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Court rules Ontario must wait for payment in tobacco case

The Ontario government will have to wait for its share of a $350-million settlement reached in 2008 with Imperial Tobacco Canada Ltd. after the cigarette maker admitted it had participated in smuggling tobacco into Canada across the U.S. border.

The Ontario Court of Appeal ruled this week that Imperial Tobacco can defer payments it owes to Ontario and instead put the money into an escrow account while an arbitrator decides on a dispute over the payments.

The case stems from a deal approved in July, 2008, when two of Canada's biggest tobacco companies agreed to pay $1.15-billion in criminal and civil penalties for co-ordinating the shipment of cigarettes to the United States in the 1980s and 1990s that were then smuggled back into Canada and resold at discount prices to avoid Canadian taxes on tobacco.

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Imperial Tobacco agreed to pay a $200-million fine in the case and also agreed to pay $350-million in civil penalties to the federal government and the governments of Ontario and Quebec in exchange for a release from future legal actions.

After the deal was approved, Imperial Tobacco was hit with a separate $50-million class-action lawsuit filed by the Ontario Flue-Cured Tobacco Growers' Marketing Board on behalf of all growers and producers in the province who were required to sell their tobacco through the marketing board. The growers claimed they were underpaid for their tobacco because of the smuggling scheme.

Imperial Tobacco notified the Ontario government that it would withhold the payments it was supposed to pay the province in annual instalments over 15 years -- up to a maximum of $50-million -- and put the money into an escrow account pending the resolution of the growers' lawsuit. The tobacco company is still making required payments to the federal government and Quebec, however.

It claimed any payments that might result from the lawsuit should reduce the penalty it owes to the Ontario government because the settlement agreement included a pledge that the governments would not pursue further legal action, and any claim that is brought would reduce the promised payments.

Imperial Tobacco alleged the Tobacco Growers' Marketing Board is an entity connected to the Ontario government. The province has disputed that claim, and says Imperial Tobacco should not be allowed to withhold its required payments because of the other lawsuit.

Imperial Tobacco won approval from the Ontario Superior Court last year to have an arbitrator determine the matter -- an option permitted under the terms of the original 2008 settlement agreement.

But the province opposed the move, saying the arbitration provision did not apply in this dispute, and arguing that in any event the courts should decide on the payment issue to "avoid a multiplicity of proceedings and the possibility of inconsistent results."

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However, the Ontario Court of Appeal agreed in a ruling released Wednesday to allow the matter to be referred to arbitration and for the payments to continue to placed in escrow in the meantime.

The appeal court said it should be up to the arbitrator to decide if the dispute falls under the arbitration agreement and whether the Tobacco Board is an "entity" of the government.

"It is arguable that the dispute between [Imperial Tobacco] and Ontario is a dispute that falls within the arbitration agreement and that Ontario is a party to that agreement," Mr. Justice Russell Juriansz wrote in the court's decision.

"According to the general rule, this matter should be referred to arbitration unless there are exceptions to justify the court retaining jurisdiction over the matter. No such exceptions exist in this case."

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