A Richmond-based manufacturer will have to pay $84,420 in damages for breaching a manufacturing contract to produce natural health product powders.
Canadian Phytopharmaceuticals Corporation (CPC) was taken to court by former client Real Organics & Naturals House Ltd. and owner Ivy Liou, who alleged contractual breaches by CPC when manufacturing products using Chaga mushrooms sourced from Quebec.
Liou had wanted to process Chaga, fungus parasitic on birch trees known for active health ingredients such as polysaccharides, using the dual extraction product "well-established in China but not well known in Canada," wrote B.C. Supreme Court Justice Hugh Veenstra in a decision issued July 19.
CPC, licensed by Health Canada, is a contract manufacturer and private labeller of natural health products. The company is based at 12233 Riverside Way, near Steveston Highway and Highway 99.
Real Organics leased a location at Lansdowne Centre but laid off all of its employees in early 2019.
Three CPC employees, Kok-Sing Lim, Daniel Wang and Carina Cai, who worked with Liao on CPC's behalf were also named defendants in the lawsuit.
In the lawsuit, Real Organics alleged CPC breached the contract by failing to properly extract Chaga for capsules and having a mould issue with another powder made using Chaga residue. It also alleged wrongdoing including breaching fiduciary duties and instructing or permitting employees to forge documents.
Real Organics claimed CPC destroyed its "planned business enterprise" which included a "lost opportunity to become a market leader in Chaga products using wild Canadian Chaga."
CPC, on the other hand, denied any contractual breaches and said it did not forge any records.
Manufacturing products using Chaga and residues
According to the July 19 decision, Real Organics and CPC began processing and manufacturing Chaga capsules in 2016 and started selling them in August of the same year. The capsules were advertised at $128 per bottle but were "sold on many occasions at less than advertised price," Veenstra noted.
Liou filed multiple patent applications for Chaga extraction, none of which have been successful to date.
Real Organics also engaged CPC to produce products made with ingredients unrelated to Chaga.
The companies moved on to process a large batch of Chaga the same summer and Real Organics received a quotation from CPC for producing a "Beauty Secret Power for Women 30's+ in Powder" using the residue of raw Chaga remaining after the Chaga capsule extraction.
In the same year, CPC's founder Dr. Yuan Ma was dismissed in "unpleasant circumstances" during a shareholder dispute, wrote Veenstra. Ma's daughter and CPC's production manager Jie Ma also left the company and CPC was left with no production manager until mid-November 2016.
Products made using the large batch of Chaga were tested in November 2016 and showed a polysaccharide concentration of six per cent, compared to the 50.2 per cent concentration in the previous batch and eight per cent in raw Chaga Liou tested.
"Ms. Liou was of the view that the product could not be sold if the key active ingredient was at a 6 per cent level," wrote Veenstra.
Liou then sent an email to CPC in January 2017 requesting it stop processing the Chaga product, citing a quality concern due to the lab results.
Later in mid-2017, the beauty powder made with Chaga residue was provided to Liou and a certificate of analysis was signed by CPC representatives confirming the product conformed "with respect to various tests."
However, Liou got the beauty powder tested again after picking it up and found "the mould content was far beyond acceptable."
Soon after, Real Organics retained legal counsel and submitted a complaint to Health Canada alleging CPC failed to follow methods for production in the contract and prepared new internal records to "suggest" it followed the process, improperly handled Chaga materials and led to "significant mould growth."
CPC, on the other hand, told Health Canada a waiting time of "almost two weeks" between blending the powder and bottling due to issues with packaging size was the "only possible reason" for the mould contamination.
Real Organics then commenced legal action against CPC in August 2017 and Health Canada ultimately confirmed the beauty powder could not be sold due to mould issue.
CPC breached contract
In his decision, Veenstra found CPC breached the contract by failing to follow the specified process when extracting Chaga for the capsules.
Though there was "no clear evidence" establishing what caused the mould in the beauty powder, Veenstra found it was "far more likely" the mould appeared while CPC stored the powder in "its warehouse in wet conditions" and CPC was responsible for the mould.
He also found there was a breach of duty of honest performance.
"In my view, it is perhaps not surprising that issues arose in the days and weeks following the dramatic management change that occurred in mid-September 2016 – just as the Chaga extraction project was getting underway," wrote Veenstra, who noted the Chaga extraction took place without a production manager at CPC "other than the first two days."
"CPC went suddenly from years of hands-on management by its founder to direction by a group of directors with little previous involvement in the business."
He found CPC created new production records rather than "own up to the problems (with the Chaga project) and seek a reasonable solution" and did not tell Liou the records were created after the fact and advising her "there was significant uncertainty as to whether they were in fact accurate."
However, Veenstra rejected Real Organics' assertion that CPC's breaches caused the destruction of its business because it no longer had a marketable Chaga capsule product.
He found he did not see a basis to conclude following Real Organics' instructions could have yielded the desired concentration level. Nevertheless, Real Organics could have had a starting point for "ongoing investigations into creating a marketable product."
The 50.2 per cent concentration level in the first batch remained "one of the mysteries of the case," Veenstra added.
He dismissed Real Organics' claims of fraud and conspiracy but ordered CPC to pay Real Organics damages for the loss of the beauty powder product, cost of mould testing, acquisition costs for raw Chaga, refund of deposits paid and breach of duty of honest performance.
Veenstra also dismissed all claims against individual defendants.
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