SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 6868/08
DATE: 20120119

RE: NATIONAL LOGISTICS SERVICES (2006) INC., FORMERLY KNOWN AS 6510965 CANADA INC., Plaintiff

AND:

AMERICAN EAGLE OUTFITTERS CANADA CORPORATION and AMERICAN EAGLE OUTFITTERS, INC., Defendants

BEFORE: HOURIGAN J.

COUNSEL:
Cameron D. Neil, Counsel for the Plaintiff

Evan Thomas, Counsel for the Defendants

HEARD: JANUARY 16, 2012

ENDORSEMENT

Introduction

[ 1 ] The defendants American Eagle Outfitters Canada Corporation (“AE Canada”) and American Eagle Outfitters, Inc. (“AEO”) bring this motion for summary judgment. The plaintiff National Logistics Services (2006) Inc. (“NLS”) asserts three distinct claims against the defendants. First, it brings a claim for contractual shortfall penalties as a result of reduced shipping volumes through NLS’s distribution centre during the last six months of a logistics contract. Second, it makes a claim for misrepresentation. Third, it brings a claim for breach of a duty of good faith, communication and fair dealing.

[ 2 ] The motion for summary judgment was brought on March 6, 2009. This motion was not returnable until January 10, 2012, almost three years after the commencement of the motion.

Factual Background

[ 3 ] AE Canada is a Nova Scotia corporation registered in Ontario and is a wholly owned subsidiary of AEO. AE Canada owns and operates retail clothing stores throughout Canada under certain brands owned by AEO. AEO is a Delaware corporation headquartered in Pittsburgh, Pennsylvania. NLS is a federal corporation carrying on business as a third party logistics supplier.

[ 4 ] On February 28, 2006, AE Canada sold to the plaintiff the assets used in its national logistics services division, including a distribution warehouse facility located at 3105 Dixie Road, Mississauga, Ontario (the “Dixie Facility”). At the time of the asset sale, the plaintiff was known as 6510965 Canada Inc. It subsequently changed its name to NLS.

[ 5 ] As part of the asset sale, AE Canada entered into a Logistic Services Agreement with NLS effective February 8, 2006 (the “Logistics Agreement”). The Logistics Agreement provided that NLS would supply warehouse distribution and transportation services to AE Canada throughout all of the provinces of Canada.

[ 6 ] The initial term of the Logistics Agreement was 23 months, commencing February 28, 2006 and running to January 31, 2008. AE Canada had an option to renew the Logistics Agreement for two further six month terms at its sole discretion. NLS did not enjoy the option of a renewal under the Logistics Agreement. The agreement was terminable by either party at any time on 180 days prior written notice, but the termination clause could not be invoked by either party within the first 18 months of the contract.

[ 7 ] The Logistics Agreement contained an entire agreement clause as follows at article 11.4:

This Agreement constitutes the entire agreement between the parties with respect to its subject matter and cancels and supercedes any prior understandings and agreements between the parties with respect to such subject matter. There are no representations, warranties, terms, conditions, undertakings or collateral agreements express, implied or statutory, between the parties other than as expressly set forth in this Agreement.

[ 8 ] In article 11.5 it was expressly provided that no amendments or modifications of the Logistics Agreement were binding unless they were made in writing and duly executed by both parties:

No modification of or amendment to this Agreement shall be valid or binding unless in writing and duly executed by both of the parties and no waiver of any breach of any term or provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided, shall be limited to the specific breach waived.

[ 9 ] Also important for the purposes of this motion is Schedule “C” to the Logistics Agreement. Pursuant to that schedule, NLS had a right to charge a shortfall penalty to AE Canada on the following terms:

In the event that unit volumes are less than 10,400,000 units shipped by the end of each full Client fiscal year, the Provider reserves the right to charge the Client on the shortfall difference at the rate of 37.5 cents per unit, provided, however, that no shortfall penalty may be charged by the Provider in respect of any time period less than a full Client fiscal year.

[ 10 ] On or about April 12, 2007, the plaintiff received confirmation from Steve Lyman, AEO’s Vice-President, Retail Distribution, that it would be transitioning out of the Dixie Facility in favour of its own in-house distribution centre. Mr. Lyman informed NLS that AE Canada would renew the Logistics Agreement for one six month term and that by July 31, 2008, at the latest, it would no longer be requiring logistic services from the plaintiff.

[ 11 ] On June 30, 2008, NLS issued an invoice to AE Canada for shortfall penalties under the Logistics Agreement totalling $738,963.23, inclusive of taxes. The invoice was based on a six month period from March 1, 2008 to August 31, 2008. During the course of this motion NLS conceded that the shortfall calculation should have ended on July 31, 2008, being the date of termination of the Logistics Agreement.

[ 12 ] AE Canada has taken the position that it is not required to pay the shortfall penalty because NLS had no right to charge a shortfall penalty for a period less than AE Canada’s full fiscal year. There is no dispute between the parties that AE Canada has paid all other amounts validly invoiced by NLS.

[ 13 ] In addition to its contractual claim, NLS has also asserted a claim in this proceeding alleging negligent misrepresentation. The plaintiff alleges that the first misrepresentation was made by the defendants while they were negotiating the sale of the Dixie Facility when they represented that they had no intention of in-sourcing a distribution centre in the Canadian marketplace (the “Pre-contractual Representation”). The plaintiff alleges that a similar misrepresentation was made in December of 2006 when they received information that AE Canada was looking to establish its own distribution centre. Specifically, they allege that the defendants advised them that they had no intention of in-sourcing a distribution facility in Canada and were simply investigating, as part of their ongoing due diligence, to be able to satisfy themselves that the rates being charged by NLS were reasonable (the “December 2006 Representation”). Finally, the plaintiff alleges that in March of 2007, AEO again denied that it was working towards establishing an alternative distribution centre (the “March 2007 Representation”).

[ 14 ] The plaintiff submits that had they known that AEO had not ruled out transitioning out of the Dixie Facility in a relatively short time frame, they would most likely not have purchased the business. Moreover, they note that on January 27, 2007, the Dixie Facility was sold to a third party and NLS entered into a two year lease for the facility with the new owner. NLS argues that had they known that AEO was actively looking elsewhere for a distribution centre and taking steps to in-source its logistics services, they would not have entered into a two year lease for the premises.

[ 15 ] The defendants submit that the claim regarding the December 2006 Representation was not asserted in the original statement of claim but was added in an amended claim in August 2009 subsequent to the commencement of this motion. The defendants argue that given that the plaintiffs knew as of the middle of April 2007 that the defendants were going to be opening their own Canadian distribution centre, that claim for misrepresentation is statute barred given that it was made more than two years after the cause of action arose. They also assert, as described below, that the representations are not actionable.

[ 16 ] The plaintiff also makes a claim for breach of duty of good faith communication and fair dealing. The plaintiff submits that there were representations during negotiations with respect to AEO’s long-term commitment to the Dixie Facility and NLS, which were repeated at pivotal points in NLS’s business planning. The plaintiff alleges that AEO knew that NLS was expecting and depending on there being a long-term relationship and alleges that AEO fostered that expectation. The plaintiff submits that AEO deliberately undermined those reasonable expectations.

Analysis

(a) Summary Judgment Test

[ 17 ] In Combined Air Mechanical Services Inc. v. Flesch , 2011 ONCA 764 , our Court of Appeal developed the “Full Appreciation Test”. This case was the first comprehensive review of the changes made to the summary judgment rule effective January 1, 2010.

[ 18 ] The court identified the following classes of cases as generally appropriate for the utilization of the summary judgment rule: (i) where the parties agree it is appropriate to determine an action by way of a motion for summary judgment; (ii) where a claim or defence is without merit; and (iii) where the trial process is not required in the interests of justice (See paragraphs 40-44 of Combined Air ).

[ 19 ] The test is enunciated by the court is as follows (at paragraph 50):

Housen , at paras. 14 and 18, such as “total familiarity with the evidence”, “extensive exposure to the evidence”, and “familiarity with the case as a whole”, provide guidance as to when it is appropriate for the motion judge to exercise the powers in rule 20.04(2.1). In deciding if these powers should be used to weed out a claim as having no chance of success or be used to resolve all or part of an action, the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of a trial?

[ 20 ] The court provided examples of when summary judgment should generally be utilized (e.g. document-driven cases with limited testimonial evidence, limited contentious factual issues, and/or a record that can be supplemented, at the motion judge’s direction, by hearing oral evidence). It also provided examples of when the summary judgment should generally not be granted (e.g. cases involving multiple findings of fact, conflicting evidence, numerous witnesses, and/or a voluminous record) (See Combined Air paragraphs 51-52).

[ 21 ] The court cautions that being knowledgeable of the entirety of the motion record does not necessarily equate with fully appreciating the evidence and issues, at paragraphs 53-55:

The full appreciation test requires motion judges to do more than simply assess if they are capable of reading and interpreting all of the evidence that has been put before them

... a motion judge is required to assess whether the attributes of the trial process are necessary to enable him or her to fully appreciate the evidence and the issues posed by the case. In making this determination , the motion judge is to consider, for example, whether he or she can accurately weigh and draw inferences from the evidence without the benefit of the trial narrative, without the ability to hear the witnesses speak in their own words, and without the assistance of counsel as the judge examines the record in chambers

... Unless full appreciation of the evidence and issues that is required to make dispositive findings is attainable on the motion record – as may be supplemented by the presentation of oral evidence under rule 20.04(2.2) – the judge cannot be “satisfied” that the issues are appropriately resolved on a motion for summary judgment.

[ 22 ] This is the test which I must utilize in determining whether this is an appropriate case to grant summary judgment in whole or in part.

(continued exactly as original until end)

HOURIGAN J.

Date: January 19, 2012