Written on January 23, 2012.
Purina sold its products through a dealer network, each dealer having its own exclusive territory. After discovering that one of its dealers, Rens, had been selling a competitor’s product, Purina appointed the plaintiffs the exclusive dealer in the Rens territory. The dealership agreement could be terminated by either party on giving 90 days written notice.
Purina continued to sell its product directly to Rens who resold to its former customers. Then Purina sold these products to a neighbouring dealer who, with the knowledge of Purina and Rens, redirected the product to customers of Rens in the plaintiffs’ territory. Why did Purina ignored the plaintiffs’ exclusive rights? Perhaps it was concerned about the potential loss of business in that territory while the plaintiffs were getting up to speed.
The plaintiffs sued Purina for breach of the dealership agreement. They joined Rens and the neighbouring dealer as defendants claiming a conspiracy to intentionally inflict economic harm by illegal means.
The trial judge found that the defendants acted intentionally and in concert. Their actions were directed at the plaintiffs with knowledge that losses would result. Relying upon a previous Ontario Court of Appeal judgment in Reach M. D. v. Pharmaceutical Manufacturers Association of Canada (Reach), he held that the defendants were not “at liberty” or “not authorized” to act the way they did. In his view such conduct constituted the illegal means that was the final element of the claim.
The Ontario Court of Appeal maintained the judgment against Purina based on its breach of the plaintiffs’ exclusive rights, but reduced the damage award to 90 days loss of business. The Court held that since Purina was entitled to terminate the contract on 90 days, the plaintiffs could only recover for losses during that period. The Court also awarded $30,000 punitive damages for the deliberate and concealed nature of Purina’s breach of contract.
The judgment against Rens and the neighbouring dealer was reversed. The Court considered that the trial judge erroneously extended the Reach decision beyond “strict illegality”. The Purina breach of contract was actionable only against Purina and not against these defendants. As neither of these defendants had done anything illegal, they could not be liable for damages.
The case limits the scope of the claim of conspiracy by unlawful means. Drafters of sales agency, franchise and dealership agreements will note the important of a general clause, applicable in all circumstances, allowing either side to terminate these agreements on a certain length of notice. The case continues Reach as an applicable authority where member associations act against third parties without jurisdiction .