Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 SCR 580

Supreme Court of Canada

Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 S.C.R. 580

Date: 1975-04-22

Atlantic Paper Stock Limited

and

Elliot Krever & Associates (Maritimes) Ltd. Appellants;

and

St. Anne-Nackawic Pulp and Paper Company Limited Respondent.

1975: Feb. 5; 1975: April 22.

Present: Martland, Judson, Ritchie, Spence and Dickson JJ.

ON APPEAL FROM THE SUPREME COURT OF NEW BRUNSWICK, APPEAL DIVISION

Contracts—Breach of contract—Force majeure clause—Interpretation—Ejusdem generis rule—‘Non availability of markets’—Discharging condition.

St. Anne as owner and operator of a pulp and paper mill contracted to purchase exclusively from the appellants all its requirements of waste paper for secondary fibre. The contract provided for a minimum purchase of 10,000 tons of waste paper per year for ten years subject only to “an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the non‑availability of markets for pulp or corrugating medium.” After fourteen months St. Anne advised appellants that it would not accept any more secondary fibre and the latter sued for damages. In defence St. Anne pleaded non-availability of markets for pulp or corrugating medium. The trial judge allowed the action and awarded damages for breach of contract but this judgment was set aside on appeal. Quantum of damages aside, the sole question was whether non-availability of markets for pulp or corrugating medium had discharged St. Anne from its obligations under the contract.

Held: The appeal should be allowed.

An act of God clause or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. “Non-availability of markets” as a discharging condition is limited to an event over which the respondent

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exercises no control. The difference between the conclusion of the trial judge and that of the Appeal Division turned essentially on whether the word “non-availability of markets” meant non-availability of economic markets for St. Anne. The effect of the Appeal Division opinion would have been to relieve St. Anne of contractual obligation if St. Anne could not operate at a profit. St. Anne could not however rely on a condition which it brought upon itself. On the evidence the findings of the trial judge that the conditions existing in the market had not changed substantially and that there was a market for corrugating medium were justified and, despite the facts that the market was a declining one and not an economic one for St. Anne, determinative of the appeal. Lack of an effective marketing plan and inordinate operating costs resulted in a failure for which St. Anne, not changes in the market, was responsible.

APPEAL from a judgment of the Supreme Court of New Brunswick, Appeal Division, allowing an appeal from a judgment of Barry J. at trial awarding damages for breach of contract. Appeal allowed.

Donald M. Gillis, Q.C., and Thomas L. McGloan, Q.C., for the appellants.

John G. Bryden, for the respondent.

The judgment of the Court was delivered by

DICKSON J.—This litigation arises out of a contract for the sale by Atlantic Paper Stock Limited and Elliot Krever & Associates (Maritimes) Ltd. to St. Anne-Nackawic Pulp and Paper Company, Ltd. of ten thousand tons of waste paper a year for ten years, to be used as secondary fibre in the manufacture of corrugating medium at St. Anne’s mill. After fourteen months, St. Anne advised Atlantic and Elliot Krever it would not accept any more secondary fibre and the latter sued for damages. In defence, St. Anne pleaded non-availability of markets for pulp or corrugating medium within the meaning of the concluding words of cl. 2(a) of the contract, reading:

St. Anne warrants and represents that its requirements under this contract shall be approximately 15,000 tons a year, and further warrants that in any one year its

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requirements for Secondary Fibre shall not be less than 10,000 tons, unless as a result of an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the nonavailability of markets for pulp or corrugating medium.

The trial judge, Mr. Justice Barry, allowed recovery and assessed the damages of Atlantic at $49,145 and the damages of Elliot Krever at $59,145. The Appeal Division of the Supreme Court of New Brunswick set aside the judgment in the Queen’s Bench Division and ordered that Elliot Krever have judgment for $1,638. In the present appeal Atlantic and Elliot Krever desire an order reversing the decision of the Appeal Division and affirming the finding of the trial judge; they also ask that the amount of damages awarded by the trial judge be increased to the amount set out in the statement of claim, namely, Atlantic $97,433.40 and Elliot Krever $208,089.34. Quantum of damages aside, the sole question is whether non-availability of markets for pulp or corrugated medium discharged St. Anne from its obligations under the contract.

St. Anne owns and operates a mill at Nackawic, New Brunswick which was designed to manufacture pulp and paper. St. Anne is a wholly owned subsidiary of Parsons & Whittemore, an American company with world-wide interests in the pulp and paper industry. Construction of the mill was started in 1968 and completed in 1970, at a cost of $72,000,000, of which $18,000,000 was invested in the section designed for the manufacture of paper. The mill began to manufacture paper in April of 1970 and bleached hardwood Kraft pulp in June of 1970. The paper manufactured was a semi-chemical medium commonly referred to as corrugating medium, which is used in the packaging and box industry. Corrugating medium is placed between two sheets of what is known as linerboard, a product not produced by St. Anne, to form the stuff of which cardboard cartons are made. The raw materials required to produce the type of corrugating medium manufactured by St. Anne included fifteen per cent so-called secondary fibre,

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which is waste paper salvaged from used corrugated cartons and shipping cases.

The contract in issue in these proceedings is dated April 10, 1970, and obligates St. Anne to purchase, on stated terms, exclusively from or through Atlantic and Elliot Krever, all its requirements, maximal 18,000 tons and minimal 10,000 tons, of secondary fibre for its mill. Following upon the execution of this contract, Atlantic and Elliot Krever entered into agreements with the City of St. John and with two New Brunswick breweries for the provision of the secondary fibre needed under the contract with St. Anne. Atlantic and Elliot Krever furnished St. Anne with secondary fibre in accordance with the terms of the contract until they received, without warning, advice by telegram on June 9, 1971, that St. Anne would not accept any more fibre. The paper machine closed down on June 16, 1971, and has since stood idle.

An act of God clause or force majeure clause, and it is within such a clause that the words “non-availability of markets” are found, generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. If markets were unavailable to St. Anne, did they become so because of something unexpected happening after April 10, 1970? Was the change so radical as to strike at the root of the contract? Could the company, through the exercise of reasonable skill, have found markets in which to trade? Clause 2(a) contemplates the following frustrating events: an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities. Reading the clause ejusdem generis, it seems to me that “nonavailability of markets” as a discharging condition must be limited to an event over which the respondent exercises no control.

The primary cause of the failure of St. Anne’s corrugating medium facility was lack of an effec-

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tive marketing plan for corrugating medium. Marketing forecasts made in 1967 looked to the United States as an important outlet. It was hoped and believed that corrugating medium would enter United States at the rate of duty applied since the 1920’s to the entry of strawboard. This hope was not realized. That fact, together with a more realistic appreciation of prevailing freight rates, forced abandonment at the end of 1969 or early 1970 of plans to sell in the United States. This decision antedated the contract which St. Anne entered into with Atlantic and Elliot Krever. With the frustration of its plans to market in the United States, St. Anne turned its attention to the Canadian market to which little attention had been given in earlier planning. Later events proved that in the feasibility study the ability of St. Anne to break into the Canadian market had been greatly overestimated, through, it would appear, lack of appreciation of the extent to which the Canadian market was integrated, with parent companies manufacturing corrugating medium and selling to subsidiary companies manufacturing cardboard cartons. The machines of Consolidated Bathurst Pulp & Paper Ltd., for example, have been running at full capacity for many years and that Company has always been able to market its production of corrugating medium, in Canada and offshore, but its “captive outlets” accounted for 40,000 of the 60,000 tons of the Company’s Canadian sales. The degree of integration of the paper and container industries in Canada and the difficulties this would present to a competitor should have been well known in 1970 and before. The European market was also studied and tested by St. Anne, particularly the United Kingdom and West Germany. The packaging industry in Europe developed very rapidly in the late 1960’s but peaked in 1969 and thereafter reflected a decreasing import volume of semichemical corrugating medium, due in part to the development of a process, and establishment of manufacturing plants, which began producing corrugating medium, called “‘bogus’ medium”, using only secondary fibre and no primary pulp. There was also increasing receptivity in the European market to the Scandinavian corrugating medium and its use of high quality primary fibre from birch trees. These competitive and technological factors, however, did not emerge full blown in the period April

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1970 to June 1971 nor were they massive in effect. The effect on the West German market was to cause a decline of eight to ten per cent a year in import volume. The evidence supports the trial judge in this statement:

Feasibility studies had been done for the defendant, prior to construction and the reports were optimistic. Needless to say, the predictions on all points have been incorrect so far. The situation at the time of cancellation of the contract herein was substantially the same as at the time of the studies.

The difference between the conclusion of the trial judge and that of the Appeal Division turned essentially on whether the words “non-availability of markets” meant non-availability of economic markets for St. Anne. Mr. Justice Barry applied what might be called an objective test, the Appeal Division a subjective test. The Appeal Division was of opinion that the words “available market” necessarily connoted a market advantageous or profitable to St. Anne. Mr. Justice Barry found no such connotation in the language of the clause. The effect of the Appeal Division opinion would be to relieve St. Anne of contractual obligation if St. Anne could not operate at a profit. I doubt that reasonable men would have made such a bargain. It would in my opinion be doing violence to the plain words “non-availability of markets for pulp or corrugating medium” in the context of the entire clause within which the words are found, to permit St. Anne to rely upon its soaring production costs to absolve it of contractual liability. The following table was compiled by me from the evidence:

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Sales volume and selling price per ton increased during the period. Production costs per ton amounted to $150.29 in June 1970 and $186.94 in June 1971. The mill cost of Consolidated Bathurst per ton in 1971 amounted to $80 to $95 per ton. It would appear, therefore, that on an average selling price per ton of $120 St. Anne would lose $30.29 per ton in June 1970 and $66.94 per ton in June 1971. In the first year of operation St. Anne’s mill operated at a loss of $9,000,000 as against a projected loss of $782,000. As Mr. Justice Barry said, “the defendant simply priced itself out of any available market existing”.

The trial judge made important findings which, with great respect, I fear the Appeal Division tended to overlook, but which in my opinion should be accepted as they are fully supported in the evidence and, I think, correct. They are also determinative of this appeal. The critical one is this:

…the conditions existing in the market on April 10, 1970, when the parties executed P-1 were and are substantially the same as at the time of cancellation in June 1971 and at present.

Exhibit P-1 is the contract to which I have referred. He also held:

I find that there is a market for corrugated medium, albeit a declining one, and very competitive market, and certainly, not an economic market at the defendant’s cost per ton…

Mr. Wiltshire, senior Vice-President of St. Anne, was asked by counsel to state the factors on which the decision to stop production were based. He prefaced his answer by the words: “It was an accumulation of circumstances”, and then referred to a change of agents in Germany, failure to get repeat business, competition from bogus medium, unsold inventory of more than half of production, re-evaluation of the Canadian dollar. The factors confirm beyond doubt the presence of many serious marketing difficulties, but, in my opinion, they do not establish, in the face of evidence of a strong demand for corrugated medium throughout the world and of competitors of St. Anne selling to the

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limit of their respective productive capacities, that markets for corrugating medium were not available to St. Anne.

I do not think St. Anne can rely on a condition which it brought upon itself. A fair reading of the evidence leads one to conclude that the whole St. Anne project for the manufacture of corrugating medium was misconceived. The problems which plagued it proceeded, however, not from non-availability of markets for corrugating medium but from (i) lack of an effective marketing plan, as I have stated; St. Anne spent $16,000,000 to produce a product without any notion of where the product would be sold and (ii) inordinate operating costs, aggravated by two subsidiary factors (a) lack of captive outlets and (b) failure to produce linerboard; customers needed both corrugating medium and linerboard, and preferred manufacturers who could offer both. The project, conceived in ephemeral hopes and not the harsh realities of the market place, resulted in a failure for which St. Anne and not changes in the market for corrugating medium during the period April 10, 1970 to June 9, 1971 must be held accountable.

For the foregoing reasons I find myself in agreement with the trial judge as to the liability of St. Anne and I would not alter his assessment of damages. I would allow the appeal, set aside the decision of the Appeal Division and affirm the findings of the trial judge, with costs in this Court and in the courts below.

Appeal allowed with costs.

Solicitors for the appellants: Gilbert, McGloan, Gillis & Jones, Saint John.

Solicitors for the respondent: Bryden & Arsenault, Fredericton.