR-MacDonald test. That test has been modified for the context of parties seeking interlocutory injunctions to require a party, before a final determination, to either do something or not do something.
A. What Does the Stay Apply To?
In the Appellants’ written submissions on this stay motion, the “matter under appeal in the Notice of Appeal includes DFO decisions dated November 26, 2018 and April 4, 2019, and audits cited to support those decisions”.
That paragraph aptly captures the essence of the matter under appeal and it is that “matter” that is captured by the stay in subsection 16(6) of the Act, section 25.0.1 of the SPPA and Tribunal Rule 33.07.
Applying the binding authority of Denby, the Tribunal concludes the statutory stay applies to the four consequences imposed on the Appellants by the November 26, 2018 DFO decision.
As conceded by DFO on this motion and to re-phrase the DFO decision through the lens of the statutory stay provision, pending a final determination of this appeal:
DFO is stayed from treating all milk deliveries to the Appellants as utilized at Class 2(a);
DFO is stayed from issuing a new invoice to the Appellants at Class 2(a) pricing for milk utilization during the time the audits were being conducted;
DFO is stayed from demanding payment of $1,820,529.93, being an amount compromised by DFO in earlier litigation with the Appellants and the subject of June 24, 2016 Minutes of Settlement; and,
The required meeting between DFO and the Appellants for DFO to be satisfied that the Appellants’ record keeping, and milk utilization declarations comply with DFO’s requirements is also stayed.
The Denby case reinforces that a stay should preserve the status quo that existed before the November 26, 2018 DFO decision.
B. What is the Status Quo?
While the evidentiary record is not yet complete, several features in evidence on this motion implicate the status quo.
One feature of the status quo is informed by the June 24, 2016 “Terms of Proposed Settlement” between the parties. Paragraph 6 of that provided:
With respect to future audits, DFO will have, at any time, unfettered access to all SGF records, books, and documents, including original production records and financial statements. SGF must maintain proper records and accounts, including original production records and financial statements for all milk used in processing or sales. DFO, in conjunction with any other inspector or auditor, such as CDC, CFIA, or DFC will be permitted to inspect SGF books, records, documents and premises for milk from all sources and into any product. Financial statements are confidential and will remain on SGF premises.
When questioned by the Tribunal about the import of the above paragraph, counsel for the Appellants argued that the paragraph is an acknowledgment that DFO did not have audit and inspection authority but was a contract that provided DFO with audit and inspection authority, but that the Appellants’ contested that settlement agreement because they were not getting what they bargained for. Counsel for the Appellants also argued that the contestation of that settlement agreement was an issue for the substantive appeal.
Another feature of the status quo is that before the impugned DFO decision, the Appellants had been subject to and participated in three audits. While the notice of appeal raised issues regarding the outcome of those audits, which is an issue for the substantive appeal, the Appellants were subject to audit and inspection.
Another feature of the status quo is that the DFO conducts regular inspections and audits of milk processors related to milk utilization. The frequency of inspection and audit is based on DFO’s risk assessment system but typically the frequency is once annually. However, the Appellants have not submitted to an inspection and audit since August 1, 2017 - meaning the Appellants have been unaudited for over two years.
A final feature that implicates the status quo is the Appellants’ amended notice of appeal. While the Appellants argue that DFO’s regulatory authority does not extend to their milk processing operations, the amended notice of appeal pleaded that the Tribunal should order that a new audit occur, covering the period January 1, 2013 to July 31, 2017 and be conducted under current standards by an independent and qualified auditor mutually agreed upon by the Appellants and DFO. While not making any final determinations about DFO’s authority, that pleading suggests tacit recognition of audit authority.
Therefore, we conclude that the status quo included DFO authority to conduct inspections and audits of the Appellants’ milk utilization and the statutory stay does not operate to stay DFO’s authority to conduct an inspection and audit of the Appellants’ milk utilization for the period since August 1, 2018.
We conclude this as to the status quo relying on the binding authority of Denby and making no final determination about DFO’s regulatory authority to conduct inspections and audits of the Appellants’ milk utilization, as that final determination will be made after hearing the substantive appeal evidence and arguments.
C. Does the Stay Suspend Legislation, Regulations or DFO Polices?
The short answer, again informed by the binding authority of Denby, is the stay does not suspend legislation, regulations or DFO policies.
While issues related to DFO’s delegated authority are raised in this appeal, those issues are reserved for resolution in the substantive appeal hearing, as we have not been provided the full evidentiary context nor full legal argument.
D. Additional Stay Terms Sought by DFO
On this motion it was not disputed that DFO continues to sell milk to the Appellants and those sales are approximately $20 million annually.
On this motion DFO also seeks two additional terms of definition or direction that relate specifically to the ongoing business relationship between the Appellants and DFO and that do not arise automatically under the statutory stay.
DFO argues on this motion that pending the disposition of the substantive appeal, it should have an order that the Appellants preserve original copies of production records and related financial records for milk used by the Appellants in milk processing or sales and that the Appellant provide security for amounts found to be owing because of the DFO decision under appeal.
DFO submits that regarding these additional two stay terms the appropriate test for the Tribunal to use is the three-part test set out in the Supreme Court of Canada’s decision in RJR-MacDonald.
The essence of the two additional terms sought by DFO is an order requiring a party to do something or not do something. In that respect, the requested additional terms can be equated to a request for an interlocutory injunction and therefore, the Tribunal accepts that the three-part test from RJR-MacDonald is the appropriate test.
The RJR-MacDonald Court concluded that the test for granting such relief was met if there was a serious constitutional issue to be determined, and if complying with the new regulations would cause irreparable harm, and where, considering the public interest, the balance of convenience favours retaining the status quo until the Court disposed of the issues.
The present appeal does not raise constitutional issues or Charter issues but focuses on the authority delegated to DFO and the validity of subordinate legislation enacted by DFO. In that respect, the RJR-MacDonald test can be modified for application.
Is There a Serious Question to be Determined?
The serious question branch of the test evolved from the House of Lords in American Cyanamid Co. v. Ethicon Ltd., 1975 CanLII 2598 (FC), [1975] 1 All E.R. 504 where that test was explained as “the claim is not frivolous or vexatious; in other words, that there is a serious case to be tried”. The Court in RJR-MacDonald observed that the “threshold is a low one” and “a prolonged examination of the merits is generally neither necessary nor desirable”.
The Appellants’ written motion submissions on this point make four broad points to support their proposition that the DFO’s case is meritless: no evidence of the Appellants’ regulatory obligations to keep records; lack of DFO authority to establish the milk classes in issue and the corresponding prices; lack of DFO authority to impose penalties on a milk processor; breach of the requirements of procedural fairness by DFO.
Regarding the point about the Appellants’ record-keeping, we have noted that in three separate audits of the Appellants’ milk utilization during 2017 and 2018, three auditors raised similar issues related to the Appellant failing to keep required records. We also observe that one of the audit reports was provided to the Appellants in draft for comment and includes an Appendix G that distils the Appellants’ comments about the audit findings. None of the reported Appellants’ comments in Appendix G challenge the auditor’s finding that “available records do not afford a reasonable basis to conduct verifications of its reported milk activity”. We have also already noted the antecedent litigation between the Appellants and DFO and the Minutes of Settlement filed as part of the record on this motion. A cursory reading of those Minutes of Settlement supports an inference that inappropriate record keeping was at least one driver in the prior litigation. We are not deciding the validity or findings of any audit report in this motion decision and we are not deciding the scope or limits on any regulatory authority or obligation to maintain records, and we are not making any final determination about the validity or enforceability of those Minutes of Settlement; however, given those materials in the record, it militates against the Appellants’ first broad submission of “no evidence” regarding record-keeping issues.
Two other broad issues the Appellants point to in support of the “no merits” arguments can be grouped as “lack of authority”. DFO authority is central to the appeal and a finding that DFO either did or did not have the requisite statutory authority would decide the substantive appeal issues. As noted elsewhere in these reasons, we reserve deciding those issues until the full evidentiary context and full legal argument has been made at the substantive appeal hearing.
The issue about lack of “procedural fairness” in DFO’s decision-making goes to the very November 26, 2018 DFO decision under appeal. In the appeal under the Act, the Tribunal may order or direct the DFO to take such action under the Milk Act as the Tribunal considers proper and, in that regard, the Tribunal may substitute its opinion for that of the DFO. The essence of those provisions of the Act is that the Tribunal “stands in the shoes” of the DFO in a fresh hearing. While evidence of any procedural unfairness in DFO’s decision-making process may still be relevant contextual evidence on the substantive appeal, the impact of any procedural unfairness in DFO’s decision-making is cured by the de novo nature of the Tribunal hearing.
A cursory review of the Appellants’ notice of appeal and amended notice of appeal reinforces that the regulatory framework related to the production and processing of milk is complex and the facts are complex.
Similarly, in reviewing the Appellants’ written motion submissions, nearly 100 paragraphs focus on the absence of any merit to support DFO’s authority. Those arguments include factual determinations that can only be made on a complete evidentiary record and complex legal arguments related to the structure of the regulatory regime for milk in Ontario. That review of the merits militates in favour of there being a serious question for determination.
Guided by the direction from the Supreme Court that the threshold on this branch of the test is a low one, and that the merits review should not be prolonged or in-depth, we conclude at this stage there is a serious issue to be determined in this appeal and DFO has met the first branch of the test.
Will there be Irreparable Harm?
Modifying the Supreme Court’s directions about the second branch of the test results in the question “whether DFO would, unless the additional stay terms are granted, suffer irreparable harm”.
The financial implications in issue exceed $13 million and as noted by both parties, the amount in issue grows with each month as the business transactions between the Appellants and DFO continue.
RJR-MacDonald informs us that “irreparable” in this branch of the test relates to the nature of the harm rather than its magnitude, reinforcing that harm cannot be quantified in monetary terms, or “which cannot be cured, usually because one party cannot collect damages from the other”.
The DFO has engaged the possibility it cannot collect the financial implications from the Appellants. It has pointed to the complex corporate arrangements of the Appellants and the lack of initial clarity in the appeal filing about who was involved as Appellants. That, with the amounts at stake are two factors in our considering the irreparable harm issue.
We agree with the Appellants’ submission that on this branch of the test it is not incumbent on the Appellants to establish that they will suffer irreparable harm if the Tribunal grants the DFO stay motion. The consideration of relative harm as between the parties is made in the final branch of the test.
However, faced with DFO raising the financial implications and leading evidence supporting irreparable harm, the Appellants have filed no evidence about their ability to satisfy the financial implications if those amounts are ultimately determined to be owed, nor have they filed any evidence to allay the DFO issue about the complexity of the Appellants’ corporate structure, in the financial implications issue. That response and the absence of any evidence from the Appellants is another factor in considering the irreparable harm issue.
Based on those factors, we are satisfied that DFO will suffer irreparable harm if the security is not ordered.
Who is favoured in the Balance of Convenience?
Another factor sometimes related to irreparable harm relates to the public interest.
RJR-MacDonald informs us the public interest is best considered as part of the “balance of convenience” branch of the test, particularly where one litigant is a public agency and the case involves challenges to legislative validity.
DFO is the regulator authorized by the Legislature to regulate milk production and marketing. The regulatory system for milk in Ontario involves not only provincial authority and intra-provincial aspects but federal authority and extra-provincial aspects that together create a composite nation-wide regime.
The Milk Act is the highest order of legislation engaged in this appeal, and the Milk Act’s purpose informs, guides and shapes all subordinate legislation.
- The purpose and intent of this Act is,
(a) To stimulate, increase and improve the producing of milk within Ontario;
(b) To provide for the control and regulation in all respects of the producing or marketing within Ontario of milk, cream or cheese, or any combination thereof, including the prohibition of such producing or marketing in whole or in part; and
(c) To provide for the control and regulation in any or all respects of the quality of milk, milk products and fluid milk products within Ontario.
There can be no doubt reading that purpose section that the public interest is central to that legislative objective.
Considering this legislative backdrop, the scale tips more in favour of the public regulator than the private litigants.
Turning to the first specifically requested stay term of preserving original records, we note that is a feature of the regulatory system imposed on all 72 milk processors in Ontario and we have noted that the evidence on this motion suggests that the Appellants have not complied with that requirement. The public interest is for all participants in the system to play by the same regulatory “rules”, even in circumstances such as this appeal where the Appellants have challenged the validity of those “rules”. That determination of validity will eventually depend on the outcome of the substantive appeal. Meanwhile, it does not serve the public interest to have one out of seventy-two processors operating under a different set of rules. This consideration tips the balance more in favour of the public regulator than the private litigants.
Turning to the second specifically requested stay term of financial security, we note that the underlying issue is DFO’s pricing structure. As discussed, that pricing structure allows DFO to ensure a level playing field among processor competitors and a fair return to the milk producers. Using the same “rules”-based analysis from above, it does not serve the public interest to have one out of seventy-two processors operating under a different set of pricing rules. This consideration tips the balance more in favour of the public regulator than the private litigants.
Turning to consider the harm to DFO if we do not grant the financial security versus the harm to the Appellants if we do grant the financial security, we find the balance tips in favour of the DFO.
(i) Preserving Original Records
Since we have clarified that the statutory stay does not operate to prevent DFO from conducting inspections and audits into the Appellants’ milk utilization for the period since August 1, 2018, it logically follows that the original records required by an audit should be preserved.
However, we go further to say this clarification or direction to preserve such records should be part of this decision given the evidence on the motion disclosed:
- In an August 2017 audit of the Appellants, the auditor reported that the Appellants’ “available records do not afford a reasonable basis to conduct verifications of its reported milk activity”.
- In a September 2018 audit of the Appellants, the auditor reported that the Appellants’ “production data was transferred to a clean form and originals were not retained” and “production records cannot be validated and record-keeping is not sufficiently reliable to support milk utilization reports”.
- In an October 2018 audit of the Appellants, the auditor reported that the Appellants’ “production records cannot be validated, and record keeping is not reliable enough to support milk utilization”.
Those three audit reports emanated from three auditors. There was no evidence from the Appellants on the motion to counter those observations about the Appellants’ milk utilization records.
While the independence and accuracy of those audits may be issues on substantive appeal, this motion is not the place to determine the underlying independence or accuracy of those audits.
The lack of audit evidence on this motion to contradict or challenge those audits reinforces the importance of directing the Appellants to preserve for inspection original copies of production records and related financial records for milk used by the Appellants in milk processing or sales, pending the disposition of this appeal by the Tribunal.
It is also appropriate for us to observe this motion is not the appropriate time or place for the Tribunal to dictate to DFO the timeframe for inspections and audits, who the auditor should be or should not be, or what audit standards should be used. Pending the Tribunal’s disposition of this appeal, such details remain as part of the status quo as discussed. In that regard it is also appropriate to observe that the evidence on the motion confirms the proposed auditor has been cross appointed by the Commission. Counsel for the Appellants has conceded that the Commission has regulatory authority over the Appellants’ milk processing operations. It would be inappropriate at this stage for the Tribunal to create audit terms that could implicate the authority of the Commission as the Commission is not before the Tribunal on this motion or in this appeal.
(ii) Security
The magnitude of the financial issues between the parties is explained in both the DFO motion materials and the Appellants’ motion materials which both suggest the amounts exceed $13 million.
Understanding the amounts in issue requires a short explanation of DFO’s variable milk pricing structure set out in DFO General Regulation 10/17.
- (1) Every processor shall, in respect of each month,
(a) Complete a milk utilization report through the Milk Utilization Verification (MUV) system; and
(b) Submit to DFO such milk utilization declarations through the MUV system, by the seventh day of the next following month or the next business day when the seventh falls on a holiday or weekend.
(2) Subject to subsection (3), where a processor fails to comply with subsection (1) in respect of any month,
(a) all milk supplied to the processor in the month shall be deemed to have been utilized by the processor as Class 1(a) for fluid milk processors or the highest class utilized in the prior month for industrial milk processors; and
(b) the processor shall pay DFO for the milk at the price referred to under subsection (2)(a).
The amounts in issue arise from the price differential between the Appellants’ reported utilizations which it used to determine the price the Appellants have paid DFO for their milk utilization and the “deemed” price reflected in subsection 24(2)(a) and a September 8, 2015 letter from DFO to all milk processors, which would include the Appellants. That September 8, 2015 letter alerted milk processors that the “failure to provide such proper books and records . . . will result in the deeming of such milk utilization to” the higher price class.
The DFO seeks security of $13,244,529.00 comprising the following amounts:
- $7,095,000 (estimated amount owing for period October 2016 to July 2017);
- $4,329,000 (estimated amount owing for period December 2018 to July 2019);
- $1,820,529 (amount compromised in the June 24, 2016 Minutes of Settlement).
The validity of the estimated amounts is in issue in this appeal. The Minutes of Settlement are also challenged in this appeal. The total $13,244,529.00 remains in issue for determination in the substantive appeal. In this motion we are not making any final determination of what amounts, if any, are owed by the Appellants to the DFO.
Part of the DFO evidence on the stay motion included the DFO Credit Program document which is a DFO policy governing how it grants credit to processors buying milk from DFO. DFO does not grant credit to the Appellants as their business relationship is Collect on Delivery. However, the Credit Program provides insight into DFO’s business practices in granting credit to processors. In very general terms, the Credit Program utilizes an external agency that assesses the creditworthiness of processors based on credit criteria that includes current assets to liabilities; equity to total assets; cash flow to total debt service. Based on that credit criteria and a credit scoring system, DFO exempts some processors from the requirement of posting security. Where security is posted, DFO generally requires security equal to the “processor’s highest two consecutive months’ purchase of milk from DFO”.
The cross-examination evidence of Kristin Benke confirmed that the Appellants’ annual milk purchases from DFO are approximately $20 million. The $13 million sought by DFO as security represents well over half the Appellants’ annual milk purchases from DFO.
Based on our analysis of the three-part test from RJR-MacDonald, we are satisfied that the Appellants should provide security pending the disposition of the appeal. However, we are not satisfied that $13 million sought by DFO is appropriate.
The evidence before the Tribunal is that the Appellants buy approximately $20 million of milk annually from DFO which averages $1,666,666.67 monthly. Two months’ average sales would be $3,333,333.33. We find that in these circumstances, security equal to two months’ average milk sales is appropriate pending the outcome of the appeal. We arrived at two months’ informed by the DFO Credit Program approach to requiring two months’ security from some milk processors who do not demonstrate a satisfactory credit score under that Program.
ORDER
The DFO motion to define the stay under subsection 16(6) of the Act is granted in part.
The stay under subsection 16(6) of the Act, does not result in the automatic suspension of legislation, regulations or DFO policies enacted or to be enacted, including but not limited to the powers of DFO under sections 8 and 9 of the Milk Act, R.S.O. 1990 c. M.12.
Without limiting the generality of the foregoing, this stay does not prevent DFO from conducting an inspection or audit of the milk utilization of the Appellants, during the conduct of this appeal, for periods outside the scope of the decision under appeal.
Any director, officer, employee or representative of the Appellants, and any person in a non-arm’s length relationship with the Appellant, shall cooperate with DFO and with the Tribunal as necessary to give effect to the stay.
Pending the disposition of the appeal by the Tribunal, the Appellants shall preserve for inspection original copies of production records and financial statements for all milk used by the Appellants in processing or sales during the conduct of the appeal.
Without limiting the generality of the foregoing, the Appellants shall preserve for inspection original copies of the documents identified in section 4.5 of the Milk Utilization Audit Standards, as approved by the Canadian Dairy Commission on July 25, 2014, and the documents identified in Appendix B to the National Milk Utilization Audit Standards, Revised Draft, dated July 18, 2018.
The Appellants shall provide DFO with security in a letter of credit, or other security acceptable to DFO and approved by the Tribunal, for $3,333,333.33.
The Appellants shall ensure the security described above remains in place during the conduct of the appeal.
DFO shall take no steps to collect on the security required by this order before the final appeal disposition.
During the conduct of the appeal, a party may, by motion, seek directions from the Tribunal regarding any disputes relating to DFO’s exercise of its powers regarding the Appellants or the Appellants’ compliance with the stay.
On motion of a party, the Tribunal may modify or supplement the stay during the conduct of the appeal.
DATED at Collingwood, Ontario this 16th day of December, 2019.
