1048547 Ontario Inc. (Skotidakis Goat Farm) v. Dairy Farmers of Ontario, 2022 ONAFRAAT 11

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 Courriel: AFRAAT@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

1048547 Ontario Inc. (Skotidakis Goat Farm) Vs Dairy Farmers of Ontario

Skotidakis Goat Farm vs DFO [FINAL DECISION] 2022ONAFRAAT11

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

November 1, 2, 3, 4, 5, 8, 9 and 10, 2021; February 8, 9 and 10, 2022 and March 10, 2022, by video conference

DATE OF DECISION:

April 26 , 2022

002Skotidakis19

NEUTRAL CITATION:

2022ONAFRAAT11

FILE NO.: 002Skotidakis19

DATE: 2022/04/26

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 1048547 Ontario Inc. (Skotidakis Goat Farm), from decisions of Dairy Farmers of Ontario, including retroactive assessments.

AND IN THE MATTER OF: A virtual hearing held pursuant to Rule 18 of the Tribunal’s Rules of Procedure.

BETWEEN:

1048547 Ontario Inc. (Skotidakis Goat Farm)

Appellant

– and –

Dairy Farmers of Ontario

Respondent

Represented by Marie Henein, Jennifer Brevorka, and Sarah Strban

Represented by David K. Wilson, Julie Mouris and Alyssa Holland

HEARD: November 1, 2, 3, 4, 5, 8, 9 and 10, 2021; February 8, 9 and 10, 2022 and March 10, 2022, by video conference

Before: Glenn C. Walker, Chair; Harold McNeely, Vice-Chair; and Peter Koroneos, Member.

Appearances:

Marie Henein, Counsel for the Appellant

Jennifer Brevorka, Counsel for the Appellant

Sarah Strban, Counsel for the Appellant

David K. Wilson, Counsel for the Respondent

Julie Mouris, Counsel for the Respondent

Alyssa Holland, Counsel for the Respondent

Arlene Minott, Secretary and General Counsel, Dairy Farmers of Ontario

Chris Charfield, witness for the Appellant

Michelina Paris, witness for the Appellant

John Skotidakis, President of 1048547 Ontario Inc. (Skotidakis Goat Farm), the Appellant

Alan Mak, witness for the Respondent

Kristin Benke, witness for the Respondent

Hossein Behzadi, witness for the Respondent

Genevieve Leong, witness for the Respondent

Murray Sherk, witness for the Respondent

DECISION

INTRODUCTION

11048547 Ontario Inc., also known as Skotidakis Goat Farm, (“SGF”) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (“Tribunal”) from the decision of Dairy Farmers of Ontario (“DFO”) dated November 26, 2018, and the reconsideration decision of DFO dated April 4, 2019.

2In its Fresh as Amended Notice of Appeal dated February 23, 2021, SGF seeks the following relief:

1. To set aside DFO’s November 26, 2018 decision and its April 4, 2019 reconsideration decision;

2. In the alternative, to reduce the penalties imposed by these DFO decisions;

3. For a declaration that DFO lacks the authority to unilaterally cease milk deliveries to SGF;

4. For a declaration that any persons with interests in conflict to SGF recuse themselves from future DFO decisions relating to SGF;

5. That the Appellant be granted the costs of this appeal; and

6. For such further and other relief as counsel may advise or the Tribunal may permit.

PROCEDURAL BACKGROUND

3On November 30, 2018, SGF attempted to appeal DFO’s November 26, 2018 decision to the Tribunal. That appeal was not accepted on the basis that SGF had failed to request a reconsideration hearing before the DFO Board pursuant to section 16(5) of the Ministry of Agriculture, Food and Rural Affairs Act, R.S.O. 1990, c. M.16 (“Act” or “MAFRAA”).

4After the reconsideration hearing, SGF filed another Notice of Appeal on April 8, 2019. This Notice has been amended several times.

5A number of preliminary motions were filed, considered and decided by the Tribunal. A summary of these preliminary motions and citations for the decision of each, where applicable, follows.

6DFO brought a motion asking the Tribunal to define the stay created by section 16(6) of the Act. Among other things, the Tribunal concluded that the stay did not prevent DFO from conducting an inspection or audit of the milk utilization of SGF, during the conduct of the appeal, for periods outside the scope of the decision under appeal. On December 16, 2019, the Tribunal ordered the preservation of certain records by SGF and ordered that SGF provide to DFO a letter of credit in the amount of $3,333,333.33 as security for any amounts found to be owing to it. ¹

7SGF brought a motion seeking disclosure of a broad category of documents relying upon DFO’s statutory obligations under section 16(7) of the Act. The Tribunal found that framed under section 16(7) of the Act, the breadth of materials sought in the eleven categories was a fishing expedition and dismissed the motion. ²

8The Tribunal dealt with motions and made several procedural orders dealing with proposed restricted access with respect to disclosure documents dealing with commercially sensitive information.

9On a motion brought by SGF, the Tribunal was asked to amend its order of December 16, 2019, concerning the letter of credit. In its decision dated April 27, 2021, the Tribunal declined to hold the letter of credit itself, defined the length of time that the said letter of credit should be held and ordered that it was to be delivered to DFO within 15 days of the date of its decision. ³

10A subsequent motion brought by SGF for disclosure pursuant to Rule 24.02 of the Tribunal’s Rules of Procedure was also dismissed, the Tribunal finding that the motion was nothing more than a fishing expedition and an attempt to relitigate the initial disclosure motion.

PRELIMINARY MATTERS

11At the hearing, prior to the commencement of evidence, three preliminary issues were raised by the parties. The Tribunal made its decision with respect to each of these three issues and indicated that reasons would be included in this decision. Those reasons follow.

Sequence of Witnesses

12SGF sought an order providing that DFO and not the Appellant should present its evidence to the Tribunal first because of the nature of the case or, in the alternative, that it be allowed to call two of DFO’s witnesses, Kristin Benke and Murray Sherk, as part of its case.

13Both parties agreed that the appeal takes the form of a hearing de novo and that the Appellant has the burden of proof.

14SGF took the position that the Tribunal’s Rules of Procedure do not address the sequence of witnesses or the ability of one party to call another party’s witness and confirmed the well-established principle that the Tribunal has authority to govern its own process.

15Counsel for SGF argued that its appellate arguments are based on DFO’s procedures and rules, and the statutory authority governing DFO and its audit capabilities. Such evidence is within the purview of Ms. Benke and Mr. Sherk. The evidence elicited in their examination is therefore essential to the Appellant’s ability to prove its case.

16Counsel for DFO pointed out the long-established practice before the Tribunal for the appellant to present its case first. He drew the panel’s attention to Rule 53.07(4) in the Rules of Civil Procedure which provides that a person cannot call an adverse party as a witness if the adverse party’s lawyer undertakes to call the person as a witness. Counsel then confirmed on the record that he would call Ms. Benke and Mr. Sherk.

17It has been the practice of the Tribunal for many years, in appeals under section 16 of the Act, to have the appellant present its evidence first. Before April 2021, when the Rules of Procedure were updated, the order of presentation was set out in Rule 30.03 which provided that the evidence of the appellant was first in order of presentation. This rule was not included in the 2021 revision because the order of presentation is dealt with in another document called “Preparing for Your Hearing 2021” which clearly states that, other than appeals under the Drainage Act, the appellant presents his or her case to the Tribunal panel first.

18In order to change this practice, it would be necessary for the party requesting the change to provide compelling reasons and precedent. SGF provided neither. The Tribunal found that the caselaw cited was unhelpful and that the appellant would not suffer procedural unfairness in view of our comments below.

19Rule 1.10 of the Tribunal’s Rules of Procedure states that where any matter of procedure is not provided for by these rules, the Rules of Civil Procedure may be followed where the Tribunal determines they are appropriate.

20The Tribunal’s Rules of Procedure do not provide for the calling of an adverse party as a witness and therefore we find it appropriate to follow Rule 53.07 of the Rules of Civil Procedure, which states, in part, as follows:

53.07(1) Subrules (2) to (7) apply in respect of the following persons:

1. An adverse party.

2. An officer, director, employee or sole proprietor of an adverse party.

3. A partner of a partnership that is an adverse party.

(4) A party may call a person referred to in subrule (1) as a witness unless,

(a) the person has already testified; or

(b) the adverse party or the adverse party’s lawyer undertakes to call the

person as a witness.

21Rule 53.07 applies to both Ms. Benke and Mr. Sherk. Ms. Benke is an employee of DFO and Mr. Sherk is the Chair of the DFO Board. Counsel for DFO undertook to call both as witnesses during the presentation of its case. Consequently, the rule does not permit counsel for SGF to call these witnesses as part of her case.

22Counsel for SGF will have the opportunity to cross-examine these witnesses and to call proper reply evidence relating to their testimony. Neither of these advantages would be available to the appellant if they had been called as part of its case. Accordingly, we find that there is no prejudice to SGF in proceeding in this manner.

23Finally, the Tribunal will base its decision on the totality of the evidence before it.

International Cheese Inc. Witness

24DFO objected to Michelina Paris, the Chief Operating Officer of International Cheese Inc. (“ICI”), being called as a witness by SGF.

25Like SGF, ICI is also a mid-sized cheese processor and purchases milk from DFO. Also, like SGF, it is subject to Milk Utilization Verification audits by DFO.

26Counsel for DFO argued that any evidence that Ms. Paris might offer would be irrelevant to the issues before the Tribunal and constitute a collateral attack on ICI audits.

27Counsel for SGF responded that her evidence will be relevant and show that, despite DFO’s statements to the contrary, DFO does not treat all cheese processors equally. SGF denies that there is any collateral attack on the DFO audits of ICI.

28The Tribunal decided to allow Ms. Paris to testify. DFO’s objection was premature and based solely on the witness’s “Will Say” statement. The Tribunal felt that the proper approach was for DFO to object to any questions which it felt would elicit irrelevant answers and/or to address the issues of relevancy and collateral attack in its final argument.

29This is the safest approach. The following comments on this issue are found in Administrative Law in Canada, Fourth Edition, Sara Blake, LexisNexis/Butterworths at page 58:

If the failure to admit relevant evidence affects the fairness of the proceeding, the decision may be quashed. Accordingly, when in doubt as to relevance, it may be advisable to admit the evidence and decide later whether it has any importance to the matters to be decided.

Witness Exclusion Order

30The parties requested an order excluding witnesses. John Skotidakis was not excluded on the basis that he is the president of the appellant and could remain as the person who would be instructing counsel for SGF.

31An issue arose as to who would remain in the hearing to instruct counsel for DFO.

32Counsel for DFO wished to have Kristin Benke present to instruct him. She is the Special Advisor and Director, Economics & Policy Development for DFO and was stated to have detailed technical knowledge concerning the facts surrounding this case. She would also be testifying for DFO.

33SGF suggested that Arlene Minott, General Counsel and Corporate Secretary for DFO, should be the person instructing counsel for DFO, as she was not listed as a witness.

34The Tribunal inquired of Ms. Minott, who was present, as to whether she had the same detailed technical knowledge concerning the facts surrounding this case. She stated that she was generally familiar with the appeal but did not have the same detailed knowledge as Ms. Benke.

35The Tribunal decided that Ms. Benke would be allowed to remain in the hearing because she had more detailed technical knowledge and would be the appropriate person to instruct DFO counsel.

36An order was then made to exclude witnesses other than John Skotidakis and Kristin Benke, there being no proposed expert witnesses.

CONTEXTUAL BACKGROUND

37In Canada the dairy industry is part of a supply management system. On a national level the Canadian Dairy Commission (“CDC”) oversees the national supply management of milk set out in Regulation 760 under the Milk Act, R.S.O. 1990, c. M.12 (“Milk Act”). In its December 16, 2019 motion decision, the Tribunal provided an extensive overview of the system. This overview will provide helpful contextual background for the reader of this decision and a summary of that overview is repeated here.

38Under the marketing plan, milk is defined as milk from cows and the plan applies to the control and regulation related to the producing and marketing of milk within Ontario.

39The 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.

40DFO receives delegated authority from the Ontario Farm Products Marketing Commission (“Commission”) under several provisions of the Milk Act. 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 persons to inspect the books, records and 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 terms of the Act, regulations or the marketing plan.⁴

41Under that legislative authority, the Commission enacted Regulation 354/95 and delegated those powers set out in the regulation to DFO.

42DFO is the sole source of non-imported cow milk for processors such as the Appellant. DFO uses a variable pricing structure for the sale of its milk to processors. The price is based on how the milk is used. As a simple example, if a processor buys two kilograms of milk from DFO and processes 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.

43The 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. The price differential between the milk classes can be significant.

44Processors input how they have used the milk via an electronic program known as the Milk Utilization Verification system (“MUV”) monthly, and that information is communicated to DFO who uses that information to invoice the processor for the milk shipped to it in the previous month.

45As with any self-reporting system, the information submitted is subject to audit, known as a Milk Utilization Verification Audit (“MUVA”).

46During an audit, if the DFO auditor finds that the records of the processor do not support the information that was reported, the auditor will enter its findings into the system as an adjustment and a corrected invoice will be issued to the processor.

FACTUAL BACKGROUND

47SGF is a family-owned business which has operated in Saint-Eugene, Ontario since 1975. The business employs 240 to 300 employees and operates 24 hours a day, 6 days a week. The business owns approximately 7000 goats and uses both goat milk and cow milk to process feta cheese, cream cheese, hard cheese, sour cream, dips and yogurt which it markets under its own label and others.

48John Skotidakis is the president of the corporation and other family members are also involved in running the operation.

49SGF uses goat milk, imported milk and milk that it purchases from DFO to produce its products. For the period from October 2016 to July 2017, John Skotidakis estimated that SGF purchased approximately twenty to twenty-five million dollars in milk from DFO. He considers that SGF is a mid-sized processor.

50As a result of concerns raised by its regular auditor, DFO engaged the services of Ferguson + Mak LLP to conduct a MUVA. Alan Mak, who has extensive experience in forensic accounting and investigation and was appointed as a special inspector by DFO, conducted an audit of SGF’s records in December of 2015.

51After the completion of the Mak MUVA for the period ending on September 30, 2015, an adjustment was made resulting in a further sum of $6,820,529.93 being owed by SGF to DFO. SGF appealed this decision to the Tribunal. The appeal was settled by the parties and the terms of the settlement were set out in a Settlement Agreement dated June 24, 2016 (“Settlement Agreement”). The appeal to this Tribunal was subsequently withdrawn.

52Paragraph 9 of the Settlement Agreement dealt with the financial aspects of the settlement and provided that:

With respect to the outstanding audit adjustment for the period ending September 30, 2015 in the amount of $6,820,529.93, DFO is prepared to accept payment in the amount of $5.0M payable over 60 months from the date this agreement is approved. This payment will be separate and not be included on SGF’s MUV. The $5.0M will be billed separately in the June 2016 milk invoice. SGF will provide DFO with 60 monthly post-dated checks in the amount of $83,333.33 starting on the first day of the first month after this agreement enters into force. However, if at any time during the 60 months, in the event of any SGF default or breach of any term of this agreement, then the outstanding amount of the full adjustment shall be due and owing upon the default, less any payments received at the time of the default. For greater clarity, once SGF has satisfied the payment of $5M [sic] and after 60 months, then the outstanding audit adjustment of $6,820,529.93 will be deemed fully paid.

53Paragraph 6 of the Settlement Agreement also provided that 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 and that DFO in conjunction with any other inspector or auditor, such as the Canadian Dairy Commission, the Canadian Food Inspection Agency or Dairy Farmers of Canada will be permitted to inspect SGF books, records, documents and premises for milk from all sources and into any product.

54As a result of the failed audit, SGF lost several special class permits issued by the CDC. By the time of the hearing, these had been reinstated. The $5,000.000.00 payment has also been paid in full.

55In late 2016, after the Settlement Agreement was entered into, SGF retained Christopher Charfield as Director of Operations to monitor and improve record keeping at the plant. Mr. Charfield had five years’ experience doing MUVA as an employee of IBM, who at that time was the official auditor for DFO.

56Based on his experience as a MUV auditor, Mr. Charfield familiarized himself with the SGF operation and made certain changes in how records were produced on the plant floor and subsequently entered into the MUV system.

57Sometime in 2016, DFO again engaged the services of Alan Mak to assist in the ongoing compliance monitoring of SGF and to conduct a further MUVA. This audit covered the period October 2015 to October 2016 and lead to an audit report dated August 22, 2017 (“Mak Report”).

58On April 30 and May 1, 2018, another MUVA of SGF’s records was conducted for the period October 2016 to July 2017 by Hossein Behzadi and KPMG. Mr. Behzadi is the Director of Audit and Evaluation for the CDC and has extensive experience in conducting MUVA. This audit was initially meant to be a joint audit with KPMG who at this point in time were the new MUV auditors for DFO, having replaced IBM. Eventually, however, two separate audit reports were produced: the CDC report dated September 17, 2018 prepared by Hossein Behzadi (“CDC Report”) and the KPMG report dated September 17, 2018 (“KPMG Report”).

59In addition to the period October 2016 to July 2017, the KPMG Report also covered the period April 2016 to December 2016.

60The following conclusions were reached by Mr. Mak in the Mak Report:

• SGF’s available records do not appear to represent the complete milk-related processing and sales activity of SGF.

• There are discrepancies in the reported production and sales of SGF’s products that are made in-house (“Made Goods”).

• There are material differences in the volume of milk that is estimated to be required for Made Goods and its total reported milk purchases comprising of both DFO milk and US-imported milk.

• These discrepancies give rise to concerns that:

o Non-DFO milk is being used in the production of domestically sold Made Goods;

o SGF may be buying milk from sources other than DFO and the two US-based vendors that it has disclosed for the purposes of making domestically sold goods; and

o SGF’s reported production of goods made under the Domestic Dairy Product Innovation Program has been overstated.

61The report outlines other concerns considering the obligations SGF undertook when it entered into the Settlement Agreement. Those concerns include:

• Recipes and Adjusting Journal Entries Reports were requested during the audit but not provided.

• Numerous errors in manufacturing records.

• Incomplete production records.

• Inconsistencies between production and manufacturing records.

62The CDC report also concluded that based on conventional audit procedures and resultant findings, Mr. Behzadi was not able to verify the accuracy and completeness of the milk usage reported by SGF. Nor was he able to propose individual audit adjustments to correct the implicated declarations due to the extent of production document inconsistencies and limited availability of records for audit purposes.

63In conclusion, the CDC Report states that production records cannot be validated and record-keeping is not reliable enough to support milk utilization reports.

64The KPMG Report reached the same conclusions as the CDC Report although covering a greater 16-month period from April 2016 to July 2017.

65By registered letter, dated November 26, 2018 to SGF, Ryan Mills, General Counsel and Corporate Secretary of DFO advised that DFO had accepted the findings in the three audit reports and had concluded that SGF was in breach of its obligations pursuant to the Milk Act and its Regulations to keep proper records and properly and accurately report milk utilization. DFO advised that the following steps would be taken.

66First, DFO, in accordance with DFO Milk Regulation 10/17, would treat all milk deliveries to SGF commencing December 1, 2018 as being utilized at Class 2a, namely the highest class utilized by SGF in the prior month.

67Second, DFO would issue to SGF a new invoice for milk delivered during the CDC and KPMG audit period with an adjustment to the highest class utilized the month prior.

68Third, because of SGF’s failure to maintain proper records in breach of the Settlement Agreement, DFO would be seeking payment by SGF of the amount it compromised in that agreement, namely $1,820,529.93.

69Fourth, it would be necessary for DFO to meet with SGF to address its record keeping and milk declaration process to be satisfied that SGF is in compliance with all of its obligations, and failure to do so would result in DFO ceasing milk deliveries to SGF.

70SGF requested a reconsideration of the DFO decision. The reconsideration hearing was held on February 27, 2019. It is admitted by DFO that there were a number of procedural errors resulting in breaches of natural justice made by DFO in conducting the hearing before the DFO board; the most glaring of which was the exclusion of the unrepresented John Skotidakis during part of the evidentiary portion of the hearing. It was also accepted by the parties that the de novo hearing before the Tribunal cured those defects.

71The reconsideration decision was released on April 4, 2019 and it confirmed the earlier DFO decision.

72With respect to the first finding in the DFO letter of November 26, 2018, SGF was invoiced for all milk delivered by DFO from December 1, 2018 to early 2020 at the highest rate, that is Class 2a. No reason was given as to why that manner of billing ceased in early 2020.

73The amount cited by the Appellant in argument as the retroactive amount owed to DFO pursuant to the second finding in the DFO letter of November 26, 2018 is $7,095,000.00. John Skotidakis testified that he was not aware of any invoice for that amount having been issued and no such invoice was put into evidence. The exact amount of the retroactive payment is not in issue. What is in issue is the authority of DFO to impose that payment.

74Milk continues to be delivered by DFO to SGF at the time of this hearing.

THE ISSUES

75During the lengthy history of this proceeding, many issues have come and gone. In the most recent iteration of the Notice of Appeal referenced above, two declarations were requested. This relief has now been abandoned.

76Further, throughout these proceedings there has been an attempt to impugn the three audit reports. However, in final argument there was no attempt to do so. When asked by the Tribunal whether the reliability of the audit reports remained an issue, lead counsel for the appellant replied that the reports are what they are.

77Accordingly, the Tribunal accepts the findings in the Mak Report, the CDC Report and the KPMG Report.

78The Tribunal finds that the reports have been prepared using the National Milk Utilization Audit Standards (2014) by experienced auditors and we find all three reports to be reliable. Although this was Mr. Mak’s second MUV audit, he has an impressive background in forensic accounting. KPMG conducts MUV audits on a regular basis for DFO and Mr. Behzadi, who wrote the CDC report, has extensive Canada-wide experience in preparing MUV audit reports.

79The Tribunal will rely upon the Appellant’s written submissions in final argument to identify the remaining live issues.

80The broad legal issues as stated by the Appellant are:

(A) Does DFO’s economic sanction constitute a penalty?

(B) If not, does the plain language of section 24(2) of DFO’s General Regulation authorize the invoice? Can DFO’s September 2015 Letter to Processors be read to supplement that position?

(C) Can DFO contract with private entities to expand its authority under the Milk Act? If so, does the Tribunal have jurisdiction to find a breach of contract and award damages for the breach?

(D) Does the Tribunal have jurisdiction to provide “binding, enforceable direction” without DFO Board action or directive for a period not under appeal?

DISCUSSION AND ANALYSIS

Interpretation of Section 24(2) of DFO’s General Regulation

81Section 24 of DFO General Regulation 10/17 provides as follows:

24(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).

(3) Upon receipt of the milk utilization declaration mentioned in subsection (1), DFO shall adjust the amount determined under subsection 2(b) in a subsequent month in accordance with the utilization of the milk as declared.

82The appellant argues that DFO reached the decision which is being appealed with respect to the “economic sanction” imposed by DFO on SGF by applying subsections 24(1) and (2) of the DFO General Regulation 10/17 and a September 2015 letter drafted by DFO staff and, according to DFO, distributed to all processors as a directive.

83Throughout the hearing, counsel for the appellant referred to the payment of approximately $7,095,000.00 as a “penalty” or “fine” and in argument as an “economic sanction”. Counsel for the respondent avoided using those terms. For reasons that will become clear, the Tribunal will use the term “surcharge” when referring to this payment.

84The letter of September 8, 2015 from Patrick Hop Sing, Director Corporate Services for DFO was sent to all Ontario dairy processors. It served as a reminder to the processors of their obligations pertaining to milk utilization declarations and record keeping requirements and provided them with a copy of the Milk Utilization Audit Standards, advising that they contain minimum standards. In the last paragraph of the letter, the writer points out that failure to provide proper books and records is a failure to report milk utilization declarations and that in accordance with the Regulation such failure will result in deeming of such milk utilization to the highest class utilized in the prior month without exception.

85The appellant argues that section 24(2) of the Regulation should be given its “plain” or “ordinary” meaning and cannot be enhanced by using the directive letter of September 8, 2015. Furthermore, there is nothing in the Regulation requiring that MUV declarations must be substantiated by an audit.

86DFO General Regulation 10/17 was passed by the DFO Board pursuant to powers delegated to it under the Milk Act. As such, it is entitled to the same standard of interpretation as would be accorded to a provincial statute or regulation.

87Section 64 of the Legislation Act, 2006, S.O. 2006, c.21, Sched. F provides that an Act shall be interpreted as being remedial and shall be given such fair, large and liberal interpretation as best ensures the attainment of its objects and that this applies to a regulation, in the context of the Act under which it is made and the extent that the regulation is consistent with that Act.

88As a regulation made pursuant to powers granted and delegated under the Milk Act and its regulations, the interpretive instructions in section 64 should apply to DFO General Regulation 10/17.

89Additional instruction can be taken from the decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, where the Court stated at paragraph 121:

The administrative decision maker’s task is to interpret the contested provision in a manner consistent with the text, context and purpose, applying its particular insight into the statutory scheme at issue. It cannot adopt an interpretation it knows to be inferior – albeit plausible – merely because the interpretation in question appears to be available and is expedient. The decision maker’s responsibility is to discern meaning and legislative intent, not to “reverse-engineer” a desired outcome.

90Consequently, the Tribunal finds that the “plain” or “ordinary” meaning approach in interpreting Section 24 of the Regulation would not be appropriate as it would rely solely upon its text and ignore its context and purpose. The Tribunal also finds that it is unnecessary to rely upon the September 8, 2015 directive letter in order to interpret the section.

91Context means the whole section and not just the contested subsection 24(2). It also includes the broader context of the milk supply management plan outlined above.

92The purpose of section 24 of the Regulation is to provide a self-reporting system that is fair to all, especially dairy farmers who must sell their milk to DFO, ensuring that they receive proper compensation based on the end use of that milk.

93SGF admits in its submissions that by design, DFO is a body partial to the interests of milk producers and that this makes sense. DFO’s Board members are elected by milk producers and must be milk producers. DFO considers itself to represent the interest of Ontario dairy farmers. ⁵

94Where the industrial milk processor, such as SGF, fails to submit the monthly declaration or is late filing the declaration, it will be charged for the milk at the highest rate. When the declaration is filed, an adjustment will be made pursuant to section 24(3).

95The evidence showed that when audit results based on reliable records differed from the declaration filed for a specific month, the auditor would make an adjustment.

96The MUV system will only function properly when the MUV declaration can be verified from the processor’s records on an audit.

97The interpretation of the section, when the context and purpose, as well as the text is considered, only makes sense when it is understood that it is a verifiable milk utilization declaration which drives the system. If the declaration is not verifiable, it is not a declaration and section 24 must be read with that interpretation.

98If a processor cannot provide a verifiable milk utilization declaration, then the highest price must be paid, as there will be no adjustment. This result again ensures that the milk producer is protected from any impropriety or abuse in the submission of declarations by the processor.

Does the “Surcharge” Constitute a Penalty?

99SGF argues that the “surcharge” constitutes a penalty and is therefore subject to the limiting provisions of Section 7(3) of the Milk Act.

100Section 7(3) reads as follows:

A penalty imposed on a person other than a producer under paragraph 6 of subsection (1) shall not exceed 10 per cent of the price payable to the producers for the regulated product marketed or processed during the immediately preceding twelve-month period by the person.

101In the Milk Act, “producer” means a producer of milk, cream or cheese; and “regulated product” is defined as milk, cream or cheese, or any combination thereof, in respect of which a plan is in force⁶.

102Section 7(1)(6) provides that the Commission may make regulations with respect to regulated products generally or to any regulated product … providing for the imposition, amount, disposition and use of penalties where, after a hearing, the Commission or marketing board is of the opinion that the applicant or licensee has failed to comply with or has contravened any term or condition of a licence or any provision of this Act, the regulations, any plan or any order or direction of the Commission or marketing board.

103There are several reasons why Section 7(3) is of no application here.

104Firstly, the limitation on a penalty only applies to a penalty imposed in a regulation made by the Commission. Section 24, referred to above, is contained in a regulation made by DFO and there is nothing in the section that would extend the protection to the DFO General Regulation.

105Secondly, the penalty would have to be imposed “after a hearing” before the Commission or DFO. Section 24 of DFO General Regulation 10/17 is considered to be policy and does not require a hearing before the DFO board. The initial decision was contained in a letter from the DFO General Counsel and Corporate Secretary. The decision only went to the DFO board for reconsideration. This does not constitute the “hearing” as contemplated by section 7 of the Milk Act.

106Thirdly, the section apparently only applies to a person who is not a producer; yet the definition of producer includes the producer of cheese (SGF).

107The Tribunal therefore finds that section 7(3) of the Milk Act has no application to this fact situation

108Even if section 7(3) should apply here, the Tribunal has concluded that the “surcharge” is not a penalty within the meaning of that subsection.

109SGF argues that DFO’s methodology of using section 24(2) so that section 24(3)’s savings clause effectively converts section 24 into a penalty provision, instead of one properly intended to incentivize MUV system compliance. It argues that since SGF can never provide a verifiable MUV declaration, the savings clause becomes a penalty clause.

110We disagree that the intention of section 24(2) is meant to provide an incentive for MUV compliance. Although it may have that affect, the primary purpose of section 24 is to ensure fair and proper compensation to dairy farmers for their product. This is consistent with the Tribunal’s interpretation of the section.

111SGF further argues that the Tribunal’s own jurisprudence and Ontario caselaw considering the term “penalty” further proves that DFO’s decision to economically punish SGF for unreliable records constitutes a penalty.

112It maintains that a penalty does not need to constitute a fine, it only needs to impose a disadvantage. We pause to point out that the wording of section 7(3) appears to anticipate a monetary amount.

113In reviewing the caselaw put forward by SGF, we find that none of the cases are directly on point and that all can be distinguished. Based on the Tribunal jurisprudence, the appellant asserts that the key feature of a penalty is that it follows a breach of a rule or regulation and is designed to deter non-compliance with the statutory scheme.

114The Tribunal finds that the “surcharge” is not a penalty within the meaning of the Milk Act. Stated once again, the primary purpose of the “surcharge” is not to deter non-compliance with section 24 of the DFO Regulation 10/17 but to ensure fair and proper compensation to dairy farmers for their product.

Enforcement of the Settlement Agreement

115The June 24, 2016 Settlement Agreement provided for the settlement terms between the parties on a previous appeal to the Tribunal, which has since been withdrawn.

116The Settlement Agreement provided that DFO would waive the payment of a portion of the “surcharge” imposed after a 2015 audit amounting to $1,820,529.93 (“compromised amount”). SGF made certain commitments concerning record keeping and access to records on subsequent audits.

117DFO alleged a breach of the agreement and in its decision and reconsideration decision sought payment of the compromised amount.

118SGF challenges the jurisdiction of the Tribunal to enforce the Settlement Agreement and further alleges that the agreement is void as certain portions were ultra vires the authority of DFO.

119The Tribunal finds that it does not have jurisdiction to deal with the enforcement of the Settlement Agreement in the context of this proceeding and that DFO’s remedy is in the courts, not before this Tribunal.

120This Settlement Agreement arises out of another proceeding which is no longer before the Tribunal, having been withdrawn. In making the decisions, DFO has improperly conflated the two appeals.

121Even if the previous appeal was still before the Tribunal, we question whether the Tribunal would have jurisdiction for the following reasons.

122There is nothing in section 16(11) of the MAFRAA, which sets out the Tribunal’s powers on appeal, that would support the relief requested by DFO, that is the enforcement of the Settlement Agreement.

123As an administrative tribunal, this Tribunal cannot even enforce its own orders. Orders of the Tribunal are to be filed with the Superior Court of Justice, where they are deemed to be an order of that court and enforceable as such. ⁷

Orders Sought by DFO as Part of this Appeal

124In final written submissions, DFO sought six orders from the Tribunal. Those requests and the decision of the Tribunal with respect to each one follow.

125DFO seeks affirmation from the Tribunal of DFO’s authority to invoice SGF for the audit period of October 1, 2016 to July 31, 2017 at the highest class price (Class 2a) in the amount of $7,095,558.03. For the reasons given above, the Tribunal confirms that DFO has this authority.

126DFO seeks affirmation from the Tribunal of DFO’s authority to invoice SGF for $1,820,529.93 being the amount conditionally forgone by DFO under the Settlement Agreement for the audit period ending September 30, 2015. For the reasons given above, the Tribunal finds that it does not have any jurisdiction with respect to the enforcement or the enforceability of the Settlement Agreement and that this matter should be dealt with by the courts.

127DFO requests that the Tribunal direct SGF to provide DFO with security in the form of a letter of credit, or other security acceptable to DFO, for any amounts payable as affirmed by the Tribunal’s Order, which security shall remain in place on a declining balance basis until the full amounts owing are paid.

128In an order of the Tribunal dated December 16, 2019, the Tribunal ordered that SGF provide DFO with security by way of a letter of credit, or other security acceptable to DFO and approved by the Tribunal, for $3,333,333.33.

129In a motion decision dated April 27, 2021, the Tribunal declined to hold the letter of credit, which had still not been issued, and confirmed that the letter of credit needed to be held and not used by DFO until after the “final appeal disposition”. The decision clarified the meaning of “final appeal disposition” in terms of section 18 of the Act.

130The order of December 16, 2019 is an interlocutory order made pursuant to section 16(6) of the Act and former Rule 33.07 of the Tribunal’s Rules of Procedure and arose out of a motion to limit or define the stay of the original decisions.

131The Tribunal was not directed to any authority which would give it the power to order that SGF provide a further letter of credit as part of the final decision, disposing of the appeal.

132The Tribunal finds that with the issue of this decision, the appeal has been disposed, as there is no appeal from this decision (only a review of the decision by the Minister pursuant to section 18 of the Act) and that section 16(6) of the Act has no further application.

133DFO further seeks affirmation from the Tribunal of DFO’s authority to invoice SGF for interest on amounts owing pursuant to the November Decision effective November 26, 2018. It asserts that DFO’s ability to charge interest is consistent with a combination of section 4.6.2. of DFO’s Credit Program and section 17(2) of the Statutory Powers Procedure Act.

134No evidence was presented on this issue and the issue was not addressed in final oral argument.

135Section 17(2) of the Statutory Powers Procedure Act provides that a tribunal that makes an order for the payment of money shall set out in the order the principal sum, and if interest is payable, the rate of interest and the date from which it is to be calculated.

136No reference to interest is made in either the original decision or the reconsideration decision. These decisions only state that SGF will be invoiced for the surcharge amount.

137This Tribunal is not making an order for the payment of money, but merely confirming the decision of DFO with respect to the surcharge. Consequently, section 17(2) of the SPPA does not apply.

138The Tribunal assumes that upon the release of this decision and the termination of the stay, DFO will invoice SGF in the usual manner and apply its usual interest policy.

139DFO has requested two further orders, which would have the affect of expanding the scope of this appeal.

140Firstly, it seeks an order directing SGF to produce for inspection such books, records and documents identified by DFO’s designated MUV auditors as necessary to verify SGF’s milk utilization for the August 1, 2018 to June 30, 2019 audit period. For greater certainty, it states that SGF should be directed to produce all original records, including make sheets, and to produce any documents, including system-generated reports, as determined to be necessary by any MUV auditor designated by DFO.

141Secondly, pending the completion of the audit referenced in paragraph 140, an order confirming that DFO may invoice SGF at the highest-class price for that audit period, with the proviso that DFO shall implement any verifiable and authorized audit adjustments resulting from the audit report for that period.

142DFO argues that these orders flow from SGF’s breach of the Tribunal’s stay motion decision.

143DFO also suggests that the Tribunal remain seized for a specified period of time to address any issues that may arise in the implementation of these orders.

144The Tribunal declines to make these orders or to remain seized of this appeal for two reasons. The Tribunal has no authority pursuant to section 16(11) of the Act to expand the scope of this appeal beyond the audit period in question and to make these orders. In the event that the Tribunal is incorrect in this finding, it declines to exercise its discretion in favour of DFO. To accede to DFO’s requests would possibly lead to a legal quagmire. The role of the Tribunal is to hear appeals, not to police the compliance of parties outside of an appeal that has been disposed of.

SUMMARY AND CONCLUSION

145As previously stated, the many issues in play during the proceeding had, by final argument, been distilled into the three main issues that have been addressed in these reasons.

146With respect to the surcharge of $7,095,000.00, the Tribunal finds that DFO had authority pursuant to Section 24 of the DFO General Regulation 10/17 to make that determination.

147The Tribunal finds that the said surcharge is not a penalty within the meaning of Section 7(3) of the Milk Act.

148The Tribunal finds that it is without jurisdiction to enforce the Settlement Agreement of June 24, 2016.

149Tribunal wishes to thank all counsel for their professional presentations and co-operation during this hearing.

Footnotes

1. 1Skotidakis Goat Farm (1048547 Ontario Inc.) v. Dairy Farmers of Ontario, 2019 ONAFRAAT 21
2. 2Skotidakis Goat Farm (1048547 Ontario Inc.) v. DFO, 2020 ONAFRAAT 2
3. 3Skotidakis Goat Farm v. DFO, 2021 ONAFRAAT 9
4. 4Milk Act, subsections 3(2) and 3(5).
5. 5Paragraph 73, Appellant’s final written submissions
6. 6Section 1, Milk Act
7. 7Section 19, Statutory Powers Procedure Act, R.S.O. 1990, c. S.22