CITATION: American Marketing Systems, Inc. v. Old THGI, Inc., 2007 ONCA 226

DATE: 20070329

DOCKET: C44962

COURT OF APPEAL FOR ONTARIO

RE:

AMERICAN MARKETING SYSTEMS, INC. and THE HUME GROUP, INC. (Applicants/Appellants) – and – OLD THGI, INC., HUME PUBLISHING COMPANY, LTD., TUDORCROFT INVESTMENTS, INC. and J. TREVOR EYTON (Respondents/Respondents in Appeal)

BEFORE:

LABROSSE, LANG and ROULEAU JJ.A.

COUNSEL:

John M. Buhlman and Megan Ferrier

for the appellants

P. John Brunner

for the respondents

HEARD:

March 26, 2007

On appeal from the judgment of Justice Victor Paisley of the Superior Court of Justice, dated January 24, 2006.

E N D O R S E M E N T

[1] The appellants, American Marketing Systems, Inc. and the Hume Group, Inc. obtained an arbitration award in Illinois against Old THGI, Inc. (Old THGI) and the respondents, Hume Publishing Company, Ltd. (Hume Publishing), Tudorcroft Investments, Inc. (Tudorcroft) and J. Trevor Eyton for $500,000, plus $244,406 in costs, both in U.S. dollars. Two levels of court in Illinois upheld the award.

[2] The appellants applied in Ontario to enforce the award against Old THGI and the respondents and to obtain judgment for the amount of the award. The application judge enforced the award against Old THGI and dismissed the balance of the application. The appellants appeal to this court. In the event the appellants are successful in setting aside the dismissal, the respondents cross-appeal seeking a stay of the proceeding on the basis that the dispute should be referred to arbitration.

[3] In 1998, the appellants, American Marketing Systems Inc. and what is now the Hume Group, Inc., both U.S. corporations, bought a business from Old THGI in accordance with an Asset Purchase Agreement (the Agreement), to which the respondents were “Parties”.

[4] The Agreement provides for an adjustable purchase price that depended on the performance of the business during the first two years after its sale. The appellants paid an initial $3,000,000 to Old THGI, which included a $500,000 “earnout” advance payment. If the business performed well, the appellants agreed to pay more. However, if the business performed poorly, the Parties agreed that the earnout advance would be returned to the appellants. In the Agreement, the respondents, Hume Publishing and J. Trevor Eyton, agreed to indemnify the appellants in certain circumstances, in particular for the potential repayment of the “earnout” advance if it was not repaid by Old THGI.

[5] The Agreement provided for arbitration of disputes that arose under the Agreement.

[6] Based on his calculations of the EBITDA generated by the business under the terms of the Agreement, the Illinois arbitrator held Old THGI liable for repayment of the earnout advance, plus the costs. In addition, the arbitrator’s award named the respondents as parties liable for the award.

[7] After completion of the review process in the Illinois appellate courts, the appellants brought an application in Ontario seeking two separate grounds of relief: first, to enforce the arbitration awards against Old THGI and the respondents; and second, for judgment against the respondents, framing the issue as one of interpretation of contract. We address these two claims separately.

[8] We are of the view that it was open to the application judge to refuse to enforce the Illinois arbitration award on the basis of the International Commercial Arbitration Act, R. S.O. 1990, c. I.9. Article 34(2)(a) of that Act provides that a court may set aside an arbitration award where the party making the application was not given proper notice of the arbitration or where the award deals with a dispute not falling within the terms of the submission to arbitration.

[9] The respondents did not receive proper notice of the arbitration, at least in their capacities as indemnifiers of Old THGI Inc.’s obligations. Moreover, neither the appellants’ counterclaim nor the arbitrator’s reasons raise or consider the parameters of the respondents’ indemnification obligations under the Agreement.

[10] In those circumstances, the application judge was clearly entitled to decline to enforce the award against the respondents. We see no basis to interfere with his decision on this issue.

[11] The appellants also sought judgment on the respondents’ contractual indemnification obligations based on the provisions of the Agreement regarding indemnification of the appellants for certain of Old THGI’s liabilities. The only two respondents against whom the appellants proceed in this appeal are Hume Publishing and J. Trevor Eyton, both of whom are based in Ontario.

[12] The application judge’s reasons do not deal with this issue.

[13] The Agreement provides for arbitration of disputes between the parties, which would include, in the usual course, the respondents’ obligations under the indemnity provisions. It is the appellants’ position, however, given the arbitral awards from Illinois about the quantum of the advance and Old THGI’s liability to pay, there is no dispute left to arbitrate.

[14] On the other hand, the respondents argue that they should be entitled to raise issues about their indemnification obligations, both regarding the Illinois requirement for good faith dealing and regarding the interpretation of “Buyer Indemnifiable Losses”, which is what they agreed to indemnify in the Agreement.

[15] Article 8 of the International Commercial Arbitrations Act requires the court to refer a matter to arbitration where an action “is brought in a matter which is the subject of an arbitration agreement”. In our view, the dispute between the parties in connection with the respondents’ indemnification obligations under the Agreement, at least arguably, is a matter which is the subject of the arbitration agreement. See Dalimpex Ltd. v. Janicki et al, 2003 34234 (ON CA), [2003] O.J. No. 2094 (Ont. C.A.). Since it is at least arguable that the issues sought to be determined by Hume Publishing and J. Trevor Eyton fall within the arbitration clause, this is a matter for the arbitral tribunal to decide at first instance. In that circumstance, the judgment dismissing the indemnification claim is not appropriate.

[16] Accordingly, we would grant the appeal, but only on the second issue of the indemnification claim. We set aside the application judge’s dismissal of the application on that issue against Hume Publishing and J. Trevor Eyton, but stay that part of the application, and refer the appellants and these respondents to arbitration.

[17] As success on the appeal is divided, we make no order as to costs. In light of the result of this appeal, which leaves the application outstanding regarding the indemnification obligation, the costs below are reduced to $40,000, inclusive of Goods and Services Tax and disbursements.

“J.M. Labrosse J.A.”

“S.E. Lang J.A.”

“Paul Rouleau J.A.”