Judge rules contracts of Saskatchewan canola trader are 'unconscionable' and 'must all be set aside'
Court says Input Capital unjustly benefited from ‘highly profitable’ and ‘heavily one-sided’ contracts
A Court of Queen's Bench judge has ruled that contracts Regina canola trader Input Capital Corporation (ICC) made with a Saskatchewan farmer were "heavily one-sided" and "unconscionable" and therefore "they must all be set aside."
This ruling comes two weeks after a group of farmers launched a class action lawsuit against the company raising similar concerns — alleging ICC had engaged in "predatory lending" and its contracts were unfair and should be declared illegal.
Between April 2014 and March 2015, Macoun-area farmer Terry Gustafson entered into a series of agreements with ICC, a publicly-traded company that bills itself as a "low cost source of capital for farmers." It does business across Western Canada.
The entire contractual relationship between Mr. Gustafson and ICC is substantially unfair and cannot be permitted to stand.- Justice Jeffery Kalmakoff - Court of Queen's Bench judge
ICC says it is a buyer and seller of grain that offers farmers up-front payment for a fixed amount of a future canola crop. It refers to this as a streaming canola contract and on its website it says it has more than 300 active agreements.
Justice Jeffery Kalmakoff, in his ruling released late Thursday, says ICC's agreements with Gustafson were "heavily one-sided" and "unconscionable."
"To put it simply, there is no risk to ICC in the streaming contracts," he found. "The obligations and expense, apart from the up-front payment, all rest on Mr. Gustafson."
The judge concluded that, because of that fundamental unfairness, "the entire contractual relationship between Mr. Gustafson and ICC is substantially unfair and cannot be permitted to stand."
Input considering appeal of findings
The ruling wasn't entirely favourable for Gustafson.
The judge found that ICC had given the farmer about $4.4 million in up-front payments and he ruled Gustafson had to give that money back.
In a news release, ICC noted that in his 99-page ruling the judge found in favour of the company on a number of arguments that had been made by Gustafson, and, the release says, he concluded "Input did not breach any of its contractual obligations to the client."
"While Input achieved success in the case, the court did make certain findings that Input believes to be in error. Input is considering an appeal of these findings."
Gustafson's lawyer, Gordon Kuski said his client is pleased by the ruling.
Kuski said in court he attempted to show the contracts "were unfair and that Mr. Gustafson was taken advantage of and the judge ruled that."
Ruling 'may be the end of Input', says lawyer
Kuski said while the facts of this case are very specific, this ruling may have implications for other disputes involving ICC.
"Anybody who is in a dispute of a similar variety, this ruling will certainly not hurt them," said Kuski.
In a text message to CBC, he said the ruling "means every farmer in the clutches of Input can get free and most can get back a lot of money."
Morris Feduk, the lead plaintiff in the class action, says his dealings with ICC led to his land being foreclosed on and his farm equipment being seized and sold.
He said he's teetering on the brink of bankruptcy, but that this ruling gives him some hope.
"It means that they owe me money because of the equipment they sold and my land that they sold. They've been overpaid," Feduk said.
He said he realizes he has a long legal road ahead, as the claims in his lawsuit haven't been tested in court.
'A substantial inequality'
Justice Kalmakoff said "the court's power to set aside a contract should not be lightly exercised."
He said the bar for Gustafson was high. He had to prove:
- "There was at the time of entering the agreements, an inequality between himself and ICC, where ICC was in the more powerful position."
- That ICC "used this position of power in an unconscionable manner to achieve an advantage over Mr. Gustafson."
- "There is a substantial unfairness in the agreements themselves."
Kalmakoff said each of these points was borne out by the evidence.
When Gustafson entered into the agreements with ICC he "had suffered two consecutive years of bad financial times and was on the brink of a third." For the 2014 year, he reported a $3.6-million loss to his farming operation.
The judge said that in 2014, the year Gustafson entered the first agreement, the farmer's debt-to-equity ratio stood at 179.8 per cent "and it was expected to climb to 622 per cent in 2015." Gustafson's accountant was recommending he consider bankruptcy.
By contrast, the judge said ICC was "a stable and successful company, with substantial capital at its disposal." Quoting from a news article, he said that by 2014 ICC had raised more than $100 million from investors and that by late 2015 it had an assessed market capital of more than $240 million.
"I have no difficulty in concluding that Mr. Gustafson's financial distress, and ICC's relative strength created a substantial inequality," the judge wrote.
ICC bargained in 'an unconscionable manner'
In reviewing the agreements between ICC and Gustafson, Kalmakoff found "the contracts are heavily one-sided."
He said if ICC signs a contract with a farmer that is financial stable and successful and is therefore able to meet its obligations, "ICC profits handsomely," and the farmer "makes out alright."
However, if the farmer fails to meet his obligations, ICC can enforce its security agreements and seize the farmers land and equipment, which works out well for ICC but for the farmer "not so much."
The judge said because the consequences for the farmer if he failed were so severe, ICC had an extra responsibility to make sure the farmer had the necessary financial stability.
The judge say ICC was well aware that Gustafson was desperate to sell his canola, partly because ICC had tied up so much of the grain delivery space.
"ICC had made it very difficult for farmers to sell canola independently, given the market conditions, and the lack of available delivery space (much of which was already spoken for by ICC)."
In addition, the judge pointed out that ICC failed to provide Gustafson with copies of the contracts in advance of signing and didn't leave copies with him after they were signed.
"The contracts were signed quickly, in circumstances where Mr. Gustafson was anxious to get to other tasks, and there was little detailed discussion of many important terms."
The contracts — signed by Gustafson and ICC representative Gord Nystuen — were sometimes finalized at a kitchen table or in a pickup truck. In those contracts, Gustafson agreed to place security agreements on his land and equipment, putting him at risk significant of loss if he failed to meet the terms of the agreements.
"The terms of all of these agreements are so unfavourable to Mr. Gustafson and all the consequences to him so harsh in the event of default, that treating the execution of such agreements as a casual and informal manner is a factor that weighs heavily in favour of finding that Mr. Nystuen acted unconscionably."
The judge did note that Nystuen did not misrepresent what was in the contracts.
The judge also found that though ICC was aware of Gustafson's growing financial troubles the company "continued to insist that Mr. Gustafson enter the contracts on ICC's terms."
The judge said ICC was increasing Gustafson's obligations to delivery grain which was making it more difficult "for him to meet those obligations, meaning he would be more likely to default an create a situation where ICC would enforce its security."
ICC agreements with Gustafson 'substantially unfair'
The judge said a cursory view of the contracts may initially lead one to conclude that they are fair, resulting in a healthy but reasonable profit for ICC and an acceptable return for Gustafson.
But he said if you dig a bit deeper, a different picture emerges. He said the most troubling fact is that ICC is taking virtually no risk in these agreements while the farmer is bearing the burden.
"The agreements reflect a highly profitable arrangement for ICC, which is almost entirely without risk," Kalmakoff wrote.
He said given the large up-front payment Gustafson received, the contract initially appears quite generous "but the longer the contracts go on, the smaller the benefit and the greater the risk."
He said if Gustafson were to breach any term of the contract, ICC would have the right to demand the return of the upfront payment and "to foreclose on the mortgage and sell Mr. Gustafson's land and seize all of his present and after-acquired property."
He said in light of all this "I can reach no other conclusion other than that the agreements must be set aside as unconscionable."