COURT OF APPEAL FOR ONTARIO
DOHERTY, MOLDAVER AND MACPHERSON JJ.A.
BETWEEN:
WELCH FOODS INC., A COOPERATIVE
Joel Richler and Theresa L. Howarth for the appellant
Plaintiff/Defendant by Counterclaim (Appellant)
- and -
CADBURY BEVERAGES CANADA INC.
John F. Rook, Q.C. and
John Cotter
for the respondent
Defendant/Plaintiff by Counterclaim (Respondent)
HEARD: December 14 and 15, 2000
On appeal from the judgment of Justice Romain Pitt dated February 26, 1999.
A. INTRODUCTION
1In 1945 C.B. Powell started a food brokerage business in St. Catharines. By the late 1940s he was acting as a food broker for a large international company, the Welch Grape Juice Company. After acquiring a plant in St. Catharines in 1954, Powell Foods Company undertook the manufacturing of Welch products in Canada. In 1969, Schweppes acquired a majority interest in the Powell company and merged with Cadbury to form Cadbury Schweppes Powell Limited. C.B. Powell and his son, Tom, remained with the new company until the late 1970s.
2For almost half a century the relationship between Welch and Cadbury prospered. A series of licensing agreements governed the relationship. Welch’s products, especially its grape juice, became well-known in the marketplace and Cadbury’s St. Catharines plant and personnel did a good job of manufacturing and distributing Welch products. By the mid-1990s, the St. Catharines plant provided employment to several hundred workers and both companies made substantial profits from the relationship.
3Unfortunately, all of that changed in the spring and summer of 1996. The relationship ruptured as both companies took steps which outraged the other. The longstanding commercial relationship, conceived in the early post-war years and nurtured by effective corporate leadership for almost half a century to the benefit of both companies, tumbled into distrust, then acrimony, and eventually litigation.
4In 1998, Justice R. Pitt presided over a 41 day trial. He heard the testimony of 19 witnesses and examined more than 2000 documents. In a 93 page decision released on March 29, 1999 he found in favour of Cadbury on most issues. Welch appeals from his decision.
5There are three distinct branches to the appeal from Pitt J.’s decision. The first, and most important, branch of the appeal relates to a practice in the food business known as co-packing, which is simply another term for subcontracting. At the centre of the co-packing dispute is the 1972 licensing agreement between the parties under their current corporate rubrics, Welch Foods Inc., A Cooperative (“Welch”) and Cadbury Beverages Canada Inc. (“Cadbury”). In the licensing agreement, Welch granted to Cadbury the exclusive right to manufacture and sell Welch products in return for annual royalty fees. In 1996, Cadbury sought to enter into a co-packing arrangement whereby a Mississauga company, Imperial Flavours Inc. (“Imperial”), would manufacture and store Welch’s frozen concentrated juice products. Pursuant to its interpretation of the 1972 licensing agreement, Cadbury sought Welch’s permission to enter into the co-packing relationship with Imperial. Welch consented to a test run of this arrangement but, several months later, refused to consent to a permanent co-packing agreement between Cadbury and Imperial.
6The trial judge concluded that a clause in the licensing agreement, which spoke of the possibility of Cadbury assigning the agreement or an interest therein with Welch’s consent, indicated that it was permissible for Cadbury to use Imperial to co-pack Welch frozen juices, with Welch’s consent. Moreover, the trial judge interpreted another clause in the licensing agreement as providing that Welch could not withhold its consent unreasonably. He then concluded that Welch’s refusal to give consent in this case was unreasonable.
7The second branch of the appeal involves the interpretation of restrictive covenants in the licensing agreement and assessing whether Cadbury breached those covenants by its involvement with the sale of juice products bearing the trade-mark C’Plus, a brand competing with Welch.
8The third branch of the appeal relates to the remedies provided by the trial judge, including the damages he awarded to Cadbury and the restrictions he imposed on Welch with respect to its future assessments of whether to grant or withhold its consent to any co-packing arrangement proposed by Cadbury.
B. FACTS
(1) The parties and the events
9The 1972 licensing agreement between Welch and Cadbury grants Cadbury the exclusive right to manufacture, sell and distribute certain products bearing Welch trademarks, including grape juice, grape jams and jellies, frozen concentrated grape juice and grape drinks. In return for these rights, Cadbury paid Welch an annual royalty. The agreement provides for extensions of its term to the year 2025 if Cadbury makes certain advertising expenditures.
10For most of the nearly 50 years during which Welch and Cadbury, and their predecessors, operated under various licensing agreements, Cadbury fulfilled its obligations at its own plant in St. Catharines. However, there was nothing in the licensing agreements that explicitly required Cadbury to perform all of its obligations itself or limited Cadbury to activities at the St. Catharines plant. Indeed, the crucial 1972 licensing agreement dealt with the possibility that Cadbury would utilize other companies in its Welch-related operations. Two articles of the 1972 licensing agreement which are at the heart of this litigation provide:
5.05 If Powell [Cadbury] assigns this Agreement or any interest therein without the prior written consent of Welch except as security for the purpose of its financing, Welch may forthwith terminate this Agreement by notice in writing to Powell.
6.02 Any approval or consent required of either party hereunder shall be in writing signed by an executive officer or by an agent designated in writing for that purpose by an executive officer. Both parties agree that no such approval or consent will be unreasonably withheld, consistent with the tenor and purpose of this Agreement.
11In early 1996, Cadbury decided to lower production costs by subcontracting some of its Welch manufacturing and storage business to Imperial. It sought Welch’s permission to conduct a test co-packing venture with Imperial with respect to Welch’s frozen concentrates. Frozen concentrated juice made up the majority of Welch product that Cadbury manufactured.
12In response to Cadbury’s request, Welch conducted an inspection of Imperial’s plant in January 1996. Welch identified several quality issues that it required be addressed to maintain its high quality standards. Notwithstanding these concerns, Keith Naughton, Welch’s Quality Specialist in Corporate Quality Assurance, concluded that Imperial had the proper facilities, procedures and personnel to successfully co-pack Welch’s frozen concentrates. Imperial promptly attended to, and resolved, Welch’s quality concerns.
13Welch approved an interim co-packing agreement between Cadbury and Imperial dated February 1, 1996, after having made changes to it. In the Cadbury-Imperial agreement, Welch was named as a third-party beneficiary entitled to enforce the terms of the contract in its own right and was named as an additional beneficiary on the insurance contract issued under the agreement. Welch and Cadbury also entered into a separate agreement by which Cadbury would indemnify Welch for Imperial’s contractual breaches and product liability in excess of Imperial’s insurance coverage.
14The interim Cadbury-Imperial agreement contained the following noteworthy clauses:
Cadbury hereby represents and warrants to Imperial that under its agreement with Welch Foods Inc. (“Welch”) Cadbury has authority to enter into co-packing agreements with others with the consent of Welch, and further represents and warrants to Imperial that Welch has provided its consent to the arrangements set forth in this letter agreement.
Cadbury hereby represents and warrants to Imperial as follows:
(1) Cadbury has the sole exclusive right and authority to produce and package the Product and with the consent of Welch to sub-license others to produce and package the Product, and that Welch has consented to the production of the Product under the Test Run by Imperial.
(2) It is contemplated that if the Test Run is successful one or more further test runs may be agreed to by Cadbury and Imperial . . . If the test runs are successful, it is contemplated that Cadbury and Imperial shall enter into a formal co-packaging agreement . . . .
15At this juncture, all was quiet on the Niagara grape front in the Welch and Cadbury camps. Welch was content with the manner in which Cadbury was fulfilling its obligations under the licensing agreements.
16This all changed with a single event on April 18, 1996. Cadbury announced that it was closing its St. Catharines plant due to the pending termination of its licence agreement with another company, Ocean Spray. Cadbury did not consult with Welch about this decision and informed Welch about it on April 19. Welch was not pleased.
17The relationship between Welch and Cadbury entered a new phase. Both sides considered their options for continuation of the relationship. Potential scenarios included: Welch buying out its licensing agreement with Cadbury; Welch co-packing its own products for Cadbury; Cadbury keeping its St. Catharines plant open; Cadbury shifting production to one of its plants in the United States; and Cadbury fulfilling its obligations under the licensing agreement by co-packing arrangements with companies like Imperial.
18It soon became clear that the Cadbury-Imperial co-packing arrangement was a major weapon in the Welch-Cadbury dispute. If the arrangement continued, Cadbury would not have to abandon the playing field even though it was closing its St. Catharines plant. If the arrangement ceased, Welch would be in a very strong position, either to expand significantly its own Canadian role or to provoke Cadbury to sell, or modify to Welch’s benefit, its interests under the 1972 licensing agreement.
19After some preliminary meetings and reasonably cordial communications in May 1996, relations quickly turned sour as the parties failed to reach an agreement. One of the focal points of the deteriorating relationship became the Cadbury-Imperial co-packing arrangement. In a letter date August 12, 1996, Welch informed Cadbury that it “withdraws its consent to the limited co-packing arrangements entered into between Cadbury and Imperial in February of this year.” However, Welch did not completely close the door on co-packing arrangements between Cadbury and Imperial. In the same letter, Welch informed Cadbury that “Welch is prepared to consider a fresh proposal put forward by Cadbury whereby Imperial Flavours would act as a co-packer of certain WELCH’S products”. Welch reiterated its non-consent to the Cadbury-Imperial co-packing arrangements on several other occasions through the autumn of 1996.
20Cadbury took the position that it was unfair for Welch to withdraw its consent when all of the conditions which justified its interim agreement with Imperial remained in effect after the test run was completed. Eventually, as Welch’s position hardened, so did Cadbury’s. On October 29, 1996, Cadbury informed Welch that it intended to continue co-packing with Imperial without Welch’s consent. Cadbury also told Welch that Welch’s refusal of consent was “patently unreasonable” and contravened article 6.02 of the 1972 licensing agreement.
(2) The litigation
21In February 1997, Welch commenced an action seeking, inter alia, a declaration that the 1972 licensing agreement required Cadbury to manufacture and market all Welch products (except prune nectar) and that co-packing was not permitted under the terms of the agreement. In light of the action against it, Cadbury decided to continue production at its St. Catharines plant, which did not close as Cadbury had planned, to cease production at Imperial, and to leave it to the court to determine whether it could co-pack with Imperial.
22After commencing its action, Welch performed an audit of Cadbury in 1997 pursuant to article 3.02 of the licensing agreement. In the course of the audit, Welch said that it uncovered evidence that prompted it to amend its pleadings to add allegations that Cadbury had violated several articles of the licensing agreement by selling a competitive line of non-carbonated grape products under the name C’Plus.
23By way of background to this aspect of Welch’s claim, article 1.03 of the 1972 licensing agreement provides that Cadbury cannot sell any grape product under any other trademark or label, or manufacture or sell an imitation grape or grape flavoured product. In 1988, Cadbury acquired the C’Plus trademark. The trademark was already licensed to the predecessor of Coca Cola Foods Canada Inc. (“Coke”). As a result of Cadbury’s acquisition of the trademark, Coke’s licence to manufacture and sell all flavours of C’Plus non-carbonated fruit drinks in Canada was now from Cadbury. Cadbury received a royalty in consideration for Coke’s use of the licence. The flavours of the C’Plus fruit drinks in issue are grape drink, wild cherry apple drink and tropical fruit punch, all of which contain some grape juice. Cadbury admitted that it had supplied concentrates to Coke for C’Plus Tetra products, but that it had not done so for several years. Cadbury also admitted that it had acted as an intermediary in the sale of C’Plus products by Coke to Pepsi Cola (“Pepsi”) bottlers.
24With respect to this breach of restrictive covenant aspect of its claim, Welch sought damages of $1 million, a disgorgement of profits earned from the breach and a declaration that Welch could terminate the licensing agreement as a result of Cadbury’s default.
25In its amended statement of defence and counterclaim, Cadbury sought a declaration, inter alia, that under the licensing agreement it could enter into agreements, including with Imperial, for the co-packing of frozen juice with Welch’s consent, such consent not to be unreasonably withheld. Cadbury claimed damages of $10 million for breach of the licensing agreement. Cadbury also made claims relating to Welch’s alleged breach of an agreement relating to the supply of Niagara grapes and Welch’s alleged improper conduct during its audit of Cadbury in 1997.
(3) The trial judge’s decision
26The trial judge held that, on a proper construction of the licensing agreement, Cadbury was permitted to subcontract the manufacture of Welch’s frozen concentrated grape juice, with Welch’s consent, such consent not to be unreasonably withheld. The trial judge further held that Welch had unreasonably withheld its consent to the use of Imperial as a co-packer.
27The trial judge dismissed Cadbury’s claims against Welch relating to the supply of Niagara grapes and the manner in which Welch conducted its 1997 audit of Cadbury.
28The trial judge also held that Cadbury had not breached the licensing agreement by licensing its C’Plus trademark to Coke. However, the trial judge held that Cadbury had breached the licensing agreement by selling concentrates of grape drink (but not wild cherry apple drink and tropical fruit punch) to Coke and by acting as an intermediary in the sale of grape drink products from Coke to Pepsi bottlers.
29On the question of remedies, the trial judge awarded Cadbury damages of $465,000 to the end of 1998 and $192,000 per year thereafter for Welch’s unreasonable refusal to consent to Cadbury’s subcontracting to Imperial. The trial judge also ordered that if in the future Cadbury sought Welch’s consent to enter into a co-packing agreement with Imperial, Welch could not withhold its consent unreasonably. He then imposed several conditions on Welch’s discretion. Welch could not withhold consent based on considerations of competition, confidentiality or pre-1996 quality issues. He further ordered that disputes about quality issues were to be resolved by the Dominion Experimental Farm of Vineland, Ontario or by any other reputable Canadian food analyst in accordance with article 1.07 of the 1972 licensing agreement. The trial judge also held that Welch was to accord appropriate deference to the opinions of Health Canada on the suitability of proposed co-packers insofar as quality issues are concerned.
30On the C’Plus issues, the trial judge did not think that Cadbury’s conduct warrants the remedy of termination of the licensing agreement. He ordered that Cadbury pay Welch a two per cent royalty on Cadbury’s sale of the concentrates for grape drinks to Coke and the sale of grape drinks from Coke to Pepsi bottlers in which Cadbury played the role of intermediary.
31Welch appeals the components of the trial judge’s decision that went against it, including both substantive issues and remedies. Cadbury does not appeal any of the matters on which it lost.
C. ISSUES
32The issues presented by this appeal are:
(1) Did the trial judge err in concluding that the licensing agreement entitled Cadbury to enter into a co-packing arrangement, with Welch’s consent, which Welch could not withhold unreasonably?
(2) Did the trial judge err in holding that Welch unreasonably withheld its consent to Cadbury’s co-packing arrangement with Imperial?
(3) Did the trial judge err in awarding damages to Cadbury for Welch’s breach of the licensing agreement and in his quantification of those damages?
(4) Did the trial judge err in imposing conditions on Welch’s discretion with respect to decisions in the future about granting or withholding consent to co-packing proposals from Cadbury involving Imperial?
(5) Did the trial judge err by not permitting Welch to terminate the licensing agreement because of Cadbury’s breaches relating to C’Plus products?
D. ANALYSIS
(1) The co-packing issue
33The trial judge held that the 1972 licensing agreement, properly construed, permitted Cadbury, with Welch’s consent, to subcontract some of its Welch-related work to other companies. In reaching this conclusion, the trial judge did not accept Cadbury’s submission that it had a right to co-pack without Welch’s approval. Nor did he accept Welch’s argument that the licensing agreement was in effect a personal services contract the performance of which Cadbury could not delegate.
34In essence, the trial judge was of the view that the co-packing issue was governed by articles 5.05 and 6.02 of the licensing agreement which permitted Cadbury to assign the agreement, or any interest in it, to a third party, with Welch’s consent, such consent not to be unreasonably withheld. The core of the trial judge’s reasoning is contained in this passage in his judgment:
Cadbury’s right to assign the licencing agreement or an interest therein with the appropriate consent of Welch, in practical terms, meant that any company with Welch’s consent could have become the manufacturer of all or some of Welch’s products. If such a company did acquire even an interest only in the licence, it could have manufactured any one or all of Welch’s brands and could have done so in its own plants; so that the notion . . . that the licence somehow contemplated manufacture at St. Catharines by Welch [sic: Cadbury] personnel only, was unfounded. That viewpoint was expressed by Welch in its devastating letter of October 22, 1996 in which the writer said that “the original licence to Cadbury only anticipated and only allowed for Cadbury’s production of Welch brand product”.
The 1972 agreement was drawn, in my view, with sufficient skill and foresight to anticipate the emerging and now-exploding practice of outsourcing or co-packing. The controls and inspection rights provided for, particularly in paragraph 1.07, and several other paragraphs, and the drafting skills of commercial lawyers were considered adequate protection for Welch, as indeed the interim co-packing agreement amply demonstrated. Conversely that same perspective renders unsustainable Cadbury’s least-forcefully advanced proposition that Cadbury had a right to co-pack without approval. In a word Cadbury could co-pack but only with Welch’s consent, such consent not to be unreasonably withheld.
35In my view, this interpretation of the licensing agreement in the context of the co-packing issue is correct. Welch’s submission that articles 5.05 and 6.02 are irrelevant to the co-packing issue and that no co-packing of Welch’s products is permitted under the licensing agreement is completely undermined by its own conduct, including its own formal interpretation of the licensing agreement, in the early months of 1996.
36Some introductory points serve to place Welch’s consideration of Cadbury’s request to co-pack with Imperial in context. First, with Welch’s consent, Cadbury had previously used co-packers (Palm Dairies, Eplett Dairies and Sweet Ripe) to produce one of Welch’s products, Welchade, in Canada. Second, in the United States, Welch itself used co-packers. Third, Welch’s own internal documents demonstrated that Welch regarded co-packing as a vehicle for growth outside the United States. For example, in the document Welch’s 1996 Profit Plan and 1997-2000 Long Range Plan, Welch stated:
Traditionally, the biggest obstacle to international growth has been product affordability. Because exported product will always be expensive, significant international growth depends on an “insider” strategy with local production by a licensee, co-packer or joint venture partner. [Emphasis added.]
These contextual points establish that, contrary to the picture Welch tried to paint at the trial, co-packing was not a bogeyman inimical to Welch’s interests.
37Turning to the events of early 1996, it is clear that Cadbury felt that it needed to obtain Welch’s consent to its proposal that it co-pack with Imperial. Cadbury made its formal request for consent on January 29, 1996 in a letter from Cadbury’s division counsel to Welch’s general counsel. Cadbury said: “we are seeking to obtain Welch’s formal consent in accordance with the provisions of our license agreement to contract with Imperial to co-pack and store the Welch’s frozen line in Canada”.
38It is also clear that Welch shared Cadbury’s view that co-packing was permissible but that Welch’s consent was required. In an internal memorandum, William Hewins, Welch’s Vice-President (International), the man principally responsible for Welch’s business interests in Canada, including its relationship with Cadbury, said: “I believe that the formal approval letter should be sent under my signature, but backed up by R & D’s approval confirmation and Legal’s agreement and input on proper language of the approval letter”.
39In addition to reviewing Cadbury’s proposal from a legal perspective, Welch took steps to ascertain whether Imperial could produce Welch products in accordance with Welch’s high standards for product quality. The quality audit report prepared by Keith Naughton, a Quality Specialist, on January 29, 1996 concluded:
Our quality audit of Imperial Flavours shows them to be an experienced food packaging company with a background in packing frozen concentrates for their own brand and as a copacker. Imperial Flavours demonstrated that they have the proper facilities, procedures and personnel to successfully copack Welch’s frozen concentrates.
The report went on to note minor deficiencies at Imperial which, it is common ground, Imperial quickly remedied to Welch’s satisfaction.
40After completing its internal review, including the inspection of Imperial and the legal review of the actual document setting out the Cadbury-Imperial agreement, Welch, through its general counsel, gave its consent (subject to five conditions which were quickly met by Cadbury) to the Cadbury-Imperial agreement on January 30, 1996. Welch’s role in the process and its formal consent are explicitly reflected in the Cadbury-Imperial Co-packing agreement:
Cadbury hereby represents and warrants to Imperial that under its agreement with Welch Foods Inc. (“Welch”) Cadbury has authority to enter into co-packing agreements with others with the consent of Welch, and further represents and warrants to Imperial that Welch has provided its consent to the arrangements set forth in this letter agreement.
41Welch’s role and consent were also acknowledged shortly thereafter in its internal January Monthly Report dated February 5, 1996:
Cadbury/Mott’s Canada – The license holder for Welch products in Canada requested that they be allowed to pack frozen concentrates at a co-packer. QA conducted a quality audit of Imperial Flavours in Toronto. With several specific items that need to be addressed, Imperial Flavours was approved to co-pack Welch concentrates for Cadbury/Mott’s Canada.
42In summary, the trial judge held that the co-packing issue was governed by articles 5.05 and 6.02 of the licensing agreement. It is clear that when they addressed the co-packing issue in early 1996, both companies, through their senior officers and their legal advisers, shared the trial judge’s view. Later, when co-operation turned to conflict and litigation, both parties resiled from their shared interpretation of the licensing agreement. Cadbury took the position that it could co-pack without Welch’s consent. Welch argued that co-packing was impossible under the 1972 licensing agreement.
43The trial judge held that the wording of the licensing agreement and the conduct of the parties precluded the adoption of either of these extreme positions. In my view, the trial judge’s interpretation of the agreement was correct. As he concluded: “In a word Cadbury could co-pack but only with Welch’s consent, such consent not to be unreasonably withheld”.
(2) The consent issue
44The consent issue is anchored in article 6.02 of the 1972 licensing agreement which, for convenience, I set out again:
6.02 Any approval or consent required of either party hereunder shall be in writing signed by an executive officer or by an agent designated in writing for that purpose by an executive officer. Both parties agree that no such approval or consent will be unreasonably withheld, consistent with the tenor and purpose of this Agreement.
45On January 30, 1996, Welch formally consented to the interim Cadbury-Imperial co-packing agreement. In the summer and fall of 1996, Welch refused to consent to a long term co-packing agreement. The trial judge concluded that Welch’s refusal to consent was unreasonable and violated article 6.02. In reaching this conclusion, the trial judge reviewed a great deal of evidence and made clear findings with respect to it.
46Welch’s counsel candidly admits that on the consent issue he is seeking to overturn the trial judge’s factual finding that Welch withheld its consent unreasonably. As Welch’s counsel acknowledged, this is a steep hill for Welch to climb. The test for reversal is that the trial judge committed a palpable and overriding error in his assessment of the facts. This test was enunciated by the Supreme Court of Canada in Stein v. The Ship ‘Kathy K’, 1975 CanLII 146 (SCC), [1976] 2 S.C.R. 802. I think it instructive to set out the entire passage where the test is established because it speaks not only to the test, but also to the appellate court’s role in its application. Ritchie J. said at p. 808:
These authorities are not to be taken as meaning that the findings of fact made at trial are immutable, but rather that they are not to be reversed unless it can be established that the learned trial judge made some palpable and overriding error which affected his assessment of the facts. While the Court of Appeal is seized with the duty of re-examining the evidence in order to be satisfied that no such error occurred, it is not, in my view, a part of its function to substitute its assessment of the balance of probability for the findings of the judge who presided at trial.
47I agree with Welch’s submission that Cadbury had an onus to show that Welch’s withholding of consent was unreasonable and that the test for determining this question is objective, referable to the circumstances known to Welch when it withheld its consent: see BRS Northern Ltd. v. Templeheights Ltd., [1998] 2 E.G.L.R. 182 (Ch.D.) and British Bakeries (Midlands) Ltd. v. Michael Testler & Co. Ltd., [1986] 1 E.G.L.R. 64 (Ch.D.).
48Welch submits that the trial judge erroneously preferred his own beliefs and opinions as to the commercial reasonableness of withholding consent over those of Welch executives. I disagree. The trial judge carefully considered Welch’s conduct leading up to its decision to withhold consent in the context of the express words of article 6.02, namely whether the decision was “consistent with the tenor and purpose of this Agreement”.
49It should be recalled that the licensing agreement, which structured a relationship that had begun in the late 1940s and was scheduled to continue until 2025, provided benefits to both companies: namely, access to Welch products for Cadbury and royalties for Welch. Both companies had an obligation to respect the integrity of the licensing agreement; at a minimum, neither could take deliberate steps to undermine it during its life. This obligation applied to Welch’s decision whether to withhold its consent to Cadbury’s request; the decision could not be exercised “to achieve some collateral purpose wholly unconnected with the terms of the [agreement]” : see Bromley Park Estates v. Moss, [1982] 1 W.L.R. 1019 at 1033 (Eng. C.A.) and Dominion Stores Ltd. v. Bramalea Ltd. (1985), 1994 CanLII 161 (ON CA), 38 R.P.R. (2d) 12 at 23 (Ont. Dist. Ct.).
50The trial judge carefully reviewed the evidence and held, in effect, that Welch had refused its consent for an improper and collateral purpose, namely “to appropriate the benefits of the license which Cadbury and its predecessors had enjoyed since 1954”. In other words, Welch withheld its consent to force Cadbury to default on the licensing agreement, or alternatively, to compel Cadbury to enter into a different relationship that would be more profitable for Welch.
51The record abundantly supports the trial judge’s conclusion. Indeed, far from being a palpable and overriding error, the trial judge’s conclusion was, in my view, correct.
52Welch approved Cadbury’s co-packing proposal on January 30, 1996. From that date to April 18 there was not a whisper from Welch about dissatisfaction with, or even concern about, the Cadbury-Imperial arrangement.
53On April 18, Cadbury announced the closing of its St. Catharines plant. An internal meeting of senior Welch personnel took place on May 1. One of the discussion topics for this meeting was:
How shall Welch’s balance the eventual possibility of re-acquiring the Brand license in Canada versus the potential damage to Welch’s current royalty ($460 M) if reacquisition is not possible? [Emphasis in original.]
In other words, almost immediately Welch was thinking in terms of the possibility of using Cadbury’s decision to close the St. Catharines plant as a vehicle for reacquiring its brand licence in Canada, a licence which Cadbury had held for almost 50 years.
54Why would this be attractive to Welch? The answer is found in an illuminating note written by Vice-President Hewins after a Welch meeting on May 16:
1st step in strategy
benefit of getting the business back
(pot of gold)
In a note written after a meeting on May 13 involving Dan Dillon, Welch’s CEO, and Pat O’Donnell, the Chairman of the National Grape Co-operative (“National”), of which Welch was a wholly-owned subsidiary, Mr. Hewins quantified the potential upside for Welch:
Power Play
$28 MM sales - $5 MM new profit
55It is clear that Welch acted quickly on this scenario. Mr. O’Donnell’s notes of the same May 13 meeting record:
Cadbury Strategy:
We should go after Canadian growers to become members
( Now – this year)
That will put us (Welch) in driver seat
re: license
56This note is a reference to Welch’s strategy, formulated less than a month after Cadbury’s plant closing announcement and pursued with vigour almost immediately, to try to entice local grape growers away from Cadbury to Welch. This strategy was hardly consistent with respecting the integrity of the Welch-Cadbury licensing agreement. Cadbury depended on its longstanding relationship with many local grape growers to provide it with the grapes from which it made Welch products.
57At the same May 13 meeting, both Welch Vice-President Hewins and National CEO O’Donnell recorded that a firm decision had been made to refuse to permit Cadbury to co-pack with Imperial.
58Interestingly, Welch did not communicate either of those two decisions to Cadbury for some time. It was not until late June 1996 that Cadbury became aware that Welch was competing for the allegiance of local grape growers and Welch’s formal refusal to consent to co-pack with Imperial was not communicated to Cadbury until August 12.
59The chronology I have described provides a partial response to one of the arguments advanced by Welch on the consent issue. In his judgment the trial judge listed the fourteen reasons that Welch advanced for withholding consent. He dealt extensively with seven of the reasons because they related to the conduct of Imperial and Welch. However, he did not discuss the other seven reasons because they “all relate to Cadbury’s conduct rather than to Imperial’s qualifications”. Welch contends that the trial judge’s failure to consider Cadbury’s conduct amounts to reversible error.
60I disagree. It is clear from the chronology that Welch made its negative decision on the co-packing issue by May 13, although it did not formally communicate the decision to Cadbury until August 12. Most of Cadbury’s conduct which Welch would like to inject into the decision-making process occurred after May 13.
61Moreover, ignoring for the moment the fact that the chronology renders irrelevant several of Welch’s alleged reasons, I would observe that most of the seven Cadbury-related reasons for Welch’s refusal to consent to the co-packing arrangement are, in my view, either unfounded (for example, the allegation that Cadbury was lax in conducting its investigation of Imperial; after all, Welch had itself performed a detailed inspection and approved Imperial for co-packing!) or trivial when set against Welch’s conduct (e.g. Cadbury’s mistake, which it corrected, of providing Imperial with confidential information beyond the products that Imperial was producing).
62There are two other Welch submissions which should be addressed.
63In its factum, Welch submits:
The trial judge erred in finding that technical approval of Imperial as a potential copacker necessarily implied management approval of the proposal. He erroneously inferred that approval of the interim agreement tied management hands and deemed any refusal to approve permanent copacking as unreasonable. In effect, the trial judge elevated Welch’s technical approval to an ultimate executive approval conditional only upon the successful conclusion of the tests.
64I disagree. Welch’s initial approval of the Cadbury-Imperial co-packing agreement was far more than a technical approval. It is true that technical personnel, including inspectors and research and development staff, were involved. However, Welch’s legal staff was also deeply involved in the approval process. Indeed, Welch’s legal staff reviewed the proposed agreement, made changes to it, and insisted on related and supplementary legal documentation between Welch and Cadbury. Finally, the whole approval process was supervised by Mr. Hewins, Welch’s Vice-President (International) with responsibility for Canada.
65In its factum, Welch also submits:
The trial judge also ignored a key distinguishing feature of the Cadbury proposal: that if accepted, there would for the first time in North America be a copacking relationship between a Welch licensee and a third party copacker, as opposed to a direct relationship between brand owner and manufacturer, whether licensee or copacker.
66My observation about this submission is that if this untrodden path was of real concern to Welch, why did Welch permit the interim co-packing agreement to proceed in February 1996? Welch started down this path with its eyes wide open in February and made no complaints about the voyage before April 18. Moreover, a particularly important provision of the interim co-packing agreement, to which Welch agreed, contemplated a formal co-packing agreement if the test run were successful. This course of conduct completely undercuts its submission grounded in the uniqueness of the co-packing route.
67In summary, in my view the Cadbury-Imperial co-packing agreement was a small and non-controversial matter for Welch until April 18, 1996. After that date, it became a major weapon for Welch as it moved quickly and aggressively to, in the trial judge’s words, “appropriate the benefits of the licence which Cadbury and its predecessors had enjoyed since 1954”. This course of conduct led Welch to withhold its consent to a continuation of the co-packing arrangement. This decision was made for a collateral and impermissible purpose. It was, therefore, not a reasonable withholding of consent within the meaning of article 6.02. On the contrary, the withholding of consent was not, in the words of that article “consistent with the tenor and purpose of the Agreement”.
(3) The damages award issue
68In disposing of Cadbury’s claim for damages for unreasonable refusal of consent to co-pack, the trial judge accepted the evidence of Cadbury’s expert witness, Stephen Cole, that the increased cost of production at Cadbury’s St. Catharines plant compared to production at Imperial was $465,000 from August 12, 1996, the date of Welch’s formal refusal, to December 31, 1998. The trial judge also held that damages should continue to accrue until Welch either consented to or was made to consent to the use of Imperial or some other co-packer, but not beyond December 31, 1999 without court approval.
69Welch does not challenge the dates chosen by the trial judge as the basis for calculating damages. Moreover, the parties agree that if the $465,000 award is correct, Welch should pay an additional $192,000 in damages for the 1999 calendar year.
70Welch contends that its refusal to consent to co-pack caused no loss to Cadbury which, contrary to its plan, kept the St. Catharines plant open in order to fulfil its obligations under the licensing agreement. Since the fundamental premise of the Cole Report was that the St. Catharines plant would close, the calculations in the report are flawed.
71I do not see the relevance of this submission. The reason Cadbury kept the St. Catharines plant open was Welch’s refusal to consent to co-packing at Imperial. Accordingly, it was entirely appropriate for Mr. Cole to compare the costs to Cadbury of keeping the plant open with the costs of co-packing at Imperial. In his report he documented a difference of $465,000. The trial judge accepted his analysis and conclusion.
72In Longeuay v. Thomas (1982), 1982 CanLII 2122 (ON CA), 35 O.R. (2d) 660 at 663 (C.A.), a case dealing with damage awards, Lacourcière J.A. cautioned that “[a]n appellate court should not interfere unless the assessment is wholly erroneous or there is a demonstrable error of principle”. There is nothing in Welch’s submissions or the trial judge’s reasons to justify such a conclusion in this case.
(4) The issue of the remedy for the unreasonable refusal to consent
73Cadbury’s position at trial on the question of the appropriate remedy for Welch’s unreasonable withholding of consent was that the trial judge should declare that Cadbury was entitled to co-pack. The events that gave rise to the litigation took place mainly in 1996. The trial judgment is dated February 29, 1999. Because of the lapse of time and because “no one from Imperial testified about Imperial’s current capacity to meet Welch’s standards” [emphasis in original] the trial judge was not prepared to make the declaration sought by Cadbury. Instead, he declared that “Cadbury may at any time in the future request Welch to consent to a co-packing contract with Imperial or any other business entity, and Welch could not unreasonably withhold consent to such a request.”
74However, the trial judge imposed three constraints on any future Welch decision relating to consent to co-pack:
A refusal based on considerations of competition or confidentiality in the case of Imperial is ipso facto unreasonable.
If there is a dispute about the reasonableness of Welch’s refusal to consent from the perspective of quality, such dispute is to be finally resolved by Dominion Experimental Farm of Vineland, Ontario or any other reputable food analyst in accordance with section 1.07 of the 1972 agreement. With respect to Imperial, quality issues are to be confined to developments arising subsequent to June 30, 1996 when, as I have found Imperial was a suitable co-packer.
In assessing the suitability of a co-packer, Welch is required to give appropriate deference to the opinion of Health Canada officials on the suitability of the co-packer in so far as quality issues are involved.
Welch challenges all three of these constraints.
75Welch submits that the constraint on its ability to consider issues of competition and confidentiality in the case of Imperial is inconsistent with the underlying premise of the trial judge’s remedy, namely to permit a current assessment of relevant factors if Cadbury makes a new request for Welch’s consent to a co-packing arrangement with Imperial. Welch states that if considerations of competition and confidentiality were relevant in 1996, they are equally relevant in 2001. I agree with this submission. Considerations of competition and confidentiality are fundamental to any business entity. Accordingly, Welch is entitled to investigate, and feel secure about, these issues before granting its consent to any future Cadbury-Imperial co-packing arrangement.
76The second constraint is admittedly a somewhat creative one which, counsel informed us, was not the subject of evidence or argument at trial. In my view, the constraint is consistent with the 1972 licensing agreement. Article 1.07 provides that disputes between Welch and Cadbury about “the condition and quality of the products” should be resolved by Dominion Experimental Farm or any other reputable food analyst. I see no reason why this mechanism should not apply to quality issues in the context of a Cadbury co-packing proposal and Welch’s consideration of whether to consent to it, both of which are governed by the licensing agreement.
77Welch contends that there was no evidence at the trial about whether the Dominion Experimental Farm even exists today. Welch also submits that the reference to “any other reputable food analyst” is too vague to be useful or enforceable. I disagree. The parties agreed to these dispute resolution mechanisms relating to quality issues in 1972. It is their obligation to keep their own licensing agreement current. In the absence of evidence to the contrary, the assumption should be that the potential role of the Dominion Experimental Farm continues to be available. As to the vagueness submission relating to “any other reputable food analyst”, I observe that the parties chose this language in 1972. Again, it is their duty to monitor the language of their licensing agreement as the years roll by. A court should not infer, absent evidence, that the language chosen by the parties is too vague to be enforceable today.
78The third constraint envisages a role for Health Canada in the resolution of disputes relating to quality. Cadbury’s counsel concedes that there was nothing in the record before the trial judge to support this constraint. He speculates that the trial judge meant to refer to Agriculture Canada. However, in the end, he does not submit that this court should substitute Agriculture Canada for Health Canada. Instead, he concedes this ground of appeal.
(5) The C’Plus/Termination of licensing agreement issue
79The trial judge found that Cadbury had breached the 1972 licensing agreements in two respects: first, by supplying concentrates of grape drinks to Coke for making grape drink products; and second, by acting as an intermediary in the sale of grape drink products from Coke to Pepsi bottlers.
80Welch sought a declaration that it was entitled to terminate the licensing agreement because of these breaches by Cadbury. The trial judge refused to grant such a remedy. Instead, relying on a 1990 agreement between the parties relating to Crush products, he ordered Cadbury to pay Welch a two per cent royalty on Cadbury’s sale of concentrates to Coke and on the sale of grape drink products in which Cadbury was the intermediary.
81In refusing to make a declaration that Welch was entitled to terminate the licensing agreement, which would have resulted in forfeiture of the licence by Cadbury, the trial judge considered the factors set out by the Supreme Court of Canada in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. (1994), 1994 CanLII 100 (SCC), 115 D.L.R. (4th) 478 (S.C.C.). As expressed by Major J., at p. 487:
The power to grant relief against forfeiture is an equitable remedy and is purely discretionary. The factors to be considered by the court in the exercise of its discretion are the conduct of the applicant, the gravity of the breaches, and the disparity between the value of the property forfeited and the damage caused by the breach: Shiloh Spinners Ltd. v. Harding, [1973] A.C. 691 (H.L.); Snell’s Equity, 29th ed. (London: Sweet & Maxwell, 1990), at pp. 541-2.
82The factors set out in this passage clearly favoured Cadbury on the termination/forfeiture issue. Cadbury’s breaches of the licensing agreement with respect to C’Plus products were minor breaches relating to peripheral products. To permit Welch to terminate the entire licensing agreement as a remedy for these breaches would be tantamount to the shooting of a healthy elephant to kill the flea on its back. Accordingly, I agree with the trial judge that “[f]orfeiture would also be out of all proportion to the financial loss caused to Welch”. Welch’s loss was small; compensation in the form of the royalty payments ordered by the trial judge was entirely appropriate.
83In my view, the result reached by the trial judge on this issue is sustainable on a second basis. The 1972 licensing agreement contains a provision, article 5.04, that deals with termination of the agreement. Welch has never delivered a notice of termination to Cadbury pursuant to this provision. I see no reason why the trial judge should have made a declaration that Welch could terminate the licensing agreement in light of Welch’s failure to comply with the means to do so as specified in the agreement.
E. DISPOSITION
84I would dismiss the appeal on the first, second, third and fifth issues.
85I would allow the appeal, in part, on the fourth issue by deleting the conditions the trial judge imposed relating to considerations of competition and confidentiality in the case of Imperial and the role of Health Canada in the approval process.
86Cadbury has been substantially successful on the appeal. I would award Cadbury its costs of the appeal.
RELEASED: February 1, 2001
(signed) “J. C. MacPherson J.A.”
(signed) “I agree D. H. Doherty J.A.”
(signed) “I agree M. J. Moldaver J.A.”
