A-558-79
The Queen (Appellant)
v.
Sovereign Seat Cover Mfg. Limited and Fingerhut
International Limited (Respondents)
Court of Appeal, Urie and Ryan JJ. and Kerr
D.J.—Ottawa, December 19, 1979 and February
11, 1980.
Practice — Motion to strike pleadings — Appeal from
decision of Trial Judge to strike statement of claim because
action was founded in contract and not in federal law —
Action was to recover moneys paid under a development
incentive grant because defendants failed to comply with the
conditions of the grant — Whether action is based on contract
or on federal law — Appeal allowed — Federal Court Rule
419 — Regional Development Incentives Act, R.S.C. 1970, c.
R-3, as amended by R.S.C. 1970 (2nd Supp.), c. 25, ss. 4, 5, 6,
10 — Regional Development Incentives Regulations, SOR/69-
398, as amended by SOR/71-51, ss. 7, 15, 16.
Appeal from a judgment granting a motion brought by the
respondents to strike the statement of claim as disclosing no
cause of action. The initial action was brought by the Crown to
recover moneys paid under a development incentive grant
because the defendants failed to observe the conditions on
which the grant had been made and thus acted contrary to
sections 15 and 16 of the Regional Development Incentives
Regulations. The Crown's offer was that the amount of the
development incentive was conditional upon the approved capi
tal costs of the proposed development and the number of jobs,
averaged over the second and third years after the date of
commercial production, as determined by the Minister to have
been created directly in the new products portion of the opera
tion of the new facility. The defendants accepted the Crown's
offer, but subsequently failed to comply with its terms. They
also failed to repay the grant. The Trial Judge struck the
statement of claim because he found that the liability was not
imposed or created by the statute. Thus the issue on appeal is
whether the Crown's action is based on federal law or whether
it is based on contract.
Held, the appeal is allowed. The right to the incentive is
based on the provisions of the Act, particularly section 10.
Similarly the right of the Crown to recover the sum claimed in
this action is a right based on the terms of sections 15 and 16 of
the Regulations, which are operative as such and not by virtue
of their incorporation in a contract between the Crown and the
defendants. Even if, on a study of relevant documents, it were
determined that the written offer and acceptance contained
contractual elements, the claim asserted by the plaintiff in this
case as determined by reading the statement of claim, would be
based on the relevant sections of the Regulations. It follows
that the claim is based on a federal regulation and thus on
applicable federal law and is within the jurisdiction of the
Federal Court. The relevant sections of the Regulations impose
directly and in express terms the obligation to repay.
R. v. Rhine [1979] 2 F.C. 651, applied.
APPEAL.
COUNSEL:
T. L. James for appellant.
G. E. Fisk for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Gowling & Henderson, Ottawa, for respond
ent.
The following are the reasons for judgment
rendered in English by
RYAN J.: This is an appeal from a judgment of
the Trial Division* delivered September 11, 1979,
granting a motion brought by the respondents (the
defendants in the action), pursuant to paragraph
419(1)(a) of the Federal Court Rules', to strike
the statement of claim as showing no cause of
action which is within the jurisdiction of the Fed
eral Court.
The purpose of the action brought by the Crown
is to recover from the defendants a sum of money
representing 80% of a development incentive
grant. Payment was made to the defendants on or
about March 7, 1974, pursuant to the Regional
Development Incentives Act 2 and the Regional
Development Incentives Regulations ("the
Regulations") 3 . The claim is based on an allega
tion that the defendants had not observed the
* [Not distributed—Ed.]
' Paragraph 419(1)(a) of the Federal Court Rules provides:
Rule 419. (1) The Court may at any stage of an action order
any pleading or anything in any pleading to be struck out,
with or without leave to amend, on the ground that
(a) it discloses no reasonable cause of action or defence, as
the case may be,
and may order the action to be stayed or dismissed or
judgment to be entered accordingly.
2 R.S.C. 1970, c. R-3, as amended.
3 SOR/69-398, as amended by SOR/71-51.
conditions on which the grant had been made and
thus had acted contrary to sections 15 and 16 of
the Regulations.
The learned Trial Judge was of the view that the
payment of the incentive had been made under the
terms of a contract between the parties, a contract
constituted by the acceptance by the defendants of
a written offer made to them by the plaintiff. He
found that the alleged liability of the defendants to
make repayment was based on this contract; it was
not in his view a liability imposed or created by the
federal Act or Regulations. The statute, as he read
it, "... creates conditions precedent to an entry
into a contract between the parties and certain
terms to be included therein but does not, of itself,
create the right sought to be enforced and it
follows that while the liability arises as a conse
quence of the Statute it is not a liability imposed
or created by the Statute and is therefore not a
liability created by and based on a federal law."
Having so found, he struck the statement of claim,
basing his decision on McNamara Construction
(Western) Ltd. v. The Queen 4 .
The issue in this appeal thus is whether the
Regional Development Incentives Act and Regula
tions provide the basis for the Crown's action or
whether the claim is one based on contract.
I will state in rather more detail certain of the
facts alleged in the statement of claim.
It was alleged that, as far back as December
1971, the defendant Sovereign Seat Cover Mfg.
Limited ("Sovereign Seat Cover") made an
application for a development incentive. There
were negotiations. A written offer of an incentive,
made on behalf of the Minister of Regional Eco
nomic Expansion, was accepted by Sovereign Seat
Cover on March 3, 1972. But as a result of
circumstances, which are set out in the statement
of claim, the original offer was declared by the
parties to be null and void.
The Crown allegedly made another written offer
on February 1, 1974, this time to both defendants,
Sovereign Seat Cover and Fingerhut International
Limited. It was a term of the offer that the
amount of the development incentive was based on
4 [1977] 2 S.C.R. 654.
the approved capital costs of the proposed develop
ment and the number of jobs, averaged over the
second and third years after the date of commer
cial production, as determined by the Minister to
have been created directly in the new products
portion of the operation of the new facility. This
new offer was accepted by the defendants on Feb-
ruary 24, 1974.
It was also alleged that on March 7, 1974, a
cheque in the amount of $109,280, representing
80% of the development incentive, was sent to the
defendants. I presume that the cheque was sent
pursuant to the Minister's obligation under section
10 of the Act 5 .
The statement of claim then sets out these alle
gations in its paragraphs 15 and 16:
15. In or about the month of February, 1977, the Plaintiff
discovered that the Defendants or either of them had, prior to
October 31st, 1976, discontinued without notice to the Plaintiff,
manufacturing vacuum cleaners and comforters, and therefore
had ceased operating the eligible assets comprised in the
approved capital costs on which the amount of the development
incentive was based and had also failed to create the estimated
5 Section 10 of the Regional Development Incentives Act
provides:
10. When the Minister is satisfied that a facility for the
establishment, expansion or modernization of which a de
velopment incentive has been authorized, the amount of
which was based on
(a) the approved capital costs of establishing, expanding or
modernizing the facility, or
(b) the approved capital costs of establishing or expanding
the facility and the number of jobs created directly in the
operation,
has been brought into commercial production or, in the case
of a facility for the expansion or modernization of which a
development incentive has been authorized, the expanded or
modernized facility has been brought into commercial pro
duction, the Minister shall pay to the applicant an amount on
account of the development incentive not exceeding 80% of
the amount estimated by the Minister to be the amount of
the development incentive, and the remainder of the incen
tive shall be paid in such amounts and within such period,
(c) not longer than 30 months from the day the facility or
the expanded or modernized facility was brought into
commercial production, in a case to which paragraph (a)
applies and to which paragraph (b) does not apply, or
(d) not longer than 42 months from the day the facility or
the expanded facility was brought into commercial produc
tion, in a case to which paragraph (b) applies,
as are prescribed by the regulations.
43 jobs associated with the said new products in the second and
third years immediately following the dates on which the
facility was brought into commercial production, all contrary to
Sections 15 and 16 of the Regulations under the Regional
Development Incentive Act.
16. The Plaintiff has requested repayment of the Total develop
ment incentive paid to the Defendants pursuant to the provi
sions of the said Act and Regulations but to date, the Defend
ants have omitted or refused to remit the monies owing to the
Plaintiff.
Sections 15 and 16 of the Regulations provide:
15. (1) It is a condition of a development incentive in
respect of a facility that, if
(a) during the 24 months immediately following the date on
which the facility is brought into commercial production, in
the case of a facility in respect of which the development
incentive is based only on the approved capital costs, or
(b) during the 36 months immediately following the date on
which the facility is brought into commercial production, in
the case of a facility in respect of which the development
incentive is based in part on the number of jobs created in
the operation,
eligible assets comprised in the approved capital costs on which
the amount of development incentive is based cease to be used
in the facility, the applicant shall, unless the Minister deter
mines that the cessation of use was unavoidable, repay to Her
Majesty such amount of the development incentive as may be
determined by the Minister to be the same proportion of the
total development incentive as the approved capital costs of the
eligible assets that have ceased to be used in the facility are of
the total approved capital costs.
(2) An applicant shall
(a) notify the Minister forthwith upon ceasing to use eligible
assets under the circumstances referred to in subsection (1);
and
(b) repay any amount required to be repaid by him pursuant
to subsection (1) not later than four months from the date on
which the eligible assets so ceased to be used.
16. It is a condition of any development incentive that is
based in part on the number of jobs created in the operation
that, if during the second and third years immediately following
the date on which the facility is brought into commercial
production, the number of jobs created directly in the operation
is less than the estimated number of jobs on which payments on
account of the development incentive are based, the applicant
shall repay to Her Majesty the amount paid on account of the
development incentive that was related to the number of jobs
that were not so created.
The purpose of the Regional Development
Incentives Act is stated in its general title:
An Act to provide incentives for the development of productive
employment opportunities in regions of Canada determined
to require special measures to facilitate economic expansion
and social adjustment.
The statute and the Regulations provide a
detailed code or scheme empowering the Minister
of Regional Economic Expansion to authorize the
provision of development incentives to applicants
for them (section 4); provide the basis for deter
mining the amount of a primary development
incentive, a secondary development incentive, and
a special development incentive (section 5); fix the
maximum amount of a development incentive and
authorize the provision of incentives of lesser
amounts (section 6); and require the Minister to
pay the authorized incentives (section 10). The
Act covers many other details of the regional
incentives program, as do the Regulations.
Section 7 of the Regulations refers to "any offer
of a development incentive under the Act". It is
obviously envisaged that, when the Minister has
considered an application in the light of the provi
sions of the Act and the Regulations, he may offer
to provide an incentive—a grant—to an applicant
in an amount and on terms, consistent with the
Act and the Regulations, he considers appropriate.
The authorization of the incentive will, again quite
obviously, depend on the applicant's acceptance of
the terms. This does not mean, however, that the
applicant's right to the incentive becomes contrac
tual in nature when he "accepts the offer". His
right to the incentive is based on the provisions of
the Act, particularly on section 10.
Similarly, the right of the Crown to recover the
sum claimed in this action is a right based on the
terms of sections 15 and 16 of the Regulations,
quoted above, which are operative as such and not
by virtue of their incorporation in a contract be
tween the Crown and the defendants. Even if, on a
study of relevant documents, it were determined
that the written offer and the acceptance con
tained contractual elements, the claim asserted by
the plaintiff in this case, as determined by reading
the statement of claim, would be based on the
relevant sections of the Regulations.
It follows that the claim as asserted in the
statement of claim is a claim based on a federal
regulation and thus on applicable federal law. In
this respect, the statement of claim is based on a
cause of action within the jurisdiction of the Fed
eral Court 6 .
I may say that, in my view, the decision of this
Court in The Queen v. Rhine', relied on by the
appellant, is clearly applicable. That case involved
a claim by the Crown for repayment of a prairie
grain advance payment made to the defendant
under the Prairie Grain Advance Payments Act'.
The submission on behalf of the defendant had
been that the liability to repay was imposed by the
undertaking he was required by the Act to give
prior to receiving the advance payment, not by the
Act itself. The Prairie Grain Advance Payments
Act was, however, regarded by the Court as an
integral part of a larger scheme or plan provided
by the Canadian Wheat Board Act 9 for marketing
prairie grains. The obligation to repay had its
source in the legislation and not in any contractual
promise founded on the undertaking required by
the statute. I would say that, if anything, the
present case is even more clearly a case in which
the Crown claim is based on a federal statutory
obligation. The relevant sections of the Regula
tions impose directly and in express terms the
obligation to repay.
I would allow the appeal with costs.
I would set aside the judgment appealed from
and substitute a judgment dismissing with costs
the defendants' motion, dated September 5, 1979,
seeking an order to strike the statement of claim.
* * *
URIE J.: I concur.
* * *
KERR D.J.: I concur.
6 Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10,
section 17.
' [1979] 2 F.C. 651.
' R.S.C. 1970, c. P-18, as amended.
9 R.S.C. 1970, c. C-12, as amended.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.