Momentous.ca v. Canadian American Association of Professional Baseball et al. : Professional Sports is Risky Business

Recently, several Canadian cities, including Winnipeg, Quebec, and even Hamilton, have been rumoured to be in the bidding for major professional sports franchises, particularly National Hockey League (NHL). As of 31 May 2011, it appears Winnipeg is confirmed to be the newest city to hold an NHL franchise. However, establishing or re-establishing a professional sports franchise in a Canadian city can be a messy affair.

In this context, interested eyes should pay close attention to the upcoming Momentous.ca Corporation v. Canadian American Association of Professional Baseball Ltd. case before the Supreme Court. On 20 May 2011, the Supreme Court of Canada granted leave to hear this case.

The Facts
The Ottawa Rapidz baseball team was created to bring baseball back to Ottawa after the demise of the Ottawa Lynx triple ‘A’ baseball team, who played in the city from 1993-2007.

After considerable multi-party negotiations, the Ottawa Rapdiz baseball team was created by Momentous.ca and entered into the Can-Am League for the 2008 season. Similar to many large cities in Canada, the home stadium of the Rapidz was owned by the City of Ottawa, who also entered into a lease agreement with the team. Because of financial losses, similar to previous NHL franchises in Winnipeg and Quebec City, the Rapidz were forced to fold after the 2008 season. The Rapidz management then applied under the League by-laws for a voluntary withdrawal due to financial hardship.

However, the Can-Am Board of Directors rejected this application. As a consequence of the application, the League terminated the Rapidz League membership and “drew down” the team’s $200,000 letter of credit. This letter of credit was required to be posted by the team as a condition of entry into the League.

Momentous.ca Corporation and its related companies (Rapidz Sports and Entertainment Inc., Rapidz Baseball Club Inc. and Zip.ca Inc.), all Ontario corporations, then sued the League and the City of Ottawa in contract and tort.

A messy affair
Momentous.ca claims the League “illegally terminated the membership of the Rapidz Baseball and had no right to draw down the letter of credit.” Furthermore, the corporation alleges “the defendants intentionally initiated an interlocking sequence of indebtedness all to the risk and jeopardy” of Momentous.ca.

The Can-Am defendants’ response is a motion under Rule 21. 01(3)(a) of the Ontario Rules of Civil Procedure requesting a stay or dismissal on the grounds that Ontario is not the proper jurisdiction for the action. The League’s motion is on the basis that the League’s by-laws have choice of forum and arbitration clauses, both signed by the plaintiffs. The by-laws stipulate North Carolina is the forum for all disputes and any dispute is subject to mandatory arbitration.

The Ontario Superior Court and Court of Appeal for Ontario both already ruled on this case, albeit with slightly differing decisions. At the Superior Court, Justice Ratushny granted the defendants’ 21.01(3)(a) motion and dismissed the action.

However at the Court of Appeal, Justice Laskin’s decision exposes the messiness of this conflict of laws claim.

Two agreements were created for the Rapidz entry into the league: a lease agreement and a league affiliation agreement. The former provides: a two year lease on the stadium; the $200,000 letter of credit; and a mandatory arbitration clause with a waiver of legal action outside the league by-laws.

Meanwhile, the league affiliation agreement specifies that any “unsanctioned withdrawal” from the league requires the forfeiture of the $200,000. The league affiliation agreement also states the agreement would be governed by the law of North Carolina, and that the party consents to personal jurisdiction in North Carolina.

In addition to the lease and league affiliation agreements, the third contract source is the League by-laws.

These agreements, as well as the consent by Momentous.ca to them, appears to have decided the case. But the story does not finish there.

What makes the Ontario Court of Appeal ruling interesting is that Justice Laskin, without going into the merits of the individual claims, found the plaintiffs could proceed against Mr. Wolff and the City of Ottawa, whereas they could not against the League.

Neither Mr. Wolff nor the City of Ottawa were directly part of the three governing agreements. Mr. Wolff was also sued in his personal capacity as Director and Commissioner of the League and as a shareholder in Ottawa Pro Baseball Inc. (OPBI) in connection with his shareholder loan and covenant to pay stadium rent.

Justice Laskin found that because Mr. Wolff sued the Rapidz in Ontario for his guarantee and indemnity, Momentous.ca could pursue a personal action against him. Furthermore, because the City of Ottawa had “reneged on a commitment for a long term lease of the stadium,” they could also be sued.

Nevertheless, because Momentous.ca’s pleading before the Court of Appeal did not properly address these nuances between the defendants, Justice Laskin ruled it could not succeed and dismissed the appeal. This now brings the revised claim before the SCC.

The Lesson
For the past decade, many efforts have been made by Canadian cities to either re-claim lost professional teams or establish new ones. As the Momentous.ca case illustrates, such attempts should be advanced in the most diligent manner and be attuned to the potential mine-field that is the business side of professional sports.

First, lease and league affiliation agreements should be crafted very carefully. Can-Am protected itself well against Momentous.ca’s claims by placing choice of law and forum provisions, as well as mandatory arbitration provisions within these agreements. Furthermore, the League by-laws buttressed these provisions to further mitigate its risk. These agreements and by-laws were deciding factors in both Justice Ratushny and Justice Laskin’s decisions in favour of the League.

However, the biggest lessons are for both Mr. Wolff and the City of Ottawa. Both could have found ways to protect themselves against the litigation launched by Momentous.ca. Perhaps these parties could have protected themselves by finding a way to enter into the Can-Am agreements. By remaining outside the lease and league affiliation agreements, both parties left themselves vulnerable to Momentous.ca’s claims, as exposed Justice Laskin.

Nevertheless, it is still too early to know how the SCC will decide. Momentous.ca has a “momentous” task in vindicating its claim, but a significant risk to municipalities has been exposed.

Regardless of the risk to tax-payers this case demonstrates, public funding remains a hot topic in the current debate about acquiring new professional sports franchises. Yet, as the National Post’s Bruce Arthur very aptly writes about Winnipeg: “Return of team feels like justice for fans, but it’s really just business”.

After the SCC rules on the Momentous.ca case, greater clarity can guide fans and cities on better protecting themselves in the unpredictable and risky world of professional sports. Cities seeking to establishing professional sports teams in the future should proceed with diligence and caution. Hopefully, this lesson will not come at the expense of Ottawa’s tax-payers who have already lost one football and two baseball teams in the past six years.