2016 ONSC 4042

Court File and Parties

COURT FILE NO.: CV-15-519486 DATE: 20160617 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: CONSTRUCTION DISTRIBUTION & SUPPLY CO. INC. Plaintiff – and – KING PACKAGED MATERIALS COMPANY Defendant

COUNSEL: Alan B. Dryer and O. Kahane-Rapport, for the Plaintiff Ted Frankel and Colin Pendrith, for the Defendant

HEARD: February 8, 2016

M. D. FAIETA j.

REASONS FOR DECISION

INTRODUCTION

[1] The defendant, King Packaged Materials Company (“King”), is a manufacturer and seller of cement-based products used in the construction industry. King agreed to allow the plaintiff, Construction Distribution & Supply Co. Inc. (“CDS”), to distribute its concrete repair products. King terminated this Distribution Agreement in September 2015. King gave CDS three months’ notice. CDS claims that the notice was insufficient and that it was entitled to 24 months’ notice. King brings this motion for summary judgment to dismiss this action and to grant its counterclaim for payment of products that it delivered to CDS.

[2] For reasons that follow, I have granted this motion for summary judgment. I find that CDS was entitled to three months’ notice of termination. I have found that CDS is not entitled to damages given that King provided CDS with adequate notice of its termination of the Distribution Agreement. I have also granted the counterclaim.

BACKGROUND

[3] By the early 1990s, King had developed a line of concrete repair products that engineers used for various projects such as to repair balconies, parking garages and other concrete structures. King sold its concrete repair products to contractors by the truckload or by the skid.

[4] In 1996, CDS sought permission from King to sell King’s concrete repair products to contractors who were interested in purchasing less than the truckload amounts. King agreed to allow CDS to sell its products (“Distribution Agreement”). The Distribution Agreement was not reduced to writing. The parties agreed on pricing for the various products and a rebate program whereby CDS would receive a percentage rebate if CDS exceeded certain sales targets. The Distribution Agreement was for an indefinite term. Either party could terminate the Distribution Agreement at any time.

[5] The evidence of Joe Hutter, the Vice President, Sales, for King until 2012, is that the Distribution Agreement was not exclusive. CDS did not promise to sell King’s line of concrete repair products exclusively. The evidence of Stanley Lazar, Vice President of CDS, is that King gave CDS the exclusive right to sell King’s concrete restoration products.

[6] I prefer the evidence of Hutter on this point for the following reasons. First, Lazar appears to contradict himself when he states in response to Hutter’s evidence, at paragraph 61 of his affidavit, that “… it might have been a non-exclusive relationship, but CDS was the first distributor and, for the first five years, the only distributor”. Second, during the period of this agreement, Lazar was not present when the agreement was made between Hutter, on behalf of King, and Robert Huggy, on behalf of CDS. Third, Huggy does not allege that the Distribution Agreement was an exclusive arrangement. Fourth, if the Distribution Agreement were exclusive, CDS would have alleged a breach of the Agreement when King added three other distributors in 2001 who directly competed with CDS. Although CDS was upset, it took no action. Accordingly, I find that the Distribution Agreement did not give CDS the exclusive right to sell King’s concrete restoration products.

[7] Lazar states that the Distribution Agreement was terminated at a meeting held on September 23, 2014. He states that he was surprised by the notice of termination and that there had been no warning or complaints from King. He stated that no meaningful explanation was provided. However, an email dated October 7, 2014 to Scott Rand, Vice President, Sales for King provides a detailed description of what CDS was told at the meeting. It states:

Below are the main points we addressed with CDS at our meeting on the 23rd.

• Vision 20/20 – in order to achieve our goals we need a strategic partner sooner rather than later
• No significant sales growth in 5+ years
• CDS focus is on FA/MS products, refuse to push higher value products
• RS Products – did not pick up samples in the spring. Purchased 2 pallets of RS-S10SCC and now are returning them
• Special pricing – … – Special Pricing is okay as long as it benefits CDS

We obviously had many more issues over the last couple of years, but we wanted to focus on the lack of sales growth and CDS’ refusal to carry or push our higher valued/newer products.

Gary will focus on their sales this year. Up until the end of September, they are at $391,728 … . This is an increase of 47% over the same time last year. However this only gets them to the same level they were at in 2010 at the end of September and behind the 2009 numbers.

[8] Consistent with the above email, Rand’s evidence is that King ended the Distribution Agreement with CDS for various business reasons including its pricing strategy of King’s products and declining sales between 2009 and 2013.

ISSUES

[9] King states that its motion raises the following issues:

(1) Is this an appropriate motion for summary judgment? (2) Is King obliged to provide CDS with reasonable notice of its intention to terminate the Distribution Agreement? (3) If so, how much notice was required? (4) What amount of damages should be awarded to CDS? (5) Should King be granted judgment on its counterclaim for invoices that CDS has not paid?

ANALYSIS

[10] This motion for summary judgment is brought pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Its objective is to promote access to justice by providing a streamlined and fair process which results in the just adjudication of a dispute. See Trotter v. Trotter, 2014 ONCA 841, at para. 49.

[11] The following principles are applicable on a motion for summary judgment:

• a court shall grant summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence. See Rule 20.04(2)(a) of the Rules of Civil Procedure.
• the onus is on the moving party to show that there is no genuine issue requiring a trial;
• the summary judgment process must: (a) allow the judge to make the necessary findings of fact, (b) allow the judge to apply the law to the facts, and (c) be a proportionate, more expeditious and less expensive means to achieve a just result. See Hryniak v. Maudlin, 2014 SCC 7, at para. 49.
• each side must "put its best foot forward" with respect to the existence or non-existence of material issues to be tried; See Canada (Attorney General) v. Lameman, 2008 SCC 14, at para. 11.
• a court may exercise any of the following powers for the purpose of determining whether there is a genuine issue requiring a trial, unless it is in the interest of justice for such powers to be exercised only at a trial.
  1. Weigh the evidence.
  2. Evaluate the credibility of a deponent.
  3. Draw any reasonable inference from the evidence.
  4. Order that oral evidence be presented by one or more parties for the purposes of exercising the above powers. See Rule 20.04(2.2) of the Rules of Civil Procedure.
• If the court cannot grant judgment on the motion, the court should: (a) Decide those issues that can be decided in accordance with the principles described above; (b) Identify the additional steps that will be required to complete the record to enable the court to decide any remaining issues; (c) In the absence of compelling reasons to the contrary, the court should seize itself of the further steps required to bring the matter to a conclusion. See Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, at para. 33; aff’d 2014 ONCA 878, leave to appeal refused, [2015] S.C.C.A. No. 97.

ISSUE #1: IS THIS AN APPROPRIATE MOTION FOR SUMMARY JUDGMENT?

[12] CDS submits that the contradictory evidence of the parties cannot be resolved without a trial. Amongst other things, it submits that the length of the reasonable notice period turns on disputed oral testimony. Such concerns are not necessarily a bar to a motion for summary judgment in light of the powers given to a Judge under Rule 20.04, described above.

[13] In my view, in light of the extensive record filed, the interests of justice do not require that the factual disputes that arise on this motion be resolved at trial rather than by using the powers provided under Rule 20.04. Accordingly, this is an appropriate motion for summary judgment.

ISSUE #2 – IS CDS ENTITLED TO REASONABLE NOTICE OF THE TERMINATION OF THE DISTRIBUTION AGREEMENT?

[14] CDS admits that the Distribution Agreement provided that either party could terminate it. CDS submits that it was implied that if either party decided to terminate the Distribution Agreement, then it would have to provide reasonable notice. King disputes that reasonable notice is an implied term of the contract.

[15] The test for determining whether to imply a term in a contract was described by the Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 SCC 677, [1999] 1 S.C.R. 619, at paras. 27-29, as follows:

The general principles for finding an implied contractual term were outlined by this Court in Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 SCC 55, [1987] 1 S.C.R. 711. Le Dain J., for the majority, held that terms may be implied in a contract: (1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary "to give business efficacy to a contract or as otherwise meeting the 'officious bystander' test as a term which the parties would say, if questioned, that they had obviously assumed" (p. 775) … .

As mentioned, LeDain J. stated in Canadian Pacific Hotels Ltd., supra, that a contractual term may be implied on the basis of presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the "officious bystander" test. It is unclear whether these are to be understood as two separate tests but I need not determine that here. What is important in both formulations is a focus on the intentions of the actual parties. A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties. This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis. As G. H. L. Fridman states in The Law of Contract in Canada (3rd ed. 1994), at p. 476:

In determining the intention of the parties, attention must be paid to the express terms of the contract in order to see whether the suggested implication is necessary and fits in with what has clearly been agreed upon, and the precise nature of what, if anything, should be implied. [Emphasis added]

Legal Incidents of a Particular Class or Kind of Contract

[16] In Hillis Oil and Sales Ltd. v. Wynn’s Canada Ltd., 1986 SCC 44, [1986] 1 S.C.R. 57, the Supreme Court of Canada interpreted an ambiguous termination provision in a standard form distributorship agreement covering an exclusive sales territory as requiring reasonable notice of termination. In arriving at this conclusion, the court stated, at 67:

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 ONCA 555, 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. …

[17] Hillis, and each of the cases cited above in Hillis, involved distributors that had exclusive sales territories. CDS did not have an exclusive sales territory. King sold in the same market as CDS. As well, CDS was never an exclusive distributor of King’s concrete restoration products. Between 1996 and 2005, King sold its concrete restoration products directly to customers by the truckload or by multiple skids. CDS sold to customers requiring less than truckload amounts of King’s concrete restoration products. Between 2001 and 2013, King also distributed its concrete restoration products through three other companies. King also had distribution agreements with others. The non-exclusive nature of their relationship is reflected by the fact that CDS did not complain when these three other distributors were added.

Presumed Intention of the Parties

[18] CDS submitted that I should imply a requirement for reasonable notice into the Distribution Agreement: R.G.O. Office Products Ltd. v. Knoll North America Corp. [1996] A.J. No. 34 (A.B.Q.B.). Subject to my discussion below of implying reasonable notice based on custom, it is not clear that the parties “obviously assumed” that reasonable notice of termination would be required under the Distribution Agreement.

Custom

[19] CDS has provided no evidence that reasonable notice of termination is a customary requirement of a non-exclusive distributorship agreement. CDS refused to produce copies of its other distribution agreements.

[20] However, the affidavit of Scott Rand, Vice-President, Sales, for King states, at para. 55:

Although not required to do so, King gave CDS more than 90 days' notice. This notice period is consistent with industry norms and practices. Attached … are five similar distributorship agreements. [Emphasis added.]

Conclusion

[21] In my view, King’s own evidence shows that the custom of the trade in respect of similar distributorship agreements was to provide reasonable notice of termination. Accordingly, it is an implied term of the Distribution Agreement that reasonable notice of termination be provided to CDS by King.

ISSUE #3: HOW MUCH NOTICE IS REASONABLE IN THE CIRCUMSTANCES?

[22] The amount of notice that should be provided when a distribution agreement is terminated must reflect what is reasonable in the circumstances which, in turn, requires a consideration of many factors including the duration or permanency of the relationship, the dependence of the distributor on the manufacturer, the volume of the distributor’s business that is derived from sales of the manufacturer’s product, whether the distributor maintains an inventory of the manufacturer’s products, whether the distributor had sales people, and the manner in which the termination of the relationship was disclosed to the distributor: 1193430 Ontario Inc. v. Boa-Franc Inc. (2005), 2005 ONCA 39862, 78 O.R. (3d) 81 (C.A.), at paras. 45, 62.

[23] In light of these considerations I find that:

(a) the Distribution Agreement was for an indefinite term that lasted 18 years; (b) CDS had a low level of dependence on King’s products. The Distribution Agreement was not exclusive for either CDS or King. CDS admitted that it sold other concrete restoration products; however none of those competing products were in the price range of King’s products; (c) CDS admitted that sales of King’s products were less than 5% of the total sales of CDS [7]. CDS refused to provide a copy of its financial statements to demonstrate the relative importance of the sales of King’s products to its overall sales; (d) CDS kept an inventory of King’s concrete restoration products. Despite the fact that the three month notice period given by King ended on December 23, 2014, CDS continued to sell King’s concrete restoration products into March 2015 from its inventory. An email dated March 25, 2015 indicated that “we still have some of King’s SCC in stock, while supplies last”. CDS provided no evidence that a customer unsuccessfully attempted to purchase King’s concrete restoration products from CDS in the first three months of 2015; (e) CDS’s salespersons sold an array of products, and were not limited to King’s concrete restoration products. No salesperson was dedicated to sell King’s products; (f) King notified CDS that it was terminating the Distribution Agreement in person. Such notice was confirmed in writing.

[24] CDS submits that it is entitled to two years’ notice of the termination of the Distribution Agreement given that this court, in Inno-Vite Inc. v. Rowland 2003 ONSC 32162, [2003] O.J. No. 3171 awarded 12 months’ notice for the termination of an exclusive distributorship agreement that lasted 13 years. However, the circumstances in Inno-Vite bear no similarity to this case given that: (1) CDS did not have an exclusive distribution agreement with King; (2) Sales of King’s products amounted to less than 5 percent of CDS’s sales whereas sales of a nutritional supplement amounted to about half of Inno-Vite’s sales; (3) There is no evidence that the sales of King’s products increased 100-fold with CDS’ distribution, as was the case in Inno-Vite; (5) CDS did not make a substantial investment (or any investment at all) in servicing the market for King’s products other than in filling orders that were placed.

[25] In Clarke, Irwin & Co. v. George G. Harrap & Co., [1980] O.J. No. 482, Justice Cory, as he then was, stated, at para. 48:

The purpose of notice must be to ease the loss, pain and disruption of separation. Alternate business must be secured. If that is not possible, arrangements must be made for the dismissal of staff. A substantial rearrangement in the affairs of the plaintiff was required in light of the termination.

[26] While CDS seeks a replacement of King’s products, there is no evidence that staff was dismissed or that a substantial rearrangement in the affairs of CDS was required.

Conclusion

[27] The three months’ notice of termination that King gave to CDS was reasonable in the circumstances. In coming to this conclusion, I note that this amount of notice is at the high end of the 30 - 90 day range of the notice provisions referenced in Mr. Rand’s affidavit.

ISSUE #4: WHAT AMOUNT OF DAMAGES SHOULD BE AWARDED TO CDS?

[28] Given that adequate notice of termination of the Distribution Agreement was provided by King, no damages should be awarded to CDS.

[29] CDS submits that it received less than three months’ notice as a result of the following notice that was sent by King to its customers on December 3, 2014:

King Concrete Products Distributor Change for 2015

Effective January 1st, 2015, King Packaged Materials Company’s concrete product line will no longer be distributed through Construction Distribution & Supply (CDS) within the Greater Toronto & Hamilton Area (GTHA).

This product line continues to be available through Jamac Sales Limited and will now also be available through National Concrete Accessories Company Inc. (NCA). …

King has maintained longstanding relationships with both Jamac and NCA Ottawa/Baycor. Through this change in distribution, we hope to further the reach of King concrete products across Canada.

[30] CDS submits that this announcement should have been made at the end of the three month notice period and that as a result of the announcement, it lost customers. CDS has not submitted any specific evidence of lost customers. Further, it is my view that this notice, both in its timing and content, was appropriate.

[31] Further, CDS submits that King refused orders from CDS for delivery of its concrete restoration products in late October 2014 or early November 2014. However, CDS purchases of products in October and November 2014 were over 40% of its year to date purchases of those products. King was unable to keep pace with the orders from CDS. CDS objected to the suggestion that it was stockpiling King’s products during this period.

[32] In respect of both allegations of bad faith, I note that CDS apparently continued to sell King’s products from its inventory well beyond the three month notice period that ended on December 31, 2015 given its email dated March 25, 2015 noted above, which indicated that it was still offering King’s products for sale.

[33] In my view, the allegation that King’s actions effectively shortened the three month notice period is not supported by the evidence.

ISSUE #5: SHOULD KING’S COUNTERCLAIM BE GRANTED?

[34] There is no dispute that CDS owes King the sum of $93,890.49 for the products that King supplied to CDS. CDS claims that a rebate of either 4% or 6% should be applied to the amount claimed by King given that it is entitled to a rebate on account of the volume of products that it purchased from King in 2014. In my view a rebate is not available in the absence of payment: Gerry’s Distributors Ltd. v. Itwal Limited, [1999] O.J. No. 170, at para. 12 (C.A.).

[35] Accordingly, King’s counterclaim is granted in the amount of $93,890.49 plus interest. King shall apply the appropriate rebate, once payment of its invoice is made by CDS.

CONCLUSIONS

[36] I grant King’s motion for summary judgment. In my view, none of the issues on this motion raise a genuine issue that requires a trial. I have concluded that CDS is entitled to three months’ notice of termination of the Distribution Agreement. Given that it received adequate notice, I find that CDS is not entitled to damages arising from the termination of the Distribution Agreement. I also grant King’s counterclaim for unpaid invoices, plus interest.

[37] King shall submit its costs submissions, its outline of costs and any settlement offers within 14 days of today’s date. CDS shall submit its costs submissions and its outline of costs within 21 days of today’s date. The costs submissions shall be no more than three pages long. I encourage the parties to make best efforts to settle the issue of costs.

Mr. Justice M. D. Faieta

Released: June 17, 2016

COURT FILE NO.: CV-15-519486 DATE: 20160617 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: CONSTRUCTION DISTRIBUTION & SUPPLY CO. INC. Plaintiff – and – KING PACKAGED MATERIALS COMPANY Defendant

REASONS FOR DECISION

M. D. FAIETA, J.

Released: June 17, 2016

Footnote: [7] Cross-Examination of Stanley Lazar, December 18, 2015, Questions 77-79.