Commercial Alcohols Inc. v. Suncor Energy Products Inc.

Commercial Alcohols Inc. v. Suncor Energy Products Inc. Collection Decisions of the Court of Appeal Date 2008-04-09 Neutral citation 2008 ONCA 261 Docket numbers C45259 Judges Laskin, John Ivan; Gillese, Eileen E.; LaForme, Harry Smith Subject Civil Decision Content CITATION: Commercial Alcohols Inc. v. Suncor Energy Products Inc., 2008 ONCA 261 DATE: 20080409 DOCKET: C45259 COURT OF APPEAL FOR ONTARIO LASKIN, GILLESE and LAFORME JJ.A. BETWEEN: COMMERCIAL ALCOHOLS INC. Plaintiff (Appellant) and SUNCOR ENERGY PRODUCTS INC. Defendant (Respondent) Alan J. Lenczner, Q.C for the appellant William J. Burden and Linda I. Knol for the respondent Heard: September 10, 2007 On appeal from the judgment of Justice John D. Ground of the Superior Court of Justice dated April 24, 2006. LASKIN J.A.: A. OVERVIEW [1] This appeal concerns the interpretation of the price-protection provisions of a contract between the appellants Commercial Alcohols Inc. (“CAI”), and the respondent, Suncor Energy Products Inc. (“Suncor” or “Sunoco”). [2] In the early 1990s, Suncor decided to produce and sell ethanol-blended gasoline. In 1996 it signed a ten-year contract with CAI for the supply of ethanol. Suncor agreed to purchase annually from CAI on a “take-or-pay” basis 130 million litres of ethanol at a price three cents per litre less than the wholesale price of gasoline. [3] One of the price-protection provisions of the contract – s. 19.3 – required CAI to match the price an alternate supplier of ethanol offered to Suncor, if the alternate offer provided for a contract term of at least one year and for the supply of at least 60 million litres of ethanol. CAI could decline to match the offer only if it released Suncor from buying from CAI the amount of ethanol Suncor purchased from the alternate supplier. [4] In 2005, Suncor received an offer from an alternate supplier that met both criteria in s. 19.3, and at a price 30 cents per litre less than the price Suncor had agreed to pay CAI. Suncor asked CAI to match the offer or release it from its purchase obligation. CAI refused, relying on s. 19.1 of the contract. Section 19.1 provides: “[i]t is the intention of the parties that in the event that an active market develops for Ethanol in Ontario, that Sunoco’s general competitiveness shall not become impaired as a result of its commitments under this Agreement.” There was no active market for ethanol in Ontario because Suncor’s competitors in Ontario – Esso, Shell and Petro Canada – did not sell ethanol-blended gasoline. CAI claimed that it was not required to match the alternate offer under s. 19.3 because the condition in s. 19.1 had not been met. It began an action in the Commercial List. [5] The narrow issue of contractual interpretation on which the action turned was whether, as CAI contended, s. 19.1 applies to offers under s. 19.3, or whether, as Suncor contended, s. 19.3 is a stand-alone provision. After an 11-day trial, Ground J. found in favour of Suncor. [6] On its appeal, CAI renews its argument that s. 19.1 informs s. 19.3 of the contract. I would dismiss the appeal. I agree substantially with the reasons of the trial judge. Both the wording of s. 19 of the contract and the factual context in which the contract was signed support his conclusion that s. 19.3 operates independently of s. 19.1. These reasons are intended to supplement those of the trial judge. B. RELEVANT FACTUAL BACKGROUND (1) Genesis of the contract [7] To manufacture finished gasoline, a refiner mixes a variety of crude oils with other components. The process is akin to mixing a cocktail. Many components can be used, including ethanol, which is often made from corn. Each refiner has its own recipe. [8] As the trial judge found, in the early 1990s Suncor decided to introduce ethanol-blended gasoline throughout Ontario, both in service stations using its brand name Sunoco, and in service stations it operated under the names Pioneer and UCO. Suncor blended ethanol with gasoline on a one-to-nine ratio for sale to Ontario motorists. Cars run just as well on the blend. And the blend has marketing advantages: ethanol is seen as a “green” fuel, which is friendlier to the environment, and its use increases the market for corn, thus benefiting Ontario’s farmers. [9] To implement its decision to introduce ethanol-blended gasoline, Suncor needed a supplier of ethanol. In the petroleum industry, long-term contracts for the supply of a component are unusual. The industry is so competitive, that, in order to keep costs low, refiners prefer to be able to change components quickly and easily. Long-term contracts limit their flexibility to do so. Indeed, the trial judge found that the ten-year supply contract between Suncor and CAI was “unprecedented.” [10] Despite being unusual, this long-term contract held advantages for both parties. Suncor wanted a guaranteed long-term supply of ethanol to ensure the viability of its decision and to justify the cost of the capital investments required for ethanol blending. CAI also wanted a long-term contract because it intended to build a state-of-the-art, world-scale production plant. A long-term contract would allow CAI to obtain financing to build the plant, which was to be located in Chatham, Ontario, and to service the debt. (2) The long-term supply contract [11] In 1995, Suncor began negotiations with CAI for a long-term contract for the supply of ethanol. Both parties were represented by counsel. After nine months of intense negotiations, Suncor and CAI reached an agreement in principle. They signed the contract on September 30, 1996. [12] Section 1.1 of the contract recites that CAI intended to build a “state of the art, world scale plant” in Chatham. Sections 1.2 and 4.6 stipulate that once CAI achieved full production at its plant, Suncor would purchase from CAI, on a take-or-pay basis, a minimum of 130 million litres of ethanol annually. [13] Section 14.3 of the contract sets the per-litre price Suncor must pay CAI: essentially Suncor’s wholesale price for regular unleaded gasoline less three cents. Section 12.1 set the initial term of the contract at ten years. (3) The price-protection provisions of the contract [14] The contract contains three price-protection provisions in favour of Suncor – ss. 18, 19.2 and 19.3. Each becomes effective on the happening of certain events. [15] Section 18 ensures that Suncor always gets CAI’s best price. If CAI sells ethanol to a third party at a price lower than the s. 14.3 price, Suncor has the right to request this lower price. Section 18 is not in issue on this appeal. [16] Section 19.3 is in issue on the appeal, and s. 19.2 is relevant to the interpretation of s. 19.3. Section 19 begins with this heading in block capitals: “19.0 COMPETITIVENESS OF CAI ETHANOL PRICING WITH THE PRICING OF ETHANOL BY OTHERS SELLING IN THE ONTARIO MARKET” [17] Section 19.1, the section on which CAI relies, is headed “Intent,” and as I said earlier, states: It is the intention of the parties that in the event that an active market develops for Ethanol in Ontario, that Sunoco’s general competitiveness shall not become impaired as a result of its commitments under this Agreement. [18] Section 19.2 is headed “CAI Price Match to Market Price,” and, importantly, begins with the words “To give effect to this intention”. Under this provision, where significant amounts of ethanol – at least 100 million litres annually – are traded in Ontario at an average price lower than the section 14.3 price, CAI must match this lower price. Section 19.2 provides, in part: To give effect to this intention, the parties agree that during the term of this Agreement, in the event that Sunoco can demonstrate to CAI that: (i) the annual traded volumes of Ethanol in Ontario (excluding Ethanol sales made pursuant to this Agreement) are equal to or greater than 100 million litres, whether such volumes are produced in Ontario or imported (the “Ontario Market”); and (ii) that such volumes of Ethanol have traded in the Ontario Market for a period of at least one year at an average price (for Ethanol of like quality and on like payment terms) which is less than the average price over the same period paid pursuant to this Agreement; then CAI shall provide a price reduction to Sunoco, and shall maintain such price reduction for so long as the average price in the Ontario Market remains lower than the average Ethanol Price provided pursuant to Section 14 of this Agreement. The price reduction shall be equal to the difference between the said average prices and shall be reviewed by the parties annually. [19] Section 19.2 then equates the establishment of an active market for ethanol with the annual trading of at least 100 million litres of ethanol: For greater clarity, once it is established that an active market for Ethanol has developed and the active market price is less than the Ethanol Price calculated pursuant to section 14 of this Agreement then the parties will agree on a procedure for monitoring the active market and on an amendment so that the section 14 Ethanol Pricing Formula reflects market conditions and will in no event exceed the Ethanol Price under the Ethanol Pricing Formula. In the event that the parties cannot agree on an Ethanol Pricing Formula Amendment it shall be determined by arbitration. [20] Section 19.3 is headed “CAI Price Match to Alternative Supply,” and begins with the words “The parties further agree…”. Under s. 19.3, where Suncor receives a bona fide offer from another producer to supply at least 60 million litres of ethanol annually for a term of at least one year, at a price lower than the s. 14.3 price, CAI must match this lower price: The parties further agree that, during the term of this Agreement, in the event that a then existing producer of Ethanol delivers a bona fide offer to supply an annual volume of at least 60 million litres of Ethanol of like quality and on a gasoline based pricing formula to Sunoco for a contract term of at least one year, and that such an offer provides for a discount which is higher than the 3 cents per litre provided for under this Agreement, then CAI shall increase the discount to match the alternate supply contract effective from the date that the alternate supplier has offered to supply Sunoco for the offered volume and for the offered contract term. [21] Section 19.4 of the contract gives CAI the right to decline to match the price under either s. 19.2 or s. 19.3, provided that it releases Suncor from buying from CAI the volume of ethanol Suncor purchased from either the Ontario market or the alternate supplier. (4) The Aventine offer [22] In May 2005, Suncor received an offer from Aventine Renewable Energy Inc. to supply up to 130 million litres of ethanol during the period July 1, 2005, to June 30, 2006, at a price about 30 cents per litre lower than the s. 14.3 price. [23] Although CAI conceded that the Aventine offer satisfied all the criteria in s. 19.3 of the contract, it refused to match the Aventine price or to release Suncor under s. 19.4. Instead, CAI claimed that its obligations under ss. 19.3 and 19.4 are triggered only if the conditions in section 19.1 are met. The trial judge found that neither condition had been met. There was no active market for ethanol in Ontario, and thus Suncor’s general competitiveness with other Ontario purchasers of ethanol was not impaired. Thus, CAI said that it did not have to match Aventine’s price or release Suncor. [24] The trial judge did not agree. He dismissed CAI’s claim, declaring that “Section 19.3 is operative whether or not there is an active market as defined in Section 19.2, for ethanol in Ontario”. C. ANALYSIS (1) Positions of the parties [25] CAI’s basic position is that the trial judge erred in concluding that s. 19.3 is an independent or stand-alone provision. CAI submits that its obligations under s. 19.3 are tied to and informed by the conditions in s. 19.1. [26] CAI makes four points in support of this submission. First, it says that s. 19.3 is in the same section as s. 19.1 because it is subsidiary to s. 19.1. If s. 19.3 were a stand-alone provision it would be in a separate section. [27] Second, CAI says that ss. 19.2 and 19.3 are connected. Section 19.2 begins with the words “To give effect to this intention,” and s. 19.3 with the words “The parties further agree”. The two sections simply contemplate different scenarios in which an active market for ethanol can come about. Section 19.2 addresses the scenario where the active market is a public market and the price is known; s. 19.3 addresses the scenario where one of Suncor’s competitors buys ethanol privately, and the purchase price is unknown. In that case, an offer under s. 19.3, such as the offer from Aventine, acts as a proxy for the competitor’s private purchase. [28] Third, CAI says that if s. 19.3 were an independent provision, then s. 19.2 would be unnecessary and therefore meaningless. [29] Finally, CAI says that interpreting s. 19.3 as an independent provision is commercially unreasonable because that interpretation would undermine Suncor’s ten-year commitment, on which CAI relied in building its new plant. Suncor could obtain an offer from another supplier immediately after the contract was signed, thereby negating the core price provisions on which the contract was based. [30] Suncor’s basic position is that the trial judge was correct in concluding that s. 19.3 is a stand-alone provision. Suncor makes two main points in support of this position. First, it says that the trial judge’s interpretation is supported by the plain wording of s. 19.3 and by the contrasting wording of s. 19.2. On the other hand, CAI’s interpretation requires the court to read words into s. 19.3. [31] Second, Suncor says that in the light of the trial judge’s findings about the context in which the contract was signed, its interpretation of s. 19.3 is commercially reasonable, whereas CAI’s interpretation is commercially unreasonable. [32] I agree with Suncor’s position. (2) Interpreting a contract [33] The goal of contractual interpretation is to determine the intent of the parties when the contract was made. To do so, the court looks at the words the parties used and the context in which the contract was signed. Goudge J.A. concisely summarized the proper approach to contractual interpretation in his reasons in Kentucky Fried Chicken Canada v. Scott’s Food Services Inc., [1998] O.J. No. 4368 at para. 25 ( C.A. ): While the task of interpretation must begin with the words of the document and their ordinary meaning, the general context that gave birth to the document or its “factual matrix” will also provide the court with useful assistance. See also a more extensive discussion of this approach by Doherty J.A. in Dumbrell v. Regional Group of Companies (2007), 85 O.R. (3d) 616 at paras. 47-56 ( C.A. ). I begin with the wording of s. 19. (3) The wording of section 19 [34] The plain wording of s. 19 strongly suggests that it is a stand-alone provision that applies regardless of whether an active market for ethanol has developed in Ontario. Apart from being in the same overall section, s. 19.3 is not tied in any way to s. 19.1. Section 19.3 makes no reference to s. 19.1 or to the conditions in s. 19.1. By contrast, s. 19.2 expressly refers both to the “intent” in s. 19.1 and to the “active market” condition in s. 19.1. [35] I do not accept CAI’s contention that the opening words of s. 19.3, “The parties further agree,” is a substitute for the opening words of s. 19.2 “to give effect to this intention.” If the parties had intended s. 19.3 to reflect the “intent” in s. 19.1, presumably they would have said something like “to further give effect to this intention.” [36] Instead, the wording of s. 19.3 shows that the parties intended to address a scenario entirely different from the scenario in s. 19.2: where one of Sunoco’s competitors is not actively buying ethanol, yet Sunoco receives an offer from another producer to supply it with a substantial amount of ethanol at a price lower, than the s. 14.3 price. [37] Also, CAI’s interpretation of s. 19.3 strains the language of that provision and requires the court to read in words. The notion that a s. 19.3 offer stands as a proxy for a private contract between an ethanol supplier and one of Suncor’s competitors is not in any way captured by the wording of s. 19.3. The parties were represented by counsel throughout the negotiations. If they had wanted to capture this notion, they would have said so. [38] Finally, interpreting s. 19.3 as an independent provision does not render s. 19.2 meaningless. For example, as Suncor points out and as the Aventine offer demonstrates, Suncor may be able to obtain a supply of 60 million litres of ethanol over a one-year term even though an active market for ethanol has not developed (that is, even though 100 million litres of ethanol has not yet been traded annually in Ontario at an average price lower than the average price paid by Suncor under s. 14.3 of the contract). Or, to use another example, at least 100 million litres of ethanol could trade annually even though no single producer had been willing to supply 60 million litres to Suncor for at least a one-year term and at a lower price than Suncor pays under section 14.3. Both of these examples show that interpreting s. 19.3 as an independent provision does not make s. 19.2 unnecessary to ensure Suncor’s price protection. [39] The plain wording of s. 19 shows that s. 19.3 is a stand-alone provision. Section 19.3 does not depend on the conditions in section 19.1 having been met. Moreover, the trial judge’s findings on the context in which the contract was signed support the commercial reasonableness of this interpretation. (4) The context in which the contract was signed [40] The trial judge made numerous findings of fact about the context in which the contract was signed. These findings, which were not challenged on appeal, show the commercial reasonableness of Suncor’s interpretation of s. 19.3. Here I will refer only to those contextual findings that I consider particularly important. [41] First, the production and marketing of gasoline is highly competitive, especially on costs. The price of crude oil, which is the principal ingredient of gasoline, is determined by North American or world prices. To be competitive, Suncor must price its gasoline at the market price. It cannot charge more simply because its gasoline contains ethanol. Thus, when entering into the long-term supply contract with CAI, Suncor needed to ensure that it would not pay an above-market price for ethanol. If it did so, it would be taking on a cost for one of its components that other refiners were not taking on for their components. [42] Second, an alternate supplier provision containing a price-match clause is a typical term in a supply contract. Section 19.3, therefore, is typical and does not undermine the parties’ bargain. It merely requires CAI to sell ethanol to Suncor at the same price as another supplier is willing to sell ethanol to Suncor. [43] Moreover, s. 19.3 is not onerous. As the trial judge said at para. 35 of his reasons: To grant this protection to Suncor, whether or not there is an active market for ethanol in Ontario, also appears to me to be reasonable in that it was contemplated by both parties at the time of entering into the Agreement that the plant to be constructed by CAI would be a modern, state of the art, cost efficient plant which would be competitive with ethanol producers within or outside Ontario… [44] Third, the conditions that must be met to trigger CAI’s obligations under s. 19.3 are stringent. Although in theory, as CAI contends, Suncor could have obtained an alternate offer for 60 million litres of ethanol for a term of at least one year immediately after signing its contract with CAI, that was highly unlikely. The trial judge found “that, at the time of entering into the Agreement, there were no offers or agreements available for the supply of ethanol for a period of one year or more”. The Aventine offer shows the validity of the trial judge’s finding; that offer came nearly nine years after the contract was signed. [45] Fourth, Suncor’s interpretation of s. 19.3 accords with each party’s interest when the contract was signed. CAI wanted a ten-year, take-or-pay contract to obtain financing to build its plant. Suncor wanted to ensure that it was not paying an above-market price for ethanol. The trial judge found that the parties balanced their interests by ensuring Suncor was committed to buying ethanol from CAI unless the market price for ethanol was lower than the price under s. 14.3 of the contract. In short, Suncor received price protection in exchange for taking on a ten-year, take-or-pay obligation. [46] All these contextual considerations, grounded in the trial judge’s unassailable findings of fact, demonstrate the commercial reasonableness of interpreting s. 19.3 as an independent price-protection provision. D. CONCLUSION [47] The trial judge interpreted the price protection given to Suncor by s. 19.3 of the contract as a stand-alone provision, independent of the conditions in s. 19.1. I agree with his interpretation. I would therefore dismiss CAI’s appeal with costs in the amount agreed to by counsel, $20,000, all-inclusive. RELEASED: April 9, 2008 “John Laskin J.A.” “JIL” “I agree E.E. Gillese J.A.” “I agree H.S. LaForme J.A.”