Overview

Two companion decisions of the Supreme Court of Canada were recently released in cases included on our Appeals to Watch in 2016 list, Ferme Vi-Ber inc. v. Financière agricole du Québec, 2016 SCC 34, and Lafortune v. Financière agricole du Québec, 2016 SCC 35.

Both cases involved the interpretation of the same Québec farm producer income stabilization program (the “ASRA Program”) administered by La Financière agricole du Québec (“La Financière), a statutory authority. The appeals focused on whether the ASRA Program should be governed by public administrative law principles or the private rules of contract law.

The Supreme Court rejected both appeals by Québec farm producers who contested compensation amounts provided to them under the ASRA Program. These producers claimed that the ASRA Program was a contract of insurance under the Civil Code of Québec (“CCQ”), and that La Financière had violated the terms of the contract as it did not consider the rule of the reasonable expectations of the insured (“the reasonable expectations rule”).

In its decisions, the Supreme Court (Justice Côté dissenting in Ferme Vi-Ber) ruled in favour of La Financière and held that the ASRA Program was not a social insurance program, and that the reasonable expectations rule did not apply. Instead, the program was governed by the private rules of contract law. As such, La Financière had discretion in determining the calculation method used to compensate farm producers, and did so in accordance with the requirements of good faith and contractual fairness.

Background

The ASRA Program provides financial support to farm producers, who voluntarily participate and contribute to its funding together with La Financière. It protects the participants from having their income drop below a level defined by certain products or classes of products designated as insurable. The purpose of the program is to guarantee that an average farm producer never earns less than a predetermined percentage of the average income of a skilled worker.[1]

The producers contested various compensation payments, arguing that the calculation method used by La Financière was improper. In Ferme Vi-Ber, the producers specifically took issue with a process referred to as “linkage”, where La Financière accounted for other income received by farm producers from government contributions. These linked amounts were deducted by La Financière to account for other income that may have impacted the financial needs of the average benchmark farm, which was the reference standard of the ASRA Program. Income received could be linked either collectively, on the basis of the amounts that the average benchmark farm would have received, or individually, on the basis of the amounts each participant actually received from the government. As such, the higher the linked amounts, the lower the compensation received under the program.[2]

In 2007, La Financière linked the amounts received collectively, which resulted in less compensation to farm producers than if the amounts had been linked individually.[3] The producers brought their claim for relief to the courts and argued the ASRA Program was a contract of insurance under the CCQ, and that it had to be interpreted based on the reasonable expectations rule which required individual linking.[4]

Similar arguments about proper calculation methodology were made by farm producers in Lafortune, who had contested the statistical and accounting methods used in an economic study relied on by La Financière to determine compensation in the 2006 to 2008 years.[5]

Decisions Below

In Ferme Vi-Ber, the trial court allowed the action and held that the ASRA Program was a contract of insurance, and that La Financière had to exercise discretion in accordance with the terms of the program and in a reasonable manner, which it had failed to do.[6] The Québec Court of Appeal allowed La Financière’s appeal and ruled that the ASRA Program was not a contract of insurance under the CCQ, and that it was a sui generis administrative contract that contained elements of public and private law. Despite its characterization, La Financière was not required to use individual linking and had the authority to determine what calculation method to use on a case-by-case basis. [7]

In Lafortune, the trial court rejected the farm producers’ claim and held that the ASRA Program is not a contract of insurance. Further, even if it was characterized as such, under the reasonable expectations rule, the producers would not be entitled to their claim for damages because “[participants] understood that there would be losses in some years”.[8] The Québec Court of Appeal dismissed the farm producers’ appeal and found that the contract’s characterization was not determinative, as the issue concerned the validity of the calculation methodology, which did not require warrant the Court’s intervention.[9]

Supreme Court of Canada Decisions

The Supreme Court reviewed the general characteristics applicable to government social insurance programs governed by public law and found that the ASRA Program differed in several ways from a social insurance program, and was not incidental to any statutory public law scheme. Further, the ASRA Program contained several contract-like provisions. It also did not fall within the structure of a simple agricultural subsidy program. On the basis of this contextual exercise, the ASRA Program was characterized as an innominate administrative contract and not subject to the rules of public law.[10] While La Financière had discretion in implementing the government scheme, the public interest had to be considered when exercising such discretion, and La Financière was required to act with regard to the duty of good faith and contractual fairness as set out in the CCQ.[11]

Further, the ASRA Program is not a contract of insurance as it does not contain the three main characteristics as set out on the CCQ: “(i) an obligation on the client to pay a premium or assessment; (ii) the occurrence of a risk; and (iii) an obligation on the insurer to make a payment to the client if the insured risk occurs.”[12] Given that conclusion, La Financière was not subject to the interpretive rules specific to those contracts, including the reasonable expectations rule, which the producers alleged had been violated.

Significantly, the Supreme Court used both decisions to clarify the extent to which the reasonable expectations rule applies in Québec law. The farm producers had argued that the interpretative rule applies in its “maximum dimension” regardless of whether there is contractual ambiguity. La Financière took the position that the rule applied in its “minimum dimension”, only where an ambiguity existed. The Supreme Court agreed with the latter position.[13]

In Ferme Vi-Ber, the Supreme Court relied on the rules of contractual interpretation set out in the CCQ, and determined that linking amounts individually was possible, but linking amounts collectively must be preferred.[14] Notably, La Financière was under no statutory or contractual obligation to link amounts individually.[15] The Supreme Court concluded that La Financière acted in accordance with the duty of good faith and contractual fairness as the calculation method was determined after extensive consultations with representatives of farm producers, and La Financière assessed the impact of the decision on the program’s participants to ensure the decision would be fair.[16]

In Lafortune, La Financière also acted in accordance with the principles of good faith and contractual fairness by participating in extensive consultations during the economic study. In addition, there was no evidence to suggest bad faith. Even if the ASRA Program had been characterized as a contract of insurance, the reasonable expectations rule did not apply as the provisions at issue were not ambiguous.[17]

Dissent

Justice Côté would have allowed the Ferme Vi-Ber appeal in part by reducing the damages claim. In her view, the ASRA Program’s characterization as a contract or otherwise made no difference to the result as the determinative issue involved contractual interpretation. Justice Côté held that the relevant ASRA Program provision was ambiguous and must be interpreted in favour of the farm producers who were the adhering party to the contract.[18]

Implications

These decisions have significance across Canada as they better clarify whether the rules of public law or private law apply when parties challenge government decisions arising out of government compensation programs that have non-traditional structures.

The decisions also define limits on the application of the rule of the reasonable expectations of the insured for Québec insurance contracts, and set out that the rule can only be relied on in the presence of ambiguity.

Case Information

Ferme Vi-Ber inc. v. Financière agricole du Québec, 2016 SCC 34

Docket: 36205

Date of Decision: July 29, 2016

Lafortune v. Financière agricole du Québec, 2016 SCC 35.

Docket: 36210

Date of Decision: July 29, 2016