0000016804-01-500018.txt : 20011009
0000016804-01-500018.hdr.sgml : 20011009
ACCESSION NUMBER: 0000016804-01-500018
CONFORMED SUBMISSION TYPE: 8-K/A
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010914
ITEM INFORMATION: Other events
FILED AS OF DATE: 20011001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CANADA SOUTHERN PETROLEUM LTD
CENTRAL INDEX KEY: 0000016804
STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311]
IRS NUMBER: 980085412
STATE OF INCORPORATION: CT
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 8-K/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-03793
FILM NUMBER: 1749980
BUSINESS ADDRESS:
STREET 1: 706 SEVENTH AVE
STREET 2: SUITE 505
CITY: CALGARY ALBERTA CANA
STATE: A0
BUSINESS PHONE: 2032458380
MAIL ADDRESS:
STREET 1: 149 DURHAM RD
STREET 2: OAKPARK UNIT 31
CITY: MADISON
STATE: CT
ZIP: 06443
8-K/A
1
k8a0914s.txt
FORM 8-K/A
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 14, 2001
------------------
Canada Southern Petroleum Ltd.
(Exact Name of registrant as specified in its charter)
Nova Scotia, Canada 1-3793 98-0085412
------------------------------ ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Suite 505, 706 Seventh Avenue, S.W., Calgary, Alberta, Canada T2P 0Z1
(Address of principal executive offices)
Registrant's telephone number, including area code (403) 269-7741
Not Applicable (Former name or former address,
if changed since last report.)
2
FORM 8-K/A
CANADA SOUTHERN PETROLEUM LTD.
Item 5. Other Events
Canada Southern Petroleum Ltd. (the "Company") reported on September
17, 2001 that the trial court in Calgary had rendered its decision in the
Kotaneelee field litigation by written opinion of the trial court, dated
September 14, 2001.
A copy of the Company's press release dated September 17, 2001 is
attached hereto as Exhibit 99.1 and is incorporated herein by reference.
A copy of the trial court's written decision is attached hereto as
Exhibit 99.2 and is incorporated herein by reference and may also be accessed at
the court's home page on the world wide web,
http://www.albertacourts.ab.ca:8080/
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(c) Exhibits.
Exhibit No. Exhibit
99.1 Company Press Release, dated
September 17, 2001.
99.2 Decision of the Court of Queen's
Bench of Alberta, Judicial
District of Calgary in the matter
of Canada Southern Petroleum Ltd.,
Magellan Petroleum and Pantepec
International, Inc. v. Amoco Canada
Petroleum Company Ltd., et al.,
issued on September 14, 2001.
FORM 8-K/A
CANADA SOUTHERN PETROLEUM LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CANADA SOUTHERN PETROLEUM LTD.
(Registrant)
By /s/ Ben A. Anderson
----------------------------------------
Ben A. Anderson
President
Date: October 1, 2001
EXHIBIT INDEX
Exhibit No. Description
------------------ -----------
99.1 Company Press Release, dated September 17, 2001.
99.2 Decision of the Court of Queen's Bench of
Alberta, Judicial District of Calgary in the
matter of Canada Southern Petroleum Ltd.,
Magellan Petroleum and Pantepec International,
Inc. v. Amoco Canada Petroleum Company Ltd., et
al., issued on September 14, 2001.
EX-99
3
prexhib.txt
EXHIBIT 99.1 PRESS RELEASE
PAGE>
Exhibit 99.1
CANADA SOUTHERN REPORTS
TRIAL COURT DECISION IN
KOTANEELEE LITIGATION
Calgary, Alberta, Sept. 17, 2001 - Canada Southern Petroleum Ltd.
[NASDAQ: CSPLF; Toronto/Boston/Pacific: CSW] today reported that the trial court
in Calgary has rendered its decision in the Kotaneelee field litigation. In the
litigation, Canada Southern is seeking monetary damages for the defendants'
alleged breach of contractual obligations and fiduciary duties, a reduction in
the carried interest account because of improper charges to the account by the
defendants, and a declaration that charges for gas processing fees were
improperly made by the defendants.
o The Court held that while the defendants had an affirmative
contractual obligation (but not a fiduciary obligation) to market the gas from
the Kotaneelee gas field when it was possible to do so, the defendants had not
breached their contractual obligation.
o The Court also held that the defendants made improper charges to the
carried interest account in the amount of Cdn. $5.297 million in connection with
the repair and rebuilding of the field's dehydration facilities.
o The Court further held that defendant Amoco Canada was not entitled
to make gas processing fee charges to the carried interest account. The Company
estimates that Canada Southern's share of charges made to date is approximately
Cdn. $22 million.
o The Court made no ruling on the issue of taxable costs of the
litigation, saying only that "Costs may be spoken to if and when necessary".
A Company spokesman said that the Company had not had an opportunity to
review the decision in detail with counsel and would not comment on the ruling
until it had the opportunity to do so.
Statements in this release that are not historical in nature are
intended to be -- and are hereby identified as -- "forward-looking statements"
for purposes of the "Safe Harbor Statement" under the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. Among these
uncertainties are the cost, duration, and ultimate outcome of the Kotaneelee gas
field litigation.
Contact: Ben Anderson, at (403) 269-7741
EX-99
4
exhdec.txt
EXHIBIT 99.2 DECISION OF QUEENS BENCH
` Page: 1
Canada Southern Petroleum Ltd. v. Amoco Canadian Petroleum Company Ltd.,
2001 ABQB 803
Date: 20010914
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
Action No. 9001-03466
BETWEEN:
CANADA SOUTHERN PETROLEUM LTD., MAGELLAN PETROLEUM
CORPORATION AND PANTEPEC INTERNATIONAL, INC.
Plaintiffs
- and -
AMOCO CANADA PETROLEUM COMPANY LTD., AMOCO PRODUCTION
COMPANY, AMOCO CANADA RESOURCES LTD., (FORMERLY DOME PETROLEUM
LIMITED), ANDERSON OIL AND GAS INC., (FORMERLY COLUMBIA GAS
DEVELOPMENT OF CANADA LTD.), MOBIL OIL CANADA, LTD., IMPERIAL OIL
RESOURCES LIMITED (FORMERLY ESSO RESOURCES CANADA LIMITED), MOBIL
RESOURCES LTD. AND MOBIL OIL CANADA PROPERTIES
Defendants
AND BETWEEN:
COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
(now ANDERSON OIL AND GAS INC.)
Plaintiff by Counterclaim
- and -
CANADA SOUTHERN PETROLEUM LTD., MAGELLAN PETROLEUM
CORPORATION, PANTEPEC INTERNATIONAL INC., AMOCO CANADA
RESOURCES LTD., AMOCO CANADA PETROLEUM COMPANY LTD.,
CANADIAN SUPERIOR OIL LTD., (now MOBIL RESOURCES LTD.) MOBIL OIL
CANADA LTD. IMPERIAL OIL LIMITED and ESSO RESOURCES CANADA
LIMITED (now IMPERIAL OIL RESOURCES LIMITED)
Defendants by Counterclaim
AND BETWEEN:
Action No. 8901-15660
Page: 2
CANADA SOUTHERN PETROLEUM LTD.
Plaintiff
- and -
COLUMBIA GAS DEVELOPMENT OF CANADA LTD., DOME
PETROLEUM LIMITED, AMOCO PETROLEUM COMPANY LTD.,
MOBIL OIL CANADA LTD., and ESSO RESOURCES OF CANADA LTD.
Defendants
AND BETWEEN:
Action No. 8801-13549
AMOCO CANADA PETROLEUM COMPANY LTD., DOME
PETROLEUM LIMITED and AMOCO PRODUCTION COMPANY
Plaintiffs by Counterclaim
- and -
CANADA SOUTHERN PETROLEUM LTD., MAGELLAN PETROLEUM
CORPORATION, PANTEPEC INTERNATIONAL LTD., ALLIED-SIGNAL INC.,
HOME OIL COMPANY LIMITED, KERN COUNTY LAND COMPANY, COLUMBIA
GAS DEVELOPMENT OF CANADA LTD., CANADIAN SUPERIOR OIL LTD., ESSO
RESOURCES OF CANADA LTD., and MOBIL OIL CANADA LTD.
Defendants by Counterclaim
-------------------------------------------------------
REASONS FOR JUDGMENT
of the
HONOURABLE MR. JUSTICE D.I. MACLEOD
-------------------------------------------------------
APPEARANCES:
Page: 3
V.A. MacDonald and J.P. McMahon
for Canada Southern Petroleum Ltd., Magellan Petroleum Corporation
and Pantepec International, Inc.
D.O. Sabey, Q.C., R.W. Thompson, J.N. Craig, V.R. Prather
for Amoco Canada Petroleum Company Ltd., Amoco Canada Resources Ltd.,
formerly Dome Petroleum Limited and Amoco Production Company
J.B. D. Malone, Q.C., J.L. Lebo, Q.C., M.H. Hollins
for Anderson Oil & Gas Inc., formerly Columbia Gas Development of
Canada Ltd.
K.J. Warren, M.E. Mestinsek, P.W. Nykyforuk and R.J. Robinson
for Mobil Resources Ltd, formerly Canadian Superior Oil Ltd.,
Mobil Oil Canada Ltd. and Mobil Oil Canada Properties
L.R. Duncan, Q.C., M.W. McCachen and T. Palfy
for Imperial Oil Resources Limited, formerly Esso Resources Canada
Limited
TABLE OF CONTENTS
Paragraph No.
I. INTRODUCTION.............................................................................................1
II. ISSUES...................................................................................................6
III. BACKGROUND
A. THE PARTIES....................................................................................10
B. THE HISTORY....................................................................................17
C. THE ACTIONS...................................................................................101
IV. ANALYSIS
A. THE PROPER PARTIES............................................................................111
B. THE MARKETING CLAIM
1. Contractual Obligations
a) Positions of the Parties....................................................118
b) Direct Privity..............................................................123
c) Assignment..................................................................125
Page: 4
d) Novation....................................................................145
e) Incorporation by Reference
i) The 1966 Agreement..................................................152
ii) The 1977 Agreement..................................................155
f) Implied Obligation to Market................................................161
g) The Status of Imperial......................................................166
h) The Duration of the Obligation..............................................170
i) Scope of the Obligation.....................................................184
2. Equitable and Property Law Considerations
a) Are Any of the Defendants Bound
by a Fiduciary Obligation?..................................................194
i) Joint Venture.......................................................209
ii) Operator............................................................212
iii) Fact Based Analysis.................................................215
b) Does Clause 3.1(D) Run With the Land?.......................................231
3. Satisfaction of Any Obligations
a) Positions of the Parties....................................................239
b) The Business Judgment Rule..................................................261
c) The Pre-1986 Period.........................................................263
d) The Post-1986 Period........................................................265
4. Conclusion and Remedies .............................................................269
------------------------
C. THE CARRIED INTEREST CLAIM
1. Introduction and Positions...........................................................279
--------------------------
2. Application of Fiduciary Law.........................................................282
----------------------------
3. The Plaintiffs' Right to Challenge Expenditures......................................283
-----------------------------------------------
4. The Plaintiffs' Right to Audit.......................................................288
------------------------------
5. The Good and Workmanlike Standard....................................................292
---------------------------------
6. The Nature of the Good and Workmanlike Standard......................................298
-----------------------------------------------
7. The Plaintiffs' Admission............................................................302
-------------------------
8. Analysis.............................................................................305
--------
Page: 5
a) Revamp of the Facilities....................................................306
b) The I-48 Well Workover......................................................318
9. Conclusion...........................................................................324
----------
D. THE PROCESSING FEE ISSUE
1. Basis for a Gas Processing Fee.......................................................325
------------------------------
2. Background...........................................................................327
----------
3. Analysis.............................................................................329
--------
4. Conclusion...........................................................................337
----------
V. FINDINGS
A. LIMITATIONS...................................................................................340
B. PRAYERS FOR RELIEF............................................................................341
C. COSTS.........................................................................................352
VI. APPENDIX...........................................................................................Page 89
I. INTRODUCTION
[1] This case is about a gas field in the Yukon called Kotaneelee. The relevant
time frame extends from the mid-fifties, when permits were issued by the
Government of Canada to explore, to the present, with the field still in
production, and into the future, 2010, when it is estimated production will
cease.
[2] The Plaintiffs were the holders of the permit covering land within which
Kotaneelee was established. In 1959, the Plaintiffs farmed out a 50% interest in
the oil and gas rights to a group of companies that can loosely be described as
predecessors in interest to the present Defendants. The farmout agreement
contained a provision that the Defendants' predecessors would "assure the
earliest feasible development and marketing of oil and/or gas found on the
properties."
[3] By the mid 1960s, the Defendants' predecessors had earned their interest in
the lands and in 1966 the Plaintiffs' working interest was converted into a
carried interest. Accordingly, the Plaintiffs were not responsible for the costs
incurred in developing the field and would not share in the revenue from the
field until sales exceeded costs. In 1977, the Defendant
Page: 6
Anderson, then known as Columbia, agreed to drill a well and act as operator in
order to earn a 1/3 working interest from all of the other parties.
[4] By the end of the 1970s several successful gas wells had been drilled, a
dehydration plant constructed and the field had been connected to the Westcoast
Transmission Pipeline in the area. Some sales were made to Westcoast in 1979 and
1980 on a best efforts basis, but these sales ceased and the plant was
mothballed in 1983. In 1989 and 1990, steps were taken to demothball, revamp and
reopen the plant. Sales recommenced in 1991 and have continued to the present.
[5] Several times over the years the Plaintiffs took the position that the field
was not being developed and marketed in accordance with the obligations
contained in the original Farmout Agreement. As a result, in the mid-sixties
proceedings were commenced and discontinued in the Yukon and, in 1987, commenced
in Florida. In late 1988 both the Florida court and this court, in litigation
arising from the Florida proceedings, determined that Alberta, not Florida, was
the appropriate jurisdiction for litigation between the parties. Subsequently,
the Plaintiffs commenced proceedings in Alberta in 1989 and 1990. Those suits,
together with a counterclaim left over from the earlier Alberta action in
response to the Florida proceedings, have culminated in these Reasons for
Judgment.
II. ISSUES
[6] The issues in the action generally arise in two areas: the marketing of the
gas by the Defendants; and the amounts included, or not included, in the carried
interest account for expenses incurred by the Defendants in developing the
field, constructing and revamping the plant, and producing the gas.
[7] The issues relating to marketing can be briefly stated as follows:
a) Did the Defendants, or any of them, owe an express or implied
contractual obligation or a fiduciary duty to the Plaintiffs
to market gas from the Kotaneelee gas field, and if through
express contractual language did it arise through direct
privity, novation, assignment or incorporation by reference?
b) Did any obligation to market terminate under the terms of the
relevant Agreements or by some other event, or was it a
continuing obligation?
c) Did the obligation, if any, run with the land?
d) If an obligation to market did extend to any or all of the
Defendants, was it breached by any or all of them and, if so,
when?
e) What damages, if any, flowed from such breach or breaches?
Page: 7
f) Are the Plaintiffs entitled to any other remedies instead of
or in addition to damages?
[8] The issues relating to the carried interest account can similarly be
stated as follows:
a) What part, if any, of the carried interest account calculated
by the Defendants is disputed by the Plaintiffs?
b) What obligations to the Plaintiffs arise from the agreements
with respect to the disputed items, and which Defendants are
under those obligations?
c) Were any such obligations breached by the Defendants, or any
of them, and if so, to what remedies are the Plaintiffs
entitled?
d) Should the carried interest account include an amount for a
gas processing fee with respect to gas processed in the plant
constructed by the Defendants upstream of the connection to
the Westcoast Pipeline?
[9] Additional issues raised in this litigation include:
a) Whether Alberta or the Yukon Territories is the forum
conveniens for all issues relating to the Kotaneelee field and
whether a permanent anti-suit injunction should be issued;
b) Whether the proper parties are before the Court;
c) Whether the Plaintiffs' claim is barred by the Limitations of
Action Act, R.S.A. 1980, c. L-15 or the doctrine of laches.
III. BACKGROUND
A. THE PARTIES
[10] The Plaintiffs in this action are Canada Southern Petroleum Ltd.
("Canada Southern"), Magellan Petroleum Corporation ("Magellan") and Pantepec
International, Inc., ("Pantepec"). These three Plaintiffs hold a 30%, 2.67%,
and 0.67% carried interest respectively in Kotaneelee, and are referred to
collectively as "C-M-O."
[11] Canada Southern, which has been carrying on business in Canada since
the early 1950's, and Magellan, which is incorporated in Delaware, are both oil
and gas companies. Pantepec, formerly Oil Investments, Inc. ("Oil
Investments"), is also incorporated in the state of Delaware.
Page: 8
[12] The Defendants include Amoco Canada Petroleum Company Ltd. ("Amoco
Canada"), Amoco Canada Resources Ltd. ("Amoco Resources"), formerly Dome
Petroleum Limited ("Dome"), Dome in its own name and Amoco Production Company
("Amoco Production") a Delaware corporation. Collectively, when appropriate,
they have and will be referred to as "Amoco" or "the Amoco Group." They are
all oil and gas companies carrying on business in Canada and in the United
States.
[13] The Defendant Anderson Oil & Gas Inc. ("Anderson") is a wholly owned
subsidiary of Anderson Exploration Ltd., a Canadian oil and gas producer.
Anderson was formerly known as Columbia Gas Development of Canada Ltd.
("Columbia"), another Defendant.
[14] The Defendant Imperial Oil Resources Limited ("Imperial"), is an oil
and gas producer which was formerly known as Esso Resources Canada Limited
("Esso"), another Defendant.
[15] The Defendants Mobil Oil Canada Ltd., Mobil Oil Canada Properties and
Mobil Resources Ltd, formerly Canadian Superior Oil Ltd., which is also a
Defendant by Counterclaim, (collectively "Mobil"), are oil and gas producers in
Canada and in the United States.
[16] The Defendants are the current working interest owners in Kotaneelee.
B. THE HISTORY
[17] What follows in this section is taken largely from the briefs of the
parties and while I believe it is generally an accurate and fair account of the
events described it is intended more as background than as formal findings of
fact. Where it is necessary for my specific conclusions, I have attempted to
express my findings of fact more precisely in the analysis portions of these
Reasons.
[18] On June 14, 1956, Neil W. Tracy of Calgary was granted a series of
permits by the Federal Department of Northern Affairs and Northern Resources
authorizing him to explore for oil and natural gas on a huge tract of land
stretching from the southeast corner of the Yukon Territory eastward through the
Northwest Territories. Included in those permits was permit 1007, located in the
Yukon, which covers the area now known as Kotaneelee. The total amount of lands
covered by the permits exceeded 1.25 million acres.
[19] In the 1950's, American entrepreneur William F. Buckley and his family
controlled a number of companies around the world. They were usually small, had
few employees and limited finances. Canada Southern Petroleum Ltd. was one of
them. Like many of the Buckley family of companies, Canada Southern's modus
operandi was to explore and identify geological prospects in frontier areas,
upgrade them with surface geology and seismic and then solicit larger oil
companies with greater financial resources to come in and, in exchange for an
interest in the property, finance the drilling of wells and the development of
the prospect.
Page: 9
[20] On May 2, 1957, Mr. Tracy assigned his interest in his northern
permits, including permit 1007, to Canada Southern in consideration for a 2.5%
royalty from any production from those lands.
[21] After Canada Southern obtained its interest from Mr. Tracy, two other
Buckley family companies became involved by obtaining a 12.5% interest each in
the permits. These were Oil Investments Inc. and Magellan Petroleum Corporation,
both Panamanian corporations. Through a series of corporate restructures and
transfers in the 1960's, those two companies' interests are now held by Pantepec
International Inc. and Magellan Petroleum Corporation, both Delaware
corporations. Together, these three companies are the Plaintiffs and have been
referred to in the various agreements and this litigation as the C-M-O Group.
[22] In 1959, the C-M-O Group commenced discussions with a number of
companies in order to enlist their assistance in the exploration and development
of the permitted area. The incentive was to allow those other companies to farm
into the lands, including permit 1007. On June 25, 1959, the C-M-O Group entered
into an agreement with Home Oil Company Limited ("Home"), Signal Oil & Gas
Company ("Signal"), Alminex Limited ("Alminex"), United Oils, Limited ("United")
and Kern County Land Company ("Kern").1 C-M-O's new co-venturers were
collectively referred to in the 1959 Agreement and in this litigation as the
H-S Group.
[23] The 1959 Agreement provided that 50% of the C-M-O Group's working
interest was transferred to the H-S Group in the following proportions: Home,
12.5%; Signal, 25%; Alminex, 5%; United, 2.5%; and Kern, 5%. As consideration
for obtaining their respective interests, the 1959 Agreement provided that the
H-S Group was to pay C-M-O $3,500,000 in four installments over four years.
Additionally, the H-S Group was obliged to drill a minimum of five exploratory
wells on or before May 28, 1964. One of those wells was to be drilled on the
western block of the properties which included permit 1007.
[24] As a further consideration for the interest they acquired, the H-S
Group agreed, in clause 3.1(D), to "assure the earliest feasible development and
marketing of oil and/or gas found on the properties." The Agreement also
included an operating procedure (Schedule "B") and an accounting procedure
(Schedule "C").
[25] In the 1959 Agreement Home was designated the managing operator and
thereby given the authority under the operating procedure to conduct
exploration, development and operations on the lands on behalf of all the
parties. The remaining parties, including the Plaintiffs, were designated
"non-operators" under the accounting procedure and "joint operators" under the
operating procedure.
-----------
1 Exhibit 9
Page: 10
[26] By March of 1962, five wells had been drilled on the properties. The
second well was a gas find but has always been and still remains shut-in. The
other four were classified as dry and abandoned.
[27] During the 1961-62 period, a number of additional agreements were
executed between the parties to facilitate further drilling and exploration.
Included in these was a rearrangement of the respective interests of the members
of the C-M-O Group. They divided their joint 50% working interest so that Canada
Southern would hold 90% or 45% of the whole, and Magellen and Oil would each
have 5%, or 2.5% each of the whole.
[28] By agreement dated November 22, 1961, the H-S Group assigned one-half
of its interest in the properties to Pan American Petroleum Corporation
("Pan Am"), now the Defendant Amoco Production. Pan Am agreed to assume one-half
of the obligations of the H-S Group under the 1959 Agreement. In a letter dated
January 30, 1962, Pan Am gave notice of the assignment to the C-M-O Group and
agreed to be bound by all of the terms and provisions of the 1959 Agreement.
Pan Am also proposed a novation agreement but that was never accepted by the
C-M-O Group.
[29] The somewhat disappointing early results from drilling led to a
decision to drill two further wells. One of these wells was located on permit
1007 known as the Panam et al A-1 Kotaneelee YTP-50. Drilling began in April of
1962 and small amounts of gas were found but the well was ultimately suspended
on September 23, 1963.
[30] On September 27, 1962, Signal assigned its remaining 12.5% working
interest in the property to Dome Petroleum, now known as the Defendant Amoco
Resources. In a letter to the C-M-O Group dated September 28, 1962, Dome
agreed to assume all of Signal's obligations and to be bound by all of the
terms and provisions of the 1959 Agreement.
[31] On February 27, 1963, Magellan proposed to drill a well on permit 1007
at its own expense and risk. On March 1, 1963, Canada Southern confirmed it
would join Magellan in the cost of drilling the new well. Gas was found as a
result of drilling what was called the I-27 well, but it was not considered a
commercial discovery and the well was suspended.
[32] As a result of the I-27 find, Canada Southern asserted that an
obligation has arisen to develop and market gas from the properties, and
specifically on permit 1007. By letter dated April 17, 1964, Canada Southern
demanded the other working interest owners begin development and marketing of
gas and, in particular, demanded a continuous drilling program take place on
permit 1007. That position was reiterated in a further letter dated May 25, 1964
which again asserted that the H-S Group had obligations concerning development
and marketing of the lands.
[33] No further development occurred, notwithstanding Canada Southern's
letters, except for one attempted rework of the I-27 well in which only Dome and
Canada Southern participated, the other working interest owners having opted
out.
Page: 11
[34] On October 27, 1964, Kern assigned its remaining interest in the
properties to Dome. Dome gave notice of this assignment to the C-M-O Group and
the other working interest owners by letter dated February 5, 1965. The letter
confirmed that under the assignment agreement Dome agreed to assume all of
Kern's obligations under the 1959 Agreement and to be bound by all of its terms
and provisions.
[35] On March 2, 1965, the C-M-O Group filed a Statement of Claim in the
Yukon Territorial Court naming all other working interest owners, except Dome,as
Defendants. Among the relief sought the Plaintiffs asked for a declaration that
the Defendants had breached their obligation to assure the earliest feasible
development of the gas found on permit 1007.
[36] While this litigation was proceeding, Home and United assigned their
remaining interest in the lands to Dome. The assignment was dated July 16, 1965,
and notice of the assignment was given by Dome to the C-M-O Group, as well as
Pan Am and Alminex. Once again, Dome agreed to be bound by the terms and
provisions of the 1959 Agreement.
[37] By July of 1965, the parties and their respective interests were:
C-M-O, 50%; Alminex, 2.5%; Pan Am, 25% and Dome, 22.5%.
[38] On May 17, 1966, the C-M-O Group launched a second action in the Yukon
Territorial Court, this time including Dome as a Defendant. That action sought
advice and direction from the court respecting a number of additional matters
which had arisen between the parties.
[39] In 1966 the parties entered into discussions regarding the properties
and the ongoing litigation. This resulted in an agreement being executed in
November, taking effect April 1, 1966, between the C-M-O Group, Alminex, Pan Am,
Dome and a Dome subsidiary, Provo Gas.2 The latter four parties were referred to
as A-D-P in that Agreement and recognized as parties or assignees of parties to
the 1959 Agreement.
[40] The 1966 Agreement amended the terms of the 1959 Agreement in various
respects, the most important of which was the conversion of the C-M-O Groups'
interest in the lands from a 50% working interest to a 50% carried interest.
Carried interest provisions, "attached to and forming part of" the 1959
Agreement were contained in Schedule "D". These provisions relieved the C-M-O
Group from any obligation to contribute to the costs of exploration and
development and, in exchange, their rights as working interest owners or joint
operators were limited. Schedule "D" provided that the C-M-O Group was only
entitled to receive 50% of the revenue from any particular block on the lands
when sales exceeded expenses for that block. Schedule "D" also provided that the
C-M-O Group could propose and carry out its own operations and convert at any
time to a working interest owner, subject to various adjustments.
--------
2 Exhibit 32
Page: 12
[41] Article 9 of Schedule "D" provided that the working interest owners
were to give the C-M-O Group notice if they proposed to construct "gas gathering
systems and a gas processing plant for the purpose of putting natural gas from
that block or blocks into a marketable state or otherwise to process the gas for
the removal of liquids and/or sulphur." The C-M-O Group then had an option to
participate and, if it decided not to, a processing fee would be charged for gas
processed through the plant based on a formula devised by the Alberta Public
Utility Board in the Shell Jumping Pound decision in December of 1961.
[42] After the 1966 Agreement was signed, the C-M-O Group filed a notice of
discontinuance of the second Yukon action. No further action was taken in the
first Yukon lawsuit and it too was eventually discontinued in October of 1976.
[43] On November 24, 1966, Dome was appointed operator of the properties.
Between 1966 and 1968, four wells were drilled on the properties but none on
permit 1007. Each well was classified as dry and abandoned. Apparently no
further work, other than seismic, was done on the property covered by Permit
1007 until 1977.
[44] Meanwhile, exploration activity was also taking place on lands near
permit 1007. Amoco Canada was exploring its wholly owned interests in the
Beaver River field in northern British Columbia and the southern Yukon, and
at its Pointed Mountain field north of permit 1007.
[45] In June of 1968, Amoco Canada, as nominee for Pan Am, entered into a
gas sales agreement with Westcoast Transmission Company Ltd. ("Westcoast") as
the buyer. The "contract area" encompassed by the agreement included the Pointed
Mountain and Beaver River fields and permit 1007. Westcoast then began
construction of a pipeline to the Beaver River and Pointed Mountain fields. On
June 30, 1969, Pan Am, in a general conveyance of assets, assigned all of its
interests, including its interest in the Kotaneelee area, to Amoco Canada. In
that agreement, Amoco Canada agreed to assume Pan Am's obligations under any
agreements relating to the assigned assets. It does not appear that notice of
this assignment was formally sent to the C-M-O Group or the other working
interest owners.
[46] By November of 1969, Amoco Canada had developed sufficient reserves in
its Beaver River and Pointed Mountain fields to satisfy the requirements of its
agreement with Westcoast. Kotaneelee was not developed or used for that
Westcoast contract.
[47] During this time, Westcoast constructed a raw gas gathering line from
its Fort Nelson gas processing plant to the Beaver River field and extended it
to Pointed Mountain in 1972. Amoco Canada commenced sales of gas from the Beaver
River field to Westcoast in October of 1971, and from Pointed Mountain field in
1972.
[48] Meanwhile, in January of 1969, the federal government issued oil and
gas leases covering the Kotaneelee area naming Dome, Canada Southern and Pan Am
as joint lessees. In November 1970, Dome entered into a general exploration
agreement for a large area in
Page: 13
northern Canada, including permit 1007, with Columbia Gas Development
Corporation, the American parent of the Defendant Columbia Gas Development of
Canada Ltd. This was the first involvement that Columbia had with respect to the
lands. In 1971 the American parent assigned its Dome contract to the Defendant
Columbia which, in 1974, earned an interest in Dome's interest in the area.
[49] In the early 1970's, two major events occurred in British Columbia
which had an impact on efforts to sell Kotaneelee gas. The first was the 1973
failure of Amoco Canada's Beaver River gas field. This had disastrous results
for Westcoast which was then unable to meet its domestic and export contract
requirements. Faced with domestic shortages, the British Columbia government
pressured federal authorities, with the result that the Beaver River shortages
were allocated entirely to the export customer, Northwest Pipeline. This caused
outrage in the American gas industry and led to some mistrust of British
Columbia and the Westcoast system as a reliable gas supplier. Meanwhile,
Westcoast scrambled to find replacement gas and eventually contracted with Pan
Alberta Gas Ltd. This meant Westcoast had sufficient supply to satisfy its
obligations. Ultimately Westcoast had an oversupply as the Pacific Northwest
began to wean itself from high-priced Canadian gas and promote fuel conservation
and fuel switching techniques.
[50] The second major event in the early 1970s was the agreement between the
British Columbia Petroleum Corporation ("BCPC") and Westcoast dated November 13,
1973 (the "B.C. Agreement"). BCPC had been formed by the B.C. government after a
commission recommended its creation as a cure for low wellhead prices and
depressed exploration and development in the Province. The B.C. Agreement
provided that BCPC would purchase from British Columbia producers all of the gas
necessary for Westcoast to supply its sales contracts. In turn, Westcoast
purchased the gas from BCPC and then transported and delivered it to its sales
customers. The only minor exceptions were small volumes purchased by Westcoast
from Amoco's Pointed Mountain field in the Northwest Territories, and small
amounts from Alberta through Westcoast Alberta. The result was effectively a
"lock-up" giving preference to B.C. sourced gas until about 1985.
[51] Other political and economic developments had an impact on gas markets
in the 1970s and into the 1980s. The 1973 Arab oil embargo and resulting federal
policy initiatives increased the export price of natural gas dramatically. In
the United States fuel conservation measures were introduced in response to the
Arab embargo which substantially reduced demand for imports of Canadian gas. The
combination of higher prices and lower demand caused a significant decrease in
U.S. markets for Canadian producers.
[52] In the summer of 1976 discussions began between Canada Southern and
Columbia about the possibility of Columbia farming into the lands. Columbia was
also talking to Westcoast to see if there was a market for gas that might be
produced from those lands. Westcoast wanted proof of reserves and
deliverability, but at that time there was no drilling taking place and the
Kotaneelee field had not been established or tied into any pipelines.
Page: 14
[53] On February 1, 1977, Columbia entered into a letter agreement with
Amoco Canada, Dome, Alminex and Canada Southern, for itself and on behalf of
its' partners Magellan and Oil.3 In exchange for drilling and completing a test
well in the vicinity of the I-27 well, Columbia would obtain an interest in
some of the lands (Block A) from each of the working interest owners, and
16.665% of the C-M-O Group's carried interest would be converted to a working
interest and assigned to Columbia. The 1977 Agreement acknowledged the 1959 and
1966 Agreements as the "existing agreements" and amended certain of their terms
and provisions to account for Columbia's involvement. Further, the 1977
Agreement provided that Columbia would be the operator on Block I, a portion of
the properties in Block A, and conduct those operations in accordance with the
existing agreements.
[54] On June 9, 1977, four months later, Columbia, by agreement, conveyed a
beneficial interest in a portion of its own interest in the lands to the
Defendant Imperial.4 In that agreement Imperial agreed to participate with
Columbia in the drilling of the test well and agreed to be subject to the terms
of the 1959 and 1966 Agreements. Imperial assigned its interest to the Defendant
Esso on August 31, 1978.5
[55] Columbia completed the drilling of the H-38 (later designated the B-38)
test well in the fall of 1977, thereby earning its interest in the properties.
Thus, the working interest ownership at Kotaneelee was: 31.21% Dome; 18.75%
Amoco Canada; 33.333% Columbia; 15% Esso; and 1.875% Alminex, now the Defendant
Mobil Resources Ltd. The C-M-O Group was and still is in a 33.333% carried
interest position.
[56] The H-38 well established what became the Kotaneelee field. Following
the first exploratory well, several additional wells were drilled on Kotaneelee
over the next few years. At least two were gas wells, the E-37 and I-48. There
was also a re-working of the I-27 well but it retained its status as a shut in
well and has never been produced. With the completion of the I-48 well in 1980,
Kotaneelee was capable of delivering over 70 mmcf per day of raw gas into the
Westcoast system for processing at the Fort Nelson gas processing plant.
[57] In addition to the drilling of these wells at Kotaneelee, certain
common facilities such as roadways, runways etc. were constructed during the
period 1977 through 1980. During this same period of time Columbia constructed a
facility, the nature of which is at issue in this litigation. The field was also
tied into the Westcoast pipeline system.
[58] By the time the Kotaneelee field was established, prospects for gas
sales were poor as a result of lower-priced alternative fuels in the U.S., the
distrust of and antipathy toward the
------------
3 Exhibit 50
4 Exhibit 52
5 Exhibit 55
Page: 15
Westcoast system engendered by the handling of the shortages after the Beaver
River failure, and the increase in indigenous B.C. production following the
implementation of the B.C. Agreement. Nonetheless, on November 1, 1978,
Columbia, on behalf of all parties, entered into a gas sales agreement with
respect to the Kotaneelee lands with Westcoast (the "1978 Westcoast
Agreement").6
[59] During the time frame 1979 through 1980, 1 billion cubic feet of
natural gas was sold from Kotaneelee to Westcoast producing approximately $3
million in revenue. The 1978 Westcoast Agreement was a best-efforts agreement,
and because of the then existing gas marketing environment, purchases tapered
off and ceased by the end of 1980. By that time the National Energy Program had
been announced and was taking its toll on the energy industry.
[60] At around the same time the parties tried to negotiate a more formal
agreement to replace the 1977 letter agreement. However, nothing further was
ever executed between the C- M-O Group and the present working interest owners.
[61] In April of 1979, Columbia, on behalf of all of the Kotaneelee
participants, entered into a contract for the sale of Kotaneelee gas to its
affiliate, Columbia Gas Transmission Corporation, in the northeastern United
States. The two parties then made the necessary applications to their respective
national regulatory agencies for approval. Columbia obtained an export permit
from the National Energy Board ("NEB") but its affiliate was unable to obtain
import approval from the U.S. authorities and eventually the agreement was
terminated.
[62] In 1981, Canadian Superior Oil Ltd. acquired an interest in the
Kotaneelee lands when it amalgamated with Alminex. On June 15, 1988, Canadian
Superior transferred its interest in Kotaneelee to Mobil Oil Canada Properties,
a partnership between Mobil Resources Ltd. and Mobil Oil Canada Ltd. Mobil
Properties continues to hold that interest. In 1991, Canadian Superior changed
its name to Mobil Resources Ltd.
[63] In March of 1982, a third gas sales agreement for Kotaneelee gas was
concluded with Westcoast as buyer and Texas Gas Transmission Corporation ("Texas
Gas") in the southwestern United States as ultimate purchaser. Although export
approval was received from the NEB to allow for the export of gas to service
this contract, Texas Gas was unable to secure an import licence from the
American regulatory authorities, and in January of 1985, Texas Gas terminated
the contract, no gas having been delivered.
[64] On December 6, 1982, the Kotaneelee working and carried interest owners
met to discuss a proposal by Amoco Canada to mothball the Kotaneelee facilities
and shut in the wells. Amoco Canada was concerned that the cost of maintaining
the facilities was high and in a regulated, high-priced market prospects for
sales were remote. Canada Southern representatives attended the meeting and
voiced objections to the proposal because of the effect
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6 Exhibit 1317
Page: 16
shutting in might have on marketing initiatives. However, as a carried interest
owner, it did not have a vote. The Kotaneelee working interest owners ultimately
voted to mothball the facility and shut in the wells with Columbia voting
against the plan. The mothball operation was conducted in early 1983 and the
field was shut in.
[65] Columbia reported the mothballing to the Canada Oil and Gas Lands
Administration ("COGLA"). It was initially agreed that the wells and facilities
would be inspected monthly by Columbia and COGLA in anticipation the field would
reopen in November of 1983 to fulfill the contract with Texas Gas. That
inspection schedule later changed to once a year. From 1983 to 1989,
approximately 20 inspections were made with COGLA present at 11 of them.
[66] On October 31, 1985, the "Halloween Agreement" was concluded between
the producing Provinces and the federal government. This agreement, and the
so-called Western Accord signed March 28, 1985, were intended to remove federal
regulation on crude oil and petroleum product prices and to bring about
deregulation of natural gas prices. The goal was to bring about competition as
existing contracts expired and access to pipeline capacity increased. Needless
to say, this kind of government activity was welcomed in the oil and gas patch.
[67] From 1984 to 1986, the parties sought markets for Kotaneelee gas and
discussions to this end were held with, among others, Lear Petroleum and
Producer's Gas regarding a potential sale into the California Enhanced Oil
Recovery ("EOR") market. No agreement was concluded. Canada Southern and
Columbia pursued further EOR markets but regulatory barriers continued to be an
impediment. Dome considered Kotaneelee gas for its Western Liquid Natural Gas
Project to sell liquified natural gas to Japanese customers. Due to financial
setbacks, Dome was unable to continue with the project and its partners, Unocal
and Petro- Canada, abandoned the project in 1986 when it became uneconomic after
the collapse of oil prices.
[68] In July of 1986, Columbia's manager of marketing signed a letter of
intent with Inland Natural Gas Marketing Ltd. ("Inland") which was sourcing a
supply of gas for a number of industrial customers on its system in southern
British Columbia. The other Kotaneelee working interest owners disapproved of
that sale and Columbia terminated negotiations.
[69] The topic of marketing Kotaneelee gas was a matter of some interest to
Canada Southern board members who, on September 24, 1986, met with
representatives of Columbia. Apparently, a representative of Columbia indicated
at that meeting that a market was available for Kotaneelee which had been turned
down by a working interest owner. Neither the market nor the working interest
owner was immediately identified. Naturally, this news caused a bit of a stir at
Canada Southern's offices, although it did not particularly pursue the matter
with Columbia or the other working interest owners.
[70] On January 20, 1987, Columbia representatives again met with members of
Canada Southern's board. While there does not appear to have been further
discussion of the turned- down market, Canada Southern's representatives were
apparently told that interest would be
Page: 17
charged on the carried interest account. By this time, the reported Kotaneelee
costs were approximately $63 million. This news caused considerable concern to
Canada Southern whose board members wondered if payout could ever occur under
such circumstances. Ultimately Canada Southern and its sister companies Magellan
and Pantepec responded with litigation.
[71] On May 5, 1987, Amoco Canada's management committee passed the
following:
AUTHORIZED treatment of 'carried' partners' gas in Amoco operated
areas. ... only Amoco-owned gas contracted to long-term higher-priced
markets is allocated exclusively to these markets. Amoco gas would be
allocated first from 100% Amoco w.i. wells and secondly from Amoco
wells co-owned with partners. The remaining Amoco gas 'released' from
these long-term contracts, and all carried partners' gas would be
allocated to Amoco's lower-priced short-term markets . . . 7
[72] In June of 1987, Dome began negotiations to sell gas from its Cypress
field in northeastern British Columbia near Kotaneelee to Washington Natural Gas
("WNG"), a large utility located in the Pacific Northwest. These negotiations
resulted in Dome signing a firm long-term export contract with WNG for the sale
of Cypress gas. Dome apparently considered reopening Kotaneelee to backstop the
WNG contract for one year while production facilities were being constructed in
the Cypress field. Instead, it opted to purchase gas from third parties and
brokered that gas to fulfill its obligations to WNG.
[73] Meanwhile, in April of 1987, Amoco Canada began negotiating to acquire
the shares of Dome. A Plan of Arrangement was executed and filed in September of
1988. On May 1, 1989, Dome amalgamated with Hudson's Bay Oil and Gas and changed
its name to Amoco Canada Resources Ltd. The shares of Amoco Resources are wholly
owned by Amoco Canada. As a result, Amoco became the dominant interest holder in
Kotaneelee with just under half of the working interest.
[74] In August of 1987, Columbia received a solicitation from Inland which
was again tendering for industrial gas. The pricing proposed was not as
favourable as had been discussed a year earlier and Columbia did not submit a
bid believing the proposal would not have been acceptable to the other
Kotaneelee working interest partners.
[75] In the summer of 1987, Canada Southern commenced an action in the
United States District Court in Tallahassee, Florida against Allied-Signal Inc.
("Allied") the successor-in-interest to Signal, one of the original members of
the H-S Group. Canada Southern was seeking just under $847 million from Allied
for, inter alia, damages from an alleged breach of clause 3.1(D), the marketing
clause set out in the 1959 Agreement.
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7 Exhibit 428
Page: 18
[76] Early on in the Florida litigation, Allied made an application to
dismiss the action because indispensable parties, namely the present and other
past working interest owners, were not before the court. That application was
opposed by Canada Southern which argued that the present working interest owners
had not been novated into the 1959 Agreement and that Allied was still obligated
under the terms of that Agreement. Allied's application was initially denied by
a Florida court.
[77] In September of 1988, Allied brought suit in Alberta against Amoco
Canada, Dome, Amoco Production and the Plaintiffs for indemnity for any
liability that might result from the Florida litigation. Amoco counterclaimed
against the Plaintiffs and all of the past and present working interest owners
of Kotaneelee. That counterclaim forms part of this trial.
[78] In December of 1988, Mr. Justice Medhurst of this court granted an
application brought by the three Amoco Plaintiffs by Counterclaim for an
interlocutory anti-suit injunction restraining the Plaintiffs, the C-M-O Group,
from proceeding in any forum other than Alberta. At that time the Florida action
was nearing trial and Allied had renewed its application for dismissal. Upon
considering Justice Medhurst's Order and reasons, the Florida court granted
Allied's dismissal application. Appeals were launched from the Florida and
Alberta orders but were ultimately abandoned.8
[79] Meanwhile in B.C., two privatization initiatives in 1988 had a
substantial impact on the natural gas industry in that province. First, Inland
and B.C. Hydro's Gas Division combined to form B.C. Gas Inc. Second, BCPC was
taken over by a large group of producers which ultimately led to a name change
to CanWest Gas Supply Inc. on August 1, 1990. Existing contracts to supply gas
to B.C. Gas Inc. were all scheduled to expire on November 1, 1991, and the
upcoming expiry of these contracts opened a large market for producers to
supply gas to B.C. and Columbia, on behalf of the Kotaneelee participants,
explored these possibilities.
[80] Further marketing efforts in 1988 included discussions by the various
Kotaneelee participants with ProGas, an aggregator; Shell and Mobil regarding
EOR projects in California; Alberta & Southern Gas Co. Ltd.(A&S); and Union Gas
in southwestern Ontario, among others.
[81] In early 1989, Columbia informed its working interest partners that it
had a potential sale for Kotaneelee gas to Michigan Consolidated ("MichCon"), a
gas purchaser in the U.S. midwest. Amoco initially said it did not support the
proposed sale due to concerns about transportation, the lack of take obligations
and the price. After further discussions and correspondence on the prospect,
Amoco told Columbia it could support a sale if certain conditions could be
negotiated into the contract. By then, MichCon was no longer interested.
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8 Transcript page 1652, Exhibit 249
Page: 19
[82] In 1989 and 1990 discussions continued with B.C. Gas and BCPC for the
sale of Kotaneelee gas into the B.C. market and with various and other assorted
buyers in the U.S. Contracts to which Kotaneelee gas was dedicated in part were
successfully negotiated with two co-generation projects in New England and
deliveries commenced in 1992. In April 1990, Columbia and BCPC concluded a
contract for a one year supply of gas beginning in November of 1990.
[83] In early 1989, Columbia began to consider the reactivation of the
Kotaneelee facility in the hopes that markets were improving, particularly as a
result of its ongoing discussions with BCPC and B.C. Gas. O'Rourke Engineering
Ltd. ("O'Rourke") was retained to review the historical file and design
information, conduct a plant inspection and recommend possible modifications to
improve performance. O'Rourke was also asked to provide cost estimates for their
review and inspection, and cost estimates and schedules for any work they
recommended.
[84] Overall, O'Rourke's reports were positive about the state of the
facilities, indicating that there was no significant external corrosion and that
ultrasonic testing had disclosed minimal internal corrosion. However, O'Rourke
did not disassemble any equipment or remove cladding on piping to check for
corrosion prior to reaching this conclusion.
[85] Reactivation or modification of the Kotaneelee facility required
approval from COGLA, and Columbia began discussions with that body about
reopening the field. At that time there was heightened public awareness of
environmental matters and COGLA expressed concerns about airborne emissions.
COGLA had no regulations in force but Columbia was encouraged to follow draft
regulations which were expected to be approved.
[86] On October 27, 1989, a lawsuit was filed in Alberta by Canada Southern
against Columbia, Dome, Amoco Canada, Mobil Oil Canada Ltd. and Esso Resources
of Canada Ltd. This action sought declarations that interest could not accrue on
the joint account and that the costs of the gathering lines and dehydration
systems, built in the late 1970's, were expenditures for the joint account. That
lawsuit forms part of this trial.
[87] On December 6, 1989, the Kotaneelee owners met and it was decided that
Columbia would act as project manager on the revamp project, using engineering
consultants for specialized engineering design and bid specifications. An
Authority for Expenditures ("AFE") sent to the working interest owners in
January of 1990 estimated a cost of just over $4 million for the modification,
turnaround and start-up of the Kotaneelee gas production facilities. Ultimately,
it cost three times as much as that estimate.
[88] The AFE included the cost of a vapour recovery unit ("VRU") because
COGLA had apparently insisted sulphur dioxide emissions be reduced to zero in
keeping with their previously expressed environmental concerns. The Plaintiffs'
are of the view that the VRU was unnecessary.
Page: 20
[89] In March of 1990, a lawsuit was filed in Alberta by Canada Southern
against the Amoco Group, Anderson, Mobil Oil Canada Ltd. and Imperial. The
statement of claim has been amended twice and the style of cause now includes
Magellan and Pantepec as Plaintiffs, and Mobil Resources Ltd. and Mobil Oil
Canada Properties as Defendants. It is in this lawsuit that the Plaintiffs claim
the present working interest owners have breached their marketing
obligations.
[90] In the meantime, Columbia retained Quantel, a Calgary engineering firm,
to prepare a detailed design, conduct procurement activities and develop
construction plans for the revamp project. A construction supervisor was hired
and the plan was to complete the project by October of 1990 for a November 1st
start-up. Physical work began with the mobilization of men and heavy equipment
in late June of 1990.
[91] When dismantling began, severe and unexpected corrosion was discovered
that had not been anticipated in the O'Rourke inspection reports. The scope of
the project changed as a result and caused significant delays and considerable
cost increases. In early September, Columbia sent a status report to the
Kotaneelee participants addressing the delay and enclosing a supplemental AFE in
the amount of $4.8 million to cover the increased costs.
[92] Columbia had also prepared a plan to service the I-48 well and an AFE
was circulated and approved. COGLA also gave this plan its blessing. Work began
in July of 1990 and almost immediately severe corrosion of the tubing and
downhole equipment was discovered. A scale cleaning operation was also
undertaken which resulted in a tubing failure. In August of 1990 further work
was done on the well resulting in a second tubing failure which caused joints of
tubing to be blown out of the hole injuring some of the workers on the site. In
March, of 1991 the Kotaneelee participants agreed to sidetrack the well.
[93] In August of 1990, Amoco retained Bob McTague of Optima Engineers
("Optima") to fly to Kotaneelee, conduct an inspection and prepare an
independent report on Columbia's operations. Mr. McTague was not impressed. In
September of 1990 Optima was retained to take over construction management of
the revamp project. Costs continued to rise and a second supplemental AFE was
issued on November 5, 1990. The revised project estimate was now nearing $12
million. The job was completed in February of 1991.
[94] On November 2, 1990, the Kotaneelee working interest owners voted to
replace Columbia with Amoco Canada as operator. Shortly after, Amoco Canada
requested Columbia turn over the production facility but refused to take over as
operator of the Kotaneelee wells. At a meeting in February of 1991, the working
interest owners agreed to postpone the change of operatorship until March 1992,
in part because of the ongoing litigation. Columbia remained interim operator
until the wells and plant could be taken over by one agreed upon operator.
[95] On March 8, 1991, Amoco Canada, Columbia and Esso entered into
long-term contracts with B.C. Gas Inc. with deliveries slated to begin in
November 1991 when B.C. Gas Inc.'s existing contracts were scheduled to expire.
Page: 21
[96] On the same day, those Defendants and Amoco Resources entered into an
agreement (the "Participants' Agreement") which provided as follows:
Article 1 - Purpose of this Agreement
Each Participant will exercise good faith in observing the intent of
this Agreement, which is to require each participant to maximize
production and sales of natural gas from Kotaneelee under BCGI
Contracts, even though the BCGI contracts permit each Participant to
produce and sell natural gas from sources of natural gas supply, other
than Kotaneelee. No Participant will unreasonably reduce its deliveries
from Kotaneelee by reallocating nominations under the BCGI Contracts
(B.C. Gas Contracts), to sources of gas supply, other than Kotaneelee,
with the effect that part or all of that Participant's share of
Kotaneelee production is required to be sold under the BCGI Contract of
another Participant, resulting in a net reduction of natural gas sales
from Kotaneelee.9
[97] On December 31, 1991, Anderson Exploration Limited purchased all of the
shares of Columbia and changed the company's name to Anderson. In July of 1992,
Amoco Canada indicated it was satisfied with Anderson as operator and withdrew
its intention to take over.
[98] Anderson continued as operator of Kotaneelee and began issuing
Kotaneelee payout status reports to Canada Southern. On May 12, 1997, Anderson
sent a payout statement to Canada Southern and, for the first time, advised in
a cover letter that the recorded operational costs included the costs of the
plant, as they always had, despite disagreement on the point between the working
interest owners. Amoco Canada, Dome and Amoco Production had, of course, already
put the plant costs at issue when they filed their 1988 counterclaim seeking a
declaration that C-M-O had no ownership in the plant and that the C-M-O Group
was subject to a gas processing fee.
[99] In the summer of 1999, C-M-O received a payout status report from Amoco
Canada which included a retroactive gas processing fee in the range of $83
million to $122 million, depending on whether interest was included.
[100] Because of the delay in the revamp of the facilities, the delivery of
gas to BCPC pursuant to the short term contract with Columbia did not begin in
November of 1990 as originally planned. Instead, deliveries began in February of
1991 and in November 1991 gas deliveries began to B.C. Gas Inc. pursuant to the
long term contracts signed eight months earlier. Gas from Kotaneelee has flowed
continuously since then and the field is expected to produce until 2010.
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9 Exhibit 90
Page: 22
C. THE ACTIONS
[101] There are three actions before the Court for determination.
[102] Action 9001-03466 has come to be known as the CSP damages action. This
claim was filed in March of 1990 by Canada Southern against the Amoco Group,
Anderson, Mobil Oil Canada Ltd. and Imperial. The statement of claim was amended
twice and the style of cause now includes Magellan and Pantepec as Plaintiffs,
and Mobil Resources Ltd. and Mobil Oil Canada Properties as Defendants, all of
which were added on November 17, 1993. It is in this action that the relief
claimed by the Plaintiffs includes damages for breach of contract, in particular
the marketing clause, various remedies for breach of fiduciary duty and an order
declaring the proper amount of the carried interest account. At one time there
was a plethora of third and fourth parties involved in the action, but by May of
1996 these actions had all been discontinued.
[103] Action 9001-03466 also includes a counterclaim brought by Columbia
against Canada Southern, Magellen, Pantepec, Amoco Resources, Amoco Canada,
Canadian Superior Oil Ltd., Mobil Oil Canada Ltd., Imperial Oil Limited and
Esso. All of the Defendants by counterclaim, except Magellen and Pantepec, have
filed defences (or amended defences as the case may be). In this counterclaim,
Columbia seeks an order that it is entitled to an undivided one-half interest in
some of the lands, an order requiring Canada Southern and Amoco to assign this
interest to it in accordance with the agreement between the parties and an order
that all the Defendants by counterclaim pay Columbia their proportionate share
of a gas export license obtained at some unstated time by Columbia. As against
Canada Southern, the last claim is made by way of a setoff with respect to the
issue of the carried interest account in the main claim.
[104] Anderson argued its counterclaim is only relevant if the Plaintiffs
recover judgment in the main action, and it "reserves the right to address the
Court in respect of the issues raised" in its counterclaim. Nowhere in its
briefs are there any references to any evidence called directly relating to
these issues or that might be relevant to this claim. Nor did the Plaintiffs
refer to any evidence relevant to this claim, indeed, they did not refer to the
existence of this counterclaim at all.
[105] Notwithstanding Anderson's attempt to reserve the right to address the
Court relating to these matters, in the absence of any evidence or argument I
consider this counterclaim to have been abandoned.
[106] The second action (No. 8801-13549) started as a claim by Allied Signal
against Amoco Canada, Dome, Amoco Production and the Plaintiffs. Essentially,
this action was a response by Allied to the Plaintiffs proceeding against it in
Florida for breach of the marketing covenant. In the Alberta action, Allied
sought indemnity from the Defendants should it be found liable in Florida. What
is left of that action is a counterclaim brought by those three Amoco Group
Defendants (i.e. not Amoco Canada Resources) against the Plaintiffs and Mobil
Page: 23
Oil Canada Ltd., Canadian Superior Oil Ltd., Columbia and Esso Resources of
Canada Ltd. Discontinuances were filed against other Defendants by counterclaim,
members of the original H-S Group by May of 1996.
[107] Along with other relief sought in its counterclaim, the three Amoco
Plaintiffs by counterclaim sought an injunction against the Plaintiffs
(Defendants by counterclaim) continuing their action in Florida, and a
declaration that Alberta was the forum conveniens for all matters between the
parties. On December 14, 1988, Justice Medhurst granted an interlocutory
anti-suit injunction that enjoined the Plaintiffs from continuing the Florida
litigation against Allied. A Florida Judge concurred and the Florida action was
dismissed later that month. Meanwhile in Alberta, leave to continue proceeding
with the counterclaim was granted by Justice Lomas in January of 1996, and
Allied discontinued its indemnity claim. The counterclaim seeks declarations
that any obligation to assure the earliest feasible development and marketing of
natural gas had either expired, been eliminated or satisfied; that neither the
H-S Group nor their successors and assigns were liable to the Plaintiffs for any
alleged failure to develop and market oil and/or natural gas from the Kotaneelee
lands; and that the cost of the Kotaneelee gas plant should not be charged to
the carried interest account but rather is owned by the working interest owners
and the Plaintiffs must pay a processing fee.
[108] Obviously, there is considerable overlap between the CSP damages action
and the issues raised in Amoco's counterclaim. The main difference is the issue
relating to the gas processing fee. This action has become known as "Amoco's
counterclaim" or the "gas processing fee claim."
[109] The third proceeding (No. 8901-15660) was filed October 27, 1989 by
Canada Southern against Columbia, Dome, Amoco Canada, Mobil Oil Canada Ltd. and
Esso Resources of Canada Ltd. In this action, referred to as the CSP declaratory
action, Canada Southern seeks declarations that interest cannot accrue or be
charged upon expenditures for the joint account made by the Defendants and
expenditures for gathering lines and dehydration equipment are expenditures for
the joint account.
[110] The CSP declaratory action and the CSP damages action were consolidated
by order of Mr. Justice Lomas on December 15, 1994. In that same order it was
determined that the case and evidence relating to Amoco's counterclaim would be
heard at the same time as the consolidated action. The trial of all these
actions began September 3, 1996. After 336 days of trial and the introduction of
1,772 Exhibits, closing arguments were heard February 6, 2001.
IV. ANALYSIS
A. THE PROPER PARTIES
[111] Amoco raises the issue whether the Plaintiffs Pantepec and Magellan,
added to the CSP damages action in 1993, are properly parties in this
litigation. They also raise the issue of the addition of these two Plaintiffs in
the context of limitations which will be addressed later in
Page: 24
these Reasons. Amoco correctly points out that these two Plaintiffs are Delaware
corporations, and not Panamanian as were Magellan and Oil Investments, the two
original members of the C-M-O Group with Canada Southern. The Panamanian
corporations were signatories to the 1959 and 1966 Agreements, and in the 1977
Agreement all the parties acknowledged that Canada Southern was authorized to
execute that Agreement on behalf of "its partners." Amoco argues there is no or
insufficient evidence that the Delaware corporations named in the actions are
the successors to the Panamanian corporations. Further, Amoco submits Canada
Southern has not shown that it had the authority to bring the damages action on
behalf of the two Delaware corporations in 1990 when Canada Southern, in its
statement of claim, referred to suing "on behalf of itself and two other
parties," or in 1993 when the claim was amended to officially add the two
Delaware corporations as Plaintiffs.
[112] None of the other Defendants appear to have taken a position on this
point outside the context of limitations. It is presumed, however, that they
agree with Amoco's position insofar as Mr. Warren, in closing argument on behalf
of all of the Defendants, referred to the Plaintiffs Magellan and Pantepec as
the "Delaware corporations," "the purported assignees of Magellan and Oil
Investments of Panama."10
[113] Canada Southern tendered documentation to establish that the named
Delaware corporations are the successors in interest to the original Panamanian
members of the C-M-O Group.11 I also heard testimony from Benjamin Heath, South
Trimble III and Arthur Burgess O'Donnell who all had knowledge of the various
transfers and corporate restructurings. Indeed Heath and O'Donnell were, at
various times, the president and vice-president respectively of Magellan.
[114] Further, Amoco's point is inconsistent with its previous actions. Amoco
sued the two Delaware corporations when it filed its counterclaim in the "gas
processing action" as it has now become known. This counterclaim was filed in
1988, two years prior to the filing of the damages action brought by Canada
Southern for itself and its co-Plaintiffs. At that time Amoco sued, inter alia,
Magellan and Pantepec and, in paragraph 5, pleaded they were Delaware
corporations. In February of 1990, again prior to the filing of the Plaintiffs'
damages action in March of that year, Amoco amended its counterclaim to include
an acknowledgment in paragraph 5 that the Delaware corporations were the
successors in interest to the Panamanian corporations. There should be no need
in the CSP damages action, action 9001-03466, for Canada Southern to prove
equitable or any other assignments when pleadings predating their action already
acknowledge this fact. The Defendant Amoco cannot sustain any arguments it was
prejudiced or exposed to a multiplicity of proceedings by not having Magellan
and Pantepec properly named in the 1990 action until 1993. They were already in
litigation with
--------
10 Transcript page 28220
11 Exhibits 137, 299, 300, 301, 302, 682, 683 and 684
Page: 25
those Plaintiffs and, as Mr. Warren said in his closing, "there is considerable
overlap between the issues raise by the Amoco counterclaim and the CSP damages
action."
[115] None of the witnesses were asked in direct or cross whether Canada
Southern had authority from its co-Plaintiffs to launch the damages action
against these Defendants. However, Arthur Burgess O'Donnell testified that from
early on there was an understanding that Canada Southern would "run the show in
Canada." He did not recall any formal agreement reflecting the general trust
relationship between Magellan, Pantepec and Canada Southern. Benjamin Heath, in
his testimony, said he was aware Magellan and Oil Investments had agreed Canada
Southern would hold their interests in the properties in trust, but that he had
come across only an unsigned form of trust contract between Magellan and Canada
Southern.
[116] In any event, I have the continuing representation of Mr. MacDonald and
Mr. McMahon that they are instructed by and represent these Plaintiffs, and I
accept that representation.
[117] I find the Plaintiffs are properly named and properly before this
Court.
B. THE MARKETING CLAIM
1. Contractual Obligations
a) Positions of the Parties
[118] As previously stated, the 1959 Agreement contained an express
development and marketing covenant which read:
3.1 H-S shall pay C-M-O for the interests acquired hereunder the
following considerations . . .
(D) H-S will assure the earliest feasible development and marketing of
oil and/or gas found on the properties.
[119] The Plaintiffs take the position that all of the Defendants are bound
by that express obligation either because they were signatories to the 1959
Agreement, because they agreed to be bound when taking an assignment from an
original signatory to the agreement, or because the clause was incorporated by
reference in the 1966 and 1977 Agreements. Even without this express obligation
to market, the Plaintiffs suggest that there is an implied obligation to market
in oil and gas ventures of this kind. Further, the Plaintiffs argue that clause
3.1(D) imposes a continuing obligation on the Defendants to search for markets
for Kotaneelee gas. They concede that "feasible" involves an element of
commercial success, that is, that marketing should be done at a profit to the
owners of the field. Nonetheless, they submit that the clause still requires the
Defendants to act in the best interests of the Plaintiffs regardless of their
own
Page: 26
individual interests. In other words, it obliges the Defendants to market
Kotaneelee gas even if they could make a better profit marketing other gas.
[120] The Defendants' responses are, of course, tailored to the individual
circumstances by which they each found themselves involved in Kotaneelee.
However, there is considerable overlap, and with the exception of the Defendant
Mobil Resources, they deny there is any privity between themselves and the
Plaintiffs with respect to clause 3.1(D). The Defendants argue that the clause
was not incorporated by reference in the 1966 and 1977 Agreements and, even
though some of them may have expressly agreed in an assignment from an original
member of the H-S Group to abide by the terms of the 1959 Agreement, that
obligation is not enforceable by the Plaintiffs, only the original
signatory/assignor. They further contend that an obligation to market cannot be
implied. All of the Defendants argue that even if any of them were bound to
perform clause 3.1(D), that obligation has long-since expired. In any event,
they say the law of contract does not allow for continuing obligations. Finally,
they stated if there was an obligation to market, express or implied, it did not
require them to sell Kotaneelee gas in priority to all their other interests.
[121] What needs to be decided is the legal mechanism, if any, by which the
Defendants, or any of them, have become obliged to market Kotaneelee gas. The
options are that they are bound to perform this obligation:
a) as an original member of the H-S Group (direct privity);
b) by assignment from an original member of the H-S Group;
c) because they are signatories to the 1966 or 1977 Agreements
and those Agreements incorporate clause 3.1(D) by
reference; or
d) because of an implied obligation.
[122] I do not have to decide whether any of the Defendants are bound to
perform clause 3.1(D) by way of a novation into the 1959 Agreement. It was
common ground among the parties that none of the present Defendants, except
Mobil Resources, were parties to the 1959 Agreement and that it was the
Plaintiffs' general policy not to enter into novation agreements when new
parties became involved in any of their business ventures. Indeed the evidence
here is that the Plaintiffs consistently refused to enter into a novation
agreement with new working interest owners as they appeared on the scene. The
Plaintiffs, in their written briefs and oral argument, did more than concede
there were no novations. They argued against such a conclusion. Nevertheless,
a significant number of pages of argument were produced by the parties on that
issue, possibly because of some confusion about the distinction between novation
and assignment, and also in response to the reasons of my brother O'Leary, J.
who earlier in this litigation struck third and fourth parties in part because
of a finding of an implied novation of the present Defendants into the 1959
Agreement. Consequently that issue will also be addressed briefly later in this
section.
Page: 27
b) Direct Privity
[123] One of the original members of the H-S Group and a signatory to the
1959 Agreement was Alminex. In 1981, Alminex amalgamated with the Defendant by
counterclaim, Canadian Superior Oil Ltd., which later changed its name to Mobil
Resources Ltd., one of the three Mobil Defendants. In 1988, Canadian Superior,
as it then was, transferred its interest in Kotaneelee to the Defendant Mobil
Properties, a partnership between Mobil Resources and Mobil Ltd. Mobil
Properties continues to hold that interest.
[124] I find that the Defendant Mobil Resources, as conceded, has direct
contractual privity with the Plaintiffs respecting the 1959 Agreement and clause
3.1(D). Mobil Properties, on the other hand, is an assignee.
c) Assignment
[125] Clause Q.1 of Schedule "B" of the 1959 Agreement, the operating
procedure, provided for assignments by the parties. It said:
No Joint Operator shall dispose of any interest hereunder unless the
person receiving the same agrees with the other joint operators to be
bound by all of the terms and provisions of this Agreement. If such
disposition imposes greater obligations or expenses on the Manager
Operator or other Joint Operators then such person shall agree to pay
all costs and expenses in connection therewith.
[126] The Defendants argue the long-established principle that, generally,
only rights or benefits under a contract may be assigned, not liabilities. In
support they cite Cheshire, Fifoot and Furmston, Law of Contracts at 535 - 536
which states:
The question that arises here is whether B can assign the obligation
that rests upon him by virtue of his contract with A to a third person,
C, so that the contractual liability is effectively transferred from
him to C. Can he substitute somebody else for himself as obligor?
English Law has unhesitatingly answered this question in the
negative.12
[127] The authors there then refer to Tolhurst v. Associated Portland Cement
Manufacturers at 660 - 668 where Collins MR said:
It is, I think, quite clear that neither at law nor in equity could the
burden of a contract be shifted off the shoulders of a contractor onto
those of another
--------
12 Cheshire, Fifoot and Furmston, Law of Contracts, 13th ed. (London:
Butterworths, 1996)
Page: 28
without the consent of the contractee. A debtor cannot relieve himself
of his liability to his creditor by assigning the burden of the
obligation to somebody else; this can only be brought about by the
consent of all three, and involves the release of the original
debtor.13
[128] The rationale which supports this principle was set out by the Supreme
Court of Canada in National Trust Co.v.Mead, at 426:
The common law has long recognized that while one may be free to assign
contractual benefits to a third party, the same cannot be said of
contractual obligations. This principle results from the fusion of two
fundamental principles of contract law: 1) that parties are able to
make bargains with the parties of their own choice (freedom of
contract); and 2) that parties do not have to discharge contractual
obligations that they had no part in creating (privity of contract).14
[129] This appears to be so even when, as here, the remaining original party
has by conduct, if not expressly, consented to the assignment. Further, it
appears to be so when, again as here, the assignee has expressly agreed in the
assignment to perform the original signatory's obligations and to indemnify that
assignor should it be necessary to do so. If the assignment includes both the
original parties to the contract and the assignee, and it expressly discharges
the assignor, then there has been a novation, a new contract has been formed and
there is privity between the remaining original party and the assignee.
[130] In this case, the various assignment agreements were strictly between
the assignor and the assignee. The Plaintiffs were not parties to those
agreements and did not expressly discharge the other original contracting
parties. By their conduct, the Plaintiffs consented to the assignment but the
law is clear that without a novation, the remaining original party, like the
Plaintiffs here, cannot enforce assigned obligations against the assignee alone.
[131] There are, in theory, at least two exceptions which have been developed
to the rule that only benefits, not burdens, can be assigned. These are the
"conditional benefit principle" and the so-called "pure principle of benefits
and burdens." The conditional benefit principle arises where the right assigned
is only conditional or qualified, the condition being that certain restrictions
shall be observed or certain burdens assumed. The restrictions or qualifications
are an intrinsic part of the right which the assignee has to take as it stands
(Chitty on Contracts).15
--------
13 Tolhurst v. Associated Portland Cement Manufacturers (1900) Ltd., [1902]
2 K.B. 660 (C.A.)
14 National Trust Co. v. Mead, [1990] 2 S.C.R. 410
15 Chitty on Contract, vol. 1, 28th ed. (London: Sweet & Maxwell, 1999)
Page: 29
A classic example is where an assignee takes the benefit of road or sewer use.
The burden of paying for that usage is also, as a condition or qualifier,
assigned with the benefit.
[132] The "pure principle" was formulated by Megarry, V.C. in Tito v.
Waddell.16 In that case, the Vice-Chancellor ruled that commissioners who held
mining rights by assignment were liable to perform their assignors' covenant to
replant trees. Megarry agreed that the mining rights were independent, or not
conditioned on or qualified by the replanting obligation and, therefore, the
conditional rule did not apply. Indeed, he stated that only when the benefit and
burden are independent (yet still in the same contract) can the pure principle
apply. One must first establish if the benefit and burden are conditional or
qualified by each other and, if not, then and only then, will a question of the
pure principle arise. At that point, the question of whether the assignee can
take the benefit without the burden will depend on the circumstances under which
he came into the transaction. If the assignee takes the benefit as the purported
assignee of the whole contract and undertakes to discharge all burdens and
indemnify the assignor, then the circumstances would indicate that it was not
intended that the assignee takes the benefit without the burden.
[133] There has been some question whether the pure principle ever was good
law. Indeed, the House of Lords in Rhone v. Stephens17 appears to have limited
the principle substantially so that while the burden need not necessarily be
directly conditional or qualified by the benefit, as in the conditional rule, it
must still at least be "relevant" to the benefit. At page 73 the court, per Lord
Templeman, states:
Mr. Munby also sought to persuade your Lordships that the effect of the
decision in the Austerberry case had been blunted by the 'pure
principle of benefit and burden' distilled by Megarry V.C. from the
authorities in Tito v. Waddell (no. 2) [cite omitted]. I am not
prepared to recognize the 'pure principle' that any party deriving any
benefit from a conveyance must accept any burden in the same
conveyance. McGarry V.C. relied on the decision of Upjohn J. in Halsall
v. Brizell [cite omitted]. In that case the defendant's predecessor in
title had been granted the right to use the estate roads and sewers and
had covenanted to pay a due proportion for the maintenance of these
facilities. It was held that the defendant could not exercise the
rights without paying his costs of ensuring that they could be
exercised. Conditions can be attached to the exercise of a power in
express terms or by implication. Halsall v. Brizell was just such a
case and I have no difficulty in whole heartedly agreeing with the
decision. It does not follow that any condition can be rendered
enforceable by attaching it to a right nor does it follow that every
burden imposed by a conveyance may be enforced by depriving the
covenantor's
--------
16 Tito v. Waddell (No. 2), [1977] 3 All E.R. 129 (Ch. Div.)
17 Rhone (A.P.) and Another (A.P.) v. Stephens, [1994] 2 All E.R. 65 (H.L.)
Page: 30
successor in title of every benefit which he enjoyed thereunder. The
condition must be relevant to the exercise of the right (Emphasis
added).
[134] Prior to Rhone, the Supreme Court of Victoria in Australia also
rejected the pure principle in Government Insurance Office v. K.A. Reed
Services.18 Speaking for the full court, Brooking J. stated, at page 841:
As for the "pure principle" propounded in Tito's case, it is founded
upon authority that will not sustain it and at odds with settled and
fundamental rules. It is in truth a mere maxim masquerading as a rule
of law, false and misleading (as Salmond said) when read literally.
[135] It appears the only Canadian decision to have applied the pure
principle from Tito is Silver Butte Resources v. Esso Resources.19 In that case,
the plaintiff, Silver Butte, had a contract with Esso relating to mining
properties. Esso later assigned its interests to another company, Tenajon,
which proceeded to mine the property in a joint venture with a third company,
Westmin. Silver Butte objected to the assignment, notwithstanding that Esso
fully acknowledged that it remained liable to the plaintiff on all obligations
in the original contract. The British Columbia Supreme Court found that the
assignment was valid despite the lack of contractual privity between Silver
Butte and Tenajon/Westmin, and that Silver Butte could sue the assignees under
either the conditional or pure principle of benefit and burden to enforce rights
it had under the original contract with Esso.
[136] Rather oddly, both Tito and Silver Butte were raised by the Defendants
Imperial and Anderson. The Plaintiffs did not raise or rely on these cases, and
did not respond to either Imperial or Anderson's arguments as to their relevance
or applicability in the present circumstances. Instead, the Plaintiffs referred
to Paramount Resources v. Metis Settlement.20 In Paramount Resources, a
corporation, Transwest Energy Inc., entered into an agreement with Metis
Settlement, agreeing that the Existing Leases Land Access Panel ("ELLAP") would
have the jurisdiction to hear and decide disputes. Transwest transferred its
interest in the Settlement lands to Paramount Resources Ltd. The Settlement
argued that Transwest and Paramount failed to honour the assignment provisions
contained in the original agreement. Transwest and Paramount disagreed and the
Settlement sought to have ELLAP resolve the dispute. ELLAP
--------
18 Government Insurance Office v. K.A. Reed Services Pty. Ltd. et al, [1988]
V.R. 829 (S.C. Full Court)
19 Silver Butte Resources Ltd. v. Esso Resources Canada Ltd. (1994), 19 B.L.R.
(2d) 299 (B.C.S.C.)
20 Paramount Resources Ltd. v. Metis Settlement Appeal Tribunal (ELLAP), (1999)
250 A.R. 233 (C.A.), Notice of discontinuance of application for leave to
appeal to S.C.C. filed, S.C.C. Bulletin, 2000, p. 1294
Page: 31
determined that it did have jurisdiction to hear the dispute. The issue for
determination before the Court of Appeal was whether Transwest and Paramount had
agreed in writing that ELLAP had jurisdiction to decide disputes.
[137] In Paramount, the Court of Appeal acknowledged that an assignment does
not necessarily release the assignor from its obligations under a contract. It
also recognized that a novation may have that effect but the Settlement refused
to execute one. The court stated at page 237:
Even though the Settlement would not sign, both Transwest and Paramount
have acted upon, and given effect to the assignment and novation
agreement they both executed. In fact Paramount relied upon it to
obtain an injunction against the Settlement when settlement lands were
blockaded.
[138] In that case, however, the court was not looking at the issue of
assigning burdens. Instead, it was concerned with whether there had been a
written agreement amongst the parties granting ELLAP jurisdiction to decide
disputes. Consent to jurisdiction of a tribunal is not analogous to, much less
determinative of, the substantive issue of privity of contract in the context of
assignment and novation.
[139] Despite the weakening of the authority of Tito by the House of Lords,
the criticism by the Australian High Court, and the paucity of Canadian
authority, it seems to me at least arguable that the covenant to market referred
to as "payment" in clause 3.1(D) is sufficiently "relevant" to support the
Plaintiffs' claim on the basis of the assignments.
[140] However, the Plaintiffs did not argue that the pure principle of
benefit and burden applied in this case. The House of Lords' decision in Rhone
states that the condition must be relevant to the exercise of the right. There
is no indication in that decision what is necessary to satisfy that requirement.
It appears to require something less than dependancy between the benefit and the
burden, as is required to support a finding of a conditional benefit and burden.
[141] In the present case, the marketing covenant appears to have been part
of the consideration paid by the H-S Group in exchange for the interest it
gained in the field. I cannot accept, however, that "relevancy" is synonymous
with consideration. Were that the case, it would mean that the burdens included
in almost every contract would be assignable so long as the contract was
supported by valid consideration. If the House of Lords had intended that
result, it strikes me their reasons in this regard would have exceeded the one
short paragraph that is included in the Judgment.
[142] In any event, the Plaintiffs failed to argue how the term "relevant"
might be applied in this case, nor am I able to see any relevance other than the
provision of consideration. Accordingly, I find that the pure principle of
benefit and burden is inapplicable in these circumstances.
Page: 32
[143] The Amoco Group of companies acquired their interests by way of
assignments from the H-S Group to Pan Am and Dome. In each, the assignee
expressly agreed to assume the obligations of the 1959 Agreement and in most
cases gave notice of that to the Plaintiffs pursuant to clause Q.1 of the
operating procedure. The assignments usually stated that the assignees would
indemnify the assignors from any liability relating to events post-dating the
assignment.
[144] In view of all of the above, I find that the Amoco Group is not obliged
to the Plaintiffs to perform clause 3.1(D) by virtue of having received
assignments of interests from original members of the H-S Group.
d) Novation
[145] In National Trust, the Supreme Court of Canada reiterated, at 427, the
test to determine if a novation has occurred:
1. The new debtor must assume the complete liability;
2. The creditor must accept the new debtor as principle debtor
and not merely as an agent or guarantor; and
3. The creditor must accept the new contract in full satisfaction
and substitution for the old contract.21
[146] In that decision, Wilson, J, discussed whether there was a fourth
requirement, that the consent of the original debtor is also required. She held
that consent to changed terms more likely indicates continuing liability,
whereas changes in the original terms without the knowledge or consent of the
original debtor are a strong indication of novation.
[147] In the present case, all of the parties agreed that there was never any
novation of the 1959 Agreement despite some efforts on the part of the
Defendants at various times to institute such an arrangement. In particular, the
Plaintiffs have never expressly discharged the original H-S signatories in
substitution for the Defendants Amoco, Columbia and Imperial (Mobil already
admitting privity with respect to that agreement). In fact, I note that in the
1966 Agreement the Plaintiffs expressly reserved their rights against the
members of the H-S Group thus preventing any implication by conduct or otherwise
that the H-S Group was discharged, and that the Plaintiffs had accepted the new
agreement in satisfaction and substitution for the old.
[148] In June of 1991, Allied, Signal, Home and Kern applied for an order
terminating their involvement as Third Parties and Defendants by counterclaim in
these proceedings. The
--------
21 supra, Footnote 14
Page: 33
Plaintiffs apparently took no part in the application. O'Leary J., as he then
was, granted the application for several reasons, including a finding of implied
novation by which Canada Southern had accepted the Amoco Group as a contracting
party in substitution for each of the applicants.22
[149] The Court of Appeal overturned the decision on the basis that the
motions were not made so as to bind the Plaintiffs, making no comment on the
finding of implied novation.
[150] It appears no further application was made in the matter, but the
applicants were dropped from the proceedings by way of settlement. The basis of
the settlement was not made known to me.
[151] I can understand the reasoning of O'Leary in finding implied novation
on the material then before him. However, we now have some four years of trial
evidence which does not, in my view, indicate any novation. Further, Mr.
MacDonald, on behalf of the Plaintiffs, concedes there was none. Therefore there
is no basis on which I am able to make on a finding of novation, express or
implied.
e) Incorporation by Reference
i) The 1966 Agreement
[152] On April 1, 1966, the Plaintiffs, Alminex, Pan American, Dome and Provo
Gas entered into a new agreement out of a desire to amend provisions of the 1959
Agreement (referred to as "the Main Agreement") and to make further provisions
for the conduct of operations on the properties. The question whether an
agreement can be amended without the participation of all of the original
signatories is not an issue which was raised by any of the parties in this
litigation. The 1966 Agreement includes in the recitals that Pan Am, Dome and
Provo Gas are "assignee successors in interest" to members of the H-S Group with
respect to the permits, the Main Agreement and the properties. The body of the
Agreement then amends the 1959 Agreement by converting the Plaintiffs' interest
to a carried interest, and adding Schedule "D", the carried interest provisions,
which are said to be "attached to and forming part of . . . " the 1959
Agreement.
[153] The 1966 Agreement also expressly amends the 1959 Agreement by deleting
paragraph 3.1(C). It makes no mention of 3.1(D), the marketing covenant.
[154] Not having been changed or deleted by the 1966 Agreement, I am
satisfied clause 3.1(D) was unaffected by it and remained in force against the
Amoco Group. Amoco argues it was incompatible with the change in status of the
Plaintiffs to carried interest owners, but it
--------
22 Allied Signal Inc. v. Dome Petroleum Ltd. (1991), 122 A.R. 321, reversed
1992), 3 Alta. L.R. (3d) 155 (C.A.)
Page: 34
seems to me their need for the covenant was unchanged and possibly even
increased. Amoco also argues at length that the Plaintiffs took a contrary
position in the Florida litigation when it sued only an original member of the
H-S Group and insisted there that the present working interest owners were not
necessary parties. However, it seems to me the law is that pleadings filed in
another jurisdiction and in relation to other, albeit similar, issues do not
constitute formal, binding admissions in this jurisdiction. As informal
admissions they are, however, prima facie admissible but may or may not be
binding. The weight to be given to the admission is to be determined in the
particular circumstances in which it was made.23 In this case, rather extensive
pleadings from the Florida litigation were admitted into evidence. I find the
pleadings themselves and the explanations for them offered by witnesses for the
Plaintiffs do not constitute the kind of admissions argued for by the
Defendants, particularly in light of the fact that the Florida proceedings were
ultimately dismissed, in part, on the basis that Alberta is the proper forum.
ii) The 1977 Agreement
[155] The 1977 Agreement became necessary to facilitate the entrance of
Columbia into the Kotaneelee relationship. This Agreement dated February 1, 1977
is between Columbia, Canada Southern (acknowledging it is acting for the other
members of the C-M-O Group), Amoco, Dome and Alminex. It essentially allows
Columbia to obtain a further interest in Kotaneelee in exchange for drilling and
completing a test well.
[156] The 1977 Agreement refers to the 1959 and 1966 Agreements as the
"existing agreements," and states operations "shall be conducted in accordance
with the existing agreements as hereby amended." It goes on to terminate two
previous agreements between some of the parties, but does not purport to vary or
delete clause 3.1(D). Amoco argues only provisions of the existing agreements
expressly adopted should be binding on the parties to the 1977 Agreement, but I
see no basis for this view.
[157] Amoco supports Columbia's argument that "operations", by definition,
does not include a duty to search for a market. In that regard they cite Gulf
Oil v. E.L. Reid24 and Riley v. Meriwether25, both American cases involving
forfeiture of leases. The argument appears to assume that the intention of the
parties in 1977 was only to incorporate Schedule "B" to the 1959 Agreement, the
"operating procedure," and not the whole of the 1959 and 1966 Agreements.
However, that is not how the 1977 Agreement reads, even though it would have
--------
23 Gerling Global General Insurance Co. v. Canadian Occidental Petroleum Ltd.
(1998), 64 Alta. L.R. (3d) 174 (Q.B.), reconsidered on new facts and
reversed, additional reasons (1998), 64 Alta. L.R. (3d) 196 (Q.B.)
24 Gulf Oil Corporation v. E.L. Reid, 337 S.W. 2d 267 (Tex. Sup. Ct., 1960)
25 Riley v. Meriwether, 780 S.W. 2d 919 (Tex. Ct. Appl, 1989)
Page: 35
been very simple to draft it in such a manner. The Plaintiffs point out that the
Oxford Dictionary definition of "operation" is "activity, performance, discharge
of function", clearly broad enough to include "marketing." I agree with the
Plaintiffs' position on the point.
[158] Moreover, that same Schedule "B" which Columbia accepts as a governing
document contains a number of clauses which may imply that marketing is a
function of operations. For example, F.1(h) obligates the manager operator to
regulate the production of gas "in accordance with market demands." Similarly,
L.1 refers to the manager operator "preparing and treating production for
marketing purposes."
[159] More important, and fatal to Columbia's argument, the 1977 Agreement
incorporates the carried interest provisions, Schedule "D" of the 1966
Agreement. Clause 2.6 of that Schedule "D"defines operational costs as including
" . . . marketing costs with respect to that Block . . . " Surely if marketing
costs are operational costs, marketing is included in operations.
[160] I am satisfied that the 1977 Agreement incorporated all of the
provisions of the 1959 and 1966 Agreements which were not otherwise expressly
deleted or amended, including clause 3.1(D). Consequently, Amoco and Mobil
continue to be bound and Columbia became obliged to perform.
f) Implied Obligation to Market
[161] The Plaintiffs argued that contracts should be interpreted with regard
to the commercial context in which they are made, and "the commercial context of
any oil and gas development agreement is that the parties enter into these
agreements with a view to selling the product for a profit."26 Consequently, the
Plaintiffs appeared to be suggesting that the present working interest owners
were bound, if not by express covenant then by an implied obligation to market.
They cited American jurisprudence to that effect. They did not, however, argue
for this conclusion, no doubt because the 1959 Agreement on which they rely
contained an express clause. Not wanting to let the matter go by, in its
argument the Amoco Group agreed that contracts should be interpreted in light of
their commercial context, but insisted that implying covenants, while perhaps
popular in the United States, is inconsistent with the Canadian jurisprudential
approach which looks only to the actual words of a document.
[162] Esso's witness, Peter Nettleton, made an interesting comment in
cross-examination when he stated:
The assumption I made in initially preparing this (report) was that
there was a contractual obligation on the part of the Kotaneelee
working interest to market gas just
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26 Plaintiffs' Brief page 44
Page: 36
like there's any obligation of - under any other contractual
arrangement in the natural gas business for the parties to effectively
market gas.27
[163] He also said: "The entire natural gas business works on the assumption
that if gas reserves are explored for and found, then the parties would then
naturally try and recover their investments and look for economic markets."28
[164] The latter quote suggests that the sort of "obligation" Mr. Nettleton
had in mind was more relevant to the parties' self interest than their
co-venturers'.
[165] In any event, in view of the Plaintiffs' limited argument on the point
and lack of any Canadian authorities cited, I am unable to conclude from the
evidence that there is an implied obligation to market generally, or
specifically, in this case.
g) The Status of Imperial
[166] The Defendant Imperial became involved in Kotaneelee under a
"Participation Agreement" with Columbia dated June 7, 1977, some 4 months after
the date of the 1977 Agreement. The Plaintiffs were not parties to the
Participation Agreement, nor was Imperial a party to the 1959, 1966 or 1977
Agreements. Imperial gave no notice to the Plaintiffs that it had obtained its
interest or that it considered itself bound to any of those agreements. Instead,
when Columbia notified the Plaintiffs of its arrangement with Imperial, it
confirmed the Plaintiffs could "continue to look solely to Columbia for
performance" of the 1977 Agreement.
[167] The Participation Agreement did contain the following paragraph 5:
Upon earning, Imperial shall be novated into the existing operating
agreements pertaining to the lands, meantime through agreement with
Columbia [Imperial] shall be subject to the applicable rights,
privileges and obligations contained in the aforesaid agreements.29
[168] The Plaintiffs argue that this clause shows an intention on the part of
Imperial to be bound to the provisions of the 1959, 1966 and 1977 Agreements,
even though there are only limited references to the 1959 and 1977 Agreements in
the Columbia/Imperial document. Further, they argue that in July of 1978, they
executed a transfer of the Crown leases in the names of Canada Southern, Amoco,
Dome, Columbia and Imperial, thus creating privity between themselves and
Imperial and obligating Imperial to perform clause 3.1(D). However,
--------
27 Transcript page 17883-17884
28 Transcript page 17884
29 Exhibit 52
Page: 37
the transfer document admitted into evidence was not signed by all of the
parties and, of particular relevance here, was not executed by Imperial.30 I
also note that Imperial is not a party to the renewal of the Crown lease in
1989.31
[169] Clearly there is little, if any, indication of privity between the
Plaintiffs and Imperial. While paragraph 5 of the Participation Agreement shows
an intention on the part of Imperial to be bound by at least some of the same
obligations as the other working owners, no novation or any other kind of formal
agreement was ever executed. The failure to transfer the leases to include
Imperial further persuades me that the parties, particularly the Plaintiffs and
Imperial, never formalized any intentions as between themselves, assuming they
existed at all. Imperial had a vote on the operating committee, even though the
Participation Agreement did not expressly provide for that level of involvement
as it is only an agreement between Imperial and Columbia. Nevertheless,
Imperial's conduct and participation, and apparent acceptance of same by the
Plaintiffs is not, in my view, sufficient to create privity between those two
parties and does not create privity with respect to clause 3.1(D) of the 1959
Agreement.
h) The Duration of the Obligation
[170] The next question is whether cause 3.1 (D) in the 1959 Agreement was
time limited as argued by the Defendants. They say Article 3.1(D) either applied
only during the initial exploration period, a maximum of 5 years, or until gas
was produced into a trunk pipeline in 1980. They also argue the obligation did
not survive, or was terminated by the subsequent Agreements in 1966 and 1977,
not being expressly adopted. I have already dealt with that last issue.
[171] The Defendants' argument seems to be essentially that the parties would
not have contemplated a continuing obligation beyond the end of the initial
exploration period or, at most, after the gas was first produced into a trunk
pipeline. Amoco, in particular, argues that position was expressly stated by
senior executives of the Plaintiffs. Nevertheless, I did not hear that view
expressed by all of the representatives of the Plaintiffs (Dean Reasoner, for
example, the very influential counsel to the company) and it was never stated in
any express agreement. On the plain language of the 1959 Agreement, clause 3.1
(D) stands by itself and is not tied to any other clause, and I see no
suggestion anywhere in the Agreement of an intention to limit it as argued by
the Defendants. If it were the intent of the parties that the obligation under
the clause terminate at some point, it seems to me they would have simply
provided for that in the 1959 Agreement or in the 1966 Agreement as they did
with clause 3.1 (C).
[172] The Defendants also argue a general incompatibility of clause 3.1 (D)
with the "fundamental" restructuring of the Plaintiffs' interest from a working
to carried interest by the
--------
30 Exhibit 54
31 Exhibit 1733
Page: 38
1966 Agreement. As above, I cannot agree. It seems to me as a carried interest
owner the Plaintiffs had less influence on what was happening with the field
than they did as a working interest owner, and if anything, they had a greater
need for a marketing covenant after the restructuring than before.
[173] Finally, the Defendants argue that the obligation terminated when the
Defendants first marketed the gas by way of the "best efforts" contract with
Westcoast in 1979. This of course raises the question whether the obligation to
market was a one time only or continuing obligation. The Defendants who argue
the point (Amoco and Mobil) state that on a plain reading of the clause the
obligation arose at a fixed point in time, when gas was found, and any breach
would occur on a failure to get the gas to market at that point, assuming it was
feasible in the commercial sense. In other words, they take the position that
there can only be one earliest feasible time to market the product. Further,
they argue that this would be consistent with the parties' intentions in 1959
as, at that time, they would have been looking for a single, long term
arrangement, the industry not yet contemplating short term spot market deals.
[174] Amoco also argues that no one would agree to an obligation of
indefinite duration, and that such a perpetual contract is unenforceable. I
cannot agree that construing this clause as a continuing obligation also defines
it as a "perpetual" obligation. The parties were free to terminate their
relationship ending all obligations. Further, the obligation was dependent on
there being Crown leases to exploit the field in the first place, none of which
were indefinite.
[175] The possibility that clause 3.1(D) constitutes a continuing obligation
is also relevant to any limitation defences on which the Defendants might rely.
If the obligation can be said to arise at a fixed point, then the cause of
action would necessarily arise upon the failure to perform, presumably within
some reasonable period of time after the obligation was triggered. In this case,
the Defendants argue the time for performance and any breach (which is of course
not admitted but denied) have long past and the Plaintiffs' claims for a remedy
are out of time.
[176] The Plaintiffs point out that clause 3.1(D) is clearly part of the
consideration the H-S Group paid for the right to earn an interest in the lands.
Unlike a one-time payment, it is a "continuing consideration" which remains
outstanding until all the gas found on the property is marketed. Consequently,
the clause creates a continuing obligation or "a continuing commitment or
guarantee that gas discovered at Kotaneelee would be sold as soon as it was
capable of being carried out with commercial success for the owners of the
field, and in a timely manner, without delay." A breach would occur if a
feasible commercial opportunity arises and is not taken. Essentially, the
Plaintiffs argue that even if a particular breach occurs, that is an opportunity
to sell is foregone, the obligation to market remains alive and is capable of
subsequent or successive breaches.
[177] The Defendants argue that the law of contract does not allow for a
continuing cause of action which is only applicable to certain torts such as
trespass. They say that in contract, a cause of action arises when the breach
first occurs and that while the damages from such
Page: 39
breach might continue, suit must be brought within six years of the breach. They
cite Costigan v. Ruzicka32 as authority.
[178] In Costigan, a farmer sold his land to a timber company but obtained a
life interest in the property so he could continue to graze his cattle. He
instructed the Defendant, his counsel, to handle the transfer and register a
caveat protecting his interest. The caveat was never filed and years later the
property was sold to a bona fide purchaser for value without notice, who
subsequently told the farmer his cattle were no longer welcome or allowed on the
property. The farmer then discovered the caveat had not been filed to protect
his interests and sued his solicitor.
[179] Laycraft, J.A., for the court stated that the existence of damage is
not an essential element of a cause of action in contract. The cause of action
is complete with breach and, on the plain wording of the limitation statute, the
limitation period commences to run at that point. In that case, while it was not
necessary to decide precisely the point at which the limitation period in
contract commenced to run, he said "The answer, in my view is a reasonable time
after the task was undertaken and, in any event not later than the day the
(solicitor's) file was closed." In that case it seemed significant that the
solicitor had closed his file and did not maintain a relationship with the
farmer. The breach, then, occurred at a point when there could no longer be any
expectation that the solicitor would perform.
[180] With respect, I do not believe that the Court of Appeal in Costigan
ruled out the possibility of a continuing obligation in contract which is
capable of many or successive breaches. Indeed, it appeared that the solicitor
there was under a continuing obligation to register the caveat until the
relationship ended or until a reasonable time had passed after he had undertaken
the task.
[181] This distinction was made in Ian F. Brown v. Carling O'Keefe,33 a case
cited by the Plaintiffs. In Brown, the plaintiff tenant sued the defendant
landlord for various breaches under a 10 year lease. Hunt, J. found Costigan
unhelpful in the matter before her. Referring to Costigan, she said that in that
case:
...there was one relevant act, namely, the registering of a transfer
without a caveat. The Alberta Court of Appeal rejected the argument the
solicitor was under a continuing duty
--------
32 Costigan v. Ruzicka (1984), 33 Alta. L.R. (2d) 21 (C.A.), Leave to appeal to
S.C.C. refused (1984), 13 D.L.R. (4th) 368n
33 Ian F. Brown Ltd. v. Carling O'Keefe Breweries of Canada Ltd., [1992] A.J.
No. 1207 (Q.B.)
Page: 40
to file the caveat. But this kind of situation is entirely different
from the one before me where the parties have a contractual
relationship which is to run for ten years.34
Hunt, J. said in the case before her, the landlord's duties continued throughout
the term of the lease. She rejected another case cited to her having to do with
an improper siding job, the issue there being whether each step in the
deterioration of the siding was a fresh breach of contract. Hunt, J. said:
Again, this situation is not analogous to the one before me where the
Defendant was under an ongoing obligation to provide certain services,
breaches of which obligation could vary in magnitude and detail over
time.35
[182] It seems to me that in the present case, the Defendants have confused a
continuing cause of action with a continuing obligation. There can be no doubt
that contracts can contain both obligations that are time specific and
obligations that continue during the life of the contract and which are capable
of one or more breaches. For example, Clause F.1 of the 1959 Agreement states
that the manager operator shall "conduct (the operations) in a good and
workmanlike manner and in accordance with prevailing field practice . . . "
Surely this imposes a continuing obligation on the part of that manager operator
for so long as they hold that position. Moreover, such a clause is capable of
many or successive breaches, each of which would raise a cause of action. In
this case, assuming commercial feasibility, a failure to market at all would be
a continuing breach of the continuing obligation under clause 3.1(D) and, until
rectified in some meaningful way, is actionable although clearly damages could
only be awarded back six years from the date of the filing of the claim.
[183] In my view, the Defendants' argument that the obligation terminated
when the first gas sale was made in 1979 cannot be accepted. To do so would
render the clause virtually meaningless. I find that the reasoning of Hunt, J.
in Ian Brown is appropriate here, and the more common sense approach would be
that the clause creates an ongoing obligation for the life of the field. I agree
with the Plaintiffs that one sale, and particularly a minimal sale is not s
ufficient to discharge the Defendants' obligations under the clause. As Hunt, J.
said in Brown:
I agree that the Defendant, at least on some occasions made efforts to
execute repairs in a relatively timely fashion. To suggest, however,
that responding to the tenant' s complaints in a relatively timely
fashion regardless of whether the problem is ever permanently solved
demonstrates compliance with the repair covenant would be to rob the
tenant of the very protection meant to be afforded by such an
obligation. Just as it would not be reasonable to hold a landlord
responsible for breach of a repair covenant because of the failure to
execute
--------
34 Ibid at paragraph 43
35 Ibid at paragraph 46
Page: 41
repairs immediately, nor would it be reasonable to allow the landlord
to evade liability where its efforts to repair never seemed to succeed.
i) Scope of the Obligation
[184] Clause 3.1(D) requires the obligees to "assure the earliest
feasible . . . marketing of . . . gas found . . . " Much argument centred around
the meaning of the word "feasible."
[185] The Plaintiffs, or at least some of their representatives, most notably
Mr. Dean Reasoner, for a very long time took the position that the word meant
"possible, "doable," without regard for economics, and it appeared for most of
the trial the Plaintiffs were maintaining that position. However, in written
argument that position appears to have softened. The Plaintiffs now take the
position that the clause:
a) offers a continuing commitment or guarantee that gas
discovered at Kotaneelee would be sold as soon as it was
capable of being carried out with commercial success for the
owners of the field, and in a timely manner, without delay,36
or
b) creates a continuing obligation to market the product
if it can be done at a profit to the owners of the
----------------------------------------------------------
field37 (Emphasis added).
----------------------------------------------------------
[186] I agree that "feasible" must be construed as including a commercial or
profit element.
[187] The Plaintiffs then argue that assuming a profit must be made, the
clause further requires the Defendants to give a priority to marketing
Kotaneelee before any other gas they may have available. This view is supported
by the evidence of two of the Plaintiffs' marketing witnesses, John Anthony and
Peter Milne.
[188] Mr. Anthony testified that in arriving at his opinion, he assumed "that
the duty to market this gas overrode (the Defendants) priorities with respect to
marketing any other gas that they had under contract or under development."38
When asked why, he said:
Well, the problem we -- I looked at, it was that if you assume
that this gas supply simply one -- a part of one of their
corporate gas pools, we'll just take one of these producers -
the supply itself, you can never guarantee that it's ever
gonna hit the top of its priority list for marketing, because
they have many priorities. They have economic cutoff points
for
--------
36 Plaintiffs' Brief page 43 paragraph 17
37 Plaintiffs' Brief page 41 paragraph 5
38 Transcript page 4681
Page: 42
projects that you're not aware of. You know, they may accept
projects above the 50% rate of return, and you're not aware of
that. They may wanna predominantly go in the direction to
drill for oil and develop oil projects and not gas projects.
You're not aware of that. There may be a ranking within the
company that this one goes before that one. You're not aware
of that. And over time, each of these priorities can move
around, and, frankly, Kotaneelee may have been No. 2 one year,
No. 1 one year, and No. 20 one year. You have no idea where
they were at.
If you compound that with the fact there's three or four guys
in this pool or producers in this pool, then you're at the
mercy of all of their priorities, and this is over time. Each
year these priorities can change. So unless you -- I assume
that it was Priority 1 for all of them, okay, and it had to be
Priority 1 for all of them - you couldn't guarantee that it
was - it would ever be sold, so you had to make that
assumption.
[189] In his testimony, Peter Milne put it somewhat differently:
The first assumption that I made, which is a very important assumption,
and that is that there was a duty on behalf of the Defendants to market
Kotaneelee gas and not simply a duty to market when it suited their own
particular agendas, but a duty to find the most economic market
opportunity in a timely basis regardless of their own priorities or
their own economic ranking of the different options that they might
have had -- any one of them might have had before them at any given
point in time.
Q And why was that?
A Otherwise, the obligation or a duty doesn't have any meaning.
If it doesn't have -- if it's not a duty to market the gas as
a highest priority, then it's not unreasonable to believe that
the gas would never get to market. Because given the number of
parties involved and their conflicting strategies and
objectives and their investment thresholds, that the
probability of Kotaneelee emerging as the No. 1 development
option for all of the parties at any given point in time is
remote if not impossible.39
[190] It seems to me the plain wording of the clause must be taken to refer
to all the parties from time to time involved with the marketing of the field,
that is all of the Defendants and the Plaintiffs. In other words, it must be
feasible for all of them. That is not to say one or more parties can arbitrarily
or capriciously take a position which necessarily results in a claim that,
--------
39 Transcript pages 5094-5095
Page: 43
for them, a particular market at a particular time is not feasible. In my view,
there must be a balancing of all the economics and surrounding circumstances at
the time a possible market presents itself.
[191] That view of the matter leads me to the conclusion the position taken
by the Plaintiffs in argument and reflected in the assumptions made by Messrs.
Anthony and Milne are too extreme in the absence of express wording in the
agreement. It would require, in many instances, that the Defendants, or one or
more of them, would at times be in effect purchasing the Plaintiffs' share of
the gas themselves in order to satisfy the obligation.
[192] Further, when you consider the Defendants had invested approximately
$60 million in the field, it makes no sense to suggest that gas might never have
been sold unless the Defendants gave it the highest priority.
[193] On the other hand, as indicated earlier, I am unable to accept the
Defendants' arguments that the clause is limited to one point in time or expired
after the initial exploration period, or when the field first produced into the
Westcoast Pipeline. That simply makes little sense when one recognizes the very
significant expense incurred in developing and marketing the field. One would
think the obvious goal of the parties would be to produce the whole field to
exhaustion, which the parties have agreed is likely to take some 20 years, that
is from 1991 until 2010, and so recover the investment and make at least a
reasonable return on it. And that general goal, one would think, would be the
same for all of the parties, including the Plaintiffs.
2. Equitable and Property Law Considerations
a) Are Any of the Defendants Bound by a Fiduciary Obligation?
[194] In the alternative to seeking contractual remedies, the Plaintiffs
claim a fiduciary relationship existed between the Plaintiffs and each of the
Defendants. They claim the 1959, 1966 and 1977 Agreements created a joint
venture, and each of the joint venturers owed a fiduciary duty to each other, at
least insofar as the obligation to market at the earliest feasible opportunity
was concerned. They also claim that the Defendants owe fiduciary duties to the
Plaintiffs by virtue of being joint operators of the field. Finally, they claim
that on a fact-based analysis, the Defendants owed a fiduciary duty to the
Plaintiffs to market the gas from Kotaneelee in priority to any other interests
the Defendants may have had in other gas fields.
[195] The Defendants deny that a fiduciary relationship existed at all. More
particularly they assert that if any duty to market Kotaneelee gas was owed, it
was through a contractual arrangement which, in any event, does not bind them.
Even if they were obliged by clause 3.1(D) to market Kotaneelee gas, they argue
that this contractual obligation did not rise to the level of a fiduciary duty
to market the gas, let alone a fiduciary duty to market it in priority to any of
their other interests.
Page: 44
[196] All of the parties cite the decisions of the Supreme Court of Canada in
Frame v. Smith40, LAC Minerals v. International Corona41 and Hodgkinson v.
Simms.42 From those cases it is clear the Supreme Court has concluded that
certain "traditional" relationships are fixed in law as fiduciary in nature.
These include relationships between director and corporation (but not
shareholder), solicitor and client, trustee and beneficiary and agent and
principal. Columbia, in its brief, refers to these as "status-based" fiduciaries
where the fiduciary relationship is automatically assumed because of the type of
relationship between the parties. The Supreme Court has, of course, said that
fiduciary obligations are not limited to these traditional or status-based
relationships - the door never closes. However, outside those fixed categories
the Supreme Court has said that the circumstances of the particular relationship
must be analysed using the framework in Hodgkinson and/or Frame to determine if,
in that particular case, it can be said that a fiduciary duty or duties are owed
by one or more parties to another. These have come to be known as "fact-based"
fiduciaries.
[197] I am mindful that the Supreme Court, and indeed the Alberta and Ontario
Courts of Appeal, have cautioned against the finding of a fiduciary relationship
or the existence of fiduciary duties when the parties are engaged in an arms
length commercial transaction. The eminent professor Donavan Waters, in an
article published after the parties' arguments were submitted, nicely summarized
the development of fiduciary law in this country and, at page 676, said:
Contractual obligations did not readily attract the fiduciary
classification. The status of the potential fiduciary would be
determined by observing whether there was power and influence in one
person to affect another's legal position, and the success of the
argument that a fiduciary status existed would depend on whether the
contract did bar all self-interest to the one with power or influence.
Since contract is essentially the achievement of mutual self-interest,
through bargain and agreement, fiduciary relationship would not readily
be invoked.43
[198] He then points out that, notwithstanding the difficulties inherent in
applying fiduciary concepts to commercial transactions, "In the years since the
1970's Canada has developed the usage of the fiduciary concept to a degree that
is unparalleled in any other Commonwealth jurisdiction." England, it appears,
has held fast to applying the fiduciary principle only in the traditional
relationships, and Australia "appears to regard the fiduciary relationship that
is
--------
40 Frame v. Smith (1987), 42 D.L.R. 4th 81 (S.C.C.)
41 LAC Minerals v. International Corona Resources Ltd. (1989), 61 D.L.R. (4th)
14 (S.C.C.)
42 Hodgkinson v. Simms et al (1994), 117 D.L.R. (4th) 161 (S.C.C.)
43 Waters, Donovan W.M., "The Reception of Equity in the Supreme Court of Canada
(1875 - 2000), (2001), 80 C.B.R. 620.
Page: 45
based on a characterization of the duties imposed upon or voluntarily assumed by
the parties as being an interference with contractual autonomy that should
rarely be invoked". New Zealand likewise. The danger for the Canadian courts,
Waters points out, is the potential for trivialization of the concept of a
fiduciary relationship and the uncertainty arising from the confusion growing
increasingly apparent between a fiduciary duty and the lesser, but more
commercially relevant expectation or duty to act in good faith.
[199] These dangers have been acknowledged by the Supreme Court most recently
in Cadbury Schweppes v. FBI Foods.44 That decision, released in January of 1999,
was not referred to by any of the parties in written or oral argument,
notwithstanding it is the latest word from our highest court on fiduciary law. I
acknowledge the Defendant Amoco in it's written brief filed in August 2000 cites
the British Columbia Court of Appeal decision in this case but on the issue of
laches, not fiduciary obligations in general. In any event, in the Supreme Court
decision at paragraph 30, Binnie, J., for the seven members of the court stated:
Even prior to Lac Minerals the Court expressed the view that the policy
objectives underlying fiduciary relationships did not generally apply
to business entities dealing at arms length. In Frame v. Smith, [1987]
2 S.C.R. 99, Wilson, J. stated at pages 137-38:
Because of the requirement of vulnerability of the beneficiary
at the hands of the fiduciary, fiduciary obligations are
seldom present in the dealings of experienced businessmen of
similar bargaining strength acting at arms length: see, for
example, Jirna Ltd. v. Mister Donut of Canada Ltd. (1971) 22
D.L.R. (3d) 639 (Ont. C.A.), aff'd [1975] 1 S.C.R. 2. The law
takes the position that such individuals are perfectly capable
of agreeing as to the scope of the discretion or power to be
exercised, i.e., any "vulnerability" could have been prevented
through the more prudent exercise of their bargaining power
and the remedies for the wrongful exercise or abuse of that
discretion or power, namely damages, are adequate in such a
case.
To the same effect, see Lac Minerals per Sopinka J. at p. 595,
Hodgkinson v. Simms, [1994] 3 S.C.R. 377, at p. 414 per La Forest J and
the comment of Professor Davies that "[s]trong evidence should be
required before a breach of confidential information situation is
metamorphosed into one of fiduciary relationship"
(Davies, supra, at p. 7). Despite these warnings, a majority of this
--------
44 Cadbury Schweppes v. FBI Foods Ltd., [1994] 8 W.W.R. 727, supplemented,
[1995] 4 W.W.R. 104 (B.C.S.C.); reversed in part on other grounds, [1996]
9 W.W.R. 609, [1996] 10 W.W.R. 752 (B.C.C.A.), further supplemented [1997]
2 W.W.R. 149 (B.C.C.A.), reversed [1999] 1 S.C.R. 142 (S.C.C.)
Page: 46
court in Hodgkinson v. Simms, supra, held that where the ingredients
giving rise to a fiduciary duty are otherwise present, its existence
will not be denied simply because of the commercial context. The
vulnerability of clients to their professional advisors invoked
traditional fiduciary principles. In this case there is nothing in the
relationship between a juice manufacturer and its licensee to suggest
that the former surrendered its self interest or rendered itself
"vulnerable" to a discretion conferred on the latter. The overriding
deterrence objective applicable to situations of particular
vulnerability to the exercise of a discretionary power (M.(K.) v. M.
(H.), supra, per McLachlin J. at p. 86) does not operate here. If
different policy objectives apply, one would not expect the remedy
necessarily to be the same.
[200] This excerpt from Cadbury was relied on by the Ontario Court of Appeal
in Visagie v. TVX Gold.45 In a case relating to a joint venture to acquire
mining rights in Greece, the Court of Appeal overturned the trial judge's
decision that a defendant owed fiduciary duties to its partner (the court upheld
the finding of breach of confidence and breach of the confidentiality agreement
and agreed with the remedy ordered by the trial judge). In the present case, the
Plaintiffs in their brief relied heavily on the trial decision and the finding
of a fiduciary relationship in a commercial context. They may not have been
aware of the Court of Appeal decision as it was released in June of 2000, around
the time their brief was filed. The Defendants did not cite the Court of Appeal
decision in their written briefs filed in the fall and it was not mentioned by
either side in the replies and sur-replies filed thereafter. The Plaintiffs
continued to refer to the trial decision in their oral argument in February of
2001.
[201] Nevertheless, the decision and the reasoning of the Court of Appeal are
instructive. At paragraph 25 of the Appeal Court decision, Charron, J.A.,
stated:
In my view the trial judge erred in concluding there was a fiduciary
relationship between the parties. The duties owed by each party to the
other during the currency of the agreement and after its termination,
as described by the trial judge, arose from the terms of the agreement
itself rather than from any fiduciary obligation imposed by law. The
Supreme Court of Canada in Cadbury Schweppes, supra, makes it clear
that fiduciary obligations are seldom present in a commercial context
between parties acting at arms length (Emphasis added).
[202] Later, Charron, J.A. said that the trial judge's finding that the
plaintiff (Alpha) was dependent on or vulnerable to the exercise of discretion
by the defendant (TVX) was a vulnerability flowing from the terms of an
agreement freely entered into by the parties and insufficient to elevate the
relationship to one that was fiduciary in nature. The parties were in an equal
bargaining position and Alpha could have negotiated greater or different
protection for
--------
45 Visagie et al. v. TVX Gold Inc. (1998), 42 B.L.R. (2d) 53 (Ont. Gen. Div.)
reversed in part, [2000] 49 O.R. (3d) 198 (C.A.)
Page: 47
the confidential information it was providing to TVX. There was no reason for
equity to intervene to rewrite the bargain. Any exploitation by TVX of Alpha's
vulnerability which arose from the contract could be remedied in an action for
breach of confidence or for breach of the confidentiality agreement.
[203] At paragraph 40, Charron, J.A. said:
The parties in this case have reduced their agreement to writing. It
was open to them to include a non-competition clause that would prevent
TVX from competing with Alpha for Kassandra. They have not done so. As
stated above, the court "should be extremely circumspect in adding to
the bargain they have set down."
[204] The Alberta Court of Appeal also cautioned against the imposition of
fiduciary obligations on parties to arms length commercial agreements. In 155569
Canada Ltd. v. 248524 Alberta Ltd.,46 a case cited by the Defendants Mobil and
Imperial, at paragraph 91, the court said:
Vulnerability is often seen to be lacking in commercial settings, so
that the courts invoke the fiduciary concept sparingly, opting instead
to uphold the inviolability of business enterprise: see Ironside et al
v. Smith (1998) 223 A.R.379; 183 W.A.C. 379 (C.A.). This is true of
cases with facts similar to the one at hand.
[205] The Alberta Court of Appeal then adopted the reasoning of the British
Columbia Court of Appeal in Litwin Construction v. Pan47 where the B.C. court
had said:
In a commercial relationship, where the parties have different
interests which they both seek to carry forward by entering into a
contract or contracts with each other, it would be a most exceptional
case where the law would impose a fiduciary obligation which the
parties themselves did not make a term of their contracts, either
expressly or by implication through the officious bystander or business
efficacy rules (Emphasis added).
[206] In 155569 the Alberta Court of Appeal also referred to Hodgkinson where
LaForest, J., for the majority, acknowledged that although the existence of a
contract in itself does not preclude the existence of fiduciary obligations in
commercial relationships, the courts should use a "wary hand" in applying
fiduciary concepts to business dealings. At 414, LaForest said:
--------
46 155569 Canada Limited v. 248524 Alberta Ltd. (2000), 255 A.R. 1 (C.A.),
application for leave to appeal to S.C.C. filed S.C.C. Bulletin, 2000,
p 1473 (00)
47 Litwin Construction (1973) Ltd. v. Pan (1989), 52 D.L.R. (4th) 459 (B.C.C.A.)
Page: 48
Commercial interactions between parties at arms length normally derive
their social utility from the pursuit of self-interest, and the courts
are rightly circumspect when asked to enforce a duty (i.e. the
fiduciary duty) that vindicates the very antithesis of self-interest:
(citations omitted).
[207] The comments made and approved of by the Alberta Court of Appeal in
155569 are in keeping with previous decisions including Terra Energy v. Kilborn
Engineering48 and Luscar v. Pembina Resources.49
[208] With that jurisprudence in mind, the first question to consider is
whether the Defendants, or any of them, owed a fiduciary duty or duties to the
Plaintiffs by virtue of being joint venturers or joint operators. That is, is
there something inherent in the status of being a joint venturer or joint
operator that, at the very least, makes the Defendants, or any of them, prima
facie fiduciaries.
i) Joint Venture
[209] The Plaintiffs contend that the parties here were involved in a joint
venture and "a joint venture is one of the legal relationships or categories
that is recognized in law as creating fiduciary obligations."50 They cite Wonsch
Construction v. National Bank of Canada,51 Harris v. Lindeborg,52 Visagie,
United Dominions v. Brian Pty Ltd.,53 and Central Mortgage v. Graham54 in
support of this argument.
--------
48 Terra Energy Ltd. v. Kilborn Engineering Alberta Ltd. (1999), 170 D.L.R.
(4th) 405 (Alta. C.A.), leave to appeal to S.C.C. dismissed, S.C.C. Bulletin,
2000, p. 165
49 Luscar Ltd. v. Pembina Resources Ltd. (1994), 24 Alta. L.R. (3d) 305 (C.A.),
leave to appeal to S.C.C. dismissed, S.C.C. Bulletin, 1995, p. 1311
50 Plaintiffs' Brief page 72 paragraph 118
51 Wonsch Construction Co. v. National Bank of Canada (1987), 70 C.B.R. (N.S.)
318 affirmed (1990), 75 D.L.R. (4th) 732 (Ont. C.A.)
52 Harris v. Lindeborg, [1931] S.C.R. 235
53 United Dominions Corporation Ltd. v. Brian Pty Ltd. (1984), 157 C.L.R. 1
(H.C.A.)
54 Central Mortgage & Housing Corporation v. Graham (1973), 43 D.L.R. (3d) 686
(N.S.S.C.)
Page: 49
[210] As already stated, the Ontario Court of Appeal overturned the finding
of a fiduciary relationship in Visagie. To the extent the trial decision
actually stood for the proposition that joint venturers automatically owe
fiduciary duties to each other this has clearly been reversed.
[211] The Wonsch case also does not help the Plaintiffs. In Visagie, the
Ontario Court of Appeal cast doubt on this decision when noting that the trial
judge had relied on Wonsch to find, wrongly, a fiduciary relationship between
the parties before her. Moreover, the Alberta Court of Appeal in Luscar cast
doubt on Wonsch. In any event, Wonsch specifically held that while joint
ventures create fiduciary duties, not all of the obligations between the parties
fall into the fiduciary category. In Harris, the Supreme Court of Canada found
the contract between the parties established a fiduciary relationship insofar
as the defendants had undertaken to act as the plaintiffs' agent, and were thus
categorized as trustees who were required to account. At best, the cases relied
on by the Plaintiffs here suggest that joint venturers may owe fiduciary
obligations to one another in certain circumstances. There is nothing automatic
about it. Joint venturers are not status based or traditional fiduciaries for
all purposes.
ii) Operator
[212] The Plaintiffs also argue that "a fiduciary obligation is clearly
imposed upon the operator of an oil and gas property in respect of the operation
and management of that property for the non-operators." For this proposition
they cite Bank of Nova Scotia v.Societe General (Canada),55 Erehwon Exploration
v. Northstar Energy,56 Prairie Pacific v. Scurry-Rainbow,57 Moco Resources v.
Unocal Canada,58 Trilogy Resource v. Dome Petroleum.59
[213] In my view these cases do not support the proposition that operators
are status based or traditional fiduciaries for all purposes vis-a-vis their
joint (non) operators. Clearly as the cases indicate, some of the duties of an
operator are fiduciary in nature, most particularly in the area of accounting
for expenditures and sales. Each case depends on its own facts, the relationship
between the parties and the particular contractual arrangements in place. As our
Court of Appeal said in Luscar at 328-329:
--------
55 Bank of Nova Scotia v. Societe General (Canada) (1988), 58 Alta. L.R. (2d)
193 (C.A.)
56 Erehwon Exploration Limited v. Northstar Energy Corp. (1993), 15 Alta. L.R.
(3d) 200 (Q.B.)
57 Prairie Pacific Energy Corp. v. Scurry-Rainbow Oil Ltd. (1994), 147 A.R. 260
(Q.B.)
58 Moco Resources Ltd. v. Unocal Canada Resources Ltd. (1997), 204 A.R. 246
(Q.B.)
59 Trilogy Resource Corp. v. Dome Petroleum Ltd. (1990), 76 Alta. L.R. (2d) 140
(Q.B.) new trial ordered (1991), 83 Alta. L.R. (2d) 97 (C.A.)
Page: 50
While I accept that there may be fiduciary aspects of the duty of an
operator, not every duty is fiduciary. The mere fact a contract imposes
responsibilities on one party upon which another relies, does not mean
the party is a fiduciary with respect to the duty created. Moreover,
where a specific term of a contract addresses an issue, the contractual
remedy may properly redress the wrong, thereby reducing any
vulnerability. The parties having addressed the issue specifically by
contract, without making the duty to give notice a fiduciary one is
also a factor to be considered . . .
.....Thus, a party may have fiduciary obligations arising from its
relationship but not every obligation is a fiduciary one. In the case
of a contract, one party may be put in a position of owing extended
duties, but it is important to examine carefully the alleged actions to
ensure they derive from the loyalty of the relationship, and are truly
fiduciary obligations, as opposed to merely contractual, express or by
implication.
[214] I am satisfied that, on the authorities, there is no basis for the
proposition that joint venturers and joint operators of oil and gas properties
are, for all intents and purposes, fiduciaries in the traditional sense.
Consequently, a factual analysis is required before it can be said, as the
Plaintiffs here argue, that in this case, the operator, or operators through the
years owed a fiduciary duty as opposed to a contractual duty to their joint
(non) operators to market the oil and gas found in the field. Further, while all
of the Defendants were at some point or another joint operators, not all were
the operators in the sense of having the responsibility for the day-to-day
control and management of the property. Even if an operator was considered to be
a fiduciary for all purposes, the obligations arising would only be attributable
to Columbia as Amoco, Mobil and Imperial were never operators of the field.
iii) Fact Based Analysis
[215] All of the parties cite the decisions in Frame and Hodgkinson for the
test to be applied when determining if a party is a fiduciary with respect to
another. In Frame, Wilson J., at 98, said:
...Yet there are common features discernable in the contexts in which
fiduciary duties have been found to exist and these common features do
provide a rough and ready guide to whether or not the imposition of a
fiduciary obligation on a new relationship would be appropriate and
consistent.
Relationships in which a fiduciary obligation have been imposed seem to
possess three general characteristics:
(1) The fiduciary has scope for the exercise of some discretion or
power.
Page: 51
(2) The fiduciary can unilaterally exercise that power or
discretion so as to affect the beneficiary's legal or
practical interests.
(3) The beneficiary is particularly vulnerable to or at the mercy
of the fiduciary holding the discretion or power.
[216] Since that decision, there has been considerable debate regarding
the necessity or degree of vulnerability required. In Lac, Sopinka, J. for
the majority stated that while the criteria set out in Frame were not
exhaustive, vulnerability or dependency was an indispensable feature of a
fiduciary relationship. His brother, LaForest J. disagreed, and in Hodgkinson,
writing for the majority he clarified the court's approach on that issue at 173:
From a conceptual standpoint, the fiduciary principle may properly be
understood as but one of a species of more generalized duty by which
the law seeks to protect vulnerable people in transactions with others.
I wish to emphasize from the outset, then, that the concept of
vulnerability is not the hallmark of fiduciary relationship though it
is an important indicia of its existence. Vulnerability is common to
many relationships in which the law will intervene to protect one of
the parties. It is, in fact, the "golden thread" that unites such
related causes of action as breach of fiduciary duty, undue influence,
unconscionability and negligent misrepresentation.
[217] At 176 he outlined the test, or the factors to look for:
In these cases the question to ask is whether, given all of the
surrounding circumstances, one party could reasonably have expected
that the other party would act in the former's best interests with
respect to the subject matter at issue. Discretion, influence,
vulnerability and trust were mentioned as non- exhaustive examples of
evidential factors to be considering in making this determination.
Thus, outside the established categories, what is required is evidence
of a mutual understanding that one party has relinquished its own
self-interest and agreed to act solely on the behalf of the other
party.
[218] He gives further assistance at 178:
The existence of a fiduciary duty in a given case will depend upon the
reasonable expectations of the parties, and these in turn depend on
factors such as trust, confidence, complexity of subject matter, and
community or industry standards.
[219] The parties here spent considerable time in their briefs debating
whether the test as outlined and elaborated on by the Supreme Court of Canada
could be described as what came
Page: 52
to be referred to as a "mutual expectations" test or a "reliance" test. The
Plaintiffs appear to argue that Hodgkinson stands for the proposition that,
insofar as the Defendants (or at least Amoco) acted in a way that allowed the
Plaintiffs to expect that they would act in the Plaintiffs' interest, a
fiduciary relationship was created. The Plaintiffs say Amoco cannot escape a
finding of a fiduciary duty merely by proclaiming it had no such intention.
[220] I agree that an alleged fiduciary cannot escape that designation merely
by denying it had any intention to act as a fiduciary or comply with fiduciary
obligations. Nevertheless it seems clear to me that the Supreme Court has said,
and rightly so, that there must be some kind of mutual understanding between the
alleged fiduciary and its beneficiary that the one is acting in the interests of
the other. Mere reliance on the part of the purported beneficiary seems
insufficient.
[221] Our Court of Appeal in Luscar gave a further elucidation of the factors
to consider when examining a relationship for the existence of fiduciary
obligations in the previously quoted passage at page 328-29 of that decision.
[222] I have already found that there is privity of contract between the
Plaintiffs and the Defendants Amoco, Mobil and Columbia, and that the obligation
contained in clause 3.1(D) survived the 1959 Agreement and forms part of the
1966 and 1977 Agreements. What must now be determined is whether the contractual
obligation in clause 3.1(D) rises to the level of a fiduciary duty.
[223] The Plaintiffs say that the fact they were a carried interest owner
after 1966 and were small companies lacking in marketing expertise is evidence
they were dependent on, vulnerable to or at the mercy of the Defendants,
particularly with respect to the obligation to market. I agree that this loss of
control created a certain dependancy but it is one that the Plaintiffs bargained
for just as the parties did in Visagie. Further, as the Defendants remind us,
the Plaintiffs were not vulnerable in that sense in 1959 when, as a working
interest owner, they negotiated the 1959 Agreement including clause 3.1(D).
[224] The Plaintiffs also argue, as discussed earlier in these Reasons, that
the obligation to assure marketing at the earliest feasible time means that the
Defendants had to make gas sales from Kotaneelee in priority over sales of any
other gas they might have available for marketing from other fields. If clause
3.1(D) is interpreted that way, the Plaintiffs suggest that then forms the basis
for their claim that the Defendants relinquished their own self-interest in
favour of the Plaintiffs, as would be the case in a fiduciary relationship.
[225] I have found that it is unreasonable to expect that profit-orientated
corporate entities such as the Defendants would relinquish their self interest
entirely. Mobil quite rightly points out that such an interpretation would have
an enormous impact on the oil and gas industry, a view acknowledged in Luscar.
Page: 53
[226] In my view, as stated, the absence of clear words to the effect that
the Defendants would market Kotaneelee gas in priority to all their other
interests is fatal to the Plaintiffs' argument. That the clause imposes an onus
on the Defendants to market the gas at the earliest feasible time does not mean
it imposes the more onerous obligation to relinquish self-interest associated
with a fiduciary.
[227] With respect to the Plaintiffs' vulnerability to the Defendants, the
Defendants recited a long list of facts they argued belie the existence of a
fiduciary relationship or fiduciary duties between any of the parties. The most
compelling of these is that in 1959, when clause 3.1(D) came into existence, the
Plaintiffs were working, not carried, interest owners.
[228] In further denial of the Plaintiffs' vulnerability, the Defendants
point to the Plaintiffs' witnesses who acknowledged they had not been operating
in a vacuum and were provided with information from a variety of other sources
besides the operator Columbia. They pointed to evidence showing the Plaintiffs'
directors were involved in marketing efforts, sometimes with the Defendants, and
even retained their own marketing consultants. The Defendants argue the
Plaintiffs bargained for and received benefits in 1966 to offset taking on a
carried interest position, and in any event they could convert back to a working
interest at any time. They had the opportunity to operate on the lands and to
take and market their share. The Defendants argue the Plaintiffs were
sophisticated enough to have counsel during the negotiating of the 1959 and 1966
Agreements, and that those Agreements provide the Plaintiffs with all the
contractual remedies they needed without resorting to the assistance of equity.
Indeed, they remind the Court that the Plaintiffs' steps in the Yukon court in
the 1960's and the Florida court in the 1980's indicates the Plaintiffs
themselves were aware of their contractual remedies and were not afraid to use
them.
[229] The Defendants cite compelling evidence that establishes the Plaintiffs
here were not vulnerable to the extent required to cast a fiduciary net over the
relationship between the parties. The case law indicates that if such a net is
to be cast, it must arise from the circumstances and terms of the agreement
itself. In reviewing the 1959 Agreement which contains the express clause
3.1(D), I have noted other clauses which suggest the parties did not expect or
intend that they would be in a fiduciary relationship. For example, as in the
Luscar case, the 1959 Agreement contains an "entire agreement" clause (Z.1).
Further, the relationship is expressly not a partnership (clause S.1).
[230] I cannot, therefore, find any basis for finding that the obligation to
market contained in clause 3.1(D) is a fiduciary obligation. It is a contractual
obligation and the Plaintiffs' remedies for a breach, if any, lies in contract.
b) Does Clause 3.1(D) Run With the Land?
[231] In the alternative to fiduciary and contractual arguments, the
Plaintiffs look to the law of property and equitable considerations to bind the
Defendants to the obligations in clause
Page: 54
3.1(D) of the 1959 Agreement. Specifically, the Plaintiffs point out that clause
CC.6 of Schedule "B" to the 1959 Agreement states:
All terms, covenants, provisions and conditions of this Agreement shall
run with and be binding upon the said lands during the term hereof.
[232] In written argument the Plaintiffs cite two American cases in support
of the proposition that, not only can an obligation to develop and market be
implied in freehold and (U.S.) departmental leases, but that implied obligation
runs with the land and is binding on assignees unless there is an express
provision to the contrary (Watchorn v. Roxana60 and Phillips v. Taylor61). The
Plaintiffs state that here there is an express agreement that the development
and marketing covenant in the 1959 Agreement runs with the land and the
Defendants inherited the obligation.
[233] I do not find these cases determinative. Watchorn does not discuss the
concept of covenants running with the land and Phillips speaks of an implied
obligation to develop on the part of a lessee's assignee, but it does not say
that such an implied obligation runs with the land.
[234] The Defendants, in their written briefs, aptly point out that merely
stating something doesn't make it so. They argue that even if they are bound to
the 1959 Agreement containing clause CC.6, the marketing covenant must still
pass the long established tests for determining whether a particular covenant
runs with the land. They argue it fails because:
1) Clause 3.1(D) is a positive covenant and, as a matter of
property law, positive covenants cannot run with the land;
2) The two possible exceptions to the rule that positive
covenants cannot run with the land, to the extent either are
good law, do not apply to these facts in any event;
3) There is here no dominant and servient tenement and clause
3.1(D) does not touch and concern the land;
4) Notwithstanding clause CC.6, there is no evidence the parties
intended clause 3.1(D) would run with the land; and
5) The Defendants, or at least Imperial, did not have notice of
the clause.
--------
60 Watchorn v. Roxana Petroleum Corp., 5 F. 2d 636, certiorari denied 269 U.S.
581 (8th Circ., C.A., 1925)
61 Phillips Petroleum Co. v. Taylor, 116 F. 2d 994 (5th Cir. 1941)
Page: 55
[235] The Defendants cite learned authors Megarry and Wade, The Law of Real
Property,62 Ziff, B., Principles of Property Law,63 Gale on Easements64 and
Benson, Understanding Property65 who all describe the test for determining if a
covenant runs with the land in much the same manner. The Defendants also cite
more than a dozen cases when analysing specific parts of the test to show that
the present facts do not fit within the rubric of the jurisprudence on covenants
running with the land. These included Rhone,66 Tulk v. Moxhay,67 Carruthers v.
Tioga Holdings,68 Halsall v. Brizell,69 Tito,70 Re: Nylar Foods,71 Galbraith v.
Madawaska Club,72 and Parkinson v. Reid.73
[236] In their reply, the Plaintiffs assert that the cases relied on by the
Defendants on the issue of positive and restrictive covenants are "not helpful"
and "completely unsuitable in the present case." I cannot agree. They then make
further unsupported assertions and finally argue that the interest of each of
the Defendants is a profit a prendre, an incorporeal heriditament which allows a
party to take something off another person's land for their own benefit. They
--------
62 Megarry and Wade, The Law of Real Property, 5th ed. (London: Stevens & Sons,
1984) Megarry and Wade, The Law of Real Property, 6th Edition
63 Ziff, B., Principles of Property Law, 2nd ed. (Toronto: Carswell, 1996)
64 McMullen, D.H., Gale on Easements, 12th ed. (London: Sweet & Maxwell, 1950)
65 Benson, M. & Bowden, M.-A., Understanding Property: A Guide to Canada's
Property Law (Toronto: Carswell, 1997)
66 supra, Footnote 17
67 Tulk v. Moxhay (1848), [1843-60 reprint] All E.R. Rep. 9 (L.C. Ct.)
68 Carruthers v. Tioga Holdings Ltd., (1997), 199 A.R. 40 (M.C.), affirmed
(1997), 13 R.P.R. (3d) 202 (Alta. Q.B.), reversed on other grounds (1999),
171 D.L.R. (4th) 507 (Alta. C.A.)
69 Halsall v. Brizell, [1957] 1 All E.R. 371 (Ch. Div)
70 supra, Footnote 16
71 Re: Nylar Foods Ltd. and Roman Catholic Episcopal Corp. of Prince Rupert et
al, (1988), 48 D.L.R. (4th) 175 (B.C.C.A.)
72 Galbraith v. Madawaska Club Ltd., [1961] S.C.R. 639
73 Parkinson et al v. Reid, (1966) 56 D.L.R. (2d) 315 (S.C.C.)
Page: 56
rely on Scurry Rainbow74 for the proposition that covenants which would run with
the demise of land also run with the demise of incorporeal hereditaments so that
assignees can be bound. Scurry indeed stands for that proposition.
[237] The problem is, as the Defendants pointed out in their sur-replies,
that the covenant in question is not contained in the permits or leases granted
by the Crown to the parties. Citing Berkheiser v. Berkheiser,75 they say the
permits and leases are the documents which would create a profit a prendre, and
they say nothing about the responsibility for developing and marketing the land.
Further, the actual leases were not even granted by the Crown until 1969, 10
years after the 1959 Agreement. As such, the Defendants argue that as the Crown,
and not the Plaintiffs, is the grantor of the lands in question, only the Crown
has a reversionary interest that a covenant running with the land would be
designed to protect. Clause 3.1(D) is just a contractual term between the
parties to the 1959 Agreement, a contractual creation between co-lessees. It was
not imposed by the Crown when the land originally began to "run," and it does
not touch and concern the land.
[238] I find the arguments of the Defendants persuasive and the weight of
authority firmly on their side. The 1959 Agreement does not create a "profit a
prendre " in the sense that is meant by the Supreme Court of Canada in
Berkheiser. It is, instead, a contract outlining the various obligations of the
parties. Clause 3.1(D) is simply one of its terms. Even if it could be said that
the Plaintiffs had a sufficient interest in the lands to impose covenants
binding on the lands, this covenant fails the established tests for covenants
running with the land.
3. Satisfaction of Any Obligations
a) Positions of the Parties
[239] Having found that at least some of the Defendants are bound to perform
the contractual marketing obligation in clause 3.1(D), I must now turn to the
evidence to determine if the Defendants breached that obligation.
[240] The Plaintiffs' case with respect to the sufficiency of the Defendants'
efforts to market the gas rests primarily on the evidence of six witnesses: John
Anthony, a former VP of marketing of Trans Canada Pipelines, head of Can West,
the successor to BCPC, and at the time of trial, an energy consultant; Peter
Milne, the director of the Government of Canada Natural Gas Branch through
deregulation, and at the time of trial an energy consultant; John Sproul, a
former VP of Pacific Gas and Electric Company, the parent company of A&S; John
Brown, an energy consultant with offices in Houston, Texas; Eugene Pendery, a
director of
--------
74 Scurry Rainbow Oil Ltd. v. Galloway Estate (1993), 8 Alta. L.R. (3d) 255
(Q.B.), affirmed (1994), 23 Alta. L.R. (3d) 193 (C.A.), leave to appeal to
S.C.C. dismissed, S.C.C. Bulletin, 1995, p. 615
75 Berkheiser v. Berkheiser (1957), 7 D.L.R. (2d) 721 (S.C.C.)
Page: 57
Canada Southern since 1986; and Richard O'Callaghan, a former VP of a subsidiary
of Inland, a company serving the east Kootenay market in British Columbia.
[241] Messrs. Anthony and Milne were both qualified as experts in the
marketing of natural gas during the relevant time period. They prepared a joint
report and presented and defended it as witnesses in the trial. Essentially,
they expressed the opinion that there were markets available for Kotaneelee gas
from 1984 to 1991: 1984 to 1986 by way of a substitution by the Defendants into
aggregator pools, preferably with A & S; and from 1984 to 1991 to nine specified
markets, including the Pacific Northwest, British Columbia, and eastern Canada.
[242] John Brown was qualified to give expert evidence with respect to
marketing of natural gas in the U.S., but not in the Pacific Northwest. His
opinion, based on a review of the documents, was that there had not been
marketing at the earliest feasible time and that Columbia had brought markets to
the other Defendants but they all wanted to sell gas from other fields. John
Sproul, qualified to give evidence with respect to gas supply and substitution
into the Alberta and Southern pools, rather surprisingly testified in cross
that, in his view, it was "a remote possibility" a substitution could have been
achieved before 1986,76 and much more of a possibility, a "real potential," or a
"real opportunity" after 1986.77 Eugene Pendery investigated the marketing
situation with respect to Kotaneelee in mid-1986, and described the "dismay of
the Plaintiffs upon learning a market had been turned down by one of the
Defendants," but rather oddly made no follow-up investigation to ascertain which
Defendant had declined. Mr. Pendery also acknowledged it appeared Columbia was
pursuing markets at that time at prices which may have given a "break-even"
result. Richard O'Callaghan described an arrangement his company made with A&S
which Mr. Anthony considered to be similar to the substitution he and Mr. Milne
were proposing, but acknowledged Columbia had the right to terminate the
contract which was not part of the Anthony/Milne proposal.
[243] The Defendants counter with evidence from some fifteen witnesses. Seven of
these, called as fact witnesses, were actually involved in attempting to market
gas from Kotaneelee. They were: Gil Graham, marketing manager of Columbia; Don
Bowes and Norval Horner, employed by Dome; Werner Neumeister, employed by Amoco;
Hugh Gillard and Hank Petranik, employed by Dome and Amoco; and David Goodwill,
a former director of Canada Southern.
[244] They also called eight witnesses who were qualified to give expert
evidence: Geoffrey Edge, chairman of the NEB from 1971 to 1986; Peter Nettleton,
a former senior executive of Imperial who was Imperial's head of regulatory
affairs from 1978 to 1991, and at the time he testified was a private
consultant; George Lechner, the former head of BCPC and later vice- president of
gas supply for BC Gas and involved in the negotiation which eventually
contracted Kotaneelee to a long term sales contract; Philip Griffin, former VP,
general counsel, and
--------
76 Transcript page 5573
77 Transcript pages 5555-5557, 5573, 5598
Page: 58
secretary of Westcoast and since 1994 practising commercial energy law in
Vancouver; Scotty Cameron, former senior executive of Pan Alberta Gas, including
president and chairman from 1975 to 1996; George Walsh, a former VP of A&S,
qualified specifically to give opinion evidence with respect to the policies,
practices and activities of A&S respecting the negotiation, purchase,
transportation and regulation of natural gas from 1981 to 1989; Randy Randolph,
former VP of gas supply in the mid-1980's for Northwest Pipeline, qualified to
give expert evidence as to the marketing of gas in the U.S. and the policies and
practices of Northwest during the period 1984 to 1989; and Dr. Andrew Safir, an
economist and former White House staffer, and in 1979 and 1980, California's
chief business economist, since then the head of Recon Research Corp., an
economic and energy consulting firm. He was qualified to give evidence as to
appropriate markets for Kotaneelee gas and pricing in the 1980's and early
1990's.
[245] Gil Graham was hired by Columbia in February of 1986 as manager of
marketing. As one of his major activities he set about marketing Kotaneelee. He
conducted an extensive analysis of what he considered to be the possible markets
for Kotaneelee, and in the process seemed to involve all of the market areas
suggested by Messrs. Anthony and Milne.
[246] Mr. Graham had a plan, one that seems not all that different from that
proposed by Mr. Anthony. His plan was, I believe, fairly stated by counsel in
their written argument as follows:
In light of all these factors, Columbia's objective was to obtain a
long-term contract for Kotaneelee gas, spend the money to de-mothball
the field and then start up. According to Mr. Graham, Columbia's
corporate business objective in terms of Kotaneelee was to start
delivering gas from Kotaneelee as soon as it could, consistent with
maximizing its cash flow present value. A long-term contract was sought
for the following reasons:
a) for all practical purposes, once the field was put
back in operation, operating expenses were fixed; and
b) to obtain firm transportation service on Westcoast,
it would be necessary to commit to tolls which were
virtually all demand charges, meaning that there were
very high fixed expenses which would have to be paid
even in periods of low prices or shut-in.
Spot markets were not considered desirable because they could be
interrupted and the prices go to unacceptable levels. However, if a
long-term contract was obtained with a delayed commencement date, Gil
Graham was prepared to consider whether, on the basis of short-term
markets, the economics supported
Page: 59
an earlier start before commencement of deliveries to the long-term
contract. Economic realities had to be considered any time one went to
sell gas.78
[247] Mr. Graham gave detailed evidence as to each of the prospects he
pursued and of the end result. Sometimes either he or the prospect lost interest
for a variety of reasons. In July 1986, he negotiated a letter of intent signed
by himself and Inland,79 but none of the other Defendant working interest owners
approved the arrangement.
[248] Very detailed evidence was also given by Werner Neumeister, whose major
activity for a time was to seek out direct sales in the Pacific Northwest for
Amoco. He reiterated in response to many questions both in chief and in cross
that he had Kotaneelee in mind throughout the period, and the attitude of his
management was clearly shown at a meeting involving Mr. Meeker, a senior
executive of Amoco's U.S. parent. Mr. Neumeister said he came away from that
meeting with "one impression", that he was not going to get any more funds for
drilling in B.C. until the Kotaneelee problem had been solved.80
[249] Mr. Neumeister also addressed the May 5, 1987 policy81 passed by Amoco
Canada's management committee which the Plaintiffs, when it came to their
attention, dubbed the "us first" policy. The Plaintiffs suggest this policy
reflected Amoco's unwillingness to share marketing opportunities with a field in
which they held a relatively small working interest, and in particular, an
unwillingness to share marketing opportunities with carried interest partners.
Counsel for Amoco repeatedly insisted that the policy was not in fact a policy
but only a direction and, in any event, was never implemented. Mr. Neumeister
testified that the policy, or direction, had no impact on his marketing
efforts.82
[250] Hugh Gillard of Dome was involved in the negotiation of the arrangement
which seems to be closest to one that on its face would appear to have been
suitable for Kotaneelee. It was a long term contract entered into between Dome
and WNG in November of 1988 for the sale of 25 mmcfd. Dome had been pursuing a
contract with WNG for some years and apparently had a preference to use their
Cypress field for the supply. Mr. Gillard did an analysis of some eight
scenarios which included Kotaneelee as a comparable, and for various reasons the
preference of Cypress was confirmed. It may be worth noting that one of the
calculations examined were net-backs and Kotaneelee was the lowest. WNG was also
interested in a further supply of 25 mmcfd, but indicated some disinterest in
Kotaneelee and a wish to diversify the supply, but
--------
78 Anderson Brief page 96
79 Exhibit 241
80 Transcript page 13455
81 Exhibit 428. See supra paragraph 71
82 Amoco Brief page 115, Transcript pages 8859-8870,14554-14567,14997-14998
Page: 60
nothing came of that. Later, Kotaneelee was considered a third time when it
appeared the Cypress plant would not be on stream until one year after the
contract was to commence, and Dome was obliged to provide a replacement source
for that period. Mr. Gillard considered five possibilities, other Amoco gas,
Alberta Gas, Kotaneelee, Aiken Creek and brokered gas. He narrowed that to
Kotaneelee, Aiken Creek and brokered gas, and in the end chose the brokered gas
on the basis that brokered gas was available at a good price. In contrast, using
Kotaneelee would involve start-up costs with no sure prospect markets would be
available for the gas after the one year period.
[251] Mr. Gillard also testified he felt the natural market for Kotaneelee
was the Pacific Northwest, not the U.S. midwest, and that it made no sense to
flow Kotaneelee gas past uncontracted Alberta Gas. He also said he was not in
favour of Columbia's proposal regarding MichCon because of there was neither
firm transportation nor obligation to take, and low net-backs. This led to a
sharp letter from Columbia to which Amoco responded by letter dated October 6,
1989,83 drafted by Mr. Gillard, which included the following:
During the last few months Columbia and ourselves have held several
conversations regarding two other potential sales which, for various
reasons, did not come to fruition. In both cases Columbia made a point
of implying, via a letter to the other working interest owners, that
Amoco's philosophy or position on certain marketing terms was the
principle reason for the past failure of negotiations. Prior to any
discussion concerning the above noted subject Amoco wishes to confirm
why the potential sales in fact did not materialize.
The first potential sale, brought to Amoco by Columbia, involved a sale
to a U.S. midwest customer via Westcoast (WEI), NWPL and Colorado
Interstate Gas (CIG). The proposal, as presented to us, contemplated
that the buyer would have no minimum take obligations, would not keep
the seller whole on demand charges, would hold only interruptible
service on CIG with the seller having to hold firm on NWPL and WEI and
finally, the price was very inadequate for a long term firm sale. Our
concerns were noted by letter, a copy of which is attached, as we
believe that it was not unreasonable for a seller/major owner to want
these terms rectified.
The second potential sale was in fact brought to the table by Amoco.
Amoco passed on the potential opportunity because it believed that
there may have been a good fit between the buyers short and long term
needs for gas and the objectives of the major owners. It was our belief
that the buyer was willing and able to enter into both a long term sale
with Columbia and a shorter term sale with Amoco. Amoco was reluctant
to enter into a long term arrangement, involving high demand charges,
with a 'broker' who had no assets to speak of.
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83 Exhibit 811
Page: 61
The final result was that the buyer considerably downgraded its earlier
proposal and was unable to make any firm commitments in a timely
fashion. Any reference by Columbia that Amoco was at fault for the
termination of negotiations is rejected by Amoco.
Amoco was and will continue to make every effort to market the gas from
the Kotaneelee field and feels confident about its ability to do so.
With the amount of capital invested to date there is more than enough
incentive to market the gas, but not on terms which do not even meet
what we consider minimum standards.
[252] The approach of the Defendants' fact witness to the marketing of
Kotaneelee was strongly supported by the evidence of their witnesses giving
expert testimony. Collectively, their evidence was lengthy so it is difficult to
summarize in a meaningful way, but very generally they were all of the view the
substitution proposed by Messrs. Anthony and Milne for the pre-1986 period could
not have been achieved. Further, they expressed the view that in the post-1986
period there were so many obstacles facing the Kotaneelee producers that they
were unable to compete until 1991 when the BC utility market became available,
and they took advantage of it.
[253] Each of these experts had their own perspective on the industry and
their evidence reflected that. For example, Scotty Cameron testified that, in
his opinion, pre-1985, the parties' only real chance was the Texas Gas
arrangement (in which he was very involved on behalf of Pan Alberta), and that
having failed, his conclusion was that marketing was not possible in that time
period. He said that post-1985, Kotaneelee was still locked out of BC and east
of Alberta was still very difficult except with respect to gas very near the
border.
[254] Geoffrey Edge testified that from 1981-1985 there was no long term
market available, and he could not see putting the field on production for short
term, interim sales. With specific reference to the Anthony/Milne substitution
proposal, he said categorically no substitution could have taken place which
required Alberta or BC gas to be shut in. From 1986 onwards he acknowledged
there were many more short term markets but stated that it was difficult to get
transportation until Pacific Gas and Electric Company expanded; there was only
interruptible transportation on Northwest Pipeline; the market east of Alberta
was not available until 1990; and BC, the natural market for Kotaneelee, was
tied up by BCPC until 1991.
[255] Peter Nettleton, commenting specifically on the opinion of Messrs.
Anthony and Milne, testified that in his view they disregarded that Kotaneelee
was remote and had uncertain reserves and that attempts were made to actively
market the gas; that gas exports had collapsed due to Canadian government price
increases and the development of the gas bubble; and after deregulation 1986 to
1988, Kotaneelee could not compete for direct sales because of pipeline take or
pay ("TOP") constraints and supply under existing contracts had lower gathering
process and transportation costs. He further said that in his view, nothing
could have been accomplished until 1991 when the BCPC contracts expired. Until
then Kotaneelee was locked out of BC and couldn't compete elsewhere.
Page: 62
[256] Randy Randolph testified that the Pacific Northwest was the natural
export market for Kotaneelee, but until the Pacific Northwest went into open
access in June of 1988, given the choices available for gas supply to the local
LDCs (B.C. Hydro, Inland and Pacific Northern Gas) it would have been "very
difficult and highly improbable that, given the choices that were available for
gas supply to our local distribution companies, as well as the fact that there
were ample supplies available - - we were in a surplus mode - - that Kotaneelee
could have been sold on a long term basis into the Pacific Northwest."84 He also
said that the situation was much the same in the U.S. midwest and northeast and
that Kotaneelee, in his view, was not suitable for the co-generation market. He
reiterated a view expressed by other witnesses that for many years Kotaneelee
had to bear the "burden" of the Beaver River failure and the government's
allocation of 100% of the resulting shortages to the Pacific Northwest.
[257] Andrew Safir testified that in his opinion, if Kotaneelee had been
producing in the 1980's, it would have gone to the U.S., specifically to the
Pacific Northwest. Especially earlier it would have been extremely difficult
with low well head prices and net backs so low the economy feasibility would
have been "not very viable." He dismissed the Anthony/Milne substitution
proposal by saying there was no evidence to support it. He said sales were
possible in the late 1980's, but would have been on an interruptible short term
basis, on the spot market, as, for example was the overwhelming nature of
Amoco's sales at that time. He said in his view, Amoco's contract with WNG would
"not have been terribly economically viable"85 as a market for Kotaneelee.
[258] George Walsh testified that he disagreed with the Anthony/Milne
substitution theory, saying A&S had too much gas; were paying for gas they had
not taken; and in their TOP settlements and to the Alberta Petroleum Marketing
Commission they had undertaken not to take on any new gas. He said any
substitution was especially difficult where there were different working
interest owners and it was never done during this time at A&S. He said the
negotiation with Canada Southern were more along the line of planning, the only
significant gas taken from contracts in the 1980's was from PacGas which was
more diverse, had more wells and lots of upside.
[259] Philip Griffin testified that difficulties with the Anthony/Milne
substitution proposal included the fact at the time the aggregators were not
contracting, shutting in gas in other jurisdictions, there must be a benefit for
all parties and all factors must be working. He said the Texas Gas Agreement did
that but the Anthony/Milne proposal did not. With respect to the BC market, he
said the first opportunity to "break into the closed system" was in 1991, and
the Kotaneelee producers took it.
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84 Transcript page 24035
85 Transcript page 24490
Page: 63
[260] George Lechner testified that in his view, it was not realistic to
think the aggregators would substitute gas from two wells in a remote location
for gas under long term contracts with the result that BC and/or Alberta would
lose their royalties. With respect to the post-1986 period, he said that markets
were defined but not incremental, very competitive, and Kotaneelee was farthest
from the market. His opinion was that Kotaneelee would have been unable to
compete until the expiration of the large utility contracts in 1991 provided a
feasible market opportunity, one that was close, long term, reliable, had
acceptable load factors and competitive prices. With specific reference to the
July 1986 letter of intent with Inland, Mr. Lechner said the deal could not
proceed because the British Columbia Utilities Commission "was concerned about
the utility doing an end run on their long-term obligation to purchase gas
through BCPC."86
b) The Business Judgment Rule
[261] I am mindful of the line of authorities cited by the Defendants, in
most detail by Esso, that there are limited circumstances where the courts will
second guess the business judgment of the parties. In the relatively recent
Ontario case, CW Shareholdings Inc. v. WIC,87 the application was made by a
shareholder to have a pre-acquisition agreement set aside as oppressive. Blair
J, at p 12 stated:
58 In this respect, the next issue of law to be addressed is regarding
the circumstances in which a Court will second guess the business
judgment of the parties and what are the standards to be applied to
that consideration.
The Business Judgment Rule
59 In assessing whether or not directors have met their fiduciary and
statutory obligations, as outlined earlier in these Reasons, Canadian
courts have generally approached the subject on the basis of what has
become known as the "business judgment rule." This rule is an extension
of the fundamental principle that the business and affairs of a
corporation are managed by or under the direction of its board of
directors. It operates to shield from court intervention business
decisions which have been made honestly, prudently, in good faith and
on reasonable grounds. In such cases, the board's decisions will not be
subject to microscopic examination and the Court will be reluctant to
interfere and to usurp the board of director's function in managing the
corporation. The oft-cited remarks of Anderson J. in Brant Investments
v. KeepRite Inc., (1987), 60 O.R. (2d) 737 (H.C.) - made in the context
of an oppression remedy hearing - are apt in this regard. At pp. 759 -
760, he said:
--------
86 Transcript page 21024
87 CW Shareholdings Inc. v. WIC Western International Communications Ltd.,
[1998] O.J. No. 1886 (Gen. Div.)
Page: 64
The jurisdiction [to review] is one which must be exercised
with care. On the one hand the minority shareholder must be
protected from unfair treatment; that is the clearly expressed
intent of the section. On the other hand the court ought not
to usurp the function of the board of directors in managing
the company, nor should it eliminate or supplant the
legitimate exercise of control by the majority . . .
... Business decisions, honestly made, should not be subjected
to microscopic examination. There should be no interference
simply because a decision is unpopular with the minority.
60 In upholding the decision of Anderson J., and in commenting on that
passage, Madam Justice McKinlay stated [(1991), 3 O.R. (3d) 289 (C.A.),
at p. 320]:
There can be no doubt that on an application under s. 234 the
trial judge is required to consider the nature of the impugned
acts and the method in which they were carried out. That does
not mean that the trial judge should substitute his own
business judgment for that of managers, directors, or a
committee such as the one involved in assessing this
transaction. Indeed, it would generally be impossible for him
to do so, regardless of the amount of evidence before him. He
is dealing with the matter at a different time and place; it
is unlikely that he will have the background knowledge and
expertise of the individuals involved; he could have little or
no knowledge of the background and skills of the persons who
would be carrying out any proposed plan; and it is unlikely
that he would have any knowledge of the specialized market in
which the corporation operated. In short, he does not know
enough to make the business decision required . . .
It is important to note that the learned trial judge did not
say that business decisions honestly made should not be
subjected to examination. What he said was that they should
not be subjected to microscopic examination. In spite of those
words, the learned trial judge did, in fact, scrutinize, in a
very detailed and careful manner, the nature of the
transaction in this case and the manner in which it was
executed.
Page: 65
[262] The Plaintiffs, in their Reply brief, dismiss the CW Shareholdings Inc.
decision on the basis it was not a contract case, and rely instead on Mormacsaga
v. Crelinsten Fruit,88 also cited by Imperial. In that decision, the court,
while recognising the principle that courts should be reluctant to substitute
their business judgment for the judgment of businesspeople in the industry, held
that the decision made was not shown to be exercised with sound business
judgment. The principle stated in both cases is the same.
c) The Pre-1986 Period
[263] In my view, the argument of the Plaintiffs on the substitution option
fails for want of sufficient proof. There has been no evidence given of a
non-incremental substitution involving any of the aggregators during the period
leading up to 1985. Messrs. Edge, Cameron, Nettleton and Walsh, all of whom were
intimately involved in the industry at the time, say unequivocally it would not
have worked. Furthermore, George Walsh was the only witness called by either
side from A&S, which the Plaintiffs suggest was the most suitable market.
[264] It is worth noting that John Anthony acknowledges there would have been
some difficulties achieving a substitution, saying:
And there are obviously problems with this, because it -- you know,
there's problems with the fact that it isn't an incremental sale which
people have pointed out, and there may be flow-back consequences where
Alberta would lose revenue, but I believe that these problems could
probably have been overcome with a series of, you know, compromises,
and I think those were possible . . .89
d) The Post-1986 Period
[265] All of the Defendants' fact witnesses testified as to their efforts to
sell Kotaneelee gas and I am satisfied they were genuinely using their best
efforts to do so. I accept their explanation that other fields were for some
markets more appropriate because the markets were short term and the prices
competitive, and that Kotaneelee had to be brought on stream at a significant
cost. Indeed, their "plan" seems quite consistent with the "plan" envisioned by
John Anthony.
[266] The Plaintiffs argue vigorously that the conduct of Dome and Amoco with
respect to the WNG contract shows a complete disregard of any obligation to the
Plaintiffs with respect to Kotaneelee. I am not persuaded that this is the case,
unless I accept the Plaintiffs' view that the obligation to market Kotaneelee
gas is an over-riding one, which, as indicated earlier, I do not.
--------
88 Mormacsaga (The) v. Crelinsten Fruit Co., [1969] 2 Ex. C.R. 215
89 Transcript page 4716
Page: 66
[267] On the facts here I am satisfied the decisions made by the Defendants
were made exercising sound business judgment. For example, the comments in the
Amoco letter of October 6, 1989 on their face make perfect sense, and indicate
the exercise of sound business judgment to achieve a proper return on the asset
for all the owners, and not, as the Plaintiffs suggest, an attempt to treat the
Plaintiffs unfairly in any way.
[268] I am led to the conclusion that the Defendants collectively did not act
unreasonably in continuing to strive for a firm long term contract at an
attractive price. Such a course of action benefited the Plaintiffs as much as
the Defendants, and I am unable to regard the Defendants actions in that regard
as a breach of their contractual obligation.
4. Conclusion and Remedies
[269] Having reached the conclusion that the obligation to market was
satisfied by the Defendants, I do not believe I ought to make any findings on
damages, despite the number of witnesses who testified for many weeks on the
subject and the number of expert reports, rebuttals and updates filed throughout
the course of the trial.
[270] Some 64 years ago, in Jalbert v. Canada90, Davis, J, in the Supreme
Court of Canada said:
Even though a trial judge may take, as a matter of law, a view of a
case which precludes the plaintiff from recovering damages, an
appellate court is entitled to have, in case it should reach a
different conclusion on the question of liability, the advantage and
assistance of the trial judge's views as to the weight which should be
attached to the evidence of the several witnesses who appeared before
him.
[271] The few authorities there are since Jalbert go both ways on the
question whether a trial judge, having found no liability or breach as the case
may be, should proceed to make findings in the alternative in the event his or
her initial findings are overturned on appeal. Various trial judges have
commented on the necessity or desirability of making findings in the
alternative. For example, in Phillips v. Lyle91 Southin, J. said "In most cases
when a trial judge dismisses an action it is, I think, inappropriate for her
(or him) to address the issue of damages." She warned of a "natural tendency"
on the part of a trial judge not to give the question of damages the close
attention it deserves when the finding is, to the judge's mind, of no real
significance. Southin, J. proceeded to address the issue of damages in the case
before her even though she had dismissed the plaintiff's action against one
defendant for damages arising from one of two motor vehicle accidents. The
defendant in the second accident had admitted liability making a
--------
90 Jalbert v. Canada, [1937] S.C.R. 51, affirmed [1938] 1 D.L.R. 721 (P.C.) at
68
91 Phillips v. Lyle [1988] B.C.J. No. 1708 (B.C.S.C.), affirmed, [1990] B.C.J.
No. 212 (B.C.C.A.)
Page: 67
damages assessment necessary for apportionment purposes. The fact it was a close
case on liability was also stated as a factor.
[272] I found a very persuasive examination of the duty of a trial judge in
these circumstances in Caplan Builders v. Royal Bank of Canada.92 In that case,
Bouck, J., said generally "only in the most exceptional cases" would a judge or
jury assess damages after a finding of no liability. Stating it was a matter of
judicial discretion, he set out four matters for consideration:
1. Was the dismissal of the action based predominantly on
questions of fact? (adding an academic exercise should be
avoided when a higher court is unlikely to interfere in the
absence of palpable and overriding error);
2. Was the dismissal of the action based upon unsettled issues of
law? (noting a second trial could be expensive if a higher
court disagrees with the trial court's interpretation of the
law);
3. Will the assessment of damages require the judge to make
findings of fact which may conflict with similar findings made
on the issue of liability? (commenting judgments can take on
an air of unreality and be confusing if contradictory findings
of fact have to be made to assess damages);
4. Will the assessment involve a lengthy assessment of the facts
and the law? (acknowledging this is the least persuasive
consideration but recognising judicial time is scarce).
[273] In this case, on the marketing issue my conclusions have resulted
predominantly from findings of fact. Further, the law engaged by the facts here
is not particularly unsettled and where it might be, for example on the issue of
assignments and privity or the existence of a fiduciary duty, different findings
would not alter the final result since I have found, on the facts, that there
was no breach in any event.
[274] Also, of particular importance here is Bouck. J.'s third consideration.
In this case, assessing damages would clearly require findings which would
conflict with findings on the issue of whether any marketing obligation was
satisfied. To give just one example, my conclusion on that issue follows my
acceptance of the evidence of the Defendants' marketing witness over the
Plaintiffs', primarily Messrs. Anthony and Milne. Both, particularly Peter
--------
92 Caplan Builders Ltd. v. Royal Bank of Canada (1988), 25 B.C.L.R. (2d) 335
(S.C.) affirmed, [1989] B.C.J. No. 1074 (Q.L.) (B.C.C.A) (The Court of Appeal
expressly stated it did not "consider the observations" of the trial judge on
this judicial dilemma as Bouck, J. had issued them in supplemental reasons
after the parties had filed appeals.)
Page: 68
Milne, also gave evidence relevant to damages and any assessment of damages
would require different findings with respect to some of their evidence.
[275] I might say that my acceptance of the evidence of the Defendants'
marketing witnesses over that of Messrs. Anthony and Milne was not on the basis
of credibility. I found both Messrs. Anthony and Milne to be honest, credible
witnesses, but the overall weight of the marketing evidence was contrary to
theirs.
[276] Bouck. J.'s fourth consideration is unquestionably an important factor
for this case, perhaps more important here than in most cases, but still the
least important of the four.
[277] Finally, if my findings of liability are varied, it is my view there
ought to be further evidence heard, updating the calculations of the experts to
take into account revenue and expenses to the date of an assessment and perhaps
to provide clarifying evidence with respect to past and future gas prices.
[278] For those reasons, I exercise my discretion and do not assess damages
in the alternative with respect to the marketing claim.
C. THE CARRIED INTEREST CLAIM
1. Introduction and Positions
[279] The carried interest account is the account necessitated by the
Plaintiffs' conversion from a working interest to a carried interest owner in
1966. The 1966 Agreement, as previously stated, made specific amendments to the
1959 Agreement to facilitate the change and added the carried interest
provisions, Schedule "D", which was stated to be "attached to and forming part
of" the 1959 Agreement. Essentially, in exchange for losing the status and
control of a non or joint operator working interest owner, the Plaintiffs were
no longer required to pay their share of the costs of developing and operating
the field as those costs were incurred. However, they would not receive their
share of any revenue from the field until operational receipts exceeded
operational costs.
[280] The Plaintiffs complain that some of the capital expenditures incurred
by the Defendants after June 30, 1988, and charged to the carried interest
account are improper and unreasonable, and they ask this Court to reduce the
account accordingly. They argue that the Defendants, and in particular Columbia
as operator, owed a duty to operate the field in a good and workmanlike manner,
and that they breached that duty particularly with respect to the revamp of the
facility and the I-48 well. They further argue that the Defendants owed
fiduciary duties to the Plaintiffs which were also breached by the way the
Defendants managed and operated the Kotaneelee field.
[281] The Defendants, or more accurately Columbia with the concurrence of the
others, argue the Plaintiffs have no contractual or other rights to challenge
joint account expenditures
Page: 69
or to claim that operations were not conducted in a good and workmanlike manner
under the operating procedure. The Defendants concede that the Plaintiffs have
some rights as carried interest owners, but that those rights are limited to
voting for the operator, disclosure of information about the operations and the
receipt of statements and right to audit the carried interest account. They say
the Plaintiffs' right to challenge expenditures charged to the carried interest
account is limited to establishing that such expenses fall within the definition
of operating costs in Schedule "D". They deny they owe any fiduciary duties to
the Plaintiffs with respect to these or any other matters.
2. Application of Fiduciary Law
[282] At the outset, I dismiss the Plaintiffs' claims that the Defendants
owed fiduciary duties to them under Schedule "D" of the 1966 Agreement, the
carried interest provisions or Schedule "B" of the 1959 Agreement, the operating
procedure. Much of the same reasoning as in the earlier discussion relating to
whether a fiduciary obligation was owed in respect of the marketing clause
applies here as well. In particular, I find that those two schedules clearly and
expressly outline the parties' respective rights in relation to the carried
interest account and the operating procedure. As discussed earlier, there is
nothing in the particular circumstances of these parties that gives rise to
fiduciary obligations, particularly when they have negotiated and bargained for
their resulting positions in an arms length commercial transaction. They did not
expressly provide that the obligations in the schedules at issue here were of a
trust nature. More important, and as previously pointed out, clauses S.1 and Z.1
of Schedule "B", the operating procedure, clearly provide that the agreement
shall not be construed as creating a partnership and that it is the entire
agreement with no implied covenants, conditions, terms or reservations.
3. The Plaintiffs' Right to Challenge Expenditures
[283] Clause 2.6 of Schedule "D" to the 1966 Agreement defines operational
costs as:
The cumulative total of all expenditures made by A-D-P on and after
April 1, 1966 . . . including, without limiting the generality of the
foregoing, all permit renewal fees, lease rentals, exploratory costs,
development costs, production costs and marketing costs with respect to
that Block and including all lessors' royalties and the overriding
royalties to which the permits in that Block are subject . . . provided
that no cost shall be charged as an operational cost unless it can be
charged to the joint account under the Accounting Procedure (or, with
respect to the cost of independent operation, could be so charged if
the operation were for the joint account).
[284] Under the terms of clause 3.2 of Schedule "D", A-D-P is to maintain the
carried interest account setting out the operational costs and receipts (also
defined). Schedule "D" also states that paragraph 2 of Schedule "C" of the 1959
Agreement, the accounting procedure, shall be followed in rendering statements.
It is assumed that the reference is to Article I,
Page: 70
paragraph 2 of Schedule "C" which deals with the timing and detail required in
statements and billings, and not Article II itself which describes the items the
operator can charge to the joint account on behalf of all the non-operators
described in that schedule as being anyone or more of the non-operating parties.
I further note that Schedule "C" places all of the responsibility for accounting
on the shoulders of the operator. It would appear then that the operator,
Columbia in this case, is required to render statements of the carried interest
account to the Plaintiffs.
[285] The Plaintiffs insist that the proviso at the end of clause 2.6 of
Schedule "D", that operational costs must be capable of being charged to the
joint account under the accounting procedure (Schedule "C"), gives them the
right to monitor and object to expenditures charged to the joint account, and
thereby the carried interest account. Otherwise the proviso would be
meaningless. They also cite Novalta Resources v. Ortynsky Exploration.93 In that
case, Sulatycky, J. held that a non-operator was entitled to challenge
expenditures alleged to have been made in breach of a covenant to carry on
operations prudently and in accordance with good oilfield practices or in breach
of the duty of good faith.
[286] The Defendants argue that the proviso in clause 2.6 merely means that
once the joint operators have approved a charge to the joint account (and
thereby for inclusion in the carried interest account), it satisfies the
requirements of clause 2.6 and is an operational cost. They say the Plaintiffs
really want to challenge charges to the joint account under Schedule "C", the
accounting procedure, but they cannot do so because they do not have the status
of non-operator under that schedule. A non-operator is defined as any of the
non-operating parties, and since the Plaintiffs are in a carried interest
position they are not a non-operator because they are not required to pay as you
go like the rest of the non-operators under the accounting procedure. They
distinguish Novalta on the basis that in that case, the challenger was a working
interest non-operator and not a carried interest party.
[287] I agree with the Plaintiffs that their rights under clause 2.6 of
Schedule "D" are not as limited as the Defendants suggest. The Plaintiffs
rightly point out that if the Defendants' view was correct, the joint operators
could simply approve a cost to the joint account and then claim it was an
operational cost whether or not the cost was reasonable under the accounting
procedure, Schedule "C". I find the Plaintiffs have a right to challenge costs
charged to the carried interest account through that contractual provision. If
I am wrong on that point, however, in my view the Plaintiffs can still challenge
costs charged to the carried interest account on the basis that the Defendants
have not operated the field in a good and workmanlike manner, as will be
discussed later.
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93 Novalta Resources Ltd. v. Ortynsky Exploration Ltd.(1994), 18 Alta. L.R.
(3d) 4 (Q.B.)
Page: 71
4. The Plaintiffs' Right to Audit
[288] The Plaintiffs also claim a right to challenge charges to the carried
interest account on the basis of clause 3.1 of Schedule "D", the carried
interest provisions. That clause provides that the Plaintiffs have a right to
receive statements and demand audits with respect to the carried interest
account as though they were joint operators (non-operators) under the accounting
procedure. Article I, paragraph 4 of the accounting procedure describes those
audit rights as the ability to "protest or question the correctness" of charges.
[289] The Defendants take the position that the Plaintiffs' right to audit is
limited to corrections, adjustments or errors due to arithmetic or accounting
errors. The Plaintiffs counter that such a limitation would be fundamentally
unfair. Neither cited any authority for their respective positions.
[290] Blacks Law Dictionary defines "Audit" as:
Sometimes restricted to a mere mathematical calculation or process,
but, in its generally accepted sense, includes an investigation and
weighing of the evidence and deciding of whether entries in books are
true and correct. Lumber Mut. Casualty Ins. Co. of New York v.
Horowits, 1 N.Y.S.2d 191, 193, 165 Misc. 506.94
[291] I am inclined to think the Plaintiffs' audit right is considerably
broader than the position taken by the Defendants. Even so, the right to audit
does not create other substantive rights. Nevertheless, I need not make any
ruling on the point in light of my finding that the Plaintiffs can challenge
charges to the carried interest account on the basis of clause 2.6 of Schedule
"D", the carried interest provisions, and by asserting that the charges resulted
from a breach of the good and workmanlike standard as will be discussed next.
5. The Good and Workmanlike Standard
[292] Clause F.1 of Schedule "B" of the 1959 Agreement, the operating
procedure, provides, inter alia:
F.1 The Manager Operator shall, in the conduct of the operations
hereunder:
a) conduct the same in a good and workmanlike manner and in
accordance with prevailing field practice, conforming to all
applicable laws, rules, orders and regulations . . .
[293] Clause T.1 of Schedule "D" limits the liability of the Operator. It
states:
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94 Black's Law Dictionary, 6th ed. (St Paul, Minn: West Publishing Co. 1990)
Page: 72
T.1 Except as hereinbefore provided the Manager Operator shall not be
liable to any Joint Operator in damages or otherwise howsoever for
anything done by the Manager Operator hereunder or for the Manager
Operator's failure to do anything hereunder, except for:
i) acts of fraud, dishonesty or gross neglect on the part of any
officer of the Manager Operator in carrying out the duties of
the Manager Operator under this Agreement,
ii) the failure of the Manager Operator to remedy any default
hereunder as soon as reasonably possible after the receipt by
it from any Joint Operator of written notice of such default.
[294] Clause 11.1, of Schedule "D" of the 1966 Agreement deals with
"operations generally" and states the Plaintiffs "shall not be "joint operators"
under the operating procedure (defined earlier as Schedule "B" to the 1959
Agreement) except as otherwise expressly provided herein." They are then, in
that same clause, given the right to vote for the manager operator as if they
were a working interest.
[295] The Defendants argue that the Plaintiffs do not have a right to enforce
the good and workmanlike standard because after 1966 they were no longer joint
operators. They further submit Columbia was never actually appointed as
operator/manager, however it clearly took on the responsibilities and was
accepted and treated by all of the parties as operator. The Defendants also
argue any liability of the operator to the Plaintiffs ought to be limited by
clause T.1, and the Plaintiffs have not pleaded sufficiently, nor does the
evidence show gross negligence, fraud or dishonesty.
[296] I am inclined to agree that the evidence does not come up to the
standard required to show gross negligence and fraud. But that is not the
standard the Plaintiffs need to meet. Schedule "D" of the 1966 Agreement does
not make the Plaintiffs joint operators for the purposes of Clause T.1 which
protects the operator expressly from liability to joint operators. It would seem
the exclusion is excluded and Columbia cannot use it as a shield against the
Plaintiffs. Ironically, this accords with Columbia's repeatedly argued position
that the Plaintiffs, since 1966, were not joint operators and consequently, were
not owed duties by the operator.
[297] The Plaintiffs have a direct contractual connection with the operator,
and indeed have a vote in its selection. In any event, the obligation in clause
F.1 is not limited to joint operators. In my view, the Plaintiffs are able to
hold the operator to the standard set out in clause F.1, especially since the
Plaintiffs, as carried interest owners, have no say in what operational expenses
are incurred in the first instance.
Page: 73
6. The Nature of the Good and Workmanlike Standard
[298] Columbia concedes that if it owes a duty to the Plaintiffs under clause
F.1 it must satisfy two requirements: to conduct operations in a good and
workmanlike manner; and to conduct operations in accordance with prevailing
field practice. They submit they amount to the same thing, and I agree.
[299] The parties appear to agree that a breach of the standard would amount
to negligence as was found by Moshansky, J. in Morrison Petroleums Ltd. v.
Phoenix Canada Oil Co.95 In that case, the court was considering the 1981 CAPL
operating procedure which required, in similar wording to the case here, that
operations be conducted "in a good and workmanlike manner, in accordance with
good oilfield practice."
[300] In his judgment, Moshansky, J. said, at paragraph 96:
There is a question however as to whether the court is entitled to
consider the evidence of the plaintiff's negligence with respect to the
preparation of the AFE as the part of the broad examination of the
defendant's allegation of negligence on the part of the plaintiff in
the planning for and drilling of the Bougie well. I equate negligence
with not following good oilfield practices (Emphasis added.)
[301] The Plaintiffs here cited a number of cases besides Morrision, all
American, to further define the standard. In the end, Columbia agreed it takes
no issue with the Plaintiffs' characterization of the standard as that of a
reasonably prudent operator acting in good faith and without negligence. What
Columbia really argues is that on the evidence the Plaintiffs have not shown
Columbia failed to meet the standard.
7. The Plaintiffs' Admission
[302] Before turning to the evidence, it should be noted that the Plaintiffs
narrowed their original claim for a reduction of $63,504,409 to the carried
interest account by a formal admission filed in these proceedings. It states:
Pursuant to the Letter Agreement amongst Counsel for all parties to
this action dated March 5, 1996, and in accordance with the provisions
of Rule 230 of the Alberta Rules of Court, the Plaintiffs Canada
Southern Petroleum Ltd., Magellan Petroleum Corporation and Pantepec
International, Inc., hereby admit:
1. The Plaintiffs' claim for an adjustment to the Joint Account
and the Carried Interest Account, as pleaded in paragraphs 30
to 32 of the Amended Amended Statement of Claim filed herein,
is limited to the
--------
95 Morrison Petroleums Ltd. v. Phoenix Canada Oil Co. (1997), 198 A.R. 81 (Q.B.)
Page: 74
approximately $34 Million of expenditures charged to the Joint
Account and to the Carried Interest Account for the period
June 30, 1988 to November 30, 1993.
[303] It might be noted that some evidence was given relating to events which
occurred prior to June 30, 1988. However, that evidence was accepted, pursuant
to a ruling given December 18, 1997, only insofar as it might be relevant as
background to the position of the Plaintiffs with respect to the post-June 30,
1988 costs.
[304] The Plaintiffs, in their brief, further narrowed their claim for
reduction of the carried interest account as follows:
258. The disputed costs include the costs since June 30, 1988
identified by both Mr. Baguley and Kevin Milne. The identification of
these costs was agreed to by Mr. Christianson.
259. Mr. Baguley identified the I-48 well costs that should be excluded
in an amount of $11,600,339.00. These costs did not include the B-38
well costs.
(Exhibit 392)
260. Mr. Baguley also identified the radiography of existing welds and
repair of these welds that should be excluded in an amount of
$294,570.65.
(Exhibit 392)
261. Kevin Milne identified the facility costs that should be excluded
in an amount of $13,297,540.00.
(Exhibit 397)
262. Kevin Milne also identified a portion of the operating costs that
was attributable to the imprudent and unreasonable facility costs in
amount of $1,290,611.
(Exhibit 397)
263. The total costs that should be excluded from the carried interest
account are $26,483,060.65.
264. This means that the stipulated amount of the carried interest
account as of November 1993 is overstated by $26,483,060.65."96
--------
96 Plaintiffs' Brief pages 200-201
Page: 75
8. Analysis
[305] The Plaintiffs' claim for a reduction of the carried interest account
can be conveniently separated into two parts: the revamp of the facilities from
Spring 1990 to Spring 1991; and the I-48 well.
a) Revamp of the Facilities
[306] From the evidence of Kevin Milne, the Plaintiffs claim facility costs
in the sum of $13,297,540, and operating costs of $1,290,611. The first is based
on Mr. Milne's evidence that:
...if my conclusions are accepted relating to an inadequacy of the
project management, none of the costs of the reconstruction project
would have been incurred. All those costs are the result of Columbia's
failure to manage as a prudent operator. And the final costs of the
reconstruction project was $13,297,540. The second cost conclusion is
that even accepting that the reconstruction project was necessary, it
would have cost less if Columbia had managed the project as a prudent
operator. And my estimate is that it would cost - - the cost of
reconstruction to remedy defects resulting from design and workmanship
defects during the initial period and physical deterioration during the
initial and mothball period should not be any more than the cost of a
new plant which was estimated to be $8 million; the conclusion being
that it should have cost not more than $8 million. The third conclusion
and final conclusion relative to costs is the vapour recovery unit, and
the estimated cost of the vapour recovery unit, which was unnecessary,
was at least $4,966,000. If we accept that the reconstruction project
was necessary and that it was managed prudently, nevertheless the
vapour recovery unit was unnecessary.97
[307] I find it impossible to reconcile Mr. Milne's first conclusion, that
none of the reconstruction costs were necessary, with the Plaintiffs' acceptance
of all expenditures charged to the carried interest account up to June 30, 1988.
Also, Mr. Milne acknowledged during cross-examination on his qualifications that
despite his extensive experience he did not have any experience in bringing a
facility like Kotaneelee out of mothball after being left cold for several
years, nor in estimating the costs necessary to restore such a facility.
[308] Mr. Milne's conclusion with respect to overspending, however, is quite
a different matter. We have the evidence of Mr. Milne and Glenn Christianson,
qualified by the Plaintiffs as an expert in the construction of oil and gas
plants, that there was over spending. Mr. Milne also said an estimate of $8
million for a new plant, which was contained in an Amoco memo, was reasonable,
although I acknowledge that the author of that memo was never identified.
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97 Transcript pages 7005-7006
Page: 76
There is no evidence of any firm request by COGLA that zero emissions were
required, and evidence that the application by Anderson to cease using the
vapour recovery unit ("VRU") was subsequently approved. In addition, perhaps the
most telling fact is that in the midst of the construction, Columbia's
co-working interest owner, Amoco, was sufficiently upset at what was going on
with the revamp that they brought in Robert McTague of Optima. Mr. McTague was
critical of what was going on, and as a result Columbia was removed from the job
and replaced by Optima. Along the way several Columbia employees all appear to
have either lost their jobs or were transferred to other projects.
[309] Further, as the Plaintiffs rightly emphasize, there were
inconsistencies between the testimony of Raymond Kaczmer, Columbia's Supervisor
of Production Operations at the time, and a memo he wrote to Mr. R.P. Harisch, a
co-worker at Columbia, in March of 1991, following the project.98 The memo did
not mention corrosion problems as justification in whole or in part for the
length and cost of the revamp. The Defendants' answer to this criticism was that
the question asked by Mr. Harisch was a different one than what delayed the
project and/or caused the overrun. However, one would think this explanation
would likely be in the memo, and I am disturbed that despite Mr. Kaczmer's
repeated reiteration of the findings of unexpected corrosion, no record seems to
appear in the very meticulous records kept by Columbia of the day-to-day
progress of the job.
[310] With respect to Mr. Milne's third conclusion that, in any event, the
VRU was unnecessary and the cost was just under $5 million, he did acknowledge
if the VRU was a package the cost would be different, presumably lower, and if
COGLA really did want an emission free plant it might have been a reasonable
business decision. It seems to me with these qualifications to his evidence, the
role of the VRU can properly be considered as part of the question of
overspending.
[311] Mr. Baguley's figure of $294,570.65 for weld repairs likewise ought to
be properly considered as part of the question of overspending during the
revamp.
[312] The Defendants' attack on Mr. Milne's evidence is by way of evidence
from J. Frank Davis, a very experienced engineer, who was qualified primarily in
design, construction and operation of oil and gas handling, processing, treating
and transportation facilities.
[313] Mr. MacDonald, for the Plaintiffs, argues Mr. Davis was impeached on
his qualifications because of doubts about whether certain material he sent for
publication was in fact published, and because he claimed a Mississippi court
had accepted his evidence when in fact it had been, according to the Plaintiffs,
"unhesitatingly rejected."99 I do not think these
--------
98 Exhibit 1701, Transcript pages 26041-26061
99 Plaintiffs' Brief page 270, Exhibit 1736: Piney Wood Country Life School et.
al. v. Shell Oil Company Memorandum of Opinion and Order. U.S. District Court
of Mississippi Jackson Division. Filed April 24, 1989
Page: 77
errors can have the effect of negating Mr. Davis' qualifications to give the
evidence he did. On the other hand, however, I do not regard them as minor or
irrelevant, as argued by Mr. Lebo for Columbia. I believe they do go to the
weight of Mr. Davis' testimony, as at the very least they indicate a surprising
degree of sloppiness or inattention in the preparation of his curriculum vitae
which is presented to the Court as an indication of his credentials.
[314] In addition, I would mention that while I found Mr. Davis to be very
articulate, and even entertaining in giving his evidence, it was extremely
voluminous and amounted to less, in my view, of a dispassionate opinion on the
subject covered than to a lengthy advocacy of the Defendant's position thereon.
[315] There was one short portion of Mr. Davis' evidence which, unfortunately
from the Defendants' point of view, I believe revealed the weakness in the
Defendants' argument that Columbia's effort during the revamp was quite within
normal practice. It was in his summary of his opinion where he stated:
When I weigh all of the documents and all of the evidence that I've
looked at, my judgment is that Columbia was an average, or perhaps
slightly above average, operator. With the addition of a bluebeard
engineer or a heavyweight operating person, I believe that Columbia
could have been a well-above-average operator. They did many things
very well. But I thought that they should have done a better job on the
revamp project of alerting interested parties to the possibilities of a
cost overrun. That weighs in my judgment of Columbia.100 (Emphasis
added).
[316] Considering all of this evidence, I conclude Columbia did not fulfill
its duty to perform the revamp in accordance with an acceptable level of
good-workmanship, and an appropriate amount ought to be deducted from the
carried interest account. Exactly what amount should be deducted is difficult
and must be somewhat arbitrary, but I think a fair amount would be arrived at by
taking the sum of $13,297,540, the actual cost of the revamp, and deducting the
figure of $8 million estimated for a new plant. This is Kevin Milne's second
alternative, and I accept his evidence in that regard.
[317] With respect to operating costs, the Plaintiffs claim that Mr. Milne's
report identified $1,290,611 in imprudent and unreasonable spending. However,
that figure does not appear in Mr. Milne's report and in direct he was not asked
about his written conclusions regarding operating costs. Mr. Milne's report did
say that operating costs in 1991 and 1992 were significantly greater than in
subsequent years but "some of the extraordinary costs incurred in 1991 and 1992
may have resulted from design or workmanship defects in the facilities
constructed during the initial period (Emphasis added)."101 In cross-examination
he confirmed
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100 Transcript page 20124
101 Exhibit 397
Page: 78
to Mr. Lebo he could not express his professional opinion without more
information.102 Therefore I conclude it is inappropriate to make any deduction
from the carried interest account in that regard.
b) The I-48 Well Workover
[318] The Plaintiffs' claim with respect to the I-48 Well is $11,600,339. It
was identified by the Plaintiffs' witness Roy Baguley, a metallurgical engineer,
who testified:
Now those costs that I have read are after June of 1988, and I assumed
those costs were due to corrosion, and I believed those costs were due
to corrosion, and that cost is shown in table IV of the report.103
[319] Mr. Baguley was qualified as an expert in the fields of metallurgy,
materials and welding. He professed no expertise or experience in petroleum,
chemical or production engineering. Despite this, the Plaintiffs base their
argument with respect to the I-48 costs on Mr. Baguley's comments. Essentially
they argue that the Defendants failed to protect the well against corrosion, in
particular by failing to install a tubing plug as required by COGLA.
[320] The Defendants counter with the evidence of two witnesses: Bryan
Jackson, Columbia's drilling engineer, who testified in detail as to all of the
steps taken with I-48 and the reasons for them; and Robert Tuttle, a petroleum
engineer whose 50 some year career focussed on research, operational
applications, development of industry standards and scholarly publications
relating to corrosion in oil and gas wells.
[321] Mr.Tuttle's evidence on the general question was as follows:
Q And in your opinion, sir, was the work-over and subsequent
sidetracking of I-48 in 1990 and 1991 attributable to a
failure of the operator to pay due attention to corrosion
protection?
A No, I don't think so. The reason for the sidetrack was a
failure in the bottom of the well, the corrosion -- the high
corrosion rate. The operator at this point in time had no way
of cleaning the well up. There was no market for the gas, so
he had no way of producing for a long enough time to remove
those corrosive fluids from the bottom of the hole.
Q And just so we're clear, you're now speaking about back in 1980?
--------
102 Transcript page 7288
103 Transcript page 6674
Page: 79
A Yes. So the wells were shut-in in a situation where corrosion
was apt to occur if the fluids flowed back into the reservoir
-- into the wellbore. There was no opportunity to clean the
well up.
Q Now, sir, if you assume that somewhere between 11 and $12
million Canadian was spent on reworking the I-48 well in 1990
and 1991, in your opinion, is that a lot of money for a well
of this nature?
A No. Considering the work, there was extensive work that was
done in this particular well by the sidetracking operation and
having to shut off the bottom of the well, the whole process.
This would seem to me to be a reasonable cost. For example,
most of our wells in south Louisiana, which is close to New
Orleans or -- and in south Texas, which is close to Houston.
In order of magnitude, a reasonable AFE estimate for just
replacing the tubing -- you know, pulling in the tubing and
replacing it and then doing some minor work -- would have been
in the order of 2 to $3 million. Those were often supplemented
and very often did approach the $10 million range, depending
on the difficulty of the operation, and that's U.S. dollars.
So the $11 million, which I would assume at that time was like
$8 million U.S. money, seemed like a very reasonable value for
the extensive work that occurred.104
[322] And with particular regard to the failure to use a tubing plug was:
Q All right. And my question for you, sir, is whether, in your
opinion, if a tubing plug had been placed in this well, in the
packer and tailpipe assembly at approximately 3600 metres,
would it have had any impact on preventing corrosion in the
casing below that level, sir?
A No, I don't see how it could possibly have any effect on the
casing corrosion.
Q Why do you say that, sir?
A Because it only affects the internal portion of the tubing.
That's the only part that's protected by the tubing plug.
Q All right. So is it your opinion that it would have had no
impact on the casing below or above the packer, then?
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104 Transcript page 21694
Page: 80
A That's correct.105
[323] In light of all the evidence relating to the I-48 well, and in
particular that of Mr. Tuttle, I find that the Plaintiffs' claim for the
$11,600,339 has not been made out.
9. Conclusion
[324] In the result, I conclude only the sum of $5,297,540 should be deducted
from the carried interest account and I so direct.
D. THE PROCESSING FEE ISSUE
1. Basis for a Gas Processing Fee
[325] The gas processing fee issue arises from the 1988 counterclaim filed by
three Amoco Defendants, Amoco Canada, Dome and Amoco Production (i.e. not Amoco
Canada Resources) against the Plaintiffs, Mobil Oil Canada Ltd., Canadian
Superior Oil Ltd., Columbia and Esso Resources of Canada Ltd. The claim is based
on the provisions of Article IX in the 1966 Agreement:
9.1 If A-D-P during the period in which C-M-O holds the C-M-O carried
interest in the Blocks or any of them as aforesaid, proposes to
construct gas gathering systems and a gas processing plant for the
purpose of putting natural gas from that Block or those Blocks in a
marketable state or otherwise to process it for the removal of liquids
and/or sulphur, A-D-P shall advise C-M-O of such proposal . . .
9.2 ...Whether the said plant and gas gathering systems are constructed
by C-M-O and A-D-P or solely by A-D-P, the cost of construction,
operation and maintenance thereof, and the receipts and revenues
therefrom, shall not be added to the operational costs or the
operational receipts respectively for the purposes of the C-M-O carried
interest, but the following provision of this Article shall apply
thereto:
(a) The said gathering systems and plant shall be owned
and operated by the parties hereto who bear the cost
thereof as provided in this clause 9.2 and as a
project separate and apart from the ownership and
operation of the lands subject hereto.
(b) The owners of the said gathering systems and plant
shall have and are hereby exclusively granted the
right to gather and process the
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105 Transcript page 21680
Page: 81
gas produced from the lands subject hereto and to the
Main Agreement which are (or are to be) served by the
said gathering systems and plant, and to charge for
such gathering and processing a fee or charge which
will limit cumulative net revenue to the said owners
of the said gathering systems and plant in accordance
with the principles expounded in the Alberta Public
Utilities Board's Shell-Jumping Pound decision of
December, 1961, assuming the following in applying
such principles:
[326] There follows under sub-subheadings (a) through (g) such items as rate
of return, debt equity ratio, interest rates, income tax allowance and
depreciation, and the clause continues in subheading (c):
(c) The operational costs for a Block shall include the
fee or charge which is made under subclause (b) for
gathering and processing the gas produced from that
Block while C-M-O holds the C-M-O carried interest
therein . . .
2. Background
[327] As related in the History, a plant was built on the Kotaneelee site in
the late 1970's. There is a long history of commentary, position taking,
negotiation, and disagreement between the parties, primarily the Plaintiffs and
Amoco, as to whether the plant, mothballed in 1983 and de-mothballed and
modified in 1990, was intended to be covered by these provisions. Amoco says it
was and the Plaintiffs say it was not. Both argue that the other, by words or
conduct over the years, have acknowledged the position of the other to be
correct. The non- Amoco Defendants make no argument one way or the other, but
say it is an issue which must be resolved by the Court and that they will abide
by the result. Recent statements prepared by the Defendant Anderson, successor
to Columbia as operator, do not show a processing fee, but do contain a
statement to the effect that not all of the working interest owners agree on the
amounts shown for operational expenses. Amoco has calculated such a fee and has
included it in statements of their own. Both Amoco and the Plaintiffs have put
the matter in issue in the pleadings.
[328] Late in the trial the Plaintiffs applied for an order that they begin
receiving payments from the carried interest account based on Anderson's
statements. On April 10, 2000 after two days of argument, I ruled that the
Defendants were properly in receipt of the revenues in question until they
exceeded expenses and the question of expenses was before the Court. The
Plaintiffs could only obtain the interim relief they sought if they could bring
themselves within the authorities relating to prejudgment orders, and they could
not. The Plaintiffs appealed this ruling to the Court of Appeal, but that court
ruled the appeal was premature and ought to be argued after judgment in this
action.
Page: 82
3. Analysis
[329] The Plaintiffs make three arguments in support of their position that
it is inappropriate for a gas processing fee to be charged to the carried
interest account and, in effect, to them. First, they say that the provisions of
Article IX in the 1966 Agreement were superceded by the 1977 Agreement, by which
Columbia was given the opportunity to earn an interest in the field. They argue
that under the terms of the 1977 Agreement, Columbia undertook to drill a test
well and, under clause VIII, if the test well was capable of producing natural
gas in paying quantities to undertake "at its sole cost, risk and expense to
provide the necessary facilities to place the Test Well on production." Aside
from the fact this position was neither pleaded nor referred to in any evidence
put before the Court, it requires that the reference to "completion" in the
heading of clause VIII be construed to include not only the earning well, but
also the plant. The Defendants argue the language of the Agreements cannot be so
construed, and I agree.
[330] The Plaintiffs' second argument relates to the question whether the
non-Amoco Defendants have somehow agreed to the Plaintiffs' argument as to a gas
processing fee. I ruled against the Plaintiffs on this point on April 10, 2000,
and my view on that matter is unchanged.
[331] The third argument of the Plaintiffs is that the plant in question is
not a gas processing plant as defined in the 1966 Agreement. In short, the
Plaintiffs argue the plant is neither a "gas processing plant" nor was it
constructed for the "purpose of putting natural gas in a marketable state."
Their evidence on the point was given by Kevin Milne, the engineer who also gave
evidence with respect to the revamp of the plant and who at one time actually
worked at the Jumping Pound plant.
[332] In his testimony Mr. Milne said the following:
I conclude that the facilities included as gas processing facilities in
the DTT Report are not facilities for putting natural gas in a
marketable state for these reasons:
- the main function of the Kotaneelee facilities is to remove
water from the produced gas
- the produced gas with water removed is not in a marketable
state.
Secondly:
I conclude that the facilities included as a gas processing
plant in the DTT Report are not a gas processing plant for
these reasons:
Page: 83
- the Kotaneelee facilities dehydrate the gas and a dehydrator
is not a gas processing plant
- the Kotaneelee facilities do not recover natural gas liquids
or sulphur and a gas processing plant recovers natural gas
liquids or sulphur.106
[333] Mr. Milne based his conclusions on definitions contained in the Alberta
Gas Conservation Act as follows:
. . . marketable gas means a mixture mainly of methane originating from
raw gas, if necessary through the processing of the raw gas for the
removal or partial removal of some constituents, and which meets
specifications for use as a domestic, commercial or industrial fuel or
as an industrial raw material . . .
. . .processing plant means a plant for the extraction from gas of
hydrogen sulphide, helium, ethane, natural gas liquids or other
substances, but does not include a well head separator, treator, or
dehydrator.107
[334] He also looked at other definitions commonly used by the Gas Processing
Association of America including:
. . . gas processing means the separation of constituents from natural
gas for the purpose of making saleable products and also for treating
the residue gas to meet required specifications . . .
. . . gas processing plant means a plant which processes natural gas
for recovery of natural gas liquids and sometimes other substances such
as sulphur . . . 108
[335] Mr. Milne acknowledged that the word "processing" as distinct from
"processing of natural gas" is a general term meaning causing a change of state
in a substance, and so virtually everything that happens in a production
facility can be said to be "processing." He also acknowledged that non-technical
people might and in various publications do use the term gas processing plants
to refer to plants such as Kotaneelee. He maintained his view that there are
proper definitions for gas processing plant and gas processing in the industry,
and the Kotaneelee plant does not comply with those definitions.
[336] Rather surprisingly, the Defendants did not counter Mr. Milne's
evidence with direct evidence of an expert. Even Frank Davis who certainly had
lengthy experience with gas plant
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106 Transcript pages 26953-26954
107 Transcript pages 26943-26944
108 Transcript page 26944
Page: 84
construction and who was on the witness stand for some 21 days, was only asked
by Defendants' counsel a question as to what he would call the Kotaneelee plant.
He replied that in the 1950's it would be a gas conditioning plant, and by 1978
it would be called a gas processing plant. He said nothing about 1966, the year
of the Agreement, and the subject was not pursued any further.
4. Conclusion
[337] I am reluctant to make any finding of an admission on the part of the
Plaintiffs or Amoco based on all of the comments referred to, mainly in
documents authored by individuals not called as witnesses for one reason or
another. It seems to me they all amount to commentary on a legitimate question
which had been raised as to the effect of Article IX in the 1966 Agreement, and
in my view, it remains a legitimate question today.
[338] Apart from all of the comments of individuals closely associated with
the Plaintiffs, raised by Amoco, the main thrust of the Amoco argument on the
meaning of Article IX of the 1966 Agreement is to point to the large number of
references in the voluminous exhibits to gas processing facilities or gas
processing, that include or would include Kotaneelee. They do not point to any
evidence that deals directly with the question of whether it appears the parties
intended the situation to be governed by a processing fee calculated by the
quite complicated method which came to be known as the "jumping pound formula".
[339] The only witness who in my view dealt directly with that question is
the Plaintiffs' witness, Kevin Milne. He was highly qualified to give the
evidence he did and gave very clear testimony that he did not believe the
qualifications contained in Article IX were met by the Kotaneelee plant. He
stood up well in my view under very competent, searching cross- examination. I
accept his evidence on this matter and find, in the circumstances, a charge to
the carried interest account of a gas processing fee is not appropriate.
V. FINDINGS
A. LIMITATIONS
[340] In view of my findings that the obligation in clause 3.1(D) is a
continuing obligation and that in any event the Defendants did not breach that
obligation, the question of limitations is moot.
B. PRAYERS FOR RELIEF
[341] The Pleadings in the three actions before me contain a substantial
number of requests for relief. For the Reasons I have given, I make the
following rulings:
Page: 85
Action 9001-03466
Canada Southern Petroleum v. Amoco Canada Petroleum Company et al
[342] The Plaintiffs' claims against the Defendants in paragraphs (a), (b),
(c), (d), (e), (f), (g), (h) and (j) of the Prayer for Relief in the amended
amended statement of claim are dismissed. With respect to paragraph (i), an
Order will issue declaring the operational costs included in the carried
interest account is to be reduced by $5,297,540. The matter of costs is
discussed in the context of all three actions below.
[343] As previously stated, I consider the amended counterclaim brought by
Anderson to have been abandoned.
Action 8901-15660
Canada Southern Petroleum et al v. Columbia Gas Development of Canada
et al
[344] There was some controversy about this claim, and in particular the
Plaintiffs' request for a declaration that interest cannot accrue or be charged
upon expenditures for the joint account. Considerable time was spent
distinguishing between the "joint account" and the "carried interest account,"
and ultimately it appeared the parties recognized the Plaintiffs were concerned
about the potential for interest being charged to the carried interest account.
Through the course of the trial it became further apparent that the parties
agree such interest cannot and has not been charged. I note as well the
Plaintiffs did not include it in their list of issues identified in the
conditional certificate of readiness filed in March of 1996. Consequently, I
consider that request for relief to have been abandoned.109
[345] The Plaintiffs' second request for relief asked for a declaration that
expenditures for gathering lines and dehydration equipment are expenditures for
the joint account. This is essentially the same issue as raised in the third
action, Amoco's counterclaim regarding a gas processing fee. As stated I find
there is no basis for a gas processing fee and grant the Plaintiffs this relief.
Action 8801-13549
Allied-Signal Inc. v. Dome Petroleum Limited
And Between
Amoco Canada Petroleum Company et al v. Canada Southern Petroleum et al
[346] The Plaintiffs by Counterclaim request, in paragraph (3) of the Prayer
for Relief, a declaration that the earliest feasible development and marketing
of oil and/or gas found on the properties has occurred. My finding that the
obligation is of a continuing nature makes this form of relief inappropriate.
However, the dismissal of the Plaintiffs' claim for a breach would seem to
amount to the same thing, at least as of the date of trial.
--------
109 Transcript pages 2183 and 1679, Exhibit 250, Columbia Brief page 124
Page: 86
[347] The relief requested in paragraphs (1), (2), (4) and (5) are dismissed.
[348] The remaining requests for relief in paragraphs (6) through (12) relate
to the question of the proper forum for the resolution of issues between the
parties, and a request for a permanent injunction restraining the Plaintiffs
Canada Southern, Magellen and Pantepec from proceeding against the Defendants in
any forum other than Alberta.
[349] In December of 1988, Medhurst, J. ruled that Alberta is the forum
conveniens and granted Amoco's application for an interlocutory injunction
restraining Canada Southern from further prosecuting or taking any steps on
their own behalf, and as alleged trustee for Magellan and Pantepec in the
Florida action. Canada Southern was further restrained from bringing any action
against Allied or the Plaintiffs or Defendants by counterclaim regarding any
alleged breaches of the marketing clause except in this Court.
[350] For the reasons given by Medhurst, J., I too find that Alberta is the
forum conveniens for all matters between the parties relating to the Kotaneelee
field, and I order that the injunction be made permanent.
C. COSTS
[351] Costs may be spoken to if and when necessary.
DATED at Calgary, Alberta this 14th day of September, 2001.
--------------------------
J.C.Q.B.A.
VI. APPENDIX
A&S Alberta & Southern Gas Co. Ltd.
A-D-P Alminex, Pan Am, Dome and Provo Gas
AFE Authority for Expenditures
Anderson Anderson Oil and Gas Inc.
Allied Allied-Signal Inc.
Alminex Alminex Limited
Amoco Collectively, Amoco Canada Petroleum Company Ltd.,
Amoco Canada Resources Ltd., Dome Petroleum Limited
and Amoco Production Company
Amoco Canada Amoco Canada Petroleum Company Ltd.
Page: 87
Amoco Group Collectively, Amoco Canada Petroleum Company Ltd.,
Amoco Canada Resources Ltd., Dome Petroleum Limited
and Amoco Production Company
Amoco Production Amoco Production Company
Amoco Resources Amoco Canada Resources Ltd.
Anderson Anderson Oil & Gas Inc.
BCPC British Columbia Petroleum Corporation
BP Amoco Amoco Corporation in the United States
Canada Southern Canada Southern Petroleum Ltd.
Catawba Catawba Corporation
C-M-O Group Collectively Canada Southern, Magellan, Pantepec
COGLA Canada Oil and Gas Lands Administration
Columbia Columbia Gas Development of Canada Ltd.
Dome Dome Petroleum Limited, now Amoco Canada Resources
Ltd.
EOR Enhanced Oil Recovery
Esso Esso Resources of Canada Limited
H-S Group Collectively Home, Kern, Alminex, United and Signal
Home Home Oil Company Ltd.
Imperial Imperial Oil Resources Limited
Inland Inland Natural Gas Marketing Ltd.
Kern Kern County Land Company
LDC Local Distribution Companies (B.C. Hydro, Inland
Natural Gas and Pacific Northern Gas)
Magellan Magellan Petroleum Corporation
MichCon Michigan Consolidated
mmcf/d million cubic feet of gas per day
Mobil Collectively Mobil Resources Ltd., Mobil Oil Canada
Ltd., and Mobil Oil Canada Properties
NEB National Energy Board
Oil Investments Oil Investments, Inc.
O'Rourke O'Rourke Engineering
Pan Am Pan American Petroleum Corporation
Pantepec Pantepec International, Inc.
Provo Gas Provo Gas Producers Ltd.
Signal Signal Oil & Gas Company
Texas Gas Texas Gas Transmission Corporation
TOP Take or pay
United United Oils Limited
VRU Vapour Recovery Unit
Westcoast Westcoast Transmission Company Ltd.
WNG Washington Natural Gas