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. 1048547 Ontario Inc. v Dairy Farmers of Ontario

In 1048547 Ontario Inc. v Dairy Farmers of Ontario (Div Court, 2023) the Divisional Court allowed a Milk Act tribunal [the 'Agriculture, Food and Rural Affairs Appeal Tribunal' (AFRAAT)] to assess chargeable milk usage at it's highest rate (by default) where the JR applicant had not provided verifiable milk usage records. On JR the applicant argued unsuccessfully that this practice constituted an administrative penalty, which was unauthorized by the involved statute:
The penalty/surcharge issue

[26] The Tribunal also considered the Applicant’s argument that by charging the highest price for milk purchased during the audit period, the DFO created a surcharge that acts as a penalty on the Applicant, which is inconsistent with the Act and an impermissible reading in of words which were not intended. The Applicant pointed to s. 7(1)6 of the Milk Act, which grants 6 regulation-making powers to the Commission, including the use of penalties where there has been a contravention of the Act, regulations or order of the Commission. In addition, s. 7(3) of the Milk Act limits any penalty for non-producers of milk to no more than 10 per cent of the price payable to the producers for the product in the preceding twelve-month period.

[27] The Tribunal concluded that the deemed highest price levied on the Applicant was not a “penalty” used to deter non-compliance with the legislative scheme; rather it was part of the scheme for ensuring fair payment to milk producers. It preferred to refer to the increased amount owing as a “surcharge.” This seems quite appropriate, and reasonable; a surcharge, dictionaries tell us, is an additional charge or payment, or something added to the original cost or quoted price.

[28] On the other hand, the Applicant submits that any disadvantage imposed by a statute amounts to a penalty, relying on Regina v. Budget Car Rentals (Toronto) Ltd. (1981), 1981 CanLII 1751 (ON CA), 31 O.R. (2d) 161 (C.A.), in which the Court of Appeal for Ontario cited the Shorter Oxford English Dictionary definition of penalty: “a punishment imposed for breach of law, rule, or contract; a loss, disability, or disadvantage of some kind, either fixed by law for some offence, or agreed upon in case of violation of a contract”. The Applicant points to examples of other regulatory actions which have been found to constitute penalties, such as licence revocations, or milk quota reduction: see Dimi Meat Products v. Director, 2010 ONAFRAAT 8; Senn and Suter v. DFO, 2015 ONAFRAAT 2.

[29] These cases provide examples of regulatory disadvantages, which might also include fines, imposed in reaction to a breach of a law or rule. In contrast, s. 24(2) of the DFO Regulation is based on an expectation of accurate milk usage reporting. While there may be an economic disadvantage to being deemed to have purchased milk at the highest price, the information required to support a claim to lower pricing is wholly within the control of the processor, and the failure of the processor to support a lower price simply means it is charged the higher price. The provisions do not function as “punishment”, nor is the surcharge a fine; rather, the ability to increase the price is simply a mechanism to ensure, as the Tribunal noted (at para. 110), that dairy farmers receive “fair and proper compensation.”

[30] Further, if milk usage is later established by verified records, s. 24(3) allows for an adjustment downward. This is a pricing scheme that is subject to validation, for known pre-set price classifications, and it is up to the processors to support their claim for a lower price.

[31] The Applicant submitted that the Tribunal did not discuss or consider the effect of s. 24(3) of the DFO Regulation, arguing that it was not available to it once the word “verifiable” was read into s. 24(2). However, in para. 109 of its decision, the Tribunal addressed s. 24(3), stating the Applicant’s position that “since [the Applicant] can never provide a verifiable MUV declaration, the savings clause becomes a penalty clause.” Although the Tribunal did not respond directly to this point, as we have already stated, the Applicant’s inability to support an adjustment to a lower price does not make being charged the higher price a penalty; it is, as the Tribunal said, simply a mechanism to ensure that dairy farmers receive “fair and proper compensation.”

[32] The Tribunal also observed that the penalty provisions referenced in s. 7 of the Milk Act, as well as the limits on penalties, relate to penalties that flow following a hearing to determine whether an applicant “has failed to comply with or has contravened… any provision of this Act, regulations, any plan, order or direction of the Commission or marketing board.” That is a different regulatory response and procedure than is found in the operation of the price provisions in s. 24(2) of the DFO Regulation.

[33] The practical impact of the Applicant’s position would allow processors to avoid the implications of s. 24(2) and thereby create an incentive, flowing from the 10 per cent limit on penalties, to engage in large scale deceptive record-keeping practices in order to take advantage of the price classification system as a cost of doing business. This would be at odds with the goal of fairly compensating milk producers based on the use of their product.

[34] In our view, therefore, the Tribunal made a reasonable decision in finding that the operation of s. 24 does not give rise to a “penalty” at all, let alone one which is subject to the limiting provision in s. 7(3) of the Milk Act.


[37] The evidence before the Tribunal, summarized by it at paras. 58 – 64 of the decision, was that the Applicant’s records were incomplete. There were discrepancies in reported production and sales numbers, inconsistencies between production and manufacturing records, and material differences in volumes of milk used for certain products and total purchases. Numerous records were requested but not provided.
. 1048547 Ontario Inc. v Dairy Farmers of Ontario

In 1048547 Ontario Inc. v Dairy Farmers of Ontario (Div Court, 2023) the Divisional Court dismissed a JR argument that to read the text of Daily Farmers of Ontario (DFO) regulations as requiring that their "Milk Utilization Verification" be in fact 'verifiable' was 'unreasonable'. The court did this (in part) on a straight-forward purposive 'modern principle' statutory interpretation application:
The Tribunal’s decision that the DFO can invoice the Applicant at the highest class price when its MUV declarations cannot be verified was reasonable

[16] The Applicant argued that having submitted MUV declarations, the DFO had no authority under s. 24(2) of the DFO Regulation to charge for milk usage at the highest rate. The Applicant submitted that a plain reading of s. 24(2) meant that only milk processors who produce no MUV declarations are subject to being billed at the highest rate for purchased cow milk, and that s. 24(2) does not require that the MUV declarations be verifiable.

[17] Section 24 of the DFO Regulation provides:
24(1) Every processor shall, in respect of each month,
(a) complete a milk utilization report through the Milk Utilization Verification (MUV) system; and

(b) submit to DFO such milk utilization declarations through the MUV system, by the seventh day of the next following month or the next business day when the seventh falls on a holiday or weekend.
(2) Subject to subsection (3), where a processor fails to comply with subsection (1) in respect of any month,
(a) all milk supplied to the processor in the month shall be deemed to have been utilized by the processor as Class 1(a) for fluid milk processors or the highest class utilized in the prior month for industrial milk processors, and

(b) the processor shall pay DFO for the milk at the price referred to under subsection 2(a).
(3) Upon receipt of the milk utilization declaration mentioned in subsection (1), DFO shall adjust the amount determined under subsection 2(b) in a subsequent month in accordance with the utilization of the milk as declared.
[18] The Applicant submits that the Tribunal acted unreasonably and erred in law by giving an unreasonable interpretation to ss. 24 (1) and (2) by effectively reading the word “verifiable” into s. 24(1) and 24(3) of the DFO Regulation, relying on “a basic principle of statutory interpretation that the court should not accept an interpretation which requires the insertion of extra wording where there is another acceptable interpretation which does not require any additional wording”: Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103, at para. 27.

[19] We disagree. The Tribunal properly understood its task in interpreting s. 24 of the DFO Regulation, noting at para. 89, the “additional instruction” from Vavilov, at para. 121:
The administrative decision maker’s task is to interpret the contested provision in a manner consistent with the text, context and purpose, applying its particular insight into the statutory scheme at issue. It cannot adopt an interpretation it knows to be inferior – albeit plausible – merely because the interpretation in question appears to be available and is expedient. The decision maker’s responsibility is to discern meaning and legislative intent, not to “reverse-engineer” a desired outcome.
[20] The Tribunal considered the overall scheme of the Milk Act, the purpose of the legislation and the words used in the section. It found that s. 24(2) must be read in the overall context of the “milk supply management plan” in Ontario (para. 91). At para. 92 the Tribunal stated that the purpose of s. 24 is “to provide a self-reporting system that is fair to all, especially dairy farmers who must sell their milk to DFO, ensuring that they receive proper compensation based on the end use of that milk.”

[21] The Tribunal heard and accepted the evidence from audit witnesses that the accuracy and verifiability of processor declarations is fundamental to the system’s objectives of ensuring a fair return to producers and equitable treatment of processors. A milk processor that is not able to verify its milk usage declarations undermines the objectives of the system. A processor that pays for milk based on actual, verified usage should not have to compete with a non-compliant processor that benefits unfairly from price discounts. This evidence about the importance of accurate, verifiable MUV declarations informed the Tribunal’s analysis of the statute and regulations.

[22] The Tribunal reasoned that the MUV system can only function properly where processors’ MUV declarations can be verified by audit. The Tribunal found that this is the only reasonable interpretation of how s. 24 is to be applied, given the critical role of verifiable MUV declarations in driving the milk supply and compensation system. The Tribunal concluded, at para. 97, that “[i]f the declaration is not verifiable, it is not a declaration and section 24 must be read with that interpretation.”

[23] Consistent with the long-standing directive of the Supreme Court of Canada in Maple Lodge Farms v. Government of Canada, 1982 CanLII 24 (SCC), [1982] 2 S.C.R. 2, at p. 7, the Tribunal interpreted s. 24 of the DFO Regulation in a manner that would give effect to the scheme intended by the legislature, avoiding a “narrow, technical construction.” Or, as the Ontario Court of Appeal put it in Wilder v. Ontario Securities Commission (2001), 2001 CanLII 24072 (ON CA), 142 O.A.C. 300 (C.A.), at para. 23, “[a] court should be loath to prefer a rigidly narrow and literal interpretation over one that recognizes and reflects the purposes of the Act.”

[24] In our view, therefore, the Tribunal’s conclusion that s. 24 requires verification of the information provided in MUV declarations is reasonable. While we agree that courts and tribunals should not lightly engage in reading additional words into legislation, in our view there is no other “acceptable interpretation” of the DFO Regulation: Friesen, at para. 27. Section 24 itself states that it is a Milk Utilization Verification (MUV) system” (emphasis added). The audit powers granted to the DFO exist in order to allow for verification and ensure compliance with the overall scheme of the DFO Regulation and the supply management system. Verifiability of MUV declarations is essential to the effective operation of the regulatory scheme, which involves self-reporting and the need for verification – “trust but verify”, as counsel for the DFO put it.
. 1048547 Ontario Inc. v Dairy Farmers of Ontario

In 1048547 Ontario Inc. v Dairy Farmers of Ontario (Div Court, 2023) the Divisional Court sets out a useful background involving the Milk Act, and an appeal under the Ministry of Agriculture, Food and Rural Affairs Act (MAFRAA) to the Agriculture, Food and Rural Affairs Appeal Tribunal (AFRAAT) - here in a JR of AFRAAT milk-related decisions:
[3] The Applicant is a family-owned industrial milk processor in eastern Ontario, employing approximately 300 people. It produces a variety of milk products including feta cheese, cream cheese, dips, and yogurt.

[4] The Applicant uses cow milk produced in Ontario, which it blends with goat milk in its products. As such, the Applicant’s purchase and use of cow milk is subject to the supply-management regulatory scheme for milk production and marketing overseen by the Canadian Dairy Commission (the “CDC”) and the Ontario Farm Products Marketing Commission (the “Commission”). This system controls the production, marketing and pricing of milk to ensure a fair return for producers and a continuous and adequate supply of dairy products for consumers.

[5] In Ontario, cow milk regulation is governed by the Milk Act, R.S.O. 1990, c. M.12. The DFO is a marketing board which exercises delegated authority from the Commission under several provisions of the Milk Act. It was formerly known as the Ontario Milk Marketing Board: Milk and Farm-Separated Cream – Plan, R.R.O. 1990, Reg. 760, s. 4. The DFO has the exclusive power to buy milk from dairy farmers, to sell it to processors such as the Applicant, and to set the price at which the milk is sold. The DFO has a variable pricing structure for the sale of milk, depending on how the milk is used by processors, e.g., for yogurt, cheese or other products: DFO Milk General Regulation 10/17, a regulation under the Milk Act (the “DFO Regulation”).

[6] The DFO relies on milk processors to self-report monthly on how they use milk. The DFO issues monthly invoices following receipt of Milk Utilization Verification (“MUV”) declarations from purchasers/producers. Under s. 24 of the DFO Regulation, if a processor fails to complete an MUV declaration in any month, it shall be charged the highest price for milk purchased that month, which may be adjusted if there is compliance later. Ensuring accurate self-reporting is accomplished by the DFO through a range of regulatory tools, including the use of milk audits. The DFO has the authority 1) to require persons engaged in producing, processing or marketing of milk or milk products, including processors, to provide information to it, 2) to appoint persons to inspect the books, records and documents of persons engaged in marketing milk, and 3) to take such action and make such orders and issue such directions as are necessary to carry out the terms of the Act and regulations passed pursuant to it: Milk Act, s. 9; Milk and Farm-Separated Cream – Marketing, O. Reg. 354/95.

[7] As a medium to large processor, the Applicant purchases at least $20 million worth of cow milk annually from the DFO. Accordingly, price differentials can be significant.

[8] Following a series of audits of the Applicant relating to its purchase and use of milk between 2015 and 2017, the DFO concluded that it could not verify the Applicant’s MUV declarations that had determined the price it had paid for milk. On November 26, 2018, the DFO advised the Applicant that it would be issuing a new invoice for milk delivered between October 1, 2016 and July 31, 2017 at the highest price rate. This price adjustment required the Applicant to pay the DFO an additional $7.095 million. The DFO also indicated it would be charging for milk at the highest rate going forward (the “prospective order”), and sought an amount previously compromised between the parties in an earlier dispute, bringing the total amount in dispute to approximately $13 million.

[9] Pursuant to s. 16 of the Ministry of Agriculture, Food and Rural Affairs Act, 1990, c. M. 16, the Applicant appealed the DFO’s decision to the Tribunal.

[10] On April 26, 2022, following a lengthy de novo hearing, the Tribunal upheld the decision of the DFO. The Tribunal accepted the evidence that the DFO was unable to verify the uses of the milk purchased by the Applicant due to the Applicant’s inadequate record-keeping and therefore the DFO was justified in charging the Applicant at the highest price rate. The Tribunal rejected Skotidakis’ argument that there was no statutory authority requiring milk usage verifications to be “verifiable” based on the plain wording of s. 24(2) of the DFO Regulation. The Tribunal held that it lacked jurisdiction to deal with the amount previously compromised and the DFO abandoned its prospective order.

[11] For the reasons that follow, we see no basis to interfere with the Tribunal’s decisions.

[12] In our view, the Tribunal’s interpretation of s. 24(2) of the DFO Regulation requiring that MUV declarations be verifiable is reasonable. The Tribunal analyzed the scheme of the legislation and the provisions under review, and its interpretation was supported by evidence of how the regulatory scheme functions. It also concluded, reasonably, that the decision to charge a higher price for the milk purchased by the Applicant did not amount to a “penalty” and was supported by the plain reading of s. 24(2). The Tribunal’s acceptance of the uncontradicted evidence of the auditors—that the claimed usage of milk could not be verified and that it was impossible to accurately determine how milk was used—was also reasonable.

[13] Additionally, the Tribunal’s interlocutory decision to require the Applicant to post security for a portion of the extra amounts charged by the Respondent was also reasonable and in accordance with the legal test for interlocutory relief set out in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311.


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Last modified: 30-05-23
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