Hillis Oil & Sales v. Wynn's Canada, [1986] 1 S.C.R. 57

Hillis Oil and Sales Limited Appellant;

and

Wynn's Canada, Ltd. Respondent.

File No.: 17669.

1984: November 2; 1986: February 28.

Present: Beetz, Estey, McIntyre, Lamer and Le Dain JJ.

on appeal from the court of appeal for nova scotia

Contract ‑‑ Distributorship ‑‑ Termination by manufacturer without cause ‑‑ Whether required reasonable notice ‑‑ Clause providing for termination by manufacturer with immediate effect in the event of breach of agreement by distributor, insolvency of distributor, or change in partnership of distributor ‑‑ Other clause providing for termination by manufacturer and distributor at any time with or without cause ‑‑ Whether inclusion of words “upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end” in first clause and their omission in second clause created ambiguity as to whether distributorship agreement could be terminated with immediate effect pursuant to the second clause or only upon giving reasonable notice ‑‑ Application of the contra proferentem rule of construction.

Appellant was an exclusive distributor of respondent's products for some ten years in the Maritime Provinces. The standard terms of the distributorship agreement offered by the respondent were not subject to negotiation or modification. Respondent purported to terminate the distributorship agreement with immediate effect pursuant to clause 23 of the agreement, which provided that the manufacturer and distributor could terminate the agreement at any time with or without cause. Clause 20 of the agreement provided that in the event of breach of the agreement by the distributor, insolvency of the distributor or change in partnership of the distributor, the manufacturer could give notice of termination of the agreement and that "upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end".

The issue was whether, in view of the inclusion of the underlined words in clause 20 and their omission in clause 23, the latter clause should be construed as impliedly requiring reasonable notice of termination. The Trial Division held that the agreement could be terminated pursuant to clause 23 only upon giving reasonable notice and that reasonable notice of termination of the distributorship agreement would have been one year. It awarded damages to the appellant for breach of contract. This judgment was reversed by the Appellate Division.

Held: The appeal should be allowed.

If it stood alone as the only termination clause in the distributorship agreements clause 23 would have to be construed as permitting termination with or without cause by either party with immediate effect. But clause 23 cannot be regarded as standing alone; it must be construed in the light of the agreement as a whole, and in particular, in the light of the other termination provision in clause 20. The inclusion of the words "upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end" in clause 20 and their omission in clause 23 creates an ambiguity as to whether the distributor's agreement may be terminated pursuant to clause 23 with immediate effect. If a distributorship does not contain a provision for termination without cause it is so terminable only upon giving reasonable notice of termination. A right to terminate a distributorship agreement without cause with immediate effect must be expressly provided for in the agreement. In view of the inclusion of the above words in clause 20 and their omission in clause 23, the words "at any time" in the latter clause do not make it clear and unequivocal that the agreement may be terminated without cause with immediate effect. There is a strong suggestion that where it was intended to provide for termination with immediate effect the concluding words in clause 20 were the ones considered to convey that meaning. The words "at any time" in clause 23 then bear the same relationship to the right to terminate under that provision as the specified events bear to the right to terminate in clause 20; they merely indicate that the right to terminate provided by clause 23 may be exercised at any time, but the clause is silent as to when termination may take effect. In the absence of provision for this question, the rule requiring reasonable notice of termination should be applied as an implied term of the contract. The fact that the same requirement would necessarily have to apply to termination for cause pursuant to clause 23 does not make this any less a reasonable alternative construction of clause 23. A possible reason for an intended difference between clause 20 and clause 23 with respect to the right to terminate for cause with immediate effect is that clause 20 is for the protection of the manufacturer in the specified events whereas clause 23 gives the distributor as well as the manufacturer the right to terminate for cause. Given this ambiguity as to whether the distributorship agreements may be terminated pursuant to clause 23 with immediate effect or only upon reasonable notice, the ambiguity should be resolved in favour of the appellant and against the respondent by application of the contra proferentem rule of construction, which is a rule of general application where, as here, there is ambiguity in the meaning of a contract which one of the parties, as the author of the document, offers to the other with no opportunity to modify its wording.

Cases Cited

Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888; McClelland and Stewart Ltd. v. Mutual Life Assurance Co. of Canada, 1981 CanLII 53 (SCC), [1981] 2 S.C.R. 6, applied; Martin‑Baker Aircraft Co. v. Canadian Flight Equipment, Ltd., [1955] 2 All E.R. 722; Paper Sales Corporation Ltd. v. Miller Bros. Co. (1962) Ltd. (1975), 1975 CanLII 555 (ON CA), 55 D.L.R. (3d) 492; C. C. Hauff Hardware, Inc. v. Long Mfg. Co., 19 ALR3d 191 (Iowa 1965); Bushwick‑Decatur Motors v. Ford Motor Co., 116 F.2d 675 (1940); Seegmiller v. Western Men, Inc., 437 P.2d 892 (1968); Shell Oil Co. v. Marinello, 307 A.2d 598 (1973); Lee (John) & Son (Grantham), Ltd. v. Railway Executive, [1949] 2 All E.R. 581; Red Lake (Twp.) v. Drawson, 1963 CanLII 282 (ON SC), [1964] 1 O.R. 324, aff'd. 1964 CanLII 638 (BC SC), [1964] 2 O.R. 248; Chin v. Jacobs, 1972 CanLII 439 (ON CA), [1972] 2 O.R. 54; Alex Duff Realty Ltd. v. Eaglecrest Holdings Ltd. (1983), 1983 ABCA 119, 44 A.R. 67, referred to.

Authors Cited

Anson, Sir William R. Anson’s Law of Contract, 25th (Centenary) ed. by A. G. Guest, Oxford, Clarendon Press, 1979.

Gellhorn, Ernest. "Limitations on Contract Termination Rights ‑‑ Franchise Cancellations," [1967] Duke L.J. 465, 465‑521.

Vesely, J. George. "Franchising as a Form of Business Organization ‑‑ Some Legal Problems" (1977‑78), 2 C.B.L.J. 34, 34‑67.

APPEAL from a judgment of the Nova Scotia Court of Appeal (1983), 1983 CanLII 5146 (NS CA), 55 N.S.R. (2d) 351, 114 A.P.R. 351, allowing an appeal from a judgment of Richard J. Appeal allowed.

John M. Davison, Q.C., and F. V. W. Penick, for the appellant.

John M. Barker, Q.C., for the respondent.

The judgment of the Court was delivered by

1. Le Dain J.‑‑This appeal raises a rather narrow issue concerning the interpretation of a termination clause in a distributorship agreement. The issue is whether a clause providing for termination of the agreement by the manufacturer or the distributor "at any time" with or without cause should be construed as impliedly requiring reasonable notice of termination because another clause of the agreement providing for termination by the manufacturer in certain events, including any breach of the agreement by the distributor, stipulates that termination in such case shall take effect upon the giving of the notice of termination.

2. The appeal is by leave of this Court from the judgment of the Supreme Court of Nova Scotia, Appeal Division, on February 14, 1983, allowing the appeal from the judgment of Richard J. in the Trial Division on August 26, 1982, which awarded the appellant damages for breach of contract because of the respondent's failure to give the appellant reasonable notice of termination of the agreements under which the appellant was an exclusive distributor of certain of the respondent's products in Nova Scotia, New Brunswick and Prince Edward Island.

I

3. During the relevant period the respondent Wynn's Canada, Ltd. (hereinafter referred to as "Wynn's") was the subsidiary of Wynn Oil Company of Los Angeles, California, and part of a multinational business organization with distributor networks in some eighty countries. It was engaged in the manufacture and sale of automotive engine and cooling system additives as well as industrial lubricants and coolants, among other products. It distributed its products through wholesale distributors with exclusive sales territories. The standard terms of the form of distributorship agreement (or "distributor's agreement", as it is entitled) offered by Wynn's and its parent to prospective distributors were not subject to negotiation or modification. As the president of Wynn's acknowledged in his testimony, it was a case of sign the standard form or not be a distributor.

4. The appellant Hillis Oil and Sales Limited (hereinafter referred to as "Hillis") was incorporated as a distributorship company in Nova Scotia in 1959. Its relationship with Wynn's, which began in 1969, is reflected in a series of agreements which may be briefly identified. By a distributor's agreement of October 1, 1969 Hillis was appointed as the exclusive distributor in Nova Scotia of a line of products in the marketing division of Wynn's designated as "Automative". That agreement was replaced by a distributor's agreement of July 18, 1972, which made Hillis the exclusive distributor in Nova Scotia and Prince Edward Island of certain "xtend" products in the marketing division of Wynn's designated as "Automotive & Fleet". A modification agreement of July 17, 1974 added "x‑tend guarantee kits" (sometimes referred to as "warranty sales") to the products covered by the agreement of July 18, 1972. A modification agreement of February 23, 1976 extended the exclusive territory covered by the agreement of July 18, 1972 to include New Brunswick and Newfoundland. A modification agreement of February 4, 1977 deleted the word "Fleet" from the designation of the marketing division covered by the agreement of July 18, 1972. A distributor's agreement of February 11, 1977 made Hillis the exclusive distributor in the four Atlantic Provinces of certain lines of products in the marketing division of Wynn's designated as "industrial/fleet". By agreement effective July 1, 1979 Newfoundland was withdrawn from the Hillis territory. The action in damages is based on the termination of the distributor's agreements of July 18, 1972 and February 11, 1977, as modified from time to time, but the agreement of July 18, 1972 is the one that is generally referred to, being the more important of the two.

5. From 1959 to 1969, when the Wynn's distributorship began, the business of Hillis was chiefly dependent on the sale of one product, Quaker State Motor Oil. By 1978 the sale of Wynn's products was accounting for about 90 per cent of the company's profit. Hillis made a considerable investment in time and money to develop the potential of the Wynn's distributorship. In particular, it hired a sales manager and increased its sales staff from an average of two to an average of eight or nine. It also enlarged its warehousing facilities and stocked inventory at various locations for its salesmen. A high proportion of its development costs were incurred in connection with the introduction in 1976 of the "flush unit program" for cleaning radiators and promoting the sale of Wynn's radiator additives and with the difficulties experienced with that program in the following year or two. The president of Hillis estimated that it would have taken three or four years to recover the company's investment or development costs but that was made impossible by the termination of the distributor's agreements in early 1980. It should perhaps be observed that while the standard distributor's agreement did not expressly prohibit Hillis from handling products that would be competitive with those of Wynn's, there was a clear understanding from Wynn's that Hillis should not do so.

6. The distributor's agreements of July 18, 1972 and February 11, 1977 contain the following clauses 20 and 23 providing for termination, the terms of which give rise to the issue in the appeal:

7. In the event that Distributor shall breach, or shall have breached, any of the terms, provisions or conditions of this Agreement, or in the event there be filed proceedings in bankruptcy, voluntary or involuntary, by or against Distributor, or that Distributor becomes insolvent or determined, voluntarily or involuntarily, to be bankrupt, or in the event of any dissolution of, or change in, partnership, if Distributor is a partnership, then, in any of such events, Manufacturer may, at its option, by notice in writing to Distributor by mail to Distributor's last known address, terminate and cancel this Agreement; and upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end.

8. That Distributor acknowledges the receipt of a duplicate of this Agreement and accepts such appointment as a distributor subject to, and conditioned upon, Distributor's keeping, observing and performing all of the terms, provisions and conditions in this Agreement set forth all to the full satisfaction of Manufacturer.

That this Agreement may be terminated and ended, wholly or as to any Marketing Division designated in this Agreement, and/or as to any "XTEND Products" specified in this Agreement, at any time, with or without cause, by either party hereto, by written notice given to the other of them by mail addressed to the last known address of the party to whom said notice is directed. And upon any termination of this Agreement by either party, the Distributor shall remain liable for all sums due to Manufacturer for purchases made by Distributor and unpaid for up to the time of such termination.

7. Clause 24 of the standard distributor's agreement provides that "in the event of, and upon, termination of this Agreement at any time by either party with or without cause under any circumstances whatsoever" the manufacturer shall have the option to repurchase products from the distributor at a defined price and that notice of the intention to exercise such option shall be given "at the time of the effective date of such termination or at any time within ten days after said effective date of such termination".

8. By letter dated February 11, 1980 Wynn's gave Hillis notice of termination of the distributor's agreement of July 18, 1972 as follows:

By the terms of the Distributor's Agreement between you and Wynn's Canada Ltd., dated July 18th, 1972, it is provided, among other things:

"That this Agreement may be terminated and ended, wholly or as to any Marketing Division designated in this Agreement, and/or as to any product specified in this Agreement, at any time, with or without cause, by either party hereto, by written notice given to the party to whom said notice is directed. And upon any termination of this Agreement by either party, the Distributor shall remain liable for all sums due to Manufacturer for purchases made by Distributor and unpaid for up to the time of such termination."

In accordance with the foregoing provision, this company does hereby give you written notice that said Distributor's Agreement, dated July 18th, 1972, shall be and hereby is terminated and ended wholly and as to all Marketing Divisions and all products specified in said Agreement.

9. By letter dated April 22, 1980 Wynn's gave Hillis notice of termination of the distributor's agreement of February 11, 1977 as follows:

Notice is hereby given that the Distributor's Agreement between you and Wynn's Canada Ltd., dated February 11, 1977, is hereby terminated and ended wholly as to all marketing divisions and all products specified in the said Agreement, effective immediately pursuant to the provisions of the said Agreement.

10. Following the termination of the agreements Wynn's established four new distributorships with former employees of Hillis in the territory covered by the Hillis distributorship. Hillis sued the new distributors as well as Wynn's but the claim against the new distributors was settled before trial.

11. It was agreed at a pre‑trial conference that the termination of the distributor's agreements of July 18, 1972 and February 11, 1977 purported to be made pursuant to clause 23 of the agreements rather than clause 20, as indeed is clear from the terms of the notice of February 11, 1980. Considerable evidence was adduced at the trial concerning the performance of Hillis and the reasons for the termination, but the trial judge held that it was irrelevant, in so far as the interpretation and application of clause 23 were concerned, since that clause provided for termination with or without cause. He did not make a finding as to whether Wynn's had cause.

12. In maintaining the action of Hillis against Wynn's for breach of contract Richard J. held that one year would have been reasonable notice of termination of the distributor's agreements and fixed the damages at $91,846. From this amount was to be deducted the sum of $18,924.72, which was agreed by the parties to be owing by Hillis to Wynn's, for a net award of $72,921.28, with interest at the rate of 15 per cent from August 11, 1980. The length of notice required and the amount to which Hillis is entitled if Wynn's is liable for breach of contract are not in dispute. The sole issue in this Court, as in the Court of Appeal, is whether, in terminating the distributor's agreements pursuant to clause 23, Wynn's was obliged to give Hillis reasonable notice of termination.

13. The reasoning of the trial judge on this issue is contained in the following passages of his reasons for judgment:

There is no question the Distribution Agreement is prepared by Wynn's and is totally non‑negotiable as to variations. The agreement is the same used by Wynn's throughout the world ‑‑ albeit in the appropriate language. Kenneth M. Lovett, President of Wynn's Canada said the Distributor Agreement is the only one used by Wynn's ‑‑ "sign that form or not be a distributor." Mr. Lovett indicated it was normal practice for Wynn's not to give prior notice of cancellation of an agreement because of the impossibility of a continuing relationship after notice had been given.

I am satisfied that the contra proferentem rule applies here and any ambiguity must be interpreted against the author ‑‑ in this case Wynn's.

The difference in the wording of the two termination clauses ‑‑ 20 and 23 ‑‑ bears some comment. Under clause 20 notice must be given "in writing" and "upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end." It is clear from this that a notice given pursuant to clause 20 is effective on the giving ‑‑ by mail ‑‑ of the written notice.

In the case of a notice of termination under clause 23 it is not expressly stated when the notice is to take effect. Standing alone, clause 23 could be interpreted as making the termination effective as of the time of delivery of the written notice to the other party. However, when read in conjunction with clause 20 it appears clause 23 lacks the specificity of the earlier clause. If both clauses resulted in immediate termination without notice, then the final phrase of clause 20 ("this Agreement shall be cancelled, terminated and at an end.") would be redundant. In my view, the court ought to assume that words in a contract mean something, and, that when two phrases differ, the author meant the result or effect to be different.

With respect to clause 20, it is obvious the notice was meant to be immediately effective. One must conclude, therefore, that the author of clause 23 meant its effect to be something other than clause 20. The only reasonable conclusion is that a termination under clause 23 would take place upon notice rather than immediately.

14. In the Court of Appeal Hart J.A., delivering the unanimous judgment of the Court, held that there was no ambiguity arising from the terms of clauses 20 and 23 as to whether the agreement could be terminated with immediate effect pursuant to clause 23. He said:

I am persuaded by the arguments of counsel for the appellant that we have here a case where the terms of the contract are perfectly clear. I can see no ambiguity relating to the termination provisions, and, in my opinion, the trial judge was in error when he implied an additional agreement between the parties which was not necessary to the interpretation of the written contract between them. Either party had the right to terminate the distributor's agreement without cause at any time they chose, and Wynn's chose February 11, 1980 the date upon which they delivered the notice of termination to Hillis.

II

15. If it stood alone as the only termination clause in the distributorship agreements clause 23 would have to be construed, I think, as permitting termination with or without cause by either party with immediate effect. But clause 23 cannot be regarded as standing alone; it must be construed in the light of the agreement as a whole, and in particular in the light of the other termination provision in clause 20. The general principle was stated by Estey J. in Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 901, where he said that "the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract." Also particularly apposite are the words of Dickson J. (as he then was) in McClelland and Stewart Ltd. v. Mutual Life Assurance Co. of Canada, 1981 CanLII 53 (SCC), [1981] 2 S.C.R. 6, at p. 19, where he said:

Taken alone and read without consideration of the scheme of the policy the kindred language of the self‑destruction clause and the Declaration undoubtedly create a formidable argument in support of the case of the assurance company. It is plain however these cannot be read in an isolated and disjunctive way. The question before us is not to be determined on a mechanical reading of two phrases set apart, but rather on a reading of the policy and the Declaration in entirety.

16. With great respect, I agree with the learned trial judge that the inclusion of the words "upon the giving of such notice, this Agreement shall be cancelled, terminated and at an end" in clause 20 and their omission in clause 23 creates an ambiguity as to whether the distributor's agreement may be terminated pursuant to clause 23 with immediate effect. If a distributorship agreement does not contain a provision for termination without cause it is so terminable only upon giving reasonable notice of termination. See Martin‑Baker Aircraft Co. v. Canadian Flight Equipment, Ltd., [1955] 2 All E.R. 722 (Q.B.), at p. 736; Paper Sales Corporation Ltd. v. Miller Bros. Co. (1962) Ltd. (1975), 1975 CanLII 555 (ON CA), 55 D.L.R. (3d) 492 (Ont. C.A.), at p. 498; C. C. Hauff Hardware, Inc. v. Long Mfg. Co., 19 ALR3d 191 (Iowa 1965). A right to terminate a distributorship agreement without cause with immediate effect must be expressly provided for in the agreement. (It is not necessary for purposes of the present appeal, in view of the conclusion with respect to ambiguity, to consider whether a provision for the termination of a distributorship agreement without cause with immediate effect should be held to be void for unconscionability or subject to some good faith limitation. Compare Bushwick‑Decatur Motors v. Ford Motor Co., 116 F.2d 675 (1940); Seegmiller v. Western Men, Inc., 437 P.2d 892 (1968), and Shell Oil Co. v. Marinello, 307 A.2d 598 (1973); and see Gellhorn, "Limitations on Contract Termination Rights‑‑Franchise Cancellations," [1967] Duke L.J. 465; Vesely, "Franchising as a Form of Business Organization‑‑Some Legal Problems" (1977‑78), 2 C.B.L.J. 34.) The question is whether, having regard to the inclusion of the above words in clause 20 and their omission in clause 23, the words "at any time" in the latter clause nevertheless make it clear and unequivocal that the agreement may be terminated without cause with immediate effect. In my respectful opinion they do not. There is a strong suggestion that where it was intended to provide for termination with immediate effect the concluding words in clause 20 were the ones considered to convey that meaning. The words "at any time" in clause 23 then bear the same relationship to the right to terminate under that provision as the specified events (breach of contract by the distributor, insolvency and change in partnership) bear to the right to terminate in clause 20; they merely indicate that the right to terminate provided by clause 23 may be exercised at any time, but the clause is silent as to when termination may take effect. In the absence of provision for this question, the rule requiring reasonable notice of termination should be applied as an implied term of the contract. The fact that the same requirement would necessarily have to apply to termination for cause pursuant to clause 23 does not in my opinion make this any less a reasonable alternative construction of clause 23. A possible reason for an intended difference between clause 20 and clause 23 with respect to the right to terminate for cause with immediate effect is that clause 20 is for the protection of the manufacturer in the specified events‑‑breach of contract by the distributor, insolvency of the distributor and change in partnership of the distributor‑‑whereas clause 23 gives the distributor as well as the manufacturer the right to terminate for cause. The manufacturer, knowing that it could always terminate for cause with immediate effect pursuant to clause 20, might well have found it acceptable that neither party should have the right to terminate for cause with immediate effect pursuant to clause 23.

17. Given this ambiguity as to whether the distributor's agreements could be terminated pursuant to clause 23 with immediate effect or whether such termination could take effect only upon reasonable notice, I also agree with Richard J. that it should be resolved against Wynn's and in favour of Hillis by application of the contra proferentem rule of construction. It is true that this rule has been most often invoked with reference to the construction of insurance contracts, particularly clauses in such contracts purporting to limit or exclude the insurer's liability. Statements of the rule and its application in such cases may be found in the decisions of this Court in Consolidated‑Bathurst, supra, and McClelland and Stewart, supra. The rule is, however, one of general application whenever, as in the case at bar, there is ambiguity in the meaning of a contract which one of the parties as the author of the document offers to the other, with no opportunity to modify its wording. The rule is stated in its general terms in Anson’s Law of Contract (25th ed. 1979), at p. 151, as follows:

The words of written documents are construed more forcibly against the party using them. The rule is based on the principle that a man is responsible for ambiguities in his own expression, and has no right to induce another to contract with him on the supposition that his words mean one thing, while he hopes the Court will adopt a construction by which they would mean another thing, more to his advantage.

The rule is also stated in general terms by Estey J. in McClelland and Stewart, supra, at p. 15 as follows:

That principle of interpretation applies to contracts and other documents on the simple theory that any ambiquity in a term of a contract must be resolved against the author if the choice is between him and the other party to the contract who did not participate in its drafting.

Examples of cases in which the rule has been applied to the construction of contracts other than insurance contracts are Lee (John) & Son (Grant­ham), Ltd. v. Railway Executive, [1949] 2 All E.R. 581 (C.A.); Red Lake (Twp.) v. Drawson, 1963 CanLII 282 (ON SC), [1964] 1 O.R. 324 (H.C.), aff'd 1964 CanLII 638 (BC SC), [1964] 2 O.R. 248 (C.A.); Chin v. Jacobs, 1972 CanLII 439 (ON CA), [1972] 2 O.R. 54 (C.A.); and Alex Duff Realty Ltd. v. Eaglecrest Holdings Ltd. (1983), 1983 ABCA 119, 44 A.R. 67 (C.A.)

18. For these reasons I am of the opinion that the respondent is liable for breach of contract for its purported termination of the distributor's agreements without giving the appellant reasonable notice of such termination. I would accordingly allow the appeal, set aside the judgment of the Appeal Division and restore the judgment of Richard J. in the Trial Division, with costs in this Court and in the Appeal Division. Costs in the Trial Division should be as awarded by the trial judge.

Appeal allowed with costs.

Solicitors for the appellant: John M. Davison and F. V. W. Penick, Halifax.

Solicitor for the respondent: John M. Barker, Halifax.