| Cineplex (Western Canada) Inc., core of the dispute is a clause in the lease that prohibits the tenant’s participation in a competing business within 1,200 feet of the Granville Cinema |
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Date: 20091120 Docket: S060716 Registry: Vancouver Between: Emtwo Properties Inc. and Terrma GP I Inc. Plaintiffs And Cineplex (Western Canada) Inc. and Defendant Before: The Honourable Madam Justice Fenlon Reasons for Judgment
[1] The defendants Cineplex (Western Canada) Inc. (“Cineplex Western”) and Cineplex Entertainment Limited Partnership (“Cineplex LP”) have applied under Rule 39(29) to sever the issues of liability and quantum, with all issues relating to liability to be determined first. BACKGROUND [2] The plaintiffs Emtwo Properties Inc. and Terrma GP I Inc. are the past and present owners respectively of a cinema located on Granville Street in Vancouver (the “Granville Cinema”). The defendants, or their predecessor companies, were tenants of the Granville Cinema and operated the theatre located there until September 30, 2005, when the lease was assigned to the existing tenant, Empire Theatres Partnership (“Empire”). Empire is not a party to this action. [3] At the core of the dispute is a clause in the lease that prohibits the tenant’s participation in a competing business within 1,200 feet of the Granville Cinema (the “Radius Clause”). [4] The plaintiffs claim that the defendants breached the Radius Clause when Cineplex LP acquired the Scotiabank Theatre on Burrard Street in Vancouver as part of its acquisition of Famous Players Limited Partnership. The Scotiabank Theatre (formerly the Paramount Theatre) is alleged to be within 1,200 feet of the Granville Cinema. The Radius Clause provides that if the tenant operates a competing business within 1,200 feet of the Granville Cinema, the landlord is entitled to add the gross revenues from that competing business to the gross revenues of the Granville Cinema. This is significant because article 4.03(a) of the lease requires the tenant to pay, in addition to minimum rent, 10% of the amount by which gross revenues exceed $4 million per year. ISSUES [5] The main issue in the case is whether Cineplex Western’s parent company, Cineplex LP, which operates the Scotiabank Theatre, is bound by the Radius Clause. [6] The Radius Clause includes a revision, which I replicate below. It applies not only to the tenant, Cineplex Western, but also to: ...any person under its control ? While this clause as amended is cryptic, the plaintiffs maintain that it applies to Cineplex LP because that company is the sole shareholder of Cineplex Western and has the power to manage or supervise the management of the business and affairs of Cineplex Western. The plaintiffs submit that Cineplex Western is the alter ego of Cineplex LP and Cineplex LP is therefore bound by the terms of the lease, and in particular the Radius Clause. [7] The defendant Cineplex LP disagrees and maintains that the Radius Clause applies only to the tenant and any of the tenant’s subsidiaries. The defendants argue that Cineplex LP, as the parent company of Western Cineplex, cannot be construed to be under the control of its subsidiary and accordingly Cineplex LP is not bound by the Radius Clause. [8] There are a number of particular issues relating to the main issue of whether Cineplex Western’s parent company Cineplex LP is bound by the Radius Clause. With respect to liability, these include: (a) whether Cineplex Western is wholly owned, dominated, used, managed and operated by Cineplex LP; (b) whether the Plaintiffs can invoke the alter ego principle to pierce the corporate veil and hold Cineplex LP equally responsible for the obligations of Cineplex Western under the terms of the Lease; (c) whether Cineplex LP is otherwise bound by the terms of the Lease; (d) whether the Radius Clause is operative against Cineplex LP in light of the approved CCAA Plan; (e) whether Famous Players LP is connected to either Cineplex Western or Cineplex LP, in the manner contemplated by the Radius Clause; (f) whether the Scotiabank Theatre is within 1200 feet of the Granville Cinema. [9] With respect to damages the issues include: (a) the interpretation of Gross Revenue under the Lease; (b) how the Gross Revenue of the Granville Cinema and the Scotiabank Theatre should be calculated (c) whether the combined Gross Revenue of the Granville Cinema and the Scotiabank Theatre would exceed $4 million annually thereby giving rise to a right of the plaintiffs to collect percentage rent; (d) how such percentage rent should be calculated; (e) who is liable to pay such percentage rent and, in what proportion. [10] No trial date has been set, but counsel anticipate that a full trial of the issues of liability and damages will take five to eight days. Some documents have been exchanged, but the defendants have not produced financial documents relating to damages. Pending the outcome of this application, the defendants hope to obtain an order to delay such production until after a trial on the issue of liability only has been heard. ANALYSIS [11] The starting point in severing the issues of liability and damages is Rule 39(29): (29) The court may order that one or more questions of fact or law arising in an action be tried and determined before the others, and upon the determination a party may move for judgment, and the court, if satisfied that the determination is conclusive of all or some of the issues between the parties, may grant judgment. [12] The Court’s authority to grant severance is discretionary: BC (Minister of Forests) v. Okanagan Indian Band, 2008 BCCA 107; Sather v. Rousseau, 2006 BCSC 264. [13] The scope of the Court’s discretion in this regard must be interpreted in light of the overall object embodied in Rule 1(5): “to secure the just, speedy and inexpensive determination of every proceeding on its merits”. [14] In Nguyen v. Bains, 2001 BCSC 1130, Martinson J. summarized the factors to be considered on an application of this kind at paras. 11 and 12: 11 Courts have considered the question of when some issues should be tried before others. These are some of the points that have been made: a. A judge's discretion to sever an issue is probably not restricted to extraordinary or exceptional cases. However, it should not be exercised in favour of severance unless there is a real likelihood of a significant saving in time and expense. b. Severance may be appropriate if the issue to be tried first could be determinative in that its resolution could put an end to the action for one or more parties. c. Severance is most appropriate when the trial is by judge alone. d. Severance should generally not be ordered when the issue to be tried is interwoven with other issues in the trial. This concern may be addressed by having the same judge hear both parts of the trial and ordering that the evidence in the first part applies to the second part. e. A party's financial circumstances are one factor to consider in the exercise of the discretion. f. Any pre-trial severance ruling will be subject to the ultimate discretion of the trial judge. (See BC Practice: Issue 37 (May/00) where the authors provide a useful overview of the relevant cases and issues arising from them, andGoldman, Sachs, & Co. v. Sessions, [1999] B.C.J. No. 1226 (S.C.)) 12 The first of these points is that the Court must be satisfied that there is a real likelihood of a significant saving in time and expense. More than a bare, or mere, assertion that there is a real likelihood of a significant saving in time and expense is required to satisfy the Court. That is, there must be case specific information that there will likely be a significant saving in time and expense. The Court should be told what specific issues, evidence or legal arguments would be avoided and why, as well as how much time and money would likely be saved as a result. [15] The onus is on the applicant to demonstrate that severance ought to be granted. It has recently been confirmed that this onus is higher than simply demonstrating that it would be “just and convenient” to award severance. In Hynes v. Westfair Foods Ltd., 2008 BCSC 637, Madam Justice Bruce summarized the test in this way at para. 33: 33 While there appears to be some divergence of opinion in regard to the test to be applied when considering an application to sever liability and damages, I am satisfied that the authorities support a higher onus on the plaintiff than merely showing it is just and convenient. In my view, the plaintiff must show that they have an exceptional or extraordinary case in which either the trial of liability or damages will not be complicated, where the issues of liability and damages are not intertwined, and where there is some evidence that makes it at least probable that a separate trial on the issue of liability will put an end to the action ... [16] I will consider the defendants’ application using what are, in my view, the main factors to be addressed in the exercise of the Court’s discretion to sever liability from damages under Rule 39(29): 1. Is there evidence that severance is likely to result in a significant saving of time and expense? 2. Is there some evidence that a severed trial will put an end to the action? 3. Are the issues of liability and damages intertwined? 4. Is there a compelling reason to justify severance other than savings of time and expense? 1. Is there evidence that severance is likely to result in a significant saving of time and expense? [17] The defendant applicants submit that it is self-evident that there is a potentially significant savings of time and expense that would result if liability and quantification of damages are severed. [18] Specifically, the defendants argue that being able to focus on the evidence and arguments pertaining to liability issues without the need to consider damages would allow the parties to significantly narrow their preparation for trial: examinations for discovery, interrogatories and other pre-trial preparation will focus on those individuals who have knowledge of the liability issues; witnesses for both parties would suffer less disruption and inconvenience with more narrowly focussed discovery and a trial on liability alone. [19] Further, the defendants argue that quantification of damages will require consideration of thousands of pages of financial data generated by Famous Players LP and Empire and would be focussed on “various potential quanta involving non-parties and time periods”. They say that if severance is ordered, there will be a significant savings in costs and disbursements, including the time that the parties will be required to expend in order to obtain and review the documents of the non-parties, and the cost of engaging financial experts to compile and analyze the data and provide reports. [20] As I have noted, the burden of proof is on the defendants to demonstrate that there is a real likelihood of savings in time and expense if severance is granted. No evidence of such savings has been adduced by the defendants. They rely instead on the “self evident” proposition that a trial that involves liability only will be shorter than a full trial, and that limited document production, (if indeed an order were to be granted to that effect), will cost less than comprehensive document disclosure. While it is preferable for an applicant to provide evidence to demonstrate how much time and money could be saved through severance, I am of the view that a failure to do so is not an absolute bar to the exercise of the Court’s discretion. There may be cases in which the issues, evidence and arguments have been so concretely described that the Court may be satisfied from that information alone that time and expense will be saved, even though evidence of the precise number of days and dollars is not available. [21] In the present case, where a full trial is estimated by the plaintiffs to be five days and by the defendants to be eight days, there does not appear to be great scope for savings in trial time if the quantum of damages is set aside for a separate hearing. There are compelling arguments against limiting document production or examination for discovery to liability issues, therefore the potential for a reduction of pre-trial expense is also questionable. [22] In summary on this point, the defendants have not established that there is a real likelihood that there will be significant savings in time and expense if quantum of damages is addressed in a separate trial. 2. Is there some evidence that a severed trial will put an end to the action? [23] The defendants submit that there are a number of potential outcomes on the liability issues that would put an end to the action. They argue that if the plaintiffs fail to establish that one of the defendants is a tenant under the lease, or that Famous Players LP is under the control of that tenant, then there will be no liability. The defendants submit that since a finding on liability in the defendants’ favour could put an end to the entire litigation, severance is an efficient way to proceed. [24] It will always be the case, where a defendant succeeds on the issue of liability in a severed trial, that there will be no need to determine damages and the action will be at an end. If that were all that was required, an argument could be made for severance in every proceeding. Yet it is clear that severance is the exception rather than the rule in civil trials. In my view, in relation to this criterion, something more must be demonstrated to justify severance. The burden is on the applicant to adduce some evidence to demonstrate that a finding in favour of the plaintiffs on liability would increase the probability that the litigation would end, for example by settlement. [25] In some cases where damages are relatively straight forward, a decision on liability, even a positive one, will increase the likelihood of the case being settled without the need to hold a hearing to determine quantum. That is not so in the case at bar. If liability is decided in the plaintiffs’ favour, the parties will have no basis for agreeing on damages, particularly if an order delaying production of documents was to be made in conjunction with the order for severance. Without production of documents and preparation of experts’ reports, the parties will not have a sense of the measure of damages. 3. Are the issues of liability and damages intertwined? [26] The defendants submit that while the issues related to liability and quantum are complex, they are not significantly interwoven. They argue that liability will turn on such matters as the corporate structure of the defendants, their relationship to each other and Famous Players LP, whether either defendant is bound by the terms of the lease and whether the Radius Clause in the lease is applicable to the Scotiabank acquisition. The evidence that will be led in respect of those issues, according to the defendants, will be significantly different from the evidence that will be required to quantify damages, which they say will depend largely on the financial records of Famous Players LP and Empire, neither of which are currently parties to the litigation. [27] The defendants submit that there is little risk that the parties will have to prepare for the case more than once, or that evidence will have to be repeated. They argue that even if there is a delay between the two trials, it will not be necessary for witnesses or the Court to recall the evidence from the first trial in order to determine the second. [28] In my view the issues of liability and damages are intertwined because there are aspects of liability that will involve an examination of financial records. For example, the issue of whether Cineplex LP exercises sufficient control or influence over Famous Players LP as defined in the Radius Clause, and whether it can be said to be directly or indirectly engaging in, or furnishing any financial assistance to the operations of the Scotiabank Theatre by Famous Players LP, cannot be addressed without considering the financial interactions between those entities. Similarly, the corporate relationship between the defendants, and in particular, whether Cineplex Western is the alter ego of Cineplex LP, will involve an examination of financial information. Addressing these issues will require evidence relating to: (a) the flow of revenues generated from the Scotiabank Theatre to Cineplex LP; (b) any financial assistance provided by or on behalf of Cineplex LP to Famous Players LP; (c) the corporate relationship between the two partnerships; and (d) the degree of control, governance or influence maintained by Cineplex LP over the operations of Famous Players LP. [29] In the result, I am satisfied that a separate trial in relation to quantum of damages will require some duplication of evidence. While that can be addressed to some extent by having the same judge hear both parts of the trial, and by having evidence in the first trial form part of the record in the second, it is inevitable that there will be some repetition of arguments and evidence. 4. Is there a compelling reason to justify severance other than savings of time and expense? [30] The strongest argument made by the defendants in support of severance is the potential for the disclosure of highly confidential and sensitive financial information to the defendants’ competitors to the prejudice of the defendants. In particular, the defendants say that the financial records of Famous Players LP would be made available to Empire, the party currently operating the Granville Cinema. The defendants argue that: Both non-parties have the right to protect their legitimate commercial interest in keeping their financial information confidential. Such financial information is not relevant to the issues of liability, and there would be a risk that disclosure could unfairly prejudice or affect the non-party. Unnecessary disclosure, therefore, could be prejudicial to the operation of those non-parties. The defendants argue that neither party should be required to disclose sensitive, confidential information until such time as it is determined that liability attaches to the defendants under the lease. [31] The only affidavit evidence filed by the defendants in support of this application relates to the defendants’ concern for protecting the confidentiality of financial information from its competitor, Empire. [32] There are a number of weaknesses with the defendants’ position. First, the documents that the defendants seek to shield from discovery by severance are financial documents going to calculation of the plaintiffs’ damages. The lease stipulates that damages for breach of the Radius Clause are to be calculated by including gross revenue from the Scotiabank Theatre in the calculation of percentage rent payable under the lease for the Granville Cinema. [33] Gross revenue is defined as such amounts as are received (net of taxes) from all box office receipts or other forms of admission to the theatre or from rentals derived from the use of the theatre (including what are described as “four wall deals”). [34] Affidavit evidence filed by the plaintiffs indicates that box office receipts make up the vast majority of gross revenue in the theatre industry. Further, a company called Rentrak makes the figures for box office receipts available amongst competitors who subscribe to their service, including figures for individual theatres such as the Scotiabank Theatre. In the result, Empire has access to the figures for box office receipts for the Scotiabank Theatre quite apart from this litigation. [35] In reply the defendants point out that the figures given to Rentrak are not net of taxes, but the defendants do not dispute that box office revenues are available to Empire through the subscription service. The defendants say, though, that the gross revenue that is not derived from box office receipts is “highly sensitive” data relating to alternative programming and four wall deals. Answers to interrogatories delivered by the plaintiffs in relation to this evidence disclose that between July 2005 and June 2009, 96.5% of the gross (tax in) receipts were generated from box office receipts, and that no box office receipts were excluded from the information reported to Rentrak. That information (which can fairly be described as the vast majority of gross receipts) is accordingly available to Empire through the subscription from Rentrak. The responses to the interrogatories also disclose that of the remainder, 2.1% of gross receipts is derived from alternative programming, and 1.3% of gross receipts is derived from four wall deals. [36] From this information, Empire could calculate quite precisely not only what the total box office revenues of the Scotiabank Theatre are, but also how much revenue is derived from alternative programming and four wall deals. [37] I conclude from this evidence that the defendants’ concerns regarding the potential disclosure of financial information in this action are misplaced. [38] Further, Empire is not a party to this litigation and so would not be entitled to receive any information disclosed in the course of these proceedings. The documents produced and other discovery will be protected by the implied undertaking of confidentiality that applies to documents or other information disclosed in litigation in British Columbia: Juman v. Doucette, 2008 SCC 8. In addition the plaintiffs have indicated that they will consent to a confidentiality order if the defendants require further assurance in this regard. [39] In conclusion on this point, I do not find that there are extraordinary or compelling reasons relating to confidentiality of financial information that would justify severing liability and damages in this case. CONCLUSION [40] The defendants have not demonstrated that there would be a real savings in time or expense if severance of liability and quantum is ordered. On the contrary, there is a real prospect that severance would result in unnecessary duplication of evidence concerning the financial relationships between the two defendants and between Cineplex LP and Famous Players LP. In the result, the defendants’ application is dismissed with costs payable to the plaintiffs at Scale B in any event of the cause. The Honourable Madam Justice L. A. Fenlon
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