The Province of Ontario (“Ontario”) was partly successful on appeal of a motion judge’s order to stay its Superior Court application on the ground that an arbitration process ought to have been followed in a dispute with Imperial Tobacco (“Imperial”) regarding the scope and effect of a release Ontario provided as a term of settlement of a civil claim against Imperial.

[2011] O.J. No. 3392

2011 ONCA 525

Ontario Court of Appeal

S.T. Goudge, E.E. Gillese and R.G. Juriansz JJ.A.

July 20, 2011

Imperial entered into a $350 million dollar settlement, payable over 15 years, in an action brought against it by Canada and the provinces arising out of Imperial’s role in tobacco smuggling across the Canada-US border from January 1985 - December 1996. Pursuant to a settlement agreement (the “Agreement”), Canada and the provinces provided Imperial with a release.

The Agreement contained defined terms for the “Releasing Entities” ("Her Majesty in Right of Canada and in Right of the Provinces and includes for greater certainty the Canada Revenue Agency and the Canada Border Services Agency”, the "Released Claims" (“all civil claims that may be allowable to the Releasing Entities" relating to or arising out of the smuggling of tobacco or any failure on the part of ITCAN (Imperial Tobacco Canada Limited) to pay taxes, duties, excise, customs or excise taxes or duties or amounts payable on account of smuggled or imported tobacco”) and the "Released Entities" , which included ITCAN (Imperial) and related companies.

Section 15 of the Agreement read as follows

“RELEASE

15. The Releasing Entities hereby, without any further action on the part of such Releasing Entities, absolutely and unconditionally fully release and forever discharge, the Released Entities from the Released Claims. Without in any way limiting the generality of the foregoing, the Releasing Entities further agree that: (a) in the event that a proceeding, claim, action, suit or complaint with respect to a Released Claim is brought by Releasing Entity against a Released Entity, this release may be pleaded as a complete defence and reply, and may be relied upon in such a proceeding as a complete estoppel to dismiss the said proceeding; and (b) in the event of (a), the Releasing Entity that initiated the proceeding shall be liable for all reasonable costs, legal fees, disbursements and expenses incurred by the Released Entity as a result of such proceeding.”

In December 2009, the Ontario Flue-Cured Tobacco Growers' Marketing Board (the “Tobacco Board”) commenced a $50 million class action against Imperial Tobacco, claiming, on behalf of growers and exporters of, the difference between a lower export price that Imperial paid the Tobacco Board, and the amount that should have been paid for domestic-use tobacco where that tobacco was exported from Canada and then smuggled back into Canada over the U.S. border. Imperial had paid less than the contractual price negotiated by the Tobacco Board on behalf of those farmers/growers for domestic-use tobacco. Ontario was not a party to the class action and would not receive any money arising out of a settlement or award in the action.

The language of the release provided that, if Imperial learned of an action that could give rise to monetary liability on its part arising out of the Released Claims or “Claims Over made by a Releasing Entity or an Entity claiming through or on behalf of the Releasing Entity”, it could escrow the settlement payments up to the amount claim in the newly discovered action.

When Imperial learned of the class action, it gave Canada notice that it would pay the funds due to Ontario into escrow, up to an amount of $50 million, until the class action was resolved. Ontario applied for a declaration that the class action was not a released claim by a responsible government under the Agreement.

A few months later, Imperial applied to stay Ontario’s application on the basis that the matters at issue were subject to arbitration.

Coincident with the application for declaratory relief, Imperial served Canada with a Notice of Arbitration pursuant to the arbitration clause of the Agreement, seeking the same declaration and the ability to pay up to $50 million into escrow pending resolution of the class action.

Ontario and the Tobacco Board opposed the stay on the basis that the arbitrator’s jurisdiction did not extend to questions about whether Imperial could hold payments due to Ontario under the Agreement in escrow pending resolution of the class action brought by the Tobacco Board.

The stay application was granted, and Ontario appealed.

On appeal, the majority defined the question as whether the Tobacco board’s class action claim was a “Released Claim by a Responsible Government” under the Agreement. The issue could not be addressed by limiting the scope of the inquiry to whether the Tobacco Board is an “Entity claiming through or on behalf of a Releasing Entity” for the purposes of s. 7 of the Agreement only, as the dissenting judgement suggested. Rather, consideration must be given to the whole Agreement.

The rule of systemic referral to arbitration referred to Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801 (“Dell”) requires that an arbitrator resolve questions of their own jurisdiction, unless there is a particular exception permitting the court to do so. Where it is “arguable” that a dispute falls under arbitration provisions, the court should grant a stay. Generally, it is not for the Court to reach final determinations as to the scope of the arbitration agreement, or whether any particular party is a party to the arbitration agreement. However, where it is clear that a party is not a party to the arbitration agreement, the court should make a final determination on an application for a stay. Where it is merely arguable that the party is not a party to the arbitration agreement, the question falls within arbitral jurisdiction to determine.

Section 7 of the Agreement conferred on Imperial the ability to pay settlement monies under the Agreement into escrow where it learned of an action that could give rise to monetary liability “in any way relating to, arising out of, or in connection with any Released Claims or Claims Over made by a Releasing Entity or an Entity claiming through or on behalf of Releasing Entity” pending resolution of the claim, and to reduce its payments under the Agreement by the amount of the monetary liability in the action.

With respect to the s. 7 issue, while Ontario was held to have a significant stake in the outcome of these issues, the Tobacco Board was held to have none, since it would be paid an award or settlement in the class action, once a resolution was reached, either way.

The impact of s. 15 issue was different. It conferred upon Released Entities an absolute and unconditional release, and the ability to rely on that release as a complete defence in any action “brought by a Released Entity with respect to a Released Claim.” So, if the Tobacco Board’s action fell within s. 15, Imperial would have a complete defence to the action, thus impacting the Tobacco Board significantly.

To answer the question about whether the class action is a Released Claim by a Responsible Government, a determination of the “factual matrix in which the Agreement was negotiated”, going beyond documentary evidence alone, is required.

Challenges to the arbitrator’s jurisdiction to resolve the issues on the application, for the purposes of s. 7, must be considered by the arbitrator. The application was properly stayed in that regard, until the arbitrator made a determination on jurisdiction questions relating to s. 7 of the Agreement.

On the questions relating to s. 15 of the Agreement, the Tobacco Board was a party to the class action that Imperial was seeking to stay in favour of arbitration, but not to the Agreement or the arbitration clause therein. However, the outcome of the s.15 question would have a significant impact on the Tobacco Board. Thus, “…the court can reach a final determination rather than require that the arbitrator first determine a jurisdictional challenge brought on that basis.” The arbitrator could not resolve the issue since the Tobacco Board was not a party to the Agreement. With respect to the s.15 issues, the stay was ordered lifted.

The appeal was dismissed on the s. 7 declaration issue, but allowed, and the stay lifted, on the s. 15 issue.

The dissenting judge would have upheld the stay on both s.7 and s.15, applying the general rule from Dell.