The Supreme Court of Canada is set to hear a landmark case that may change the way  arbitration and choice of forum clauses are enforced in Canada.

The Court recently granted leave to appeal in the case of Momentous.ca Corporation et al. v Canadian American Association of Professional Baseball Ltd et al, 2010 ONCA 722, 103 OR (3d) 467. The conflict between the parties surrounds the downfall of the Ottawa Rapidz, a professional baseball team owned by subsidiary companies of Momentous.ca.

In 2008, the Rapidz joined and competed in the Can-Am League, a baseball organization based in North Carolina. They played their games at a stadium owned by the City of Ottawa.  Prior to entering the league, the Rapidz agreed to be bound by the league’s by-laws and signed a lease agreement and a league affiliation agreement. Both agreements required the parties to resolve all disputes using an internal arbitration process, which is detailed in the by-laws.  The agreements also contained choice of forum clauses, which state that any arbitration decisions will be enforced by the courts of North Carolina.

Due to significant financial losses, the Rapidz’ owners opted to shut the team down before the 2009 season. However, the Can-Am directors rejected the Rapidz’ application to voluntarily withdraw from the league. Instead, they terminated the Rapidz’ membership in the league and drew down a $200,000 letter of credit posted by the team.

In turn, the Rapidz sued the league and its subsidiary company, Inside the Park LLC, as well as several of the league’s principals and the City of Ottawa. All but two of the defendants were based in the United States. The Rapidz claimed that its membership in the league was illegally terminated and sought damages for breach of contract and for the torts of intentional misrepresentation, intentional interference with contractual relations, and civil conspiracy.

The Rapidz brought their claim in Ontario. All of the defendants, except for the City of Ottawa, delivered pleadings defending the action on the merits and responding to the substance of the allegations made by the Rapidz. These defendants (‘the Can-Am defendants’) also pleaded and relied upon the arbitration and choice of forum provisions in the lease agreement, the league affiliation agreement, and league by-laws.

The Can-Am defendants denied that the Ontario courts have jurisdiction over them and brought a motion to have the action stayed or dismissed. The motions judge sided with the defendants and dismissed the action.

The Ontario Court of Appeal upheld the motions judge’s decision. The Court did accept the Rapidz’ argument that the Can-Am defendants had consented or attorned to jurisdiction in Ontario by defending the action on the merits. However, it held that when the parties have agreed to an arbitration or choice of forum clause, the courts should exercise discretion and may nonetheless refuse to exercise jurisdiction over the parties.

When the Supreme Court hears the appeal, the parties will field questions on whether the defendants can rely on arbitration and choice of forum clauses after attorning.

In applying for leave to appeal, the Rapidz argued that it would be unfair to allow a defendant to argue its case in Ontario, and accept jurisdiction if the Ontario decision was favourable to it, but  refuse to accept jurisdiction if the result was unfavourable. The Rapidz also reasoned that by attorning to the jurisdiction of the Ontario Courts, Ontario jurisdiction, the Can-Am defendants consented to an amendment of the contract which voided the arbitration and choice of forum clauses.

The Can-Am defendants, in turn, argued that attornment has little or no relevance to the question of whether an Ontario court should exercise jurisdiction when the parties have agreed to resolve disputes in a different jurisdiction or by a different mechanism.

The Supreme Court is scheduled to hear the appeal in February 2012.  The case has the potential to affect how arbitration and choice of forum clauses in commercial agreements are interpreted and enforced in Canada.