Sask. Court of Appeal overturns lower ruling, says Input Capital's canola contracts are not 'unconscionable'

The Saskatchewan Court of Appeal says a trial judge was mistaken when he concluded that Input Capital Corporation's (ICC's) streaming canola contracts were "unconscionable" and therefore unenforceable.

The dispute is related to a series of agreements Macoun-area farmer Terry Gustafson entered into with ICC in 2014 and 2015.

ICC is a publicly traded company that bills itself as a "low cost source of capital for farmers." It offers farmers up-front payment for a fixed amount of a future canola crop. It refers to this as a streaming canola contract.

In his May 2018 ruling, Court of Queens Bench Justice Jeffery Kalmakoff found ICC's agreements with Gustafson were "heavily one-sided" and "unconscionable" and therefore "they must all be set aside."

The Court of Appeal's decision, released Friday, said Kalmakoff "erred in his interpretation of the agreements and misapprehended the contractual relationship between the parties leading him to erroneously conclude the agreements were unconscionable and that the agreements were void and unenforceable in their entirety."

"Those findings must be set aside," the Court of Appeal concluded.

Court of appeal flags errors

It found that Kalmakoff made several crucial errors.

In reaching his conclusion last May, Kalmakoff said the evidence showed that "there was at the time of entering the agreements, an inequality between [Gustafson] and ICC, where ICC was in the more powerful position."

However, the Court of Appeal said "the trial judge erred in principle by failing to consider evidence that was relevant and material to the question of whether an inequality of bargaining power existed between ICC and Gustafson Farms."

For example, the court said ICC presented evidence that indicated Gustafson was "a well educated, experienced farmer and businessman."

"He attended university and obtained a Master's degree in divinity," the Court of Appeal said. "Mr. Gustafson owned a car dealership. He built houses and had developed a city block in Estevan, Saskatchewan. He had a house moving company. Gustafson Farms had professional advisors throughout and had received legal advice about some of the Agreements."

Kalmakoff concluded part of the inequality was the fact Gustafson was in significant financial trouble.

However the Court of Appeal found the judge failed to explain how that was undue hardship.

"I expect there is nothing special or significant about a Saskatchewan farmer negotiating a grain delivery transaction from the financial circumstances in which Gustafson Farms found itself. It likely happens every day."

Who's really at risk?

The trial judge found the agreement between Gustafson and ICC was fundamentally unfair because "there is no risk to ICC in the streaming contracts" while Gustafson bore significant risk.

The Court of Appeal said this is untrue.

It found "both parties obtain the benefit of certainty of cost or income, thereby smoothing out the risk of market fluctuations that are beyond their foresight or control."

The court said that, if anything, it was ICC that took the greater risk. The court noted that Gustafson received $4.5 million from ICC in advanced payments but "had failed or declined to deliver any canola to ICC" in 2015.

Instead of providing grain to ICC, Gustafson sold 2,750 tonnes of canola to third party companies and processors "plainly selling again the canola it had already sold to ICC."

"The evidence and the agreements establish nearly the opposite conclusion to the one drawn by the trial judge, i.e., it was Gustafson that had little to no risk under the streaming contracts," the court ruled.

Not 'grossly unfair'

Kalmakoff also concluded that the pricing model in the contracts was unfair.

"The more Mr. Gustafson produced, the more profitable the contracts became for ICC, and to a certain extent, the less beneficial to Mr. Gustafson," Kalmakoff wrote.

The Court of Appeal found that the trial judge failed to fully understand the agreements. It said that, after crunching the numbers, it was clear the price ICC was offering "is decidedly not 'grossly unfair,' 'grossly inadequate' or so divergent from community standards of commercial morality as to require judicial intervention."

The court pointed out that Kalmakoff also made an error when chastised ICC for attempting to enforce its security agreements by moving to seize assets.

"The trial judge 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 Court of Appeal said that if the trial judge was correct, it would have significant implications for agricultural lending broadly speaking.

"If this arrangement is unconscionable by reason of the nature of the security interests Gustafson Farms had granted to ICC then all other secured agricultural lending arrangements are too."

Gustafson's lawyer didn't respond to CBC's request for an interview.

ICC said it would be putting out a statement before markets open on Monday.