Court of Appeal for Ontario

Date: 20220715 Docket: C67938

Judges: Doherty, Tulloch and Thorburn JJ.A.

Between:

Maple Leaf Foods Inc. Plaintiff/Defendant by Counterclaim (Respondent)

And:

Ryanview Farms, James Theodore Smith and Velma Jean Smith Defendants/Plaintiffs by Counterclaim (Appellants)

Counsel: Martha A. Cook, for the appellants Benjamin Waterman, for the respondent

Heard: January 4, 2022 by video conference

On appeal from the judgment of Justice John A. Desotti of the Superior Court of Justice, dated December 12, 2019, with reasons at 2019 ONSC 7160.

Tulloch J.A.:

[1] This is a second appeal on the issue of damages. The underlying litigation was heard and decided in the March 18, 2014 judgment of Justice Haines of the Superior Court of Justice (“the Haines Decision”). The Haines Decision ordered the appellants to pay $16,503.71 to the respondent and dismissed the appellants’ counterclaim. The appellants were successful on appeal and this court ordered a new trial on the assessment of damages: Maple Leaf Foods Inc. v. Ryanview Farms, 2015 ONCA 566.

[2] The second trial on the matter of damages was heard and decided by Justice Desotti of the Superior Court of Justice (“the Desotti Decision”). The Desotti Decision determined that the respondent was liable for damages in the amount of $564,324.42, inclusive of interest.

[3] The appellants now appeal a second time, arguing that Desotti J.’s remarks and reasons give rise to a reasonable apprehension of bias. They also argue Desotti J. erred in his assessment of damages.

Background Facts

[4] The appellants were pig farmers. In 2004 and 2005, they decided to repopulate their herds and purchased breeding pigs (gilts) and boars from the respondent for this purpose. The respondent represented to the appellants that the gilts would produce healthy segregated early weaners (“SEWs”).

[5] In February 2006, the respondent delivered 1,130 gilts and 10 boars to the appellants and initially housed them in isolation barns. Unfortunately, one truckload was significantly delayed and the 245 gilts contained in that truckload arrived in poor health. The gilts in that truckload became ill with a respiratory virus and eventually infected the entire herd at the isolation barn where they were housed.

[6] In anticipation of the SEWs that would be produced from the new gilts and boars, the appellants had entered into a contract with a third party in July 2006 for the sale of approximately 550 SEWs per week (“the Werden Contract”). The spread of strep suis and pasteurella infections among the animals at one of the appellants’ isolation barns, however, rendered the appellants incapable of fulfilling the Werden Contract.

[7] The parties negotiated a replacement delivery of 300 gilts. 158 replacement gilts were delivered to the appellants in November 2006, with the majority of those pigs going to the farm property, Ryanview 2 (“R2”) and the rest going to a different farm property, Ryanview 1 (“R1”). Again, however, there were transportation issues, and the animals arrived infected with strep suis. Additionally, the pigs at R1 became sick with porcine reproductive and respiratory syndrome virus (“PRRSV”) on November 22, 2006.

[8] Negotiations between the parties resumed, and in 2007, the parties agreed to a further delivery of replacement gilts, as well as purebred animals for breeding. The parties disputed the terms of this agreement at trial: the appellants claimed the respondent agreed to provide additional replacement gilts and purebred animals for free; the respondent, however, later issued invoices for the delivery.

[9] Between April and July 2007, 350 replacement gilts and 87 purebred animals were delivered to the appellants’ farm property, Ryanview 3 (“R3”).

[10] In November 2007, another outbreak of PRRSV occurred, affecting the animals at R1, R2, and R3. Many of the animals were concurrently experiencing strep suis and conformation issues.

[11] Between 2006 and 2009, the market for SEWs was declining, as piglets became more expensive to raise than they could be sold for. In 2009, the appellants entered into the Hog Farm Transition Program, a federal government program, which provided subsidies to hog farmers who ceased production for three years. Regrettably, the appellants ultimately lost their farm through foreclosure.

(1) The Haines Decision

[12] The proceedings began when the respondent sued the appellants for outstanding invoices for the 2007 replacement animals. The appellants counterclaimed for damages arising from the loss of production due to the unsatisfactory quality of gilts delivered.

[13] On the matter of outstanding invoices, the trial judge accepted the appellants’ testimony that the respondent agreed to provide replacement animals for free. It was inconsistent with the surrounding circumstances to find that the appellants would agree to pay full price for replacement gilts as a solution to problems caused by the respondent. The outstanding balance owing was determined to be $16,503.71.

[14] With respect to the appellants’ counterclaim, Haines J. determined that there was no written contract for the delivery of pigs, nor did the appellants agree to terms or conditions that limited the respondent’s liability. In the absence of a written contract, Haines J. considered the application of s. 15 of the Sale of Goods Act, R.S.O. 1990, c. S.1:

Subject to this Act and any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows:

1. Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description that it is in the course of the seller’s business to supply (whether the seller is the manufacturer or not), there is an implied condition that the goods will be reasonably fit for such purpose, but in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose.

2. Where goods are bought by description from a seller who deals in goods of that description (whether the seller is the manufacturer or not), there is an implied condition that the goods will be of merchantable quality, but if the buyer has examined the goods, there is no implied condition as regards defects that such examination ought to have revealed.

[15] The trial judge agreed with the appellants that there was an implied warranty: the respondent was in the business of selling gilts for the purpose of establishing the production of high health SEWs; the appellants relied on the experience and judgment of the respondent’s representative in deciding to purchase the gilts; the gilts were purchased by way of description in reliance on the advice of the respondent’s representative; and the actual animals were unknown to the appellants until their arrival at the farms. Justice Haines concluded that the respondent breached the implied warranty of fitness by delivering diseased animals to the appellants in February and November 2006.

[16] Justice Haines dismissed the appellants’ counterclaim. He began his analysis by considering s. 51(2) of the Sale of Goods Act: “The measure of damages for breach of warranty is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty.”

[17] Justice Haines concluded that the appellants had failed to prove they suffered damages as a result of the breach. In considering the appellants’ claims of loss of production, the trial judge preferred the records in the Canadian Agricultural Income Stabilization (CAIS) program over the records in PigCHAMP, a service that records the operations of pig farmers, and which had been used by the experts. He observed that the evidence of both experts supported the conclusion that the initial disease and conformation issues attributable to the respondent had some continuing impact on the appellants’ operations subsequent to the PRRSV outbreaks. Nevertheless, he was unable to find any loss attributable to the respondent subsequent to the November 2006 PRRSV outbreak, and he could not determine the extent of loss attributable to the respondent before this date. Moreover, Haines J. was not satisfied that the reduced prices for the pigs being sold to Werden Livestock (though not under the Werden Contract) were attributable to the breach of implied warranty rather than to the PRRSV outbreaks.

(2) The First Appeal

[18] Ryanview Farms appealed the Haines Decision, arguing that Haines J. had erred in assessing damages on the counterclaim, and that he also erred by failing to determine and account for how many free replacement animals the respondent agreed to provide in 2007.

[19] The court held that Haines J. had erred in his approach to assessing damages. There was also no explanation for his decision to use the CAIS records or how they should be applied, even though the expert evidence and calculations were based on PigCHAMP records. Justice Haines further erred by failing to resolve some of the differences in the experts’ assumptions and by failing to make a finding as to how many free replacement animals were promised by the respondent, and how that affected the balance owing by the appellants.

[20] A new trial was ordered to address two issues: 1) the assessment of damages for the respondent’s breach of implied warranty; and 2) the number of replacement animals promised to the appellants, and the impact, if any, of that determination on the calculation of the balance owing to the respondent (and potentially on the calculation of damages).

(3) The Desotti Decision

[21] At the outset of his reasons, Desotti J. noted that both parties had narrowed the scope of the trial to the issues identified under the first appeal, and that both parties had relied on evidence adduced at the first trial. Justice Desotti reviewed the facts which were not in dispute, which have been explained earlier in these reasons, and he stated that he could accept from the Haines Decision factual findings which were neither challenged nor tainted by error.

[22] Justice Desotti concluded that the respondent had agreed to deliver 450 replacement pigs; however, 46 gilts were never delivered. He also concluded that the agreement for the respondent to provide 300 replacement pigs in 2006 was based on the expectation that the pigs would arrive in good condition.

[23] There being no dispute that the respondent had breached the implied warranty of fitness, the primary contention at the second trial was whether the appellants had established damages flowing from this breach.

[24] Justice Desotti concluded that the Werden Contract would have ended in November 2006 as a result of the PPRSV outbreak. The PRRSV outbreak was unrelated to the breach of warranty, as even healthy herds may become infected with PRRSV. However, the loss of profits from the breach would continue beyond November 2006 and impact R1, R2, and R3, because the 158 replacement gilts delivered in November 2006 again arrived in poor condition due to transportation issues. The loss of profits between the end of November 2006 and the end of November 2007 was less certain, due to the combination of the poor quality of gilts, a second PRRSV outbreak, and the crashing market for SEWs. Justice Desotti finally concluded that the breach of warranty did not continue past November 2007. The 2007 onset of PRRSV in the farms was a negative economic factor that made it impossible for the appellants to continue their SEW production past the Hog Farm Transition Program.

[25] Justice Desotti ultimately assessed the appellants’ total damages in the amount of $370,534 as follows:

• $154,007 for the respondent’s failure in February 2006 to deliver disease free gilts to the appellants (factoring in a deduction for the revenue actually received in the 19 weeks leading up to November 22, 2006).
• $42,672 for the value of 46 replacement gilts which were not delivered;
• $27,386 for lost profits in R2 from November 22, 2006 to December 31, 2006;
• $283,678 less actual revenue received in the amount of $139,859, for lost profits in R2 and R3 from January 1, 2007 to November 30, 2007; and
• $2,650 in additional veterinarian costs.

[26] From this damages award, he deducted the previous judgment awarded in favour of the respondent, in the amount of $16,503.71. Prejudgment interest was calculated in the amount of $207,107.68 from September 30, 2006 to September 30, 2019 and in the amount of $3,186.45 from September 30, 2019 to December 12, 2019.

[27] The final damage award was therefore $564,324.42.

Issues on Appeal

[28] The appellants raise the following issues on appeal:

1. Did Desotti J.’s remarks, taken together with his reasons for judgment, give rise to a reasonable apprehension of bias?
2. Did Desotti J. err in his assessment of damages in that: a) He failed to assess damages as of the date of the breach; b) He erroneously considered the hindsight evidence of the PRRSV outbreaks in November 2006 and 2007; and c) His assessment of loss for the period between January 1, 2007 and November 30, 2007 is plainly wrong and not grounded in the evidence.

[29] As I will explain below, issues 1 to 2(b) are dismissed. With respect to issue 2(c), I agree with the appellants that Desotti J. erred in his assessment of loss between January 1, 2007 and November 30, 2007.

Do the Judge’s Remarks and Reasons Give Rise to a Reasonable Apprehension of Bias?

[30] The appellants argue that the Desotti Decision gives rise to a reasonable apprehension of bias because the trial judge’s comments in the course of the trial, taken together with the reasons for judgment, indicate that he was biased toward affirming findings and methodologies made in prior proceedings rather than hearing the trial on its own merits.

[31] While counsel framed this issue as one of a reasonable apprehension of bias, the core issue is whether the trial judge, intentionally or inadvertently, relied too heavily on previous factual findings and, as such, abdicated his responsibility to objectively assess damages on the merits of the case.

[32] There is no indication that the trial judge unduly relied on findings in the Haines Decision and in the first appeal. As noted above, both parties relied on evidence filed in the first trial. Having regard to both the filed and live evidence, Desotti J. outlined the facts which were not in dispute. He also recognized that some of the findings in the Haines Decision were tainted by error and could not be relied upon. The trial judge considered this evidence in conjunction with the contested arguments and conclusions in the expert reports and engaged in a thorough analysis to determine which portions of the contested evidence he accepted or did not. I would not give effect to this ground of appeal.

Did the Trial Judge Err in the Assessment of Damages?

[33] The appellants argue that the trial judge made three errors in his assessment of damages: 1) the trial judge erred in assessing damages as of the date of the trial; 2) the trial judge erred by considering hindsight evidence in the form of post-breach events; and 3) the trial judge erred in the calculation of loss between January 1, 2007 and November 30, 2007.

(1) The Assessment of Damages as of the Date of Trial and the Use of Post-Breach Events

[34] The appellants’ first and second arguments on the assessment of damages may be considered together. They argue that the trial judge erred by assessing damages as of the date of trial rather than as of the date of the breach, and that it was an error to consider hindsight evidence of the PRRSV outbreaks in November 2006 and November 2007 in assessing damages. In oral submissions, the appellants acknowledged that if this court were to find that the assessment of damages is properly done as of the time of trial, not the date of breach, then this argument would become moot.

[35] The presumptive date for assessment of damages in contract law is the date of breach: Rougemount Capital Inc. v. Computer Associates International Inc., 2016 ONCA 847, 410 D.L.R. (4th) 509, at para. 45. This presumptive rule can be displaced in appropriate circumstances, where an assessment of damages at the date of breach would not fairly reflect a party’s loss: Rougemount, at paras. 46, 50; Kinbauri Gold Corp. v. Iamgold International African Mining Gold Corp. (2004), 246 D.L.R. (4th) 595 (Ont. C.A.), at paras. 65-68. As this court explained in Rougemount, at para. 52, only special circumstances will warrant a deviation from this presumption.

[36] In this case, regard must be had to s. 51(2) of the Sale of Goods Act, which explicitly prescribes how damages are to be assessed where there is a breach of warranty: “The measure of damages for breach of warranty is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty.” As further explained by the learned author G.H.L. Fridman in Sale of Goods in Canada, 6th ed. (Toronto: Carswell, 2013), at pp. 331 and 334:

In an action for breach of warranty it is necessary for recovery of damages for an alleged loss to establish that what happened was reasonably foreseeable as a likely consequence, that is, a serious possibility, even though the exact concatenation of events, the specific consequence, might not have been.

The general principle as to the measure of damages in actions for breach of warranty is that laid down in section 51(2) of the Ontario Act, which was the subject of discussion and elaboration in Parsons in which it was stated that the test of direct and natural consequences of a breach involved the determination of what the parties might reasonably contemplate as being a serious possibility of such breach….

[37] The interplay of the date of assessment of damages jurisprudence and s. 51(2) is such that a trial judge may look to post-breach events to determine whether they would have fallen within the reasonable contemplation of the parties and to fairly reflect a party’s loss.

[38] The appellants argued that there is jurisprudence for the proposition that post-breach events cannot be considered in assessing damages for breach of contract, relying on Filice v. Complex Services Inc., 2018 ONCA 625, 428 D.L.R. (4th) 548 and Kim v. Kim, 2019 BCSC 222. Neither case assists the appellants.

[39] In Filice, the principle of fairness, as stated in Rougemount, was the court’s justification for declining to consider the loss of the respondent’s mandatory gaming registration following a wrongful dismissal. On the facts of that case, it was contrary to fairness to limit the claim of damages. In Kim, while a property fire subsequent to a breach by the landlord was irrelevant in assessing the plaintiff’s initial loss, it was considered in determining whether the plaintiff had mitigated her losses. Neither case puts forward a general proposition that post-breach events should not be considered in assessing damages.

[40] In order to determine which of the appellants’ losses were direct and natural consequences based on what the parties would have reasonably contemplated as a serious possibility of a breach, it would be necessary to consider the events that followed the date of breach. Stated otherwise, the trial judge was required to consider whether the post-breach events were within the reasonable contemplation of the parties as a serious possibility of a breach.

[41] There was sufficient evidence before the trial judge on which to justify deviation from the presumptive assessment date, particularly in light of s. 51(2) of the Sale of Goods Act. The presence of significant intervening events, which the trial judge found made the loss suffered more uncertain, must be considered in determining what measure of damages fairly reflects the appellants’ loss as a direct and natural consequence of the breach. To do otherwise would not be just in all the circumstances and risks burdening the respondent with more than its fair share of liability. Setting the date of the trial as the date of assessment of damages permitted the trial judge to properly consider the direct and naturally resulting loss in the circumstances of this case, particularly in light of ancillary factors such as the PRRSV outbreak and the crashing market for SEWs.

[42] I therefore would not give effect to these grounds of appeal.

(2) The Calculation of Damages Between January 1, 2007 and November 30, 2007

[43] The appellants’ final ground of appeal is that Desotti J. erred in deducting $139,859 from the lost profits between January 1, 2007 and November 30, 2007, which totalled $283,678. They argue the trial judge misapprehended $139,859 as being actual revenue earned by the appellants when in fact it represents lost profits suffered from selling SEWs at lower than market price.

[44] I agree. The trial judge explained the damages for lost profits at R2 and R3 between January 1, 2007 and November 30, 2007 as follows:

Based on Schedule 12 A of the Hoare report, the lost profit for this period was $283,678.00 for R.F.2 and R.F.3. From this lost profit, a deduction was made of $139,859.00 because based on OMAFRA information, these SEWs were sold at an actual price that was less than this average.

I would note that the significant deduction of $139,859.00 from the lost profit of $283,678.00, was based on the OMAFRA average or what was the average for quality SEWs….

[45] The trial judge described this head of damages as follows:

Loss of profits in R.F.2 and R.F.3 based on the Hoare report is stated at $283,678.00 less what was actually received by way of reduced revenue of $139,859.00 leaving a net loss of $143,819.00. [Emphasis added.]

[46] The trial judge’s characterization of the $139,859 figure as reduced revenue received by the appellants misapprehended the expert report prepared by James Hoare for the respondent (“the Hoare report”).

[47] Properly understood, the figure of $283,678 represents the total lost profit between January 1, 2007 and November 30, 2007 and is the sum of two components: excess expenses incurred and lost revenue. In the Hoare report schedules, the excess expenses incurred were in the amount of $63,916 for feed and veterinary costs, as well as the cost of renting an additional barn. The lost revenue amounted to $219,762. Lost revenue was calculated as the difference between the projected SEW revenue and the estimated SEW revenue earned by the appellants. The projected SEW revenue was $363,204, representing a projected sale of 9,373 pigs for $38.75 per SEW. The estimated SEW revenue was $143,442, representing the estimated 7,311 pigs the appellants sold for $19.62 on average per SEW. The total lost profit therefore already accounts for the revenue the appellants actually received. Nothing further need be deducted.

[48] Further support for this conclusion is found in understanding what the $139,859 figure represents. According to the Hoare report, it is a portion of the lost profit attributable to selling at below market price:

Referring to Schedule 12A, we calculated the lost profit incurred by Ryanview 2 and Ryanview 3 during the period January 1 to November 30, 2007 to be of $283,678. A significant portion of the lost profit is due to Ryanview selling the SEWs at a price that was lower than the average received by Ontario farmers for weaned pigs based on OMAFRA information. We cannot determine if the reduced pricing is as a result of the Alleged Act or other unrelated factors that impact the pricing of the SEWs. On Schedule 12A, we calculate the impact of selling the SEWs at below market price to be $139,859. In other words, of the lost profits of $283,678, $139,859 is due to Ryanview selling the SEWs at reduced prices. [Emphasis added.]

[49] Had the appellants been able to sell 7,311 pigs at the OMAFRA average price of $38.75 per SEW, they would have had a revenue of $283,301. However, they actually sold 7,311 pigs for $19.62 per SEW on average, which is a revenue of $143,442. The difference in revenue between the OMAFRA selling price average and the appellants’ selling price average totals $139,859. This figure, as indicated in the excerpt from the Hoare report above, consists of the portion of the lost profit attributable to selling at a below market price.

[50] To conclude, the $139,859 figure is not the reduced revenue the appellants earned, and it was an error for the trial judge to reduce the lost profits of $283,678 by $139,859. This ground of appeal is allowed.

Disposition

[51] Accordingly, the appeal is allowed in part to correct the award of damages between January 1, 2007 and November 30, 2007 to $283,678, plus prejudgment interest at the rate set by the trial judge. The appeal is otherwise dismissed.

[52] The parties are to deliver written cost submissions of up to three (3) pages in length within ten days of receipt of this judgment. The costs submissions should address both the costs at trial and the costs on appeal.

Released: July 15, 2022 “D.D.” “M. Tulloch J.A.” “I agree. Doherty J.A.” “I agree. Thorburn J.A.”