Citation: 2013 TCC 248
Date: 20130802
Dockets: 2009-1597(IT)G
2009-1586(IT)G
2009-1911(IT)G
BETWEEN:
RIVER HILLS RANCH LTD.,
BAR M STOCK RANCH LTD.,
AVALON RANCH LTD.,
appellants,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
River Hills Ranch Ltd. (“River
Hills”), Avalon Ranch Ltd. (“Avalon”) and Bar M Stock Ranch Ltd. (“Bar M”)
(collectively referred to as the “appellants”) were in the business of
collecting pregnant mare urine (“PMU”) for Wyeth Organics (“Wyeth”), a
multinational pharmaceutical corporation formerly known as Ayerst Organics Ltd.
(“Ayerst”), a division of Wyeth Canada. The collection of the PMU was done
pursuant to PMU Collection Agreements (the “Collection Agreements”). Between
October and December 2003, Wyeth terminated its 2003-2004 Collection Agreements
with each of the appellants and executed releases (the “Releases”). Wyeth paid
the appellants amounts labelled as Feed and Herd Health Payments (the “FHH
Payments”) under the terms and conditions of the Releases. The Minister of
National Revenue (the “Minister”) treated those amounts as income. The
appellants say they are capital.
II. Factual Summary
A. Background Information
[2]
Wyeth used PMU, reduced
to conjugated estrogens, as the active ingredient in a drug used to treat
symptoms of menopause in women. It acquired its PMU from North American
producers, including the appellants, under the Collection Agreements. The
Collection Agreements, which were renewed annually, included the following
terms and conditions:
1. The appellants were
to supply a specific amount of conjugated estrogens from PMU.
2. The collection season
was to run from October through April and to commence and end on days
determined at the sole discretion of Wyeth.
3. The appellants were
to attend to the health and well-being and ensure the humane treatment of the
mares in providing the PMU, and to follow the “Recommended Code of Practice for
the Care and Handling of Horses in PMU Operations” (the “Code”); of note on
this point is that the clauses dealing with this became more stringent over the
years.
4. Under the 2003-2004
Collection Agreements, the appellants were to supply PMU solely and exclusively
to Wyeth.
[3]
The appellants made significant
capital investments in order to begin their PMU operations, including the
following:
1. the purchase of machinery
and equipment, such as harnesses and feeding, watering, and urine-collection
systems; and
2. the construction of
facilities, including independent barns for the sole purpose of PMU production that
were equipped with tank rooms, stalls, pens and corrals, which conformed to the
Code.
B. The Releases and
Schedule “A”
[4]
In or around 2000,
Wyeth began contracting with PMU producers for reduced quantities of PMU. At a
meeting held in October 2003, Wyeth finally advised PMU producers from across
Canada that an undisclosed number of PMU producers would be released from their
2003-2004 Collection Agreements.
[5]
The Collection
Agreements were cancelled for all three appellants between October and December
2003. Under the Releases, River Hills agreed to be bound by the Code in its PMU
operations until January 31, 2006, and Avalon and Bar M agreed to be so
bound until December 31, 2005.
[6]
Further, the appellants
agreed to release Wyeth with regard to any action whatsoever in exchange for the
payments set out in Schedule A to the Releases. In the case of River Hills,
Schedule A provides as follows:
I. Rancher Payment Program
Wyeth Organics will pay the Releasor(s) a single one‑time lump
sum payment equal to seventeen percent (17%) of the total Releasor’s(s’) 2003-2004
collection season payments. This amount will be paid in or about August 2004.
II.
Feed and Herd Health Payment Program
Wyeth
Organics will pay the Releasor(s) sixty-eight percent (68%) of the total of the
Releasor’s(s) [sic] 2003-2004 collection season payments for feed and
herd health expenses. This total payment amount will be paid in multiple installments
as follows:
a) fifteen percent (15%) of the total payment amount in or
about August 2004,
b) 2.7 percent of the total payment amount approximately
each month commencing in September 2004 and ending in December 2005, and
c) ten percent (10%) of the total payment amount in or about
January 2006.
In
order to receive payments pursuant to the Feed and Herd Health Payment Program,
the Releasor(s) must satisfy the following conditions:
1.
the Releasor(s) must maintain the Releasor’s(s’)
horses in accordance with the Code;
2.
an audited number of horses categorized by age
and function must be provided on February 1, 2004; October 1, 2004; February 1,
2005 and October 1, 2005. The number of horses will be counted by the
Releasor(s) and a Wyeth Organics Field Compliance Specialist;
3.
the Releasor(s) must provide written
confirmation to Wyeth Organics of the number of horses sold and the price
received for such horses as of the first day of each month commencing February
1, 2004;
4.
an audited number of other species of animals on
the Releasor’s(s’) farm must be provided as of the dates referred to in
subsection 2 above;
5.
the Releasor(s) must certify that the Releasor(s)
was the operator of the PMU farm on the dates referred to in subsection 2
above;
6.
the Field Compliance Specialists will continue
to conduct inspections of all PMU operations until January 2006. In this
regard, the Releasor(s) must grant access, at any reasonable time, to any land
on which the Releasor’s(s’) PMU operation is carried on, to any person
designated by Wyeth Organics or any veterinarian certified by the Code
(“Certified Veterinarian”) to verify that the horses are receiving appropriate
veterinary care and that such horses are being adequately fed;
7.
the Releasor(s) must certify to Wyeth Organics,
on a quarterly basis, on the form attached hereto, that the Releasor(s) has
provided appropriate veterinary care and feed to the Releasor(s) [sic] horses;
8.
the Releasor(s) must agree to cooperate in all
respects with, and must not verbally or physically abuse, any representative or
agent of Wyeth Organics; and
9.
the Releasor(s) shall have all of the
Releasor’s(s’) horses included in a herd health program pursuant to the Code
with a Certified Veterinarian with veterinary visits in January 2004, March
2004, November 2004, January 2005 and March 2005.
If,
in the sole judgment of Wyeth Organics, the Releasor(s) does not meet any one
or more of conditions 1 through 9 above the Releasor(s) will not receive any
further funds pursuant to the Feed and Herd Health Payment Program and may be
required to repay to Wyeth Organics all or a portion of funds previously
received.
[7]
In regard to Avalon and
Bar M, Schedule A of the Releases provides:
I. 2003-2004 Collection
Season Payments
Wyeth Organics, a Division of Wyeth Canada (hereinafter
called “Wyeth Organics”) will pay the Releasor(s) for the full quantity of
contracted grams of conjugated estrogens from PMU for the 2003-2004 collection
season, as set out in the Releasor(s) [sic] 2003-2004 P.M.U. Collection
Agreement. Payments will be made on an approximately weekly basis commencing
the week of October 20, 2003.
II. West Nile Virus Vaccination Reimbursement Program
Wyeth
Organics will reimburse the Releasor(s) at the rate of C$14.58 (US$10.08) per
dose for vaccinating the Releasor(s) [sic] herd against West Nile Virus
during the 2002-2003 collection season. This amount will be paid in or about
November 2003.
III.
Rancher Payment Program
Wyeth
Organics will pay the Releasor(s) a single one-time lump sum payment equal to
seventeen percent (17%) of the total of the Releasor’s(s’) 2003-2004 collection
season payments referred to in paragraph I above. This amount will be paid in
or about April 2004.
IV. Feed and Herd Health Payment Program
Wyeth
Organics will pay the Releasor(s) fifty percent (50%) of the amount of the
2003-2004 collection season payments, referred to in paragraph I above, for
feed and herd health expenses. This total payment amount will be paid in
multiple installments as follows:
a) 15 percent of the total payment amount in or about August
2004, and
b) 2.1875 percent of the total payment amount approximately
each month commencing in September 2004 and ending in December 2005.
In
order to receive payments pursuant to the Feed and Herd Health Payment Program
the Releasor(s) must satisfy the following conditions:
1. the Releasor(s) must maintain the Releasor’s(s’) horses
in accordance with the Code;
2. an audited number of horses categorized by age and
function must be provided on October 1, 2003; February 1, 2004; October 1, 2004
and February 1, 2005. The number of horses will be counted by the Releasor(s)
and a Wyeth Organics Field Compliance Specialist;
3. an audited number of other species of animals on the
Releasor’s(s’) farm must be provided as of the dates referred to in subsection
2 above;
4. the Releasor(s) must certify that the Releasor(s) was the
operator of the PMU farm on the dates referred to in subsection 2 above;
5. the Field Compliance Specialists will continue to conduct
inspections of all PMU operations until December 2005. In this regard, the
Releasor(s) must grant access, at any reasonable time, to any land on which the
Releasor’s(s’) PMU operation is carried on, to any person designated by Wyeth
Organics or any veterinarian certified by the Code (“Certified Veterinarian”)
to verify that the horses are receiving appropriate veterinary care and that
such horses are being adequately fed;
6. the Releasor(s) must certify to Wyeth Organics, on a
quarterly basis, on the form attached hereto, that the Releasor(s) has provided
appropriate veterinary care and feed to the Releasor(s) [sic] horses;
7. the Releasor(s) must agree to cooperate in all respects
with, and must not verbally or physically abuse, any representative or agent of
Wyeth Organics; and
8. the Releasor(s) shall have all of the Releasor’s(s’)
horses included in a herd health program pursuant to the Code with a Certified
Veterinarian with veterinary visits in November 2003, January 2004, March 2004,
November 2004, January 2005 and March 2005.
If,
in the sole judgment of Wyeth Organics, the Releasor(s) does not meet any one or
more of conditions 1 through 8 above the Releasor(s) will not receive any
further funds pursuant to the Feed and Herd Health Payment Program and may be
required to repay to Wyeth Organics all or a portion of funds previously
received.
[8]
The termination of the
2003-2004 Collection Agreement resulted in the complete cessation of the
appellants’ PMU businesses.
[9]
The Canada Revenue
Agency (“CRA”) treated all the collection season payments and the rancher payments
made under the Releases as being on account of capital. The FHH Payments were
characterized as income.
C. Facts Specific to
Each of the Appellants
a. River Hills
[10]
Mrs. and Mr. McIntyre testified
on behalf of River Hills, of which they are the shareholders.
[11]
After securing his
first PMU contract in 1992, Mr. McIntyre built a barn with 108 stalls and a
tank room. He also acquired approximately 200 heavy horses to form his PMU herd.
He installed automatic watering and oat-feeding systems, in conformity with
Wyeth’s specifications. Mr. McIntyre also acquired and fenced approximately 15
quarter sections of pastureland for use in his PMU operation.
[12]
The evidence shows that
River Hills carried on its PMU operation as a separate business.
[13]
On October 23, 2003,
River Hills’ 2003-2004 Collection Agreement was amended to lower its quota. On
or around December 18, 2003, Mr. McIntyre received a copy of the Release by
registered mail. He was given 28 days from receipt of the letter to review and
consider its terms and conditions. He signed it on January 5, 2004.
[14]
By the end of the
collection season (no later than April 2004) River Hills had sold all of its
PMU horses.
[15]
River Hills refitted
its PMU barn for use in a cow/calf operation and for storage. Mr. McIntyre also
sold the 15 quarter sections of land he had acquired for the PMU herd.
b. Avalon
[16]
Mr. Meggison, the sole
owner of Avalon, testified on Avalon’s behalf. Mr. Meggison commenced his
PMU operation in the spring of 1992. He later transferred the operation to
Avalon. Prior to carrying on the PMU business, Mr. Meggison had a cow/calf
operation.
[17]
The evidence shows that
Mr. Meggison built an outside corral system in steel and fenced off a
30-acre piece of pastureland to begin his PMU operation. He also sold his herd
of 60 cows and purchased 70 horses. His initial feeding and watering systems
were manual and were provided by Wyeth. With time, however, Wyeth required
producers to upgrade to automatic systems.
[18]
Mr. Meggison chose light
horses for his PMU operation because the offspring of the PMU mares could then be
sold at a higher price as riding horses rather than going to slaughterhouses.
[19]
In the spring of 2003, Avalon
purchased a thousand-gram quota from a PMU producer who was retiring. This
amount was added to Avalon’s quota under its 2003-2004 Collection Agreement.
With hindsight this turned out to be a bad business decision because Avalon’s
Collection Agreement was cancelled shortly thereafter.
[20]
Mr. Meggisson attended
the meeting held in October 2003. The next day, Wyeth informed him that his
2003-2004 Collection Agreement was cancelled. He received the Release shortly thereafter
and signed it on October 24, 2003.
[21]
The market price for
horses fell sharply following the termination of the Collection Agreements. Mr.
Meggison chose not to liquidate his PMU herd immediately. He believed he would
receive a higher price for his mares if he waited for the market to recover. Eventually
Avalon sold thirty-two horses in the 2004 taxation year and twenty-seven in the
2005 taxation year.
[22]
Following the
termination of the 2003-2004 Collection Agreement, Avalon chose to refocus its
business on the breeding and sale of appaloosa horses.
[23]
Mr. Meggison kept the
exterior of the PMU barn intact. However, he modified the interior by removing
some of the PMU box stalls and replacing them with box stalls for foaling. The
PMU equipment was abandoned because it had no salvage value.
c. Bar M
[24]
Mrs. Marsh, a shareholder
of the appellant Bar M, testified on Bar M’s behalf. Bar M commenced its
PMU operations in 1972. Bar M also carried on a cow/calf operation, which
continued until the 1990s.
[25]
Bar M began
producing PMU in a small 30-stall barn built for that purpose. It subsequently expanded
the size of its operation, first to 120 stalls and then to 165 stalls as demand
for PMU grew. Over time, it also adapted its collection equipment to meet Ayerst’s
requirements. It rented pastureland to feed its horses. Bar M also
purchased pastureland shortly before the termination of its Collection
Agreement. In the early years, Bar M rented PMU horses.
[26]
Mrs. Marsh and her
husband attended the meeting held in October 2003. The next day, Wyeth informed
them that their 2003-2004 Collection Agreement was cancelled. They received the
Release shortly thereafter and signed it on October 17, 2003.
[27]
Mrs. Marsh and her
husband were able to sell eighty-eight mares in 2004 and thirty-nine in 2005.
[28]
After the cancellation
of the 2003-2004 Collection Agreement, Bar M tried getting back into the
cattle business. This activity was abandoned after a short time because it was unprofitable.
Bar M now grows hay on its pastureland. The PMU barns are used exclusively
for storage and the PMU equipment was abandoned.
III. Positions of the Parties
A. Appellants’ Position: the FHH
Payments are Capital Receipts
[29]
The appellants rely on BP
Canada Energy Resources Company v. The Queen (“BP Canada”), Canadian
National Railway Company v. M.N.R. and Pe Ben Industries Company Limited v.
The Queen
in submitting that the PMU Collection Agreements were capital assets and the
FHH Payments were capital receipts. According to the appellants, the Collection
Agreements served as the foundation of their PMU businesses and Wyeth’s
unilateral termination of the Collection Agreements destroyed those businesses.
The payments made under the Releases were meant to compensate the appellants
for the loss of their businesses.
[30]
The appellants argue
that the FHH Payments were not for “feed” and “herd health” as their
designation seems to indicate. Rather, they were part of the appellants’
compensation for the termination of their PMU businesses. This conclusion is
supported by the fact that the appellants were not expressly required to keep
their PMU mares in order to receive the FHH Payments. These payments were not calculated
by reference to the appellants’ “feed” and “herd health” expenses and the appellants
were not required to use those payments to cover such expenses. The absence of any
conditions in that regard amounts to an ambiguity or internal inconsistency
which allows the introduction of extrinsic evidence. The extrinsic evidence, in
turn, shows that the FHH Payments were termination payments disguised as “feed”
and “herd health” payments and whose purpose was to protect Wyeth’s public
image and to compensate the appellants for the destruction of their businesses.
B. Respondent’s Position:
the FHH Payments are on Account of Income
[31]
The respondent, on the
other hand, contends that the FHH Payments were an allowance for anticipated
expenses that was received on income account and constituted income pursuant to
subsection 9(1) of the Canada Income Tax Act (“ITA”).
[32]
According to the
respondent, the absence of a condition requiring the appellants to keep their
PMU horses until the end of the period over which the payments were made does
not amount to an ambiguity. The language used in the Releases is unequivocally
to the effect that the FHH Payments were intended to compensate the appellants
for ongoing “feed” and “herd health” expenses related to their PMU herds.
[33]
The fact that the
appellants were able to dispose of their PMU mares at different points in time does
not, in the respondent’s view, affect the characterization of the FHH Payments.
IV. Issue
[34]
The issue before me is
whether the FHH Payments were received by the appellants on capital account or on
income account. The surrogatum principle must be applied to determine whether the
FHH Payments were intended to compensate the appellants for the destruction of
their businesses or to cover their ongoing operating expenses. In order to
answer this question, the Releases must be interpreted. In the context of these
appeals, are the circumstances surrounding the execution of the Releases
relevant in interpreting the meaning of the FHH Payment clauses? Is extrinsic
evidence admissible for the purpose of showing the factual matrix which led to
the execution of the Releases? Are the FHH Payment clauses ambiguous such that
extrinsic evidence may be considered for the purpose of determining the
intended purpose of the FHH Payments?
V. Analysis
A. Principles
Governing the Interpretation of the Releases
[35]
Blair J.A. of the
Ontario Court of Appeal succinctly outlined the general principles of
contractual interpretation in Ventas, Inc. v. Sunrise Senior Living
Real Estate Investment Trust. Quoting the application judge, Blair
J.A. noted:
. .
. Broadly stated . . . a commercial contract is to be interpreted,
(a) as a whole, in a manner that gives meaning to all of its terms
and avoids an interpretation that would render one or more of its terms
ineffective;
(b) by determining the intention of the parties in accordance with
the language they have used in the written document and based upon the
“cardinal presumption” that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix
underlying the negotiation of the contract, but without reference to the
subjective intention of the parties; and (to the extent there is any ambiguity
in the contract),
(d) in a fashion that accords with sound commercial principles and
good business sense, and that avoid a commercial absurdity.
[Emphasis added;
footnotes omitted.]
[36]
The parol evidence rule
prohibits the use of extrinsic evidence “to alter, vary, or interpret in any
way the words used in the writing”.
According to Sopinka J., this rule is rooted in the assumption “that when
parties reduce an agreement to writing they will have included all the
necessary terms and circumstances and that the intention of the parties is that
the written contract is to be the embodiment of all the terms”. The rule
aims at “prevent[ing] the use of fabricated or unreliable extrinsic
negotiations to attack formal written contracts”.
[37]
The parol evidence rule
is not an absolute rule; extrinsic evidence can be considered in order to
dispel ambiguities.
[38]
In Eli Lilly and Co.
v. Novopharm Ltd. (“Eli Lilly”), Iacobucci J., writing for a unanimous Supreme
Court of Canada, noted that extrinsic evidence is not admissible when an
agreement is “clear and unambiguous on its face” (at paragraphs 54-55):
. .
. [T]he contractual intent of the parties is to be determined by reference to
the words they used in drafting the document, possibly read in light of the
surrounding circumstances which were prevalent at the time. Evidence of one
party's subjective intention has no independent place in this determination.
Indeed,
it is unnecessary to consider any extrinsic evidence at all when the document
is clear and unambiguous on its face. In the words of Lord Atkinson in Lampson
v. City of Quebec (1920), 54 D.L.R. 344 (P.C.), at p. 350:
. .
. the intention by which the deed is to be construed is that of the parties as
revealed by the language they have chosen to use in the deed itself. . . . [I]f
the meaning of the deed, reading its words in their ordinary sense, be plain
and unambiguous it is not permissible for the parties to it, while it stands
unreformed, to come into a Court of justice and say: “Our intention was wholly
different from that which the language of our deed expresses. . . .”
[39]
While Iacobucci J. notes
that “surrounding circumstances” may be relevant, he offers no guidance as to the
context in which these circumstances may be referred to.
[40]
The principles enunciated
in Eli Lily were relied on by Nadon J.A. of the Federal Court of Appeal
in The Queen v. General Motors (“GM”). Writing on behalf of a unanimous Court,
Nadon J.A. noted:
. .
. First, failing a finding of ambiguity in the document under consideration, it
is not open to the Court to consider extrinsic evidence. Second, where
extrinsic evidence may be considered, that evidence must pertain to the “surrounding
circumstances which were prevalent at the time”. Third, even where there is
ambiguity, evidence only of a party’s subjective intention is not admissible.
[41]
Nadon J.A. concluded
that the Tax Court judge had erred in basing a finding of ambiguity on
extrinsic evidence presented by the parties rather than on an analysis of the
agreement at issue as a whole. His position was subsequently adopted by
Campbell J. of this Court in On-Line Finance & Leasing Corp. v.
The Queen.
[42]
More recent court
decisions have clarified the relevancy of “surrounding circumstances” and
suggested an approach different than that outlined in GM. For instance,
in Dumbrell v. Regional Group of Companies Inc. (“Dumbrell”), Doherty
J.A. of the Ontario Court of Appeal, having referred to Lord Hoffmann’s opinion
in Investors Compensation Scheme Ltd v. West Bromwich Building
Society,
noted that the “meaning of [a] written agreement must be distinguished from the
dictionary and syntactical meaning of the words used in the agreement”.
According to Doherty J.A., while the plain meaning of the words “will be
important and often decisive in determining the meaning of the document”, a “consideration
of the [“objective contextual scene”]
in which the written agreement was made is an integral part of the interpretative
process and is not something that is resorted to only where the words viewed in
isolation suggest some ambiguity.
[43]
Prior to Dumbrell,
Goudge J.A. of the Ontario Court of Appeal had also noted that courts can use
extrinsic evidence in taking into account the “factual matrix” of an agreement
in cases where there is no ambiguity.
He indicated that the factual matrix of an agreement includes to the genesis of
the agreement, its purpose, and the commercial context in which it was made. In
so doing, he relied on the following observations by Lord Wilberforce of the
House of Lords in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen:
No
contracts are made in a vacuum: there is always a setting in which they have to
be placed. The nature of what is legitimate to have regard to is usually
described as “the surrounding circumstances” but this phrase is imprecise: it
can be illustrated but hardly defined. In a commercial contract it is certainly
right that the court should know the commercial purpose of the contract and
this in turn presupposes knowledge of the genesis of the transaction, the
background, the context, the market in which the parties are operating.
[44]
These two decisions (Dumbrell
and KFC) suggest that a distinction must be made between the case where
extrinsic evidence is admissible for the purpose of resolving an ambiguity - a
notable exception to the parol evidence rule - and the case in which such
evidence is considered for the purpose of giving meaning to the terms and conditions
of an agreement in light of the “surrounding circumstances” or the factual
matrix of the agreement. In the latter case, no ambiguity need exist. The
respondent, in her written submissions, cites Gilchrist v. Western Star
Trucks, a case in which this distinction is recognized in the following
terms:
The
goal in interpreting an agreement is to discover, objectively, the parties’
intention at the time the contract was made. The most significant tool is the
language of the agreement itself. This language must be read in the context of the
surrounding circumstances prevalent at the time of contracting. Only when the words,
viewed objectively, bear two or more reasonable interpretations, may the court
consider other matters such as the post-contracting conduct of the
parties . . . .
[45]
I agree with the
appellants’ observations that there are inconsistencies in the FHH Payment
clauses, which, when considered together, cause the reader to question the intended
purpose of the FHH Payments.
[46]
The FHH Payments were
not calculated by reference to the appellants’ herd size or the actual “feed”
and “herd health” expenses incurred. The payments were based on a percentage of
the appellants’ 2003-2004 collection season payments. There were no
requirements in the Releases for the appellants to account for or otherwise
document the use of the FHH Payments.
[47]
While the appellants
were bound by a series of conditions – nine in the case of River Hills and
eight in the case of Avalon and Bar M – there were no conditions requiring the
appellants to actually use the FHH Payments solely to cover “feed” and “herd health”
expenses. This indicates that Wyeth was willing to make the FHH Payments
regardless of whether the appellants incurred “feed” and “herd health” expenses
or not.
[48]
Wyeth did not require
the appellants to keep their PMU herd in order to receive the FHH Payments. They
were only required to provide Wyeth with an audited number of horses at
specific dates until October 1, 2005 in the case of River Hills and February 1,
2005 in the case of Avalon and Bar M. Also, in the case of River Hills, paragraph
3 of the FHH Payments clause expressly contemplates the sale of River Hills’
horses without any effect on the FHH Payments, provided that Wyeth received
written notice of any sales made. Without horses, there could be no “feed” and
“herd health” expenses. The FHH Payment clauses provided no adjustment
mechanism that would have reduced the amounts payable for feed and herd health
expenses in the event that the appellants sold their herds following the
signature of the Releases.
[49]
Finally, the 2003-2004
Collection Season Payments clause of Avalon’s and Bar M’s Releases provided for
payment for the full quantity of conjugated estrogens for the collection season.
In the normal course of the appellants’ businesses, that amount would have covered
their operating expenses, including the “feed” and “herd health” expenses for
their herds. These inconsistencies suggest that the FHH Payments were not
intended to compensate the appellants for their “feed” and “herd health”
expenses.
B. Analysis of the Extrinsic Evidence
[50]
The appellants argue
that the following evidence confirms that the FHH Payments were contract
termination payments intended to protect Wyeth’s image and to discharge it with
respect to any future claims.
1. Wyeth eliminated
numerous PMU producer contracts.
2. It was the parties’
understanding that the FHH Payments were payments for the termination of the
Collection Agreements.
3. The appellants received
the FHH Payments regardless of the fact that they had no horses or that they
had materially fewer horses than the number used in their PMU businesses at the
time the contract was cancelled.
4. The appellants
understood that Wyeth was making the payments in response to concerns aired in
the media with respect to sales of horses to slaughterhouses.
5. Wyeth was informing
the farms of the activities of People for the Ethical Treatment of Animals (PETA),
whether or not those activities took place.
6. There were confrontations
between the pharmaceutical industry and various animal rights groups – a fact
which is a matter of common knowledge.
[51]
It is clear from the earlier
cited jurisprudence that evidence of the subjective intention of the parties
has “no independent place” in the interpretative process. Therefore, evidence
pertaining to the parties’ understanding as to the intended use of the FHH
Payments is inadmissible.
[52]
With regard to the third
point, I disagree with the respondent’s assertion that events following the
signature of the Releases are beyond the scope of this analysis and should not
be admitted for the purpose of interpreting the Releases. Nadon J.A.’s
comments in GM indicate that subsequent conduct can be a useful guide to
the interpretation of a written agreement “in some cases”. Indeed,
in The Law of Contract in Canada, Fridman notes that “[i]n Canada it
seems clear that the subsequent actions of the parties may be admissible to
explain the true meaning and intent of their agreement. Indeed,
“there is no better way of determining what the parties intended than to look to
what they did under it”.
[53]
The respondent raised
objections on the basis of hearsay to the evidence concerning the first, third,
fourth and fifth points. I took that evidence under advisement.
[54]
Mrs. McIntyre, Mrs.
Marsh and Mr. Meggison noted that the circumstances that gave rise to the inclusion
of paragraph IV 6. in the 2003-2004 Collection Agreements are described in that
provision, which reads as follows:
Animal
Welfare
6.
THE SUPPLIER must promptly notify THE COMPANY of any investigation or other
action taken by any Humane Society or any other investigative agencies
regarding alleged mistreatment of any animals.
[55]
Both Mrs. and Mr.
McIntyre testified that Wyeth had expressed verbal concerns regarding the
activities of animal rights groups and had advised PMU producers that if PETA
or any humane society approached them, they were to notify Wyeth so that they
could send a spokesperson. Mr. Meggison stated that the “investigative agencies”
to which Paragraph IV 6. of the 2003-2004 Collection Agreements refers might
have included PETA, because it was common knowledge among PMU producers that
PETA did not like the PMU business.
[56]
In my opinion, it is
well known that animal rights groups have challenged the pharmaceutical
industry’s use of animals for testing and for drug production purposes. Clause
IV of the Collection Agreement shows that Wyeth was concerned with the actions
of such groups.
[57]
The respondent argues
that the appellants were “not without opportunity to negotiate more favourable
terms”. They had time to review the terms and conditions of the Releases before
assenting thereto. I disagree with that contention. I prefer the appellants’
evidence that the Releases were presented on a take-it-or-leave-it basis. I
infer that Wyeth’s decision to cancel the Collection Agreements placed the
appellants in a precarious financial situation. I also note that Wyeth is a
sophisticated organization with deep pockets while the appellants were farmers
facing significant financial hardship as a result of the destruction of their
PMU businesses. The covering letter attached to River Hills’ and Avalon’s
Releases suggest that Wyeth’s settlement offer was not open to negotiation. The
letter states:
In
accordance with our recent telephone conversation [“discussion” in Avalon case]
concerning your PMU Operation we are enclosing a Release and Agreement for
your review and signature.
. . .
In
order to participate in the programs outlined in
the Release and Agreement you must return a signed copy to Wyeth Organics
within [twenty-eight (28) days [“fourteen (14) days” in Avalon’s case] from the
date you receive this letter.
. . .
In
order to indicate your agreement with the foregoing, please date, sign and
return the enclosed duplicate copy of this letter.
[Emphasis added.]
[58]
Though there were
certain differences between the appellants’ Releases as to the amounts paid
and, in the case of River Hills, as to the types of payments received, the
Releases were basically standard form contracts drafted by Wyeth. The above-quoted
letter and the appellants’ testimony indicate that the appellants were
presented with a take-it-or-leave-it offer.
[59]
In my opinion, the
evidence led by the appellants and discussed above is admissible because it
pertains to the factual matrix or circumstances surrounding the Releases and/or
because the FHH Payment clauses are ambiguous in light of the inconsistencies
noted earlier. This evidence supports the appellants’ theory that the FHH
Payments were dressed up as compensation for “feed” and “herd health” expenses but
in reality were intended to compensate the appellants for the destruction of
their established PMU businesses and to secure a Release for Wyeth with respect
to potential lawsuits.
VI. Conclusion
[60]
In the instant case,
the parties agreed that the surrogatum principle must be applied in order to
characterize the FHH Payments. In general terms, this means that these payments
will have the same character as whatever they represent compensation for.
[61]
In light of the
evidence, I find that Wyeth presented the Releases to the appellants in order
to secure protection from potential lawsuits and to counter a potential
negative public backlash as a result of the destruction of the PMU herds in
Western Canada.
[62]
It is also clear that
the appellants’ PMU businesses were destroyed by Wyeth’s actions. The
Collection Agreements were the source of all or substantially all of the
appellants’ revenue. Without that source of revenue, the PMU herds and the
equipment used in the PMU operations became worthless as capital assets.
[63]
Wyeth was not required under
the Collection Agreements to pay the appellants’ “feed” and “herd health”
expenses. That obligation fell exclusively to the appellants. Wyeth’s
obligation was to pay the agreed - upon rate for delivered PMU. Applying Associate
Chief Judge Bowman’s reasoning in BP Canada, I conclude that the
cancellation of the Collection Agreements led to the “sterilization of a
capital asset”. The appellants were forced out of business.
[64]
While Wyeth might have
hoped that the appellants would use the FHH Payments to cover “feed” and “herd health”
expenses, the evidence shows that they were under no obligation to do so. The
evidence also shows that the appellants were free to liquidate their PMU herds
and that they did so over varying lengths of time. Describing the FHH Payments
as “feed” and “herd health” expense does not change the fact that the payments
were made to compensate the appellants for the loss of their PMU businesses occasioned
by Wyeth’s cancellation of the Collection Agreements. Therefore, I conclude
that the FHH Payments were capital receipts, no different than the collection season
payments and rancher payments that were treated as capital receipts by the
Minister. The FHH Payments therefore gave rise to a capital gain.
[65]
For all of these
reasons, the appeals are allowed and the matters are referred back to the
Minister for reconsideration and reassessment in accordance with these reasons
for judgment.
Signed at Magog, Québec, this 2nd day of August 2013.
“Robert J. Hogan”
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