ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 11-CV-437105
DATE: May 28, 2012
BETWEEN:
Allied Systems (Canada) Company
Applicant
- and -
Honda Canada Inc.
Respondent
APPLICATION UNDER Rule 14.05(3)(d), (g) and (h) of the Rules of Civil Procedure , R.R.O. 1990, Reg. 194
COUNSEL:
• Lawrence E. Thacker and Brian Kolenda for the Applicant
• Geoff Moysa and Stevie O’Brien for the Respondent
HEARING DATE: May 18, 2012
PERELL, J.
REASONS FOR DECISION
[ 1 ] The Applicant, Allied Systems (Canada) Company (“Allied Canada”), an automobile carrier, submits that the Respondent, Honda Canada Inc., an automobile manufacturer, is in breach of a contract that the parties signed in March 2011. Allied Canada alleges that after signing the contract, Honda immediately planned to repudiate it and did in fact repudiate it seven months later in September 2011.
[ 2 ] In this application, Allied Canada seeks, among other things, a declaration that Honda has breached the March 2011 Contract. By counter-motion, Honda asks that this application be converted into an action so that the disputes between the parties may be resolved by action and not be application.
[ 3 ] For the reasons that follow, I agree with Honda Canada that this application should be converted into an action. I, therefore, will make only a procedural order as to the carriage of the action, and I will leave the substantive factual and legal issues to be resolved in the action. I will only summarize the facts so far as is necessary to explain why this application should be converted into an action. In this regard, nothing that I shall say is meant to be a finding of fact.
[ 4 ] A synopsis of Allied Canada’s version of the events is that for more than forty years, it had delivered automobiles for Honda. In 2009, the parties signed their first written contract for the delivery of automobiles. Before the written contract and afterwards under the 2009 Contract, the practice was that certain delivery routes were assigned to Allied Canada. Other routes were assigned to other shipping companies, but routes were never shared. In March 2011, shortly before the 2009 Contract was about to expire, Allied Canada’s North American corporate group had a business crisis, and Allied Canada said it would stop shipping Honda’s automobiles, unless Honda agreed to a new contract. After a short but intense round of negotiations, the parties signed the March 2011 Contract, and Allied Canada continuing making deliveries along its assigned routes. However, almost immediately after the signing of the contract, Honda began plans to replace Allied Canada on all its routes. This plan was fully implemented by October, 2011, and since then, Allied Canada lost its routes and it is no longer delivering cars for Honda. Allied Canada submits that Honda’s plan breached the March 2011 Contract and that it is entitled to damages for breach of contract.
[ 5 ] Allied Canada submits that it is a term of the March 2011 Contract that if Honda requires car shipments on routes that have been assigned to Allied Canada, it must use Allied Canada for those shipments, and no other carrier. Alternatively, Allied Canada submits that as a matter of the doctrine of good faith in the performance of the March 2011 Contract, which is a “requirements contract,” Honda may only use Allied Canada when car shipments need to be made on a route assigned to Allied Canada. Since Honda has re-assigned all of Allied Canada’s routes to other carriers, Allied Canada submits that the court should declare that the March 2011 Contract has been breached and the court should order a trial to quantify Allied Systems’ damages. A trial could also be used to determine any offsetting claims that Honda might have about the performance of the contract before it was repudiated.
[ 6 ] A synopsis of Honda’s competing version of the events begins the same way as Allied Canada’s account, but the narrative diverges about whether there has been a breach of contract.
[ 7 ] For its version of the facts, Honda agrees that for more than forty years, Allied Canada was its principal shipper and that in 2009, the parties signed their first written contract for the delivery of automobiles. Under the 2009 Contract, the practice was that certain delivery routes were assigned to Allied Canada. Other routes were assigned to other shipping companies, and routes were never shared. Honda also agrees that in March 2011, shortly before the 2009 Contract was about to expire, Allied Canada’s North American corporate group had a business crisis.
[ 8 ] It is at this point that the narratives diverge. Honda says that Allied Canada used the financial crisis to threaten to stop making deliveries unless Honda agreed to a new contract with a rate increase and a guarantee that certain routes would be exclusively assigned to Allied Canada. When Honda refused to accept the new contract, Allied Canada carried out its threat and stopped making deliveries. Now Honda had a crisis of its own, because it had around $69 million worth of vehicles to deliver and no replacement carrier. In these circumstances and under economic duress, and after a short but intense round of negotiations, Honda signed the March 2011 Contract, and Allied Canada resumed making deliveries along its assigned routes. However, almost immediately after the signing of the March 2011 Contract, Honda began plans to have alternatives for all of Allied Canada’s routes. It submits that this course was not precluded by the March 2011 Contract and that it wished to reserve to itself the flexibility of having more than one choice of carrier. Honda implemented its plan in the fall, and although Allied Canada presently does not have any routes, it might be assigned routes in the future.
[ 9 ] Honda submits that there are factual controversies and questions of credibility associated with the formation, interpretation, and performance of the March 2011 Contract that cannot properly be resolved by a proceeding by application. By counter-motion, it asks that the application be converted into an action.
[ 10 ] Honda says that the difference between its account of the events and Allied Canada’s version means that the resolution of the dispute between the parties requires a trial, not a proceeding by application. In the alternative, if the court does not convert the application into an action, then Honda submits that the application should be dismissed on the merits for a variety of reasons.
[ 11 ] I note here that Honda’s arguments for a dismissal of the application are inconsistent with one another. Thus, on the one hand, Honda submits that the March 2011 Contract is unenforceable because it was signed by Honda under economic duress. On the other hand, Honda accepts that the contract is enforceable, but it submits that it has not breached the contract, because, properly interpreted, the March 2011 Contract does not prohibit Honda from selecting any carrier it wishes for the routes. As a further argument, Honda suggests a different interpretation of the contract, and it submits that the March 2011 Contract is a “requirements contract” and Honda’s decision to assign routes to other carriers was justified and not a breach of the doctrine of good faith associated with requirements contracts.
[ 12 ] In its reply factum, Allied Canada submits that by conceding that the March 2011 Contract is a requirements contract, Honda must also concede that this matter can be decided by application, and, therefore, Allied Canada submits that the application should not and need not be converted into an action.
[ 13 ] In any event, Allied Canada submits that it has always been the case that there are no factual matters in dispute that would preclude proceeding by application. Thus, Allied Canada submits that the factual controversies are irrelevant because, for instance, evidence about the subjective intentions of the parties regarding the March 2011 Contract is inadmissible or precluded by the entire agreement clause in the March 2011 Contract. For another example, Allied Canada submits that Honda`s purported reliance on subsequent conduct and the contra proferentum principle to interpret the March 2011 Contract are misguided and do not raise questions that require a trial. Allied Canada also submits that Honda’s allegation of economic duress is both legally and factually untenable and, once again, is no reason for not declaring that Honda has breached the March 2011 Contract.
[ 14 ] Allied Canada’s ultimate submission is that this is a proper case for an application. There is no factual dispute that other carriers have taken over all of Allied Canada’s routes and thus it follows as straightforward matter of contract interpretation that Honda has breached the March 2011 Contract. It submits that the only issue is whether the contract, properly interpreted, has been violated by Honda’s actions, which actions are not themselves in dispute.
[ 15 ] In my opinion, the situation is not as straightforward as Allied Canada would have it. The complexity is that at this juncture there are multiple arguments about how the March 2011 Contract should be interpreted and some of those arguments involve the doctrine of good faith in the performance of requirements contracts.
[ 16 ] As a matter of Ontario law, both the doctrine of good faith and the idea of requirements contracts are unsettled or developing areas of the law.
[ 17 ] Requirements contracts are contracts in which the vendor of goods or services agrees to supply the goods or services that are required by the purchaser, but provided that the purchaser is acting in good faith, the purchaser can vary its requirements, including a reduction to no supplies. See: Brewster of Lynchburg Inc. v. Dial Corp ., 33 F.3d 355 : Empire Gas Corp. v. American Bakeries Corp. , 840 F.2d 1333 ; Agfa-Gevaert, A.G. v. A.B. Dick Co. , 879 F.2d 1518 ; American Axle & Manufacturing, Inc. v. Durable Release Coaters Ltd. , 2010 ONSC 3368 at para. 65 ; McKinlay Motors Ltd. v. Honda Canada Inc. , [1989] N.J. No. 332 .
[ 18 ] Under the American law, if the buyer has a legitimate business reason for eliminating its requirements as opposed to a desire to avoid its contract, then the buyer acts in good faith. See: Brewster of Lynchburg Inc. v. Dial Corp ., supra at pp. 365-66; Empire Gas Corp. v. American Bakeries Corp. , supra at pp. 1339-40; Agfa-Gevaert, A.G. v. A.B. Dick Co , supra at p. 1523. Allied Canada submits that it can be determined on the record of this application that Honda did not have a legitimate business reason for replacing Allied Canada and for reducing its routes to zero.
[ 19 ] I disagree. In my opinion, the issue of whether Honda was acting in bad faith and the issue of how Canadian law determines the nature of good faith in the context of a requirements contract requires a more fulsome record than available by application.
[ 20 ] Where there is a dispute with respect to facts material to the issues to be resolved, an application is not appropriate and a trial should be ordered: Keewatin v. Ontario (Ministry of Natural Resources) (2003), 66 O.R. (3d) 370 at para. 46 (Div. Ct.); Burlington (City) v. Clairton (Village) (1979), 24 O.R. (2d) 586 at p. 589 (C.A.); Moyle v. Palmerston Police Services Board (1995), 25 O.R. (3d) 127 at p. 131 (Div. Ct.). An order directing a trial is discretionary and is typically granted where there is conflicting evidence and complex and disputed questions of fact or credibility where oral evidence is required : Van Decker v. Van Decker , [2006] O.J. No. 2321 at para. 11 (S.C.J.) ; Renegade Capital v. Hees (1990), 73 O.R. (2d) 311 (H.C.J.) ; Energy Probe v. Canada (Attorney General) (1989), 68 O.R. (2d) 449 (C.A.) .
[ 21 ] In a given case, an application might be suitable to resolve a matter of contract interpretation, but this case is not such a case. In particular, in my opinion, the determination of the arguments about the doctrine of good faith do raise both factual and legal questions that as a matter of procedural fairness and as a matter of substantive justice require the full evidentiary record of an action.
[ 22 ] I, therefore, grant Honda`s motion to convert this application into an action on the following terms:
• Allied Canada shall deliver a Statement of Claim within 20 days of the release of these Reasons for Decision;
• Honda shall deliver a statement of defence and counterclaim within 20 days of service of the Statement of Claim;
• Allied Canada shall deliver its reply and defence to the counterclaim within a further 20 days;
• The cross-examinations for the application are deemed to be examination for discovery transcripts; and
• The costs of the application are in the cause.
[ 23 ] I have ordered costs in the cause because I believe that much of the legal work for the application can be carried forward into the action, and, therefore, costs should follow the ultimate outcome of the action.
[ 24 ] Order accordingly.
Perell, J.
Released: May 28, 2012
COURT FILE NO.: 11-CV-437105
DATE: May 28, 2012
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Allied Systems (Canada) Company
Applicant
‑ and ‑
Honda Canada Inc.
Respondent
REASONS FOR DECISION
Perell, J.
Released: May 28, 2012.