Citation: Sogelco v. Island Sea Products 2002 PESCTD 58 Docket: S-1-GS Registry: Charlottetown

Transcription

1 Citation: Sogelco v. Island Sea Products Date: PESCTD 58 Docket: S-1-GS Registry: Charlottetown PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION BETWEEN: AND: SOGELCO INTERNATIONAL INC. and SOGELCO INDUSTRIES INC. ISLAND SEA PRODUCTS LIMITED, CANADA INC., and SUMMERSIDE SEAFOOD SUPREME INC. Before: The Honourable Justice David H. Jenkins (Oral Decision on application for interlocutory injunction) APPLICANTS RESPONDENTS Karen A. Campbell - Solicitor for the Applicants Derek D. Key, Q.C. and - Solicitors for the Respondents John Maynard Place and date of hearing - Charlottetown, Prince Edward Island July 23, 2002 Place and date of oral decision - Charlottetown, Prince Edward Island July 26, 2002 Date of edited oral decision - September 6, 2002

2 Citation: Sogelco v. Island Sea Products Date: PESCTD 58 Docket: S-1-GS Registry: Charlottetown BETWEEN: PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION SOGELCO INTERNATIONAL INC. and SOGELCO INDUSTRIES INC. AND: APPLICANTS ISLAND SEA PRODUCTS LIMITED, CANADA INC., and SUMMERSIDE SEAFOOD SUPREME INC. Prince Edward Island Supreme Court - Trial Division In Chambers Before: Jenkins J. Date heard: July 23, 2002 Oral Decision: July 26, 2002 Oral Decision (edited) released: September 6, 2002 (16 pages) INJUNCTIONS: contracts - application for interim mandatory injunction. RESPONDENTS CASES CONSIDERED: Deuterium of Canada Ltd. v. Burns and Roe, Inc., [1975] 2 S.C.R. 124; Weber v. Ontario Hydro, [1995] 2 S.C.R. 929; Brotherhood of Maintenance of Way Employees Canadian Pacific System Federation v. Canadian Pacific Ltd., [1996] 2 S.C.R. 495; Ticketnet Corporation v. Air Canada (1987), 21 C.P.C. (2nd) 38, (Ont. H.C.); Island Petroleum Products Ltd. v. Arsenault, [1993] 2 P.E.I.R. 223, (P.E.I.S.C.T.D.). STATUTES CONSIDERATION: Arbitration Act, R.S.P.E.I., 1988, Cap. A-16; Supreme Court Act, R.S.P.E.I Cap. S-10; Rules of Court, Province of Prince Edward Island, Rule Karen A. Campbell - Solicitor for the Applicants Derek D. Key, Q.C. and - Solicitors for the Respondents John Maynard

3 Jenkins J. (orally): [2] Sogelco seeks an interim injunction to require the respondents to comply with the agreement regarding the operation of Summerside Seafood Supreme Plant pending the outcome of a commercial arbitration proceeding. My ruling on the respondents motion for a stay of this proceeding in 2002 PESCTD 46 states the background of the application, the agreement, the dispute, the positions of the parties, the special nature of the mandatory relief in issue, and the limited role of this Court in these circumstances. Legal principles: [3] An interlocutory injunction is a temporary remedy and a discretionary matter. The relief sought in this case requires the respondent to act positively; it is mandatory, which is far less common than prohibitive injunctions. The Court s discretion must be exercised judicially. It is necessary to consider the applicable legal principles for interlocutory injunctions generally and for mandatory injunctions and to apply them appropriately to the evidence before the Court on the application. [4] The generally applicable test and its appropriate application is directed by the Supreme Court of Canada in R.J.R. - MacDonald Inc. vs. Canada (Attorney General), (1994), 111 D.L.R. (4th) 385 (S.C.C.). The test is applied in United Brotherhood of Carpenters and Joiners vs. United Brotherhood of Carpenters and Joiners of America, [1997] 1 P.E.I.R. 296 (P.E.I.S.C.T.D.) in this Court by myself to which case both parties referred. Generally the same principles should be applied by a court whether the remedy sought is an injunction or a stay. A three stage test is to be applied by the Court when considering an application for an interlocutory injunction. [5] First, a preliminary assessment must be made of the merits of the case to ensure that there is a serious issue to be tried. Regarding the strength of the applicants case, since the case of American Cyanamid Co. vs. Ethicon Ltd., [1975] A.C. 396 (H.L.) this hurdle is low. American Cyanamid substituted the previous test of strong prima facie case with the test of whether the applicant could satisfy the Court that the claim is not frivolous and vexatious ; in other words, that there is a serious issue to be tried. Once satisfied that the application is neither vexatious nor frivolous, the judge on an application should proceed to consider the second and third leg of the test, even if of the opinion that the applicant is unlikely to succeed at trial. A prolonged examination of the merits is generally neither necessary nor desirable. [6] At the second leg of the general test - once beyond the threshold of showing a serious case to be tried, it must be determined whether the applicant would suffer irreparable harm if the application is refused. Irreparable refers to the nature of the harm rather than its magnitude. Inadequacy of damages as a remedy is historical in nature. Today, according to Sharpe, Injunctions and Specific Performance (loose leaf edition),

4 Page: 2 courts look at the rationale for granting either damages or an injunction on a somewhat functional basis regarding the kind of case and the situation and circumstances of the parties. [7] The third leg of the test is a determination regarding the balance of inconvenience. This involves as assessment as to which of the parties would suffer the greater harm from the granting or refusing of the remedy pending a decision on the merits. [8] The general rule, which I have just stated and summarized, is subject to some modifications, three or four of which are pertinent in this case. C Modification #1 [9] The Supreme Court recognized two or three exceptions to the general rule that a judge should not engage in an extensive review on the merits. One of those exceptions deserves recognition here. That is, where the result of the motion or application will in effect amount to a final determination of the subject of the litigation. [10] In exceptional cases, where the result of the motion may amount to a final determination, further consideration may be involved. Sharpe on Injunctions points out at Chapter 2 that reliance on preliminary assessment should not be depreciated in all cases. The particular difficulty of assessment in one case ought not to be taken as establishing a principle of general application, especially in an area of the law in which flexibility has historically been the hallmark. Consequently, there is in some cases opportunity to consider more extensively or to revisit the first leg of the test questioning the strength of the applicants case after going through the three step assessment. For example, as Sharpe points out, subsequent cases establish that American Cyanamid does not alter the onus on the applicant to show a strong prima facie case to obtain an interlocutory injunction to restrain a breach of covenant in restraint of trade. That is because in many if not most cases involving covenants in restraint of trade the final decision for practicable purposes is the one made on the interlocutory application. The same principle has been held to apply in a take-over bid where an injunction would have effectively put one of the parties out of business. In those cases, the risk balancing is not a serious factor because there will be no trial. In some cases, though rare, it is essential that the strength of the case be the predominant consideration. In those cases, the balance of convenience cannot be determinative. That principle can be seen to have some analogous application here. Sharpe states that the list of exceptions makes it apparent that American Cyanamid cannot be applied as if it was statute. The English Court of Appeal explained that Cyanamid is in the nature of guidelines rather than a strict formula or rule to be applied in a mechanical fashion. At para Sharpe states: The weight to be placed on a preliminary assessment of the relative strength of the plaintiff s case is a delicate matter which will vary depending upon the

5 Page: 3 context and circumstances. As the likely result at trial is clearly a relevant factor, the judge s preliminary assessment of the merits should, as a general rule, play an important part in the process. However, the weight to be attached to the preliminary assessment should depend on the degree of predicability which the factual and legal issues allow. If the judge is of the view that the plaintiff is unlikely to succeed, but cannot say that the claim is frivolous or vexatious, the judge should still go on to consider the other factors, rather than dismiss the application at this threshold. This is a positive and helpful aspect of Cyanamid which should not be forgotten. However, the judge s negative impressions of the plaintiff s chances of the ultimate success should be taken into account along with all other considerations. By the same token, even if the plaintiff s case looks very strong -- a factor which should still be considered. If assessment of the merits is impracticable because of conflicting evidence or questions of credibility, the matter will have to be decided based solely on the, on the -- just a second. By the same token even if the plaintiff s case looks very strong, a factor which should definitely weigh in his or her favour, the other factors should still be considered. If assessment of the merits is impracticable because of conflicting evidence or questions of credibility then in those circumstances the matter will have to be decided solely on the basis of the balance of convenience and irreparable harm factors. C Modification #2 [11] The second modification to the general rule which I wish to address is the distinction in consideration between mandatory injunction and prohibitive injunction. A mandatory injunction is one which requires the respondents to act positively. A mandatory injunction may be given to remedy past wrongs and require the respondent to do something to remedy a wrong it has committed. Such an order is restorative in nature, requiring the respondent to take whatever steps are necessary to repair the situation in a manner consistent with the applicant s rights. On the other hand, a prohibitive injunction, which is the most common form of injunction, restrains the respondent from committing a specified act. At the heart of the injunctive process is the prohibition of wrongful conduct or conduct that would interfere with the rights of another. As mentioned by this Court in Island Petroleum Products Ltd. vs. Arsenault, [1993] 2 P.E.I.R. 223 (P.E.I.S.C.T.D.) and also in Ticketnet Corporation vs. Air Canada (1987), 21 C.P.C. (2d) 38 (Ont. H.C.J.) a court is far more reluctant to grant a mandatory injunction than it would be to grant a comparable prohibitory injunction. In a normal case the Court must, among other things, when considering mandatory injunctions, feel a high degree of assurance that at the trial or arbitration it will appear that a mandatory injunction was rightly granted. This is a higher standard than is required for a prohibitory injunction. [12] A mandatory injunction requires the court to institute a more stringent test than does a prohibitive injunction. The principles for mandatory injunctions are stated in the English case Redland Bricks Ltd. v. Morris (1970), A.C. at 652, and have been adopted in this jurisdiction. In addition to the requirement for a high degree of assurance of

6 Page: 4 success, the prospect of grave damage needs to be shown to be a very strong probability, and the costs to the defendant to do the necessary positive act need to be taken into account. [13] This higher standard may in turn be tempered by the non-arms length relationship of the parties. In the present case the parties are venturing together on the Summerside Seafood Supreme plant to pursue their respective interests. As such, they have put themselves into a position of high dependance on one another. [14] According to Sharpe, the discretion to award mandatory injunctions is still governed by the same principles which apply to any form of injunctive relief. The analysis is altered only by the fact that the defendant is required to take a purposive course of action. This affects the balance of the burden and the benefits and involves consideration of the Court s reluctance to become involved in supervision. C Modification #3 [15] The third modification involves other legal principle. An applicant for an injunction is required to deliver an undertaking as to damages arising from the granting on an injunction. The applicant has done that in this case. According to Sharpe and the case law provided by counsel for the respondent in a purely commercial context the ability to give a meaningful undertaking is a significant consideration, and the inability to give a meaningful undertaking has been held in case law to have been fatal. The onus is on the applicant to satisfy the Court that the means of fulfilling the undertaking are present. Here, the respondent points out that the applicant has experienced some financial difficulties and the respondent has sullied the applicant s creditworthiness. The applicant has brought evidence to refute and explain, and subsequently has ultimately offered some commitment to reduce the respondents exposure and to secure the undertaking. I will say more about this further on. C Modification #4 [16] There s one potential additional factor, namely supervision. The respondents submit that the Court should avoid becoming involved in the present circumstances which would involve supervision. [17] According to Sharpe, at Ch : The supervision problem is a genuine one which should not be ignored, but neither should it be given undue emphasis. [18] The courts are reluctant to become involved in injunctive relief which involves supervision of mandatory and on-going acts. I will say more about this further on as well.

7 Page: 5 Approach to disposition: [19] I include mention of these five preliminary items. [20] First, the Court s disposition on this motion for summary judgement is not necessarily a forerunner, or an indication, of how the arbitration board would adjudicate the applicants claims on their merits. It will be for the Board to make the ultimate decision. The determinations that will be made on the claims of terms for enforcement and breach of contract and regarding the various remedies sought will depend on the evidence and submissions then before the arbitration board. Disposition of this injunction application depends on assessment in accordance with the R.J.R. - MacDonald Supreme Court of Canada three-part test as modified by the case law and principles which are applied to the special circumstances of this case. [21] Second, all of the relief sought is mandatory in nature. Sogelco asks the Court to require the respondents to comply with the terms of the agreement. Each element of relief involves the respondents doing some positive act which requires commitment, expenditure, and/or risk. The rules applicable to mandatory injunctions apply throughout. [22] Third, the relief sought is interlocutory in nature. Sogelco asks the Court only to preserve its rights under the agreement pending the arbitration. The circumstances create a quandary in that regard. I wish to avoid intruding on the function of the arbitration board; however some assessment of rights and obligations is necessary at this point. The 2002 operating year is year one under the new agreement between the parties. Product availability according to agreement terms is indicated by Sogelco as being crucial. The Shareholders Agreement made October 8, 2001 at Schedule 8.01 makes a special stipulation whereby subject to availability of product and agreement on price the respondents guarantee production of Sogelco products for the 2000 year only after which both parties have more flexibility in that regard. Sogelco did not pack Maine lobster at Summerside Seafood Supreme in It did before and now it has counted on substantial supply in the 2002 summer season. Each of Sogelco and the respondents have approached the 2002 operating year based on a view that the other would facilitate the working capital requirements to finance inventory and receivables. These and other related circumstances reveal a scenario where interlocutory relief would or could effectively determine the main issue before the arbitration board. By the time the case is determined, and counsel have advised that it is going to take some time, more time than I thought it would, but some considerable months, to get the arbitration board up and running and the hearing completed and adjudicated upon. By the time the case is determined, the 2002 season may well be over, one way or the other, and the risk to one party or the other will by then have crystallized or passed. It is necessary to make more than a generally accepted preliminary assessment of the merits in these circumstances.

8 Page: 6 [23] Fourth, I have without success explored for a middle ground that would accommodate the essential needs of both parties and avoid their greatest risks. I remain convinced, and I encourage you, that the parties have the mutual business capability and capacity to find an acceptable interim arrangement to handle the working capital requirements and protect their respective interests and that they could do so better than the Court could do for them if they negotiated. However, for their own reasons, regarding which I will not speculate beyond what is necessary for this decision, the parties have not found agreement on that critical issue. I have come to the conclusion that my decision regarding working capital needs has to fall one way or the other. In the circumstances a line apportioning the cost of carrying the product between the parties cannot simply be drawn at the plant gate. The respondents version is that payment is due upon production, and that if ordered to carry inventory and receivables and bear the associated risk they would close the plant rather than incur such unacceptable risk. Sogelco s submission is that an injunctive requirement for stockpiling of inventory at the respondent s cost and risk is of no use by itself to Sogelco, because Sogelco entered the 2002 year in reliance that the respondents and Daley Bros. would provide a thirty day receivables facility for its full sales program in accordance with industry standards. Finding a middle ground doesn t work for either party. Finding a middle ground would also as well arguably involve writing terms into the agreement, which I wish to and am going to avoid doing. The parties have asked the Court to choose between two stark alternatives. [24] Finally, in assessing the application, I am using all the admissible information that has come before the Court on the application. [25] The respondents submit that Sogelco s demands are bizarre -- that Sogelco wants the Court to amend the agreement to require production, special packaging, exclusive sales, and substantial sales well above any previous experience, all at the respondents cost and risk, and without any commitment by Sogelco for pricing, payment, or purchase schedule. The respondents have sketched a picture of Sogelco as a puffed up promoter with dismal and erratic sales experience, doubtful creditworthiness, who has been indolent toward his obligations under the agreement. [26] Sogelco says the Court should be awake to the reality that the respondents have dragged their feet and have made it impossible for Sogelco to perform under the agreement; that these matters raised by the respondents could not have been fully addressed previously by Sogelco due to the respondents failure to complete the essential first steps of providing the essential production information. Sogelco points out that it is a proven player in the international marketplace, with a long track record, and that the plant has done $16 million/year before and Sogelco has done $45 million/year in sales in the past - I don t know if that is $US or $Canadian; The last number, I believe is Canadian. With credit facilities tailored to its particular businesses. Sogelco proposes that the mandatory orders be made on terms which involve a limited and secured accounts

9 Page: 7 receivable line of credit and a commitment to purchase product at a monthly rate that will consume all the summer and fall production by 2002 year-end. Three-part test: [27] I will now deal with each of the three steps in the test. C Merits of the applicants case [28] The applicant seeks to require the respondent to perform its contract. The key question is what is the agreement between the parties. There is evidence of contract documents, correspondence, oral representations and discussions, and of understandings gained. There was a great deal of evidence before the Court regarding the intention of the parties. While respecting the role of the arbitrator to determine this matter upon hearing all the evidence, it is necessary for me at this preliminary assessment stage to make some assessment based on the evidence before me. The strength of the applicants case is important for this case. That is because of the substantial consequences of an injunction on the main issue before arbitration, and also of the higher degree of assurance needed for consideration of mandatory relief. [29] Outside the agreement, the evidence regarding intention is steeped with questions of credibility, and of admissibility. The task at arbitration will be to determine the agreement between the parties, and issues will arise regarding the parol evidence and its admissibility. The agreement itself is highly instructive. Para 8.6 that of the Share Purchase Agreement dated November 2, 2002 stipulates that it and the Shareholders Agreement constitute the entire agreement between the parties, and of all representations except as stated; and no modification can be made except as in writing. That has an impact on the parol evidence. The agreement itself is in writing, and fairly thorough, although somewhat convoluted by its piecemeal development in a number of documents, and sometimes short on details on the rights and obligations of the parties. [30] Upon reading the whole agreement, and the parol evidence, and then considering the agreement again, I am satisfied that Sogelco satisfies the first leg of the test. There is a serious case to be tried. Plus I am left with a high degree of certainty as to the preferred interpretation of the agreement. Sogelco can meet the test regarding its submission on the central issue that the respondents bear the obligation of providing working capital, including financing of inventory and receivables, in the manner contemplated by the agreement. [31] The Addendum incorporating changes up to January 31, 2002 states that the spirit of the agreement is that the plant be owned and operated according to the provisions of the agreement for the express purpose of recognizing the obligation the parties have for

10 Page: 8 the business opportunity as presented by Sogelco. Under the agreement, the respondents received 60% of what were previously Sogelco s shares - 100% of the shares representing the plant operations - and in return the respondents made commitments to operate the plant. Previously, Sogelco financed the Summerside Seafood Supreme operation. Under clause 4.5(g) the respondents were to use reasonable efforts to have Sogelco released from all guarantees of those obligations to third party financial institutions. The agreement also recognized and involved the fall 2001 lease, under which Daley Bros. extended credit on terms to Sogelco. [32] The agreement contains specific direction at clause 7.01 that all plant production is to be managed in accordance with a Schedule of Principles. Clause 8.01 classifies the respondents as ensuring that Sogelco is provided with a long term uninterrupted supply of particular products. Schedule 7.01 states the marketing principles to which the parties will adhere. They will consult to promote their respective objectives. The respondents will provide the requisite production information, and seek to obtain and provide sufficient product, all exclusively for Sogelco. The parties turned their minds to pricing in clause (f) and (g). That appears to be a formula capable of providing the basis for ascertaining price. The terms of Clause (g) go beyond price to refer to two comparables: commercially competitive terms and at least as favourable as it offers such product to (Daley Bros.) best customers. [33] Under Clause 11.01, the future working capital financing and long term financing of plant operations shall be provided according to an agreed schedule. The terms of financing first refer to capital financing and particular working capital requirements, and then state that Daley Bros. is to provide all, (I underline the word all), future working capital requirements of the plant. This stipulation authorizes Daley Bros. to deal on a limited basis with two items mentioned in the agreement within the discussion of working capital -- namely inventory and receivables. [34] There is no language in the agreement that suggests Sogelco is to take up all inventory as soon as it is produced, or to finance inventory in any other manner. [35] I am familiar with the respondents evidence that prefers the view that Sogelco was to have been responsible for financing inventory and receivables. The terms of agreement trump that parol evidence, at least at this stage, in light of the language of the agreement and the factual circumstances of the transaction. The purpose of Sogelco s contemplated credit line is a controversial subject, and the exchanges between the parties are controverted as well. The presence of such controversy is not a reason for the Court to refrain from assessing the strength of the applicants case on a preliminary basis in the circumstances of the agreement in writing present in this case. [36] As well, I am informed by the evidence of the industry norms and of Daley Bros.

11 Page: 9 practices for extension of credit. [37] Without deciding the contract terms in substitution for the arbitration board, I need to say at this stage that I am satisfied to the level required for this injunction proceeding that the contract between the parties contemplates: (1) that Daley Bros. will arrange for the respondents to finance the inventory and receivables, (2) that Sogelco is to commit to take up the products at levels agreed upon in the seasonal forecasts, and (3) that credit for receivables is to be managed by the parties on commercially competitive terms which would probably be indeed what Daley Bros. offers to its best customer. [38] I am conscious that both parties say the other has failed to adhere to the agreement, and that the respondents say the applicants failure to perform its obligations should preclude granting mandatory relief now. I will necessarily leave it to the arbitration board to finally work out this chicken and egg issue, and to make adjustments based on its assessment of the instigating failure to perform under the agreement. For the present purposes through I am satisfied that (1) the information requirements are initial and critical, (2) the exclusive supply requirements are essential, and (3) the credit facilities are necessary and the respondents have failed to provide them. I cannot know with confidence why Sogelco has not sold more or all the plant production. The true positions and capabilities of the parties, and perhaps their motivation too, can only be revealed upon performance of the agreement. It is known now though that the respondents are not yet compliant and the agreement seems to contemplate the respondents taking the initial steps of performance and assuring the product marketing conditions contemplated by the agreement. [39] The nature of the relationship between the parties is also a factor for consideration. Here, Sogelco transferred control of its production plant to the respondents in return for their assurance of continuous supply of specific product. The need for court assistance is increased by the opportunity for subtle action against the rights of the other party. The respondents are in control of the plant and of supply. The non-arms length relationship of the parties toward Summerside Seafood Supreme operations suggests that the Court be wary of the need for injunctive involvement and direction. C Irreparable harm [40] I am satisfied the applicant has met the test for irreparable harm. Without deciding in this assessment between the conflicting evidence as to which party was to arrange the credit facilities, I accept Mr. Elbaz evidence that since making the agreement Sogelco proceeded on the basis that this matter was not its concern, that the plant would be provided with working capital by Daley Bros. That is reasonable at this stage of deliberation because it is consistent with a reasonable interpretation of the language of the agreement. The Court was referred to various case law, one case being CPC

12 Page: 10 International Inc. v. Seaforth Creamery Inc. (1996), 69 C.P.R. (3d) 297 (Ont. Ct. (Gen. Div.)) a.k.a. the Hellman s Mayonnaise case. That case is instructive on consideration of the issue of irreparable harm. Sogelco has shown in a manner analogous to the Hellman case that its commercial appeal and success is dependant on the continuous supply and the uniqueness of its product. Sogelco s business involves capability to commit to customers. Assurance of supply and manageable credit terms are understandably essential ingredients. Sogelco s reliance on the respondents agreement is not unreasonable. The potential consequences for Sogelco are apparent. Loss of customers, goodwill, and market position would be irreparable and would be difficult, if capable at all, of measurement in damages. Sogelco does have other sources of supply, but I accept its evidence that the Summerside Seafood Supreme commitment is integral to its 2002 marketing program. While the respondents showed that Sogelco has not purchased much product yet in 2002, and the plant did not process Maine lobster in the summer season in 2001, the respondents have not yet provided Sogelco with fulfilment of their own obligations which would give Sogelco the opportunity to perform or fail. As well, Sogelco has demonstrated its past sales experience and present commitment (as of July 18, 2002) to purchase all plant product based on the respondents procurement forecast issue which was issued on July 12, C Balance of inconvenience [41] Balance of convenience is a difficult issue in the present case. I recognize that both parties face the potential of substantial harm. I do not fail to appreciate that the respondents bear risk of financial loss should Sogelco fail to perform its obligations or should Sogelco fail, period. The receivables could be lost. The release of product without assurance of payment is obviously unsettling and problematic. As well, the specialty packed product could have a reduced net value after being converted to other products and then sold off, should that become necessary. On the other hand, Sogelco could lose markets, lose the very business opportunity for which it transferred control of the plant, and lose its minority interest in the plant. [42] The balance is different now than it was when Sogelco filed its application on July 3, At that time, Sogelco had not committed to a purchase schedule, although there had been correspondence in that regard, and there was no security against the receivables. The addition of the reciprocal commitment to purchase all the scheduled product at the rate of $750,000. US per month until Christmas changes the risk in two ways. First, it limits the working capital exposure on inventory, and second it provides an early and periodic opportunity for the respondents to monitor for compliance and take further action toward risk avoidance and risk reduction should default occur along the way. [43] This assessment is the dangerous part of this judgment - but I am satisfied with it:

13 Page: 11 Applying the stipulated cost of product of $350,000 US/week to the 15 week production schedule just recently provided by the respondents: (1) the inventory-related working capital would not exceed approximately $1.5 million US by the time of Sogelco s first purchase commitment, (2) the maximum requirement (which would occur near the end of scheduled production) would be less that $3 million US against which the respondents would have full inventory, and (3) the financing would be substantially worked down by Christmas/02. The receivables credit is the higher risk component. This would be limited to $750,000. US even through Sogelco may have a greater amount of product on its hands and in the marketplace. There would also be 15% cash against purchase, as well, which would be secured by Sogelco s interest in the Corporation and the plant. [44] The evidence, which includes financial statements, does not permit me to assess the value of the Summerside Seafood Supreme operation or of Sogelco s shares therein with any particular confidence. However, some real value is indicated, by Daley Bros. participation and investment, and by the terms of the lease in the fall of It is notable that Sogelco proposes to put its total interest on the table, so that the worst outcome for Daley Bros. would be to own the entire operation of another plant in return for its exposure of net working capital risk as stated. While the magnitude of the respondents exposure is real and significant, it is of a kind that it can be managed within Daley s operational experience. It is also a risk that appears to have been contemplated by the agreement between the parties. It appears to me that Sogelco suffers the prospect of greater harm from not granting the injunction. Conclusion: [45] Upon application of the various legal principles to the evidence before me, I conclude that my discretion should be exercised to grant the mandatory injunction on the limited terms sought, and subject to the security being provided as proposed by the applicant. Specific remedies are intrusive. They require positive acts. I have considered both the protection of the applicant s position and the burden imposed on the respondents. The respondents have presented worthy submissions on the cost and risk imposed on them, and the spectre of an unworthy applicant. These submissions are to be weighed in the context of the contractual relationship between the parties. The strength of the applicant s case is relatively important in the circumstances of this application. The applicant has demonstrated a strong prima facie case based on the terms of the contract, and in the circumstances of the rest of the evidence, the contract provisions continue, at least at this stage, to prevail. The likelihood of ultimate success will weigh heavily in favour of an injunction: Sharpe on Injunction and Specific Performance, at para [46] In this particular case, the assessment on the first leg of the test feeds the assessment on the second and third legs of the test. Proceeding on Sogelco s version of the working capital obligations, its explanation of needed credit and its scenario of irreparable harm

14 Page: 12 become more credible based on expectations and reliance, and similarly regarding the balance of convenience. [47] In the circumstances of the respondents having failed to provide necessary information, which they have advised the Court regarding the business plan at least was driven by extraneous reasons, it cannot be shown that Sogelco is indolent. [48] Supervision does not appear as an impediment, for once an interpretation of the working capital obligation is adopted, which is accomplished by this ruling, performance follows. Injunction and terms: [49] During the hearing, the respondents consented to being ordered to provide some of the information required under the agreement. [50] I wish to clarify that the Court has no intention of amending the agreement, or of imposing terms of security except as offered by Sogelco in the hearing. The orders issued only require interlocutory compliance with terms the agreement pending this arbitration, based on my interpretation of the agreement between the parties for this purpose and minor ancillary measures to address past non-performance. The credit limits, reciprocal obligation to take up minimum monthly amounts, and provide security are all ameliorating conditions as proposed by Sogelco. [51] It will be ordered that the respondents comply with the Marketing of Product Schedule 7.01 of the agreement punctually, as applicable, and without limitation that the respondents provide the applicants with information and product as thereby required. In particular, the respondents shall do the following: a. Provide forthwith to the applicants their 2002 business plan and seasonal production forecasts for the summer, fall, and winter seasons. Upon receipt and consideration of this information, the applicants shall then forthwith provide the respondents their seasonal sales forecast. b. Provide to the applicants on a next-day or day following end-of-week basis, daily or weekly production report providing in detail the quantities by product type that was packed by the plant on the previous day or week. c. Provide forthwith to the applicants for past months and promptly following future month-ends monthly financial and cash flow statements, production records and sales records for all the months in 2002.

15 Page: 13 d. Provide forthwith to the applicants immediate access to all raw product purchase records in its possession or control that would verify the respondents product purchases during 2002 spring season. e. Cause the plant to produce and make available all lobster and rock crab in accordance with Schedule 7.01 exclusively for sales and marketing to the applicants under the applicants brand and specifications in accordance with the respondents 2002 business plan and seasonal production and sales forecast; and offer the applicants on a right of first refusal basis any other species produced at the plant. f. Maintain the inventory produced for sale to the applicant in accordance with the terms of the sales forecasts under the agreement and of this injunction. g. Release to the applicants all product produced as per the production forecast and in accordance with the sales forecasts on terms consistent with Schedule h. Offer to the applicant all production from the Summerside Seafood Supreme Plant on the following credit terms: - First, provide the applicants with a 30 day line of credit limited to the amount of $750,000. US, on terms 15% payment in cash on purchases. - Second, the continuing provision of credit is subject to performance by the applicants of its commitments to: * purchase product at the rate of $750,000. US per month from July 23 onward to the end of 2002; * pay on account in compliance with the above credit terms; - The requirements upon the respondents to continue to produce Sogelco product, maintain Sogelco inventory, and extend Sogelco credit are all subject to Sogelco performing its monthly purchase obligations and paying for product on the stipulated terms. In the event of a material breach, the respondents may temporarily reduce or cease those respective activities as applicable, use inventory to reduce its financial exposure, including without limitation converting inventory pursuant to Schedule paragraph 2, and

16 Page: 14 proceed forthwith and summarily to this Court for confirmation of its ameliorative action and further direction in response to a Sogelco default. - The obligation of the respondents to provide credit beyond present levels is upon and subject to the applicants providing security for performance of its obligations under the agreement and any damages from this injunction as proposed by the applicants in the hearing, namely: * pledge of its shares in the Corporation; * pledge of its interest in the respondents loan to the applicant under the agreement, which is in the face amount of $195, The applicants shall forthwith confirm this pledge of security to the respondents. [52] I add this note to the injunction terms, which is ameliorative to the respondent. It may be addressed just by differences in calculations or may be addressed by the applicants regarding their product take up: According to the stipulated product cost of $350,000/week US, the evidence of inventory on hand of $1 million+ (Canadian), production being on a 15 week schedule with reduced production in the last two weeks nos. 14 and 15, the calculation would result in aggregate inventory of approximately $6 million US. Sogelco s commitment to purchase $750,000 US/month would use up approximately $4.7 million (US) in the 6 1/4 months by the end of 2002 year end. This calculation shows a balance of inventory not taken up by the monthly commitment. Recognizing the vagaries of this calculation, since I am dealing with very limited information based only on what the parties gave me, I am going to qualify the respondents obligation to maintain inventory and call upon Sogelco to commit to taking up the balance of $1.3 million US of inventory, either by proportionately increasing its monthly commitment for the remainder of 2002 or alternatively continuing its $750,000 US/month commitment into January and February 2003 as necessary to take up the remainder of inventory, in the absence of which the respondents would be permitted to convert surplus inventory beyond its commitment to Sogelco pursuant to this injunction in accordance with Schedule 11.02, para 2. Ancillary issues: C Arbitration clause

17 Page: 15 [53] Since the hearing on the preliminary issue my research revealed a second arbitration clause. The agreement appears to contain two arbitration clauses with different provisions. As previously mentioned, Clause of the Shareholders Agreement made October 8, 2001 provides for a two person arbitration board (a scheme which I have already surmised as appearing problematic for decision-making, and perhaps not reflective of the full intention of the draftsperson or the parties). However, there is a second clause which appears in the Share Purchase Agreement made November 2, 2001, at Clause 8.5(b). This clause (which does appear workable and expedient), requires unresolved disputes to be submitted promptly to arbitration by a single arbitrator in accordance with the Arbitration Act. It prescribes Prince Edward Island as the proper forum. And it authorizes the Court to grant interim relief which was the issue on the preliminary hearing. Counsel are requested to briefly address this apparent duplication and contradiction at the conclusion of delivery of these reasons. C Compliance [54] In making this order I am aware that enforceability may be limited to the financial capability of the respondents which are subsidiaries, unless Daley Bros., which is not a party to this proceeding or the agreements, causes their compliance to occur. Counsel for the respondents have cautioned that the consequences of mandatory orders will be that the plant will shut down. The Court cannot decide the issue on that basis. Sogelco has heard the respondents statements, and has pursued its application for mandatory relief nonetheless. In the absence of resolution by the parties, I have proceeded to decide the matter in accordance with the principles applicable to mandatory interlocutory injunctions applied to the contract made between the parties and the circumstances of the case. C Applicants undertaking to commence action [55] There is normally a requirement to commence an action for damages. Sogelco has undertaken to commence an action, but this case presents an aberration to the general rule. The arbitration clause in the agreement precludes commencing an action until the arbitration route is exhausted. So that is sufficient. It is sufficient that Sogelco s undertaking to expeditiously pursue arbitration be followed to completion before the necessity of determining any court action being commenced. Costs: [56] Both parties asked for costs. Neither party has yet spoken to costs. The parties may speak to costs, if necessary, now that you know the results of the case. If you wish to speak to costs, I prefer you do it by brief written submissions and that they be filed within thirty days from today. I want those submissions to include comments both on the awarding of costs and on the assessment of costs because the chambers judge would

18 Page: 16 normally do the assessment rather than refer it to the Prothonotary. In that regard see practice note 22, which states the information to be filed. [57] Without prejudging the issue of costs, there are two features which I bring to the parties attention. The first one is well known - that costs usually follow the result. The second, which applies to this case, requiring production of product, specialized product, maintenance of inventory, and credit on receivables may not have been granted, we will never know what might have happened, but it may not have been granted by this Court but for the assurance of terms and security to address the respondents risk which Sogelco offered only after the proceeding was commenced, and regarding a couple material elements thereof only within the hearing and late on the hearing day itself. The parties and counsel are encouraged to consider those factors before failing to agree regarding costs. July 26, 2002 (orally) September 6, 2002 (edited version) Justice David H. Jenkins