IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
Real Organics & Naturals House Ltd. v. Canadian Phytopharmaceutical, |
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2019 BCSC 394 |
Date: 20190320
Docket: S-177788
Registry: Vancouver
Between:
Real Organics & Naturals House Ltd. and Ivy Liou
Plaintiffs
And:
Canadian Phytopharmaceutical Corporation and
Kok-Sing Lim and
Daniel Wang and
Carina Cai
Defendants
Before: The Honourable Mr. Justice Voith
Reasons for Judgment
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Counsel for Plaintiffs: |
D. Chen |
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Counsel for Defendants: |
D.L.R. Yaverbaum |
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Place and Date of Trial: |
Vancouver, B.C. February 7 - 8, 2019 |
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Place and Date of Judgment: |
Vancouver, B.C. March 20, 2019 |
[1] The Plaintiffs, Real Organics & Naturals House Ltd. (“Real Organics”) and Ivy Liou, have brought an application against the defendant, Canadian Phytopharmaceutical Corporation (“CPC”), seeking two forms of relief. First, by way of a summary trial application, the Plaintiffs seek a declaratory order that CPC breached the terms of the contracts it made with Real Organics in or around July and August 2016. Second, though not explicit in their application, the Plaintiffs seek to sever certain questions of liability that arise in their Amended Notice of Civil Claim.
[2] CPC raises multiple issues in response to the application. For example, it objects to the admissibility of various pieces of evidence. It also argues that it misapprehended the nature and focus of the present application and therefore did not assemble the evidence that it might otherwise have gathered for the application. Ultimately, CPC’s position is that the present dispute is not suitable for resolution by way of summary disposition and that severing issue of liability and damages would, having regard to the relevant authorities, be inappropriate.
[3] Real Organics is a British Columbia company that is in the business of retail, online and wholesale distribution of health products, including products made from raw Chaga. Chaga is a type of mushroom that grows on birch and other trees and that is said to have various health benefits. The plaintiff, Ms. Liou, is the Chief Executive Officer, director, and shareholder of Real Organics.
[4] CPC is a British Columbia company and is a contract manufacturer and private labeler of herbal extracts, dietary supplements, vitamins and minerals, and natural health products. The various individual defendants, against whom no relief is sought on this application, either have an interest in or are employed by CPC.
[5] In or about April 2016, Real Organics delivered 50 kg of raw Chaga to CPC to be processed in a manner that would increase the concentration of various constituent elements in the Chaga for a new trial product that was to be sold by Real Organics (the “Trial Batch”).
[6] Real Organics says that the Trial Batch was to be processed using the specific formula and procedures that it delivered, in writing, to CPC (the “Procedures”). The Procedures contemplated the use of what is described as a dual-extraction process and further contemplated that the raw Chaga would be processed at specified temperatures for specified lengths of time using certain specified materials.
[7] After the Trial Batch was processed, Real Organics had the processed Chaga tested by an independent testing laboratory called Silliker Laboratories Group, Inc. (“Silliker”). It did so in order to determine the concentration levels of materials that had been extracted through the Procedures. These tests indicated that the polysaccharides in the processed material had a concentration of 50.2%. This is to be compared to earlier testing undertaken by Silliker, on the raw Chaga, that had yielded a polysaccharide concentration of 8.84%.
[8] Satisfied with these results, Real Organics directed CPC to make capsules from, and then bottle, the processed Trial Batch. Ultimately, 679 bottles of processed Chaga, containing 90 capsules each, were manufactured from the Trial Batch.
[9] Thereafter, on July 7, 2016 and August 8, 2016, Real Organics signed two purchase orders that it had received from CPC in connection with orders to process two further batches of raw Chaga (the “Purchase Orders”). In relation to the Purchase Orders, Real Organics again provided CPC with a set of written Procedures that mirrored the Procedures for the Trial Batch. Real Organics says that these written Procedures were incorporated into the Purchase Orders and were a term of its contract with CPC.
[10] On August 10 and August 23, 2016, Real Organics delivered two further batches of raw Chaga to CPC. Each batch consisted of approximately 513 kg of raw Chaga. At the end of November 2016, Real Organics was advised by CPC that its product had been processed. Real Organics again had samples of this processed product tested by Silliker. The results achieved by this testing indicated that the polysaccharide concentration of the processed material was only 6% as compared to the 50.2% polysaccharide concentration of the Trial Batch. Real Organics argues that both the Trial Batch and the two subsequent batches of raw Chaga were harvested in the same period and that they ought, accordingly, to have the same or similar levels of polysaccharide concentration if they were processed properly.
[11] The two batches of processed Chaga were never capsulated or bottled. Real Organics asserts that it has lost significant profits as a result of CPC’s breach of contract.
[12] Counsel for Real Organics acknowledged at the outset that the Amended Notice of Civil Claim, filed by previous counsel, was a poor pleading in multiple respects. I agree. It is not clear, for example, what claim the Plaintiffs have against the various individual defendants.
[13] That said, the pleading clearly advanced a breach of contract claim in respect of two products. The first is the Chaga capsule product that I have described. The second is a further product called Beauty Secret Powder. The pleading also advances a claim for negligence, for breach of fiduciary obligation, and for fraud. The fraud claim relates, inter alia, to the allegation that CPC falsified various records relating to the procedure and production of the Chaga capsule product. Real Organics seeks either specific performance of its contract with CPC or, alternatively, damages. It also seeks both aggravated and punitive damages.
[14] On this application, Real Organics only advances its breach of contract claim for the processing and production of the Chaga capsule product. Counsel for the Plaintiffs also confirmed that Real Organics had elected to pursue damages rather than specific performance.
[15] Furthermore, in order to simplify its application, Real Organics formally confirmed that it was prepared, if successful on its summary trial application, to abandon all claims in its Amended Notice of Civil Claim other than its claim for breach of contract for the processing and production of the Chaga product. If it was unsuccessful on its summary trial application, Real Organics reserved the right to pursue either all or some of these additional claims and forms of relief at trial.
[16] It is important to realize, however, that Real Organics’ claim for breach of contract has two distinct components. The first is based on CPC’s failure to follow the written Procedures provided by Real Organics (the “Procedure Breach”). The second is based on CPC’s failure to achieve the 50.2% polysaccharide concentration that had been achieved with the Trial Batch (the “Concentration Breach”).
[17] Different evidence and different considerations pertain to these two alleged breaches. Absent Real Organics being able to make out both components of its contract claim on this application, Real Organics would be seeking to sever not only the issues of liability and damages, it would also be seeking to deal with the two components of its contract claim at different stages in the litigation process.
[18] CPC admits, in its various affidavit materials, that it did not follow the written Procedures that Real Organics had provided to it. CPC now says that it did not follow the written Procedures for either the Trial Batch or for the two subsequent and later deliveries of Chaga that Real Organics’ present claim is based on.
[19] Early in its submissions, CPC accepted that the Purchase Orders constituted a contract with Real Organics and that the written Procedures formed part of that contract. I asked counsel why, if that were the case and if CPC admitted that it had not followed the written Procedures it had been provided, I should not make the declaration of breach that Real Organics sought, at least in respect of the Procedure Breach. Counsel for CPC reflected on his client’s position overnight and, on the second day of the application, asserted that he had misspoken and that he was not prepared to concede that the written Procedures received by CPC from Real Organics formed a term of the contract between the parties. I accept counsel’s assertion that he misspoke.
[20] Counsel also asserted, as I have said earlier, that he had misapprehended the nature and focus of Real Organics’ position. In particular, counsel for CPC says it misapprehended, first, the importance of the written Procedures provided by Real Organics and, second, that it did not apprehend the alleged Procedure Breach to be part of the Plaintiffs’ breach of contract claim. This assertion is more difficult to accept.
[21] Real Organics’ Amended Notice of Civil Claim, though inelegant and flawed in several respects, advances a breach of contract claim in Part 3. The pleading also states, in Part 1, that:
8. The nature of the contractual relationship between the Plaintiffs and the Defendants was one of “made to order”; the Plaintiffs provide the Chaga raw mushroom, the product’s formula for each product, and the procedure of manufacturing. The Defendants provide the manufacturing services from start to finished products.
[Underlining added.]
[22] The Plaintiff’s Notice of Application states:
The Purchase Order (The Contract)
7. In or around April 2016, Real Organics delivered 50kg of raw Chaga to CPC for a trial powder product (the “Sample”). It was to be produced based on the Dual-Extraction Procedure (the “Procedure”) provided by Real Organics.
8. In paragraph 7 of the response to amended civil claim filed by the defendants (the “Response”), the defendants admit that CPC would process the raw Chaga using the Procedure (referred to as “processing protocol” in the Response).
9. On 6th July, 2016, Real Organics received the Sample of the dual-extracted Chaga powder from CPC. Real Organics in turn sent the Sample to a third-party lab, the Silliker Laboratories Group, Inc. (“Silliker”), to verify the quality of the concentrated constituents extracted through the Procedure.
10. Real Organics was satisfied with the results of Silliker. The results indicated an index data of 50.2% for Polysaccharides, comparing to the raw Chaga which only contains 8.84% Polysaccharides, analyzed by the same lab, Silliker.
…
12. On July 7, 2016 and August 8, 2016, an order was placed to CPC to process a second batch of raw Chaga into powder according to the Procedure (the “Purchase Order”).
13. CPC received and accepted the Purchase Order.
14. The Purchase Order specified the Procedure to be followed.
15. The defendants admitted the Purchase Order is a binding contract in the Response.
[Underlining added.]
[23] Paragraph 27 of the first affidavit of Ms. Liou, filed for this application, states:
CPC did not process our first and second batch of raw Chaga of PO #070716-271 and PO# 080816-236 as per the Procedure.
[Underlining added.]
[24] These paragraphs highlight the importance of the written Procedures to Real Organics’ claim. The foregoing paragraphs in the Plaintiff’s Notice of Application also identify various paragraphs where CPC has, in its Response to Amended Civil Claim, formally accepted that the written Procedures were part of its contract with Real Organics. CPC’s Response states:
7. On or about July 7, 2016, Real Organics and CPC entered into an agreement whereby CPC agreed process 500 kg of raw Chaga for fee of $48,969.75 (the “First Chaga Order”). Under the terms of the First Chaga Order, Real Organics would supply CPC with 500 kg of raw Chaga. CPC would process the raw Chaga into 200 kg of powdered extract (a 2.5 to 1 ratio) using a processing protocol that had been provided by Real Organics. CPC would then turn the powdered extract into bottled Chaga capsules.
8. On or about August 8, 2016, Real Organics entered into an agreement for CPC to process an additional 500 kg of raw Chaga for fee of $43,087.56 (the “Second Chaga Order”). Under the terms of the Second Chaga Order, Real Organics would supply CPC with 500 kg of raw Chaga. CPC would process the raw Chaga into 200 kg of powder using the same processing protocol then turned the powdered extract into bottled Chaga capsules.
…
14. In or around October to November 2016, CPC processed the raw Chaga into powdered extract in accordance with the processing protocols provided by Real Organics.
[Underlining added.]
[25] Furthermore, under the heading “Legal Basis” and in paragraph 41 of their Response, CPC states:
In particular and without limiting the forgoing, CPC processed the raw Chaga provided by Real Organics in accordance with the procedures provided by Real Organics….
[Underlining added.]
[26] Finally, I refer to the affidavit of Ms. Cai, a defendant and employee of CPC. Ms. Cai deposes:
9. On July 6, 2016, I received an email from Ms. Liou making an order for CPC to manufacture chaga capsules from raw chaga. In the email, Ms. Liou said that she would deliver 1,100 LB of chaga nuggets to CPC for processing into powder and then capsules using a specific procedure. A copy of the July 6 email is attached to my affidavit and marked as Exhibit “A”.
10. On August 6, 2016, I received another email from Ms. Liou making a further order for CPC to manufacture chaga capsules from raw chaga. In the email, Ms. Liou again said that she would deliver 1,100 LB of chaga nuggets to CPC for processing into powder and then capsules using a specific procedure. A copy of the August 6 email is attached to my affidavit and marked as Exhibit “B”.
[Underlining added.]
Exhibit “A” and “B” to the affidavit of Ms. Cai, which are virtually identical, are the written Procedures that I alluded to earlier and that were delivered by Real Organics to CPC.
[27] Based on the foregoing materials, it is difficult to accept that CPC somehow misapprehended the importance of the written Procedures that Real Organics provided to it and that it did not apprehend that CPC’s alleged Procedure Breach constituted a part of Real Organics’ breach of contract claim.
[28] Furthermore, notwithstanding the foregoing admissions and evidence, counsel for CPC sought to argue that it was open to CPC to use its expertise and to deviate, if it thought necessary or appropriate, from the written Procedures that it had received. None of CPC’s pleadings or its affidavits advance any such entitlement, either by way of implied term or otherwise.
[29] A further set of facts is relevant. I have said that the Plaintiffs’ pleadings raise a fraud claim. A component of that fraud claim is based on the assertion that CPC knowingly falsified production records. That assertion is based on the evidence of Mr. Li, a former employee of CPC, who has deposed, inter alia, that he was told by Mr. Ying, a current CPC employee and an affiant on behalf of CPC on this application, that Mr. Ying had falsified various production records relating to the processing of Real Organics’ Chaga capsule product. Mr. Ying has denied that assertion. I advised counsel that this was not an issue I could address on this application.
[30] At the same time, the facts that underlie this issue are, at least inferentially, relevant to the Procedure Breach. CPC says that it lost the original production records that relate to the Chaga it processed for Real Organics in the fall of 2016. Mr. Ying thereafter deposed that he retroactively completed daily production records for the time periods in question. Those production records indicate that CPC adhered perfectly to the written Procedures it had received from Real Organics.
[31] However, in Mr. Ying’s affidavit of November 9, 2018, he has, again, based on his memory, re-created how Real Organics’ raw Chaga was processed. This new recollection deviates materially in several respects from the written Procedures that Real Organics provided to CPC and from the production records that Mr. Ying himself later completed.
[32] Whether the production records that Mr. Ying completed were “falsified” or simply false, in the sense that they were inaccurate, is a matter for trial. What is relevant is that Mr. Ying appeared to consider, when he completed the production records after the fact, that CPC had adhered to the written Procedures it had received from Real Organics.
[33] Because of the difficulties associated with the Concentration Breach claim advanced by Real Organics, and on account of my other conclusions on this application, I do not consider that it is necessary or appropriate for me to address the merits of the Procedure Breach further.
[34] There are several apparent difficulties with this aspect of Real Organics’ claim. At her examination for discovery, Ms. Liou, on her own behalf and on behalf of Real Organics, admitted that the Purchase Orders she had signed did not include a term that dealt with polysaccharide concentrations of the finished product. Specifically, in relation to the July 7, 2016 Purchase Order, Ms. Liou gave the following evidence:
287 Q. And to your knowledge there’s no term in this contract requiring a concentration of polysaccharides?
THE WITNESS: Yes. But we do agree on the first trial processing protocol. So I believe CPC refer the first trial process protocol. And also mention on your amend – amendment of the civil – on our civil claim in November 2016. You mentioned on your amendment say CPC and I agree the – this P0 should follow the – the processing protocol on our trial chaga—on our trial 50 kg. Because the 50 kg report come out over 50 percent of polysaccharides.
[35] In relation to the August 8, 2016 Purchase Order, Ms. Liou gave the following evidence:
327 Q. And you agree with me that there’s no term in this contract requiring any specific concentration of polysaccharides - -
THE WITNESS: Yes.
328 Q. - - polysaccharides in the finished manufactured product?
THE WITNESS: Yes. Because I believed they will follow the –
the processing protocol of our trial 50 kg chaga.
329 Q. And you believed that would result in the same concentration of polysaccharides - -
THE WITNESS: For sure.
[36] The 50.2% polysaccharide concentration was the outcome of the testing of the Trial Batch done by Silliker on behalf of Real Organics. That 50.2% polysaccharide concentration was then incorporated onto a label, prepared by Real Organics, which was delivered to CPC for placement onto the bottles of the finished Chaga capsule product.
[37] CPC advances the position that the Plaintiffs never communicated their “potency requirements” to CPC and that CPC did not therefore test the finished Chaga capsule product. One aspect of CPC’s very purpose, however, is to process raw materials in order to increase the concentrations of certain components within those raw materials. Counsel for CPC accepts that this is so. Indeed this appears to be inherent in CPC’s submission that it was permitted to use its discretion to deviate from the Plaintiffs’ written Procedures so as to arrive at some desired result. What is not clear is what CPC understood that desired result to be.
[38] Real Organics filed an expert report from Dr. Wang. The admissibility of that report is objected to, on various grounds, by CPC. Leaving aside those objections, for present purposes, one aspect of Dr. Wang’s report suggests that some level of variability in the concentrations of the components of both raw and processed Chaga is to be expected. Indeed Dr. Wang has opined that the concentration of polysaccharides in harvested raw Chaga may vary from batch to batch.
[39] This conclusion seems to be consistent with some of the earlier raw Chaga testing results that were undertaken for Real Organics and from some of CPC’s internal testing though those test results were not included within CPC’s materials. The conclusion, that some degree of variability in the concentrations of materials in the processed Chaga product is to be expected, is also consistent with a portion of the first affidavit of Ms. Liou, sworn August 16, 2018, which states:
26. … As these three shipments of Chaga were harvested at the same period, the Processed Chaga should have the same or similar level of Polysaccharide content…”
[Underlining added.]
[40] Counsel for Real Organics, in response to a question I asked, accepted that the results of the polysaccharide concentration for the Trial Batch could have varied somewhat. The result of this is that the label that Real Organics delivered to CPC, for the Trial Batch, might not have been based on a polysaccharide concentration of 50.2% but rather on a somewhat higher or somewhat lower number. Counsel for the Plaintiffs also accepted that if CPC had delivered processed Chaga that had a concentration of, for example, 45%, no action would have been brought by Real Organics.
[41] Two further factors are relevant. First, leaving aside issues of admissibility, another portion of Dr. Wang’s expert report states:
“… If the polysaccharide content of the first batch is 50.2%, it is the manufacturer’s responsibility to make sure all batches onwards will match the same or higher potency. If the result turns out to be different under the same process condition, then this is considered a “Out of Specification” and the manufacturer should do a “OOS investigation”. This is a standard procedure for a GMP registered manufactory and it does not need to be indicated on the contract; the quality agreement exists in the GMP license. As a GMP pharmaceutical manufacturer, it is our responsibility to maintain the quality of product produced and in this case, find out the reason on how it happened.”
[42] Even if the Court were to accept the existence of such a “standard procedure”, the foregoing paragraph seems to acknowledge that different batches may not all meet the same potency specifications and its focus seems to be on what ensuing investigation is thereafter “standard practice”.
[43] Second, the Plaintiffs’ Amended Notice of Civil Claim is particularly unclear as it relates to the Concentration Breach. It is not clear whether Real Organics asserts that its contract with CPC required a specific polysaccharide concentration, whether that term was express or implied, and what the material facts that support the existence of that term are.
[44] Accordingly, I do not consider that Real Organics’ pleadings in relation to this issue are sufficiently well-developed. Furthermore, I do not consider that the positions and/or the evidence of either Real Organics or of CPC are sufficiently clear or coherent to enable the Court to find the facts necessary to decide the Concentration Breach and to address the whole of Real Organics’ breach of contract claim on the merits.
[45] Further factors are relevant to whether Real Organics’ breach of contract claim is suitable for summary disposition. The factors that should be addressed when considering whether a claim can be determined by way of summary trial are well-established. Rule 9-7(15) of the Supreme Court Civil Rules, B.C. Reg. 168/2009 provides:
Judgment
(15) On the hearing of a summary trial application, the court may
(a) grant judgment in favour of any party, either on an issue or generally, unless
(i) the court is unable, on the whole of the evidence before the court on the application, to find the facts necessary to decide the issues of fact or law, or
(ii) the court is of the opinion that it would be unjust to decide the issues on the application,
(b) impose terms respecting enforcement of the judgment, including a stay of execution, and
(c) award costs.
[46] In Gichuru v. Pallai, 2013 BCCA 60, Madam Justice D. Smith, for the Court, summarized the framework for the application of R. 9-7(15) and the relevant considerations that a chambers judge should consider:
30. In Inspiration Management Ltd. v. McDermid St. Lawrence Ltd. (1989), 36 B.C.L.R. (2d) 202 (C.A.), the court confirmed that the court under this rule "tries the issues raised by the pleadings on affidavits", that "a triable issue or arguable defence will not always defeat a summary trial application", and that "cases will be decided summarily if the court is able to find the facts necessary for that purpose, even though there may be disputed issues of fact and law" provided that the judge does not find "it is unjust to do so" (p. 211). In determining the latter issue (whether it would be unjust to proceed summarily), the Chief Justice identified a number of relevant factors to consider (at p. 215):
In deciding whether it will be unjust to give judgment the chambers judge is entitled to consider, inter alia, the amount involved, the complexity of the matter, its urgency, any prejudice likely to arise by reason of delay, the cost of taking the case forward to a conventional trial in relation to the amount involved, the course of the proceedings and any other matters which arise for consideration on this important question.
31. To this list has been added other factors including the cost of the litigation and the time of the summary trial, whether credibility is a critical factor in the determination of the dispute, whether the summary trial may create an unnecessary complexity in the resolution of the dispute, and whether the application would result in litigating in slices: Dahl v. Royal Bank of Canada et al., 2005 BCSC 1263 at para. 12, upheld on appeal at 2006 BCCA 369.
[47] Real Organics says that its claim for damages is approximately $1.35 million, representing the price it expected to sell the Chaga products that CPC was to process and package. It is not clear to me how the costs of production and other expenses factor into that number. The affidavit materials filed by Real Organics also seem to contemplate some further claim for loss of goodwill. Thus, the claim, as advanced, is for a relatively significant sum.
[48] There are also some significant conflicts in the evidence, particularly as it relates to the evidence of Mr. Li and the representatives of CPC. The evidence of Mr. Li relates not only to Real Organics’ fraud claim but also, for the reasons that I have explained, to those aspects of its claim that deal with the Procedure Breach. These matters cannot be resolved on this application.
[49] There is no suggestion that Real Organics’ claim is particularly urgent. Still further, the claim by virtue of the technical nature of some aspects of the evidence and the apparent need for expert opinion evidence makes the claim moderately complex. To be specific, Real Organics intends to lead expert evidence in relation to questions of liability. CPC says it also intends to lead expert evidence in relation to questions of damages. It is likely that each party will retain experts to respond to the expert reports filed by the other party.
[50] Finally, it is clear that Real Organics’ summary trial application would result in its claim being “litigated in slices”. Indeed, for the reasons that I have explained, it would result in Real Organics’ breach of contract claim being dealt with “in slices” as well as in having the damages component of its claim being deferred to trial.
[51] Based on the foregoing considerations, I do not consider that Real Organics’ application can succeed. I am unable to find the facts necessary to decide the issues of fact or law that are raised. Additionally, it would be unjust to decide the issues raised by the application. Based on these conclusions, it is unnecessary for me to address the parties’ detailed submissions on whether it would be appropriate to sever issues of liability from questions of damages.
[52] Accordingly, the summary trial application of Real Organics is dismissed. I consider that the trial judge who hears the matter should also deal with the costs of this application.
“Voith J.”