Court File and Parties

Court File No.: CV-13-472864 Date: 2022-08-24 Superior Court of Justice - Ontario

Re: Lifford Agencies Limited, Plaintiff And: Kobrand Corporation, Defendant

Before: W.D. Black J.

Counsel: Claudio R. Aiello, for the Plaintiff Carmen A. De Facendis, for the Defendant

Heard: March 28, 2022 - April 8, 2022

Endorsement

Overview

[1] The plaintiff, Lifford Agencies Limited (“Lifford”), is an agent representing manufacturers and suppliers of wine. Lifford is an Ontario corporation with offices in Toronto, but the manufacturers that it represents are located in wine-producing regions around the world. Lifford is said to be among the largest and most successful agencies in Ontario, and at times seems to have been the single largest and most successful such agency.

[2] The defendant, Kobrand Corporation (“Kobrand”), is a New York based corporation that distributes and sells wine and spirits in the United States and elsewhere. Kobrand was founded in the 1940s and is a well-established distributor, featuring in its roster of brands various well-known and popular wines and spirits. Kobrand, and/or its principals also have ownership interests in producers of wine (which is not particularly relevant for the purposes of the matter before me but shows the extent of Kobrand’s involvement in the industry).

[3] This action relates to an arrangement between the parties over the course of about 15 years, during which Lifford was the exclusive agent in Ontario for a number of wines distributed and sold by Kobrand.

[4] While the arrangement was an exclusive one with respect to a number of Kobrand’s wines, it was not exclusive for all of the brands sold by Kobrand in Ontario. That is, for certain other wines that it sold in Ontario, Kobrand had one or more other Ontario agents throughout the time that it was dealing with Lifford. At the time of the events giving rise to this action, Kobrand in fact had three agents in Ontario, and another two agents representing it in other regions of Canada.

[5] Oddly, given the size and sophistication of the parties before me and the extent of the business between them, there was never a written agreement in place, or even proposed, to govern their overall relationship. Kobrand did provide written confirmation to the LCBO, as was required, that Lifford was Kobrand’s agent (technically its “manufacturer’s representative”) with respect to the particular brands encompassed by the ongoing Kobrand-Lifford arrangement.

[6] On January 29, 2012, having made a decision to consolidate its Canadian distribution relationships into the hands of a single agent, Kobrand terminated its relationship with Lifford, without notice.

[7] The primary issue in the trial before me is the question of what notice of termination, if any, ought to have been given and what damages, if any, are payable in lieu of notice.

[8] There is a related, smaller dispute about certain invoices delivered by Lifford to Kobrand for services allegedly performed by Lifford prior to the termination but not invoiced until after the termination. The amount in question is stated in the claim to total just over $28,000 but by the time of trial Kobrand had paid a portion of that amount, such that the remaining amount in question before me was $17,332.

[9] Kobrand had also issued a counterclaim, but I was advised at the outset of trial that it would no longer be pursuing that counterclaim. As such, the evidence before me was limited to Lifford’s claim against Kobrand.

[10] Lifford called three witnesses to testify.

The LCBO and the Sale of Wine in Ontario

[11] The first witness was Gregory Dunlop. Mr. Dunlop had never been employed by Lifford, but had worked for the LCBO for approximately 35 years before retiring in 2014.

[12] It is appropriate to discuss briefly how the wine distribution system works in Ontario, (or how it worked in the relevant timeframe up to 2012), and the central importance of the LCBO in this system. Much of the following description of those details comes from the evidence of Mr. Dunlop, and most of that evidence is not in dispute. Where certain items discussed below are of particular significance, or are disputed, I will refer to Mr. Dunlop’s specific testimony.

[13] It is fair to observe that the sale of all liquor in Ontario, including wine, has traditionally been and largely continues to be heavily regulated and controlled. The Liquor Control Act, R.S.O. 1990, c. L18, established the Liquor Control Board of Ontario (“LCBO”) and confirms various of the LCBO’s powers.

[14] The Liquor Licence Act (Ontario) confirms, among other matters, that no person or entity is allowed to sell liquor in Ontario except with a licence or permit, the granting and monitoring of which are in the hands of the Alcohol and Gaming Commission of Ontario, which is established under the Alcohol and Gaming Public Protection Act.

[15] Under the Importation of Intoxicating Liquors Act, nobody is allowed to bring alcohol into Canada unless done with governmental (federal or provincial) permission.

[16] Manufacturers within and outside of Canada are dealt with somewhat differently, but in either case, with the exception of the LCBO, nobody can sell liquor in Ontario without a specific licence to do so.

[17] Of relevance to the matters in issue before me, in order to sell wine in this province on behalf of a manufacturer, a party must be licenced as a manufacturer’s representative in Ontario.

[18] Lifford holds such a licence, (in fact, through a number of affiliated entities owned and controlled by Lifford, holds several such licences). Kobrand does not. Accordingly, in order to sell in Ontario the wine produced by the manufacturers it represents, Kobrand must do so through the services of a licenced manufacturer’s representative – an agent – like Lifford.

Two Distribution Channels

[19] During the timeframe in which Lifford and Kobrand did business with one another, wine was sold in Ontario through two LCBO streams. First was the retail distribution network, in other words wine stocked and sold in LCBO outlets throughout the province. As discussed below, the retail distribution channel was subdivided into component parts.

(a) Retail

[20] In general in the retail distribution network, an agent like Lifford would be involved in marketing to the LCBO on behalf of the manufacturers and suppliers it represented. When the LCBO agreed to purchase product from a manufacturer or supplier, the LCBO would arrange for pick up and shipping of the product in question. Upon the issuance of a purchase order by the LCBO, a supplier like Kobrand would arrange for the product in question to be available for pickup and would issue an invoice to the LCBO for the order in question. The agent would also be notified of the purchase, and would at that point issue its invoice to Kobrand for its commission. The LCBO would then pay Kobrand at an agreed point – for example 30 days or 60 days after the issuance of the purchase order, and at that point Kobrand would pay its agent.

Three Segments of Retail

(i) General List

[21] The retail distribution network within the LCBO was itself at most points during the relevant timeframe divided into three segments. This was true not only for wine but for spirits and other beverages, but given the focus of this trial I will refer to the sales channels for wine. The first segment was and remains the “general list”, featuring relatively less expensive but reasonably popular wines. At the relevant time, there were something in the range of 1700-2000 wines on the LCBO’s general list. Of that number, perhaps two to three dozen would change from year to year, and such changes would typically happen if an incumbent wine failed to meet a specified sales quota.

[22] At any point at which the LCBO was seeking to replace an underperforming wine from its general list, it would issue a “needs letter” to licenced agents and suppliers, for the most part manufacturers’ representatives like Lifford, advising of the type of product it was looking for including the variety, region and price point (as well as other related information). Mr. Dunlop testified that in response to a “needs letter” for a wine on the general list the LCBO would typically receive something in the range of 200-250 offers and would rely in part, in making its choice, on its knowledge of the agent submitting an offer, and the agent’s marketing plan, including planned promotional expenditures, in relation to the product in question.

[23] Sales quotas for general list wines during Mr. Dunlop’s tenure at the LCBO ranged from about $40,000 per annum at the low end up to about $1 million at the high end depending on the product.

(ii) Vintages

[24] The second stream within the LCBO retail distribution network was and remains “Vintages”. The Vintages program was developed during Mr. Dunlop’s time at the LCBO. It is a program pursuant to which the LCBO features fine wines, which Mr. Dunlop described as more “artisanal and premium” compared to wines on the general list. Across the province there would be as many as 15,000 listings in Vintages, with 6000-7000 new products each year. The Vintages program is built on one-time purchases and constantly changing inventory, described by Mr. Dunlop as an aggressive ongoing purchasing strategy with very high turnover and revolving lists, with one-time allotments of new products purchased and sold out and then replaced with new and different products.

[25] Mr. Dunlop testified that the average Vintages order would be in the range of 300-350 cases, which would be distributed among various Vintages sections of LCBO stores around the province. As of 2014 when he retired, Mr. Dunlop said that of about 600 LCBO stores in Ontario, approximately 300-325 had Vintages sections, so individual stores would receive relatively small allotments, typically in the range of a handful of cases per store of the overall purchase of 300-350 cases, and that the Vintages collections at any given time would vary from one LCBO store to another.

[26] As noted, by design the inventory in Vintages turns over quickly. As in the case of the general list, the LCBO uses a similar “needs letter” system to stock the Vintages sections. The selection of Vintages wines is based on wines having strong reputations, based on touring and tasting by LCBO representatives at trade shows including international trade shows, and again based in part on the reputations and marketing plans of the agents representing the wines vying for inclusion in Vintages.

[27] Mr. Dunlop testified that the “needs letter” system for Vintages accounted for about 2500‑3000 products per year (of the total at any given time of about 7000 brands), and that in response to “needs letters” for Vintages, the LCBO might receive anywhere from 800-1500 responses, for the most part from agents like Lifford.

(iii) Essentials

[28] The third part of the LCBO retail system, which is of particular relevance in this case, is a subset of Vintages called “Essentials”. Unlike the majority of Vintages wines, which turn over rapidly based on “one off” placements, Essentials, which began in the late 1990s, is comprised of a small subset of premium quality wines that have proven to be customer favourites. Essentials started with about 25 different wines, was up to about 100-110 wines by 2011, and when Mr. Dunlop retired in 2014, featured approximately 125 wines.

[29] In order to be featured in Essentials, in addition to being of high quality, a wine would have to have a demonstrated and ongoing track record of high sales. Unlike the usual Vintages wine inventory, Essentials wines would secure a permanent place on LCBO shelves within the Vintages section and to remain in place would have to meet very high sales quotas. For example, Cakebread Cabernet Sauvignon (“Cakebread Cab”), which features prominently in the dispute between the parties, was listed in the Essentials program at the LCBO (first in April of 2011) and, in order to remain in the program, had to meet a sales quota of $1 million per year. I heard extensive and uncontroverted testimony that a placement on the Essentials list is thus an extremely valuable and sought-after designation.

(b) Consignment

[30] Apart from the retail network, the LCBO’s second distribution network is called Consignment. Throughout the relevant timeframe, the LCBO operated Consignment warehouses. Agents like Lifford, (again, to be clear, entities holding licences as manufacturers’ representatives), would be allotted space within the LCBO Consignment warehouses. Mr. Dunlop testified that the Consignment program within the LCBO actually competes with the retail stream, and that the two programs do not share data with one another. He also confirmed, as did other witnesses, that, certainly by the early 2000s and beyond, space within LCBO’s Consignment warehouse(s) was at a premium, that not all agents were allotted such space, that those agents who were given space were on a “tiered” system based on sales volumes. I heard evidence that top‑tier agents like Lifford, with reasonably substantial allotments of such warehouse space, had a considerable competitive advantage.

[31] The wines distributed via the Consignment program were and are wines that are not regularly available in the retail distribution network. As happened with the Cakebread Cab featuring prominently in this case, there were times when a wine might be available both through the Consignment program and at the same time in Vintages (pursuant to a “one off” placement characteristic of Vintages) but a wine would generally not be available both through the Consignment program on one hand and either the general list or Essentials on the other.

[32] The purpose and benefit of the Consignment program was to allow the LCBO a separate channel for selling wines outside of the retail operations in LCBO stores. Consignment wines are mostly sold to the “hospitality” industry, including in particular to restaurants and hotels (there are also some sales to private individuals). This allows the LCBO to make available to consumers, as customers of restaurants for example, wines that are not typically available through the LCBO’s retail outlets (subject to potential occasional stints in Vintages).

[33] Unlike the ordering and invoicing scheme for LCBO’s retail operations described above, in the case of Consignment, an agent like Lifford would cause the LCBO to make purchase orders with suppliers represented by the agent, and to pick up the products ordered and deliver them to the Consignment warehouse. The agent would then solicit orders from customers (again, mostly restaurants, hotels and other hospitality entities). Once a hospitality customer, say a restaurant, would place an order, the agent would advise the LCBO of the customer and the details of the order.

[34] The LCBO would set aside the order (generally together with other orders placed by the same agent) for pick-up from the Consignment warehouse. The agent would pay the LCBO in advance for the order(s), would retrieve the products directly from the Consignment warehouse and deliver them directly to the customer(s), who would also pay the agent in advance, in an amount agreed with the agent. Under the Consignment program, the LCBO would only pay the supplier (in this case Kobrand) once all cases acquired under a given order (often for an array of hospitality customers) had been sold out of the warehouse.

[35] At the heart of the Consignment program was an imperative and expectation for relatively rapid turnover. The spaces allotted to agents within the Consignment warehouses were premised on the number of cases housed within the warehouse at any given time being matched by the number of cases on order and in transit, such that the cases in the warehouse were constantly being moved out and replaced on an ongoing basis.

[36] As is evident from the arrangement described, unlike for retail sales, in relation to which there is a fixed commission rate, negotiated from time to time between the supplier (here Kobrand) and the agent (here Lifford), the agent’s compensation in the Consignment program depends on the amounts the agent charges the customer. Indeed, other than generating the customer orders which in turn trigger the LCBO purchases from the supplier, there is a less direct compensation relationship between supplier and agent in the Consignment regime; unlike the retail side in which the agent invoices the supplier directly for commissions.

The Relationship Between the Parties

[37] Against this backdrop, I turn now to discuss the course of the relationship between the parties over the years, the status of that relationship at the time of Kobrand’s termination of it, and the impetus for Kobrand’s decision to do so.

Evidence of Mr. Campbell

[38] It is important, in order to understand the growth and prominence of Lifford in the “agency community” (as one or more witnesses called it) to talk about Steven Campbell and his role. Mr. Campbell was the principal of Lifford throughout the relevant timeframe, and was the main witness on its behalf.

[39] Mr. Campbell operated a restaurant in Toronto in the late 1970s and early 1980s, and then, in the late 1980s acquired the Delisle Wine Bar which he operated for a decade. During these two sojourns Mr. Campbell, as he described it, became “infatuated” with wine. While operating the wine bar in particular he dealt regularly and directly with the LCBO and developed an arrangement whereby he would source and import wines, with the involvement of the LCBO, from U.S.‑based auction houses. There was no Consignment program in place at that time at the LCBO, and Mr. Campbell’s initiative in working with the LCBO to import particular wines was novel. It allowed Mr. Campbell, who also worked with and developed connections with the agent community, to curate an enviable collection of wines for his wine bar, which in turn gave the wine bar notoriety and considerable success.

[40] Mr. Campbell testified that in 1994 he learned that Lifford was for sale, and, given his own affinity for the wine business and his knowledge of Lifford’s representation of an array of excellent California wines in particular, he decided to buy it.

[41] Lifford was one of a few agents who participated in LCBO’s Consignment program from the beginning of that program in the early 1990s, and in fact was one of four agents chosen to take part in an early pilot program that LCBO launched to test the Consignment concept.

[42] Mr. Campbell testified that, owing in part to his excellent contacts in the hospitality industry, Lifford’s Consignment-based business “took off” from the outset of his involvement, and was extremely successful.

(a) First Dealings Between the Parties in 1997 and Introduction of Cakebread

[43] In 1997, Mr. Campbell said he was approached by Gerard Yvernault of Kobrand, and was asked to replace Kobrand’s then agent for the purposes of selling Cakebread wines (not just the Cabernet Sauvignon, which is prominent in this case, but the full array of wines produced by Cakebread Cellars).

[44] Mr. Campbell testified that he initially turned down Kobrand’s request. Lifford already represented at that time some prominent California producers from the Napa Valley, for example the Beringer winery among others, and did not want to take on a relatively less well-known wine in competition with that stable of producers.

[45] However, after a meeting arranged by and including Kobrand, in which Mr. Campbell was introduced to Jack Cakebread, the proprietor of Cakebread Cellars, Mr. Campbell relented and agreed that Lifford would represent the Cakebread wines.

[46] The story of Cakebread Cellars, and Jack Cakebread’s role in that story, was the subject of evidence and debate before me. From the Kobrand perspective, the origin and evolution of Cakebread wines was described with an almost mythical quality, in particular how Jack Cakebread went from being the owner of a car repair garage to becoming the proprietor of a well-known producer of quality wines. This origin story was offered as part of the theory, discussed in more detail below, that a fine wine with a relatable background story in large measure “sells itself”.

[47] For present purposes suffice it to say that Mr. Cakebread was evidently an effective salesperson, and that meeting him persuaded Mr. Campbell to take on Cakebread Cellars, and Kobrand, as part of Lifford’s roster of represented brands.

[48] It is important to note, and not really contested, that as of 1997 when Lifford agreed to play this role, Cakebread wines were not yet available or known in the Ontario market, and had literally zero sales in that market up to that point.

[49] In those circumstances, Lifford developed a strategy to use the fledgling LCBO Consignment program to introduce Cakebread wines in Ontario.

[50] By 1997, Lifford’s status as an original and leading agent in the Consignment program had allowed Lifford to secure a preferential place and relatively larger allotments of Consignment space as compared to most agents.

(b) Successful Use of Consignment for Cakebread Wines

[51] Using this platform, Lifford sought to sell Cakebread wines widely to its network of hospitality industry customers, and thereby to create a recognition and growing demand among Ontario consumers.

[52] Over the years, and culminating in events in 2010 and 2011, that strategy was a success. Cakebread wines went from no sales in Ontario as of 1997 to steady growth and increasing recognition in the province over the following decade.

[53] From Kobrand’s perspective the steady growth is explained by the excellence and mystique of the Cakebread wines, and by the fact that many Ontarians had sampled those wines while travelling in the United States, and had brought back with them a taste and demand for the product.

[54] Lifford, on the other hand, explains the steady growth as an expected and intended product of its assiduous efforts to introduce Cakebread wines through bars, restaurants and hotels, which led to a home-grown demand for the wines.

[55] While I expect the answer is that both of these factors, and likely others, contributed to the growing market recognition of Cakebread wines, there is no doubt, and Kobrand acknowledges, that Lifford did an excellent job getting the Cakebread wines into the Ontario market and allowing consumers to purchase it (whatever the motivations for them doing so).

(c) Selection of Cakebread Cab for Essentials

[56] Of critical importance is that by 2010, Cakebread Cab was being considered by the LCBO for placement on its Essentials list, and that by April of 2011, the LCBO had made a decision to do so, such that Cakebread Cab became available as an Essentials product in the Vintages section of many LCBO locations, and has been so available ever since. This in turn confirms, inasmuch as this was the sales target that Cakebread has had to meet in order to remain on the Essentials list, that the sales of Cakebread Cab have, since that time, been at least $1 million per year.

[57] I heard evidence that by April of 2011, Lifford’s commission for retail sales of Kobrand wine brands in Ontario (through LCBO) was 20%. This means that, for the Cakebread Cab alone, the gross commission amount for Lifford, had it remained as Kobrand’s agent, would have been at least $200,000 per year (i.e. 20% of at least $1,000,000).

[58] Relatedly, I also heard evidence about what a monumental achievement it is to have a wine accepted on the Essentials list. Not only does it reflect a significant level of brand recognition, which is an accomplishment in and of itself, but it means that, given the prominence and popularity of the wines listed in Essentials, a wine on that list will typically generate large sales volume, and large associated commissions with, at that stage, comparatively minimal effort.

[59] I should also note that, separate and apart from Cakebread Cab, the Lifford-Kobrand relationship was by all accounts also otherwise successful for both parties. With Lifford’s representation, virtually all of the Kobrand products for which Lifford was the agent did well in Ontario over the years of the relationship, and both parties prospered as a result of their arrangement.

Introduction of Mr. Adamcyk and Occasional Tensions

[60] That said, I heard evidence about certain bumps along the road in the relationship. Particularly after 2007, when Kobrand deployed Michael Adamczyk as its representative in Ontario, there were occasional tensions between the parties.

[61] Mr. Adamczyk, who testified as the main witness on behalf of Kobrand, was clearly an enthusiastic and dedicated Kobrand employee. He had worked in other parts of the world promoting Kobrand brands, and had an impressive knowledge of not only Kobrand’s history and business, but also about wines and the wine industry generally.

[62] Mr. Adamczyk came across as very personable, and made it clear in his testimony that from his perspective the distribution and sale of wine is largely about relationships, and about “lifestyle” associations that buyers and end-consumers will make with the wines on offer.

[63] In keeping with this philosophy, it is clear that Mr. Adamczyk, once deployed to Ontario, made a considerable ongoing effort to get to know not only the personnel at Kobrand’s three Ontario agents (including Lifford) but also to get to know key people at the LCBO, key people in the hospitality industry including restauranteurs, and generally the customers and consumers of the Kobrand line and other products.

[64] Mr. Adamczyk’s concerted effort to get to know the key players in the Ontario market clearly irked Lifford, or at least Mr. Campbell, from time to time. Given that Lifford was not Kobrand’s only agent, and given the considerable competition among agencies for reputable brands and significant customers, Mr. Campbell clearly worried, and articulated a concern on a regular basis, that Kobrand’s direct contact with key players and customers could create conditions for Kobrand to use other agents to exploit those relationships.

[65] Moreover, my sense is that until Mr. Adamczyk arrived in the Ontario market, not only Kobrand, but also other suppliers for which Lifford functioned as agent, took a relatively “hands off” stance, and left Lifford to market and sell the suppliers’ products as it saw fit. I do not mean by this observation to denigrate Kobrand; it is clear that Lifford was performing well, such that a “hands off” strategy might have been a legitimate choice.

[66] Mr. Adamczyk, however, was anything but “hands off”, and it is clear that his determined insistence to accompany Lifford on sales calls, and not only to meet key customers once, but to maintain contacts with those customers in his own right on an ongoing basis, caused Mr. Campbell continuing concern.

[67] Mr. Campbell’s irritation was expressed in periodic emails, which were routinely met with Mr. Adamczyk’s assurances that he meant no harm and harboured no ill motives, but that he made no apologies for getting to know the Ontario market and its key players.

[68] Although a fair bit of evidence was devoted to these occasional disagreements, in my view these transient difficulties in the relationship are not really germane to the issues I must decide.

[69] That is, while there was some implicit suggestion in the evidence, and indeed in Kobrand’s closing submissions, that the transient difficulties in the Lifford-Kobrand relationship may have contributed to Kobrand’s decision in early 2012 to terminate that relationship, the evidence in fact demonstrated quite clearly that the termination decision related to other considerations.

Change in Kobrand Strategy Leading to Termination

[70] Specifically, Mr. Adamczyk testified that in the few years prior to the decision to terminate the relationship, Kobrand had successfully consolidated its sales agency relationships and channels in the United States.

[71] That is, whereas up to a few years before the termination in issue before me, Kobrand had had individual agents representing it in each of the individual states in which it sold products, Kobrand had in those last few years changed to a model whereby it was represented by a small number of large regional agents, each of which represented Kobrand products in large territories encompassing a number of states.

[72] This consolidation of Kobrand’s representation in the United States had proven to be very successful, had allowed Kobrand to negotiate volume-based discounts on commission rates, and had thus made Kobrand more profitable.

[73] Mr. Adamczyk agreed that it was the success of this model, rather than hiccups in the Lifford relationship, that caused Kobrand to decide to follow the same kind of approach in the Canadian market.

Kobrand Terminated and Replace All Canadian Agents with a Single New Agent

[74] To that end Kobrand, at or around the time that it terminated the relationship with Lifford, also terminated its relationships with all of its other existing agents in Canada, including the two other agents in Ontario, and the two other agents covering the rest of Canada.

[75] It replaced all five such agents, including Lifford, with a single agent, Charton Hobbs, which thereafter had a mandate to represent Kobrand products across Canada.

(a) Immediate Economic Benefits of Termination(s)

[76] In addition to the perceived longer term business advantages to Kobrand resulting from the consolidation of its Canadian representation into a single entity, Kobrand also orchestrated and enjoyed some immediate monetary benefits.

[77] That is, it emerged in cross-examination that associated with the termination:

(a) The commission paid by Kobrand to Charton Hobbs would effectively net to 10% as compared to the 20% it had been paying to Lifford. Part of the net calculation resulted from Charton Hobbs agreeing to contribute to costs of promotion and marketing, whereas such costs, in the Lifford relationship, had been paid by Kobrand over and above the 20% commission it paid to Lifford;

(b) Charton Hobbs agreed that, in consideration for being given the sole and exclusive agency for Kobrand products across Canada, it would negotiate and pay any severance amounts to Kobrand’s former agents, including Lifford.

Expectation of Severance and Charton Hobbs’ Negotiation of Same

[78] As the agreement described above reflects, and contrary to the alternative argument that it advanced at trial that it should owe no termination payments, Kobrand clearly understood and expected that as part of the termination of its Canadian agents, some compensation – severance as Kobrand called it – would have to be paid.

[79] As further evidence of Kobrand’s expectation in that regard, I heard evidence that Charton Hobbs in fact succeeded in negotiating and paying severance amounts for each of Kobrand’s other former Canadian agents.

[80] When Mr. Campbell refused to deal with Charton Hobbs, and instead insisted on dealing directly with Kobrand, I gather that whatever further communications ensued between Lifford and Kobrand (about which, other than thinly veiled suggestions that such discussions took place, I heard no evidence) foundered and did not lead to an agreement.

Charton Hobbs Funding Defence and On Hook for Costs (If Any)

[81] This led to the claim before me, and as also emerged in cross-examination, Charton Hobbs has also agreed as part of its deal to become Kobrand’s sole Canadian representative, to pay Kobrand’s costs to run this trial as well as any termination amounts for which the Court may find Kobrand liable.

[82] This latter revelation about Charton Hobbs footing the bill for this litigation was elicited from Mr. Adamczyk only in cross-examination and was given grudgingly and reluctantly. It emerged as something of a bombshell and made me wonder in passing about whether the theretofore hidden arrangement was champertous. I ultimately concluded that, given the discontinuance of the counterclaim, there is likely nothing improper about the clandestine scheme notwithstanding the efforts to conceal it. It does show, however, the obvious value of the agency role for Charton Hobbs (or presumably any agent).

No Evidence of Industry Practice

[83] Somewhat surprisingly, neither party presented any evidence concerning industry practice relative to termination of agency relationships in Ontario. It is apparent from the evidence discussed above that there is an expectation of severance compensation upon the termination of an agent. However, I heard no evidence concerning usual amounts for such compensation nor even about the amounts paid to the other former Kobrand agents who were terminated around the time that Lifford was, all of whom, I was told, came to agreements about those compensation amounts.

[84] As such, I am left to look to analogous case law to determine if any compensation is owing in connection with the termination of Lifford’s agency role and, if so, in what amount. I am advised by counsel that there are in fact no precedent cases dealing with this issue in this industry, such that this is a matter of “first impression”.

Consideration of Requirement for Notice

[85] On the first question, as to whether notice or payment in lieu of notice (together “notice”) is required in the termination of a distributor relationship like this one, the case law confirms that notice is generally required.

[86] This makes sense to me. Lifford had devoted considerable resources over the years to the promotion and placement of Kobrand’s line of products, and by all accounts the relationship had benefitted both parties. While implicit in that observation is the notion that Lifford had been compensated on an ongoing basis for its efforts, the example of Cakebread Cab underlines, in my view, the unfairness that would result if Lifford received no notice.

Specific Considerations re Cakebread Cab

[87] That is, the evidence confirms that as of 1997 when Lifford agreed to represent Cakebread Cab for Kobrand, that wine was essentially unknown in Ontario, and had no track record of any sales at all. Mr. Campbell’s initial refusal to have Lifford add Cakebread Cab to its portfolio illustrates that such a decision is not taken lightly.

[88] An agent, in agreeing to represent a given brand, is notionally committing a portion of its resources, in terms of time, human capital and opportunity costs, to the promotion and development of that brand (and implicitly making a decision not to devote that portion of those resources to other brands and opportunities).

[89] In the case of Cakebread Cab, the risk associated with Lifford’s decision to devote time and resources was more pronounced than it would be for a brand with a reputation and track record in Ontario.

[90] This meant that Lifford would start from “ground zero” to build the Cakebread Cab brand in this province, and there was no guarantee, mythical Cakebread origin story notwithstanding, that the wine would catch on in Ontario.

[91] However, through a deliberate and patient strategy to use the LCBO Consignment program to disseminate Cakebread Cab to bars, restaurants and hotels in Ontario, and thereby to introduce consumers here to the brand, and by taking advantage of occasional stints in LCBO’s Vintages section, Lifford managed, over the course of many years, to gradually and successfully build the knowledge, recognition and reputation of Cakebread Cab in this province.

[92] That is not to say that the exposure of Ontarians to Cakebread Cab while travelling in the United States did not play a role, nor that the quality of the wine had nothing to do with its success – clearly they did – but there is also no doubt that Lifford’s ability to proliferate Cakebread Cab in Ontario, using its contacts and its own excellent reputation as an agent representing high‑end brands, was instrumental in Cakebread Cab’s emergence as a popular luxury wine here by 2010.

[93] That growing reputation and popularity led directly to Cakebread Cab’s nomination and ultimately its selection as an LCBO Essentials brand. That in turn, as discussed above, more or less guaranteed that Cakebread Cab would enjoy, from the time of its initial placement in Essentials in April of 2011, annual sales in Ontario alone in the amount of at least $1,000,000 per year.

[94] From an agent’s perspective, it would do so without requiring significant ongoing effort, in relative terms, by way of ongoing promotion and marketing.

[95] In many ways, it is thus fair to view the acceptance of Cakebread Cab into Essentials, and the virtually guaranteed substantial ongoing sales to loyal customers thereafter, as a reward – also to Cakebread Cellars and Kobrand – for the years of effort Lifford undertook to build the brand in Ontario.

[96] As such, it is also fair to view Kobrand’s unilateral termination of the relationship shortly after Cakebread Cab’s placement in Essentials, in favour of a new agent to which it would be obliged to pay only half the commission, as opportunistic and absent compensation for Lifford, unfair.

[97] Cakebread Cab is a stark example, but nonetheless provides an illustration of the basis for requiring notice in the circumstances.

Discussion of Case Law on Notice for Termination of Distributorship Agreements

[98] Returning to the case law, there are many cases confirming that generally a distributorship agreement is terminable only on the giving of reasonable notice.

[99] A useful point of embarkation for the discussion is the Court of Appeal for Ontario’s leading decision in 1193430 Ontario Inc. v. Boa-Franc Inc. 2005 ONCA 39862, [2005] O.J. No. 4671, 78 O.R. (3d) 81, (Application for Leave to Appeal to the S.C.C. denied [2006] S.C.C.A. No 2.). The case concerned a distributorship agreement for hardwood flooring products. The plaintiff had been a distributor of the defendant’s “Mirage” hardwood flooring since 1989, and the exclusive distributor in Ontario as of 1993 when in 1994 the defendant unilaterally terminated the distribution agreement without notice. The agreement between the parties was never formalized by way of a single distributorship agreement.

[100] The trial judge had found that, although there was no basis for the defendant to terminate the relationship for cause based on alleged poor performance, there was an implied duty of good faith, which she found the plaintiff had breached by failing to advise the defendant about a particular transaction into which the plaintiff had entered.

[101] In allowing the appeal, Feldman J.A. for a unanimous Court reviewed the origins of the notion of a requirement for reasonable notice on termination of an open-ended distributorship agreement. Noting that the “concept of just cause for termination is borrowed from employment law” she observed that “the case law suggests more than one analytical origin for the incorporation of these concepts into distributorship agreements.”

[102] First, Feldman J.A. described a vein of case law seeking to characterize a distributorship relationship as “either one of employment or of independent contractor”, and that, within that framework “only the employment relationship requires reasonable notice for termination; and independent contractor can be terminated without notice”. In the cases employing this analytical approach, the effort was to determine, by reference to such factors as the duration or permanency of the relationship, the degree of reliance measured by percentage of revenue, and the degree of exclusivity, whether the relationship was more like employment (owing to longer duration, greater reliance and exclusivity) or more like an independent contractor.

[103] Feldman J. A. noted that other cases had focused on an agency analysis, concluding that “if a distributor is an exclusive agent then the relationship requires reasonable notice to terminate”.

[104] A third line of cases, she pointed out, emphasize contractual interpretation and ask “was the contract intended to create a permanent relationship that was therefore only terminable by mutual consent of the parties and not unilaterally by either party?”

[105] Finally, Feldman J.A. cited with approval the Supreme Court of Canada’s decision in Hillis Oil & Sales v. Wynn’s Canada 1986 SCC 44, [1986] 1 S.C.R. 57, and the Court’s pronouncement that “If a distributorship agreement does not contain a provision for termination without cause it is so terminable only upon giving reasonable notice of termination.”

[106] She stated that:

“This is consistent with the approach of courts in other business contracts where the duration is not fixed and the courts have implied a term that the agreement could be terminated by either side on reasonable notice… . What is reasonable will depend on the circumstances of each case including such factors as the expectations of the parties, the duration or intended duration of the relationship, the dependency of the business of the terminated party on the arrangement and the commercial climate for the product.”

[107] In the end result, the Court overturned the trial judge’s dismissal of the plaintiff’s action, confirmed that reasonable notice of termination was required, and confirmed that trial judge’s assessment that six months would be appropriate notice in the circumstances.

[108] While Kobrand argued that in the absence of a written distribution agreement, let alone one confirming exclusivity, the relationship between the parties was renewed deal‑to‑deal and contained no terms beyond those expressed in the individual purchase orders and invoices referable to the latest transaction, such that no notice would be required, it did not push that proposition hard in final argument. Cases such as Rud-Al Co. v. Il Castello Industria Dociaria Di Pelacchi & C.S.A.S. [2001] O.J. 3958 make that submission difficult. In that case the parties had a five‑year relationship but no written agreement. In weighing the arguments about whether or not an exclusive agreement could be found in the circumstances, Justice Brennan wrote:

“Many cases were cited by counsel in their submissions, from which it is apparent that the decisions dealing with the alleged breach of exclusive distribution agreements are largely dependent on the facts of each case. Here, the relationship was of 5 years’ duration, long enough to suggest it was founded on agreement, not merely the sale of goods by invoice.”

[109] In dealing with the appropriate notice period in that case, His Honour held:

“As a matter of commercial efficacy, I would not imply an intention that such a relationship would be permanent, and I accept Tony Rossi’s evidence that one year’s notice was intended. Such notice would be reasonable. In any event, I would imply an intention to provide one year’s notice if the parties did not provide for it.”

[110] The argument on which Kobrand spent more time and focus was to reference some of the cases and various of the factors summarized in Feldman J.A.’s decision in 1193430 Ontario Inc., and to note aspects of the Lifford-Kobrand relationship that weigh against a notice requirement.

[111] For example, Kobrand argued that “although Lifford was Kobrand’s agent for about 15 years, Lifford and Kobrand are unrelated and independent companies who were engaged in non-exclusive business with one another. Lifford as an Ontario wine agent was not limited exclusively to the service of Kobrand”. In other words, although Lifford had an exclusive right to promote some of the products within Kobrand’s Ontario portfolio, other agents handled other Kobrand wines, and Lifford handled various non-Kobrand wines, such that the overall relationship was non-exclusive.

[112] In addition, Kobrand notes that brands handled by Lifford, and commissions paid by Kobrand, varied over the course of the overall relationship in response to changes in the market and other factors, as a result of which, Kobrand argues, “they did not have an exclusive relationship of economic dependence that was permanent in nature.”

[113] To similar effect, Kobrand argues, the percentage of Lifford’s overall revenue comprised by Kobrand commissions was relatively small, and Lifford maintained independence and control over its operations, such that it was unlike a captive employee and more like an independent contractor. It says that “on the continuum between employer/employee relationship where reasonable notice is required to terminate and strict agency relationships where notice is not required, Lifford falls at the end of the continuum of agency relationship where notice is not required.”

[114] These arguments, while somewhat persuasive viewed in isolation, are based on selective reading from some of the approaches and cases described by Feldman J.A. in 1193430 Ontario Inc. as alternative avenues courts have followed in deciding where notice is required. I prefer Feldman J.A.’s overall distillation of competing strands of case law, citing with approval the Supreme Court of Canada’s pronouncement in Hillis that, generally speaking, if a distributorship agreement does not have a provision for termination without cause, then termination requires reasonable notice, and her related observation that this approach has been repeatedly endorsed by Courts in dealing with various business contracts in which the duration of the relationship is not fixed.

[115] I am also mindful of the evidence that I heard from witnesses on both sides, and uncontested by any contrary evidence, that Kobrand attempted, albeit through its new agent Charton Hobbs, to negotiate a severance payment with Lifford in keeping with industry practice, and in fact reached deals (or Charton Hobbs did so on its behalf) with all of the other Canadian agents whose distribution deals were ended in favour of Kobrand’s new relationship with Charton Hobbs.

Conclusion re Need for Notice

[116] On the basis if these factors, I conclude that Lifford was and is entitled to reasonable notice upon its termination by Kobrand.

How Much Notice is Required?

[117] I turn now to the question of what is reasonable in the circumstances.

[118] This determination involves two components. First I must decide what period of notice is appropriate, and second I must assess what amounts are payable over the course of whatever notice period I identify. The latter exercise involves a consideration of the expert evidence presented on both sides.

[119] In terms of the correct notice period, again I note the absence of case law in the specific industry involved in this case, and the absence of evidence about industry standards. As such, as counsel have agreed, this determination is in large measure a matter of first impression.

[120] That said, notice periods for terminations have been addressed in a number of cases in a range of industries, and counsel have cited many such cases for my reference. Both parties reference and rely upon Feldman J.A.’s general observation in 1193430 Ontario Inc. that such factors as the parties’ expectations, the duration or intended duration of the relationship, the dependency of the business of the terminated party on the arrangement, and the commercial climate for the product.

[121] Lifford’s position is that 24 months’ notice would be appropriate in the specific circumstances of this case.

[122] Kobrand points to a host of factors that it says ought to be considered in establishing an appropriate range, including items like the dependency of the agent on the line of business in issue, the level of investment made by the agent referable to the distribution of the supplier’s products, and mitigation. Overall, Kobrand notes that the “most frequent reasonable notice period is 12 months… and the high watermark is 24 months”.

[123] In support of these conclusions, Kobrand cites 16 cases from an array of industries, acknowledging that the determination is necessarily fact‑specific but arguing that courts’ approaches in other settings are nonetheless instructive.

[124] Taking Feldman J.A.’s non-exhaustive list of factors in 1193430 Ontario Inc. as the starting point, I note that, until Kobrand’s unilateral termination of the relationship in January of 2012, there was nothing to suggest that the relationship would not continue indefinitely. The relationship had been objectively successful, by all accounts Lifford had served Kobrand’s interests well, and there was no pressing imperative to change the longstanding arrangement.

[125] On the other hand, Kobrand fairly argues that Lifford’s dependency on the Kobrand business was quite limited. While there was some modest debate, (which played out in the context of the expert evidence on each side) about the percentage of Lifford’s commission revenue comprised by Kobrand business, it is clear that the percentage is single-digit.

[126] On the other hand, and turning to the “commercial climate for the product” it is apt in my view to consider the Cakebread Cab largely in isolation. That wine makes up by far the largest share of the claim, and its circumstances are unique.

[127] That is, as set out above, in April 2011, following and to at least a significant extent because of Lifford’s sustained efforts over the course of many years, Cakebread Cab secured a spot on the Essentials list, virtually guaranteeing it a revenue stream going forward that was considerably higher than what had been attained via the Consignment program and occasional stints on Vintages. Given the annual sales quota for Cakebread Cab to remain in Essentials, which by all accounts it has easily met and indeed exceeded every year since its initial placement in 2011, the minimum gross commission that Lifford would have earned relative to Cakebread Cab would have been at least $200,000 per year.

[128] While it is likely a coincidence, and a product of Kobrand’s overall business strategy of consolidating agency relationships, that within a few months of Cakebread Cab’s acceptance into the Essentials program Kobrand terminated, without notice, its longstanding relationship with Lifford, that timing also yielded significant benefit to Kobrand and significant detriment to Lifford in relation to Cakebread Cab alone.

[129] On the Kobrand side, it meant that, coupled with the virtually guaranteed and substantial revenue stream to be generated by Cakebread Cab in Essentials, there was a savings of about one‑half, in terms of gross commissions payable to an Ontario agent, by virtue of the change. There was also little risk going forward of decreases in Cakebread Cab sales, and little effort in terms of ongoing promotional work needed to maintain Cakebread Cab’s market position and associated revenues. The hard work had already been done, largely by Lifford.

[130] On the Lifford side, it meant that, notwithstanding its hard work over the years, and the risk it took from the outset in devoting time and resources to building and promoting the Cakebread Cab brand, it would see the fruits of its labour enjoyed by others. (Kobrand in particular, but also Charton Hobbs, whose gross commission revenue from Cakebread Cab, albeit less than what Lifford had been paid, would be earned with little risk or ongoing effort).

[131] In my view these considerations are fairly weighed in assessing the “commercial climate for the product” and largely offset the fact that Lifford, in an overall sense, was not heavily dependent on the Kobrand business.

[132] While as confirmed in the expert testimony discussed below Lifford’s overall revenues did not decrease following its termination by Kobrand, inasmuch as Lifford managed to bring in additional business to replace the Kobrand revenue streams, it did so by deploying its people and resources to pursue those replacement opportunities. In my view, the evidence establishes that had Lifford continued on as Kobrand’s agent, it would still have been able to secure all or most of the new business that it in fact did once terminated by Kobrand. This is because the minimal effort required to maintain and even grow the Cakebread Cab revenues would have required very little deployment of people and resources, such that those people and resources could have been used – exactly as they actually were used – to pursue and develop the additional business opportunities that in fact transpired.

[133] In other words little effort would have been required to secure the ongoing Cakebread Cab revenues, which would have freed up resources to pursue and take on the same business that Lifford in fact obtained in the wake of the Kobrand termination.

[134] In my view, the totality of circumstances, with particular emphasis on the central place of Cakebread Cab in the claim, militate in favour of a relatively longer notice period within the range that the cases establish.

[135] Specifically, while I do not find that the relevant collection of considerations justify a notice period of 24 months, I conclude that somewhat more than the “most frequent reasonable notice period” of 12 months is justified.

Conclusion re Notice Period

[136] In all of the circumstances I find that a notice period of 15 months is reasonable.

Quantification of Damages

(a) Evidence of Mr. Mak

[137] I turn now to consider the expert evidence in order to quantify what amounts are properly payable over the notice period I have found.

[138] Lifford called Alan Mak of BDO as its damages quantification expert. Mr. Mak was qualified without objection, and testified concerning his opinion as to the appropriate quantification of damages. Mr. Mak also responded to aspects of Kobrand’s expert reports authored by Lorne Kirsch of Lorovest Corp.

[139] Mr. Mak prepared a number of reports and schedules, in part because he revised some of his calculations based on information becoming available to him after his first report, and also based on aspects of Mr. Kirsch’s reports that he accepted.

[140] In general terms, Mr. Mak (like Mr. Kirsch) sought to quantify lost profits from the two relevant revenue sources, Consignment revenue and Retail sales. With a view to restoring Lifford to the position it would have been in but for the termination, Mr. Mak initially estimated what Lifford’s revenues would have been without the termination. To that end, Mr. Mak assumed that Lifford’s monthly revenues would remain constant with average monthly revenue during a twelve‑month period prior to the termination, and projected revenue growth based on historical growth rates and assumed increases of Cakebread Cab sales as it expanded into the Essentials sections of additional LCBO stores.

[141] Mr. Mak then calculated a contribution margin based on Lifford’s historical gross margin less variable costs incurred to earn the incremental revenues.

[142] Employing this approach, Mr. Mak calculated Lifford’s monthly losses in various scenarios. Within the calculation of Consignment losses, Mr. Mak’s first scenario assumes that Lifford’s relevant revenues would remain consistent with the average historical monthly revenues from 2011. In a second scenario relative to the Consignment losses, Mr. Mak assumes certain sales increases for all products during the loss period consistent with the historical revenue growth from 2010 to 2011.

[143] On the retail side, Mr. Mak used these same approaches and assumptions in the two scenarios he developed for those losses.

(b) Evidence of Mr. Kirsch

[144] In broad strokes, Mr. Kirsch used somewhat similar methodology for purposes of his calculations, but used slightly different timeframes for his analysis, and generally made more conservative assumptions about revenue growth in the “but for” scenario.

[145] For example, for purposes of his projections Mr. Kirsch based his average monthly revenue on the 12-month period from January through December of 2011. According to Mr. Mak this approach tended to understate the losses in two ways. First, it excluded revenues from January of 2012, the month in which the termination took place. Mr. Mak noted that the termination only happened on January 29, very near the end of the month, such that excluding that month, in which significant commission income was earned, understates the likely revenues. Similarly by including the Cakebread Cab sales for the first quarter of 2011, before Cakebread Cab entered into Essentials, Mr. Mak opines that Mr. Kirsch’s calculation artificially understates the expected revenue from Cakebread Cab, in that as of April 2011, and more importantly predictably and reliably going forward, that revenue would increase very substantially.

[146] I do not propose to analyze in detail all of the differences between the respective expert calculations of damages.

[147] As an initial and overriding matter, I prefer the evidence of Mr. Mak to that of Mr. Kirsch.

Concerns re Mr. Kirsch’s Evidence

[148] Lifford in fact sought to exclude Mr. Kirsch’s testimony entirely, on the basis of various concerns suggesting that Mr. Kirsch was not able to comply with his “Form 53” obligations to the Court.

[149] Among other concerns, Mr. Kirsch, in his initial report, had purported to undertake research of relevant case law, and had expressed an opinion about the appropriate notice period that the Court should use to calculate losses. It was also alleged, with some force, that he had cherry‑picked certain pieces of information advantageous to Kobrand’s position but not otherwise reasonable. For example, inasmuch as the retail commission losses are incurred in U.S. dollars, Mr. Kirsch had purported to do a conversion of the U.S. amount he had calculated into an equivalent amount in Canadian dollars. Leaving aside the fact that such a conversion is likely unnecessary (since it can be done, if required, once an award is made), Mr. Kirsch clearly selected a conversion rate based on a value of the Canadian dollar at its peak in recent history, which peak was transient and not related to any objective features of the case that would drive one to select that point in time. In other words the choice was calculated, somewhat ham-fistedly, to maximize Kobrand’s position without reasonable, or any, justification for choosing that point in time.

[150] These examples are not exhaustive, but illustrate the kinds of concerns emerging from Mr. Kirsch’s reports.

[151] In response to Lifford’s motion to exclude Mr. Kirsch’s evidence entirely, I instead excluded certain aspects of his proposed evidence. To be clear, in those instances – for example Mr. Kirsch’s purported legal opinion – my ruling was that Mr. Kirsch’s proposed testimony was not admissible, rather than the defects simply going to weight. I believed that the balance of Mr. Kirsch’s opinions, which were in the nature of methodology and calculations, should not be excluded and could be considered and weighed against the views of Mr. Mak.

[152] At the conclusion of their respective testimony, however, I continued to have misgivings about Mr. Kirsch’s evidence. Unlike Mr. Mak, who gave concessions where appropriate, Mr. Kirsch was unnecessarily argumentative at various points, and crossed the line at times from dispassionate expert to advocate. In the result, with respect to the admissible portions of Mr. Kirsch’s evidence (that is, those aspects of his reports about which I allowed him to testify), I cannot give Mr. Kirsch’s opinions as much weight as those of Mr. Mak, and so where those opinions differ I prefer and rely upon Mr. Mak’s testimony.

[153] With respect to Consignment commission losses, in my view it is reasonable to include January of 2012, and to use the period from February 1, 2011 through January of 2012. Using this period captures revenue growth, and justifies the use of Mr. Mak’s second scenario for this calculation, including his calculated contribution margin of 13.73%. As such, I conclude that Lifford’s losses under this heading total $7779 per month.

[154] With respect to retail commission losses, in my view the same 12-month period, (February 1, 2011 through January of 2012) is apt. I prefer the scenario in which retail revenue is based on the observed trailing 12-month average for that period, not excluding the disputed unpaid invoices (discussed below). That is Mr. Mak’s scenario 1(a), and yields a monthly loss of U.S. $18,011.

Discussion and Conclusion re Disputed Invoices

[155] That leaves only the remaining disputed invoices. In my view these amounts, (which as set out above I am told now total $17,332), are clearly owing. In each case, the amounts of the invoices relate to orders placed while Lifford was still Kobrand’s agent.

[156] Kobrand says that, even so, the orders in question were not actually shipped until after Lifford’s termination, such that the “risk” associated with those orders was now on the new agent (Charton Hobbs).

Conclusion re Damages

[157] In my view it is clear that the work done to elicit the orders was done by Lifford, and the orders had been placed – and thus a contract in place for such orders – while Lifford was still the agent of record. While I suppose it is theoretically possible that such transactions would not be completed for whatever reason, I have no evidence before me to suggest that that was a material risk. Indeed, there is nothing to suggest that these transactions were not completed, suggesting that whatever hypothetical risk may have transferred to Charton Hobbs, that risk did not materialize. As such, I would add the amount of $17, 332 to the award in favour of Lifford.

Costs

[158] Costs should follow the event, and given Lifford’s success here it is entitled to its costs.

[159] I instruct the parties to confer to see if costs can be agreed. If there is no agreement within 30 days, then I am prepared to receive written submissions, not exceeding five pages in length, from Lifford within 10 days after the 30 day period, and from Kobrand within 10 days after that.

[160] I wish to thank counsel for their thorough and able work throughout the trial.

Date: August 24, 2022