Industries Portes Mackie Inc. v. Garaga Inc., EYB 2008 136403

Industries Portes Mackie Inc. (the plaintiff) and Garaga Inc. (the defendant) were two companies involved in the garage door industry. In March 1998, to create an alliance, as opposed to continuing to compete against each other, they signed two agreements. In the main agreement, the plaintiff sold its client list to the defendant for the sum of $100,000. In addition, the defendant made monthly payments of $3,166 in exchange for exclusive distribution rights for a term of 12 years. Moreover, they entered into a distribution agreement pursuant to which the defendant granted to the plaintiff a line of credit and discounts on garage door purchases. In return, the plaintiff undertook to cease producing and assembling garage doors, and the plaintiff became the exclusive distributor for the defendant’s products in the Estrie region.

On May 7, 1999, the defendant imposed a credit limit of $250,000 on the creditor accounts. On July 14, the defendant stopped making its monthly $10,000 payments to the plaintiff, and on August 10 and 11, it tightened the plaintiff’s credit even more. During a meeting on August 16, the defendant required payment on delivery. On September 30, the plaintiff’s credit was once again tightened. A proposal was filed on March 1, 2000 by the plaintiff.

The contractual relations between the parties began to deteriorate. Mr. Ruel, an officer of the plaintiff corporation, proposed to purchase the plaintiff corporation for $1. On October 22, the defendant offered to purchase the plaintiff corporation for $700,000. On October 26, Mr. Ruel stepped down from his position and opened a distribution business of the defendant’s products.

On January 28, 2000, the plaintiff and its former officers, respectively, claimed from the defendant the following sums: $2,907,401; $51,604; $78,407; and $341,765.

Decision

The defendant decided to tighten the plaintiff’s credit at the beginning of a period during which the plaintiff would normally purchase $100,000 worth of garage doors each week. Not only was the plaintiff deprived of any credit from the defendant, but the defendant also required payment upon delivery. In addition, for certain orders, payment was required before production. The defendant also required a $50,000 weekly payment until its account was reduced to zero. These actions caused the plaintiff’s insolvency and forced the plaintiff to file a notice of intention and later a bankruptcy proposal, since the plaintiff was no longer capable of operating its business.

The defendant, abused its rights by unilaterally amending the terms of the agreement. The abuse was significant given that there was nothing in the agreement which permitted the defendant to take such drastic measures in reaction to rather minor contractual defaults of the plaintiff. Furthermore, the defendant’s fulfillment of its contractual obligations was not more exemplary than that of the plaintiff.

In addition, the defendant did not respect the exclusivity rights which it granted to the plaintiff in the Estrie region. Also, it failed to provide the plaintiff with the list of sales it had made (even though these were sales to clients found on the plaintiff’s client list), nor did it pay any kickback which it owed to the plaintiff for such sales.

Contrary to the defendant’s contention, the plaintiff satisfied its duty to provide the defendant with financial information. Firstly, the plaintiff had no obligation to provide the defendant with a copy of its financial statements, which had already been provided to the defendant by Mr. Ruel without the plaintiff’s knowledge. Nor did the plaintiff have an obligation to provide the defendant with its recovery plan which sought to improve the management of the business. In any event, the defendant could not complain about this issue since the plan was beneficial to the defendant, and it enabled its payments to be received from the plaintiff regularly.

Secondly, the defendant could not claim that it was not well-informed about the merger of the Groupe Mackie corporations and its consequences. This merger was planned at the time that the parties entered into the distribution agreement and the agreement even made reference to it. Furthermore, the evidence indicated that the defendant consented to the merger. Since the merger was between independent businesses, the plaintiff did not have a duty to inform the defendant of its internal management decisions.

Thirdly, the plaintiff did not have to inform the defendant that its loan request for $750,000 was rejected. The relationship between the plaintiff and its financial institution was a confidential one. In addition, the refusal was not fatal for its financial situation since the financial institution later accepted its recovery plan which resulted in an increase in its working capital.

Finally, the defendant could not invoke the refusal of the plaintiff to provide its financial statements as justification for the abuse of rights which the defendant exercised. The requisition of the plaintiff’s financial statements was simply a tactic used by the defendant to put pressure on the plaintiff company which was already in a vulnerable position. Moreover, the defendant received a letter from the plaintiff’s auditor which included much of the plaintiff’s financial information. As a result, the defendant could not claim that it was taken by surprise by the plaintiff’s financial downturn for which the defendant was in part responsible.

For the above reasons, the Court came to the conclusion that the defendant was liable for financial damages suffered by the plaintiff which were evaluated in accordance with the business’ fair market value. According to the expert witnesses, the financial damages suffered by the plaintiffs were estimated at $561,000.

The claim of the officers of the plaintiff’s company was dismissed since there was no evidence of a distinct fault at law and they were not shareholders.

Since the fees related to the proposal were not included in the market assessment value, the plaintiff withdrew its claim for reimbursement. Finally, it would be unjust for the plaintiff to be solely liable for the payment of its experts’ fees which amounted to $122,804. The defendant was thus ordered to pay the sum $80,000 as contribution to the fees