1048547 Ontario Inc. v. Dairy Farmers of Ontario, 2023 ONSC 3160

CITATION: 1048547 Ontario Inc. v. Dairy Farmers of Ontario, 2023 ONSC 3160

DIVISIONAL COURT FILE NO.: DC-383/22 DATE: 20230526

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

Lococo, Leiper and Schabas JJ.

BETWEEN:

1048547 ONTARIO INC. (SKOTIDAKIS GOAT FARM) Applicant

– and –

DAIRY FARMERS OF ONTARIO Respondent

Marie Henein, Jennifer Brevorka and Katrina Crocker for the Applicant

David K. Wilson, M. Alyssa Holland and Joseph Rucci, for the Respondent

HEARD at Toronto: May 9, 2023

REASONS FOR JUDGMENT

Leiper and Schabas JJ.:

Overview

[1] The Applicant, 1048547 Ontario Inc. operating as Skotidakis Goat Farm, seeks remedies by way of judicial review from two decisions of the Agriculture, Food and Rural Affairs Appeal Tribunal (the “Tribunal”). The Tribunal upheld a decision of the Respondent, Dairy Farmers of Ontario (the “DFO”), which had the effect of, among other things, requiring the Applicant to pay the DFO approximately $7 million arising from a dispute over milk pricing.

[2] The Tribunal decisions are a 2019 interim decision requiring the Applicant to provide a $3.3 million letter of credit in favour of the DFO as a condition for staying the DFO’s order pending the outcome of the appeal, and the ultimate decision on the merits of the appeal rendered in April 2022. These decisions are reported at Skotidakis Goat Farm (1048547 Ontario Inc.) v. Dairy Farmers of Ontario, 2019 ONAFRAAT 21, and 1048547 Ontario Inc. (Skotidakis Goat Farm) v. Dairy Farmers of Ontario, 2022 ONAFRAAT 11.

[3] The Applicant is a family-owned industrial milk processor in eastern Ontario, employing approximately 300 people. It produces a variety of milk products including feta cheese, cream cheese, dips, and yogurt.

[4] The Applicant uses cow milk produced in Ontario, which it blends with goat milk in its products. As such, the Applicant’s purchase and use of cow milk is subject to the supply-management regulatory scheme for milk production and marketing overseen by the Canadian Dairy Commission (the “CDC”) and the Ontario Farm Products Marketing Commission (the “Commission”). This system controls the production, marketing and pricing of milk to ensure a fair return for producers and a continuous and adequate supply of dairy products for consumers.

[5] In Ontario, cow milk regulation is governed by the Milk Act, R.S.O. 1990, c. M.12. The DFO is a marketing board which exercises delegated authority from the Commission under several provisions of the Milk Act. It was formerly known as the Ontario Milk Marketing Board: Milk and Farm-Separated Cream – Plan, R.R.O. 1990, Reg. 760, s. 4. The DFO has the exclusive power to buy milk from dairy farmers, to sell it to processors such as the Applicant, and to set the price at which the milk is sold. The DFO has a variable pricing structure for the sale of milk, depending on how the milk is used by processors, e.g., for yogurt, cheese or other products: DFO Milk General Regulation 10/17, a regulation under the Milk Act (the “DFO Regulation”).

[6] The DFO relies on milk processors to self-report monthly on how they use milk. The DFO issues monthly invoices following receipt of Milk Utilization Verification (“MUV”) declarations from purchasers/producers. Under s. 24 of the DFO Regulation, if a processor fails to complete an MUV declaration in any month, it shall be charged the highest price for milk purchased that month, which may be adjusted if there is compliance later. Ensuring accurate self-reporting is accomplished by the DFO through a range of regulatory tools, including the use of milk audits. The DFO has the authority 1) to require persons engaged in producing, processing or marketing of milk or milk products, including processors, to provide information to it, 2) to appoint persons to inspect the books, records and documents of persons engaged in marketing milk, and 3) to take such action and make such orders and issue such directions as are necessary to carry out the terms of the Act and regulations passed pursuant to it: Milk Act, s. 9; Milk and Farm-Separated Cream – Marketing, O. Reg. 354/95.

[7] As a medium to large processor, the Applicant purchases at least $20 million worth of cow milk annually from the DFO. Accordingly, price differentials can be significant.

[8] Following a series of audits of the Applicant relating to its purchase and use of milk between 2015 and 2017, the DFO concluded that it could not verify the Applicant’s MUV declarations that had determined the price it had paid for milk. On November 26, 2018, the DFO advised the Applicant that it would be issuing a new invoice for milk delivered between October 1, 2016 and July 31, 2017 at the highest price rate. This price adjustment required the Applicant to pay the DFO an additional $7.095 million. The DFO also indicated it would be charging for milk at the highest rate going forward (the “prospective order”), and sought an amount previously compromised between the parties in an earlier dispute, bringing the total amount in dispute to approximately $13 million.

[9] Pursuant to s. 16 of the Ministry of Agriculture, Food and Rural Affairs Act, 1990, c. M. 16, the Applicant appealed the DFO’s decision to the Tribunal.

[10] On April 26, 2022, following a lengthy de novo hearing, the Tribunal upheld the decision of the DFO. The Tribunal accepted the evidence that the DFO was unable to verify the uses of the milk purchased by the Applicant due to the Applicant’s inadequate record-keeping and therefore the DFO was justified in charging the Applicant at the highest price rate. The Tribunal rejected Skotidakis’ argument that there was no statutory authority requiring milk usage verifications to be “verifiable” based on the plain wording of s. 24(2) of the DFO Regulation. The Tribunal held that it lacked jurisdiction to deal with the amount previously compromised and the DFO abandoned its prospective order.

[11] For the reasons that follow, we see no basis to interfere with the Tribunal’s decisions.

[12] In our view, the Tribunal’s interpretation of s. 24(2) of the DFO Regulation requiring that MUV declarations be verifiable is reasonable. The Tribunal analyzed the scheme of the legislation and the provisions under review, and its interpretation was supported by evidence of how the regulatory scheme functions. It also concluded, reasonably, that the decision to charge a higher price for the milk purchased by the Applicant did not amount to a “penalty” and was supported by the plain reading of s. 24(2). The Tribunal’s acceptance of the uncontradicted evidence of the auditors—that the claimed usage of milk could not be verified and that it was impossible to accurately determine how milk was used—was also reasonable.

[13] Additionally, the Tribunal’s interlocutory decision to require the Applicant to post security for a portion of the extra amounts charged by the Respondent was also reasonable and in accordance with the legal test for interlocutory relief set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311.

Issues

[14] The issues on review are:

a. Was the Tribunal’s interpretation of s. 24 to require verification of MUV declarations reasonable?

b. Was the Tribunal’s conclusion reasonable that charging the highest price for milk when MUV declarations cannot be verified does not constitute a penalty?

c. Was the Tribunal’s decision to confirm the DFO’s requirement that the Applicant pay the highest price for milk reasonable?

d. Was the Tribunal reasonable in ordering the Applicant to provide a $3.3 million letter of credit pending the outcome of the appeal?

Standard of Review

[15] The standard of review is reasonableness: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Our review of the Tribunal’s decisions, therefore, must be restrained and grounded in respectful attention to the Tribunal’s reasoning and conclusions.

Analysis

The Tribunal’s decision that the DFO can invoice the Applicant at the highest class price when its MUV declarations cannot be verified was reasonable

[16] The Applicant argued that having submitted MUV declarations, the DFO had no authority under s. 24(2) of the DFO Regulation to charge for milk usage at the highest rate. The Applicant submitted that a plain reading of s. 24(2) meant that only milk processors who produce no MUV declarations are subject to being billed at the highest rate for purchased cow milk, and that s. 24(2) does not require that the MUV declarations be verifiable.

[17] Section 24 of the DFO Regulation provides:

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.

[18] The Applicant submits that the Tribunal acted unreasonably and erred in law by giving an unreasonable interpretation to ss. 24 (1) and (2) by effectively reading the word “verifiable” into s. 24(1) and 24(3) of the DFO Regulation, relying on “a basic principle of statutory interpretation that the court should not accept an interpretation which requires the insertion of extra wording where there is another acceptable interpretation which does not require any additional wording”: Friesen v. Canada, 1995 62 (SCC), [1995] 3 S.C.R. 103, at para. 27.

[19] We disagree. The Tribunal properly understood its task in interpreting s. 24 of the DFO Regulation, noting at para. 89, the “additional instruction” from Vavilov, at para. 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.

[20] The Tribunal considered the overall scheme of the Milk Act, the purpose of the legislation and the words used in the section. It found that s. 24(2) must be read in the overall context of the “milk supply management plan” in Ontario (para. 91). At para. 92 the Tribunal stated that the purpose of s. 24 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.”

[21] The Tribunal heard and accepted the evidence from audit witnesses that the accuracy and verifiability of processor declarations is fundamental to the system’s objectives of ensuring a fair return to producers and equitable treatment of processors. A milk processor that is not able to verify its milk usage declarations undermines the objectives of the system. A processor that pays for milk based on actual, verified usage should not have to compete with a non-compliant processor that benefits unfairly from price discounts. This evidence about the importance of accurate, verifiable MUV declarations informed the Tribunal’s analysis of the statute and regulations.

[22] The Tribunal reasoned that the MUV system can only function properly where processors’ MUV declarations can be verified by audit. The Tribunal found that this is the only reasonable interpretation of how s. 24 is to be applied, given the critical role of verifiable MUV declarations in driving the milk supply and compensation system. The Tribunal concluded, at para. 97, that “[i]f the declaration is not verifiable, it is not a declaration and section 24 must be read with that interpretation.”

[23] Consistent with the long-standing directive of the Supreme Court of Canada in Maple Lodge Farms v. Government of Canada, 1982 24 (SCC), [1982] 2 S.C.R. 2, at p. 7, the Tribunal interpreted s. 24 of the DFO Regulation in a manner that would give effect to the scheme intended by the legislature, avoiding a “narrow, technical construction.” Or, as the Ontario Court of Appeal put it in Wilder v. Ontario Securities Commission (2001), 2001 24072 (ON CA), 142 O.A.C. 300 (C.A.), at para. 23, “[a] court should be loath to prefer a rigidly narrow and literal interpretation over one that recognizes and reflects the purposes of the Act.”

[24] In our view, therefore, the Tribunal’s conclusion that s. 24 requires verification of the information provided in MUV declarations is reasonable. While we agree that courts and tribunals should not lightly engage in reading additional words into legislation, in our view there is no other “acceptable interpretation” of the DFO Regulation: Friesen, at para. 27. Section 24 itself states that it is a Milk Utilization Verification (MUV) system” (emphasis added). The audit powers granted to the DFO exist in order to allow for verification and ensure compliance with the overall scheme of the DFO Regulation and the supply management system. Verifiability of MUV declarations is essential to the effective operation of the regulatory scheme, which involves self-reporting and the need for verification – “trust but verify”, as counsel for the DFO put it.

[25] It should be noted that our attention has been drawn to amendments to the DFO Regulation addressing this issue, requiring processors to maintain and make available records to verify their MUV declarations, failing which the highest price shall be charged: DFO Milk General Regulation 06/22, a regulation under the Milk Act. The Applicant argued that this was a big change and ought not to be read in to the DFO Regulation in effect in 2019. We disagree; the amendments simply make explicit what has always been necessary for the scheme to function effectively.

The penalty/surcharge issue

[26] The Tribunal also considered the Applicant’s argument that by charging the highest price for milk purchased during the audit period, the DFO created a surcharge that acts as a penalty on the Applicant, which is inconsistent with the Act and an impermissible reading in of words which were not intended. The Applicant pointed to s. 7(1)6 of the Milk Act, which grants 6 regulation-making powers to the Commission, including the use of penalties where there has been a contravention of the Act, regulations or order of the Commission. In addition, s. 7(3) of the Milk Act limits any penalty for non-producers of milk to no more than 10 per cent of the price payable to the producers for the product in the preceding twelve-month period.

[27] The Tribunal concluded that the deemed highest price levied on the Applicant was not a “penalty” used to deter non-compliance with the legislative scheme; rather it was part of the scheme for ensuring fair payment to milk producers. It preferred to refer to the increased amount owing as a “surcharge.” This seems quite appropriate, and reasonable; a surcharge, dictionaries tell us, is an additional charge or payment, or something added to the original cost or quoted price.

[28] On the other hand, the Applicant submits that any disadvantage imposed by a statute amounts to a penalty, relying on Regina v. Budget Car Rentals (Toronto) Ltd. (1981), 1981 1751 (ON CA), 31 O.R. (2d) 161 (C.A.), in which the Court of Appeal for Ontario cited the Shorter Oxford English Dictionary definition of penalty: “a punishment imposed for breach of law, rule, or contract; a loss, disability, or disadvantage of some kind, either fixed by law for some offence, or agreed upon in case of violation of a contract”. The Applicant points to examples of other regulatory actions which have been found to constitute penalties, such as licence revocations, or milk quota reduction: see Dimi Meat Products v. Director, 2010 ONAFRAAT 8; Senn and Suter v. DFO, 2015 ONAFRAAT 2.

[29] These cases provide examples of regulatory disadvantages, which might also include fines, imposed in reaction to a breach of a law or rule. In contrast, s. 24(2) of the DFO Regulation is based on an expectation of accurate milk usage reporting. While there may be an economic disadvantage to being deemed to have purchased milk at the highest price, the information required to support a claim to lower pricing is wholly within the control of the processor, and the failure of the processor to support a lower price simply means it is charged the higher price. The provisions do not function as “punishment”, nor is the surcharge a fine; rather, the ability to increase the price is simply a mechanism to ensure, as the Tribunal noted (at para. 110), that dairy farmers receive “fair and proper compensation.”

[30] Further, if milk usage is later established by verified records, s. 24(3) allows for an adjustment downward. This is a pricing scheme that is subject to validation, for known pre-set price classifications, and it is up to the processors to support their claim for a lower price.

[31] The Applicant submitted that the Tribunal did not discuss or consider the effect of s. 24(3) of the DFO Regulation, arguing that it was not available to it once the word “verifiable” was read into s. 24(2). However, in para. 109 of its decision, the Tribunal addressed s. 24(3), stating the Applicant’s position that “since [the Applicant] can never provide a verifiable MUV declaration, the savings clause becomes a penalty clause.” Although the Tribunal did not respond directly to this point, as we have already stated, the Applicant’s inability to support an adjustment to a lower price does not make being charged the higher price a penalty; it is, as the Tribunal said, simply a mechanism to ensure that dairy farmers receive “fair and proper compensation.”

[32] The Tribunal also observed that the penalty provisions referenced in s. 7 of the Milk Act, as well as the limits on penalties, relate to penalties that flow following a hearing to determine whether an applicant “has failed to comply with or has contravened… any provision of this Act, regulations, any plan, order or direction of the Commission or marketing board.” That is a different regulatory response and procedure than is found in the operation of the price provisions in s. 24(2) of the DFO Regulation.

[33] The practical impact of the Applicant’s position would allow processors to avoid the implications of s. 24(2) and thereby create an incentive, flowing from the 10 per cent limit on penalties, to engage in large scale deceptive record-keeping practices in order to take advantage of the price classification system as a cost of doing business. This would be at odds with the goal of fairly compensating milk producers based on the use of their product.

[34] In our view, therefore, the Tribunal made a reasonable decision in finding that the operation of s. 24 does not give rise to a “penalty” at all, let alone one which is subject to the limiting provision in s. 7(3) of the Milk Act.

The Tribunal’s decision to confirm the increased price was reasonable

[35] Having found that the DFO can charge the highest price under s. 24(2) of the DFO Regulation where MUV reports cannot be verified, and that doing so does not amount to a “penalty” under the Milk Act, we now turn to the issue of whether the Tribunal reasonably concluded that it was appropriate, based on the evidence, for the DFO to charge the Applicant the highest price for the defined audit period.

[36] The Tribunal accepted the audit evidence, which was uncontradicted by other expert evidence.

[37] The evidence before the Tribunal, summarized by it at paras. 58 – 64 of the decision, was that the Applicant’s records were incomplete. There were discrepancies in reported production and sales numbers, inconsistencies between production and manufacturing records, and material differences in volumes of milk used for certain products and total purchases. Numerous records were requested but not provided.

[38] The uncontradicted evidence from the auditors was that the Applicant had an unusual practice of failing to maintain original production records and failed to provide “basic system-generated documents.” One auditor witnessed milk ingredient usage on a site visit that did not match the usage quantities declared by the Applicant.

[39] The KPMG audit evidence established that during the 16-month period from April 2016 to July 2017, the Applicant claimed class 5 and 6/7 price reductions which saved it $9.7 million. The Applicant’s records for this period could not be verified through audit, thus amounting to the Applicant seeking a substantial price reduction without backing up its claims through records as to how it used the milk.

[40] The auditors were not able to verify the accuracy or completeness of the milk usage by the Applicant and were also not able to propose adjustments. As the DFO’s Chief Business Officer, Kristin Benke, testified, “we didn't have any milk declarations that could be supported or verified, so it was equivalent to having nothing.”

[41] Counsel for the Applicant nevertheless took issue with the Tribunal decision for failing to address the ways in which the reliability of the audit reports were challenged during the hearing before the Tribunal. In paras. 76-77 of its decision, the Tribunal stated:

Further, 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.

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

[42] Lead counsel for the Applicant, who was also lead counsel before the Tribunal, took us to passages in the transcript of her submissions to address this point. When asked by the Tribunal Chair to confirm, based on the written submissions, that the Applicant was “not attacking the three audits” but rather that “it’s a question of interpretation of s. 24 in the context of those audits but not the audits themselves”, Ms. Henein replied: “I think that’s fair with a bit of nuance in the sense that the audits say what they say, so that’s what you’re presented with”, but that she took issue with their scope which “extended beyond what they were authorized to request” and, conversely, “the audits say what they say, but in part they say what they say because they didn’t get the records that we say they were never entitled to get to begin with.”

[43] Despite its complaints about the scope of the audits and the authority to conduct them, the Applicant did not raise questions about the admissibility of the evidence of the auditors. Rather, the Applicant simply complained that the Tribunal erred in saying that the Applicant had conceded the reliability of the audits, and that the Tribunal had therefore failed to engage in that evidence to determine whether it was reliable. This, it is said, makes the Tribunal’s decision upholding the assessment of the highest price for milk unreasonable.

[44] In our view, however, although the Tribunal did not address all of the Applicant’s criticisms of the audits, it did engage in a review of the evidence and the findings that the auditors made, including the evidence that the auditors were unable to make adjustments to reflect actual use of milk due to the lack of records, or records that were incomplete or inconsistent with other records – evidence and findings which were not contradicted by the Applicant.

[45] The Tribunal, therefore, acted reasonably in relying on the uncontradicted audit evidence in upholding the DFO’s assessment of the highest price during the audit period, which it found to be $7.095 million for milk purchased between April 2016 and July 2017.

The Tribunal reasonably required the Applicant to provide a $3.3 million letter of credit pending the outcome of the appeal

[46] The Tribunal’s interlocutory order requiring the Applicant to post a $3.3 million letter of credit pending the outcome of the appeal was made to ensure, as a matter of public interest, that if upheld, the amounts owing, or a significant portion of them, would be collectible.

[47] The Applicant submits that the Tribunal misapplied the well-known three-part test for a stay set out in RJR-MacDonald Inc. Again, we disagree. In its reasons the Tribunal considered each element of the test, concluding that the Applicant had met the first branch by establishing that there was a serious issue to be tried, and holding that the second branch favoured the DFO, which would suffer irreparable harm if security was not ordered. The Tribunal then went on to discuss the competing interests, including the public interest and the desirability of enforcing the rules for milk processors and contributing to a commercial level playing field. The Tribunal found, in assessing the third branch, that the balance of convenience favoured the DFO.

[48] The Applicant’s submission focused on the consideration of irreparable harm. It noted that there was no evidence that it would be unable to pay the higher price, although the Applicant filed no evidence supporting their ability to pay either. Additionally, when the security was ordered, the Applicant was facing other financial demands from the DFO making the total amount in issue when the appeal was commenced approximately $13 million. Those additional sums were either abandoned or resolved.

[49] The DFO, on the other hand, had filed evidence of the “complex corporate arrangements” which, together with the amounts at stake, led the Tribunal to find irreparable harm if security was not ordered.

[50] Application of the RJR test involves an analysis of the evidence and the application of discretion. As has often been noted, the test is flexible, the factors are not “watertight compartments” and are “interrelated in the sense that the overriding question is whether the moving party has shown that it is in the interests of justice to grant a stay.” Strength on one part of the test “may compensate for weaknesses of another”: Louis v. Poitras, 2020 ONCA 815, at para. 16.

[51] In our view, the Tribunal’s decision to require security in order to maintain the stay of the DFO’s order was reasonable. It applied the correct legal test, considered the Applicant’s arguments, and provided coherent reasons for its conclusions.

Conclusion

The application for judicial review is dismissed. The Applicant shall pay the DFO costs, in the agreed upon amount of $100,000.

Leiper J.

P. Schabas J.

I agree:

R.A. Lococo J.

Released: May 26, 2023

CITATION: 1048547 Ontario Inc. v. Dairy Farmers of Ontario, 2023 ONSC 3160

DIVISIONAL COURT FILE NO.: DC-383/22 DATE: 20230526

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

Lococo, Leiper and Schabas JJ.

BETWEEN:

1048547 ONTARIO INC. (SKOTIDAKIS GOAT FARM) Applicant

– and –

DAIRY FARMERS OF ONTARIO Respondent

REASONS FOR JUDGMENT

Leiper and Schabas JJ.

Date of Release: May 26, 2023