In Input Capital Corp. v Gustafson, 2019 SKCA 78, the Saskatchewan Court of Appeal recently overturned a trial judgment that found a standard form canola streaming contract to be unconscionable and therefore unenforceable.
Streaming canola contracts provide the farmer an upfront payment and set a price for a certain amount of future canola produced. The farmer then becomes obligated to deliver the canola to the grain marketing company – the plaintiff, in this case. Various forms of security are provided in the event of non-delivery or insufficient delivery.
Through a series of agreements, the defendant farmer received $4.5 million from the plaintiff and became contractually obligated to deliver a total of 3,750 tonnes of canola – with any proceeds over and above the initial 3,750 tonnes of canola being divided evenly between the parties.
In its review of the streaming contract, the Court conducted a fulsome review of the law of unconscionability.
Distilled to its core, the Court’s conclusion was that a contract may be overturned as unconscionable where an actual use of patently unequal bargaining power, arising from the vulnerability of one party to another, results in a grossly unfair deal.
More than a bad deal is required, and the Court will not overturn contracts lightly. However, where unequal bargaining power overcomes the ability to engage in autonomous self-interested negotiations – and the other party seizes upon that imbalance to its advantage and to obtain an inexplicably irresponsible bargain in its favour – judicial intervention is warranted because it would be inequitable to allow the stronger party to take advantage of the weaker.
In the case before the Court, there was evidence the farmer was suffering financial distress at the time of contracting. However, there was also evidence the farmer was a well-educated, experienced farmer and businessman. Failure to consider that evidence in the unconscionability analysis constituted an error in principle. Further, the isolated fact of financial distress is not sufficient on its own to meet the test within the unconscionability analysis. In order to potentially meet the test, the degree of distress would have to result in the loss of ability to autonomously negotiate in a self-interested fashion. The trial judge did not consider that aspect and erred as a result.
The trial judge was also found to have erred in his assessment of the balance of risk in the agricultural streaming contract.
The Court of Appeal disagreed that the plaintiff assumed little or no risk under the streaming contract. Notably, the defendant had sold canola to third parties (canola that it was obligated to deliver to the plaintiff) and failed to deliver any canola to pay off the $4.5 million upfront payment.
The trial judge felt the security provisions of the contract contributed to its overall unfairness, but the Court of Appeal held that this overlooked the overriding obligation of all creditors to exercise their security in a commercially reasonable manner pursuant to the various statutes that govern creditors and agricultural lending.
The trial judge also seemed to suggest that, had the defendant performed its obligations, the contract would not have been unfair. This led the Court of Appeal to conclude that the agreement itself could not be considered unfair solely based on the measures that the plaintiff had in order to exercise its security in the face of a breach of the contract.
In light of all of this, the Court of Appeal disagreed the bargain was improvident and unconscionable.