CITATION: Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135
DATE: 20090213
DOCKET: C49360
COURT OF APPEAL FOR ONTARIO
Sharpe, Armstrong and Watt JJ.A.
BETWEEN
Dancap Productions Inc., Dancap U.S.A. Investments Inc. and Dancap Private Equity Inc.
Plaintiffs (Respondents)
and
Key Brand Entertainment, Inc., SFX Theatrical Group, Inc., Key Brand Theatrical Management Group, Inc., Theatre Management Group, Inc., Theatre Management Group – Toronto, Corp., TCN Theatre Group, Inc., Fosse NY LLC, Toronto Theatre Ltd., Live Nation Theatrical Group, Inc., Eagle Eye Entertainment USA, Inc., Eagle Eye Entertainment Inc., Live Nation Family Holdings, Inc., Key Brand Family Holdings Inc., and Key Brand Holdings, LLC
Defendants (Appellants)
and
Ed Mirvish Enterprises Limited
Defendant (Respondent)
Peter Ruby and Tom Friedland, for the appellants
James Morton and Corey Steinberg, for the respondents Dancap Productions Inc., Dancap U.S.A. Investments Inc. and Dancap Private Equity Inc.
Mark Wiffen, for the respondent Ed Mirvish Enterprises Limited
Heard: January 28, 2009
On appeal from the order of Justice G.B. Morawetz of the Superior Court of Justice dated August 15, 2008.
Sharpe J.A.:
OVERVIEW
[1] The issue on this appeal is whether the motion judge erred in refusing to grant a stay on account of arbitration and forum selection clauses in one of the contracts entered into by the respondents “Dancap” and the appellants “Key Brand”.
[2] Dancap and Key Brand executed a preliminary Term Sheet outlining the general terms of a participation agreement related to Key Brand’s acquisition of theatrical assets, including two Toronto theatres. Dancap was to obtain an equity position in Key Brand and membership on its board, as well as the right to manage the theatres pursuant to separate management agreements to be concluded in the future. The parties also entered into an Additional Rights Agreement (“ARA”) which, among other things, set out the parties’ agreement to negotiate in good faith towards the conclusion of the management agreements.
[3] The ARA contains an arbitration clause requiring that “[a]ny dispute, controversy or claim arising out of or relating to” the agreement (except for equitable claims) be submitted to arbitration. The ARA also contains a forum selection clause providing for the exclusive jurisdiction of the state or United States District courts in California. The Term Sheet does not contain arbitration or forum selection clauses.
[4] Following the acquisition of the assets by Key Brand and prior to the finalization of the management agreements, Key Brand sold the Toronto theatres to the respondent Mirvish Enterprises Limited (“Mirvish”). Dancap, insisting that its claims arose under the Term Sheet and not the ARA, commenced this action for damages and injunctive relief in Ontario. Key Brand, insisting that a significant part of Dancap’s claims were subject to the ARA arbitration and forum selection clauses, moved to stay the action.
[5] The motion judge dismissed Key Brand’s motion. He ruled that Dancap’s claims arose solely under the Term Sheet and not under the ARA and that the ARA arbitration and forum selection clauses did not apply. Subsequent to that decision, Key Brand obtained an order from the Federal District Court in California requiring Dancap to submit to arbitration the core issue in the Ontario action.
[6] For the following reasons, I would allow the appeal and stay this action pending resolution of the arbitration proceedings in California.
FACTS
[7] While the parties are incorporated under different laws and have their places of business in various jurisdictions, for convenience I will refer to all of the Key Brand entities collectively as “Key Brand” and all of the Dancap entities collectively as “Dancap”. Key Brand has its principal place of business in New York while Dancap is headquartered in Toronto.
[8] In September 2007, Key Brand successfully bid for certain North American theatrical assets owned by Live Nation Inc. (the “Live Nation Assets”). The Live Nation Assets included the Canon Theatre and the Panasonic Theatre in Toronto as well as a Canadian touring business called Broadway Across Canada (collectively, the “Canadian Assets”).
The Term Sheet
[9] A Term Sheet was executed in early November 2007 to document the essential terms of the transaction. Pursuant to the Term Sheet, Dancap was to acquire an equity interest in Key Brand, representation on the Key Brand board of directors and the right to manage the Canadian Assets. The Term Sheet provides that it shall bind the parties until long form agreements, including Management Agreements with respect to the Canadian Assets, have been entered into. Under the heading “Canadian Operations”, the Term Sheet provides:
Dancap Productions will manage the Canadian Assets pursuant to the Dancap Management Agreements. This agreement [sic] will contain terms customary in such agreements, including without limitation, customary representations and warranties, mutual indemnities and other provisions consistent with normal business practices in the Theatre industry.
[10] The Term Sheet goes on to specify certain terms to be contained in the Management Agreements, including termination clauses giving either party the right to terminate the Management Agreements on certain grounds and with six months’ notice. The Term Sheet is silent on the subject of arbitration and forum selection.
The ARA and the Shareholders’ Agreement
[11] Prior to the closing of the Live Nation transaction, Key Brand and Dancap negotiated and entered into a Shareholders’ Agreement, the ARA and a Subscription Agreement, all of which were executed in late December, 2007.
[12] The ARA is an adjunct to the Shareholders’ Agreement and deals with certain rights unique to Dancap. It refers in several places to the “Management Agreements”, defined to include agreements for the management of the Canadian Assets. The following clause was added to the ARA at Dancap’s request:
- MANAGEMENT AGREEMENTS. [Dancap] and Key Brand intend to the enter into Management Agreements in accordance with the terms of the Term Sheet dated November 7, 2007 among the parties hereto and [Dancap] and Key Brand will continue to negotiate in good faith towards executing Management Agreements which have terms consistent with the terms set forth in such Term Sheet. The Management Agreements shall include a right of Key Brand to terminate the Management Agreements if [Dancap] ceases to own any common stock of Key Brand.
[13] The ARA contains an “entire agreement” clause providing that it “supersedes all prior agreements, negotiations and understandings concerning the subject matter hereof” and that it “shall supplement each of the Management Agreements and the Shareholders Agreement of even date”. The entire agreement clause further provides that “if there is a conflict between this Agreement and… the Management Agreements, this Agreement shall control and provide [Dancap] with the additional rights granted… under this Agreement.”
[14] The ARA provides that the governing law is to be the law of California and also contains the forum selection and arbitration clauses that are the focus of this appeal. Section 15(i) provides:
Jurisdiction. Subject only to the arbitration provisions of this Agreement, the parties hereto hereby irrevocably submit to the exclusive jurisdiction of the state courts of the State of California in Los Angeles County or the United States District Court for the Central District of California, for the purposes of any lawsuit, action or other proceeding arising out of or based upon this Agreement and the subject matter hereof. The parties hereto, to the greatest extent permitted by applicable law, hereby irrevocably and unconditionally waive, and agree not to assert, by way of motion, as a defence, or otherwise, in any such lawsuit, action or other proceeding brought in the above-named courts or as provided in the arbitration provisions of this Agreement, any claim that is not subject personally to the jurisdiction of such courts or arbitration tribunal, that its property is exempt or immune from attachment or execution, that the lawsuit, action or proceeding is brought in an inconvenient forum, that the venue of the lawsuit, action or proceeding is improper or that this Agreement may not be enforced in or by such court or tribunal....
[15] Section 15(j) provides:
Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement (other than claims for injunctive or equitable relief), including, but not limited to, the interpretation, breach or termination thereof (including whether the claims asserted are arbitrable), shall be referred to and finally determined by arbitration in accordance with the JAMS International Arbitration Rules. The tribunal will consist of a sole arbitrator. The place of arbitration shall be Los Angeles, California. The language to be used in the arbitral proceedings will be the English language. The arbitrator may, in the award, allocate all or part of the costs of the arbitration, including the fees of the arbitrator, and fees and costs of the prevailing party. Judgement upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof.
[16] The Shareholders’ Agreement contains parallel arbitration and choice of law clauses.
Sale of Theatres to Mirvish and Dancap’s Action
[17] Key Brand closed the acquisition of the Live Nation Assets on January 23, 2008. Shortly thereafter and prior to the finalization of the Management Agreements between Key Brand and Dancap, Key Brand entered into negotiations with Mirvish for the sale of the Canon and Panasonic theatres. Key Brand and Mirvish concluded an agreement of purchase and sale on April 8, 2008.
[18] Dancap immediately threatened proceedings, taking the position that by agreeing to sell the theatres to Mirvish, Key Brand had violated Dancap’s contractual right to manage the Canadian Assets. On April 11, 2008, Key Brand filed a petition in the United States District Court in California for an order to compel Dancap to submit their dispute to arbitration.
[19] Less than a month later, Dancap commenced this action. The statement of claim names both Key Brand and Mirvish as defendants. Key Brand asserts claims for damages for breach of contract, conspiracy under the Competition Act, breach of the duty of good faith contractual performance, constructive trust, unjust enrichment, fraudulent misrepresentation, breach of trust, interference with economic relations and inducing breach of contract.
[20] Dancap also sought injunctive relief to prevent the completion of the Mirvish transaction and specific performance of the Term Sheet.
The Decision of the Motion Judge
[21] Dancap’s motion for an interlocutory injunction to prevent the Mirvish sale and Key Brand’s motion for a stay were heard together. The motion judge dismissed both motions on August 15, 2008.
[22] The motion judge found that while Dancap had not shown a serious issue to be tried with respect to its right to prevent the sale to Mirvish, it had shown a serious issue to be tried in respect of Key Brand’s termination of Dancap’s rights to manage the Canadian Assets. However, he found that Dancap had failed to establish that it would suffer irreparable harm if left to its remedy in damages.
[23] The motion judge dismissed Key Brand’s motion for a stay on the grounds that the ARA did not address the issue of termination of management rights in the event of a sale and that the dispute between the parties related solely to the Term Sheet. He held as follows:
The Term Sheet is the starting point for this claim. The Term Sheet had not been superceded by the ARA or the [Shareholders Agreement] on the issue of management agreements.
In my view, the forum selection and arbitration clauses in the ARA and the [Shareholders Agreement] do not encompass the issues in this action.
Proceedings in the United States District Court
[24] Key Brand submits as fresh evidence details of proceedings in the United States District Court in California that transpired after the motion judge’s refusal to stay the action. It is conceded by all parties that this evidence should be admitted.
[25] On September 9, 2008, the District Court issued an order requiring the parties to submit to arbitration the issue of whether Key Brand had the right to terminate Dancap’s right to manage the Canon and Panasonic theatres upon their sale. In reaching this conclusion, the District Court judge took into account the Ontario litigation as well as the motion judge’s refusal to grant an interlocutory injunction or stay the action. He observed that the Ontario action involved additional parties and claims brought under Canadian law. He held that there was no support for Key Brand’s request to have all of the claims advanced by Dancap in the Ontario action arbitrated. However, he accepted Key Brand’s position that it was appropriate to compel arbitration on the issue of whether, as Key Brand put it:
[Key Brand] “has the right to terminate any management rights to the Theatres that Dancap may have obtained under the agreements upon the sale of the Theatres” and whether either party has breached the agreements.
[26] Dancap’s subsequent motion to alter, amend or clarify the District Court judge’s order was dismissed in part and allowed in part. The District Court judge specified that the word “agreements” should be changed to “Agreements” and should be read to include both the Term Sheet and the ARA. He also stated that the only claims that he intended to exclude from his order were the claims against the other parties in the Ontario action and the non-contractual claims.
[27] Dancap has since filed an appeal from the District Court judge’s decision that has not yet been heard. Meanwhile, pleadings have been exchanged in the California arbitration.
ISSUES
[28] The issues on this appeal are whether the motion judge erred in refusing to grant a stay of Dancap’s action in view of the arbitration clause or the forum selection clause in the ARA.
ANALYSIS
1. The Arbitration Clause
[29] Key Brand’s request for a stay rests upon art. 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, adopted in Ontario by the International Commercial Arbitration Act, R.S.O. 1990, c. I-9:
A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
[30] Article 8(1) must be read in conjunction with art. 16(1), which provides in part:
The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.
[31] As outlined above, s. 15(j) of the ARA provides, in harmony with art. 16 of the Model Law, that the arbitrator has the authority to determine “whether the claims asserted are arbitrable”.
[32] It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is “arguable” that the dispute falls within the terms of an arbitration agreement. In Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 737 (C.A.), at para. 21, Charron J.A. adopted the following passage by Hinkson J.A. in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40, as “the proper approach” to art. 8(1):
it is not for the court on an application for a stay of proceedings to reach any final determination as to the scope of the arbitration agreement or whether a particular party to the legal proceedings is a party to the arbitration agreement because those are matters within the jurisdiction of the arbitral tribunal. Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings.
Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal.
[33] As Charron J.A. explained in Dalimpex, at para. 22, “a deferential approach” allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, “is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.”
[34] More recently, in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, after a review of international and Quebec jurisprudence as well as scholarly writing on the Model Law, the Supreme Court of Canada endorsed the “competence-competence” principle that calls for deference to arbitrators to resolve challenges to their jurisdiction. At para. 84, Deschamps J. laid down a “general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.” She added, at para. 85, that “[i]f the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration” unless the question of fact or mixed fact and law requires “only superficial consideration of the documentary evidence in the record.”
[35] Neither the motion judge nor the District Court judge appears to have taken the approach mandated by Dalimpex and Dell. Both assumed jurisdiction to decide the scope of the arbitration clause themselves. The motion judge confronted the issue of whether the dispute fell within the ambit of the arbitration clause in the ARA and found that it did not. The District Court Judge undertook the same inquiry and concluded that it did.
[36] It may well be that in the United States, courts do not follow the deferential approach to arbitrability set out in Dalimpex and Dell. (I note, however, that in the statement of defence Dancap has filed in the arbitration, Dancap maintains that Key Brand’s claims are not arbitrable and reserves the right to argue the point before the arbitrator as well as before the Ninth Circuit Court of Appeals.)
[37] Whatever the law may be in the United States, I am persuaded that the motion judge erred in ruling on the scope of the arbitration clause rather than leaving the issue to the arbitrator. While the issue of whether the dispute between the parties is covered by the ARA is by no means free from doubt, for the reasons that follow, I conclude that it is at least arguable that the ARA arbitration clause governs the core issue raised in the action. That issue was properly identified by the District Court judge as being whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres to Mirvish.
[38] I turn first to the scope of the arbitration clause. Section 15(j) of the ARA is broad in scope: it applies not only to disputes arising “out of” the ARA but also to disputes “related to” the ARA. Contractual language calling for the arbitration of disputes “relating to” an agreement have been generously interpreted to enjoy “a wide compass”, an interpretation “consistent with the legislative policy… which favours arbitration over litigation where the parties so provide by agreement”: Woolcock v. Bushert (2004), 246 D.LR. (4th) 139 (Ont. C.A.), at paras. 23, 25.
[39] It is arguable that Dancap’s claim is “related to” the ARA. Although the management agreements were never finalized in written form, Dancap’s right to manage the Canadian Assets was an underlying feature of the bargain between the parties as memorialized in the Term Sheet. As the motion judge recognized, s. 9 of the ARA does at least to some extent “document certain management rights in issue” in the action. Section 9 carries forward the parties’ undertaking to “continue to negotiate in good faith towards executing Management Agreements which will have terms consistent with the terms set forth in [the] Term Sheet.” Especially when read with the “entire agreement” clause, which also refers to the Management Agreements, it is arguable that s. 9 of the ARA embraced or incorporated Dancap’s management rights as they stood at the time the ARA was executed.
[40] In my view, this is not a case where it is clear or obvious that the dispute between the parties is not governed by the arbitration clause. The determination of the scope of the ARA and the arbitration clause will require a thorough review of the parties’ complex contractual discussions, understandings, expectations and arrangements, an inquiry that clearly calls for much more than a “superficial consideration of the documentary evidence in the record.” I conclude, therefore, that on this record, the motion judge erred in refusing to stay Dancap’s action on account of the arbitration clause.
[41] When one takes into account the District Court’s decision to refer the matter to arbitration – which was not before the motion judge at the time he rendered his decision – the case for a stay of the Ontario action is even more compelling.
[42] It is apparent that as matters now stand, subject to Dancap’s appeal of the District Court order, the matter has been referred to an arbitrator in California. Both as a practical matter and as a matter of law, costly parallel proceedings that run the risk of inconsistent results are to be avoided: see Courts of Justice Act, R.S.O. 1990, c C.43, s. 138. As matters presently stand, it is difficult to see how any order other than a stay of the Ontario action could avoid duplicative proceedings.
[43] Accordingly, it is my view that this action should be stayed until the resolution of the arbitration on the core issue of whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres.
2. The Forum Selection Clause
[44] In oral argument before this court, Key Brand fairly conceded, as the District Court judge recognized, that not all of the claims pleaded by Dancap are subject to arbitration or to the jurisdiction of the California courts. In particular, Key Brand conceded that the claims advanced against Mirvish, the non-contractual claims and the conspiracy claim under the Competition Act all fall outside the reach of the arbitration clause and that if they proceed following the arbitration, they should be litigated in Ontario.
[45] Given the position taken by Key Brand and the conclusion I have reached with respect to the arbitration issue, it is not necessary for me to consider the application of the forum selection clause to the circumstances of this case.
CONCLUSION
[46] For these reasons, I would allow the appeal and order that this action be stayed pending the arbitration currently underway in California. The appellants are entitled to their costs of this appeal fixed at the agreed sum of $20,000 inclusive of disbursements and GST. Mirvish supported the position of Key Brand and does not ask for costs.
[47] We were informed that while costs submissions have been made to the motion judge, he has not yet ruled on the costs of the motion. Obviously, his ruling on the costs of the proceedings before him should take into account the ultimate success the appellants have achieved on the stay motion.
“Robert J. Sharpe J.A.”
“I agree R.P. Armstrong J.A.”
“I agree David Watt J.A.”
RELEASED: February 13, 2009