Quebec Court of Appeal, 06-02-2007, case no. 500-09-015542-053.
Before being heard by the Quebec Court of Appeal, this case had been in front of the Superior Court for 13 years before a decision was rendered. The Superior Court had awarded damages in the amount of $52,452 and $30,000 in experts’ fees to Admaco in compensation of what the Court had determined to be abusive termination of a distributorship agreement by Toshiba.(1)
The ratio decidendiof the Court of Appeal in overturning the decision was:
- Where parties agree on a notification period for termination at will under the contract, the court is not required to rule as to whether or not sufficient cause for termination existed.
- Where a contract sets a fixed notification period and the supplier chooses to grant a ‘grace period’, the court has no authority to rule on the sufficiency of the length of such grace period.
Background
In 1977, a representative of Toshiba for the province of Quebec approached the owner of a ‘one-man company’, Admaco Business Machines Ltd., to sell a new line of Toshiba calculators. Without a formal distribution contact having been signed, Admaco commenced placing orders for the calculators, always delivered by Toshiba, and sold them to its customers. In the early 1980’s, Admaco commenced ordering photocopiers and, in the mid-1980’s, fax machines. It was not until July 1985, upon the request of a new general manager for Toshiba, that a formal distribution contract was signed. This contract dealt with distribution of photocopiers and had an initial term of five years, with either party having the right of termination upon 60 days notice.
In spite of sales quotas not having been achieved since March 1988, the contract was renewed in 1990 for an additional five years. In September 1991, Toshiba notified Admaco that it was terminating the distribution agreement effective six months later, after which time, Admaco could continue to order copier supplies and parts in order to permit Admaco to continue to service any photocopiers it had sold. However, Admaco immediately ceased ordering copiers from Toshiba, but continued to service copiers already sold to customers.
Admaco’s claim for damages (2) was based on allegations of illegal and abusive termination of the distribution contract. The plaintiff’s argument was that Toshiba did not have the right to terminate the agreement without sufficient cause, the inability to meet quotas not being sufficient cause.
In first instance , the judge ruled that Toshiba did not need to have cause to terminate the contract, as it was clearly indicated therein that either party could do so upon 60 days notice, adding:
… notwithstanding the fact that in this particular matter, there appears to have been sufficient cause to terminate, if that were the only legal ground on which DEFENDANT could stand.(3)
However, the judge continues:
That being said, however, does not mean that a non-timely or abusive notice of termination could have been given by the DEFENDANT to PLAINTIFF in order either to destroy PLAINTIFF, to steal its business and/or its clients, or, in bad faith, to profit from its corporate weight to literally squeeze out the much smaller other party.
This way of doing things has been sanctioned by our Courts for a long period of time and has been called either abuse of right or lack of good faith. (*) Under these legal principles, many companies or institutions which were technically in their right were condemned to pay damages when Courts came to the conclusion that theirs actions in terminating inappropriately or wrongfully had caused damages to their counterparts.
In others words, even though the DEFENDANT, in the Court’s view, was not obligated to have cause to terminate the dealership agreement with PLAINTIFF, it had to act in an appropriate manner, in conformity with the principles of good faith and a proper exercise of its rights, in order to be exempt from a condemnation by this Court to damages.(4)
(*) see specially Houle c. Banque Canadienne Nationale, [1990] 3 R.C.S. 122, which principles have been incorporated in articles 6 and 7 of the Quebec civil Code; E. & S. Salsberg Inc. c. Dylex Ltd., [1992] R.J.Q., 2445 (C.A.); Subaru Auto Canada Ltée c. Caravane et auto du Cap Inc., J.E. 96-754 (C.A.).
With regards to the six-month notice period given by Toshiba, the judge stated that the plaintiff could not reasonably be expected to continue to sell Toshiba copiers, knowing the contract would be terminated in six months, and therefore this was ‘tantamount to no grace period’ and concluded that Toshiba had acted unreasonably with its notice of termination and should pay damages.(5)
The Court of Appeal overturned the ruling on the damages. (The criteria applied by the judge in first instance in evaluating the length of the notice period were not in themselves in dispute in appeal. We have reproduced them at the end of this report for the reader’s information.)
In writing the decision for the Court of Appeal, André Forget, J.C.A., wrote that the judge in first instance had ‘… introduced a concept foreign to business relationships by imposing a «grace period» to permit Admaco to provide a significant improvement to its efforts in order to increase its sales in the scope of the objectives that were determined by Toshiba.’(6) [transl.]
The notice period of six months given by Toshiba – although under the contract, termination at will was permitted upon 60 days notice – should not have been put into question. Furthermore, as Toshiba also had a right to terminate with cause in certain cases upon 30 days notice, the judge’s conclusion that ‘there appears to have been sufficient cause to terminate’ should have ended the debate then and there.(7)
In support of this conclusion, the case General Instrument Corp. v. Ernst & Young inc.(8) was cited, in which the Court of Appeal had come to a similar conclusion, where 60 days notice of termination had been given, although the contract could have been terminated without notice, and the court in the first instance had extended the 60 day contractual notice period by an additional month.
The Court of Appeal agreed with Toshiba that:
…it would be paradoxical to impose a greater burden on a party terminating a contract for cause than on one who terminates without cause.
The reasonable delay imposed by case law is not one to remedy a fault, but to permit the other party to be aware of the cancellation and to benefit from a period required to reorient its business activities, in particular to find, if applicable, another supplier. To reason otherwise would imply that Toshiba could never terminate the distribution contract if Admaco would improve its sales methods and respect the quotas. In other words, termination without cause would become illusionary. (9)[transl.]
The Court of Appeal also pointed out that, ironically, Admaco had turned down the grace period, as the latter immediately ceased ordering from Toshiba, only continued to service already-sold copiers, and two months later commenced ordering from its new supplier, Konica. The judge added that if, for purposes of discussion, Toshiba’s reason had been insufficient, it would have to be concluded that the termination had been made without cause. In such a case, it needed only be determined whether the period of six months – superior to the delay freely agreed upon between the parties – was sufficient. The judge in the first instance had not ruled that the period of six months was insufficient; rather, he added to such notice period a type of probationary period to enable Admaco to show it could increase its sales.(10)
Consequently, Toshiba, having granted a notice four months in excess of what it was contractually required to, was not abusive in exercising its right of termination.
CRITERIA FOR EVALUATION OF LENGTH OF REASONABLE NOTICE
In evaluating the length of notice that Toshiba should have given in the circumstances, the judge in first instance, referred to a judgment(11) previously rendered by himself, where he had analysed various criteria concerning delays and grace periods developed by case law, and which he reiterated namely:(12)
- the introduction of a new product on the market;
- the quantity of efforts or work supplied by the agent to market this new product;
- the amounts invested by the agent to achieve this endeavour;
- the development of agent’s company;
- the exclusivity of the relationship between the parties or not;
- the nature and exclusivity of the product or the percentage of revenues generated by its’ distribution;
- the duration of their commercial relationship;
- the nature of the interruption of said relationship;
- the justifications, or lack thereof, of termination;
- the comparison of numbers prior to and immediately after interruption;
- the time required for the agent to remedy the loss of its contract.
As mentioned above, the criteria were not in dispute in appeal and the principles therein remain in effect.
Furthermore, the following ratio decidendi of the first instance remain undisputed:
- A distribution contract need not be in writing; a verbal contract is as valid and binding on the parties.
- Replacement of the merchandise over time does not change the date of commencement of the relationship for purposes of determining the duration of the reasonable notice period.
Although no formal contract was signed until many years after the plaintiff commenced placing orders, it was the date the relationship commenced that applied in determining the length of the business relationship and not the date the contract was signed. With respect to this criterion, the judge ruled:
In this case a relationship between the parties started in 1977 and, even though it did not at the outset have anything to do with copiers, it nonetheless created a solid and worthwhile relationship between them as attested by different certificates of merit, letters of congratulation or other recognitions.(13)
We finally point out to the reader that this contract was not a contract of adhesion. Since the coming-into-force of the Civil Code of Quebec on January 1, 1994, a court may intervene in a contract of adhesion where a clause is determined by the court to be abusive.
André Bégin, IDI agency and distribution expert for Canada.
The text of the judgement, together with other interesting case-law on agency and distribution contracts, can be found in the Canadian page of the Reports Section of the website, while the relevant legislation concerning agency and distribution agreements in Canada can be found in the Legislation Section of the Website.
Notes:
(1) Superior Court of Quebec, case no. 500-05-007574-922 rendered March 18, 2005.
(2) The initial amount claimed was $750,000 which was later reduced by the plaintiff to $430,000, broken down as follows: $80,000 for loss of revenue on sales of photocopiers; $312,000 for loss of revenues on services to photocopiers; $38,000 for additional advertising costs incurred from having to obtain a new supplier.
(3) Superior Court judgment, par. 69.
(4) idem, pars. 70-72.
(5)idem, pars. 84-86.
(6) Court of Appeal judgment, par. 33.
(7) idem, par. 36.
(8) J.E. 2002-1007 (C.A.)
(9) Court of Appeal judgment, pars. 37-38.
(10) idem, pars.. 40-44.
(11) Tee-Comm Electronics Inc. vs. General Instrument Corporation, J.E. 99-1471 (C.S.), appeal granted in part General Instrument Cor. vs. Ernst & Young Inc., J.E. 2002-1107 (C.A.)
(12) Superior Court judgment, par. 88.
(13) idem, par. 89.
