Super Save Disposal (Alberta) Ltd v Shenwei Enterprises Ltd, 2017 ABQB 805

Court of Queen’s Bench of Alberta Citation: Super Save Disposal (Alberta) Ltd v Shenwei Enterprises Ltd, 2017 ABQB 805 Date: 20171222 Docket: 1603 19236 Registry: Edmonton Between: Super Save Disposal (Alberta) Ltd. Appellant - and - Shenwei Enterprises Ltd. Respondent _______________________________________________________ Memorandum for Decision of the Honourable Mr. Justice K.P. Feehan _______________________________________________________ I. Overview [ 1 ] Super Save appeals a Provincial Court of Alberta Small Claims decision of Judge D.G.

Ingram in which he found that a clause in a waste disposal service contract was unenforceable as being a penalty rather than a liquidated, fair pre-estimate of probable damage. The clause purported to set out as liquidated damages, in the event that Shenwei unlawfully terminated the agreement, an amount equal to the amount of monthly charges plus applicable sales taxes that would ordinarily become due to Super Save for the balance of the term of the contract.

He found he had equitable jurisdiction to relieve against a penalty and therefore dismissed Super Save’s civil claim for liquidated damages. [ 2 ] I agree with Judge Ingram’s conclusion that the clause in question was “extravagant and unconscionable”, that in a contract

for the provision of continuing services the loss of income stream, gross income, does not on its face represent a close approximation ofthe maximum damages recoverable at common law, net profit, and the clause cannot be upheld as a bona fide liquidated damages clause.This conclusion is correct at law regardless of whether the financial calculation of the difference between gross income and net profit isnot extreme; it is the quality and not solely the quantity of the difference that is determinative in a contract for the provision of continuingservices. II.

Standard of Review [3] The standard of review when the Court of Queen’s Bench sits as a civil appellant court was summarized in Kieller v SentinelSelf-Storage Corp, 2008 ABQB 783 at para 39, 1 Alta LR (5th) 130, a decision of Justice Moen of this Court: The standard of review to be applied by a civil appeal court is correctness in relation to questions of law (Housen v Nikolaisen, 2002SCC 33 , [2002] 2 SCR 235; R v Sehn, 2005 ABCA 203 , 371 AR 14) and palpable and overriding error in terms offindings of fact (Stein v The Ship "Kathy K", (SCC), [1976] 2 SCR 802; 527353 Alberta Ltd v Stedelbauer ChevroletOldsmobile

(1975) Ltd (2001), 2001 ABQB 909 , 302 AR 316 at 321 (QB)) and factual inferences (Housen at para 25). Apalpable and overriding error occurs where the trial judge makes a manifest error, ignores conclusive or relevant evidence,misunderstands the evidence or draws erroneous conclusions from it (Toneguzzo-Novell (Guardian ad litem of) v Burnaby Hospital, (SCC), [1994] 1 SCR 114 at para 13, 110 DLR (4th) 289, cited in MacCabe v Westlock Roman Catholic SeparateSchool District, 2001 ABCA 257 at para 21, 293 AR 41).

In terms of findings of mixed fact and law where the issue is theapplication of a legal standard to a set of facts, the standard of review is palpable and overriding error. However, if the trial judge madean extricable error in principle with respect to the characterization of the standard or its application, the error may amount to an error oflaw, which is subject to the standard of correctness: Housen at paras 26-36. See also McCallum v Edmonton Frame and Suspension

(2002) Ltd, 2016 ABQB 271 at para 50, a decision of Justice Graesser of thisCourt. III. Legal History [4] The original Provincial Court Civil Claim of Super Save was filed August 7, 2014 and amended April 21, 2016. It claimed$20,605.65 and costs, of which $19,401.47 was claimed as liquidated damages. At trial, the officer of Super Save said the amount was48 months times $363.16 plus GST: $18,303.26. The remainder, which comprised a debt claim, was later withdrawn, as being doublecounting. [5] The original Dispute Note of Shenwei was filed October 24, 2014 and amended May 3, 2016.

It acknowledged the wastedisposal service contract and its termination of that contract on the basis that Super Save had failed to provide the services for which ithad contracted, and had failed to pay promised credits to Shenwei for work not done.

It defended on the basis of fundamental breach ofcontract or breach of a fundamental term, the right to repudiate the contract, the assertion that the liquidated damages clause was in fact apenalty at law, and that Super Save had failed to mitigate its damages. [6] The matter proceeded to small claims trial on September 6, 2016 and Reasons for Decision were issued by Judge Ingram onSeptember 27, 2016. The Notice of Appeal was filed in the Provincial Court on October 17, 2016 and in the Court of Queen’s Bench onNovember 1, 2016. IV.

Grounds of Appeal [7] Super Save says the trial judge erred in law and in fact in finding the liquidated damages claimed amounted to a penalty andwas not a genuine pre-estimate of damages. It says the trial judge was wrong in not finding that a loss of the entire income streamresulting from the breach of contract was a close approximation of the maximum damages recoverable at common law such that it was abona fide liquidated damages clause.

Super Save also says the trial judge made findings of fact not supported by the evidence, if therewas evidence to support his findings he erred in law in admitting that evidence, and he erred in law in finding that the onus was on SuperSave to prove the liquidated damages claim was a genuine pre-estimate of damages rather than on Shenwei to prove that the liquidateddamages claim was a penalty. V.

The Contract [8] The waste disposal services contract in dispute was effective March 1, 2013 to March 1, 2018 and provided for twice weeklyremoval of six yards of waste at an initial monthly charge of $328.65 plus tax which was to increase over time to $381.32 per month plustax. [9] The disputed term in the contract was paragraph 11: Failure to Perform.

It provided that if Shenwei unlawfully repudiated theagreement prior to its expiration and if Super Save accepted the repudiation, Shenwei would be required to pay “as liquidated damages,an amount equal to the amount of the monthly charges plus applicable sales taxes that would ordinarily become due to the contractor forthe balance of the term”.

Paragraph 11 also provided that “the foregoing liquidated damages are an accurate calculation of the anticipatedlost income stream to the contractor for the balance of the term of the agreement” and were not “imposed as penalty”. [10] There was no argument before me, nor in the Court below, as to whether the termination of the contract by Shenwei for failureto perform by Super Save was an “unlawful repudiation”, and that seminal issue is therefore not before me for determination on this

appeal. Additionally, although the defence of fundamental breach of contract or breach of a fundamental term of the contract was arguedbefore the Court of first instance, it was not before me on appeal. [11] Judge Ingram found that Super Save had failed to pick up garbage on May 7, 14 and 17, July 22 and October 5, 2013 ascontracted. He found that Shenwei had provided advice to Super Save that it wished to terminate the agreement on both August 29 andSeptember 5, 2013, and that in response, Super Save had promised credits for the missed services but those credits were never paid.

Healso found that Shenwei stopped the service on January 4, 2014 and made an agreement with a competitor to pick up their waste effectiveJanuary 1, 2014. On January 13, 2014, Super Save advised Shenwei that it was entitled to accept repudiation of the agreement, in whichcase Shenwei would be responsible for payment of liquidated damages in the sum of $18,684.68. Again, there was no allegation that therepudiation was unlawful.

On March 18, 2014, Super Save issued a formal termination and demand for payment. [12] Shenwei said that due to the failure of Super Save to pick up garbage when agreed, its restaurant business was put at risk. Thegarbage in question consisted of thrown out left-over foods of various kinds and failure to dispose of the garbage promptly resulted in thegarbage becoming smelly, infected with bacteria and vermin, and left the restaurant in an unclean and unhealthy condition which broughtcomplaints from neighbours and concern over City health fines. VI. The Liquidated Damages vs.

Penalty Determination [13] Judge Ingram found as a matter of judicial notice that the waste disposal to be provided by Super Save required the incurringof operation and service costs by Super Save. He said: It is apparent the plaintiff would have had to operate trucks to remove the waste which would involve the expenditure of money, to hirepersons to operate the trucks, and equipment used in connection with them.

The plaintiff would have had to pay wages, buy gasoline,have insurance, pay waste disposal fees at the landfill or other place where the waste was disposed of, and would have had otheroperating costs which would have been incurred in the event that the service would have continued. [14] He concluded that what Super Save had actually lost was in reality not the gross “anticipated lost income stream to thecontractor for the balance of the term” but the net profit they should reasonably have expected from the contract.

He said although therewas no evidence before him on the cost of the provision of continuing services, there was no doubt a significant difference between thegross income and the net profit. He said the attempt to claim gross income, when all that had been lost was anticipated net profit, wouldhave been a windfall of unspecified amount to Super Save.

He said this term of the contract was “extravagant and unconscionable, andtherefore a penalty”. [15] During argument, counsel for Super Save represented, although this was not in evidence before me or the Court below, thatthe quantitative difference between Super Save’s gross income and net profit was very small because of what he called the synergies inthis business. He said that a typical garbage pickup route would have between 80 and 100 customers, and perhaps up to 120 customers,per day such that a loss of one customer would not considerably reduce the cost incurred by Super Save to provide the service.

It stillwould have to pay the driver, pay for gasoline, waste disposal fees and general administration costs, maintain and insure the trucks, andcontinue to incur virtually every other ongoing cost to do business.

He said in some contracts there may be a significant quantitativedifference between gross income and net profit, such as in a pure service contract, while in other contracts, such as “sign contracts”, therewould be little or no difference between those figures. [16] Judge Ingram was entitled to take judicial notice of the commercial distinction between the concepts of gross income and netprofit as being clearly non-controversial or beyond reasonable dispute, so notorious or generally accepted as not to be the subject ofdebate among reasonable persons, and capable of immediate and accurate demonstration by resort to readily accessible sources ofindisputable accuracy: Regina v Potts (1982), (ON CA), 66 CCC (2d) 219 (Ont CA); Sopinka, Lederman & Bryant,The Law of Evidence in Canada (2nd) at 1055. [17] Judge Ingram reviewed and relied upon Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd, 1915 AC 79 (HL),32262 BC Ltd v See-Rite Optical Ltd, 1998 ABCA 89 , [1998] 9 WWR 442 (Alta CA), Langille v Keneric Tractor Sales Ltd (1987), (NS SC), 19 DLR (4th) 652 (NSSC), and TriStar Cap v Super Save, 2014 BCSC 690, in concluding that it isthe duty of the Court in equity to determine whether accreted payments set out in a contract are “in truth a penalty or liquidateddamages”. [18] Quoting at para 21 from Dunlop Tyre, he said: It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest lossthat could conceivably be proved to have followed from the breach. [19] Quoting at para 22 from 32262 BC Ltd, he said it was a concern of the courts to seek fairness and reasonableness, and thatjudicial interference would be justified if the contractual result would otherwise be a grossly punitive response to the problem which itaddressed.

This case relied upon the decision in HF Clarke Limited v Thermidaire Corp Ltd (1974), (SCC), 54 DLR(3d) 385 (SCC) where Chief Justice Laskin commented on the role of the courts in interpreting contractual provisions as damages orpenalty clauses and said that the concern of the courts is one of fairness and reasonableness in the surrounding circumstances (at p 392). [20] Quoting at para 23 from Langille, he relied upon the general contract principle that an award should put the plaintiff in theposition he would have been had the defendant fully performed his contractual obligations. [21] Quoting at para 24 from TriStar Cap, he said it was settled law that the enforceability of a liquidated damages clause turns onwhether it is a genuine pre-estimate of a party’s expected loss in the event of a breach of contract or a penalty that is so oppressive orunreasonable that equitable intervention is justified to prevent injustice.

[22] In defining what constitutes a penalty, Pitch & Snyder in their text Damages for Breach of Contract say at p 6-3: A penalty clause is not a genuine pre-estimate of damages. Instead it is inserted for the purpose of compelling performance ofcontractual obligations. It is classically called an in terrorem clause and the alleged estimate is so unreasonable that it justifies theequitable intervention of the court to prevent oppression or injustice.

See also Bodkin Leasing Corporation v Mighty Moose Holdings Ltd, [2014] AJ 546, a decision of Master Prowse of this Court;Ashland Scurlock Permian Canada Ltd v NESI Energy Marketing Canada Ltd (Trustee of), [1988] AJ 678, a decision of JusticeForsyth of this Court; and Xerox Canada Ltd v Accurate Data Services Inc, [2013] AJ 1395, a decision of Master Robertson of thisCourt. [23] A fresh view of the law in this area was recently had by the British House of Lords in Cavendish Square Holding BV v TalalEI Makdessi/Parking Eye Limited v Beavis, [2015] UKSC 67.

It said as a foundational statement of law at para 9: The distinction between a clause providing for a genuine pre-estimate of damages and a penalty clause has remained fundamental to themodern law, as it is currently understood. The question whether a damages clause is a penalty falls to be decided as a matter ofconstruction therefore as at the time that it is agreed [authorities deleted].

This is because it depends on the character of the provision, noton the circumstances in which it falls to be enforced. [24] Clearly, at the time of the signing of the contract, the quantum of the difference between future gross income and net profit isnot calculable, but the qualitative difference is obvious.

This importance of the qualitative aspect of the distinction is consistent with thequalitative requirement for proof of irreparable harm as the second criteria for an interlocutory injunction or stay of proceedings; seeManitoba (AG) v Metropolitan Stores Ltd, (SCC), [1987] 1 SCR 110 and RJR-MacDonald Inc v Canada (AG), (SCC), [1994] 1 SCR 311. [25] The British House of Lords in Cavendish went on to say at para 31: The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss.These are not natural opposites or mutually exclusive categories.

A damages clause may be neither or both. [26] It analyzed the three leading cases in England, Clyde Bank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdoy Castaneda [1905] AC 6, Public Works Comr v Hills, [1906] AC 368, and Dunlop Tyre, it concluded that the legal issue is notquantum but the penal nature or quality of the contract (see paras 131-138). [27] A similar conclusion was reached in the decision of Dial Mortgage Corporation Ltd v Baines (1980), (ABKB), 15 Alta LR (2d) 211 (Alta QB), a decision of Justice J.B.

Feehan where he concluded at p 220: Reasonableness of the sum or formula adopted seems to be the key consideration, and if it is concluded that the sum or formula inquestion is not set properly in regards to the estimated loss, it will be seen as a penalty clause even though, on some occasions, the lossthat could be estimated would equal or surpass the sum or formula agreed upon. [28] Judge Ingram determined that the clause in question before him was not a genuine, covenanted pre-estimate of damagerecoverable at common law but was extravagant and unconscionable.

Relying upon the equitable jurisdiction of the Court, and the dutyof the Court to strive for fairness and reasonableness, he determined that judicial interference was justified as the contractual resultwould be oppressive and a grossly and punitive response to the repudiation of the contract. [29] He said cases for the supply of goods where there is no ongoing provision of services to be performed by the party acceptingthe repudiation of the contract are to be distinguished from cases for continuing supply of services with ongoing costs of doing business,on the basis that in the former there is no appreciable difference between gross income and net profit after the supply of the goods underthe contract: see Alwest Neon Signs Ltd v Henze (1989), 1989 ABCA 304 , 105 AR 343 (CA); 32262 BC Ltd v Besler, [2000]AJ No 141 (QB), a decision of Justice Acton of this Court; 32262 BC Ltd v G Pataki Enterprises Ltd, [1998] AJ No 313 (CA); andDirect Cash ATM Processing Partnership v 564024 Alberta Inc, 2006 ABPC 112, a decision of Judge O’Ferrall, now a member of ourCourt of Appeal.

VII. Conclusion [30] I agree with Judge Ingram. The clause as set out in paragraph 11 of the contract which claims as liquidated damages anamount equal to the amount of the monthly charges plus applicable sales taxes that would ordinarily become due to the contractor for thebalance of the term is a measurement of gross income and not a genuine pre-estimate of loss of net profit in the context of the contractbetween the parties. It is an unreasonable and oppressive response to the repudiation of the contract, and therefore a penalty, not agenuine pre-estimate of damages.

This is not because there was any proof before the trial judge of the quantitative difference betweenthe gross income and net profit figures, but because qualitatively it is unfair and inequitable to charge a gross income amount, whateverit is, when the loss suffered by Super Save was loss of net profit, whatever it is, on a liquidated damages provision in a contract. [31] I uphold the decision of Judge Ingram in dismissing Super Save’s civil claim. VIII. Costs [32] Shenwei is awarded taxable costs on a party and party basis in this Court and in the Court below.

Heard on the 10 th day of November, 2017. Dated at the City of Edmonton, Alberta this 22 nd day of December, 2017. K.P. Feehan J.C.Q.B.A. Appearances: James R. Kitsul for the Appellant David L. Schwartz for the Respondent