A Saskatchewan court has issued a ruling in a protracted legal battle between Saskatchewan farmer Terry Gustafson of Macoun, Sask., and Input Capital Corp., a Regina based company that signs “canola streaming contracts” with farm clients.
In a May 17 ruling, Court of Queen’s Bench Justice J.D. Kalmakoff ruled that contracts signed by Gustafson and Input Capital were “unconscionable” because there was a “substantial inequity in bargaining power” between the two parties who signed the agreements.
The determination absolves Gustafson from upholding the terms of the agreements and nullifies Input’s stated contractual right to collect interest on payments that were made to Gustafson, as well as security or collateral in the form of mortgage interests issued on farmland that was owned or leased by Gustafson.
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Input sued Gustafson for $7.5 million, but Kalmakoff ruled the farmer will repay $4.4 million and the company’s legal costs.
It is unclear whether the ruling may call into question the legality of other streaming contracts signed by Input Capital, a publicly traded company that had contracts with 300 farmers as of September 2017.
“The agreements (between Gustafson and Input Capital Corp., or ICC) reflect a highly profitable agreement for ICC, which is almost entirely without risk,” Kalmakoff wrote in a 100-page ruling.
“For a farmer like 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.”
Kalmakoff ruled that there was a “substantial imbalance” between the negotiating parties when the first contract was signed in April 2014. That imbalance became more pronounced as Gustafson’s financial situation became more dire.
According to testimony, Gustafson — who farmed nearly 20,000 acres — was experiencing significant financial pressure in the spring of 2014.
As of January 2014, he had been unable to sell any of the canola he had produced the previous year and was unable to meet his outstanding debts to creditors, including Toronto Dominion Bank and Farm Credit Canada.
In essence, Gustafson needed an immediate source of income in order to meet outstanding debt obligations and secure additional financing that would allow him to purchase inputs for his 2014 crop.
Input and Gustafson signed four contracts between April 2014 and April 2015.
Under the terms of the first contract, signed April 2, 2014, Gustafson agreed to deliver 1,950 tonnes of his canola on Input Capital’s behalf, in exchange for a one-time cash payment of $800,000.
That agreement led to the signing of subsequent streaming contracts in 2014 and 2015 that gave ICC ownership and control of more canola that was to be produced by Gustafson.
All told, Input paid Gustafson $4.5 million in 2014 and 2015.
During the same period, Gustafson did not deliver any canola on Input’s behalf.
Subsequent court actions initiated by Input Capital sought damages valued at approximately $7.5 million.
The company had also intended to execute terms of the agreement that would have given the company mortgage interests in land that was owned and leased by Gustafson.
However, Kalmakoff’s ruling nullified the terms of the ICC agreements, based on the fact that Gustafson was facing severe financial pressure at the time of signing.
“Despite evidence of Mr. Gustafson’s mounting financial difficulties, (Input Capital) …Â continued to insist that Mr. Gustafson enter (additional) contracts on ICC’s terms,” Kalmakoff wrote.
“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 upfront 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,” Kalmakoff wrote.
“In short, I am satisfied that … ICC (Input Capital Corp.) used their positions of relative power in an unconscionable manner to achieve a material advantage over Mr. Gustafson.”
Kalmakoff also ruled that Gustafson, who benefited materially from the contracts, must repay Input Capital nearly $4.4 million plus legal costs incurred by the company.
The court heard that Input had already recovered about $100,000 through the sale of durum wheat that was produced by Gustafson.
Input Capital officials were not available for comment by The Western Producer’s press deadline May 18.
