CANADA: an interesting case law on distributorship contacts.

André BÉGIN | CANADA | 2014-01-16


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The plaintiff, in its action, claimed an amount for unpaid merchandise from the defendant who, while not disputing the amount claimed by the plaintiff, filed a counter law-suit for damages on grounds of termination of their business relationship without notice. In the countersuit, the Court of Quebec awarded the defendant/cross-plaintiff damages representing six months of lost profits due to the unilateral termination without notice by the plaintiff/cross-defendant. The court however declined to apply compensation between the amounts awarded to each party, as this would have had unfair consequences for one party.

The relationship between the parties had lasted 16 years, without a formal contract having been signed. One of the main questions at issue was the determination of whether the parties’ relationship constituted a contract of services or an innominate contract.


Legal Provisions

The Civil Code of Quebec (‘CCQ’) sets out requirements for certain types of contracts, such as sale, lease, and contracts for enterprise or services. Contracts which are not governed by any special provisions in the CCQ are known as innominate contracts and are governed by the CCQ’s general provisions with respect to contracts and obligations.  Verbal contracts, if proven, are binding in the province of Quebec, unless a provision under the law specifically requires a contract to be in writing.

In a contact for enterprise or services, the contractor or provider of services undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay. Where the work or service is merely accessory to the value of the property supplied, the contract constitutes a contract of sale, and not a contract of enterprise or for services.

Unless otherwise stipulated in the contact, the client may unilaterally terminate the contract even though the work or provision of service is already in progress. Upon termination of the contract, the client is bound to pay to the provider of services, in proportion to the agreed price, the actual costs and expenses, the value of the work performed before the end of the contract or before the notice of termination and, as the case may be, the value of the property furnished, where it can be returned to and used by the provider of services. The latter is bound to repay any advances he has received in excess of what he has earned.

In either case, each party is liable for any other injury that the other party may have suffered.  More specifically to unjustified termination, if the provider of services terminates the contract unilaterally and without serious reason, or at an inopportune moment, he is liable for any injury caused to the client as a result of the termination. With respect to the client, caselaw has established that the obligation to pay damages depends on the circumstances of each case and that the provisions of the CCQ are sufficiently wide to include compensation calculated on the basis of the reasonable time it would take a provider of services time to find a new client.

With respect to calculation of the amount of damages, the CCQ stipulates:

The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived.

Future injury which is certain and able to be assessed is taken into account in awarding damages.


Aliments Trigone Inc. (‘Trigone’) a manufacturer of natural food products, commenced supplying products to Aux Mille et Une Saisons Inc. (‘Saisons’) in 1987. Each month, Saisons would send a purchase order to Trigone and pay every month with each new order. Due to increasing competition, Trigone decided to commence distributing its own products in certain regions of Quebec. On December 22, 2003, five days after having placed its monthly order as usual, Saisons informed Trigone by fax that it could not take delivery of the order until early January. On January 4, 2004, Trigone replied by return fax that henceforth it would assume its own distribution and requested Saisons to cancel its order.

When Trigone sued Saisons for unpaid sold products in the amount of $4,932.50, Saisons filed a counter-suit in the amount of $28,088.14 representing lost profits over a period of six months. Saisons did not contest the amount of Trigone’s claim and asked the rules of compensation to be applied.

Trigone argued that the relationship between the parties was one of a contract for services which could be terminated without notice. Saisons argued that the relationship constituted an innominate contract under which Trigone was to supply products at wholesale price which Saisons would re-sell to retail merchants. In addition, Saisons pleaded that Trigone had acted in bad faith in terminating the contract without notice.


With respect to the nature of the contract, the judge, Patrick Théroux, J.C.Q. was of the view that it was not a contract of services. Such contract would require the payment of a consideration; no consideration had been paid by Trigone to Saisons for distributing Trigone’s products. Saisons, who determined the nature and quantity of the products that were ordered and resold, was an intermediary between Trigone and the retailers, and Trigone had never retained the services of Saisons to ensure the distribution of Trigone’s products against payment.  The judge therefore concluded that the contract was an innominate contract.

With respect to the unilateral termination, the judge recalled the general principal in the CCQ that:

The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.

The judge concluded that the delay of six months claimed by Saisons was reasonable in the circumstances, which delay would enable informing the clientele, organising the transition to other brands of products of the same nature and, above all, to find a replacement supply which could have been put into place gradually to avoid the rupture of stock and the loss of profits that occurred.

The amount of damages was assessed at $20,515.75 by the court. The court found that the calculation of amount of $28,088.14 claimed by Saisons did not meet the criteria under the CCQ. For one, in Saison’s figures, the variation in the percentages representing increases of monthly profit was substantial (for example such increase went from 0.25% for November to 117% for February, and 4.77% for December to 69.11% for June) without justification for the differences.  Secondly, the claimed loss of profit was based only on the first six months of sales for 2002 and 2003, with an annual increase of 33.15% and 51.01% for the first six months. In the judge’s view, it would be unfair that Trigone be obligated to support the entire unsupported difference of 18%.  In assessing the loss of profit, the court took the average of profits for each of the years 2002 and 2003 ($26,437.29 + $35,200.84 ÷ 2 = $30,891.06), applied 33.15% as the foreseeable increase and reduced the result to six months ($30,819.06 + 33.15% ÷ 2 = $20,517.79).

Andrè Begin , IDI agency and distribution expert for Canada.

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