The Ontario Court of Appeal recently set aside the decision of the Honourable Justice Newbould based on the long-standing legal principle that a judge should not independently determine a case based on theories that were not advanced in the proceedings, as this is contrary to natural justice and is fundamentally unfair.  The result of the decision has raised the stakes in the ongoing battle over NHL sponsorship rights between Canada’s two biggest brewers by upholding the largest sponsorship agreement in NHL history.

In Labatt Brewing Company Limited et al vs. NHL Enterprises Canada, L.P. et al, Labatt Brewing Company Limited (“Labatt”) brought an application in the Ontario Superior Court of Justice against NHL Enterprises, L.P. (“NHL”), Molson Coors Canada Inc. (“Molson”) and several related companies concerning beer sponsorship rights.  By way of summary, Labatt’s initial sponsorship agreement with the NHL ran until June 30, 2011.  Pursuant to a renewal clause providing an exclusive negotiation period, the parties engaged in negotiations to renew these rights for an additional three years.  The parties were close to a final signed agreement when Molson approached the NHL, expressing an interest in negotiating sponsorship rights.  As a result of its negotiations with Molson, the NHL signed a $375 million North America-wide agreement with Molson for the exclusive Canadian sponsorship rights for a period of seven years.

In its application to the Superior Court, Labatt sought an interpretation of the terms of the renewal provision contained in the sponsorship agreement and, more specifically, whether the NHL was allowed to engage in negotiations with a third party.  Labatt took the position that the NHL had extended the exclusivity period indefinitely, and as such, an agreement on the terms of renewal had been reached.  The NHL argued that the renewal provision was unenforceable, being merely an agreement to agree, and that in any event the negotiation period had expired.  Justice Newbould ultimately agreed with Labatt’s position, finding that the NHL had indefinitely extended the exclusive negotiation period and that the parties did reach a binding and exclusive sponsorship agreement, precluding the NHL from entering into negotiations with Molson.

The NHL, Molson and several related companies recently appealed the judgment of Justice Newbould, advancing several grounds of appeal.  However, the appellate court found that the resolution of the appeal hinged on one ground in particular – whether the application judge erred by concluding that the NHL and Labatt had reached a binding and exclusive sponsorship agreement, based on a theory and legal principle that had not been advanced by counsel.

The application judge used his interpretation of the renewal provision as a catalyst to reach a conclusion that ultimately determined the rights of the parties but which the appellate court found to be procedurally unfair for several reasons.  Justice Newbould’s central conclusion was not rooted in the pleadings, evidence, positions or submissions of any of the parties.  Labatt did not plead that the parties had reached a binding sponsorship agreement on November 12, 2010, nor was there any suggestion of such a theory in the pleadings.  Further, at no time during the hearing did Labatt assert that a binding sponsorship agreement existed between the parties. In addition, during the parties’ oral submissions, the application judge did not raise the issue of whether a binding sponsorship agreement had been reached with the NHL or Molson.  As such, Justice Newbould was not afforded the benefit of the parties’ positions and arguments on an issue on which his judgment, and the rights of the parties, were founded.  Finally, the appellate court noted that had the NHL known that the issue for determination was whether a binding sponsorship agreement had been reached, it would have conducted its defence in an entirely different manner.

It has long been held by the courts that it is prejudicial 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 a claimant. In this regard, and as stated by the appellate court in Rodaro v. Royal Bank of Canada, the judicial system relies heavily on an adversarial process in order to obtain the truth which can only arise subsequent to the full and vigorous competition between opposing parties.  A theory of liability that first comes to light in the reasons for judgment, is not tested by the adversarial process.  It deprives the parties of their opportunity to answer and defend against their liability and entirely defeats the purpose of opposing parties vigorously advocating for their clients.  How could we know how a new theory of liability would hold up had it been subjected to the rigorous examination of the adversarial process?

This decision is of great significance for two reasons.  First, it reinforces the legal principle that a judge who shifts the ground for liability to a theory that has not been pleaded or argued subjects the parties to injustice and procedural unfairness.  Second, as a result of this decision, Molson will become the official beer of the NHL for the next three hockey seasons, allowing Molson to integrate its brand and product with new social media, television advertisements and popular special NHL events, such as the Stanley Cup playoffs and the Winter Classic.