DATE: 20051215

DOCKET: C43373

COURT OF APPEAL FOR ONTARIO

WEILER, ROSENBERG and GILLESE JJ.A.

B E T W E E N :

SIMEX INC.

John B. Laskin and Sandeep J. Joshi for SimEx Inc., appellant

Applicant

(Appellant)

Julian Heller and Rebecca Toth

• and -

for IMAX Corporation, respondent

IMAX CORPORATION and ROBOTS OF MARS, INC.

Darryl T. Mann for Robots of Mars Inc., respondent

Respondents

(Respondents in Appeal)

Heard: September 15, 2005

On appeal from the judgment of Justice Romain Pitt of the Superior Court of Justice dated March 8, 2005 dismissing the application for declaratory and injunctive relief.

ROSENBERG J.A.:

[1] This appeal concerns the interpretation of a contract (the “Transfer Agreement”) under which the appellant SimEx Inc. acquired the rights to certain films that were the subject of an agreement (the “Production Agreement”) between Ridefilm Corporation, a subsidiary of the respondent, IMAX Corporation, and a third party. In his judgment, the application judge, Pitt J., held that the assignment attached to the Transfer Agreement conveyed both the burden and the benefits of the Production Agreement to SimEx, including the obligation that any dispute concerning royalties be resolved by arbitration. He therefore dismissed SimEx’s application for a declaration that any legal proceedings concerning the Transfer Agreement must be brought in the Ontario courts.

[2] For the following reasons I would allow the appeal. In my view, interpreting the Transfer Agreement is a matter for the Ontario Courts. Further, the Transfer Agreement did not assign to SimEx the obligation under the Production Agreement to pay royalties and the requirement to submit disputes to arbitration.

THE FACTS

(a) The parties

[3] The appellant SimEx is an Ontario corporation based in Toronto. It is in the business of creating and developing simulation attractions that show films incorporating 3-D and other special effects. It also has a substantial presence in California through a subsidiary.

[4] The respondent IMAX is a Canadian corporation. It develops, manufactures and supplies motion picture technology for specialty theatre venues. It too has substantial premises and assets in California. Ridefilm was a wholly owned subsidiary of IMAX and was in the business of manufacturing and selling ride bases and selling or leasing films for use with those bases (the “Ridefilm bases”) to create an attraction in amusement parks and other event attraction sites. For the purposes of this appeal, Ridefilm and IMAX are interchangeable.

[5] Midland Production Corp. makes films that can be used in the type of attractions produced by Ridefilm. This appeal concerns compensation for two of Midland’s films that were sold to Ridefilm. Midland is a California corporation. It is the predecessor to the respondent Robots of Mars, Inc. For the purposes of this appeal, Midland and Robots are interchangeable. SimEx has an ongoing relationship with Robots through its California subsidiary.

(b) The first agreement: The 1994 Midland (Robots) and Ridefilm (IMAX) Production Agreement

[6] In 1994, Midland (now Robots) and Ridefilm agreed that Midland would produce two films for use and distribution by Ridefilm. This Production Agreement has several provisions that are important to resolving this appeal. The following is a brief summary of these provisions:

1. Ownership: Ridefilm would be the owner of the films produced by Midland and Midland assigned, sold and transferred all its right, title and interest in the films to Ridefilm.

2. Compensation: Midland was entitled to contingent compensation (referred to in some of the court documents as royalties) from the use of the films. The compensation was based on a sliding scale depending on the profits from the exploitation of the films.

3. Assignment: Ridefilm had the right to “assign any and all of this Agreement and the rights, licenses and privileges granted it hereunder”. Midland’s consent to the assignment was not required.

4. Choice of law: The agreement was to be interpreted in accordance with the law of New York and any legal action was to be instituted in a court in New York.

5. Arbitration of disputes: In the event of any dispute the parties agreed to submit the dispute to “binding arbitration before an arbitration panel of the American Arbitration Association at a site to be selected by the arbitration panel.”

(c) The second agreement: The 2001 IMAX/Ridefilm and SimEx Transfer Agreement

[7] By 1999, IMAX was anxious to get out of the simulation ride business carried on by its subsidiary Ridefilm. To avoid potential liability to Ridefilm’s clients, IMAX needed to find an entity that would be willing to fulfill Ridefilm’s obligations to its clients. It sought to sell Ridefilm’s assets to a purchaser who would provide the services required under Rideflims’s contracts with its clients. After a lengthy search, IMAX was able to reach an agreement with SimEx. The negotiations culminated in the March 2001 Transfer Agreement. The resolution of this appeal turns on the interpretation of several provisions of this agreement. The following is a brief summary of the relevant provisions of the Transfer Agreement:

1. Acquired assets (Article 1): Ridefilm agreed to sell its interest in various physical assets listed in a schedule to the agreement and certain rights such as the right to use the Ridefilm mark. The films were not listed in this schedule. SimEx paid $200,000 U.S. for the acquired assets.

2. Liabilities assumed by SimEx (Article 2): SimEx agreed to assume certain liabilities, such as payment of taxes on the acquired assets but also stated that it was not responsible for other liabilities not provided for in the section. SimEx relies on the wording of this clause because it appears to limit its obligation to assume other liabilities of IMAX

3. Representations and Warranties of Ridefilm and IMAX (Article 3): Ridefilm/IMAX made certain representations concerning ownership of the films listed in Schedule 3.04 “subject to the terms and conditions of the relevant agreements attached hereto as Schedule 3.04(b).” The two films in question in this appeal that were produced by Midland are listed in Schedule 3.04(a). Schedule 3.04(b) includes the 1994 Production Agreement between Midland and Ridefilm and the agreements between Ridefilm or IMAX and other production companies. Under some of these other agreements IMAX/Ridefilm did not acquire ownership of the films as it did in the 1994 Ridefilm and Midland Production Agreement.

4. Transfer of rights to films (Section 5.05): This section sets out the crucial agreement concerning assignment of rights. “At the Closing Date, Ridefilm and or IMAX agree[d] to transfer title or assign its rights, as the case may be, to the films set out in Schedule 3.04(a).” Ridefilm did not require Midland’s consent to the assignment or transfer of title in these two films. The form of assignment set out in Schedule 5.05 tracks the wording of Section 5.05.

5. Royalties (Section 5.09): SimEx agreed to pay royalties to Ridefilm where the Schedule 3.04(a) films were used. The amount of royalties depended on whether the films were played on Ridefilm or SimEx bases. However, SimEx’s obligation to pay royalties terminated on the fourth anniversary of the Closing Date.

6. Choice of law (Section 8.01): The agreement was to be governed by the laws of Ontario and any legal action was to brought in the courts of Ontario.

7. Assignment (Section 8.05): The consent of the other party was required to assign “any right, remedy, obligation or liability” arising under the agreement.

[8] Michael Needham, the president of SimEx, was involved in the negotiations that gave rise to the Transfer Agreement. He states in his supplementary affidavit that the phrase “subject to the terms and conditions of the relevant agreements” in section 3.04 and the phrase “subject to the terms and conditions of said Agreement” in the assignment were added when it was discovered that Ridefilm did not have legal title to three of the ten films but was a mere licensee. This problem did not affect the two films involved in this case. IMAX’s principals state that they understood that the assignment of the films included assignment of the obligation to pay the compensation to Robots. The Transfer Agreement and the Assignments were not drafted solely by SimEx but were a matter of negotiation with IMAX and Ridefilm.

(d) The California arbitration

[9] In California in June 2003, Robots (the successor to Midland) commenced arbitration in accordance with the Production Agreement alleging that IMAX had failed to pay royalties owing under the Production Agreement. In September, IMAX cross-claimed against SimEx alleging that SimEx had assumed all the liabilities and obligations under the Production Agreement because of the Transfer Agreement. SimEx took the position that it was not a party to the Production Agreement and that, in any event, any legal proceedings had to be taken in Ontario in accordance with the Transfer Agreement. Nevertheless, Robots served an amended statement of claim in the arbitration proceedings purporting to add SimEx as a party to the arbitration.

(e) The Application

[10] SimEx commenced its application in October 2004, seeking a declaration that it was not a party to and not bound by the Production Agreement and that any legal proceedings commenced by IMAX or Robots arising out of the Transfer Agreement had to be taken in Ontario courts. It also sought an injunction enjoining IMAX or Robots from filing any document, taking any step to attempt to add SimEx as a party, or requiring SimEx to submit to the jurisdiction of or participate in the California arbitration.

THE REASONS OF THE APPLICATION JUDGE

[11] The core of the application judge’s reasons appears in para. 22:

On the face of the Assignment, which is a freestanding document, it contains nothing that would be seen as rebutting the presumption that it conveyed both the burden and benefits of a contract to the assignee. See ABN Amro Bank Canada v. Krupp Mak Maschinenbau Gmbh (1996), 1996 12449 (ON SCDC), 135 D.L.R. (4th) 130 (Ont. Div. Ct.); and Petro-Canada v. 366081 Ltd. (1995), 1995 7418 (ON SC), 25 B.L.R. (2d) 19 (Ont. Ct. (Gen. Div.)).

[12] The application judge also took into account that the Transfer Agreement “specifically provides for the assumption of liabilities”, referring to section 2.01. He was of the view that, at a minimum, the last paragraph of this clause was unclear. Accordingly, he could invoke the contra proferentem rule and the ejusdem generis principle. The application judge found that other provisions of the Transfer Agreement showed that the parties were aware that the agreement would impact on the rights of third parties. He stated that it was not clear why the other party to the Production Agreement (now Robots) was not a party to the Transfer Agreement, “if only to give its consent”.

[13] The application judge held that SimEx could not avoid the effect of the arbitration provision in the Production Agreement by inserting its own choice of forum and law in its Transfer Agreement. SimEx obviously had notice of the arbitration provision.

[14] Finally, the application judge noted that all parties had a connection with California, that SimEx had participated on a special appearance basis in the arbitration, and that Ontario and California law “in the context of this dispute are very similar”. These additional features “would lead to judicial equanimity about the matter proceeding wholly in California.”

[15] He therefore dismissed the application.

POSITION OF THE PARTIES

[16] SimEx submits that the application judge made several errors as follows:

• Finding that the Transfer Agreement was ambiguous.

• Applying the contra proferentem and ejusdem generis rules to resolve the ambiguity.

• Holding that the Assignment was a free-standing document.

• Applying a presumption that assignment of rights carries the assignment of both the benefits and the burden of the contract.

[17] SimEx submits that as a result of these errors the application judge failed to properly interpret the contract, and therefore, erred in failing to make a declaration that SimEx is not a party to, and is not bound by the compensation and arbitration terms of, the Production Agreement.

[18] IMAX and Robots support the decision of the application judge.

ANALYSIS

(a) Interpreting a contract

[19] The Supreme Court of Canada has considered the rules respecting interpretation of contracts on several occasions. The best known articulation of these principles is found in the reasons of Estey J. in Consolidated-Bathurst Export Limited. v. Mutual Boiler & Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888 at 901:

Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation . . . which promotes a sensible commercial result. [Emphasis added.]

[20] In Eli Lilly & Co. v. Novopharm Ltd., 1998 791 (SCC), [1998] 2 S.C.R. 129 at para. 56, Iacobucci J. elaborated on the concepts of promoting the intent of the parties and a commercially sensible interpretation. He explained that absent ambiguity, the primary vehicle for divining the intent of the parties is the words of the contract itself:

When there is no ambiguity in the wording of the document, the notion in Consolidated-Bathurst that the interpretation which produces a "fair result" or a "sensible commercial result" should be adopted is not determinative. Admittedly, it would be absurd to adopt an interpretation which is clearly inconsistent with the commercial interests of the parties, if the goal is to ascertain their true contractual intent. However, to interpret a plainly worded document in accordance with the true contractual intent of the parties is not difficult, if it is presumed that the parties intended the legal consequences of their words. [Emphasis added.]

[21] Iacobucci J. also stated at para. 54 that the contract must be interpreted “in light of the surrounding circumstances.”[^1] Evidence of the subjective intent of the parties has “no independent place in this determination” (at para. 54). Furthermore, “it is unnecessary to consider any extrinsic evidence at all when the document is clear and unambiguous on its face” (at para. 55).

[22] In Canadian Premier Holdings Ltd. et al. v. Winterthur Canada Financial Corp. et al. (2000), 2000 5724 (ON CA), 132 O.A.C. 172 (C.A.) at para. 13, Laskin J.A. explained that, “Where the words of a contract are not ambiguous commercial reasonableness may inform the court’s reading of the text, but the interpretation that produces a sensible commercial result is not determinative.”

[23] To summarize, while the court strives to interpret a contract in a manner consistent with the intent of the parties, the parties are presumed to have intended the legal consequences of their words. The court will consider the context or factual matrix in which the contract was drafted, including commercial reasonableness, to understand what the parties intended. The court will not adopt an interpretation that is “clearly” commercially absurd. The court must also consider the contract as a whole. The various provisions “should be read, not as standing alone, but in light of the agreement as a whole and other provisions thereof”: Scanlon v. Castlepoint Development Corp. (1992), 1992 7745 (ON CA), 99 D.L.R. (4th) 153 (Ont. C.A.) at 179. Where the contract is unambiguous, extrinsic evidence is inadmissible. In my view, the contract in this case was unambiguous. Therefore, while evidence as to the background that led to the two agreements, especially concerning the Transfer Agreement, may be helpful in understanding the context, the assertions by the parties as to what they intended is not admissible.

(b) Nature of the dispute

[24] At the heart of this case is choice of forum. IMAX and Robots assert that this case is about interpreting the Production Agreement and the interpretation of that agreement is vested in the arbitrators in California. SimEx asserts that the case is about interpreting the Transfer Agreement, a task that is presumptively vested in Ontario courts.

[25] In my view, the gist of the dispute between SimEx and IMAX turns on the interpretation of the Transfer Agreement. It is only by interpreting the Transfer Agreement that it is possible to determine what portions of the Production Agreement may have been incorporated by reference into that agreement and what parts of the Production Agreement were assigned to SimEx. Under the Transfer Agreement, the parties have chosen to be governed by Ontario law and have agreed that any disputes should be brought in the courts of Ontario. As such, the burden is on IMAX to show there is “good reason” that it not be bound by the forum selection clause. See Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27, [2003] 1 S.C.R. 450 at para. 20. Given SimEx and IMAX’s connection to Ontario and Canada and since the case turns primarily on interpretation of the Transfer Agreement, IMAX has not shown “strong cause” or “good reason” why it should not be bound by the forum selection clause.

(c) The Transfer Agreement

[26] In interpreting the Transfer Agreement, it is helpful to look at its overall structure. I start with the recitals and in particular recital “D,” where Ridefilm and IMAX recite that they “wish to assign certain rights that they have to certain films”. That recital does not suggest that Ridefilm and IMAX wish to assign the agreements that led to the production of those films.

[27] The Transfer Agreement itself contains eight articles. Article One is entitled “SALE OF CERTAIN ASSETS”. These are for the most part physical assets but also included are rights, such as the right to use the Ridefilm mark. There is a discrete price of U.S. $200,000 attached to these “acquired assets”. The rights to the films are not included in this part of the agreement.

[28] Article Two is entitled “LIABILITIES”. SimEx places a great deal of importance on this part because, while it sets out certain liabilities, such as payment of taxes in relation to the “acquired assets”, it also states that “SimEx is not responsible for any liabilities (employee, maintenance, warranty) other than those noted in this section 2.01”. The full text of the clause is as follows:

2.01 LIABILITIES ASSUMED BY SIMEX

SimEx will assume, as of the Closing Date, the following liabilities and obligations of Ridefilm (collectively, the “Assumed Liabilities”):

(a) payment of taxes, if any, in respect of the Acquired Assets; and

(b) all liabilities for provision of film prints to the Ridefilm Base Owners as set out in Schedule 2.01(b) to a maximum of US $251,900.

SimEx is not responsible for any liabilities (employee, maintenance, warranty) other than those noted in this Section 2.01.

[29] Schedule 2.01(b) sets out a list of film prints that Ridefilm was obligated to supply to various clients. This obligation, which SimEx assumed, was valued at U.S. $251,900. SimEx submits that Article Two is clear and unambiguous and wholly determines its liabilities.

[30] Having regard to the position of clause 2.01(a) in the contract and its reference back to the acquired assets, it seems to me that Article Two is intended to govern the relationship between the parties with respect to the acquired, mostly physical, assets and liabilities. It is apparent on the face of the contract that SimEx’s obligations are not limited to what is set out in Article Two. For example, in Article Five, to which I will turn shortly, SimEx agreed to pay royalties to RideFilm.

[31] Article Three is entitled “REPRESENTATIONS AND WARRANTIES OF RIDEFILM AND IMAX.” In this article, Ridefilm/IMAX represent that they have good title to the acquired assets. In a separate section, Ridefilm/IMAX represent that they have the right to assign their rights to the films. Because of its importance, I set this section of Article Three out in full:

3.04 ASSIGNMENT OF FILMS

Ridefilm and/or IMAX have the right to assign their rights to the films set out on Schedule 3.04(a) subject to the terms and conditions of the relevant agreements attached hereto as Schedule 3.04(b). The films set out in this Section 3.04 shall hereinafter collectively be referred to as the “Ridefilm Films”. [Emphasis added.]

[32] The two films in question in this appeal that were produced by Midland are listed in Schedule 3.04(a). Schedule 3.04(b) includes the 1994 Production Agreement between Midland and Ridefilm and the agreements between Ridefilm or IMAX and other production companies. It appears that for certain of these other agreements IMAX/Ridefilm did not acquire ownership of the films as it did in the 1994 Ridefilm and Midland Production Agreement.[^2] IMAX considers the emphasized portion, “subject to the terms and conditions of the relevant agreement” supports its submission that the assignment carried with it the obligations in the agreements, such as the obligation to pay royalties and submit disputes to arbitration. I do not agree with this submission. Again, given the context, apart from the clause dealing with representations and warranties, it seems to me that this section merely makes explicit that there may be limits on the ownership of certain films and the right to assign rights to those films. In other words, IMAX may not be able to give clear title to certain films, the rights to which it purports to convey to SimEx. This section, in my view, does not answer the question of what other rights or obligations SimEx may have assumed.

[33] Section 3.04 is important, however, because it demonstrates that certain parts of the Production Agreement have been incorporated by reference into the Transfer Agreement by the use of the words “subject to the terms and conditions of the relevant agreements”. As a result, Ontario courts interpreting the Transfer Agreement will, of necessity, have to interpret some aspects of the Production Agreement, despite the choice of law and forum in the Production Agreement. I do not consider this exercise as violating the arbitration clause in the Production Agreement since the parties themselves, one of whom (Ridefilm) was party to the Production Agreement, have chosen to incorporate references to the Production Agreement in the Transfer Agreement. Resort to the Production Agreement can also be justified in view of the need to understand the context in which the Transfer Agreement was drafted. It is not only incorporated by reference, but is also part of the factual matrix.

[34] Article Four is entitled “REPRESENTATIONS AND WARRANTIES OF SIMEX”. It does not seem to me that this article is of any assistance in resolving the issues in this appeal.

(d) What was assigned

[35] In my view, the important provisions for resolving this appeal are to be found in Article Five, which is entitled “POST CLOSING COVENANTS”. The heading alone signals that this provision will deal with the ongoing obligations between IMAX and SimEx. The Article first sets out certain obligations by SimEx to the Ridefilm base owners. Section 5.05 then describes the relationship between SimEx and IMAX with respect to IMAX/Ridefilm film library. Again, because of its importance I set that provision out in full:

5.05 TRANSFER OF RIGHTS TO EXISTING FILM LIBRARY

(a) At the Closing Date, Ridefilm and or IMAX agrees to transfer title or assign its rights, as the case may be, to the films set out in Schedule 3.04(a). The form of such transfer is attached hereto as Schedule 5.05.

(b) Where applicable, Ridefilm and IMAX shall use commercially reasonable efforts to procure the consent of Midland Productions to assign the rights to the films to SimEx set out in Schedule 3.04(a) as soon as is reasonably practicable. Ridefilm and IMAX provide no covenant as to the likelihood of success in obtaining the consent of Midland Productions to the assignment contemplated in this Section 5.05. [Emphasis added.]

[36] There are several important aspects to this section. First, it is apparent that section 5.05 deals with two different classes or bundles of rights. There are some films to which IMAX/Ridefilm have title and there are some films to which they have some lesser interest. Second, there may be some films for which assignment depends on Midland’s consent. There are no such limits with respect to the two films at issue in this appeal. Under the Production Agreement relating to these two films, Ridefilm was to be the owner of the films produced by Midland, which “assigned, sold and transferred all its right, title and interest in the films to Ridefilm.” As well, Ridefilm had the right to “assign any and all of this Agreement and the rights, licenses and privileges granted it hereunder”. Midland’s consent to the assignment was not required. It seems to me that given the unlimited nature of Ridefilm/IMAX’s title to these two films, the important part of section 5.05 of the Transfer Agreement is that part whereby Ridefilm and IMAX agree to “transfer title … to the films”.

[37] The form of the transfer is set out in Schedule 5.05. I disagree with the application judge that this assignment is a “freestanding document”. It is integral to the Transfer Agreement. It is the vehicle by which IMAX fulfils one of its key obligations under the Transfer Agreement, the promise to transfer title to the films to SimEx. The schedule refers back to the Transfer Agreement. In my view, it must therefore be read together with and interpreted as part of the contract.

[38] Schedule 5.05 is entitled “ASSIGNMENT”. It provides that Ridefilm or IMAX

for good and valuable consideration as set forth in the agreement between IMAX Corporation, Ridefilm Corporation and SimEx Inc. dated March 2, 2001 (the [Transfer] “Agreement”) the receipt and sufficiency of which are hereby acknowledged:

Sells, assigns, and transfers, as the case may be to SimEx Inc., … (the “Assignee”) subject to the terms and conditions of said Agreement the Assignor’s entire right, title, and interest in and to the films listed in Schedule 3.04(a) subject to the terms of the agreements contained in Schedule 3.04(b). [Emphasis added.]

[39] IMAX relies upon this clause, especially the emphasized portion, as transferring not only title to the films but the basket of rights and obligations in the Production Agreement, which is one of the agreements listed in Schedule 3.04(b). In my view, that is not a proper interpretation of the clause when one has regard to the Production Agreement. I will turn to the Production Agreement below. However, to finish with Article Five of the Transfer Agreement, the other important part is section 5.09 entitled “FILM ROYALTIES”. This section sets out the obligations of SimEx to pay royalties to Ridefilm depending on the use of the films. Thus, SimEx agrees to pay royalties to Ridefilm for the Schedule 3.04(a) films, which includes the two films at issue in this case. These payments were, however, time limited. The royalties cease on the “Termination Date”, being the fourth anniversary of the Closing Date.

[40] Turning then to the Production Agreement, Ridefilm acquired unrestricted title to the films, under clause 8 of that agreement. Clause 8 is entitled “OWNERSHIP” and includes the following provisions:

[Ridefilm] shall at all times own the Films and all elements and components thereof … and [Midland] shall not at any time own the same.

[Midland] hereby assigns, sells, transfers and quitclaims to [Ridefilm] all right, title and interest in and to the Films, the negative and the results and proceeds of the services of all persons rendering services in connection with production of the Films.

[41] It would be difficult to imagine a more complete divesture of ownership rights than that contained in clause 8. Ridefilm, of course, agreed to pay for the films to which it had acquired these rights. That payment is set out in clause 4, which is entitled “CONTINGENT COMPENSATION”. The compensation is based on a formula that gives Midland a percentage of the net profits. Robots, the successor to Midland, claims that it has not been paid the compensation contemplated by this clause, and therefore, in accordance with the arbitration clause it has launched the California arbitration. However, Ridefilm’s ownership rights were not limited by the compensation promises. If Ridefilm failed to make the payments required, Midland would have a remedy for breach of contract but there is nothing to indicate that Ridefilm’s ownership rights would be impacted. In addition, Ridefilm agreed in clause 12.2 to indemnify Midland for any breach of the agreements made by Ridefilm. Out of interest, this may be contrasted with the Transfer Agreement. Under Article Seven of the Transfer Agreement entitled “DEFAULT”, if the Agreement is terminated prior to the fourth anniversary of the closing date, the rights assigned by IMAX/Ridefilm to SimEx under section 5.05 revert back to IMAX/Ridefilm.

(e) Presumptions concerning interpretation of contracts and assignments

[42] In my view, it is unnecessary to resort to any presumptions of construction and interpretation of contracts to resolve the issue in this case. The combined effect of reading the clauses of the Transfer Agreement and Schedule 5.05, with the relevant provisions of the Production Agreement, is that Ridefilm/IMAX transferred its ownership rights in the films to SimEx. It did not transfer its other obligations or rights under the Production Agreement. Ridefilm’s ability to transfer title to a third party (here SimEx) was unfettered. SimEx paid for those ownership rights through the time-limited royalties set out in section 5.09. I see nothing to indicate that it agreed to pay any other amounts to any other party. The obligation under the Production Agreement to pay Midland (now Robots) is a matter between Robots and IMAX.

[43] It seems to me that the application judge’s error is in his statement at para. 18:

Transferors can only transfer the interest that they have in an asset being transferred and the transferors [sic, transferees] can receive no more than the transferor had to transfer. If the transferor’s right, title and interest are limited in scope then the right, title and interest of the transferee receiving it are also limited in scope. [Emphasis added.]

[44] As I have demonstrated, Ridefilm’s title to the films at issue in this case was not limited. The contractual obligation to pay royalties did not affect the ownership rights.

[45] I do not say that Ridefilm/IMAX could not assign its obligations under the Production Agreement to SimEx. Under clause 13 of the Production Agreement, Ridefilm “shall have the right to assign any and all of this Agreement and the rights, licenses and privileges granted it hereunder”. Thus, it would appear that Ridefilm could have assigned the obligations to pay royalties to SimEx and apparently without Midland’s consent contrary to the ordinary rule that a contractor cannot shift the burden of a contract without the consent of the other party to the contract. See Lounsbury Co. v. Duthie, 1957 62 (SCC), [1957] S.C.R. 590 at 596-97 and Rodaro v. Royal Bank of Canada (2002), 2002 41834 (ON CA), 59 O.R. (3d) 74 (C.A.) at para. 33. Equally, Ridefilm could assign “any … of this agreement”, meaning that it could assign part, if it so chose. That is what happened here. It assigned or transferred title to the films. It did not transfer or assign the other bundle of rights and obligations in the Production Agreement.

[46] The cases relied upon by IMAX that stand for the proposition that vicarious performance of the assignor’s burdens or obligations without the consent of the contractor will only be permitted where it “could make no difference” have no application here.[^3] By contract, IMAX/Ridefilm was entitled to assign any part of the Production Agreement without Midland’s consent. The issue is whether it did so.

[47] In this respect, I cannot agree with the application judge that the principle (he called it a presumption) that an assignment conveys both the burden and benefits of a contract to the assignee had any application. The application judge relied upon two cases. The first is ABN Amro Bank Canada v. Krupp Mak Maschinenbau GmbH (1996), 1996 12449 (ON SCDC), 135 D.L.R. (4th) 130 (Ont. Div. Ct.). In that case, ABN received a general assignment of accounts including a Technology Licensing Agreement (TLA) from its customer. The TLA included an arbitration clause. ABN, however, claimed that it was not bound by the arbitration clause. In that context, Adams J. speaking for a majority of the court said the following at pp. 135-36:

ABN is, in law, a party to the arbitration agreement. It is a fundamental and, I think, universal commercial legal principle that an assignor is not entitled to divide that which is assigned amongst assignees so as to convey the benefits and nullify the burdens: First City Capital Ltd. v. Petrosar Ltd. (1987), 1987 4434 (ON SC), 42 D.L.R. (4th) 738, 61 O.R. (2d) 193, 7 A.C.W.S. (3d) 112 (H.C.J.). Thus, a party seeking to enforce assigned rights under an agreement can only do so subject to the terms and conditions embodied therein: Best v. Beatty (1920), 1920 439 (ON CA), 53 D.L.R. 44, 47 O.L.R. 265, 18 O.W.N. 67 (C.A.); affirmed 1921 578 (SCC), 58 D.L.R. 552, 61 S.C.R. 576. This principle has been applied, by this and other courts, to include arbitration clauses… [Emphasis added.]

[48] The difference between the ABN case and this case is that IMAX did not assign the Production Agreement but only ownership of the films that were produced as a result of the Production Agreement. Obviously, if it had assigned the entire Production Agreement, the principle set out in ABN would apply and SimEx as the assignee of the Agreement would have been bound to pay the contingent compensation and bound by the arbitration clause. IMAX assigned its rights to the films not to the agreement.

[49] The other case relied upon by the application judge, Petro-Canada v. 366084 Ontario Ltd. (1995), 1995 7418 (ON SC), 25 B.L.R. (2d) 19 (Ont. Ct. (Gen. Div.)) is similar to ABN. It deals with assignment of a party’s interest in an agreement. In that context, Cumming J. held at para. 55 that the assignee “steps into the shoes of [the assignor] and has the rights and is subject to the obligations of [the assignor] under the agreement”.

[50] There is no rule of law that prevents a party to a contract (here IMAX/Ridefilm) from assigning the rights or benefits of the contract to a third party (SimEx), while keeping the burdens. To the contrary, without the consent of the other party to the contract (here Midland/Robots), the ordinary rule is that the party (IMAX/Ridefilm) can only assign the benefits and will remain personally liable to the other party (Midland/Robots). See Rodaro, supra at paras. 33-4 and G.H.L. Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at 727. It will be recalled that the application judge queried why Robots was not a party to the Transfer Agreement “if only to give its consent” (at para. 25). Two reasons suggest themselves. Robots’ consent was not required under the terms of the Production Agreement, and in any event, IMAX was assigning only the rights not the burdens.

[51] Since, in my view, there is no ambiguity in this contract, it is unnecessary to resort to principles of interpretation such as the contra proferentem rule. I can see nothing in this record that would justify invoking that rule against SimEx. These were both sophisticated parties with legal advisers. The Transfer Agreement appears to have been a joint effort. Absent ambiguity, extrinsic evidence, such as the assertion by the IMAX principals that SimEx understood that the assignment of the films was “subject to” the obligation to pay the compensation to Robots, is not admissible.

(f) Sensible commercial result

[52] IMAX submits that the interpretation suggested by SimEx results in a “commercial absurdity.” According to IMAX, it would not make sense for IMAX to retain the obligation to pay royalties to Robots, while deprived, after four years, of the income stream from the use of the films, especially given what IMAX refers to as the “modest initial purchase price” of U.S. $200,000. I think that a court would have a difficult time deciding whether or not the U.S. $200,000 was a modest initial purchase price.

[53] In any event, U.S. $200,000 was not the only benefit that IMAX acquired from this agreement. SimEx also assumed Ridefilm/IMAX’s liability to provide film prints to the Ridefilm Base Owners, an obligation that the parties valued at U.S. $251,900. Finally, SimEx gave Ridefilm base owners access to its film library. The importance of those rights is expressed in section 7.01(b) whereby the parties acknowledge that “access to and conversion of the SimEx Film Library is a significant and unique inducement to IMAX and Ridefilm to enter into this Agreement and of a nature of which a remedy in damages for the breach of SimEx’s obligation in connection therewith will not be sufficient”.

[54] If, on the other hand, IMAX’s interpretation is correct, for the four year period following the closing of the Transfer Agreement, SimEx would be obliged to pay compensation and royalties to two different parties for use of the same films. It is not apparent to me that the interpretation of the Transfer Agreement given in these reasons is clearly commercially absurd.

DISPOSITION

[55] Accordingly, I would allow the appeal, set aside paragraph one of the Judgment that dismisses the application, and make a declaration that IMAX/Ridefilm did not assign to SimEx, through the Transfer Agreement, the compensation and arbitration obligations under the Production Agreement. SimEx did not pursue its appeal from the dismissal of the application for an anti-suit injunction.

[56] At the hearing of the appeal, the parties agreed that the successful party was entitled to costs fixed at $25,000 inclusive of disbursements and G.S.T. I would fix the costs accordingly, payable by IMAX and Robots.

[57] SimEx is also entitled to its costs of the application. Under paragraph 2 of the judgment, the application judge reserved the issue of costs. If the parties are unable to agree on the costs of the application they should make submissions to the application judge in accordance with the judgment.

Signed: “M. Rosenberg J.A.”

“I agree K.M. Weiler J.A.”

“I agree E.E. Gillese J.A.”

RELEASED: “KMW” December 15, 2005

[^1]: What this court referred to as “the factual matrix” in Arthur Andersen Inc. v. Toronto-Dominion Bank (1994), 1994 729 (ON CA), 17 O.R. (3d) 363 at 372.

[^2]: For example, in a 1996 agreement between New Wave International (“NWI”) and IMAX, while IMAX had exclusive rights “in perpetuity” to distribute the film produced by NWI, NWI retained ownership of the copyright of the film.

[^3]: Some of these cases are discussed by Farley J. in Tru-Wall Group Ltd. v. Stadium Corp. of Ontario Ltd., [1995] O.J. No. 2610 (Ont. Ct. (Gen. Div.)).