



COURT
OF APPEAL FOR BRITISH COLUMBIA




Citation:



Leggett & Platt Canada Co. v.
  Brink Forest Products Ltd.,









2010 BCCA 14




Date: 20100115

Docket:
CA036785

Between:

Leggett & Platt Canada Co./Societe
Leggett & Platt Canada

Appellant

(
Plaintiff
)

And

Brink Forest Products Ltd. and
Pleasant Valley Remanufacturing Ltd.

Respondents

(
Defendants
)






Before:



The Honourable Chief Justice Finch





The Honourable Madam Justice Kirkpatrick





The Honourable Madam Justice D. Smith




On
appeal from:  Supreme Court of British Columbia, December 24, 2008
(
Leggett & Platt Canada Co. v. Brink Forest Products Ltd.
, S073999)




Counsel for the Appellant:



T.D.
  Braithwaite





Counsel for the Respondent:



L.A.J.
  Dunn





Place and Date of Hearing:



Vancouver,
  British Columbia





November 17, 2009





Place and Date of Judgment:



Vancouver
, British Columbia





January
  15, 2010









Written Reasons by
:





The Honourable Chief Justice Finch





Concurred in by:





The Honourable Madam Justice Kirkpatrick

The Honourable Madam Justice D. Smith




















Reasons for
Judgment of the Honourable Chief Justice Finch:

I.
Introduction

[1]

Leggett & Platt [L&P] appeals from the
order of the Honourable Mr. Justice N. Smith of the Supreme Court of British
Columbia pronounced 24 December 2008, holding that, although Brink
Forest
Products Ltd. [Brink] breached its contract with L&P,
L&P
failed to establish damages for loss of opportunity.

[2]

The plaintiff claimed that its contract with
Brink entitled it to the refund of countervailing and anti-dumping softwood
lumber duties that might become recoverable by Pleasant Valley Remanufacturing
(PVR). That company was sold by L&P to Brink and was the subject matter
of the contract between them.

[3]

PVR received the refund of the duties, paid tax
on it, and sent the net amount to L&P. L&P claimed that Brink breached
the contract by not consulting with it on the tax assessment. It claimed it
lost the opportunity to set off tax credits against the taxes payable on the
refund, or otherwise lost the ability to deal with tax in a way that could have
resulted in a greater net return to it. The plaintiff claimed damages for loss
of that opportunity. The learned trial judge said that Brink had breached the
contract but that damages for lost opportunity were not proven. He dismissed
the action.

[4]

For the reasons that follow, in my view the
action was properly dismissed, but for the reason that there was no breach of
contract. It is not necessary to address the issue of damages for loss of
opportunity.

II.
Background

[5]

Prior to the parties contract, made on 17
October 2003, L&P owned PVR. PVR paid softwood lumber duties to the United
States government.

[6]

By the agreement of 17 October 2003, L&P
agreed to sell, and Brink agreed to buy, all of the issued shares of PVR for a
price of $1.1 million (the SPA).

[7]

At the time of the sale, the softwood lumber
dispute between the US and Canada was taking place. No one knew how or when the
dispute would be resolved. It was thought to be possible that the dispute might
be resolved and those companies that had paid softwood lumber duties would be
entitled to refunds.

[8]

Because L&P and Brink did not know how or
when the softwood lumber dispute might be resolved, they agreed to exclude from
the purchase and sale of PVR, and reserve to L&P, any refund of the
softwood lumber duties [Duties] that might arise in the future. This was provided
for in clause 14.5 of the SPA. The interpretation and effect of clause 14.5 is a
central issue on appeal. Clause 14.5 states in full:

Since May 22,
2002, The United States Customs and Border Protection Agency has been
collecting cash deposits in respect of countervailing duties on softwood lumber
at the time of entry of applicable product from Canada to the U.S. at a net
duty rate of 18.8% (herein the CVD Deposits). Additionally, the United States
Customs and Border Protection Agency has also been collecting cash deposits in
respect of antidumping duties on softwood lumber at the time of entry of
applicable product from Canada to the U.S. at a net duty rate of 8.4% (herein
the ADD Deposits). The CVD Deposits and ADD Deposits are herein referred to
collectively as the Subject Deposits. The Subject Deposits have been paid by
or on behalf of the Company [PVR] to and are held by the United States Customs
and Border Protection National Finance Center in respect of each shipment of
applicable product by the Company from Canada to the United States. The
mechanism for collection of the Subject Deposits involves the declaration by
the Company through a customs broker of the value of the product being shipped
with a corresponding actual payment being made via wire transfer from Leggett
& Platt, Incorporated, the indirect ultimate parent of the Company. The
legitimacy of the duties represented by the Subject Deposits are currently the
subject of a dispute between Canada and the United States which may result in
full or partial refunds being made to the payers of such deposits.
It is
agreed
that any return or refund of all or any portion of the Subject
Deposits in respect of the period up to and including October 30, 2003 shall be
for the benefit of the Vendor.
In the event that all or any portion of the
Subject Deposits in respect of the period up to and including October 30, 2003
are refunded or otherwise returned to the Company, the Purchaser shall
immediately cause the Company to pay over to the Vendor the full amount of all
such refunds or returns. It is agreed that the amount of such payment shall be
reduced by an amount equal to any income tax imposed on the Company as a result
of such refunds or returns being characterized as taxable income of the Company
pursuant to the
Income Tax Act
(Canada)
. If the Company or the
Purchaser receive any notices, notices of assessment, requests or other
communication from the United States Customs and Border Protection National
Finance Center or any other government entity or agency or any third party in
respect of the Subject Deposits, the Purchaser covenants and agrees to
immediately provide to the Vendor or to immediately cause the Company to
provide to the Vendor full legible copies of all such notices, notices of
assessment, requests or other communications.
The Purchaser shall cooperate
in good faith at the expense of the Vendor in any attempt made by the Vendor to
obtain the return or refund of all of [sic] any part of the Subject Deposits
including, without limitation, making available to the Vendor those employees
and other persons whose assistance is necessary for the purposes of evaluating
any request for or any notice, notice of assessment, request or other
communication in respect of the Subject Deposits and by making available to the
Vendor all books and records of the Company required for the same purpose.
[Emphasis added.]

[9]

In 2006, the dispute between Canada and the
United States over the legitimacy of the Duties was settled by negotiations
between the governments. The United States agreed to return a portion of the
Duties. Under the terms of the settlement, the USA retained US $1 billion and
returned to Canada approximately US $4.4 billion in deposits and accrued
interest.
This was a global settlement rather than the settlement of
individual claims for those who paid duties.

[10]

The government of Canada designated the agency
Export Development Canada [EDC] to administer a refund mechanism, which was
designed to accelerate the return of duty payments and accrued interest to
Canadian companies. The refund mechanism called for EDC to purchase from
participating companies each companys right to receive a refund. The purchase
price paid by EDC was the amount of refund owing to each company by US Customs,
calculated as a percentage of the total duty paid by the company plus accrued interest.
Thus, each party entitled to a refund received it from EDC, rather than
directly from the US government.

[11]

In September 2006, L&P sought PVRs
assistance in applying to EDC for a refund. On 26 September 2006, Brink stated
that PVR intended to make the claim. The plaintiff acknowledged this, did not
object to PVR submitting the claim, and reminded PVR of its obligations under
the SPA.

[12]

PVR completed the standard form purchase and
sale agreement used by EDC, and the refund was paid to PVR by EDC. The refund
was paid in two instalments: on 30 November  2006, EDC transferred
US $574,346.74 to PVR by wire; and, on 27 March 2007, EDC transferred a
further US $1,204.10, representing a recalculation of interest, to PVR by
wire.

[13]

On 8 December 2006, Brink caused PVR to pay over
to L&P US $378,379.63, less a $12 wire fee, in respect of the first refund. 
In making this payment, Brink advised that the amount paid was the first refund
minus 34.12% in applicable taxes.  (At a later date, L&P received a
cheque from Brink in the amount of US $793.26, being the amount of the
recalculation of interest less 34.12%.  Later, L&P also received a cheque
from Brink in the amount of US $81.85, being interest on the discounted
portion of the recalculation of interest).

[14]

There is no evidence that the plaintiff objected
to the amount it received or questioned PVRs deduction of income tax until
June 2007, when this action was commenced.

[15]

Brink says that it reduced the refund amount by
the amount of tax payable in accordance with clause 14.5 of the SPA
.
The
validity of this interpretation is an issue on appeal.

[16]

On 3 July 2007, after the statement of claim in
this action had been served, PVR caused their accountants to seek
confirmation from Canada Revenue Agency [CRA] that their opinion (i.e.,
that the refunds were taxable income in the hands of PVR) was correct. PVR did
not tell L&P either that they had taken a filing position with respect to
the refund or that they intended to communicate with CRA regarding the
appropriate characterization of the refunds. Based on PVRs submission, on 17 October
2007, the CRA found that what Brink did was in accordance with the tax laws.

[17]

The action was tried by Mr. Justice N. Smith on summary
trial under Rule 18A. The trial judge held that Brink did not breach clause
14.5 when it deducted the amount of tax payable from the refund before sending the
balance to L&P. However, the trial judge held that Brink had an obligation
to co-operate in good faith with L&P and that it breached the contract by
not allowing L&P to make submissions to the CRA. In assessing loss of
opportunity damages, however, the trial judge held that L&P had failed to
prove loss. He therefore dismissed the action.

III.
Issues

[18]

On appeal, L&P argued that the trial judge
erred in declining to award damages for loss of opportunity. Brink argued that
the trial judge erred in finding that there was a breach of contract, but that
in any event, no damages were proven.

IV.
Analysis

Issue 1: Did Brink breach clause
14.5 of the SPA?

Principles of Contractual Interpretation

[19]

The principles of contractual interpretation are
stated by Geoff Hall in
Canadian Contractual Interpretation Law,
1st ed.
(Markham: LexisNexis, 2007).

[20]

At pg. 8, Hall writes:

The
interpretation of a contract always begins with the words it uses. All of the
various aspects of contractual interpretation are rooted in the actual language
used by the parties.

[21]

Hall further states at pgs. 9-10:

While the words of a contract must always be
the starting point for interpretation, it is an overstatement to say that the
interpretive exercise can ever end with them because context is always
important to discerning meaning accurately ...

Context has two separate aspects ...

The first aspect, the context of the
document, is important because words are never used in isolation. As a result,
interpretation of a word or group of words must have regard for the way
language is used in the document as a whole. This element of context is given
effect by the rule that contracts must be read as a whole with meaning given to
all provisions ...



The second
aspect is the context of the surrounding circumstances which give rise to the
contract. There is always a background to a contract. Whether simple or
complex, the background is essential to discerning its correct meaning. In
contractual interpretation, this aspect of context is given effect by the rule
that the factual matrix must be considered when interpreting a contract.

The Contract

[22]

Clause 14.5 has three parts. The words preceding
It is agreed provide the factual matrix. The second part is the agreement
concerning the transfer of refunds and tax payable on the refunds. The third
part records the purchasers agreement to assist L&P in any attempt it
might make to obtain a refund.

Part 1

[23]

As Hall states, above, the second contextual
aspect to contractual interpretation is the surrounding circumstances which
gave rise to the contract. The factual matrix of this contract is described in
the first part of clause 14.5.

[24]

It states:

Since May 22,
2002, The United States Customs and Border Protection Agency has been
collecting cash deposits in respect of countervailing duties on softwood lumber
at the time of entry of applicable product from Canada to the U.S. at a net
duty rate of 18.8% (herein the CVD Deposits). Additionally, the United States
Customs and Border Protection Agency has also been collecting cash deposits in
respect of antidumping duties on softwood lumber at the time of entry of
applicable product from Canada to the U.S. at a net duty rate of 8.4% (herein
the ADD Deposits). The CVD Deposits and ADD Deposits are herein referred to
collectively as the Subject Deposits. The Subject Deposits have been paid by
or on behalf of the Company to and are held by the United States Customs and
Border Protection National Finance Center in respect of each shipment of
applicable product by the Company from Canada to the United States. The
mechanism for collection of the Subject Deposits involves the declaration by
the Company through a customs broker of the value of the product being shipped
with a corresponding actual payment being made via wire transfer from Leggett
& Platt, Incorporated, the indirect ultimate parent of the Company.
The
legitimacy of the duties represented by the Subject Deposits
are currently
the subject of a dispute between Canada and the United States which
may
result in full or partial refunds being made to the payers of such deposits.
[Emphasis added.]

[25]

The opening part of clause 14.5 records a number
of important circumstances in which the contract was made. It records that the softwood
lumber duties have been paid to the United States government on behalf of PVR.
It records that L&P was the party that paid the duties on behalf of PVR. It
records that mechanisms had been implemented by the US government to enable the
payment of such duties.

[26]

The clause also records that the softwood lumber
dispute between the US and Canada was then unresolved. It was unclear to the
parties whether the dispute would be resolved, when it would be resolved, or on
what terms. The parties were aware, however, that the dispute
may result
in
full or partial refunds. The contract was entered into in a climate of
uncertainty as to the resolution of the dispute, and the parties contracted
with that uncertainty in mind and in contemplation of a possible resolution
that would result in a refund.

[27]

With this context in mind, one can consider the
meaning of the agreement recorded in the second part of clause 14.5

Part 2

[28]

As the possibility of a future refund existed,
the parties made the refund an express term of their agreement. The SPA
recognizes that because L&P had paid the duties while it owned PVR, it was
entitled to them in the event of a refund.

[29]

Thus, clause 14.5 states:

It is agreed
that any return or refund of all or any portion of the Subject Deposits in
respect of the period up to and including October 30, 2003
shall be for the
benefit of the Vendor
. [Emphasis added.]

[30]

Since any refund was to be for the benefit of
L&P, the next clause states:

In the event
that all or any portion of the Subject Deposits in respect of the period up to
and including October 30, 2003 are refunded or otherwise returned to the
Company, the Purchaser
shall immediately
cause the Company to
pay
over
to the Vendor the
full amount
of all such refunds or returns.
[Emphasis added.]

[31]

This clause provides that if there is a refund,
Brink shall immediately cause PVR to pay over to L&P the full amount of all
such refunds. This recognizes not only that any refund is for the benefit of
L&P. It also implicitly recognizes that any such refund would likely go to
PVR, given that it was technically the exporter of record. The agreement is
based on the premise that if a refund were to be made, it would likely be the exporter
of record, which was also the party with the relevant documentation, that would
have to deal with the US and would obtain the refund in the first instance.

[32]

The above provision, however, must be read in
light of the next provision, that states:

It is agreed
that the amount of
such payment shall be reduced
by an amount equal to
any income tax
imposed
on the Company as a result of such refunds or
returns being
characterized
as taxable income of the Company pursuant to
the
Income Tax Act (Canada)
. [Emphasis added.]

[33]

These two sentences must be read together. The
second sentence limits the first. In the event that PVR had tax imposed on it
as a result of the refund, the payment to the plaintiff shall be reduced by
the amount of that tax.

[34]

Tax is imposed by law. However, as noted by Vern
Krishna in
Income Tax Law,
(Toronto: Irwin Law, 1997) at pg. 14:

One of the basic
features of the Canadian income tax system is that it relies heavily on
taxpayers to self-assess their income on an annual basis on a prescribed form
and in a prescribed manner ... Thus, in a sense, the system relies on voluntary
compliance.

[35]

While the law imposes tax, it is for each
taxpayer to comply voluntarily with the tax laws and to self-assess income tax.
It was for PVR, who received the refund, to determine whether the refund was
taxable in its hands.

[36]

Read together, the two sentences interact to
permit PVR to receive the refund, to self-assess whether it was subject to
income tax, and if tax was payable, to reduce the amount of the payment to
L&P by the amount of the tax. The effect of the two provisions is to
require Brink to pay L&P the full amount of the refund
minus
the amount of any tax that is assessed against PVR.

[37]

As correctly found by the learned trial judge, these
two sentences achieve two purposes:

[23] The
plaintiff was selling its shares in the company when both parties were aware of
the possibility of a future refund. The plaintiffs parent company had paid the
duties and the new owners of PVR
would receive an unearned windfall in the
absence of a contractual term calling for repayment to the plaintiff. The
purpose of the agreement was to make clear that the plaintiff was entitled to
the refund. The provision allowing PVR to deduct tax is secondary to that major
purpose and provides protection to defendants in the event they could not with
reasonable efforts avoid paying tax on the refund
.  [Emphasis added.]

[38]

The main purpose was to ensure repayment to the
plaintiff, who had paid the Duties. This provision would prevent a windfall to
Brink, which had not paid the Duties and had not bargained for the benefit of any
refund with L&P. The first sentence therefore requires that Brink transfer
the refund to L&P.

[39]

The second purpose recognized that while Brink
had not bargained for a windfall, it had also not bargained for a loss. The
underlying assumption of the agreement was that PVR would receive the refund since
it was the exporter of record. The parties recognized that PVR or Brink might
be obliged to pay tax as a result of receiving the refund. The contract was
written so as to avoid this by adding the second sentence. If PVR had tax
imposed on it as a result of the refund, it could reduce the amount of the
payment to L&P by that amount.

Did Brink Breach This Portion of the
Contract?

[40]

Based on this interpretation, and as held by the
trial judge, Brink did not breach this portion of the contract. When PVR received
the refund, Brink was permitted to determine whether that refund was subject to
tax. Having found that it was required to pay tax, Brink was then permitted to
reduce the amount it sent to L&P by the amount of the tax. Clause 14.5 contemplated
that Brink would send L&P a net amount.

[41]

The trial judge correctly found that there was
no breach of this part of the SPA.  He said:

[24]
I do not find that there was any
breach of contract in PVR's initial deduction of income tax from its payment to
the plaintiff. Both Mr. Janzen, the company's accountant, and Mr. Brink, the
president of both defendant companies, have sworn that they believed tax was
payable and there is no evidence to suggest those were anything other than
honest opinions reached in good faith. PVR advised the plaintiff that it was
deducting tax and of the amount it was deducting. It was open to the plaintiff,
at that point, to dispute the deduction and advise the defendants of its views
on the taxability of the refund. The plaintiff did not raise the issue at that
time and, in the absence of any protest or notice of the plaintiff's position,
the defendants were entitled to proceed as they did.

[42]

It is to be noted that Brink received a notice
from EDC that the duties were being refunded on 29 November 2006. On 1 December
2006, Brink sent an e-mail to L&P informing it that the refund had been
received, that tax had been assessed, and that the net amount would be forwarded
by cheque. On 8 December 2006 a cheque was issued. This series of events is
consistent with both the immediacy requirement under the first sentence of this
part, and the language of the second sentence.

[43]

Accordingly, the trial judge did not err in
finding that there was no breach of this part of clause 14.5

Part 3

[44]

The third part of clause 14.5 states:

If the Company
or the Purchaser receive any notices, notices of assessment, requests or other
communication
from the United States Customs and Border Protection National
Finance Center or any other government entity or agency or any third party in
respect of the Subject Deposits
, the Purchaser covenants and agrees to
immediately provide to the Vendor or to immediately cause the Company to
provide to the Vendor full legible copies of all such notices, notices of
assessment, requests or other communications.
The Purchaser shall cooperate
in good faith at the expense of the Vendor in any attempt made by the Vendor to
obtain the return or refund
of all of [sic] any part of the Subject
Deposits including, without limitation, making available to the Vendor those
employees and other persons whose assistance is necessary for the purposes of
evaluating any request for or any notice, notice of assessment, request or
other communication in respect of the Subject Deposits and by making available
to the Vendor all books and records of the Company required for the same
purpose. [Emphasis added.]

[45]

The trial judge interpreted this part of the
contract as requiring Brink to permit L&P to participate in its dealings
with the CRA in relation to the tax assessment. The trial judge said:

[25]
However, the defendants became aware of the plaintiff's position six
months later, when this action was begun. At that point, the defendants sought
a ruling from CRA, seeking confirmation of the tax treatment they had already
decided upon.

[26]
The commencement of the action did
not, in my view, put an end to the contract and the obligations under it.
When
they sought a CRA ruling at that point, the defendants still had an obligation
to co-operate in good faith with the plaintiff's efforts to obtain the refund.
In the circumstances, that meant advising the plaintiff of their dealings with
CRA and either putting the plaintiff's proposed tax treatment to CRA or
allowing the plaintiff to do so directly. The defendant's decision to seek a
CRA ruling based on their position without advising the plaintiff was, in my
view, a breach of their obligation under the contract. [Emphasis added.]

[46]

The trial judge held that Brink had breached the
contract because it did not consult with L&P on the tax issue and had not
given L&P the opportunity to argue  that the tax assessed by Brink did not
need to be paid because the refund was not taxable in PVRs hands and that
L&P should have received the entire refund before tax. The trial judge held
that L&P had lost the opportunity to argue its tax position to the CRA.

[47]

With respect, in my opinion the trial judge
erred in his interpretation of this part of the contract.

[48]

As noted above, the factual matrix of clause
14.5 is the uncertainty that existed with regard to the softwood lumber dispute
and the possible ways in which it would be resolved. The parties did not know
if the dispute would be resolved. They did not know if a refund would be
available. They did not know the mechanism through which a refund would be
available. That the government of Canada would designate EDC to administer the
deposit refund does not appear to have been within anyones contemplation when
the SPA was made.

[49]

Because of this uncertainty, the contract was
drafted on the basis of a number of assumptions. The parties appear to have
assumed that L&P would be the party to attempt to obtain a refund because
it had the incentive to do so. However, because PVR was the exporter of record,
the parties recognized that it possessed the knowledge, information, and
personnel likely necessary to obtain a refund. Thus, PVRs and Brinks
assistance and co-operation would be essential to L&P obtaining a refund.

[50]

Within this context, it is clear that Brinks
good-faith obligation related solely to situations where L&P (in any
attempt made by the Vendor) attempted to
obtain
the refund. The
contract was written on the assumption that L&P would be the party that
would attempt to obtain the refund and that it would likely have to do so from
the US government. Thus, this part of clause 14.5 ensured that L&P would
receive the co-operation necessary to succeed in that attempt.

[51]

However, as matters turned out, the negotiations
were between the governments, the EDC mechanism was put in place, and it was
not necessary for any of the parties to deal directly with the US government.
L&P, thus, did not need to make any attempt to obtain the refund from the
US government. Rather, the refund was obtainable from EDC. As noted above,
Brink proceeded to make the claim from the EDC. There is no suggestion that it
did not do so properly, fully, and in good faith. It was successful and, as a
result, PVR, as the exporter of record, received the refund from EDC.

[52]

Brink then proceeded to self-assess the tax
imposed on the refund. In doing so, there was not, contrary to the trial
judges holding, a good faith obligation on it to consult with L&P over the
tax issue. Rather, for the reasons noted above, the good faith obligation
applies solely to
obtaining
the tax either from the US
government, as the parties assumed would be necessary, or as it turned out,
from the EDC. Once EDC sent PVR the refund, the refund had been obtained. At
that point, the good faith obligation no longer applied. Instead, the two
clauses requiring immediate transfer and permitting the reduction for tax became
operative. Nowhere in the contract is there a requirement that Brink consult
with L&P during its self-assessment of tax or during its dealings with the
CRA. Thus, Brinks actions in self-assessing and paying the tax were in
accordance with the provisions of the contract.

[53]

In my opinion, therefore, the defendant did not
breach any part of the contract. Because there was no breach of contract, it is
unnecessary to consider the issue of damages for loss of opportunity.

[54]

I would dismiss the appeal.

The
Honourable
Chief Justice Finch

I agree:

The Honourable
Madam Justice Kirkpatrick

I agree:

The Honourable
Madam Justice D. Smith


