The Montreal Forum, an arena entrenched in hockey folklore, was recently the subject matter of a far different precedent. Indeed, the Montreal Forum lies at the centre of the recent decision of the Québec Superior Court in Forum Entertainment Centre Company v. Pepsi Bottling Group (Canada) Co. (2008 QCCS 4672), a case with potentially far-reaching implications for real estate developers and operators alike.

In the late 1990s, the Forum Entertainment Centre Company ("Forum") redeveloped the Montreal Forum from an abandoned hockey arena into a commercial entertainment complex consisting of shops, restaurants and a theatre. In connection with this redevelopment, Forum entered into a 15-year "exclusive supply arrangement" with Pepsi Bottling Group (Canada) Co. ("Pepsi"). Pepsi became the title sponsor for the complex and obtained "pouring rights" as the exclusive supplier of soft drinks. In exchange, Forum received annual sponsorship fees and a 38% commission payable on all soft drink sales. Underlying this arrangement was the mutual expectation, set out in the parties’ contract, that Forum would operate the complex as a "first class entertainment facility".

Pepsi failed to make any payments to Forum and, in fact, purported to terminate the arrangement after the first year of the contract on account of the failure of Forum to achieve the threshold objective of a first class entertainment facility. In support of this allegation of failure, Pepsi pointed to the following facts:

  • the opening of the complex was delayed by approximately one year;  
  • the complex was only leased to 50% of capacity;  
  • only one of three promised anchor tenants was delivered; and  
  • many of the tenants, namely Future Shop and SAQ, a liquor store, did not belong in a first class entertainment facility.

Forum sued for unpaid fees and commissions under the contract. Pepsi counterclaimed for termination of the contract on the basis of a fundamental breach, namely that Forum had breached its fundamental obligation to operate the complex as a first class entertainment facility.

The outcome of this case rested on the Court’s determination as to whether the obligation to operate the complex as a first class entertainment facility was fundamental. Notwithstanding the presence of an "entire agreement" clause, the Court went beyond the four corners of the contract and considered extrinsic evidence to breathe life into its provisions. This extrinsic evidence included a wide volume of press releases, promotional materials, public statements and expert testimony.

Based upon its review of the evidence, the Court determined the following:

  • the obligation to operate the complex as a first class entertainment facility was, in fact, fundamental to the contract; and  
  • the obligation to operate the complex as a first class entertainment facility related primarily to the character and diversity of the lessees.

The Court concluded that Forum did not attain the first class standard and found that the contract was terminated. Moreover, the Court signalled that Forum could not have avoided this outcome unless the fundamental breach, namely the failure to operate the complex as a first class entertainment facility, was wholly beyond its control.

In addition to the remedy of termination, the Court also lowered the sponsorship fees payable by Pepsi to Forum under the contract to 40%. In effect, this represents a finding as to the percentage of Pepsi's sponsorship dollars that Forum, through its unsatisfactory operation of the complex, had actually earned. Conversely, the commission payable on soft drink sales was left intact on the basis that it was unit-based, and not tied to the performance of Forum.

The decision in Forum Entertainment Centre Company v. Pepsi is presently under appeal to the Québec Court of Appeal. Until a decision is rendered on appeal, real estate developers and operators should consider that:

  • developers may be held to their pre-contractual representations as to the intended quality or character of a project, particularly in relation to lessees; and  
  • the presence of an entire agreement clause will not necessarily preclude the Court from examining extrinsic evidence toward interpreting a developer’s representations.