Exercise Caution in Commodities Contracts

A recent Saskatchewan Court of Queen’s Bench decision, PS International Canada Corp. v Palimar Farms Inc., 2016 SKQB 232, upheld unanimously by the Saskatchewan Court of Appeal in 2017 SKCA 78, demonstrates the importance of ensuring that the terms of agricultural commodity purchase contracts clearly represent the intentions of the contracting parties.

The growers in this case, Palimar Farms Inc. (“Palimar”) and Marc Agra Inc. (“Marc”), entered into “production” contracts with PS International Canada Corp., operating as Seaboard Specialty Grains and Food (“Seaboard”). Pursuant to the contracts, Marc and Palimar agreed to produce a combined total of 413 metric tonnes of #2 Canada, small red lentils at a purchase price of $0.18 per pound. The contracts stipulated that the lentils were “subject to sample acceptance” and that the contacts themselves were subject to an “act of god” clause.

The growing season experienced an extraordinary amount of rainfall which prevented Palimar and Marc from realizing the quality or quantity of lentils specified by their respective contracts with Seaboard. The heavy rainfall precipitated a sharp increase in lentil prices.

Given that the contracts were for a specific quality of lentils, without any right of first refusal on lower grades produced, Palimar and Marc treated their contracts as unfulfillable. However, Seaboard was unwilling to enter into a new deal, leading Palimar and Marc to negotiate fresh agreements with another party for the lower grade of lentils for a price almost double that originally agreed to with Seaboard.

Seaboard’s position was that Marc and Palimar breached their contracts, which forced Seaboard to purchase replacement lentils at a substantially higher cost.

Court of Queen’s Bench Decision

At the Court of Queen’s Bench, the Judge dismissed Seaboard’s claims summarily. The judge began his analysis by dealing with the claim against Marc. He held that the part of the contract reading “Grade: #2 CANADA – Subject To Sample Acceptance” (the “Grade Term”) did not give Seaboard the right to demand delivery of lentils of a quality lower than #2 Canada. He also went on to find that the production of such lentils was a “true condition precedent” such that, unless and until #2 Canada lentils were produced by Marc on the noted acres, there was no obligation on Marc to sell to Seaboard and no obligation on Seaboard to purchase from Marc. Accordingly, he dismissed the claim against Marc.

The judge noted that the situation with respect to Palimar was different because some of its lentils produced by Palimar did in fact test as grade #2 Canada. However, the judge ultimately concluded that the Palimar contract had been frustrated and that “only one sample out of more than 326 tonnes of lentils produced by Palimar graded #2.” He found that bringing the other production of Palimar to grade #2 Canada or better would have required the lentils to be cleaned or blended and that such a requirement was not contemplated or addressed in the contract. In light of this, the judge found there had been a “radical change” caused by a supervening event that had frustrated the contract. Thus, the claim against Palimar was dismissed as well.

Court of Appeal Decision

Seaboard subsequently appealed, arguing that the judge erred by failing to proceed on the basis that a true condition precedent requires an uncertain future event that is dependent on the actions of a third party.

The Court of Appeal rejected that reasoning and held that a true condition precedent is merely a condition that is dependent on an uncertain future event beyond the control of the contracting parties. In other words, a third party is not a necessary element of a true condition precedent.

Seaboard further argued that the judge erred by failing to find that Seaboard was entitled to waive the Grade Term under common law principles and under s.13(1) of The Sale of Goods Act, which says that a buyer can elect to waive a condition to be fulfilled by the seller.

The Court of Appeal rejected these arguments as well, confirming that a true condition precedent is not open to unilateral waiver because the satisfaction of the true condition precedent must occur before either party to a contract has any obligations to fulfil or waive.

Finally, Seaboard argued that the judge erred by holding that the Palimar contract was frustrated, essentially asserting that the contract was not a production contract but instead a delivery contract which, by its very essence, could not be frustrated.

The Court of Appeal disagreed, holding that the contract was specifically aimed at the production of #2 Canada lentils by Palimar, affirming that the contracts did not place the risk of non-production on the grower, like a delivery contract would. The Court of Appeal also noted that there is a long and time-tested line of authorities applying the doctrine of frustration to situations where crop failures have been caused by weather and other natural events.

In the end, the Court of Appeal dismissed Seaboard’s appeal entirely.

This case illustrates the importance of ensuring that both parties to an agricultural commodity contract have made certain that their written agreement reflects their actual intentions. Obtaining legal advice from a lawyer with expertise in agribusiness before you draft or otherwise enter into commodity purchase contracts is a highly recommended practice. Our Saskatchewan Agribusiness Law team is available to assist at all stages of this process.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.