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Can the Queen Be Taken at Her Word? Federal Court of Appeal Answers in Canada v. South Yukon Forest Corporation

Posted in Administrative, Case Comments, Construction and Real Estate, Contracts, Energy, Torts
Ronald Podolny

The Federal Court of Appeal has clarified when the federal Crown will be held responsible for representations made by its officers. In issuing its decision, the Court opted for a narrow interpretation of the Crown’s liability and reiterated that parties that rely on the Crown’s representations have the responsibility to conduct their own due diligence.

Background

The action arose out of the construction of a timber mill in the Yukon. South Yukon Forest Corporation and Liard Plywood and Lumber Manufacturing Inc. (the “Plaintiffs”) alleged that the Department of Indian Affairs and Northern Development (the “Department”) had promised and represented to them that if they built a mill in the Yukon, the Crown would ensure that there would be an adequate, long term supply of timber of the mill. The Plaintiffs built a mill in Watson Lake, Yukon. The supply of timber was inadequate, and the mill was shut down. The Plaintiffs commenced legal proceedings against the Crown alleging negligence, negligent misrepresentation and breach of contract.

Most Yukon forests are Crown land that cannot be harvested without authorization. Authorization can be obtained in three ways – a permit (for a relatively small amount), a short-term Commercial Timber Permit (“CTA”) and a long-term Timber Harvest Agreement (“THA”). A THA requires the approval of the Governor in Council by order in council.

Decisions Below

At trial, there was no dispute that certain federal officials sought to cause the Plaintiffs to build a mill in the Yukon. For example, one of the Plaintiffs testified that at a meeting with the Plaintiffs, the Executive Assistant to the Minister of Indian Affairs and Northern Development stated: “If you build a mill that will employ 100 people, why wouldn’t we give you timber?” Letters to a similar effect were sent to the Plaintiffs by various officials of the Department. At another meeting, representations to the effect that “if you build a mill, we will give you timber” were made by a Department official.

Nevertheless, a THA was never entered into.  For a while after the mill was built, it operated on the basis of CTAs with local loggers. It then failed to secure sufficient supply of timber and shut down.

The Federal Court found the Department liable for negligence, negligent misrepresentation and breach of contract. The Court concluded that the Crown owed a duty of care to the Plaintiffs and that it breached such a duty when it failed to implement a policy that would govern the long term access of the Plaintiffs to timber pursuant to a THA. The Federal Court found that the Crown was liable in negligent misrepresentation on the basis of statements made by the Department officials. Reliance on the statements was reasonable, and the Plaintiffs would not have built the mill had they not been made. The Federal Court found that the Crown was liable for breach of contract. The representation that timber would be available was an unilateral promise, which was accepted when the Plaintiffs built a mill. Thus, a contract was formed. The Federal Court found that it was an implied term of the unilateral contract that the requisite annual volume of timber would be guaranteed to be supplied.

The Federal Court of Appeal accepted all of the factual findings of the Federal Court. However, it overturned its legal findings and concluded the Crown was not liable. Pursuant to section 8 of the Territorial Lands Act, a THA could only be obtained with the consent of the Governor in Council. This fact was either known or should have been known to the Plaintiffs. Furthermore, the totality of the representations made the Plaintiffs made their reliance unreasonable, as it was evident from some of the representations that it was not certain that they would receive a THA. Accordingly, the Federal Court of Appeal held that the Plaintiffs’ reliance upon the Crown’s representations was not reasonable.

The Federal Court of Appeal also found that, as a matter of law, no contract could arise in the circumstances of the case. Any promises or representations made by the Department officials to the effect that THA would be granted were outside their authority, as such an agreement needed the approval of the Governor in Council. Where a statute regulates the power to make contracts, a contract binding on the Crown does not come into existence until the requirements of the statute are met. The Court cited Wind Power Inc. v. Saskatchewan Power Corp. to the effect that no implied term that the requisite approval by the Lieutenant Governor in Council would be granted could exist in the face of the statutory requirement for such an approval. The Saskatchewan Court of Appeal in that case also held that a contractor dealing with government is on notice of all statutory limitations paced on public officers. Similarly, in Donald Frederick Angevine v. Her Majesty the Queen, in the Right of Ontario, the Ontario Superior Court of Justice held that the Attorney General could not bind the rest of the Cabinet to accept his recommendation of a judicial appointment, and hence lacked the capacity or authority to enter into a contract with a prospective candidate for such position.

The Federal Court of Appeal did not rule on whether the Crown was liable in negligence, because it found that the Crown’s conduct did not cause the Plaintiffs’ alleged loss.

The Federal Court of Appeal thus found the Crown was not liable to the Plaintiffs and allowed the Crown’s appeal.

Significance of the Appeal

The appeal is a stark reminder of the importance of due diligence in dealing with the Crown. In particular, commercial entities cannot rely on representations of the officers of the Crown without verifying that such representations are within their authority. Private contractual parties are deemed to be on notice of any statutory limitations placed upon government officers. Furthermore, if a representative of the Crown makes a representation that is not within his or her authority to make, no contract can be formed, and the Crown will not be liable in damages.

The case signals the Federal Court of Appeal’s reluctance to hold the Crown (and hence, the taxpayer) liable for the acts of a few “bad apples” in the civil service who exceed their authority and make representations they are not empowered to make. It reinforces the responsibility of individuals and companies to do their own due diligence prior to relying upon government agents.

Case Information

Canada v. South Yukon Forest Corporation, 2012 FCA 165

FCA Court File No. A-307-10

Date of Decision: May 31, 2012