Input Capital Corp. v Gustafson, 2019 SKCA 78

Court of Appeal for Saskatchewan Docket: CACV3254 Citation: Input Capital Corp. v Gustafson , 2019 SKCA 78 Date: 2019-08-16 Between: Input Capital Corp. Appellant/Respondent by Cross-Appeal (Plaintiff) And Terry Blaine Gustafson Respondent/Appellant by Cross-Appeal (Defendant) And Morris Feduk, as the Representative Plaintiff for the Class Action Litigation against Input Capital Corp. Proposed Intervenor Before: Richards C.J.S., Caldwell and Leurer JJ.A. Disposition: Appeal allowed; cross-appeal moot Written reasons by: The Honourable Mr.

Justice Caldwell In concurrence: The Honourable Chief Justice Richards The Honourable Mr. Justice Leurer On Appeal From: 2018 SKQB 154 , Regina and Estevan Appeal Heard: February 25, 2019 Counsel: Joel A. Hesje, Q.C. and Graham E. Quick for the Appellant Gordon J. Kuski, Q.C., William G. Lane and Matthew J. Schmeling for the Respondent E.F. Anthony Merchant, Q.C. for the Proposed Intervenor Caldwell J.A. I. Introduction [ 1 ] In this appeal, Input Capital Corp. [ICC] seeks to set aside the judgment of the Court of Queen’s Bench trial judge in Input Capital Corp. v Gustafson , 2018 SKQB 154 [ Trial Decision ].

Although the Trial Decision addresses 24 issues, the matters before us all relate, in one way or another, to the trial judge’s finding that a series of forward streaming contracts and security instruments between the ICC and Terry Blaine Gustafson were unconscionable and had to be set aside in their entirety. In the cross-appeal, Mr. Gustafson seeks to set aside the award of costs after trial. The Court dismissed the intervenor application at the hearing of this appeal, with oral reasons. [ 2 ] As I would allow the appeal, the cross-appeal is moot. II. Trial decision A.

Background [ 3 ] The appeal has its genesis in an offer by ICC to purchase canola from Mr. Gustafson and related farming corporations [together, Gustafson Farms]. That bargain was struck early in 2014 and amended over time to provide for the delivery of canola in 2014 and into the future.

For the purposes of reference, the parties entered into the following agreements: (a) $800,000 short-term spot contract for 2,000 tonnes of canola to be delivered in January and February 2014, dated January 2014 [First Spot Contract]; (b) $800,000 short-term spot contract for 2,000 tonnes of canola, dated March 2014 [Second Spot Contract]; (c) $800,000 purchase contract for 1,950 tonnes of canola, dated April 2, 2014, which superseded the Second Spot Contract [Purchase Contract]; (d) $2 million forward streaming contract for 1,790 tonnes of canola annually from 2014 to 2019, dated April 30, 2014, which superseded the Purchase Contract and incorporated its canola delivery requirements [First Streaming Contract]; (e) $2 million mortgage dated April 30, 2014 [April 2014 Mortgage]; (

f) general security agreement dated April 30, 2014 [April 2014 GSA]; (g) $1 million forward streaming contract for an additional 700 tonnes of canola annually from 2015 to 2020, dated December 31, 2014 [Second Streaming Contract];

(h) $3 million mortgage dated December 31, 2014 [December 2014 Mortgage]; (

i) general security agreement dated December 31, 2014 [December 2014 GSA]; and (

j) agreement dated March 31, 2015, amending the Second Streaming Contract such that ICC paid Gustafson Farms an additional $1.5 million in exchange for Gustafson Farms’ covenant to deliver an additional 3,750 tonnes of canola in 2015 and its entire crop in 2015 [Amending Agreement]. [ 4 ] All told, Gustafson Farms contracted under the Streaming Contracts and the Amending Agreement to deliver 1,790 tonnes of canola in 2014 [1] and 6,240 tonnes in 2015, with an ongoing annual delivery requirement of 2,490 tonnes, in consideration for an upfront payment of $4.5 million from ICC as well as future payments at times of delivery.

By the fall of 2015, Gustafson Farms had defaulted under all but the First Spot Contract by failing to deliver the canola ICC had purchased. This led ICC to commence two actions against Gustafson Farms. In the first action (QBG 2120/2015, Regina), ICC sought injunctive and declaratory relief against Gustafson Farms. In the second (QBG 89/2017, Estevan), ICC sought foreclosure on the Mortgages or judicial sale of the mortgaged lands. Both actions proceeded together before the Court of Queen’s Bench in a modified

summary judgment process where the evidence consisted of affidavits and viva voce testimony. [ 5 ] As noted, one of the 24 issues raised at trial was whether, other than the Spot Contracts, the foregoing agreements [Agreements] were unconscionable. B. The issue of unconscionability at trial [ 6 ] When he came to address unconscionability in the Trial Decision , the trial judge first examined relevant case law and then framed the issues before him under three headings, taking each in turn in his analysis: [116] In this case, for Mr.

Gustafson to succeed in establishing that the contracts with ICC (or any of their terms) are unconscionable, he must establish the following three requirements: 1. There was, at the time of entering the agreements, an inequality between himself and ICC, where ICC was in the more powerful position; 2. That Mr. Nystuen, on behalf of ICC, used this position of power in an unconscionable manner to achieve a material advantage over Mr. Gustafson; and 3.

There is substantial unfairness in the agreements (or individual terms) themselves. [ 7 ] In his reasons under the first heading, the trial judge concluded Gustafson Farms had been experiencing “financial distress, which led to a substantial inequality in bargaining power” (at para 117), later describing it as “significant financial distress” (at para 119); whereas, the trial judge found “ICC was a stable and successful company, with substantial capital at its disposal” (at para 123), referring to representations ICC had made in its promotional material.

This led the trial judge to write: [124] I have no difficulty in concluding that Mr.

Gustafson’s financial distress, and ICC’s relative strength created a substantial inequality in bargaining power that existed at all times throughout their relationship, including when the Purchase Agreement, the Streaming Contracts and the Amending Agreement were executed. [ 8 ] Under the second heading, the trial judge began by addressing the personal attributes of ICC’s representative, Gord Nystuen, finding he was the “front man for ICC” when negotiating with farmers and that he was a “sophisticated, accomplished and knowledgeable businessman” (at para 125).

The trial judge then described ICC’s business model of streaming contracts as being “new and innovative” and “not like anything to which farmers were accustomed”, but which was “very profitable for ICC” (at para 125). He later observed that the Agreements were “heavily one-sided” (at para 126), describing them in these terms: [126] … If the farmer is financially stable and a successful producer, able to meet his or her obligations under the contract, ICC profits handsomely, because it acquires canola at what amounts to a price substantially less than market price.

If the farmer fails, ICC enforces its security agreements, and acquires land or other valuable assets. Under the first scenario, the farmer also makes out all right. Under the second, not so much.

Later, the trial judge said he was satisfied ICC had “emphasized the positive aspects” of the Agreements and had “glossed over or failed to mention many of the negative aspects”, including the effect of the security ICC had taken over the assets of Gustafson Farms and the many ways that security could become enforceable (at para 130). [ 9 ] Given his conclusions about the overall nature of the Streaming Contracts, the trial judge found ICC had an “extra onus” to exercise diligence when assessing a farmer’s financial stability; however, in the case at bar, he found ICC had done “little in the way of assessing Mr.

Gustafson’s financial stability” (at para 127). Furthermore, the trial judge found ICC had been aware Gustafson Farms was “desperate to sell” canola because ICC had made it difficult for farmers to sell canola independently (at para 128). Moreover, the trial judge found ICC had knowledge Gustafson Farms was under “significant financial pressure” when it signed the Purchase Agreement due to its debts to Farm Credit Canada and TD Bank—which “was why Mr. Gustafson insisted on being paid in advance of delivery” (at para 128).

The trial judge also examined ICC’s contractual obligation to deliver canola to Viterra Inc. and other buyers, concluding this was why ICC had been “willing … to provide a significant amount of money up-front to someone like Mr. Gustafson”—which “led to the execution of the First Streaming Contract” (at para 129). [ 10 ] In addition to the circumstances of negotiation described above, the trial judge found the parties had negotiated the Agreements “rather casually and informally” and ICC had been “more than happy to have Mr. Gustafson enter the agreements without having the benefit of legal advice” (at para 130).

Further, he found ICC had not provided Gustafson Farms with advance copies or signed copies of the Agreements, which were “lengthy and complicated” (at para 131). The trial judge also found Mr. Gustafson had signed the

Agreements “quickly” while “anxious to get to other tasks” and with “little detailed discussion of many of the important terms” (at para 131). The trial judge then connected the circumstances of execution of all of the Agreements with his assessment of the nature of the Agreements themselves, writing: [132] In my view, the terms of all of these agreements are so unfavourable to Mr. Gustafson, and the consequences to him so harsh in the event of default, that treating the execution of such agreements as a casual and informal matter is a factor that weighs heavily in favour of finding that Mr.

Nystuen acted unconscionably. [ 11 ] In the trial judge’s view, this factor was not static, but had grown in its importance as the arrangement between the parties had progressed. In the Trial Decision , the trial judge notes that the circumstances at play when ICC and Gustafson Farms entered into the subsequent-in-time Agreements factored heavily in his finding that ICC had used an increasingly inequitable bargaining position to its advantage: [133] Moreover, Mr. Nystuen was well aware, by the end of 2014, that Mr. Gustafson had not delivered the canola he was required to deliver for that year.

But, instead of terminating the contract, or taking steps to enforce it, Mr. Nystuen advanced more money to Mr. Gustafson, and negotiated a Second Streaming Contract, which made Mr. Gustafson’s delivery obligations much more onerous. Shortly after the Second Streaming Contract was executed, Mr. Nystuen became aware that Mr. Gustafson had lost his revolving line of credit, and had run out of options for financing. This led to the creation of the Amending Agreement, which required Mr.

Gustafson to deliver every bushel of grain that came off his land in 2015 to ICC, and gave ICC the right, unilaterally, to require a similar arrangement in 2016. [134] Despite the evidence of Mr. Gustafson’s mounting financial difficulties, Mr. Nystuen continued to insist that Mr. Gustafson enter the contracts on ICC’s terms. There was no negotiation of any of the terms, apart from required quantities of delivery, amount of advance payment, and amount of crop payments. [135] All of this led to ICC gaining a material advantage, in that it put ICC in a position of increasing strength while driving Mr.

Gustafson into a position of increasing weakness in their contractual relationship. The more up-front funding ICC provided, the more Mr. Gustafson’s chances of obtaining financing elsewhere diminished. The more ICC propped up Mr. Gustafson’s unprofitable farming operation, the harder it became for him to consider alternatives. And, the more ICC increased Mr. Gustafson’s delivery obligations, the more difficult it became for him to meet those obligations, meaning he would be more likely to default, and create a situation where ICC would enforce its security. [136] In short, I am satisfied that Mr.

Nystuen and ICC used their positions of relative power in an unconscionable manner to achieve a material advantage over Mr.

Gustafson. [ 12 ] Under the third and final heading, the trial judge concluded the combined effect of the Agreements was substantially unfair and that all of the Agreements had to be set aside in their entirety by reason of their “cumulative effect” (at para 137), explaining that, while there “would not likely” be substantial unfairness if everyone met their obligations, a bonus tonnes provision in the Streaming Contracts and a few provisions under the Amending Agreement made the relationship unconscionable, particularly when the security instruments were taken into account.

However, the “real unfairness” in the trial judge’s assessment was on the risk side of the contractual equation, where he found “there is no risk to ICC in the Streaming Contracts” (at para 145) but that breach of any term by Gustafson Farms gives ICC the right to demand repayment of sums paid and to foreclose on Gustafson Farms’ land and to “seize all of his present and after- acquired property” (at para 146). On the other hand, the trial judge observed that the Streaming Contracts “contain no specific provision regarding remedies Mr.

Gustafson would have in the event of default by ICC, for instance for failing to make crop payments as required” (at para 147). All of which led the trial judge to conclude his analysis by saying: [149] The agreements reflect a highly profitable arrangement for ICC, which is almost entirely without risk. For a farmer like Mr. Gustafson, the benefits appear generous at the front end, but the longer the contracts go on, the smaller the benefits, and the greater the risk.

There is a substantial imbalance to start with, and the more dire the financial situation of the farmer, the more pronounced this imbalance becomes.

In the circumstances of this case, when the terms of the agreements are considered cumulatively, and in light of the substantial inequality in bargaining power that led to them, I can reach no conclusion other than that the agreements must be set aside as unconscionable. [ 13 ] The trial judge summarised his analysis of the issue of unconscionability in this way: [150] I am satisfied that, in the circumstances of this case, the Purchase Agreement, the Streaming Contracts, the Amending Agreement, the Collateral Mortgage, the Collateral Security Agreements, and the Mortgage Amending Agreement are unconscionable.

They must all be set aside. [ 14 ] ICC has appealed against this result under three grounds, which impugn almost every aspect of the Trial Decision as it relates to unconscionability. III. Analysis [ 15 ] Under its principal ground of appeal, ICC alleged the trial judge erred in fact and in law when he concluded the Agreements were unconscionable and, therefore, were void and unenforceable in their entirety. In argument, ICC broke this ground into four discrete parts, taking issue with the trial judge’s

interpretation of the principle of unconscionability as it relates to: (

i) the relevant attributes or characteristics of the weaker party; (ii) the necessary degree of inequality between the parties; (iii) the requirement that the stronger party have knowledge of an inequality of bargaining position; and (iv) the degree of improvidence in the bargain struck. [ 16 ] ICC also raised related questions about how the trial judge approached the award of equitable relief and about the breadth of the relief so granted. In this respect, ICC said the trial judge erred by setting aside the Agreements in their entirety as opposed to simply severing unconscionable provisions.

Furthermore, ICC asserted the equitable remedy of restitution was not available because Gustafson Farms had not restored ICC to its original position and because the clean-hands doctrine barred Gustafson Farms from obtaining equitable

relief in the circumstances of this case. Given my conclusion on the principal grounds of appeal, I have not addressed these assertions oferror. [17] I will now briefly review the law on the principle of unconscionability. A.

The principle of unconscionability [18] In Morrison v Coast Finance Ltd (1965), (BC CA), 55 DLR (2d) 710 (BCCA) [Morrison], a germinal case inCanada under the principle of unconscionability, Davey J.A. described the requirements of the principle in this way (at 713): … [A] plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by astronger party against a weaker.

On such a claim the material ingredients are proof of inequality in the position of the parties arising outof the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of thebargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel byproving that the bargain was fair, just and reasonable: Earl of Aylesford v. Morris (1873), L.R. 8 Ch. 484, per Lord Selborne, L.C., at p.491; or perhaps by showing that no advantage was taken: see Harrison v.

Guest (1855), 6 De G.M. & G. 424 at p. 438, 43 E.R. 1298;affirmed (1860), 8 H.L.C. 481 at pp. 492-3, 11 E.R. 517. In Fry v. Lane (1888), 40 Ch. D. 312, Kay, J., accurately stated the modern scopeand application of the principle, and discussed the earlier authorities upon which it rests. At p. 322 he said: The result of the decisions is that where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor havingno independent advice, a Court of Equity will set aside the transaction.

This will be done even in the case of property in possession, and à fortiori if the interest be reversionary. The circumstances of poverty and ignorance of the vendor, and absence of independent advice, throw upon the purchaser, when thetransaction is impeached, the onus of proving, in Lord Selborne’s words, that the purchase was “fair, just, and reasonable.” (Emphasis added) [19] Shortly after Morrison, in Knupp v Bell (1966), (SK KB), 58 DLR (2d) 466 (Sask QB) [Knupp QB], aff’d(1968), (SK CA), 67 DLR (2d) 256 (Sask CA) [Knupp CA], MacPherson J. applied the principle of unconscionability toa sale of farmland.

In his analysis, MacPherson J. first found the sale price was “grossly inadequate” and then he looked to the parties’bargaining positions and how the bargain had been struck. When explaining his inquiries, MacPherson J. said he was considering“whether Mrs. Bell was capable of adequately protecting her own interests” (at 475). In Knupp QB, that inquiry spanned factors such asthe plaintiff’s knowledge of Mrs. Bell and of her forgetfulness and her disorientation, as well as her pridefulness and the fact the plaintiffwas not “an evil man” but was “beclouded by his anxious desire to get title to the land” (at 475).

The inquiry also involved considerationof Mrs. Bell’s lack of business experience and the absence of independent legal advice, the “unseemly” haste of the plaintiff, theplaintiff’s knowledge that Mrs.

Bell’s son had handled her affairs for years, and a finding that the plaintiff “should … have insisted thatshe communicate with her son before selling, or that she take other and independent advice” (at 475). [20] In Knupp CA, when affirming the Queen’s Bench decision, Woods J.A. (for himself and Maguire J.A.) described the principleof unconscionability as applying in circumstances where “the stronger party is given dominion over the weaker”, which then requires thestronger party to prove the transaction was “just, fair and reasonable” (at 259).

Turning to the findings in Knupp QB, Woods J.A. wrote (at259): The learned trial Judge ... held that the facts before him came within these principles so as to show that the contract was unconscionable.He found the price of $35 per acre to be grossly inadequate. He also expressed it as resulting in an immoderate gain at the expense ofAnnie Bell. These facts, combined with his findings as to her condition, as contrasted to that of the plaintiff, were the bases upon which hedismissed the action. In my view the learned trial Judge was justified in so holding.

It is obviously difficult to delineate what degree ofinequality between the parties or the extent of the inadequacy of the consideration which must exist before the jurisdiction may beinvoked. In my view, however, the facts found by the learned trial Judge were supported by the evidence and come within the principlesdiscussed. I would accordingly dismiss the appeal against the dismissal of the plaintiff’s action on the agreement.

Justice Hall (as he then was) concurred in the result but expressed appellate doubt that the consideration was “grossly inadequate” and hewould not have sustained the trial judge’s finding on Mrs. Bell’s mental capacity.

Nonetheless, Hall J.A. agreed the relationship betweenthe parties was such that the trial judge’s ultimate finding that the contract was unconscionable was “proper” (at 261). [21] The British Columbia Court of Appeal revisited the principle of unconscionability in Harry v Kreutziger (1978), (BC CA), 95 DLR (3d) 231 at 237 [Kreutziger], a case where the trial judge had found the transaction in question was notunconscionable. The majority reviewed the case law, referring to Knupp QB and Knupp CA, and then wrote: From these authorities, this rule emerges.

Where a claim is made that a bargain is unconscionable, it must be shown for success that therewas inequality in the position of the parties due to the ignorance, need or distress of the weaker, which would leave him in the power ofthe stronger, coupled with proof of substantial unfairness in the bargain.

When this has been shown a presumption of fraud is raised andthe stronger must show, in order to preserve his bargain, that it was fair and reasonable. [22] Addressing the evidence in Kreutziger, McIntyre J.A. (Craig J.A. concurring) quickly found the bargain—namely, the sale of a$16,000 asset for $4,500, later reduced to $3,930—was improvident (at 237–238). As to the personal attributes of the weaker party,McIntyre J.A. observed that “by education, physical infirmity and economic circumstances, [he] was clearly not the equal of therespondent” (at 237).

Justice McIntyre then wrote: “On the whole of the evidence, it is also my view that the appellant was so dominatedand overborne by the respondent that he was, in the sense of that term used by Davey, J.A., in the Morrison case, supra, within the powerof the respondent in these dealings” (at 238).

When considering the respondent’s assertions that the appellant could have, essentially,walked away from the transaction, McIntyre J.A. observed: “The fact remains, however, he did not, and in my view of the evidence it wasbecause he was overborne by the respondent because of the inequality in their positions and the principles of the cases cited apply” (at

239). [23] In concurring reasons in Kreutziger, Lambert J.A. (with whom Craig J.A. also concurred) agreed with McIntyre J.A.’srestatement of the principle of unconscionability, but took it further by referring to Lloyds Bank Ltd v Bundy, [1974] 3 All ER 757[Bundy], where Lord Denning M.R. had synthesized a single, general principle from five types of unconscionable bargains (i.e., duress ofgoods, unconscionable transactions, undue influence, undue pressure and salvage agreements).

In Bundy, Lord Denning M.R. wrote (at765): Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on ‘inequality of bargainingpower’.

By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are veryunfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reasonof his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by orfor the benefit of the other.

When I use the word ‘undue’ I do not mean to suggest that the principle depends on proof of any wrongdoing.The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing tothe other. I have also avoided any reference to the will of the one being ‘dominated’ or ‘overcome’ by the other. One who is in extremeneed may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean tosuggest that every transaction is saved by independent advice. But the absence may be fatal.

With these explanations, I hope this principlewill be found to reconcile the cases. ... [24] Although not critical of Lord Denning’s statement of the general principle, Lambert J.A. said it was “clearly not intended as atouchstone, since the liberal employment of adjectives makes it too flexible for that purpose, but rather as a demonstration that thecategories of grounds for rescission are interrelated and based on a common foundation, so that cases of one of the five types may provideguidance on another of the types” (at 241).

Following this, Lambert J.A. himself restated the principle as a matter of sufficient divergencefrom objective commercial morality, writing (at 241–242): In my opinion, questions as to whether use of power was unconscionable, an advantage was unfair or very unfair, a consideration wasgrossly inadequate, or bargaining power was grievously impaired, to select words from both statements of principle, the Morrison case andthe Bundy case, are really aspects of one single question.

That single question is whether the transaction, seen as a whole, is sufficientlydivergent from community standards of commercial morality that it should be rescinded. To my mind, the framing of the question in thatway prevents the real issue from being obscured by an isolated consideration of a number of separate questions; as, for example, aconsideration of whether the consideration was grossly inadequate, rather than merely inadequate, separate from the consideration ofwhether bargaining power was grievously impaired, or merely badly impaired.

Such separate consideration of separate questions producedby the application of a synthetic rule tends to obscure rather than aid the process of decision. The single question of whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercialmorality that it should be rescinded must be answered by an examination of the decided cases and a consideration, from those cases, of thefact patterns that require that the bargain be rescinded and those that do not.

In that examination, Canadian cases are more relevant thanthose from other lands, where different standards of commercial morality may apply, and recent cases are more germane than those fromearlier times when standards were in some respects rougher and in other respects more fastidious. In my opinion, it is also appropriate toseek guidance as to community standards of commercial morality from legislation that embodies those standards in law. I have thereforeparticularly considered the facts and decisions in Morrison v. Coast Finance Ltd., supra; Knupp v.

Bell et al. (1966), (SKKB), 58 D.L.R. (2d) 466; affirmed (SK CA), 67 D.L.R. (2d) 256 (Sask. C.A.); Miller et al. v. Lavoie (1966), (BC SC), 60 D.L.R. (2d) 495, 63 W.W.R. 359; Marshall v. Canada Permanent Trust Co. (1968), (AB KB),69 D.L.R. (2d) 260; Gladu v. Edmonton Land Co. (1914), (AB KB), 19 D.L.R. 688, 8 Alta. L.R. 80, 7 W.W.R. 279,; andHnatuk v. Chretian (1960), (BC SC), 31 W.W.R. 130; and I have considered the provisions of the Trade Practices Act,1974 (B.C.), c. 96, and the Consumer Protection Act, 1977 (B.C.), c. 6.

I have applied the standards derived from those authorities to the facts in this case, which are that the respondent purchased for $4,500 aboat that he knew to be worth $16,000 from the appellant, whom he knew to be partially deaf, easily intimidated and ill-advised, by aprocess of harassment.

In my opinion, the whole circumstances of the bargain reveal such a marked departure from community standardsof commercial morality that the contract of purchase and sale should be rescinded. [25] In Norberg v Wynrib, (SCC), [1992] 2 SCR 226 at 256, albeit in the context of a tort claim for sexual assault,the Supreme Court adopted Lambert J.A.’s morality-based approach to the principle of unconscionability in Kreutziger, as well asMcIntyre J.A.’s restatement of the principle in that case, summarising the law in these terms: It must be noted that in the law of contracts proof of an unconscionable transaction involves a two-step process: (1) proof of inequality inthe position of the parties, and (2) proof of an improvident bargain.

Similarly, a two-step process is involved in determining whether or notthere has been legally effective consent to a sexual assault. The first step is undoubtedly proof of an inequality between the parties which,as already noted, will ordinarily occur within the context of a special “power dependency” relationship. The second step, I suggest, isproof of exploitation. A consideration of the type of relationship at issue may provide a strong indication of exploitation. Communitystandards of conduct may also be of some assistance. In Harry v.

Kreutziger (1978), (BC CA), 9 B.C.L.R. 166 (C.A.), anunconscionable transaction case dealing with the sale of a commercial fishing boat for less than its value, Lambert J.A., at p. 177,approached the issue of unconscionability from a different angle: ... questions as to whether use of power was unconscionable, an advantage was unfair or very unfair, a consideration was grosslyinadequate, or bargaining power was grievously impaired, to select words from both statements of principle, the Morrison case and theBundy case, are really aspects of one single question.

That single question is whether the transaction, seen as a whole, is sufficientlydivergent from community standards of commercial morality that it should be rescinded. If the type of sexual relationship at issue is one that is sufficiently divergent from community standards of conduct, this may alert thecourt to the possibility of exploitation. [26] Overall, the combined Kreutziger approach to unconscionable transactions finds expression in Saskatchewan in Dolter v Media

House Productions Inc. , 2002 SKCA 140 , 227 Sask R 153, where this Court reversed the judgment in Dolter v Media House Productions Inc. , 2002 SKQB 228 , 220 Sask R 271 [ Dolter QB ], but took no issue with the way Klebuc J. (as he then was) had identified and summarised three threshold factors for an unconscionable transaction (at para 20): ... 1. Significant inequality in bargaining position exists between the parties based on factors such as the relative knowledge and education of the parties, the financial needs of the weaker party, or other circumstances that coerced the weaker party; 2.

The stronger party has used its position of power in an unconscionable manner to achieve a material advantage over the weaker party. If it has not, then the bargain should not be interfered with even though it may be viewed as improvident, provided that it does not otherwise offend the third threshold factor hereinafter stated. 3. The bargain arrived at has given the one party a grossly unfair advantage over the other, or otherwise is sufficiently divergent from community standards of commercial morality to warrant it being set aside.

Thus, if the bargain is fair the fact one of the parties was at a material disadvantage because of ignorance, need or other distress is of no moment. [ 27 ] The trial judge in this case referred to the factors set out in Dolter QB , as have judges in many other Saskatchewan cases, see Burkardt v Gawdun , 2003 SKQB 100 at para 31 , 231 Sask R 134; Gawdun v Burkardt , 2004 SKCA 128 at para 9 , 254 Sask R 271 [ Gawdun CA ]; Rogers v Lane Realty Corp. , 2005 SKQB 330 at para 20 , 265 Sask R 261; Martel v Mohr , 2011 SKQB 161 at para 85 , 370 Sask R 104; Cardinal v Bomok , 2013 SKQB 160 at para 22 , 419 Sask R 275; including the subsequent case of Primewest Mortgage Investment Corporation v Azimi , 2019 SKQB 37 at para 26 .

The trial judge also referred to Van de Geer Estate v Penner , 2006 SKCA 12 , [2006] 7 WWR 575 [ Van de Geer Estate ], where Richards J.A. (as he then was) distilled from Morrison , Knupp QB and Knupp CA , the following

summary of the requirements of the principle of unconscionability: [38] In order to mount a successful argument of unconscionability, a plaintiff must first establish an inequality in the position of the parties arising out of the ignorance, need or distress of the weaker which left him or her in the power of the stronger. Second, the plaintiff must establish substantial unfairness in the bargain.

When these two elements have been shown, a presumption of fraud is raised and the stronger party must show, in order to preserve the bargain, that it is fair and reasonable. … [ 28 ] The approach of the courts in Alberta is much the same, although the principle of unconscionability is described a bit differently than it is in Dolter QB and in Van de Geer Estate .

For example, the Court in Cain v Clarica Life Insurance Company , 2005 ABCA 437 , [2006] 7 WWR 111 [ Cain ], drew on Morrison and Norberg v Wynrib , as well as Canadian Imperial Bank of Commerce v Ohlson , 1997 ABCA 413 , 154 DLR (4th) 33, and other authorities, to outline the elements of the principle in this way: [32] Those authorities discuss four elements which appear to be necessary for unconscionability. (Some cases state some of the four as exceptions to be disproved by the alleged oppressor, but nothing turns on onus in this case.) The four necessary elements are 1. a grossly unfair and improvident transaction; and 2. victim’s lack of independent legal advice or other suitable advice; and 3. overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and 4. other party’s knowingly taking advantage of this vulnerability. [33] No reported case has come to my attention which upset a contract in the absence of one of these four elements, let alone all of them. … See also Lydian Properties Inc. v Chambers , 2009 ABCA 21 at paras 13–14 , [2009] 3 WWR 426. [ 29 ] A theme that runs through the jurisprudence, which is made quite clear in the Alberta case law, is that a conspicuous inequality in bargaining power must be proven before the courts will apply the principle of unconscionability.

In this regard, Coutu J. pointedly observed in Floyd v Couture , 2004 ABQB 238 , [2005] 3 WWR 287: [146] My view is that, what is meant by inequality in power is where one party is at a serious disadvantage, so serious they can be taken advantage of or exploited. I note Lord Denning referred to “where bargaining power is grievously impaired”. Probably every contract involves some disparity between the parties in terms of bargaining power and business knowledge.

Surely, it requires more than mere inequality. [147] As for the other argument, it seems to me inequality of bargaining positions alone is not enough; it must be shown it was used. It is often referred to as “unconscientious use of power” or “abuse of a position of dominance.” However, if the court finds the agreement is substantially unfair, it seems implicit the advantage was used. [ 30 ] The Ontario Court of Appeal adopted the approach in Cain in its decision in Titus v William F.

Cooke Enterprises Inc. , 2007 ONCA 573 , 284 DLR (4th) 734 [ Titus ], where the Court noted: [36] A party relying on the doctrine of unconscionability to set aside a transaction faces a high hurdle.

A transaction may, in the eyes of one party, turn out to be foolhardy, burdensome, undesirable or improvident; however, this is not enough to cast the mantle of unconscionability over the shoulders of the other party: see Fridman, The Law of Contract in Canada (Fifth Edition), p. 320. [ 31 ] Most recently, in its decision in Heller v Uber Technologies Inc. , 2019 ONCA 1 , 430 DLR (4th) 410 [ Heller ], the Ontario Court of Appeal provided a

summary of the principle as it applies in that province:

[60] I pause at this juncture to address the proper test to be applied in determining whether a contractual provision is unconscionable. In Ontario, the existing case law establishes that there are four elements to the test. Those elements are set out in Titus v. William F. Cooke Enterprises Inc. , 2007 ONCA 573 , 284 D.L.R. (4th) 734 , at para. 38 , recently affirmed in Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P. , 2018 ONCA 98 , 420 D.L.R. (4th) 335 .

They are: 1. a grossly unfair and improvident transaction; 2. a victim’s lack of independent legal advice or other suitable advice; 3. an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and 4. the other party’s knowingly taking advantage of this vulnerability. [ 32 ] In Newfoundland and Labrador, the Court of Appeal recently and thoroughly reviewed the jurisprudence on the principle of unconscionability in Downer v Pitcher , 2017 NLCA 13 , 409 DLR (4th) 542 [ Downer ].

In its decision, the Court found the principle was still evolving, with different courts stating it differently, but that the general formulation of the principle involved two things: (

i) an inequality of bargaining power giving rise to a special or significant disadvantage on the part of the weaker party; and (ii) the use of the disadvantage by the stronger party in the resulting transaction (at paras 36–38).

The Court also concluded it was futile to use linguistic formulae—such as “overwhelming imbalance”, “grossly inadequate”, “grievous impairment”, “inequality”, “grossly unfair”, “substantially unfair”, etc.—to determine unconscionability issues, saying instead: [20] A level of unequal bargaining power that distorts a transaction to the point that the presumption of rational autonomy in self- interested contract-making is displaced is a better way of describing the point at which equity should intervene than by simply using a single adjective that is malleable in its meaning .

It ties the examination to a consideration of the underlying purpose of equitable intervention and its place among the fundamental concepts that support contractual enforceability. That said, any attempt to define a bright line that clearly identifies on which side of the line a particular case falls will likely fail.

That is why a return to first principles every time will likely yield a more satisfying result in each case. [ 33 ] When addressing the scope of the court’s jurisdiction to relieve against an unconscionable transaction, the Court in Downer wrote: [37] Viewed in this light, the key question must be whether there was a degree of vulnerability that had the potential of materially affecting the ability, through rational autonomous decision-making, to protect one’s own interests .

If so, a duty will be cast on the other party not to act or to refrain from acting in such a way that the resulting transaction is reached in a manner that involves the victim being unfairly taken advantage of. As expressed by Coutu J. in Floyd v. Couture et al at paragraph 146 , “what is meant by inequality in power is where one party is at a serious disadvantage, so serious that they can be taken advantage of or exploited.” [38] Obviously, for the resulting transaction to be rendered impeachable, it must be shown that it resulted from the disadvantage that existed.

Only then can it be said that the claimant has been taken advantage of. [ 34 ] After comprehensively considering the requirements of the principle of unconscionability, the Court in Downer summarised its conclusions and restated the general principle in terms consistent with Van de Geer Estate : [54] Under these circumstances, I believe the applicable principles could be stated as follows: 1.A person claiming relief on grounds of unconscionability may succeed where: (

a) there is an inequality of bargaining power between the parties resulting from or created by a special and significant disadvantage by reason of some condition or circumstance that provides an opportunity for the other party to take advantage of the party suffering from the disadvantage; and (

b) the other party unfairly or unconscientiously (in the sense of lacking conscience) takes advantage of that opportunity. ... The Court then went on to address the specifics of the general principle in this way: 2. Inequality of bargaining position that is relevant to a claim for relief on grounds of unconscionability may arise from the personal characteristics of the claimant or the situation in which he or she finds him- or herself. For example, (

a) personal inequality could include special and significant disadvantage resulting from age, immaturity, senility, mental weakness, ignorance resulting from lack of access to critical information or physical disability; (

b) situational inequality could include special and significant disadvantage resulting from severe financial need or other pressure or dependence based on a trust or confidential relationship.

No matter what the nature of the disadvantage, however, it must involve more than what would be regarded as reasonably tolerable differences and risks of normal human activity and interaction that one would expect from persons engaged in self-interested bargaining (i.e. the disadvantage must be “special”) and it must also have the potential, if allowed to govern the relationship, of the claimant being unfairly being taken advantage of (i.e. the disadvantage must be “significant”) . 3.

The advantage resulting from the inequality of bargaining power need not be a financial advantage; it could be of a more intangible kind that results in a transaction that, but for the disadvantage, the relief-seeker or no reasonable person in the position of the relief-seeker would not likely have entered into.

4. The circumstances surrounding the taking of advantage of the relief-seeker must be such that they make the other party’s actions unconscientious in the sense that in gaining the advantage the other party knew or ought, as a reasonable person in those circumstances, to have known of the relief-seeker’s vulnerability, therefore making it prima facie unfair or unconscionable for the other party to obtain and retain the benefit from the disadvantaged party.

Knowledge could be either actual (personal, willful blindness or willful or reckless failure to make relevant and reasonable inquiries) or constructive (knowledge of circumstances as would indicate, in the mind of a reasonable person, the relief-seeker’s vulnerability). 5. Where the conditions in (1) are present, the normal policies of preserving the freedom and sanctity of contract will be displaced in favour of providing relief to the party claiming to have been taken advantage of, unless the other party can demonstrate: (

a) the resulting transaction was not unfair in the sense that it was not improvident or otherwise did not in fact confer an undue advantage, whether tangible or intangible, on the other party; (

b) the relief-seeker had the benefit of relevant legal or other advice and, knowing of the disadvantage, voluntarily chose to proceed with the transaction anyway; (

c) the other party took steps to bring the unequal circumstances to the attention of the relief-seeker or otherwise acted reasonably to be protective of the relief-seeker’s vulnerable position; (

d) recognized equitable defences apply. 6.

While not a requirement for relief, evidence of the existence of a resulting improvident bargain, in the sense of some financial detriment to the relief-seeker, may be relevant to drawing an inference that a special and significant disadvantage existed or that an unfair or unconscionable use was made of the position of disadvantage of the relief-seeker by the other party. [ 35 ] In Hess v Thomas Estate , 2019 SKCA 26 , [2019] 5 WWR 270 [ Hess ], Barrington-Foote J.A. accepted the analysis in Downer and added some detail to the distillation of the principle of unconscionability in Van de Geer Estate , addressing the degree of inequality that must arise between the parties.

After reviewing much of the foregoing jurisprudence, as well as the decision in Douez v Facebook, Inc. , 2017 SCC 33 , [2017] 1 SCR 751, and John D.

McCamus, The Law of Contracts , 2d ed (Toronto: Irwin Law, 2012), Barrington-Foote J.A. summarised the law regarding the requirement of an inequality in bargaining position in this way: [77] Each of these statements supports the conclusion that a party relying on the doctrine of unconscionability must show there is inequality to a degree that the stronger party has power over the other to the extent that the ability of the weaker party to adequately protect their own interests is materially undermined.

They are consistent with the test specified in Van de Geer , which calls for the party relying on the doctrine to demonstrate “ignorance, need or distress of the weaker which left him or her in the power of the stronger”.

They are also consistent with Dolter v Media House Productions Inc. , 2002 SKCA 140 , 227 Sask R 153 – the other decision of this Court cited by the Chambers judge – which refers with approval to a test that calls for proof of “significant inequality in bargaining position” and that “[t]he stronger party has used its position of power in an unconscionable manner to achieve a material advantage over the weaker party”.

Mere inequality is not enough. [ 36 ] As can be seen, the expression of the principle of unconscionability in Downer is more full-bodied than those in Van de Geer Estate , Dolter QB , Cain and Heller and less redolent than Morrison , Bundy , and Kreutziger .

However it may be expressed, the principle is not a panacea that remedies all manner of improvident or foolish bargains: Swan, Adamski and Na, Canadian Contract Law , 4th ed (LexisNexis: Toronto, 2018) at 984–986. [ 37 ] At root, the jurisprudence describes a principle that is underpinned factually by a consequential inequality of bargaining power found alongside an otherwise inexplicably-irresponsible bargain that, together, call out for judicial intervention because the stronger party has so taken advantage of the weaker that it would be inequitable (i.e., unconscionable) to allow the stronger to benefit itself through the bargain struck. [ 38 ] In this appeal, ICC says the trial judge failed to properly address whether the requirements of the principle were met in the circumstances of the bargain it had struck with Gustafson Farms.

I turn now to address ICC’s arguments in that regard. B. The relevant attributes or characteristics of the weaker party [ 39 ] It is clear from the case law that the personal characteristics or attributes of the weaker party are a fundamental consideration in the determination of whether an inequality of bargaining power exists.

Without here addressing the required degree of inequality necessary to invoke the principle of unconscionability, ICC says the trial judge erred in principle because he failed to consider relevant evidence that was material to that question in this case. [ 40 ] In his reasons on this point, the trial judge concluded Gustafson Farms had been experiencing “financial distress, which led to a substantial inequality in bargaining power” (at para 117), later describing it as “significant financial distress” (at para 119). As to the particulars of this, the trial judge wrote: [118] While it is true that Mr.

Gustafson had significant assets, it must be remembered that, at the time Mr. Nystuen and ICC came into the picture, Mr. Gustafson had suffered two consecutive years of bad financial times, and was on the brink of a third. In 2012, he had been able to seed only a fraction of his normal acreage because of extremely wet conditions. In 2013, despite producing excellent crop yields, he had been unable to sell much, if any, of his canola.

While this had much to do with market conditions, I accept that it was exacerbated by the fact that ICC had bought up a large share of the canola delivery capacity in the area, leaving farmers like Mr. Gustafson in a very difficult position. As of early April of 2014, Mr. Gustafson owed nearly $800,000 to Farm Credit Canada. He also had been unable to pay his 2013 operating line of credit with the TD Bank. Mr. Gustafson was in a very tight spot for a farmer: if he could not pay his creditors, he would not be able to seed a crop in 2014. …

[120] The up-front payment under the First Streaming Contract enabled Mr. Gustafson to get his head back above water for 2014, but, based on the evidence before me, it did not completely alleviate his financial distress. In his affidavit of September 15, 2015, Mr. Gustafson reported a loss of $3,578,446 for his farming operation in 2014. Furthermore, despite the fact that Mr. Gustafson continued to farm on a large scale, and owned substantial assets, he was swimming in a sea of red ink. Notes of his meeting with MNP on January 21, 2015, suggested that, if Mr.

Gustafson continued to run his farming operation as planned, he faced a projected loss of $2,275,257 for the 2015 crop year, and that none of the crops he intended to seed would cover the cost of production. Even if he substantially reduced his seeded acreage, Mr. Gustafson was still projected to lose more than $1,600,000. His debt to equity ratio for 2014 stood at 179.8%, and it was expected to climb to 622% in 2015. MNP recommended that Mr. Gustafson consider declaring bankruptcy, or at least making a proposal to his creditors. [121] In considering this issue, I cannot ignore the fact that Mr.

Gustafson continued to make significant grain sales in 2014 and 2015. That said, he also continued to face huge expenses related to financing, servicing and repairing his equipment, labour costs, fuel, and other capital costs. He told Mr. Nystuen that, if ICC could not provide him with more funds in 2015, he would be forced to quit farming. [122] It is clear that Mr. Gustafson’s financial distress continued in 2015. In early 2015, the TD Bank advised Mr.

Gustafson it was discontinuing his $1,500,000 revolving line of credit, in large part because he was obtaining funding from ICC. [ 41 ] By contrast, the trial judge found “ICC was a stable and successful company, with substantial capital at its disposal” (at para 123). This led the trial judge to conclude: [124] I have no difficulty in concluding that Mr.

Gustafson’s financial distress, and ICC’s relative strength created a substantial inequality in bargaining power that existed at all times throughout their relationship, including when the Purchase Agreement, the Streaming Contracts and the Amending Agreement were executed. [ 42 ] In its arguments on appeal, ICC recognises the evidence at trial could be taken as supportive of a finding that Gustafson Farms was experiencing financial distress at the time it entered the first Agreement, but it asserts that evidence was a small part of the relevant evidence at trial and it does not tell the whole story. [ 43 ] ICC points out that the trial judge failed to address evidence to the effect that Mr.

Gustafson is a well-educated, experienced farmer and businessman. He attended university and obtained a Master’s degree in divinity. He and his son, individually and through their corporations, operated a farm that, at its peak, involved 125 quarters of land. Gustafson Farms also offered custom farming services. Mr. Gustafson owned a car dealership. He built houses and had developed a city block in Estevan, Saskatchewan. He had a house moving company. Gustafson Farms had professional advisors throughout and had received legal advice about some of the Agreements. Mr.

Gustafson was familiar with financing and security instruments, but he regularly signed contracts without reading them. ICC also points to the record to say there was no evidence Mr. Gustafson suffered from mental or physical disability or was unable to understand contracts or to negotiate in his best interest. [ 44 ] Furthermore, ICC says the evidence reveals Mr. Gustafson did not know Gustafson Farms was experiencing financial difficulties—making it difficult to conclude he had seen himself as being in a weak bargaining position. Here, ICC points out Gustafson Farms’ business consultant testified that Mr.

Gustafson “didn’t indicate that he was in any sort of financial difficulty” when the consultant met with him in January 2015—i.e., after all but the Amending Agreement had been executed; rather, he said Mr. Gustafson “felt that he needed to do some business planning”. However, the business consultant said “[o]nce we crunched the numbers, we realized that he was in quite a lot of financial difficulty”. Nonetheless, Mr. Gustafson’s consultant testified Mr.

Gustafson had “continued to insist that he wasn’t under pressure from his principal lender, who I think was FCC at that time, or from [ICC]”. [ 45 ] Having reviewed the transcript and the evidence in the light of the jurisprudence, I agree the evidence ICC has identified is relevant and material to the key question of whether a degree of vulnerability existed on the part of Gustafson Farms that had the potential of materially affecting its ability, through rational autonomous decision-making, to protect its own interests ( Downer at para 37 ).

Although some of the relevant evidence is mentioned earlier in the Trial Decision , it is not referred to and did not factor in the trial judge’s analysis of inequality of bargaining position.

I conclude, therefore, that the trial judge erred in principle by failing to consider evidence that was relevant and material to the question of whether an inequality of bargaining power existed between ICC and Gustafson Farms. [ 46 ] On that finding, I turn to consider a related argument, namely, that the trial judge misunderstood the degree of inequality of bargaining power required under the principle of unconscionability. C. The necessary degree of inequality of bargaining power [ 47 ] I have found error in the factual framework that underpinned the Trial Decision .

The focus under this rubric is on the trial judge’s

interpretation of the degree of inequality of bargaining position required to invoke the principle of unconscionability. [ 48 ] As noted, the trial judge cited first and correctly the distilled principle from Van de Geer Estate , saying a party who seeks to have a contract set aside on the basis of unconscionability must first establish “an inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger” (at para 111).

He then observed correctly that the court’s power to set aside a contract “should not be lightly exercised” and that the court will not set aside an agreement as unconscionable “simply because there is some inequality in bargaining power, or because the contract amounts to a bad deal for one party” (at para 112), citing Gawdun CA , which itself cited and reiterated the statement of the principle in Dolter QB , where Klebuc J. had said it required “ [s]ignificant inequality in bargaining position” or “other circumstances that coerced the weaker party” (emphasis added).

Lastly on this point, the trial judge observed correctly that the requirement of an inequality in bargaining position could be satisfied where it “arises from the impecuniosity or financial distress of the weaker party, and the stronger party is aware of that financial distress” (at para 114). [ 49 ] The trial judge closed his review of the law by concluding, on the foregoing basis, that Gustafson Farms had to establish “[t]here was, at the time of entering the agreements, an inequality between [Gustafson Farms] and ICC, where ICC was in the more powerful position” (at para 116).

As is evident, although he correctly identified the law and its requirements throughout his review of the jurisprudence, when the trial judge came to summarise the law in terms of what Gustafson Farms had to establish at trial, he did so in a

way that purged the assessment of the relative bargaining positions of the parties of all nuance. [ 50 ] According to the jurisprudence, the principle of unconscionability involves the idea of: (

a) a “significant inequality in bargaining position” ( Dolter QB at para 20 ); (

b) an inequality that left the weaker “in the power of the stronger” ( Morrison at 713; Van de Geer Estate at para 38 ); (

c) an “overwhelming imbalance in bargaining power” ( Cain at para 32 ; Heller at para 60 ); (

d) a “level of unequal bargaining power that distorts a transaction to the point that the presumption of rational autonomy in self- interested contract-making is displaced” ( Downer at para 20 ); (

e) an inequality of position that “has the potential for seriously affecting the ability of the relief-seeker to make a decision as to his or her own best interests and thereby allows the other party an opportunity to take advantage of the claimant’s personal or situational circumstances” ( Downer at para 39 ); (

f) a disadvantage that involves “more than what would be regarded as reasonably tolerable differences and risks of normal human activity and interaction that one would expect from persons engaged in self-interested bargaining (i.e. the disadvantage must be ‘special’) and it must also have the potential, if allowed to govern the relationship, of the claimant being unfairly being taken advantage of (i.e. the disadvantage must be ‘significant’)” ( Downer at para 54 ); (

g) a circumstance where “one party is at a serious disadvantage, so serious they can be taken advantage of or exploited” ( Floyd v Couture at para 146 ); and (

h) an “inequality to a degree that the stronger party has power over the other to the extent that the ability of the weaker party to adequately protect their own interests is materially undermined” ( Hess at para 77 ). While the Court in Downer eschewed “linguistic formulae”, it said “what is meant by such terminology is that the inequality must relate to a special and significant disadvantage that has the potential of overcoming the ability of the claimant to engage in autonomous self- interested bargaining” (at para 39).

Regardless of its formulation, the degree of imbalance described in the jurisprudence is not reflected in what the trial judge said Gustafson Farms had to establish at trial or in how he went about his analysis on this point. [ 51 ] For example, when it came to assessing whether Gustafson Farms had met its evidentiary and persuasive burdens, the trial judge began by stating that Gustafson Farms was “experiencing financial distress, which led to a substantial inequality in bargaining power” (at para 117).

He went on to explain that while Gustafson Farms had significant assets, it could not sell much of its 2013 inventory due to the fact ICC had “bought up a large share of the canola delivery capacity in the area, leaving farmers like Mr. Gustafson in a very difficult position” (at para 118). The trial judge then found Gustafson Farms owed $800,000 to Farm Credit Canada and had been unable to pay down its 2013 operating line of credit with the TD Bank and would not be able to seed a crop in 2014 if it did not pay off its creditors (at para 118).

Following this, the trial judge stated he accepted that Gustafson Farms was “experiencing significant financial distress” when Mr. Gustafson executed the First Streaming Contract (at para 119). [ 52 ] However, the trial judge also found the upfront payment under the First Streaming Contract had “enabled Mr. Gustafson to get his head back above water for 2014”, although it did not “completely alleviate his financial distress”, noting the particulars of his financial circumstances (at para 120).

The trial judge then reminded himself that Gustafson Farms had made “significant grain sales in 2014 and 2015” (at para 121), presumably indicating the difficult position in which he found ICC had left farmers in 2013 had been assuaged. The trial judge also accepted Mr. Gustafson’s evidence that he had told ICC that if it could not provide Gustafson Farms with more funds in 2015, he would be forced to quit farming.

Frankly, this last point would seem to put Gustafson Farms in the stronger bargaining position; the adage, attributed originally to John Maynard Keynes, being: “If you owe your bank £100, you have a problem; but, if you owe a million, it has”. Regardless, the trial judge concluded Gustafson Farms’ “financial distress” had continued in 2015 because TD Bank had discontinued its line of credit “in large part because [it] was obtaining funding from ICC” (at para 122). As noted, however, the trial judge makes no reference to the evidence of Mr. Gustafson’s business consultant, who testified that Mr.

Gustafson had not been aware of the nature or extent of his “financial distress” in January 2015. [ 53 ] Juxtaposed to this circumstance of financial distress, the trial judge found ICC had always been a stable and successful corporation with substantial capital at its disposal. [ 54 ] Having set out only the financial circumstances of the parties, the trial judge had “no difficulty in concluding that Mr. Gustafson’s financial distress, and ICC’s relative strength created a substantial inequality in bargaining power that existed at all times throughout their relationship” (at para 124).

Unfortunately, the Trial Decision contains no explanation of how an inequality in financial circumstances gave rise to a such a degree of disadvantage that, importantly, it had the potential of overcoming Gustafson Farms’ ability to engage in autonomous, self-interested bargaining with ICC. First, I expect there is nothing special or significant about a Saskatchewan farmer negotiating a grain delivery transaction from the financial circumstances in which Gustafson Farms found itself. It likely happens every day.

Second, and regardless of its general frequency, the trial judge does not refer to any evidence to suggest that the degree of financial inequality in this case had “materially undermined” Gustafson Farms’ ability to adequately protect its own interests ( Hess at para 77 ). Indeed, some of the trial judge’s findings of fact are pointedly inconsistent with that conclusion. [ 55 ] As I read his reasons, the trial judge pinned his finding that the inequality in bargaining position was sufficient solely on the inequality between Gustafson Farms’ financial circumstances relative to that of ICC.

However, as Barrington-Foote J.A. observed in Hess , “it is not sufficient for the evidence to disclose simple inequality, regardless of degree. The test for unconscionability calls for something more” (at para 71). That is, in this case, the principle of unconscionability required Gustafson Farms to establish that its financial distress was so acute that it overcame Mr. Gustafson’s ability to engage in autonomous, self-interested bargaining with ICC.

As the trial judge did not hold Gustafson Farms to satisfying this requirement, I find he erred in law in his approach to the degree of inequality of bargaining position required to invoke the principle of unconscionability. Moreover, on my assessment of the evidence adduced, Gustafson Farms had failed to establish the required degree of inequality of bargaining position existed between it and ICC in the circumstances of this case.

D. The requirement that the stronger party have knowledge of an inequality of bargaining position [ 56 ] The second legal question raised in this appeal in relation to inequality of bargaining power is whether, and to what extent, the principle of unconscionability requires the stronger party to have knowledge of an inequality of bargaining position. ICC raises the question because, in its observation, the evidence at trial regarding the financial circumstances of Gustafson Farms was “far different” than the information Mr.

Gustafson had presented to ICC at the time Gustafson Farms entered the first Agreement. [ 57 ] At that time, ICC says Mr. Gustafson presented himself as a successful farmer with substantial net worth. ICC then observes there was no evidence upon which to conclude that Mr. Gustafson had represented to ICC that he was in a desperate financial situation or that he was unable to obtain financing from other sources. Rather, prior to signing the first Agreement, Mr.

Gustafson gave ICC a financial statement that showed a net worth of $7,775,000 and a $1.5 million line of credit (zero balance), with the principal assets being $1.5 million in crop inventory ($700,000 owing), $800,000 in vehicles ($300,000 owing), $2.8 million in equipment and machinery ($1.5 million owing), $1.5 million in buildings (nothing owing), $3 million in land (nothing owing), and $500,000 in cash. [ 58 ] ICC also says it made its own inquiries before entering into the first Agreement with Gustafson Farms by inquiring about the potential yield of the farm’s land, relying on reports obtained from Saskatchewan Crop Insurance Corporation, and by examining the line of equipment Gustafson Farms owned.

Although an obviously thin basis of diligence for an $800,000 forward purchase contract, ICC says it was nevertheless satisfied that Gustafson Farms was capable of producing the canola it needed and for which it had contracted. [ 59 ] On this basis, ICC says the trial judge’s finding about the financial distress of Gustafson Farms at the time it entered the first Agreement is not supported by the evidence of which ICC was aware or the representations that had been made to it by Mr. Gustafson. Indeed, ICC says the evidence Gustafson Farms adduced at trial largely contradicts the net worth statement Mr.

Gustafson had given ICC and is, therefore, evidence that Mr. Gustafson had misrepresented Gustafson Farms’ true financial position to ICC.

The point ICC makes on this evidence is that it was wholly unaware of any financial distress on the part of Gustafson Farms and, therefore, could not have knowingly taken advantage of Gustafson Farms’ weak financial position. [ 60 ] In his reasons, the trial judge correctly framed the question relevant to this ground of appeal in terms of whether ICC had “used the inequality of bargaining power in an unconscionable manner to achieve a material advantage over [Gustafson Farms]” (emphasis added).

As framed, the question implies an element of knowledge on the part of the stronger party as to what it is doing to the weaker. The requirement of knowledge is more clearly found in the explanation of the principle in Downer , where the Court wrote (at para 54): ... 4.

The circumstances surrounding the taking of advantage of the relief-seeker must be such that they make the other party’s actions unconscientious in the sense that in gaining the advantage the other party knew or ought, as a reasonable person in those circumstances, to have known of the relief-seeker’s vulnerability, therefore making it prima facie unfair or unconscionable for the other party to obtain and retain the benefit from the disadvantaged party.

Knowledge could be either actual (personal, willful blindness or willful or reckless failure to make relevant and reasonable inquiries) or constructive (knowledge of circumstances as would indicate, in the mind of a reasonable person, the relief-seeker’s vulnerability). [ 61 ] In my assessment, the trial judge’s analysis under this heading is consistent with the requirements of the law, even though it is oriented largely on the improvidence of the bargain the parties had struck and the way it had been struck. That is, the trial judge appears to have approached the matter of knowledge from several vantage points.

He makes several findings that ICC was “aware” of the financial circumstances of Gustafson Farms at critical points during the negotiation and execution of the Agreements. Further, he also approached the question of knowledge on the basis identified by Lambert J.A. in Kreutziger , i.e., by inquiring whether the bargain under the Agreements was so divergent from community standards of commercial morality that it should be rescinded—i.e., constructive knowledge.

Finally, as I read his reasons, the trial judge also alluded to recklessness or wilful blindness as alternative bases for finding constructive knowledge on ICC’s part. [ 62 ] While none of these approaches are expressly stated in the Trial Decision , it is clear from the trial judge’s findings that (

i) he concluded ICC had actual knowledge of the financial circumstances of Gustafson Farms, and (ii) had used that knowledge to take undue advantage of Gustafson Farms when negotiating the Agreements. A few of the trial judge’s material findings in that regard are (at paras 126–136): (

a) ICC was aware Gustafson Farms was desperate to sell canola in part because 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)” (at para 128); (

b) ICC was “aware” Gustafson Farms was under “significant financial pressure” at the time it entered the Purchase Agreement due to debts it owed to Farm Credit Canada and TD Bank, which was “why Mr. Gustafson insisted on being paid in advance of delivery” (at para 128); (

c) ICC needed canola to fulfil its own delivery contracts and was willing “to provide a significant amount of money up-front to someone like Mr. Gustafson” (at para 129); (

d) ICC was “well aware” Gustafson Farms had not performed but, instead of terminating or enforcing the First Streaming Contract, ICC advanced more money to Gustafson Farms and negotiated the Second Streaming Contract, “which made Mr. Gustafson’s delivery obligations much more onerous” (at para 133); (

e) shortly after it entered the Second Streaming Contract, ICC “became aware” Gustafson Farms had lost its revolving line of credit with TD Bank and had run out of options for financing, which “led to the creation of the Amending Agreement, which required Mr. Gustafson to deliver every bushel of grain that came off his land in 2015 to ICC, and gave ICC the right, unilaterally, to require a similar

arrangement in 2016” (at para 133); nonetheless, ICC “continued to insist that Mr. Gustafson enter the contracts on ICC’s terms” and there was “no negotiation of any of the terms, apart from required quantities of delivery, amount of advance payment, and amount of crop payments” (at para 134); and (

f) all of the foregoing circumstances “led to ICC gaining a material advantage, in that it put ICC in a position of increasing strength while driving Mr. Gustafson into a position of increasing weakness in their contractual relationship” because the “more up-front funding ICC provided, the more Mr. Gustafson’s chances of obtaining financing elsewhere diminished”, “[t]he more ICC propped up Mr. Gustafson’s unprofitable farming operation, the harder it became for him to consider alternatives”, and “the more ICC increased Mr.

Gustafson’s delivery obligations, the more difficult it became for him to meet those obligations, meaning he would be more likely to default, and create a situation where ICC would enforce its security” (at para 135). On this basis, the trial judge concluded that he was satisfied ICC had used its “position of relative power in an unconscionable manner to achieve a material advantage over Mr.

Gustafson” (at para 136). [ 63 ] Accordingly, while the trial judge may have but briefly addressed the actual knowledge ICC had of Gustafson Farms’ financial circumstances in terms of ICC’s “awareness” of those circumstances, I conclude the trial judge found ICC had actual knowledge and constructive knowledge of a power imbalance. In large measure, the trial judge reasoned that the improvidence of the bargain and the circumstances of its negotiation supported his conclusion that ICC had taken unconscionable advantage of Gustafson Farms by abusing its relatively stronger bargaining power. [ 64 ] In

summary, while I agree the law of unconscionability requires the stronger party to have knowledge of an inequality of bargaining power, I find the trial judge did not overlook that requirement or the evidence relevant to it. Nonetheless, it remains to be determined whether the trial judge’s conclusions about the improvidence of the bargain struck in this case, upon which his findings of unconscionability are largely based, are themselves in error. E.

The degree of improvidence in the bargain struck [ 65 ] As is by now evident, the trial judge’s decision on the issue of unconscionability was driven by his finding that the bargain struck under the Agreements was so improvident it had to be set aside. Addressing that finding, ICC alleges the trial judge erred by determining that the cumulative effect of the Agreements was substantially unfair (at para 137), pointing to what it says are palpable and overriding errors of fact in the trial judge’s

interpretation of the Agreements and to inconsistent or contradictory findings of fact upon which he relied in his analysis of the providence of the bargain. [ 66 ] As a starting point, ICC notes the trial judge considered the financial implications of the contracts by examining the upfront payment it made to Gustafson Farms and the payments that it was required to make on delivery of canola over the term of the Streaming Contracts.

The trial judge wrote: [138] If one were to examine merely the “bottom line” numbers of each contract and look at what the consequences would be for each party if all the obligations under the contract were met, substantial unfairness would not likely be found . (Emphasis added) [ 67 ] The trial judge later restated his finding of an absence of substantial unfairness under the economic terms of the Agreements but then qualified his finding with reference to the so-called bonus tonnes provisions of the Streaming Contracts, each of which entitled ICC to acquire additional canola from Gustafson Farms in a bumper year.

The trial judge explained the bonus tonnes provisions in this way: [141] Under the Amending Agreement, ICC made an up-front payment of $1,500,000. In return, Mr. Gustafson was to deliver 3,750 tonnes of canola. This works out to ICC paying Mr. Gustafson $400 per tonne. [142] If one were to look only at those numbers, there would be no substantial unfairness. But those numbers do not tell the whole story. Under the First Streaming Contract and Second Streaming Contract, Mr. Gustafson is not just obligated to deliver the “base tonnes” to ICC.

The “base tonnes” is the bare minimum he is required to deliver to meet his obligations. Under the terms of the Streaming Contracts, ICC has the right to purchase additional canola production – up to 15% over the baseline yield from Mr. Gustafson as “bonus tonnes”. Under the First Streaming Contract, ICC would pay Mr. Gustafson $200 for each bonus tonne it purchases, or less than half of the market price during the time. Under the Second Streaming Contract, ICC would pay Mr. Gustafson only $60 per bonus tonne; a mere fraction of the market price. So, the more Mr.

Gustafson produced, the more profitable the contracts became for ICC, and to a certain extent, the less beneficial to Mr. Gustafson. (Emphasis added) [ 68 ] It is clear from the Trial Decision that the bonus tonnes provisions played a determining role in the trial judge’s analysis when finding the whole of the arrangement was unconscionable. But, ICC says the trial judge’s

interpretation of the bonus tonnes provisions and their effect is in error. ICC further says the trial judge went on to reach three findings in his

interpretation of the Agreements that are inconsistent with or contradictory to his initial finding of “no substantial unfairness” and that underpin his conclusion the Agreements are unconscionable, namely, the arrangement is one-sided, the security taken by ICC is itself unconscionable, and each succeeding Agreement is more onerous to Gustafson Farms. [ 69 ] However, before I address these allegations of error, it is important that I identify the appropriate standard of review. 1. Standard of review [ 70 ] The Supreme Court recently transformed the appellate standard of review in contract

interpretation from correctness to palpable and overriding error in Sattva Capital Corp. v Creston Moly Corp. , 2014 SCC 53 , [2014] 2 SCR 633. However, in Ledcor Construction

Limited v Northbridge Indemnity Insurance Co. , 2016 SCC 37 at para 4 , [2016] 2 SCR 23, Wagner J. (as he then was), writing for the majority, carved out an exception to this transformation for standard form contracts where the issue of

interpretation has “precedential value, and there is no meaningful factual matrix that is specific to the particular parties to assist the

interpretation process”. In Wager J.’s opinion, the

interpretation of these types of contracts “is better characterized as a question of law subject to correctness review”. [ 71 ] On the facts of this case, the Agreements are standard form contracts. The trial judge found there was little or no negotiation between Mr. Gustafson and ICC as to their terms. ICC has, as we are given to understand, entered into multiple contractual relationships with farmers in Saskatchewan on the basis of these documents. Although some factual context is relevant to the relationship between the parties in this case, it is not strictly relevant to an

interpretation of the Agreements themselves. In the circumstances, I find the

interpretation of the Agreements has precedential value and there is no meaningful factual matrix that is specific to the particular parties to assist the

interpretation process. That is, the standard of correctness applies in appellate review of the trial judge’s

interpretation of the Agreements. 2. A grossly unfair advantage? [ 72 ] As noted, a basic premise of the principle of unconscionability is that the bargain struck must give the stronger party a “substantially unfair” or “grossly unfair” advantage over the weaker. Justice Lambert, in Kreutziger , wrote that courts may also find a bargain unconscionable where it is sufficiently divergent from community standards of commercial morality to warrant its rescission.

Importantly, the mere fact a bargain is or turns out to be improvident or even foolish for the weaker party does not mean it is an unconscionable transaction ( Downer at para 64 ; Titus at para 36 ; Dolter QB at para 20 ); courts do not relieve contracting parties from the product of their own foolishness. a. The nature of the bargain struck [ 73 ] Turning to the Trial Decision , although he had taken issue with the fairness of the bonus tonnes provisions, when referring to the providence of the bargain as a whole, the trial judge stated: “But

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