Appeal court overturns ruling against canola ‘streaming’ contracts

A southeastern Saskatchewan farmer and canola company Input Capital are going back to court now that a ruling last year, which ripped the company’s “streaming” contracts with the farmer as “unconscionable,” has been overturned on appeal.

The Saskatchewan Court of Appeal, in a ruling issued Friday, set aside a 2018 Court of Queen’s Bench “finding of unconscionability” and sent the matter back to the lower court to determine damages and enforcement of security owing to Input.

The court on Friday also awarded Input Capital costs for the appeal. No date has yet been set for the case to return to Queen’s Bench, Input chief financial officer Brad Farquhar said via email Monday.

Input CEO Doug Emsley said Monday the company “always knew our streaming contracts and dealings were fair, balanced and reasonable, and this decision confirms that. We look forward to continuing to serve our farm clients with this cloud of uncertainty removed.”

Queen’s Bench Justice Jeffery Kalmakoff, in May last year, had ruled largely in Input’s favour in a pair of actions the company filed against Terry Gustafson, a farmer at Macoun, Sask., about 30 km northwest of Estevan.

The Regina company had filed against Gustafson in 2015 claiming breach of contract, and again separately claiming same in 2017.

Kalmakoff in May 2018 found he was “unable to conclude” that the contracts Gustafson signed with Input should be rescinded, and ordered the farmer to pay the company $4.4 million, plus interest and “taxable costs.”

But in this specific case’s circumstances, Kalmakoff also ruled the various agreements between Input and Gustafson were “unconscionable” and “must be set aside.” Input filed an appeal later that month over Kalmakoff’s interpretation of its contracts.

Writing Friday for the appeals court, Justice Neal Caldwell found Kalmakoff “erred in his interpretation of the agreements and misapprehended the contractual relationship between the parties.”

(Kalmakoff was appointed to the Court of Appeal in May this year but was not on the three-member panel of judges hearing the appeal of his Queen’s Bench ruling.)

‘Commercially reasonable’

Publicly-traded Input deals in canola obtained from Prairie farmers by way of “multi-year streaming contracts,” including capital streams, marketing streams and, more recently, “mortgage streams.” (In May this year it halted its plans to further expand the mortgage streaming business, for lack of “options for cost-effective scalable funding.”)

The company’s canola purchases generally involve up-front payments in return for agreed-upon tonnage over a specified number of years. At the end of June, it reported a total of 406 active streaming contracts in the West, including 290 in Saskatchewan alone.

The court heard Gustafson — who at the time farmed 15 owned and 85 rented quarter sections — had agreements with Input including a purchase agreement for canola in April 2014; a streaming canola purchase contract later that month with a collateral mortgage and collateral security agreement; a streaming contract in late December that year, with a collateral security agreement and mortgage amending agreement; and an “amending agreement” in late March 2015.

Kalmakoff had found that when Gustafson didn’t deliver as required in 2014, Input instead advanced the farmer more money and negotiated a second contract making his delivery obligations “much more onerous.”

Input, Kalmakoff found, wound up in a position of “increasing strength while driving Mr. Gustafson into a position of increasing weakness in their contractual relationship.”

But the appeals court on Friday said Kalmakoff’s ruling found Gustafson Farms had “failed or declined to deliver any canola to [Input] in 2014 and 2015” while selling over 2,750 tonnes of canola in 2015 to other buyers, “plainly selling again the canola it had already sold to [Input].”

Caldwell on Friday found “it was an error for the trial judge to interpret the agreements as containing no risk to [Input]… Indeed, the two actions before the trial judge arose because the considerable risk [Input] bore under the agreements had materialized.”

Caldwell found Kalmakoff “overlooked the legal requirement that a creditor must always exercise its security in a commercially reasonable manner and, generally, under the supervision of the courts.”

The appeals court found “the escalation of Gustafson Farms’ contractual obligations does not indicate [Input] was taking increasing advantage of Gustafson Farms; rather, it indicates [Input] was properly exercising its rights under the earlier agreements in a commercially reasonable manner.”

Caldwell also found the terms of the security interests Gustafson granted to Input “are not divergent from community standards of commercial morality.”

Rather, he wrote, “there is simply no other way [Input] could have legally secured its advances or ensured the delivery of canola under the streaming contracts, particularly when Gustafson Farms has all the benefits and protections made available to farmers under debtor-protection legislation.”

If, he wrote, the arrangements between Input and Gustafson were “unconscionable by reason of the nature of the security interests… then all other secured agricultural lending arrangements are too.”

It’s not yet known how Friday’s ruling will affect other cases involving Input, among them a proposed class action filed on behalf of affected farmers by Regina lawyer Tony Merchant, alleging “predatory lending practices” by the company.

Merchant filed in May last year in Regina for representative plaintiff Morris Feduk of Melville, Sask., proposing a “class” of everyone who has had a contract with Input since October 2009 or has been “damaged by seizure” of assets by Input.

Merchant was quoted by CBC Monday as saying that while the appeals court found Input’s dealings in this case weren’t unconscionable, the ruling is “not a vindication” of the company’s methods and he feels a class action can still be argued in court. — Glacier FarmMedia Network

About the author

Editor, Daily News

Dave Bedard

Editor, Daily News, Glacier FarmMedia Network. A Saskatchewan transplant in Winnipeg.



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