Labatt Brewing Company Limited et al. v. NHL Enterprises Canada, L.P., et al.

[Indexed as: Labatt Brewing Company Ltd. v. NHL Enterprises Canada, L.P.]

106 O.R. (3d) 677

2011 ONCA 511

Court of Appeal for Ontario,

O'Connor A.C.J.O., MacPherson and Rouleau JJ.A.

July 12, 2011

Contracts -- Interpretation -- Applicant applying for interpretation of renewal provision contained in previous sponsorship agreement between parties -- Application judge finding that applicant and respondent had reached new sponsorship agreement -- Applicant not having advanced that position and respondent not having had opportunity to respond to it -- Application judge's approach procedurally unfair -- Respondent's appeal allowed.

The applicant brought an application seeking an interpretation of the renewal provision in a previous sponsorship agreement between the parties. The application judge found that the parties had reached a new, binding sponsorship agreement. The respondent appealed.

Held, the appeal should be allowed.

The applicant did not plead that the parties had reached a new, binding sponsorship agreement and did not make that assertion at any point during the application hearing; in fact, it expressly disavowed that it had reached a binding sponsorship agreement with the respondent. Had the respondent known that the existence of a binding sponsorship agreement was at issue, it would have conducted its defence to the application in a very different fashion. The respondent was not given an opportunity to address the ultimate conclusion reached by the application judge. It was procedurally unfair or contrary to natural justice for the application judge to reach that conclusion on the record before him.

APPEAL from the judgment of Newbould J., [2011] O.J. No. 2547, 2011 ONSC 3219 on an application for the interpretation of a contract. [page678]

Cases referred to Oshawa Group Ltd. v. Mason Homes Ltd., [2005] O.J. No. 4344, 47 C.L.R. (3d) 159, 143 A.C.W.S. (3d) 958 (C.A.), consd

Other cases referred to A-C-H International Inc. v. Royal Bank of Canada, 2005 CanLII 17769 (ON CA), [2005] O.J. No. 2048, 254 D.L.R. (4th) 327, 197 O.A.C. 227, 6 B.L.R. (4th) 33, 139 A.C.W.S. (3d) 525 (C.A.); Garfin v. Mirkopoulos, [2009] O.J. No. 2038, 2009 ONCA 421, 250 O.A.C. 168, 71 C.P.C. (6th) 210; Grass (Litigation Guardian of) v. Women's College Hospital (2005), 2005 CanLII 11387 (ON CA), 75 O.R. (3d) 85, [2005] O.J. No. 1403, 196 O.A.C. 201, 30 C.C.L.T. (3d) 100, 138 A.C.W.S. (3d) 752 (C.A.) [Leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 310]; Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74, [2002] O.J. No. 1365, 157 O.A.C. 203, 22 B.L.R. (3d) 274, 49 R.P.R. (3d) 227, 113 A.C.W.S. (3d) 68 (C.A.); Suddaby v. 864226 Ontario Inc. (c.o.b. Biocan Waste Management Systems), [2004] O.J. No. 2536, 131 A.C.W.S. (3d) 796 (C.A.); TSP-INTL Ltd. v. Mills (2006), 2006 CanLII 22468 (ON CA), 81 O.R. (3d) 266, [2006] O.J. No. 2702, 212 O.A.C. 66, 19 B.L.R. (4th) 21, 149 A.C.W.S. (3d) 796 (C.A.)

Terrance J. O'Sullivan and James Renihan, for NHL. Paul Steep, Thomas Sutton and Adam Ship, for Molson. Linda Rothstein, Richard P. Stephenson and Andrew Lewis, for Labatt.

[1] BY THE COURT: -- In this expedited appeal, the appellants NHL Enterprises, L.P. ("NHL") and Molson Coors Canada Inc. ("Molson") and several related companies appeal from the judgment of Newbould J. dated June 3, 2011. On an application brought by Labatt Brewing Company Limited ("Labatt") and a related company, he held that the NHL and Labatt reached a binding sponsorship agreement on November 12, 2010. As a result, the NHL was not free to enter into a similar agreement (for substantially more money) with Molson on February 8, 2011.

[2] In its application, Labatt sought an interpretation of the s. 7 renewal provision contained in the previous sponsorship agreement between the NHL and Labatt. The provision provided for a 60-day exclusive negotiation period.

[3] The appellants advance four grounds of appeal as expressed in the NHL's factum: (a) Did the application judge err by considering whether the NHL and Labatt had reached a binding sponsorship agreement on November 12, given that such a position was not advanced by Labatt in the proceeding below and the NHL did not have an opportunity to respond to it? (b) Did the application judge err in finding that the NHL and Labatt reached a binding sponsorship agreement on November 12, given that neither party believed that such an agreement existed and both parties had agreed that any such agreement had to take the form of a signed document? (c) Did the application judge err by finding that (i) the doctrines of waiver and promissory estoppel could be used by Labatt to prevent the exclusive negotiating period from expiring, and (ii) the NHL intentionally and unequivocally waived such expiry for an indefinite period of time? (d) In the event that Labatt was entitled to a remedy, did the application judge err by enjoining the NHL and Molson from implementing the Molson agreement, rather than directing a reference for damages?

[4] In our view, this appeal can, and should, be resolved on the basis of the first issue. The central conclusion of the application [page679] judge was that on November 12, 2010, the NHL and Labatt had reached a binding sponsorship agreement for the July 1, 2011-June 30, 2014 period.

[5] The problem is that this central conclusion was not anchored in the pleadings, evidence, positions or submissions of any of the parties. Indeed, the application judge recognized this when he said in his reasons, "I realize that this result is not exactly what either side contended." As such, it was procedurally unfair, or contrary to natural justice, for the application judge to reach this conclusion on this record.

[6] In Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74, [2002] O.J. No. 1365 (C.A.), Doherty J.A. held that it was both fundamentally unfair and inherently unreliable for a trial judge to make findings against a defendant on the basis of a theory of legal liability not advanced by the claimant. He said, at paras. 61-63:

The injection of a novel theory of liability into the case via the reasons for judgment was fundamentally unfair to [the defendants].

In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how [the trial judge's] lost opportunity theory would have held up had it been subject to the rigours of the adversarial process. We do know, however, that all arguments that were in fact advanced by [the plaintiff] and were therefore subject to the adversarial process were found wanting by [the trial judge].

[The trial judge] erred in finding liability on a theory never pleaded and with respect to which battle was never joined at trial. This error alone requires reversal.

[7] In a similar vein, in A-C-H International Inc. v. Royal Bank of Canada, 2005 CanLII 17769 (ON CA), [2005] O.J. No. 2048, 254 D.L.R. (4th) 327 (C.A.), Blair J.A. said, at paras. 15-18:

The trial judge dismissed the conspiracy claim, and appears on his own initiative to have shifted the ground for liability to a new theory, not pleaded or argued at trial, namely, conversion supported by a decision to pierce the corporate veil[.]

Similarly, we do not know how the trial judge's conversion theory would have fared, had it been exposed to the rigours of the adversarial process. Believing that the case against him was based upon the tort of conspiracy to defraud, as pleaded, Mr. Courtney elected to call no defence and to move for a non-suit at the end of the cross-claimant's evidence. Like the bank in the Rodaro case, he succeeded on the ground that had been litigated. But the trial judge shifted to a new theory that had not been pleaded. [page680]

Had Mr. Courtney and his counsel known that they were required to meet a case based on the tort of conversion and the court's equitable jurisdiction to pierce the corporate veil, they might well have conducted their preparations for the case, and their handling of the case at trial, differently. They might have conducted the cross-examination of RBC's witnesses on a broader basis. They might have decided to call a defence, generally. In particular, they might well have decided to call Mr. Courtney in his own defence (perhaps to provide the explanation that the trial judge felt was necessary in the context of the conversion claim, but that was apparently not necessary in the context of the conspiracy claim).

Because the appellant and his counsel did not know they were facing a case about conversion and personal liability based on corporate veil principles, they were not in an informed position to make the foregoing decisions. As a result, we do not know how these theories of liability would have survived, had the battle been joined, as Doherty J.A. said in Rodaro.

[8] In Grass (Litigation Guardian of) v. Women's College Hospital (2005), 2005 CanLII 11387 (ON CA), 75 O.R. (3d) 85, [2005] O.J. No. 1403 (C.A.), leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 310, Cronk J.A. stated, at para. 53:

I recognize that in complicated negligence actions, like this case, the parties' positions are often refined, clarified and sometimes augmented over time during the pre- trial discovery and production processes and at trial. Thus, the issues framed by the pleadings in such actions do not always reflect the developed positions of the parties or the precise issues as articulated and pursued at trial. Nevertheless, at the end of the day, the issues between the parties are defined by and confined to those pleaded. In this case, the respondents' pleading supports the conclusion that the parties did not join issue on the "risks management" theory of negligence and the Transfer Option relied upon by the trial judge. On the basis of the pleadings, it cannot be said that they were live issues in this action in any meaningful sense.

[9] In Garfin v. Mirkopoulos, 2009 ONCA 421, [2009] O.J. No. 2038, 250 O.A.C. 168 (C.A.), Sharpe J.A. said, at para. 19:

Because the appellant did not plead that Mirkopoulos agreed with Crossen that he would pay the appellant's legal fees, Mirkopoulos could not be expected to know that he should be prepared to meet that allegation. The trial judge erred in awarding judgment against him on a ground not pleaded and not litigated at trial. See, also, Suddaby v. 864226 Ontario Inc. (c.o.b. Biocan Waste Management Systems), [2004] O.J. No. 2536, 131 A.C.W.S. (3d) 796 (C.A.), at paras. 6-9; and TSP-INTL Ltd. v. Mills (2006), 2006 CanLII 22468 (ON CA), 81 O.R. (3d) 266, [2006] O.J. No. 2702 (C.A.), at paras. 34-39.

[10] With respect, the application judge's conclusion that the NHL and Labatt reached a binding sponsorship agreement by the end of their meeting on November 12, 2010 runs aground when measured against these authorities. We say this for several reasons. [page681]

[11] First, and of particular importance in light of the above passages, Labatt did not plead that the parties had reached a binding sponsorship agreement on November 12, 2010. There is not a word in the pleadings about the result of the November 12 meeting being a binding agreement giving Labatt Canadian sponsorship rights for the next three years.

[12] Second, in its factum in support of the application, Labatt submitted that the term sheet (in effect, the rolling document the parties worked on for three months) was sufficient for the purposes of s. 7 to constitute the business terms for a yet to be negotiated binding agreement. This was on the basis that s. 7 did not impose "a requirement that the parties enter into a free standing legally enforceable agreement".

[13] Third, at no time during the application hearing did Labatt assert that a binding sponsorship agreement existed between the parties. At the hearing, Labatt expressly disavowed that it had reached a binding sponsorship agreement with the NHL on November 12 or any time thereafter. Labatt argued only that on November 12 the parties had reached "Terms of Renewal", which it asserted was something less than a binding sponsorship agreement, and that as a result the NHL was obligated to continue negotiations toward a binding sponsorship agreement. When asked by the application judge whether the NHL and Labatt would be obligated to implement the "Terms of Renewal" on July 1, 2011 if negotiation for a binding sponsorship agreement were still ongoing, Labatt's counsel expressly stated that any such implementation would be "voluntary" in the absence of a signed agreement.

[14] Fourth, having heard Labatt's negative response to his query about whether Labatt was asserting that a binding sponsorship agreement had been achieved on November 12, 2010, the application judge did not raise this issue with the NHL or Molson during their submissions. He did not, therefore, have the benefit of their position on what ultimately became the pivotal conclusion on which his judgment, and the rights of the parties, turned.

[15] Fifth, we accept the NHL's submission that if it had known that the existence of a binding sponsorship agreement between the NHL and Labatt on and after November 12, 2010 was at issue, it would have conducted its defence to Labatt's application in a very different fashion. The reality is that there is a significant difference between interpreting s. 7, the renewal provision, which is essentially a pure question of law, and determining whether the NHL and Labatt formed a binding [page682] agreement on November 12, 2010, which necessarily involves the determination of factual issues.

[16] The NHL submits that this difference between the nature of the question posed by Labatt in its application (the interpretation of s. 7) and the nature of the ultimate issue decided by the application judge (the formation of a binding sponsorship agreement) would have led it, if properly apprised of the application judge's thinking, to take very different steps in the litigation, including (1) moving for the application to be converted into an action, with attendant document production, discoveries and trial procedures; (2) marshalling different evidence; (3) calling different witnesses; (4) asking different questions when cross-examining Labatt's witnesses; (5) seeking to introduce viva voce evidence, as credibility is considerably more important in determining the state of contractual negotiations than in interpreting a provision of a contract; and (6) advancing different legal arguments and making different use of the existing evidence. Likewise, Molson says it would have proceeded differently in advancing its case. We accept this submission.

[17] Labatt attempts to overcome these points by emphasizing that the application judge engaged in an extended analysis of the s. 7 renewal provision and ultimately provided a comprehensive interpretation of its wording -- precisely what Labatt's notice of application sought.

[18] We accept that the application judge interpreted s. 7. However, that is not the end of the inquiry. The motion judge used this interpretation as a springboard to reach a conclusion -- indeed the crucial conclusion -- resolving the rights of the parties. He found that the NHL and Labatt had entered into a binding sponsorship agreement on November 12, 2010, a position that none of the parties asserted, that one party (Labatt, the applicant) disavowed in oral submissions and that the other two parties did not have an opportunity to fully address. The NHL did address Labatt's submission that an agreement on "Terms of Renewal" was reached and, in doing so, took the position that more was required to constitute a binding agreement. However, the NHL was never faced with, nor did it respond to, an allegation that a binding sponsorship agreement had in fact been entered into on November 12, 2010. In short, it is the combination of the application judge's analysis of s. 7 and his conclusion that a binding agreement was reached at the November 12, 2010 meeting that creates the procedural unfairness problem in this case.

[19] Labatt's response to the case law cited above is reliance on Oshawa Group Ltd. v. Mason Homes Ltd., [2005] O.J. No. 4344, 47 C.L.R. (3d) 159 (C.A.). [page683] In that case, this court upheld the decision of a trial judge who found an independent oral contract formed on December 11, 1990, instead of the written contract asserted in the pleadings.

[20] In our view, Mason Homes does not assist Labatt. The court reviewed the pleadings and concluded, at para. 10, that "it was reasonable for the trial judge to conclude that the pleading raised the issue of the existence and breach of an agreement to lease between the parties, reached on or about December 11, 1990".

[21] In summary, the NHL and Molson were not given an opportunity to address the ultimate conclusion reached by the application judge, the formation of a binding agreement between the NHL and Labatt on November 12, 2010. In a real sense, this constituted for the NHL a "finding [of] liability on a theory never pleaded and with respect to which battle was never joined" (Rodaro, at para. 63). As Cronk J.A. said in Grass, at para. 53, "at the end of the day, the issues between the parties are defined by and confined to those pleaded". That did not happen in this case, with the result that the NHL and Molson were denied procedural fairness.

[22] The appeal is allowed and the judgment of the application judge is set aside. The matter is remitted to a different judge of the Superior Court of Justice for further proceedings if so advised.

[23] The appellants are entitled to their costs of the appeal fixed at $17,500 each, inclusive of disbursements and HST.

Appeal allowed.