Hudson King v Lightstream Resources Ltd

Court of Queen’s Bench of Alberta

Citation: Hudson King v Lightstream Resources Ltd, 2020 ABQB 149

Date: 20200227

Docket: 1001 11801

Registry: Calgary

Between:

Eugenia Hudson King, James Christian Custis Hudson, Andrew Case Hudson, ACH

Holdings, LLC

Plaintiffs

- and -

Lightstream Resources Ltd. (formerly named Petrobakken Energy Ltd.), Lightstream

Resources Partnership, Crescent Point Energy Corp. and Crescent Point Resources

Partnership

Defendants

_______________________________________________________

Reasons for Judgment

of the

Honourable Madam Justice A. Woolley

_______________________________________________________

Introduction

[1] William H. Hudson was a Texas entrepreneur and businessman. His son Chris described

him as a “wildcat” entrepreneur, someone willing to take on high risk ventures with the hope of

big gains. While Chris isn’t quite sure why, at some point in the 1960s his father became

interested in Canada, and in the development of oil and gas resources here.

Page: 2

[2]

Ultimately Mr. Hudson discovered hydrocarbons in a reservoir near Rocanville,

Saskatchewan (“Rocanville Properties”). Lacking the capital necessary to develop his discovery,

Mr. Hudson – through his company Rocanville Corporation – entered into agreements with

another Dallas based company, Triton Petroleum Limited (“Triton”), to allow the Rocanville

Properties to be developed and for him to profit from his discovery. Triton’s President and Chair,

Mr. William Lee, was another Texan and a friend of Mr. Hudson’s.

[3]

On or about June 3, 1977, the Rocanville Corporation assigned its interests in the

Rocanville Properties to Triton in exchange for $900,000 (“Rocanville Agreement”).

[4] In addition, Mr. Hudson and his wife Betty Upton Hudson created a trust for the benefit

of their three children, Mr. Andrew Hudson, Mr. Chris Hudson and Ms. Eugenia Hudson (now

Eugenia Hudson-King): the W.H. Hudson Childrens’ Trust (“Childrens’ Trust”; “Childrens’

Trust Agreement”). The Childrens’ Trust Agreement provided that when the children reached 21,

they would personally take over the interests of the Childrens’ Trust.

[5]

And, finally, the Childrens’ Trust entered into a net profit interest agreement with Triton

with respect to the Rocanville Properties (“NPI Agreement”). The NPI Agreement required

Triton to drill on the Rocanville Properties at its own risk and expense. If it discovered resources,

then 50% of any net profits from selling those resources would be transferred to the Childrens’

Trust. If it acquired other assets within the area covered by the NPI Agreement (“NPI Area”),

those assets would be subject to the NPI Agreement, with net profits realized from those other

assets shared between the parties.

[6]

The NPI Agreement had no set termination date; it still operates today for the benefit of

its current counterparties, Chris Hudson, Andrew Hudson through his holding company ACH

Holdings LLC (“ACH Holdings”) and Eugenia Hudson-King, and Crescent Point Resources

Partnership (“Crescent Point”).

[7]

The case before me arises from a dispute over the NPI Agreement. The Plaintiffs claim

that the various counterparties to the NPI Agreement, including Crescent Point, did not properly

account for profits earned on the Rocanville Properties between 1999 and 2015. They claim that

the Defendants have breached the NPI Agreement, including their duties of good faith and

honest performance. They further claim that the Defendants are fiduciaries and have breached

their duties as fiduciaries. And, finally, they claim that the Defendants have acted negligently so

as to wrongfully injure the Plaintiffs.

[8]

The Plaintiffs say that the Defendants have improperly failed to account to them for

profits earned on the Rocanville Properties in the following ways:

a) By deducting as operating expenses amounts properly characterized as overhead

from the revenues earned from the Rocanville Properties;

b) By deducting taxes paid pursuant to sections 3(1.1) and 13.1 of The Corporation

Capital Tax Act, SS 1979-1980, c C-38.1, as amended (“CCTA Tax”) from the

revenues earned from the Rocanville Properties;

c) By adjusting the NPI Agreement accounts in 2006 for amounts that should have

been accounted for between 1999 and 2006 in relation to the acquisition of assets

in the NPI Area from Cherry Hill Resources Inc. (“Cherry Hill”); and

d) By overcharging for the costs and expenses incurred when acquiring assets within

the NPI Area from Arista Energy Limited (“Arista”).

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[9]

As explained in the reasons that follow, the Plaintiffs have made out their claim in

significant part. The Defendants breached the NPI Agreement when allocating costs and

expenses incurred when acquiring assets from Arista. The Defendants also breached the NPI

Agreement by deducting the CCTA Tax from revenues earned from the Rocanville Properties.

The Hudsons’ claim in relation to the CCTA Tax is, however, statute barred for any amounts

charged prior to August 6, 2008. Further, the Plaintiffs’ claim in relation to the Cherry Hill

allocation is statute barred. Finally, the Plaintiffs have not shown that the Defendants violated the

NPI Agreement when accounting for overhead expenses.

[10] I base my decision on the terms of the NPI Agreement. The Defendants breached those

terms in relation to the Arista acquisition and the CCTA Tax. The Plaintiffs have not shown,

however, that the Defendants acted negligently. Moreover, the Defendants did not have or breach

any fiduciary obligations to the Plaintiffs.

[11] Based on the terms of its Assignment and Novation Agreement to become a party to the

NPI Agreement, I find that Crescent Point is liable to the Plaintiffs for the breaches of the NPI

Agreement, and direct it to adjust the NPI Agreement account to correct for the improper

deductions that were made between 2008 and 2015.

Background Facts

The NPI Agreement

[12] The NPI Agreement was one of three agreements dated June 3, 1977 which began the

legal relationships at issue in this litigation.

[13] Through the Rocanville Agreement, the Rocanville Corporation assigned its interests in

the Rocanville Properties to Triton in exchange for $900,000. Specifically, the Rocanville

Agreement provided:

The Assignor [Rocanville] hereby sells, assigns, transfers, conveys and sets over

unto the Assignee [Triton], and the Assignee hereby purchases and accepts

directly from the Assignor, the entire right, title, estate and interest of the

Assignor in and unto the Hydrocarbon rights [“right, title and interest…in and to

petroleum and natural gas and other related hydrocarbons…in the lands described

in Schedule ‘A’”] for the total purchase price of Nine Hundred Thousand

($900,000.00) dollars in lawful money of Canada, the receipt of which sum the

Assignor hereby acknowledges. TO HAVE AND TO HOLD the same unto the

Assignee henceforth to its own exclusive benefit absolutely, free and clear of all

adverse claims and demands whatsoever of all persons claiming through, by or

under the Assignor…

[14] Through the Childrens’ Trust Agreement William and Betty Upton Hudson created a

trust for the benefit of their three children until the children turned 21, at which point the children

would personally hold the Childrens’ Trust’s assets. The motivation for creating the Childrens’

Trust was estate planning; by 1986 all three children were 21, and the Trust was wound up. Since

that time, Andrew and Chris Hudson, and Eugenia Hudson-King, have been the counter-parties

to the NPI Agreement, with ACH Holdings becoming the assignee of Andrew’s interest in 2009.

[15] Finally, Triton entered into the NPI Agreement with the Childrens’ Trust. The NPI

Agreement provided that within one year from closing of the Rocanville Agreement, Triton

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would drill two wells on the Rocanville Properties and, if the drilling was successful, it would

continue drilling up to an additional six wells so long as the wells that it had previously drilled

were producing oil in commercial quantities: NPI Agreement, Clause II.

[16] The NPI Agreement provided that Triton would bear all “of the risks, costs and expenses

of operations conducted by Triton” and that Triton would indemnify the Childrens’ Trust for any

liability arising from the operations: NPI Agreement, Clause II.D.

[17] Clause III of the NPI Agreement set out the terms for the distribution of revenue, costs

and expenses associated with developing the property within the Rocanville Agreement. In

particular, it provided:

A. If, as and when TRITON, and its successors and assigns, recover from the

proceeds of production attributable to the properties and interests acquired by it

pursuant to the Rocanville Agreement, or any renewals or extensions thereof, and

from the income defined in Section D of this Paragraph III a sum equal to the total

of:

(a) all of the costs and expenses incurred by TRITON in the

acquisition thereof, including the consideration paid to Rocanville

Corporation therefor and interest paid by TRITON on loans and

advances made to it by a lending institution for funds paid to

Rocanville Corporation as such consideration, and

(b) all of the costs and expenses of whatsoever nature incurred by

TRITON and its successors and assigns in exploring, developing,

drilling, testing, completing, equipping, operating and maintaining

such properties and interests and marketing the production,

therefrom, and in conducting the business defined in Section D of

this Paragraph III,

HUDSON shall be entitled to receive and TRITON will pay to HUDSON, an

amount equal to one-half (1/2) of the net profits thereafter realized by TRITON,

its successors and assigns, from the development and operation of such properties

and interests and the conduct of such business.

B. “Net profits”, as such term is used in this Paragraph III shall be the amount by

which the total of:

1. Proceeds actually paid to TRITON, its successors and assigns,

for oil, gas and other minerals produced, saved and sold from the

attributable to the SUBJECT PROPERTIES (after deducting

therefrom (i) all payments made on royalties, overriding royalties,

and other payments out of production to which the same are

presently subject, and (ii) all taxes thereon other than income

taxes);

2. Consideration paid to TRITON, its successors and assigns, for

personal property and equipment constituting a portion of the

SUBJECT PROPERTIES (including equipment in or on the

properties described in Part I of Exhibit “A” to the Rocanville

Agreement, but excluding such oil[,] gas and mineral properties);

Page: 5

3. Sums paid in cash to TRITON, its successors and assigns, as dry

hole or bottom hole contributions to the cost and expense of

operations conducted on the SUBJECT PROPERTIES, to the

extent such sums are paid by parties not owning an interest in or

participating in such operations; and

4. Credits allowed or payments made to TRITON, its successors

and assigns, by the Province of Saskatchewan, Canada, for

operations conducted by TRITON, its successors and assigns, on

the SUBJECT PROPERTIES if and to the extent that such credits

or payments are funded from the production attributable to the

properties and interests covered by this agreement.

exceeds the total of the costs and expenses incurred by TRITON, its successors

and assigns, in exploring, developing, drilling, testing, completing, equipping,

operating and maintaining the SUBJECT PROPERTIES.

All of such proceeds, costs and expenses shall be acculated [sic].

C. There shall be charged as cost and expense for the purposes hereof the sum of

$1250 (Canadian) per month, in lieu of any other charge for administrative

supervision and overhead. There shall not be considered a cost and expense

incurred by TRITON and there shall not be charged as cost or expense for the

purposes hereof (i) any other cost or expense incurred by TRITON in maintaining

its corporate offices, or (ii) the salaries of any officers or employees for time not

actually expended on the properties.

…

E. Not less frequently than quarter-annually after the date of closing the purchase

and sale provided by the Rocanville Agreement, TRITON will furnish to

HUDSON a statement in detail setting forth the revenue received, the costs and

expense incurred, and the status of such net profits account. Payment for such net

profits realized during each particular quarter-annual period shall be made to

HUDSON within 30 days after the expiration of the quarter-annual period during

which the same were realized.

[18] Clause IV of the NPI Agreement provided:

If while there remains in force and effect any lease acquired by TRITON pursuant

to the Rocanville Agreement TRITON acquired any additional interest in the oil,

gas or other minerlas [sic] in and under lands within two (2) miles of any of the

lands covered by and of the leases described in Part I of Exhibit “A” to the

Rocanville Agreement, such additional interest shall constitute a part of the

SUBJECT PROPERTIES for all purposes hereof, including the computation of

net profits pursuant to Paragraph III hereof, and the cost and expense incurred by

TRITON in the acquisition thereof shall constiture [sic] a cost and expense in the

computation of net profits.

[19] For the purposes of this dispute, the key contractual provisions are Clause III.C which

caps overhead expense deductions at $1250; Clause III.B.1which allows for the deduction as

expenses the taxes paid on the proceeds earned on the oil produced from the Rocanville

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Properties; and Clause IV which allows Triton to deduct amounts for the “cost and expense” it

incurs when acquiring assets within the NPI Area.

[20] The Plaintiffs argue that some amounts deducted as operating expenses were properly

characterized as overhead within the meaning of Clause III.C and thus subject to the $1250 cap.

They argue that the CCTA Tax is functionally a capital tax, not a tax on the proceeds earned

from the Rocanville Properties, and thus not deductible within the meaning of Clause III.B.1.

They argue that while the Cherry Hill transaction amounts were properly calculated, they were

not allocated at the appropriate time period. Finally, they argue that the amounts charged to the

NPI Agreement account for the Arista acquisition did not reflect the costs and expenses incurred

in the acquisition of the assets covered by the NPI Agreement; as a result, the charges breached

Clause IV of the NPI Agreement

The parties

[21] The original counterparties to the NPI Agreement were Triton and the Childrens’ Trust.

In 1986, when Ms. Hudson-King turned 21, the Childrens’ Trust was wound up, and the Hudson

children became direct counter-parties to the NPI Agreement.

[22] In 2009 Andrew Hudson created a company called ACH Holdings to manage his

financial interests and made his brother-in-law Frank-Paul King the manager of that entity. By

way of an agreement dated November 11, 2009, he assigned his interest in the NPI Agreement to

ACH Holdings. Since that time, Andrew Hudson’s interest in the NPI Agreement, now held by

ACH Holdings, has been managed and monitored by Mr. King on his behalf.

[23] Mr. King also took responsibility for managing and monitoring his wife Ms. Hudson-

King’s interests in the NPI Agreement. During the time period at issue in this litigation, Mr.

King had employees of his companies King Strategic and King Capital Partners, Wade Wegner

and Peggy Thomm-Trout, assist him with the management and monitoring of the NPI Agreement

accounts.

[24] The Hudsons and Mr. King are all well-educated; all have university degrees.

Additionally, Chris Hudson is a lawyer and Mr. King has an MBA.

[25] Mr. King has extensive business experience in the area of securities and finance,

including in relation to the oil and gas sector. Along with his interest in his company King

Capital Partners, he is Chair and Chief Executive Officer of Four Star Energy Company and

President and Chief Executive Officer of TFO Holdings.

[26] Chris Hudson currently works as a lawyer and has done so since his graduation in 1989,

except for a period between 2000 and 2007 when he worked managing his then wife’s business

and real estate holdings. Chris Hudson has also worked in various business capacities, including

holding a 50% interest in a company called Technical People Incorporated for a time.

[27] Andrew Hudson has worked in various business ventures since he graduated from

university in 1983, although he has had some financial struggles over the years, which is what

led him to create ACH Holdings and to pass management of his financial and business affairs to

Mr. King.

[28] Ms. Hudson-King had a variety of work experiences prior to starting her family. Since

1995 she has worked as a homemaker and parent. She had the benefit of Mr. King’s expertise

and experience in relation to the management of her interests in the NPI Agreement account.

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[29] In general, the Hudsons and Mr. King have education sufficient to allow them to

understand the accounting statements provided to them with respect to the NPI Agreement, and

to ask questions and make inquiries in relation to those statements. They are though neither

accountants nor active in and knowledgeable about the Canadian oil and gas sector. At no time

did they have access to information and knowledge, or an ease of understanding, equivalent to

the various entities who were their counterparties on the NPI Agreement.

[30] In terms of those entities, Triton, which in 1988 amalgamated and continued as Triton

Canada Resources Ltd., changed its name in 1993 to Transwest Energy Inc. On March 1, 1998

Transwest Energy Inc. sold and assigned its entire interest in the NPI Agreement to Real

Resources Inc (“Real Resources”).

[31] In August 2007 Real Resources Partnership entered into a plan of arrangement with

Tristar Oil & Gas Ltd. It changed its name to TOG Partnership and continued operations as

Tristar Oil & Gas Ltd (“Tristar”).

[32] Tristar was a junior oil and gas company actively engaged in growth and expansion; it

had both an active drilling program and an active interest in acquisitions. It pursued 1 to 2

acquisitions per month, although not all of them came to fruition. From its foundation in 2006,

TriStar actively expanded, going from producing approximately 1000 barrels of oil per day to

producing 25,000 per day by 2009. The President of TriStar was Brett Herman. The Chief

Financial Officer was Jason Zapinsky. Eric Strachan was the Vice President Exploration, Filippo

Angelini was the Controller, Graham Kidd was the Vice President Engineering and Brian Purdy

worked as a corporate development analyst. Jeremy Wallis was the Vice President Lands. At the

time it acquired Real Resources in 2007, TriStar had approximately 15 employees; however, it

kept on the majority of Real Resource’s technical and administrative staff and by 2009 had about

150 employees.

[33] Organizationally TriStar had a group responsible for land – the contracts and

administration department – which included surface and mineral landmen working in area teams.

The contracts and administration department was supervised by Mr. Wallis, who had worked at

the company from when it was incorporated until it was acquired by Petrobakken in 2009. After

the acquisition of Real Resources it also had land managers, first Perry Green and then Lawrence

Fisher. Mr. Fisher was the Manager of Land and Business Development from 2008 until 2017

and reported to Mr. Wallis. Mr. Fisher was Lightstream’s corporate representative for the

purposes of this litigation. Working under the land managers in relation to the NPI Agreement

were Shyanne Way (then Woroniuk) and Shawn McDonald.

[34] TriStar also had an accounting group, a number of whom had previously worked for Real

Resources. One of those, Kristin Clark, was responsible for the accounting associated with the

NPI Agreement from 2006 until September 2014, except for the period from January 2011 to

February 2012 when she went on maternity leave.

[35] TriStar also had reserve engineers and evaluators, one of whom was Luke Kimber, who

came to TriStar from Starpoint Energy Trust. Mr. Kimber’s role at TriStar involved the

performance of reserve evaluations related to acquisition and investment decisions.

[36] On October 1, 2009 Tristar amalgamated with the Canadian Business Unit of

Petrobakken Energy and Resources Ltd. It continued as Petrobakken Energy Ltd.

(“Petrobakken”). The TOG Partnership changed its name to PBN Partnership. From that time

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Petrobakken was the managing partner and agent of PBN Partnership in respect of the NPI

Agreement.

[37] Ms. Clark, Mr. Fisher, Mr. McDonald and Ms. Way all continued to work at the company

after it was acquired by Petrobakken. Mr. Wallis did not.

[38] On May 22 2013 Petrobakken changed its name to Lightstream Resources Ltd. and PBN

Partnership changed its name to Lightstream Resources Partnership (“Lightstream”).

[39] On September 30 2014 Lightstream Resources Partnership sold and assigned its entire

interest and obligations in the NPI Agreement to Crescent Point. Crescent Point Energy Corp. is

the managing partner and agent of Crescent Point in respect of the NPI Agreement.

[40] The Assignment and Novation Agreement between Lightstream and Crescent Point set

out the nature of the obligations undertaken by Crescent Point as the “Assignee” of the NPI

Agreement and in particular to any defined “Third Party” which, in this case, were ACH

Holdings, Chris Hudson and Eugenia Hudson-King. Specifically, the Assignment and Novation

Agreement provided:

2. Assignee herby accepts the assignment herein provided and covenants and

agrees with Assignor and Third Party to assume as of the Effective Date, and

thereupon and thereafter to be bound by and observe, carry out and perform and

fulfill all of the covenants, conditions, obligations and liabilities of Assignor

under the Agreement, to the same extent and with the same force and effect as

though Assignee had been named a party to the Agreement as of the Effective

Date in the place and stead of Assignor.

3. Third Party hereby consents to the assignment and accepts Assignee as a party

to the Agreement, and hereby covenants and agrees that as of the Effective Date,

Assignee shall be entitled to hold and enforce all of the benefits, rights and

privileges of Assignor under the Agreement as if Assignee had been originally

named as a party to the agreement, and from and after the Effective Date, the

Agreement shall continue in full force and effect with Assignee substituted as a

party thereto in the place and stead of Assignor.

4. As of and from the Effective Date, Third Party hereby expressly releases,

relieved and discharged Assignor from all its duties, obligations and liabilities

arising out of or accruing under the Agreement; PROVIDED however that

nothing herein contained shall be construed as a release of Assignor from any

obligations or liability under the Agreement, which obligations or liability

accrued prior to the Effective Date…

6. for the benefit of Third Party only, Assignee expressly acknowledges that in all

matters relating to the Agreement, subsequent to the Effective Date and prior to

the delivery of a fully executed copy of this Agreement to Third Party, including

but not limited to all accounting, conduct of operations and disposition of

production thereunder, Assignor has been acting as trustee for and duly authorized

agent of Assignee. For the benefit of Third Party only, Assignee expressly ratifies,

adopts and confirms all acts or omissions of Assignor in its capacity as trustee and

agent, to the end that all such acts or omissions shall be construed as having been

made or done by Assignee

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[41] The current counterparties to the NPI Agreement are thus Chris Hudson, Eugenia

Hudson-King, ACH Holdings and Crescent Point.

[42] In terms of the issues raised by the Hudsons, the claims regarding overhead and the

CCTA Tax cover the entire period from 1999-2015 – that is, the time when Real Resources,

TriStar, Lightstream, Petrobakken and Crescent Point were variously the named counterparties to

the NPI Agreement. The Arista acquisition claim arises from the period when TriStar and

Petrobakken were the counterparties to the NPI Agreement, because the amounts in relation to

that acquisition were allocated to the NPI Agreement account in 2008 (by TriStar) and in 2010

(by Petrobakken). The Cherry Hill transaction issue arises from the period when Real Resources

was the counterparty to the NPI Agreement.

[43] The liability of Crescent Point in relation to the CCTA Tax charges prior to 2014, and in

relation to the Arista acquisition charges, turns on the interpretation of the Assignment and

Novation Agreement, and on what obligations Crescent Point incurred by virtue of having “been

named a party to the Agreement as of the Effective Date in the place and stead” of Lightstream

and having been bound to “carry out and perform and fulfill all of the covenants, conditions,

obligations and liabilities” of Lightstream as of that time.

[44] In terms of the trial before me, the witnesses for the Plaintiffs included the Hudsons, Mr.

King and Mr. King’s employee, Mr. Wegner. The witnesses for the Defendants included Mr.

Wallis, Ms. Clark, Mr. Kimber, Mr. McDonald, Ms. Way and Mr. Fisher, along with a

representative of Crescent Point, Ms. Shelley Witwer.

Overview of the Operation of the NPI Agreement: 1977-2015

[45] This section provides the background facts with respect to the following:

a) The Defendants’ general accounting practices in relation to the NPI Agreement;

b) The Defendants’ management of their legal obligations under the NPI Agreement,

including their perception of, and attitude to, the NPI Agreement;

c) The Plaintiffs’ approach to, and management of, their interests in the NPI

Agreement; and,

d) A chronology of key events.

[46] Specific facts related to the accounting for overhead and the CCTA Tax, and the

allocation of amounts for the Arista acquisition and the Cherry Hill transaction, will be set out in

the sections of the judgment analyzing those issues.

NPI Agreement Accounting – General

[47] Under the NPI Agreement, the Defendants were required to provide quarterly statements

“setting forth the revenue received, the costs and expenses incurred, and the status of” the NPI

Agreement accounts: Clause III.E.

[48] The Defendants calculated the NPI Agreement account on a cumulative and accrual

basis. The NPI Agreement explicitly directed cumulative accounting; it referred to proceeds,

costs and expenses being “acculated”, but all witnesses agreed this was a typo and that the

parties meant “accumulated”: Clause III.B.

[49] The cumulative accounting meant that while any positive balance would be paid out on a

50% basis to the NPI Agreement holders in the month it was earned, any negative balance in one

month was carried over to the next.

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[50] The accrual accounting meant that expenses would be booked as soon as they were

incurred, but the account would be adjusted once the company received invoices so as to reflect

the actual amount of the cost. The accrual accounting contributed to delays in issuing the NPI

Agreement revenue statements and also resulted in adjustments to those statements.

[51] The Defendants regularly adjusted the NPI Agreement accounts. Those adjustments

could be for a year or two but, as was the case in the Cherry Hill transaction, could occur as long

as 7 years later.

[52] When adjusting the NPI Agreement accounts, the Defendants did not identify where the

change arose or explain why it had occurred. In her testimony Ms. Clark, the accountant in

charge of the NPI Agreement accounts, explained that it was not practical to identify or explain

every adjustment because the numbers changed too frequently. Ms. Clark also said that she did

not inform the Hudsons of any time limit on when adjustments could be made and that she

herself did not understand there to be any such limit. In Ms. Clark’s view, an amended statement

was intended to be relied upon as the correct statement, and the previous statement should be

viewed as incorrect.

[53] The Plaintiffs received two types of accounting documents from the Defendants with

respect to the NPI Agreement accounts. Revenue statements listed the gross revenues received

over the reporting period and the amounts deducted from those revenues for transportation, the

CCTA Tax (called the “Saskatchewan Gov’t Surcharge”), royalties, including the Freehold

Production Tax, operating expenses and overhead in the amount of $1250. It listed, but did not

deduct, the actual amounts of overhead expenses incurred by the Defendants in relation to the

Rocanville Properties. The revenue statements also recorded the amounts charged by the

Defendants for costs incurred in relation to the acquisition of properties within the NPI Area in

those reporting periods in which such costs were incurred. Because those acquisition costs were

often high, and given the cumulative nature of the NPI Agreement account, the acquisition costs

could be carried forward for many months or even years.

[54] The Plaintiffs also received a monthly operating summary (also called a lease operating

statement/lease op) from the Defendants from time to time. The monthly operating summary

provided a more detailed month by month breakdown of revenues and expenses, including how

revenue was calculated, a list of costs associated with authorizations for expenditure for the

Rocanville Properties, the type of royalties payable, and the categories of expenses charged to

the NPI Agreement account. The monthly operating summary did not describe the nature of the

expenses charged beyond headings such as “Equipment Rentals”.

[55] To create the monthly operating summaries Ms. Clark would run a query in the company

accounting system based on a well list provided to her by the contracts and administration

department, the cost centres assigned to each well, and any authorizations for expenditure

associated with the wells. The revenue and royalty amounts came from the production

accounting group who recorded those amounts. If there were land or reserve acquisition amounts

those were provided to Ms. Clark by someone in the contracts and administration department.

[56] One challenge with the NPI Agreement accounting was the division of responsibility

between the accounting and contracts and administration departments; the Defendants did not

have any person or group responsible for all aspects of the NPI Agreement and its accounting.

Ms. Clark testified that she did not read the NPI Agreement; she relied on the landmen to provide

her with the information she needed to do the accounting in accordance with that Agreement. At

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the same time, however, Mr. McDonald and Mr. Fisher testified that they had no involvement

with Ms. Clark’s work other than to deliver allocations of costs and expenses associated with

acquisitions. They did not review her work to determine if it was being done in accordance with

the terms of the NPI Agreement. While Mr. Fisher testified that he understood the contracts and

administration department to be responsible for the interpretation of the NPI Agreement and

ensuring that it was complied with, he did not have any personal knowledge of how the NPI

Agreement accounting was done other than knowing that it was done on an accrual basis.

[57] Ms. Way, who for some time was the landman in charge of the NPI Agreement, testified

that she had responsibility to determine what was and was not included in the NPI Agreement

accounting. She also, however, said that she did not know how Ms. Clark prepared the NPI

Agreement accounts. She reviewed the accounts to be aware of what they said but did not

scrutinize the numbers they contained. She did not review Ms. Clark’s work in any way. It was

not clear from her testimony how, as a matter of practice, she ensured that the NPI Agreement

accounting complied with the NPI Agreement.

[58]

This is one of the significant points in relation to the general approach taken by the

Defendants to the NPI Agreement accounting: the organization and approach of the Defendants

created risks of gaps in ensuring that the accounting complied with the terms of the NPI

Agreement.

[59] Also significant is the extent to which the accounting for the NPI Agreement largely

flowed from the general accounting practices and approaches of the Defendants. While certain

specific facts about the NPI Agreement determined how the accounting was done – the $1250

cap on overhead, the properties to which it applied, and the ability to charge for asset

acquisitions within the lands covered by the NPI Agreement– for the most part the Defendants

approached the NPI Agreement accounting in accordance with the procedures they used for other

properties in which they had an interest; in, for example, how they identified overhead

expenditures, how they coded operating expenses and how they allocated operating expenses

between different properties.

[60] Finally, the Defendants determined how to interpret and apply the general principles set

out in the NPI Agreement, without input from, or consultation with, the Plaintiffs. That was

consistent with the structure of the NPI Agreement but is nonetheless significant for

understanding the accounting practices at issue in this trial. It was the Defendants alone who

determined what would properly be characterized as overhead and subject to the $1250 cap, what

would be included in “Proceeds actually paid…after deducting therefrom…all taxes thereon”,

what amounts should be characterized as a cost and expense incurred “in exploring, developing,

drilling, testing, completing, equipping, operating and maintaining” the Rocanville Properties,

and how to calculate the “cost and expense” incurred when acquiring interests within the lands

covered by the NPI Agreement. Significantly, the NPI Agreement did not incorporate the more

extensive accounting guidelines published by the Petroleum Accountants Society of Canada

(“PASC” – formerly the Petroleum Accountants Society of Western Canada (“PASWC”)) that

are commonly incorporated in oil and gas joint operating agreements. The only direction given

for the accounting was that contained in the NPI Agreement itself, and the interpretation of that

Agreement was done by the Defendants.

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NPI Agreement – Land Management

[61] As noted, the contracts and administration department was responsible for interpreting

the NPI Agreement. It was also responsible for assessing the relationship between the NPI

Agreement and the financial and corporate interests of the Defendants.

[62] The NPI Agreement was unusual and, for most of the employees in the contracts and

administration department, was one of only a few such agreements they encountered in their

career. Mr. Fisher observed that he had managed well over 1000 land contracts, but only three of

those were net profit interest agreements

[63] In general, the contracts and administration department viewed the NPI Agreement

negatively. They viewed it as a drag on the financial and corporate interests of the Defendants

and one which created excessive administrative work and complexity. My impression from the

record was that the department viewed the NPI Agreement as fundamentally unfair, requiring the

Defendants to share with the Plaintiffs profits that by rights should have been theirs.

[64] In 2006 Ms. Way referred sarcastically to the “wonderful NPI”. She also suggested in a

draft e-mail dated November 3, 2006, “before we drill too many wells in Rocanville, it would be

worthwhile to try and buy these guys out again”. In the final e-mail sent to management on

November 9, 2006, she said “the longer we hold out paying them anything, the better are [sic]

chances are in making a deal with them to buy out their interest”.

[65] In an e-mail from 2007, in response to a request from Mr. King to discuss the Agreement,

Ms. Way said “before we chat with the Hudson crew, I do not want us playing up the fact that we

have spent all this money on seismic which will guarantee drilling. If they think we are going to

drill, they will hold out from selling their NPI interest. At some point this year, I would like to

approach the Hudson’s [sic] with a buyout offer. As discussed, shooting seismic, buying land,

etc. is part of our business and how we evaluate our properties”.

[66] In another 2007 e-mail Ms. Way said that the “agreement has been a headache and

definitely messes up the economics for the area”.

[67] Mr. Strachan, the Vice-President Exploration of TriStar, described the NPI Agreement as

“pretty harsh” and having the potential to “impact our drilling here in the future”.

[68] Ms. Way expressed the view that the Hudsons should not be provided with information

beyond that contemplated by the NPI Agreement – that is, quarterly statements. She also noted

the advantages that accrue to the Defendants when the NPI Agreement account was in a negative

position, suggesting that the company might want to drill a new well because the well “if

successful will come on strong and then decline allowing TriStar to maximize the production

revenue that goes into our pocket w/o having to pay the Hudson’s 50% of the net profit.”

[69] In another e-mail from 2007, the TriStar area geologist, Sandy Denton, reiterated Ms.

Way’s point about the negative account position allowing new wells to be drilled without having

to pay out funds to the Hudsons; he also suggested that “by far the best option here is to buy the

NPI holders out. They would likely be more amenable to an offer now that their $75,000 a month

cheques have been cut off”.

[70] In 2008 Mr. McDonald considered in more detail the possibility of buying out the

Hudsons or converting their interest to a 1% non-convertible gross overriding royalty. He

discussed that possibility with Mr. Wallis. The goal was to remove the NPI Agreement as an

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encumbrance on the property, which Mr. McDonald viewed as desirable because the size of the

property it covered and because of its indefinite duration. Mr. McDonald also had concerns with

the administration associated with the NPI and the fact that it created a relatively archaic

encumbrance on the land, and one which is poorly understood. Mr. Wallis testified that he also

had concerns with the accounting complexities created by the NPI Agreement.

[71] Ultimately, however, Mr. Wallis and Mr. McDonald concluded that a buyout was not

financially feasible, although they did discuss the possibility with the Hudsons in early 2009.

[72] Shortly prior to the Plaintiffs filing the claim against the Defendants, Ms. Way had a

conversation with Mr. Wegner about the NPI Agreement account. In May 2010 she told Mr.

Wegner that Petrobakken had no obligation to send the Hudsons records related to the

acquisition. In Mr. Wegner’s summary, which Ms. Way agreed was accurate, he says,

Shyanne pushed hard for us to think about selling the Hudson NPI interest to

Petrobakken. She then insinuated that given their policy of no data sharing and

their acquisition history in the area, the Hudson NPI interest may never see

‘positive’ status again since the allocation of costs between Petrobakken and the

Hudson interest is somewhat at the discretion of Petrobakken.

[73]

In her testimony Ms. Way said that these comments were based on her interpretation of

the NPI Agreement, and on the guidance of Mr. Fisher.

[74] In their testimony before me Mr. Wallis, Mr. McDonald, Mr. Fisher and Ms. Way all

suggested that the correspondence here simply reflected the ordinary practices of the contracts

and administration department to review existing agreements and to consider acquisition

opportunities; Mr. McDonald said that he was always trying to increase the company’s interests

in existing areas through acquisitions or otherwise. All of them denied taking steps to

deliberately keep the NPI Agreement in a negative position so as to force the Hudsons to accept

a buy-out. They emphasized that no formal buy-out offer was ever made.

[75] I did not have any significant issues with the credibility of these witnesses, all of whom I

thought answered the questions put to them in accordance with their recollections and beliefs

about what took place. Based on the record before me, I do not find that any of them deliberately

or wilfully sought to subvert the Defendants’ contractual obligations to the Hudsons. On the

other hand, I also thought that each of them sought to characterize their approach to the NPI

Agreement as having a probity that the contemporaneous documentation did not support. That

documentation shows a consistent hostility to the NPI Agreement, and a failure to recognize the

legitimacy of the Plaintiffs’ rights to share in the profits from the Rocanville properties. That

hostility and failure, even if it did not cause them to deliberately or wilfully breach its terms,

increased the likelihood that they would fail to act consistently with what it in fact required.

[76] In my view the general attitude of the contracts and administration department to the NPI

Agreement is relevant to assessing the conduct of the Defendants, particularly with respect to the

acquisition of the costs and expenses arising from the Arista acquisition, and their duty of honest

performance.

NPI Agreement – The Plaintiffs’ Interests and Management

[77] The Hudson children only became aware of their interest in the NPI Agreement in the

mid-1990s when they first received net profits payments. This may have been because the lands

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did not become profitable until that time or, as Chris Hudson suggested, because the profits had

been retained by William Hudson personally prior to that time.

[78] The Hudsons testified that the payments from the NPI Agreement were valuable and

important to them; between 1995 and 2006, for example, Ms. Hudson-King calculated receiving

$1,278,227.58USD in net profit payments. Collectively, in 2003 the Hudsons received $422,484;

in 2004 they received $696,906; in 2005 they received $476,002; and in 2006 they received

$483,107.50.

[79] During the time when they were receiving regular payments from the NPI Agreement, the

Hudsons did not put much time into reviewing the documentation received in respect of the NPI

Agreement.

[80] As noted, Mr. King managed the NPI Agreement on Ms. Hudson-King’s behalf. From

approximately 1992, when she first received payment under the NPI Agreement, until

approximately 2006, he reviewed the statements and monitored in a general way activities in the

Rocanville area by, for example, looking for press releases that identified such activities. He or

one of his employees prepared documentation to record and track the revenues received by Ms.

Hudson-King, taxes paid on the revenues and the conversion rate from Canadian to US dollars.

Mr. King testified that he was fastidious about a careful review of the numbers. He noted as an

example an e-mail dated August 10 2006 in which his employee Peggy Thomm-Trout corrected

a $260 dollar error made by the operator in the Hudsons’ favour and wrote that “My boss makes

me balance to the penny or know the difference”.

[81] Prior to 2009 Andrew and Chris Hudson were responsible for managing their interests in

the NPI Agreement; however, the Hudson brothers were less actively engaged with the issues

than Mr. King, and they obviously relied on him and his employees to monitor and assess how

the NPI Agreement account was managed by the Defendants. After 2009, with the creation of

ACH Holdings, Andrew Hudson transferred the management of his interest in the NPI

Agreement entirely to Mr. King.

[82] Towards the end of 2006, the Plaintiffs stopped receiving payment under the NPI

Agreement. This was because the operator, which by that time was Real Resources, had spent

$3,600,000 shooting 3D seismic, and that expense had been charged to the NPI Agreement

account, putting it in a deficit position.

[83]

The cessation of payments under the NPI Agreement concerned all of the Hudsons. At

that time Andrew and Chris Hudson each had challenging financial circumstances and relied

upon the income received through the NPI Agreement. Mr. King and Ms. Hudson-King did not

have the same financial challenges as Andrew and Chris Hudson; however, once the NPI

Agreement moved into a negative position, Mr. King increased his activity and involvement in

monitoring the NPI Agreement accounts.

[84] Mr. King, Chris and Andrew Hudson had a number of discussions with Real Resources

and its representatives in relation to the seismic issue. They wanted to receive more information

about the results obtained from the 3D seismic data, and the reason for seeking that data. They

also wanted to have more information about the land covered by the NPI Agreement. Real

Resources declined, however, to provide them with much of the information requested. The

Hudsons and Mr. King could see, and were later provided with, a copy of a plat map indicating

the land covered by the NPI Agreement, but Ms. Way advised them that they were not allowed

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to see the 3D seismic data because the NPI Agreement did not entitle them to receive it. The

refusal to share the seismic data troubled Mr. King, particularly the extent to which the operator

was permitted to incur costs and include them in the NPI Agreement accounts without any input

from the Hudsons.

[85] At this time the Hudsons also had concerns about the frequency with which they were

receiving statements from Real Resources and with the accuracy of the statements. The NPI

Agreement accounts were regularly adjusted, amended and reissued, but those amendments

occurred much more frequently after 2000. Mr. King testified that between 2000 and 2006

amendments or updates occurred once or even twice a month, and often applied to multiple

reporting years. The amendments were generally to correct mathematical errors or to provide

updated information about expenses incurred. Sometimes the amendments would date back

several years.

[86] At that time, in late 2006/early 2007, Mr. King and the Hudsons considered retaining

legal counsel or seeking an audit of the NPI Agreement accounts. Mr. King made inquiries of a

contact he had in Calgary, Allan Ross of Ross Smith, with respect to identifying a suitable

accountant to complete the audit and Calgary’s “best Oil and Gas litigation attorney”. Mr. King

also hoped that Mr. Ross might be able to arrange a meeting between Mr. King and the President

of Real Resources, but that did not occur. Mr. Hudson was given a recommendation for a

Canadian lawyer, Mr. Carsten Jensen QC, in an e-mail from Mr. Ross dated October 23, 2007.

Ultimately, however, the Hudsons were not willing to undertake the expense of an audit or

obtaining legal advice at that time.

[87] In 2008 the Hudsons again considered the possibility of an audit. In January 2008 Mr.

King contacted the Hudsons to say that he thought “it would be beneficial for the four of us to sit

down and see if it makes sense to work on a plan for clearing up the situation in Canada with

TriStar”. He said that he thought the accounting was inaccurate, that a joint interest audit would

be appropriate and that they could “recover a significant amount of money from TriStar if we are

able to correct the accounting”. Mr. King estimated that an audit would cost $90-150,000, and

they would each have to pay one-third of that cost. At around this time Chris Hudson also had

discussions with Greg Draper, a forensic accountant at Meyers Norris Penny LLP, about the

possibility of a forensic audit.

[88] Again, however, the Hudsons decided against doing an external audit because of the

expense and because they were not sure how beneficial it would be. Andrew Hudson also

expressed concern about undermining the relationship with TriStar; he thought it would be

preferable for them to do the analysis themselves. It was thus agreed that King Strategic would

undertake a review of the NPI Agreement accounting documents, and other publicly available

information, to assess the NPI Agreement accounts. King Strategic agreed to complete this

review for $125USD per hour up to a maximum of $3000USD, with the cost to be shared evenly

between the Hudsons.

[89] Mr. King confirmed the scope of the review in an e-mail dated January 17, 2008. He was

to determine whether the “50% Net Profits Interest has been accounted for properly [and] in

accordance with the 1977 Net Profit Agreement” and the Hudsons’ “rights as assignees to the

1977 Net Profit Agreement”.

[90] Following this exchange King Strategic began its review. The review consisted of

analyzing all of the NPI Agreement account statements that had been received over the past

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decade and doing a comparative analysis in which they looked at production, expenses, the

amount of expenses as a portion of revenues, and royalties as a portion of revenues. They looked

at how oil prices had changed over time, and how that compared to the price being paid for

production. They also compared third-party production data to the data they had been given in

the NPI Agreement account statements. Mr. Wegner described the model as intended to track

revenue, expenses and activities related to the capital account. It relied on external sources of

information and such information as they were able to obtain from the Defendants.

[91] In June, 2008 King Strategic completed its review and reached the following conclusions:

There is not sufficient evidence suggesting that significant accounting errors exist

in the joint interest payments and billings generally. This conclusion is based on a

number of observations, of which the most important are:

o There exist little variance between the production reported by the operator

for the wells applicable to the NPI and the production reported by third-

party data sources for the last ten years.

o There exist little variance over time in the operating costs of the wells

applicable to the NPI. In fact, operating performance has generally

improved over the last ten years.

o There exist little if any decline in the wells applicable to the NPI over the

last ten years. This suggests that the operator has done an excellent job of

perpetuating the production through a combination of workovers,

recompletions, and additional drilling.

However, there remains a significant question as to the applicability of the Area

of Mutual Interest (“AMI”) concept which has been applied in the determination

of the capital expenditure allocation to the NPI. While we have considered the

AMI question in the general context of our review of the accounting data, a more

thorough lands review is required in order to determine whether or not the current

 90 square mile AMI, as determined by the operator, is in keeping with Section

IV of the original Rocanville Agreement…

Lastly, while we have not been provided 2008 accounting data by the operator,

2007 production levels and 2008 commodity price levels would support the

retirement of the current NPI deficient of approximately $2 million around year

end 2008 assuming no significant capital expenditures. [Emphasis in original]

[92] At the time of this review neither Mr. King nor Mr. Wegner realized that the Arista

acquisition had occurred, and that additional properties within the NPI Area had been acquired.

They also did not identify or analyze issues related to the CCTA Tax, the Cherry Hill allocation

or whether operating expenses were being properly distinguished from overhead, although Mr.

Wegner later included the Cherry Hill acquisition in his model.

[93] After the first allocation of $8,977,000 associated with the Arista acquisition to the NPI

Agreement account in August 2008 Mr. Wegner and Mr. King did not have any significant

concerns, although they did ask follow-up questions and request further information from

TriStar, as discussed below.

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[94] In October of 2008 Mr. King told Chris Hudson that he had engaged a lawyer at the

Miller Thomson firm in relation the interpretation of the NPI Agreement. It does not appear,

however, that the Hudsons followed through with that engagement.

[95] During the period from 2008 to 2010 the Hudsons did have some conversations with

TriStar and Petrobakken with respect to the purchase of the NPI Agreement; however those

conversations do not appear to have achieved any degree of seriousness.

[96] Mr. Wegner continued to update the models he had created in the 2008 review of the NPI

Agreement, and to monitor the NPI Agreement in that way. He also sent requests for further and

better information from TriStar from time to time, such as for information about how oil

transportation costs were calculated, and their relationship to sales revenues. At one point he

asked for information about increases in the CCTA Tax, although he testified that he had no

concerns with respect to that amount being included in the NPI Agreement account.

[97] During this time period Andrew Hudson expressed unhappiness to Mr. King about the

situation with the NPI Agreement and, in particular that no funds were being paid out; he

expressed the view that TriStar should be increasing production in the NPI Area. Mr. King

responded to Andrew Hudson in an e-mail dated March 20, 2009 in which he noted that “They

are in control and we have NO power in this deal unless they break the contract. There is NO

evidence at this time that they have ever broken the contract. Therefore, all questions, concerns,

suggestions, etc about what they should have done, could have done, should do, etc. are a waste

of time”.

[98] In May 2010 Petrobakken added an additional negative amount to the NPI Agreement

account to adjust for amounts associated with the Arista acquisition that they said ought to have

been included previously, as well as amounts associated with another acquisition. The further

Arista adjustment, not including land value, was $5,387,000. These changes caused significant

concern to the Hudsons, Mr. King and Mr. Wegner. They immediately made inquiries of Ms.

Clark and Petrobakken for information about this adjustment and took steps that ended up being

preparatory for commencing this litigation, which they did by filing their Statement of Claim in

August 2010.

[99] The approach of the Hudsons, Mr. King and his employees to the NPI Agreement reveals

that the Plaintiffs did attempt to manage their interests responsibly, although they did not seem to

have the ability to ask the right kinds of questions, or to be as critical as they needed to be in

reviewing the information that was provided to them.

[100] The Hudsons and Mr. King knew that the counterparties to the NPI Agreement had the

ability to make decisions in relation to the Rocanville Properties, the NPI Area and the

accounting for the NPI Agreement. They knew that they had no input into those decisions and

only minimal information. They did not, however, take more forceful or assertive steps to obtain

information, and to review and assess whether the counterparties were making decisions in

accordance with their legal obligations under the NPI Agreement.

[101] This was the case even though the Hudsons and Mr. King were aware that decisions were

being made that did not necessarily advance their interests, and that might not be consistent with

the terms of the NPI Agreement. They went so far as to explore the possibilities of obtaining an

audit or retaining counsel on more than one occasion. Their reasons for not doing so were

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primarily financial, the concern that the cost of that outside advice outweighed the benefits that it

could bring.

[102] What could be described as a lack of effectiveness and assertiveness by the Hudsons

combined unfortunately with the unilateral structure of the NPI Agreement, the Defendants’

hostility to the NPI Agreement and the Defendants’ skepticism towards the Hudsons’

entitlements under that Agreement. In combination, the approaches of the parties increased the

likelihood that the NPI Agreement would not be complied with, and that the non-compliance

would not be identified.

Brief Chronology

[103] A timeline for some of the key events related the NPI Agreement and this litigation is as

follows:

1. June 3, 1977: Rocanville Agreement assigns Rocanville Corporation’s

interests in the Rocanville Properties to Triton.

2. June 3, 1977: W.H. Hudson Childrens’ Trust created.

3. June 3, 1977: NPI Agreement.

4. 1986: Childrens’ Trust wound up and Andrew, Chris and Eugenia Hudson

become counterparties to NPI Agreement.

5. 1988: Amendment to the Corporation Capital Tax Act, SS 1979-1980, c.

C-38.1, as amended, to include a resource surcharge in the calculation of

the corporate tax.

6. 1992 (approx.): First payments to Hudson children under NPI Agreement.

7. March 1, 1998: Transwest (formerly Triton) sells and assigns interest in

NPI Agreement to Real Resources.

8. 1999: Acquisition of assets in the NPI Area from Cherry Hill Resources

Inc.

9. 2006: Real Resources shoots 3D seismic and charges $3.6M for that

seismic to the NPI Agreement account, putting the account into a deficit

position.

10. 2006: Real Resources adjusts the NPI Agreement account to reflect the

Cherry Hill acquisition.

11. 2006: Real Resources moves from monthly to quarterly accounting for the

NPI Agreement.

12. August 2007: Real Resources enters into a plan of arrangement with

TriStar.

13. December 17, 2007: TriStar announces arrangement to acquire Arista.

14. January 18, 2008: Closing of TriStar’s acquisition of Arista.

15. March 2008: Sproule and Associates Limited (“Sproule”) completes its

evaluation of the oil and gas assets acquired from Arista.

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16. August 7, 2008: TriStar advises the Plaintiffs of a $8,977,000 allocation to

the NPI Agreement account in respect of the Arista acquisition.

17. October 1, 2009: Tristar amalgamates with the Canadian Business Unit of

Petrobakken Energy and Resources Ltd.

18. May 17, 2010: TriStar advises the Plaintiffs of a further $5,387,000

allocation to the NPI Agreement account in respect of the Arista

acquisition for a total allocation of $14,364,000 for the Arista acquisition.

19. August 6, 2010: Commencement of this litigation.

20. September 30, 2014: Crescent Point acquires Lightstream’s interests in the

NPI Agreement and enters into the Assignment and Novation Agreement.

21. September 9, 2019: Commencement of the trial of this action.

Issues

[104] Resolving this dispute requires me to answer the following questions in relation to the

period from January 1, 2000 to December 31, 2015:

1. Did the Defendants owe fiduciary duties to the Plaintiffs in relation to the

discharge of their duties under the NPI Agreement?

2. How does the contractual duty of good faith and honest performance apply

in the context of the NPI Agreement?

3. Are the Defendants liable to the Plaintiffs in tort?

4. Did the Defendants’ allocation of expenses as operating or overhead

violate the NPI Agreement or any other legal duty owed to the Plaintiffs?

5. Did the Defendants’ allocation of the CCTA Tax violate the NPI

Agreement or any other legal duty owed to the Plaintiffs?

6. Did Real Resources’ 2006 allocation of the costs and expenses of the

November 17, 1999 acquisition of assets from Cherry Hill Resources Inc.

to the NPI Agreement accounts violate the NPI Agreement or any other

legal duty owed to the Plaintiffs?

7. Did TriStar and Petrobakken’s allocation of costs and expense to the NPI

Agreement accounts with respect to the Arista acquisition violate the NPI

Agreement or any other legal duty owed to the Plaintiffs?

8. If the Defendants breached any of their legal duties in any of these

respects what is the appropriate remedy?

Contractual Interpretation and NPI Agreements

[105] The substantive issues in this case turn on the interpretation of the NPI Agreement. As

such, they require me to apply the law governing the interpretation of contracts. They also

require me to consider the interpretive significance, if any, of this agreement being a net profits

interest agreement.

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[106] Judges must interpret a contract through the words it uses, giving those words their

“ordinary and grammatical meaning”. They must interpret each term of the contract in the

context of the agreement as a whole, not in isolation. They must look at the contract practically

and through the lens of common sense. The point throughout is to identify the intention of the

parties, objectively speaking, as revealed through the language they used and in light of the

“surrounding circumstances known to the parties at the time of formation of the contract”:

Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53 at para 47; IFP Technologies

(Canada) Inc v EnCana Midstream and Marketing, 2017 ABCA 157 at paras 65 and 80;

Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4 at

para 64.

[107] Surrounding circumstances refers to objective evidence about background facts which

existed when the parties entered into the contract and which they knew or could reasonably be

said to have known at that time: Sattva at para 58. They include things such as the purpose of the

agreement, the nature of the relationship it created or “the nature or custom of the market or

industry in which the contract was executed”: IFP Technologies at para 83.

[108] Contracts should also be interpreted “in a positive and purposive manner, trying to make

it work”: Humphries v Lufkin Industries Canada Ltd., 2011 ABCA 366 at para. 15. This

includes taking into account its commercial purpose and good business sense: IFP Technologies

at para 88. As the Court of Appeal put it in Humphries at para 15:

The court must presume that these business people intended that the contract work

in substance and frankly, beyond the nominal or technical. The court must not be

too quick to find gaps or flaws in a commercial contract’s wiring which prevent

power from reaching all its operative parts. The parties are presumed not to have

been wasting ink on an academic exercise. Therefore, where one possible

interpretation will allow the contract to function and meet the commercial

objective in view, and the other scarcely will, the former is to be chosen.

[109] It should be acknowledged, however, that neither the surrounding circumstances nor

good business sense can be used to deviate from the text of the agreement. The Court may not

discount or dismiss what the contract says: IFP Technologies at para 89.

[110] The burden of proof for establishing the breach of a contract lies with the party alleging

the breach and requires that the breach be established on the balance of probabilities: Grafikom

Speedfast Limited v Heidelberg Canada Graphic Equipment Limited, 2013 ABCA 104 at para

21; C(R) v McDougall, 2008 SCC 53 at para 49. If that party establishes the breach on the

balance of probabilities then, “as a practical matter, however … a Defendant may face an

evidentiary burden in the sense that if he does not displace all or part of the Plaintiff’s case, he

will lose”: Panarctic Oils Ltd v Menasco Manufacturing Co (1983), 41 AR 451 (CA) at para

28. That practical observation does not, however, change the central point that the party alleging

a breach must prove the breach on the balance of probabilities.

[111] Special considerations apply to interpreting standard form contracts, and in interpreting

terms that have a “common meaning to participants in a given industry”: IFP Technologies at

para 61. Those considerations do not usefully inform the interpretation of the NPI Agreement,

however, because net profit interest agreements do not follow a standard form or employ

collectively established industry precedents. Net profit interest agreements exist in legislation

and as part of regulatory schemes, but as evidenced by the testimony before me, they do not

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routinely arise as a matter of private contractual relations in the oil and gas context (Re

regulatory schemes see: Nigel Bankes, “Payout under Alberta’s Oil Sands Royalty Regulation”

ABlawg.ca, November 20, 2018).

[112] In addition, very little case law from either Canada or the United States has considered

net profit interest agreements and how to interpret them: Eugene Kuntz, “Classifying Non-

Operating Interests in Oil and Gas” Canadian Institute of Resources Law Discussion Paper,

April 7, 1988 at pp. 16 and 22. They do not contain “legal terms of art” arising from case law

having “a common meaning to participants in a given industry” to guide my interpretation: IFP

Technologies at para 61.

[113] As a result, each net profit interest agreement must be interpreted on its own terms, as a

whole and in lights of its own surrounding circumstances. As the Court of Appeal noted with

respect to net profit interest agreements, “in each particular case, the interest conveyed is to be

found by interpreting the agreement as a whole and within its context”: Bank of Montreal v

Dynex Petroleum Ltd, 1999 ABCA 363 at para 33.

[114] That being said, certain general structural features of net profit interest agreements,

including this NPI Agreement, are relevant to, and important for, resolving the dispute between

the parties. The NPI Agreement allocates risk and control in relation to the development of the

Rocanville Properties. On the one hand, and unlike a gross overriding royalty agreement, the net

profit interest holder has no entitlement to revenues from production unless the production is

profitable. The net profit interest holder receives revenues only on a net basis, not a gross basis,

thereby sharing in the risks of an oil property proving not to be commercially viable. The net

profit interest holder will have disposed of the rights they had in the properties (here the

Rocanville Properties) but the amount of the purchase price depends on the properties being

profitable on a net basis. On the other hand, the net profit interest holder only shares in risks to a

limited extent; if the operator incurs expenses that are never recovered, the net profit interest

holder does not have to pay a portion of those expenses.

[115] In this way the net profit interest holder occupies a place between a joint operator, who

fully shares in the risks and rewards associated with oil and gas production, and a royalty holder,

who does not share the risks and participates in the rewards only to a relatively modest extent. As

J.N. Sherrill explained in “Net Profits Interests – A Current View” in Proceedings of the

Nineteenth Annual Institution on Oil and Gas Law and Taxation (New York: Matthew

Bender, 1968) at p. 170:

The bundle of rights which we have equated to a net profits interest make it a

hybrid. It is like an override, since it is a nonoperating interest continuing for the

life of the property, and its holder is subject to no personal liability for

development, operation, and abandonment of the property. But, like a working

interest, the ultimate value of a net profits interest is a function of production from

the property and of the efficiency of its operation; thus, the net profits interest has

value only when its supporting working interest has value (See also: Canpar

Holdings Ltd v Saskatchewan (Minister of Energy & Mines), 1987 60 Sask R

128 (SKCA) at para 59).

[116] At the same time, however, the hybrid nature of the NPI Agreement does not extend to

operations; with respect to operations a net profit interest holder generally has no involvement or

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right to participate in or make decisions. For this reason, Mr. Sherrill concludes his analysis by

noting:

In spite of its hybrid characteristics, a net profits interest should be considered as

a type of overriding royalty interest, since its primary working interest aspect of

being reduced by operating expenses is less substantive than its overriding royalty

similarities of duration and absence of operating rights or obligations.

[117] What all of this means is that a net profit interest agreement can – and this NPI

Agreement did – create difficult situations for both sides. On one side the operator (here the

Defendants) has the burden and responsibility for operating the properties, and it has risks that it

alone bears. Yet at the end of the day it has to share 50% of its net profits with the net profit

interest holder. On the other side the net profit interest holder (here the Plaintiffs) has no control

over the operation of the properties; it has no ability to reduce or limit the expenses incurred to

generate profits from the properties. It gets to share in the profits, but without any control or

input, and with only limited knowledge of how those profits are generated or calculated.

[118] A net profit agreement also, however, has the ability to create a relationship of mutual

benefit and synergy. Unlike a gross overriding royalty the operator does not have to make

payments unless and until the properties actually generate profits. Notably, under Clause III.A of

the NPI Agreement, no payments were made until Triton had recovered all of the costs and

expenses incurred by it in acquiring the Rocanville Properties and in exploring and drilling on

those Properties. The operator also enjoys independent control and decision-making authority.

[119] And for its part, and to its benefit, the net profit interest holder enjoys the right to

participate in a significant share of the profits from the properties, with limited downside risk

should the properties prove to be expensive to operate or give rise to unforeseen liabilities or

problems.

[120] Further, because both parties ultimately have an interest in maximizing the profits from

the properties, they have an agreement that has the potential to capitalize on their mutual self-

interest in earning as much from the properties as possible. This allows the possibility for an

effective and profitable commercial relationship for both sides.

[121] This general structure – both its benefits and risks – informs the interpretation of the NPI

Agreement. Looking at the language of the NPI Agreement in the context of the contract as a

whole, its surrounding circumstances and commercial reality requires me to interpret the NPI

Agreement in a way that allows the parties to it to achieve the benefits it is designed to create,

while also constraining the risks inherent in its structure so as to allow those benefits to be

realized. It means allowing the operator independence in the management and operation of the

properties. It means allowing the operator to deduct any legitimately incurred expenses

associated with “exploring, developing, drilling, testing, completing, equipping, operating and

maintaining” the properties, unless the expense is excluded by other provisions of the NPI

Agreement.

[122] It also, though, means protecting the net profit interest holder from abuse or exploitation

by the operator arising from the operator’s unilateral power and control over the operation of the

properties and the expenses it incurs and accounts for. That is, the interpretation of the NPI

Agreement, and the identification of what constitutes a breach of its terms, must recognize that a

net profit interest holder differs from a royalty owner, because a royalty owner can accurately

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and easily track the legitimacy of the payments they receive, since those payments are a function

of independently verifiable factors, namely the quantity of production and (in some cases) its

price. By contrast, the net profit interest holder relies and depends on the operator’s competence,

efficiency and honesty in operating the properties and accounting for the expenses it incurs. The

NPI Agreement must be interpreted to ensure that the operator cannot use its unilateral authority

and power to avoid its obligations to the net profit interest holder as set out by the NPI

Agreement. This latter point is of particular importance in interpreting the duty of honest

performance that the NPI Agreement necessarily contains, and which is discussed further below:

Bhasin v Hrynew, 2014 SCC 71 at para 93.

[123] While the structure of net profit interest agreements in general, and of this NPI

Agreement in particular, must inform the interpretation of its terms, less assistance can be

obtained from the circumstances in which the NPI Agreement was negotiated. The parties to this

litigation had no direct or indirect knowledge of the circumstances which led Mr. Hudson and

Mr. Lee, the President of Triton, to enter into the agreements they did on June 3, 1977. Other

than by reviewing the NPI Agreement and the Rocanville Agreement, I have no information

about what Mr. Hudson and Mr. Lee, or Rocanville and Triton, intended to accomplish when the

agreements were negotiated and executed. I received no testimony or other evidence about the

practices or norms of Texas oil and gas executives of that time, which might have provided some

information about this agreement since, while it pertained to Canadian properties, it was entered

into by two Texan oil and gas executives and two Texas based companies.

[124] The Plaintiffs relied on the evidence of Chris Hudson that Mr. Lee and Mr. Hudson were

friends as a surrounding circumstance relevant to the interpretation of the NPI Agreement. I

reject that submission. Even if I had robust evidence of a friendship between Mr. Lee and Mr.

Hudson – which I do not, since it was only a point mentioned in passing by Chris Hudson in his

testimony – this contract was not entered into between Mr. Lee and Mr. Hudson. It was entered

into between their corporations (Rocanville Agreement) and between one of the corporations and

a family trust. It was for a significant sum of money. Triton was a company with a wide range of

international interests and developments. That the executives were also friends does not create a

basis for understanding the Rocanville Agreement or the NPI Agreement as creating anything

other than the commercial relationship which its terms set out.

[125] The Plaintiffs also relied, with respect to the interpretation of overhead, on expert

evidence about the customs and practices of the western Canadian oil and gas industry at that

time, and in particular the PASWC accounting standards applicable in 1977. In my view this

evidence is of limited assistance given the terms of the NPI Agreement and the parties to the NPI

Agreement; this point will, however, be discussed in more detail in the section of this judgment

dealing with the overhead issue.

[126] To summarize, in interpreting the NPI Agreement my focus will be on the words of the

NPI Agreement understood in the context of the NPI Agreement as a whole and its surrounding

circumstances, including its structure and the benefits and risks it creates for the parties to it.

Do the Defendants owe Fiduciary Duties to the Plaintiffs?

[127] In Elder Advocates of Alberta Society v Alberta, 2011 SCC 24 the Supreme Court

clarified the test for establishing a fiduciary duty. It identified three central requirements for a

fiduciary duty to be imposed. First, the alleged fiduciary must have given “an undertaking of

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responsibility to act in the best interests of the fiduciary”: Elder Advocates at para 30. The “party

asserting the duty must be able to point to a forsaking by the alleged fiduciary of the interests of

all others in favour of those of the beneficiary, in relation to the specific legal interest at stake”:

Elder Advocates at para 31; See also, Roussy v Savage, 2019 BCSC 1669 at para 278; Nature

Conservancy of Canada v Waterton Land Trust Ltd, 2014 ABQB 303 at para 529.

[128] Second, the alleged fiduciary must owe a duty “to a defined person or class of persons

who must be vulnerable to the fiduciary in the sense that a fiduciary has a discretionary power

over them”: Elder Advocates at para 33.

[129] Third, the power held by the alleged fiduciary must be such as to “affect the legal or

substantial practical interests of the beneficiary”: Elder Advocates at para 34.

[130] These second and third components of fiduciary duties have been explained by

University of Saskatchewan scholar Robert Flannigan as reflecting the conventional account of

fiduciary duties. Specifically, fiduciary duties prevent opportunistic behaviour by persons who

have access to and control over the assets of another. Where one party has “access to the assets

of the other” and the ability to make decisions with respect to those assets, there is a risk of

opportunism and abuse; by imposing a duty to act in the best interests of the person to whose

assets the fiduciary has access, the fiduciary duty limits (and can correct) that potential abuse:

Robert Flannigan, “The Core Nature of Fiduciary Accountability” [2009] New Zealand Law

Review 375 at 385.

[131] Professor Paul Miller has a different but related perspective on the central feature of a

fiduciary relationship, which is that it arises where a fiduciary exercises a legal discretion and

power that would otherwise be exercised by the beneficiary as a result of the beneficiary’s own

legal capacity. The fiduciary in this sense stands in substitution for the beneficiary: Paul B.

Miller, “The Fiduciary Relationship” in Andrew S. Gold and Paul B. Miller eds, Philosophical

Foundations of Fiduciary Law (Oxford: Oxford University Press, 2014). In Miller’s account,

the fiduciary has authority “derived from the legal capacity of another person” which gives the

fiduciary “discretionary power over the significant practical interests” of the person from whom

it is derived: Paul B. Miller, “Justifying Fiduciary Duties” (2013) 58 McGill Law Review 971 at

1015 and 1011.

[132] I neither endorse nor adopt Professor Flannigan or Professor Miller’s views; I note their

analysis, however, because they emphasize an aspect of Elder Advocates and earlier cases that

risks being overlooked: to have a fiduciary obligation it is not enough that the fiduciary is

powerful and the beneficiary vulnerable; the fiduciary’s power must be in relation to the

beneficiary’s legal or substantial practical interests. A fiduciary exercises a specific and

particular type of power, and the beneficiary has a specific and particular type of vulnerability,

both of which relate to the fiduciary’s ability to affect and control something belonging to the

beneficiary.

[133] In this case I am not satisfied that the Defendants owed a fiduciary obligation to the

Plaintiffs because the Defendants did not undertake to act in the interests of the Plaintiffs, and

because the power the Defendants exercise is not a power in relation to the legal or substantial

practical interests of the Plaintiffs.

[134] With respect to the undertaking, the Defendants entered into contracts where they

acquired interests in the Rocanville Properties in return for which they agreed to share profits

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with the Plaintiffs. But the terms of the agreements suggest that the Defendants’ intention was to

pursue their own self-interest, not to protect or act with loyalty towards the interests of the

Plaintiffs. The NPI Agreement contemplates that the Defendants’ pursuit of their own self-

interest in maximizing the profits earned at the Rocanville Properties will benefit the Plaintiffs; it

does not contemplate the Defendants “renounc[ing] their own interests and those of all others in

favour of those of the beneficiary”, which is what the duty of loyalty requires: Roussy at para

278. As explained by Justice LaForest in Lac Minerals Ltd v International Corona Resources

Ltd [1989] 2 SCR 574 at 646-647 (para 28): “The obligation imposed may vary in its specific

substance depending on the relationship, though compendiously it can be described as the

fiduciary duty of loyalty and will most often include the avoidance of a conflict of duty and

interest and a duty not to profit at the expense of the beneficiary”. The Defendants here cannot

reasonably be understood to have undertaken not to profit at the expense of the Plaintiffs except

in the specific way defined by the NPI Agreement itself.

[135] In terms of the power of the Defendants and the vulnerability of the Plaintiffs, the

Defendants have power because they alone operate the Rocanville Properties, they alone

determine what expenses need to be incurred for the operation, development and maintenance of

the Rocanville Properties, they alone determine what assets within the lands covered by the NPI

Agreement to acquire, and they alone account for revenues and expenses to the Plaintiffs. The

amount of profits received by the Plaintiffs depends on the decisions of the Defendants. In that

sense the Defendants have power and authority, and the Plaintiffs are vulnerable to that power

and authority.

[136] The Defendants’ power is not, however, in relation to the legal rights or substantial

practical interests of the Plaintiffs in the sense that would properly give rise to a fiduciary

obligation. The Rocanville Corporation sold all of its “petroleum and natural gas and other

related hydrocarbon” rights in the Rocanville Properties to Triton (Rocanville Agreement, clause

1(a) and Clause 2). Triton then entered into an agreement to share profits with the Hudson

Childrens’ Trust. This is not a case where the Rocanville Corporation, Mr. William Hudson, the

Childrens’ Trust, or the current Plaintiffs, retained their legal rights and interests in relation to

the Rocanville Properties while granting power over those interests to the Defendants. Rather,

they transferred those legal rights and interests and then entered into a contract under which they

could receive a revenue stream without the risks, responsibilities or liabilities connected to

ownership or development of their hydrocarbon rights.

[137] The Plaintiffs’ ability to receive that revenue stream depends on the Defendants’

compliance with the terms of the NPI Agreement, and the structure of that NPI Agreement gives

the Defendants the power to make decisions that can have a positive or negative effect on the

amount of money that the Plaintiffs receive. At the same time, however, the NPI Agreement sets

out the obligations of the Defendants and the limits on their conduct, and if the Defendants fail to

comply with those obligations or to respect those limits, as alleged by the Plaintiffs here, an

action for breach of contract arises. But the nature and structure of the duties is contractual, not

fiduciary. The Defendants have power and authority that affects the Plaintiffs, but not in relation

to the Plaintiffs’ legal or substantial practical interests other than as created by the NPI

Agreement itself.

[138] To put it slightly differently, the legal interest with respect to which the fiduciary acts

will not usually be a legal interest created by the duties said to be fiduciary, otherwise the test

would be circular: you have agreed to do something for me and because I have a legal interest in

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you doing that thing you are now my fiduciary because acting in relation to my legal interests.

That circular logic cannot be sufficient to create a fiduciary duty. The legal and practical interest

should exist independently and be subject to the power of the alleged fiduciary, not be a legal

interest arising from the power alleged to be fiduciary.

[139]

I find helpful in this respect the observations of Justice Conrad in Luscar Ltd v

Pembina Resources Ltd, 1994 ABCA 356 at para 68:

While I accept that there may be fiduciary aspects of the duties 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 first party is automatically 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.

[140] I also note that while fiduciary duties can arise in arm’s length commercial transactions,

they are rarer in that context: Lac at 595; Roorda v MacIntyre, 2010 ABCA 156 at para 16.

[141] The Plaintiffs provided me with a number of cases in support of the fiduciary obligation;

I do not, however, find those cases persuasive in relation to the obligations of the Defendants

here. In West Care Pharmacy Ltd v SwiftRx Ltd, 2008 ABQB 473 the Court imposed a fiduciary

obligation in the context of a net profit interest agreement. SwiftRx had acquired a small mail

order pharmacy business developed by a pharmacist who continued as an employee of the new

company until her employment was terminated. This case provides little guidance here, however,

because of the personal dynamic flowing from the pharmacist continuing to work with the

company, because SwiftRx acknowledged that it owed a fiduciary duty and because the case

predates the more recent Supreme Court decisions like Elder Advocates but also Perez v

Galambos, 2009 SCC 48, which also emphasized at para 71 the significance of an undertaking

by the alleged fiduciary. A more applicable American case dealing with net profit interest

agreements provided by the Defendants rejected the existence of a fiduciary duty, as did a

decision from Alberta related to royalty agreements: Garfield v True Oil Co, 667 F.2d 942 (10th

Cir. 1982); Western Oil Consultants Ltd v Bankeno Resources Ltd, [1995] 6 WWR 449 (Alta

QB).

[142] A number of other cases provided by the Plaintiffs also predate Elder Advocates and

Galambos (e.g., Great Northern Petroleums & Mines Ltd v Merland Exploration Ltd, [1983]

AWLD 362, 19 ACWS (2d) 357 (Alta QB), aff’d [1985] AWLD 157; Powermax Energy Inc v

Argonauts Group Ltd, 2003 ABQB 71) or have facts that distinguish them from this one. For

example, that one party managed funds for another (Bank of Nova Scotia v Societe generale

(Canada), [1988] 4 WWR 232 (ABCA); Eon Energy Ltd v Ferrybank Resources Ltd, 2016

ABQB 585, aff’d 2018 ABCA 243), that the beneficiary owns the property controlled by the

fiduciary (Trilogy Resource Corp v Dome Petroleum Ltd [1990] 6 WWR 726 (Alta QB); rev’d

on other grounds, 1991 ABCA 284), or that the contract expressly imposes duties of loyalty and

non-competition (Indutech Canada Ltd v Gibbs Pipe Distributors Ltd, 2013 ABCA 111).

[143] The Plaintiffs placed particular reliance on a recent decision of the Manitoba Court of

Appeal in Filkow v D’Arcy and Deacon LLP, 2019 MBCA 61. In that case the estate of a

former law firm partner had reached a settlement agreement with the former law firm about the

payment of funds owing to the estate. They subsequently ended up in a dispute with respect to

how the law firm had paid out some of the funds owed. The Court of Appeal held that the law

Page: 27

firm and the estate had a fiduciary relationship. In my view, however, the facts of Filkow

substantially differ from the facts here. In particular, the Court found an implied undertaking in

significant part because of the prior fiduciary relationship between the deceased and the law

firm, including the provisions in the partnership agreement which created entitlements for the

estate. In addition, in that case the power to affect the legal interests of the beneficiary was based

on the law firm’s failure to disclose information during the negotiation of the settlement

agreement – that is, it arose prior to the contractual relationship, not by virtue of the relationship.

[144] I have some doubts about the Manitoba Court of Appeal’s analysis on this issue; I would

have thought that non-disclosure during a contract negotiation was more properly analyzed

through the law governing misrepresentation than by being equated to the exercise of power over

another party’s legal interests. In addition, the Manitoba Court of Appeal both finds the fiduciary

duty because of the power arising in relation to the disclosure of information, and then finds the

breach of the fiduciary duty in the non-disclosure; this is the sort of circular reasoning which

strikes me as problematic. Even if I accept the Court’s analysis, however, it does not assist the

Plaintiffs’ case. Because here the Defendants have no power, and the Plaintiffs have no legal

interests, outside the terms of the NPI Agreement itself.

[145] In reaching this conclusion I do not intend to diminish the duties owed by the Defendants

to the Plaintiffs. The nature of those duties is, however, established and controlled by the terms

of the NPI Agreement, not by the law of fiduciary obligations.

The Contractual Duty of Honest Performance in the Context of the NPI Agreement

[146] The Defendants owe the Plaintiffs a duty of honest performance: Bhasin at para 93. That

duty precludes the Defendants from lying or knowingly misleading the Plaintiffs about matters

related to their performance of the NPI Agreement or from acting in a manner that undermines

the Plaintiffs’ legitimate interests under that Agreement: Bhasin at para 73; IFP Technologies at

para 192.

[147] The content of the duty beyond that basic premise has been articulated in different ways.

[148] Some recent court of appeal decisions have focused on the duty’s narrow scope. In Styles

v Alberta Investment Management Corporation 2017 ABCA 1 at para 47 the Court emphasized

that the duty was “a very narrow concept, which does not create any duty of loyalty, disclosure,

or forgoing of contractual advantages”. In Greater Vancouver Sewerage and Drainage District

v Wastech Services Ltd., 2019 BCCA 66 at para 71 (leave granted: [2019] SCCA No 123

(SCC)), the Court emphasized that the duty is “concerned substantially with conduct that has at

least a subjective element of improper motive or dishonesty”. In CM Callow Inc v Zollinger,

2018 ONCA 896 at para 17 (leave granted: [2019] SCCA No 13 (SCC)), the Court emphasized

that the duty does not create a “unilateral duty to disclose information” and, at para 18, that the

duty must be linked to the obligations arising from the contract itself.

[149] On the other hand, in Bhasin itself, at para 65, the Court said that the duty requires a

party to “have appropriate regard to the legitimate contractual interests of the contracting

partner”. In Potter v New Brunswick (Legal Aid Services Commission), 2015 SCC 10 at para 99

the Court held that the duty requires a party to be “honest, reasonable, candid and forthright”. In

IFP Technologies Chief Justice Fraser emphasized at para 189 that the duty requires a party to

have “appropriate regard” to the legitimate contractual interests of its contracting partner. She

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said that the duty prevents one party to a contract from performing the contract “in a manner

which undermines the interests of the other party”: IFP Technologies at para 192.

[150] In my view, however, these varying Court of Appeal and Supreme Court authorities can

be reconciled. The duty of honest performance must be connected to the obligations contained in

a contract. It does not create free-standing obligations of moral probity on the parties to a

contract and nor does it turn contracting parties into quasi-fiduciaries in relation to one another.

The contract defines the substantive obligations of the parties and, consistent with those

obligations, the parties may pursue their own commercial interests.

[151] At the same time, however, the duty of honest performance requires more than that the

parties not lie to or knowingly mislead one another. If the duty required only that, it is difficult to

see what it would add to the law beyond the existing legal prohibitions on fraud and

misrepresentation. As noted by the Supreme Court in Potter, the duty of honest performance

requires “candour”: that a party provide a sufficiently full and accurate account of their conduct

such that the other side is not misled about whether the contract has been fulfilled.

[152] Further, the duty also requires that a party to a contract make a meaningful effort to fulfill

the duties the contract imposes. Where a party has a contractual duty to do something, that party

has an obligation to do it, to not shirk or evade those responsibilities in a way that “undermines

the interests of the other party”: IFP Technologies at para 192.

[153] In this sense the duty can be understood as analogous to the concept of purposive

interpretation which ensures that a statute will fulfill its intended objectives: Re Rizzo and Rizzo

Shoes [1998] 1 SCR 27 at para 27. The duty of honest performance inheres in the obligations

undertaken by the parties in entering into a contract; its function is to ensure that those

obligations are in substance fulfilled, not undermined through dishonesty, evasion, avoidance or

incompetence. It does not require a contracting party to be generous, or to undertake obligations

for which they did not bargain; but it does require that party take the steps necessary to keep up

their end of the bargain they have made.

[154] In the context of the NPI Agreement, this duty thus does not change the fundamental

obligations of the Defendants in terms of the rights and responsibilities they have in relation to

the calculation of revenues from the Rocanville Properties, and the accounting of those revenues

to the Plaintiffs. It does not require them to not charge for expenses legitimately incurred and

chargeable in accordance with the terms of the NPI Agreement. But it does mean that the

Defendants had to make an effort to ensure that the decisions they made were consistent with

what the NPI Agreement required. Further, they had to communicate honestly and candidly with

the Plaintiffs; their communications could not mislead the Plaintiffs to think the NPI Agreement

had been complied with when it had not been.

[155] For the reasons set out below, I find, in addition to violating Clause IV of the NPI

Agreement, the Defendants’ allocation of the Arista acquisition to the NPI Agreement account

violated the duty of honest performance. The allocation itself did not show appropriate regard to

the Plaintiffs’ interests under the NPI Agreement, and the communication about the allocation

was misleading and lacking in candour.

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Liability in tort

[156] To find the Defendants liable in tort I must find, inter alia, that they owed the Plaintiffs a

duty of care, and that their conduct fell below the standard of care.

[157] By virtue of the proximity created by the NPI Agreement, the Defendants owed the

Plaintiffs a duty of care: “Where the defendant undertakes to provide a representation or service

in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated

to take reasonable care. And, the plaintiff has a right to rely on the defendant’s undertaking to do

so”: Deloitte & Touche v Livent Inc (Receiver of), 2017 SCC 63 at para 30.

[158] I am not satisfied, however, that the Defendants’ conduct, even where contrary to the NPI

Agreement, fell below the standard of care. The onus of establishing a breach of the standard of

care rests with the Plaintiffs: McDougall at para 46; Waap v Alberta, 2008 ABQB 544 at 29-31.

The Plaintiffs have not discharged this onus.

[159] As noted by the Defendants, the Plaintiffs provided no evidence or argument as to what

would be reasonably be expected of an operator in the context of a net profit interest agreement

with respect to accounting and operating the properties subject to that agreement. Indeed, in their

argument the refer to the standard of care only once in noting it as an essential element of tort

liability. They refer to negligence three times, but only as a simple allegation, and never with an

explanation or submission as to what it is that the Defendants did that constituted a violation of

the standard of care that could have been expected of them as parties having the duties they did

under the NPI Agreement. In their Reply Argument they say only that the standard “is informed

by the NPI Agreement” and that “Once the Court has interpreted the NPI agreement and decides

how the accounting should have been done, it will be obvious whether the Defendants were

negligent and no additional technical evidence is required”.

[160] The problem with this submission, however, is that it essentially equates proof of contract

breach with proof of negligence, which is an error. In this case, for example, the parties disagree

about the nature of the CCTA Tax, and whether it is chargeable under the NPI Agreement. My

finding that it is not chargeable amounts to a resolution of that issue in the Plaintiffs’ favour, but

it does not show that the Defendants acted contrary to what reasonably could have been expected

of an operator by taking a different view. Disagreement about what a contract requires, even

after this Court finds one party’s view to be incorrect, does not demonstrate that holding that

view fell below the standard of care.

[161] It is fair to say that my finding that TriStar and Lightstream acted contrary to the duty of

honest performance in how they allocated the costs and expenses of the Arista acquisition may

support a finding that they also violated the standard of care – it may make that conclusion

“obvious” as the Plaintiffs put it. At the same time, however, I am reluctant to say that the

Plaintiffs fell below the standard of care in the absence of any evidence about what the standard

of care requires of a party to the NPI Agreement. Otherwise the conclusion of negligence

becomes akin to “and another thing!”, adding emphasis to the conclusion of contractual breach,

rather than reflecting independent analysis of legal deficiencies in the Defendants’ conduct.

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Overhead Accounting

Introduction

[162] Clause III.C of the NPI Agreement limits the ability of the operator of the NPI area assets

to charge overhead costs. For ease of reference, Clause III.C provides:

C. There shall be charged as cost and expense for the purposes hereof the sum of

$1250 (Canadian) per month, in lieu of any other charge for administrative

supervision and overhead. There shall not be considered a cost and expense

incurred by TRITON and there shall not be charged as cost or expense for the

purposes hereof (i) any other cost or expense incurred by TRITON in maintaining

its corporate offices, or (ii) the salaries of any officers or employees for time not

actually expended on the properties…

[163] The Plaintiffs allege that the Defendants have improperly included overhead expenses as

operating expenses and charged them to the NPI Agreement account. The Plaintiffs submit that

overhead and operating expenses must be understood substantively as those terms were

understood in 1977. If an item would have been treated as overhead in 1977 – such as employees

working out of field offices not on the lands covered by the NPI Agreement – then it ought to be

treated as overhead today. This is the case, the Plaintiffs submit, even if industry standards and

accounting principles today would not treat that item as overhead. The Plaintiffs argue that the

meaning of “overhead” in the NPI Agreement was fixed in 1977 and is not subject to evolution

with industry practices or accounting principles. As they put it in their argument, “The types of

charges that are allowed or not allowed by the NPI Agreement do not change over time even if

industry practice may change”.

[164] Further, the Plaintiffs submit that the approach to overhead in 1977 that informs the NPI

Agreement is in substance the same as the approach published in the 1976 accounting procedure

developed by PASWC for use in joint operations (“PASWC 1976 Accounting Procedure”). This

is the case even though the PASWC 1976 Accounting Procedure was not incorporated by

reference into the NPI Agreement. The Plaintiffs submit that the practices and principles set out

in the PASWC 1976 Accounting Procedure reveal industry practices and accounting principles

as they were in 1977, and those industry practices and accounting principles inform and

constrain the scope of “overhead” as that term is used in the NPI Agreement.

[165] Finally, the Plaintiffs submit that following the principles of the PASWC 1976

Accounting Procedure and industry practice in 1977, and reviewing the undertaking responses

provided by the Plaintiffs, demonstrates that the Plaintiffs have improperly charged for overhead.

Specifically, as calculated by their expert Mr. Derek Malcolm, they assert that between 2003 and

2015 the Defendants included $1,750,050 of non-chargeable overhead expenses as operating

expenses, and improperly deducted those amounts from revenues in calculating the 50% profits

owed to the Plaintiffs.

[166] The Plaintiffs acknowledged in oral argument that if I reject their interpretation of the

NPI Agreement and find – as the Defendants submit – that the scope of “overhead” evolves with

industry practice and accounting procedures, I do not have an evidentiary basis for impugning

the Defendants’ approach to calculating overhead.

[167] The Defendants respond that Clause III.C limits the capped overhead to the enumerated

categories, specifically, “(i) any other cost or expense incurred by Triton in maintaining its

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corporate offices, or (ii) the salaries of any officers or employees for time not actually expended

on the properties”.

[168] In addition, even if not so limited, the scope of “overhead” reflects evolving industry

practices and accounting procedures. Because the Defendants have identified overhead and

operating expenses consistent with industry practices and accounting procedures as they exist

today, they have satisfied their obligations under the NPI Agreement.

[169] As a result, the Defendants submit that they have properly identified overhead consistent

with current industry practice and accounting procedures.

Factual Background

[170] The Defendants’ fact witnesses testified about how overhead was determined for the NPI

Agreement accounts.

[171] The monthly NPI Agreement revenue statements provided to the Plaintiffs listed an

amount for “Overhead charged”, generally in the range of $3000-5000 per month, and then listed

an amount for “Overhead allowed” in the amount of $1250 as contemplated by Clause III.C.

[172] The accounting department and its systems generated the amount of “overhead charged”.

[173] First, costs were categorized and allocated by accounting personnel in the ordinary

course. This resulted in the Rocanville Properties being allocated costs attributable to those

properties, including some costs categorized as overhead. Second, Ms. Clark ran a query in the

accounting system for the Rocanville Properties. Running this query allowed Ms. Clark to

identify the categorized and allocated costs associated with the Rocanville Properties and to

create monthly operating statements reporting those costs by category, along with details of

revenues. Third, Ms. Clark took the amounts from the monthly operating statements and collated

them to be reported in the revenue statement. This included taking all costs categorized as

overhead, adding them together, and reporting them as “Overhead charged” on the revenue

statements.

[174] While responsible for the NPI Agreement accounts for many years, Ms. Clark did not

review the NPI Agreement to see if the methodology she used was consistent with the specific

requirements of that Agreement; she simply accepted the accounting system’s categorization of

expenses as related to overhead or operations, and the system’s allocation of expenses to the

Rocanville Properties, and then used those to generate the monthly operating statements and

revenue statements.

[175] At the same time, the individuals in the contracts and administration department

responsible for the NPI Agreement, like Mr. McDonald, did not review the overhead accounting

to determine if it was consistent with the requirements of the NPI Agreement.

[176] In essence, the Defendants treated the NPI Agreement as requiring accounting in the

ordinary course – the “overhead charged” was overhead as defined by industry practice and

ordinary accounting procedures. The Defendants did not turn their mind to this point and make a

considered decision to approach the NPI Agreement accounting this way; this just was how they

approached their accounting in the ordinary course, and they applied that ordinary course

accounting to the Rocanville Properties and the NPI Agreement accounts.

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Expert Evidence

[177] Both the Plaintiffs and the Defendants provided expert evidence with respect to the

overhead issue. Mr. Moller testified for the Plaintiffs, and Ms. LaRocque for the Defendants.

Ib Moller

[178] Mr. Moller, an engineer, was qualified as an expert with respect to industry custom in the

oil and gas industry in 1977 and in particular in respect of the treatment and understanding of

overhead and administrative supervision, and the charging of direct and indirect costs and

expenses to a joint account in operator/non-operator relationships.

[179] Mr. Moller testified that oil and gas joint venture operating agreements normally include

an accounting procedure or attach such a procedure as a schedule; those procedures will be part

of the business deal negotiated by the parties. Earlier in the history of oil and gas developments

in Canada, however, joint venture agreements were somewhat more variable, often having

unique accounting procedures based on the practices of one of the parties to the agreement.

[180] The first model accounting procedure was developed in 1953 by PASWC. It was subject

to several revisions prior to the publication of the PASWC 1976 Accounting Procedure. The

PASWC 1976 Accounting Procedure followed the publication of the Canadian Association of

Petroleum Landman’s (CAPL) model operating procedure for joint operators (“CAPL 1974

Operating Procedure”).

[181] By 1977 joint ventures for large properties or facilities in Canada were generally

governed by the CAPL 1974 Operating Procedure with the PASWC 1976 Accounting Procedure

attached. Companies that developed their own accounting procedures based it on the PASWC

1976 Accounting Procedure. In addition, joint venture operating agreements drafted by land

departments for exploration and development of lands typically used the PASWC 1976

Accounting Procedure. It did take some time for the use of model agreements and procedures to

be accepted and used by industry, particularly for foreign multi-nationals; however, by 1977 use

of the PASWC 1976 Accounting Procedure would have been very extensive.

[182] The PASWC 1976 Accounting Procedure defined overhead in Clause 301 as:

the cost to the Operator of salaries, wages, employee benefits and all other

expenses of employees other than those covered by Paragraphs 202 (labour) and

206d (construction design services), and the cost of maintaining and operating

offices, camps, housing and other facilities that are not Joint Property other than

those costs covered by Paragraphs 212 (housing for chargeable labour) and 213

(labour for central production control).

[183] Its explanatory text provided:

“Overhead” provides for those costs which are covered by the overhead

assessment and are therefore not directly chargeable. Such costs include, except

where specifically provided for in the Accounting Procedure or where specific

approval is obtained from the Non-Operators to charge directly, offsite function

costs directly attributable to the staffing, maintaining and operating of the

Operator’s District Office (being the Operator’s field production office or

suboffices supervising the operations in a specific district or area), the Operator’s

Head, Home, Divisional or Regional Office or Offices and Camps, housing and

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other facilities not owned by the Joint Property. The overhead assessment also

includes those costs incurred within the Operator’s control which are of prime

benefit to the Operator and the total scope of his operations.

[184] Based on the 1976 PASWC Accounting Procedure, and what he understood to be the

typical approach of joint venture operating agreements prior to 1996, Mr. Moller opined that

overhead expenses included costs of a general nature, that were not attributable to a particular

property or well.

[185] More specifically Mr. Moller testified that overhead included the costs associated with

field offices and district offices. Only production offices physically on the site of the joint

operation could be included as operational expenses.

[186] He testified that, in the 1970s, communication costs were only partially recoverable as an

operating expense; any incoming communication to the joint operation would be treated as

overhead. He supported this opinion by noting that the PASWC 1976 Accounting Procedure

defined communications in Clause 211 as “outgoing communications incurred by Operator

directly from the Joint Property” and the explanatory text said that communications originating

other than from the joint property are “considered to be covered by the Operator’s overhead and

are not acceptable direct charges to the Joint account”.

[187] With respect to labour charges, Mr. Moller observed that under the 1976 PASWC

Accounting Procedure an operator could normally recover as operating expenses only

supervision costs with respect to the salaries and wages of first level supervisors in the field –

that is, supervisors whose “primary function is the direct supervision of other employees and/or

contract labour directly employed in a field operating capacity”.

[188] Using the 1976 PASWC Accounting Procedure, and his knowledge of industry custom in

1977, Mr. Moller reviewed charges included in the NPI Agreement monthly operating

statements. In his opinion the Defendants had included as operating expenses amounts that,

based on industry practice in 1977 and the 1976 PASWC Accounting Procedure, ought to have

been treated as overhead.

[189] Mr. Moller acknowledged that accounting for overhead has evolved since 1977. He also

recognized that oil and gas operating practices in the 1970s were different than they are today.

For example, operators communicated from the field by radio or telephone and did not have the

benefit of cell phones. They did not have the capacity for remote monitoring, and the ability to

rely on sensors and alarms. Mr. Moller also acknowledged other industry changes such as the

increased centralization of operations and horizontal drilling technology.

[190] Mr. Moller accepted that he has no knowledge about or involvement with the negotiation

or drafting of the NPI Agreement. He acknowledged that it was not a joint operating agreement

and did not incorporate the PASWC 1976 Accounting Procedure. He said that the chargeability

of costs ultimately depended on the terms of the NPI Agreement, and that he was not purporting

to interpret that Agreement.

Katrina LaRocque

[191] Ms. LaRocque was qualified to provide expert evidence in the field of oil and gas

accounting, including practices in oil and gas accounting from 1977 to the present.

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[192] Ms. LaRocque began by reviewing the nature of net profit interest agreements, which she

described as non-operating, in the same way as a royalty agreement. The difference between a

net profit interest agreement and a gross overriding royalty agreement is simply that the net

profit interest shares profits rather than revenues. As a consequence, net profit interest

agreements normally operate at a higher percentage.

[193] Ms. LaRocque noted that net profit interest agreements lack well defined accounting

procedures or standardized terms. Accounting under a net profit interest agreement is governed

by that agreement’s own provisions.

[194] With respect to overhead, Ms. LaRocque said that overhead in the oil and gas industry

has been long understood “to mean those general costs attendant to executive and administrative

functions incurred by an operator in its home division, region, or other administrative office

above the operating level indirectly serving the development and producing operations”. In her

view, “overhead relates to high level, head office costs which provide general corporate support

services which are more corporate administrative in nature rather than operational”. In testimony

she defined overhead as indirect costs that cannot be attributable to a specific business process,

product or service.

[195] Ms. LaRocque observed that joint venture agreements have standardized methods for the

chargeability of overhead, but that net profit agreements do not. She suggested, however, that the

NPI Agreement gives “unusually clear and concise direction in respect to overhead”. In her view,

the two sub-clauses of Clause III.C define and limit what can be included in overhead to “any

other cost or expense incurred by TRITON in maintaining its corporate offices” and “the salaries

of any officers or employees for time not actually expended on the properties”.

[196] Ms. LaRocque viewed the NPI Agreement as permitting all costs except those

specifically excluded. In her opinion that distinguishes the NPI Agreement from a normal joint

venture agreement which will list permitted costs, and exclude any cost not listed. She also

testified, however, that even if Clause III.C excluded all overhead expenses that would not

change her opinion.

[197] Ms. LaRocque rejected the position that accounting ought to be done in accordance with

the 1976 PASWC Accounting Procedure. It was not incorporated in the NPI Agreement, and the

NPI Agreement is not a joint venture arrangement. Rather, the accounting for overhead should be

governed by what she described as the “clearly defined” provisions in the NPI Agreement, which

in her opinion provide “sufficient direction” about what costs to include and exclude.

[198] Ms. LaRocque acknowledged that she was not qualified to provide a legal opinion with

respect to the meaning of the NPI Agreement, and that interpretation of Clause III.C was the

responsibility of this Court.

[199] With respect to the particular NPI Agreement accounts, Ms. LaRocque opined that the

categories claimed by the Plaintiffs to be overhead were in fact properly treated as operating

expenses. She reviewed the various accounting categories and identified their relationship to the

operation and maintenance of the specific properties subject to the NPI Agreement. In her view

the costs within these categories are “operational or technical in nature” and not properly treated

as overhead. She analyzed the nature of the costs incurred based on the monthly operating

statements, her knowledge of industry practices and standards, and Joint Account Data Exchange

(“JADE”) reports that had been prepared by the Defendants in connection with this litigation and

Page: 35

an audit requested by the Plaintiffs. She also reviewed undertaking responses where necessary

for clarification purposes. She did not look at any underlying invoices or documents, nor did she

review any audits that had been prepared.

[200] Ms. LaRocque said that her review did not give rise to any obvious concerns; the

expenditures accounted for seemed typical for well operations

[201] In response to a question from the Court Ms. LaRocque said that she understood the

nature of the costs within each of these accounting categories because the categories are

computer generated and used with consistency across the industry, although she acknowledged

that there can be some variation within a company.

Did the Defendants Breach the NPI Agreement with respect to overhead?

[202] The task of interpreting Clause III.C of the NPI Agreement rests with this Court. To the

extent that the expert witnesses gave evidence on the interpretation of Clause III.C I disregard

that evidence.

[203] The question before me is, then, given the ordinary and grammatical meaning of the

words of Clause III.C in the context of the NPI Agreement as a whole, and in the surrounding

circumstances, what does “overhead” include?

[204] As a starting point, I reject the Plaintiffs’ position that overhead is defined by the

PASWC 1976 Accounting Procedure or constrained by industry practices as they were in 1977.

[205] The PASWC 1976 Accounting Procedure is not incorporated into the NPI Agreement. It

and the industry practices about which Mr. Moller opined can only inform the interpretation of

the NPI Agreement if they can be considered a surrounding circumstance to that agreement.

[206] In my view the evidence does not support the inference that the PASWC 1976

Accounting Procedure, or Canadian industry practices in 1977, were such a surrounding

circumstance. I accept that the PASWC Accounting Procedure existed in 1976, which was prior

to the negotiation and executed of the NPI Agreement in 1977. I also accept Mr. Moller’s

evidence that this document was important and influential in the Canadian oil and gas industry

with respect to accounting and joint operations during this time period, and that it reflected

industry practices at that time. I accept that it was used by foreign multi-nationals in Canada.

[207] That that is the case, however, does not tell me that the norms and practices contained in

that document would have been within the knowledge or contemplation of two Texas based

companies negotiating an agreement in 1977, or part of the industry norms and practices which

would have informed the negotiations between Mr. Hudson, Mr. Lee and the companies they ran.

The PASWC 1976 Accounting Procedure was from a different community (Canada) and used in

a different context (joint ventures not net profit interest agreements). The evidence before me

does not connect it to the negotiation of a different type of agreement by American companies

and businessmen. That the properties and interests about which the parties were contracting were

in Canada does not make them or the milieu in which they negotiated Canadian.

[208] This is particularly so given that Mr. Moller’s evidence does not require me simply to

apply norms or general principles from the PASWC 1976 Accounting Procedure; it requires me

to apply the rules in that Accounting Procedure. While he and the Plaintiffs acknowledged that

the NPI Agreement did not incorporate the PASWC 1976 Accounting Procedure, such that it

could not be treated as part of the NPI Agreement’s terms, their submissions in substance

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required that I do just that. Indeed, they suggested that the rules in that document should be

applied without regard to any operating or technological changes that have occurred since that

time.

[209] That de facto incorporation requires persuasive evidence that the PASWC 1976

Accounting Procedure and the industry practices it reflects were background facts known or

reasonably known to the parties when the NPI Agreement was negotiated and executed. It

requires more than speculation that they might have been because they existed at that time and

reflected practices of Canadian industry in the joint operations context.

[210] As noted above, surrounding circumstances are the background facts which the parties

knew or could reasonably be said to have known at the time they entered into a contract,

including “the nature or custom of the market or industry in which the contract was executed”:

IFP Technologies at para 83; Sattva at para 58. I do not have an evidentiary basis sufficient to

allow me to infer that the PAWSC 1976 Accounting Procedure and the industry practices it

reflects were known (or reasonably could have been known) to the original parties to the NPI

Agreement, or that it was a custom of the market or industry in which the NPI Agreement was

negotiated.

[211] Even if, however, I treat the PAWSC 1976 Accounting Procedure as part of the

surrounding circumstances – that is, even if we analyze Clause III.C “consistent with” the

PAWSC 1976 Accounting Procedure – it does not support the constrained approach to overhead

relied on by the Plaintiffs.

[212] I find it helpful to think about overhead as something that functions at different

conceptual levels:

i) As a general definition to distinguish overhead from operation costs. Here, we

provide a basic definition: general executive and administrative costs above the

level of operations and only indirectly related to operational activities like

production and development.

ii) As a series of rules to allow an accountant to determine on a categorical basis

whether expenses relate to overhead or operations. Here, an accountant will use

something like the PASWC 1976 Accounting Procedure, generally accepted

accounting principles, corporate guidelines or accounting software.

iii) To characterize particular expenses incurred as either overhead or operational.

This characterization would flow from an identification of the type of an expense

in light of the accounting rules and practices of the party accounting for them,

with the goal of identifying whether the expense was (or was not) overhead as that

term is generally understood.

[213] By saying “administrative supervision and overhead” in Clause III.C of the NPI

Agreement the parties incorporated only the most general concept of overhead. They did not

intend to incorporate the rules contained in PASWC 1976 Accounting Procedures, or to restrict

the NPI agreement operator to industry practices as they were specifically understood in 1977.

[214] “Administrative supervision and overhead” is general and un-specified and should be

understood as defining overhead in a general and un-specified way: that is, as general executive

and administrative costs above the level of operations and only indirectly related to operational

activities like production and development. They parties did not intend to go below that general

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definition to refer to time-and-industry-specific rules and practices, such as those contained in

the PASWC 1976 Accounting Procedure. There is nothing in the language of the provision, or in

the NPI Agreement as a whole, to suggest that the parties meant something other than overhead

as generally understood and defined.

[215] Further, the instances of overhead given in the second part of Clause III.C, whether or not

they exhaust the meaning of overhead, confirm that the parties intended to refer only to this basic

concept when referring to “administrative supervision and overhead”. Costs associated with

corporate offices, or the time of employees not actually expended on the properties, are costs

above the level of operations and only indirectly related to production, as captured in the basic

concept of administrative supervision and overhead. But they do not go in any meaningful way

beyond that basic concept; they are in no way akin to the industry specific and more granular

requirements set out in PASWC 1976 Accounting Procedures, in generally accepted accounting

principles or in accounting software. Rather, they are garden-variety examples of overhead,

generally defined.

[216] I note in this respect that the general understanding of overhead has not changed since

1977. As the Plaintiffs said in their submissions, “[t]he experts agree that overhead includes costs

associated with general services provided in respect of joint properties, that are not specifically

attributable to any specific property or well”.

[217] I do not see anything in the words of Clause III.C, either in “administrative supervision

and overhead,” or in the specific examples it provides, that suggests the parties intended to freeze

the understanding of what was included in administrative supervision and overhead to a series of

rules reflective of industry practices and accounting procedures at a particular time. Rather, the

general reference to administrative supervision and overhead coupled with some basic examples,

suggests that the parties intended that whether an expense was overhead should be defined based

on the general concept of overhead and the nature of the specific expense – whether, at the time

it was incurred and in light of accounting procedures at that time, it was a general executive and

administrative cost above the level of operations and only indirectly related to production and

development. The test is not whether the expense would have been properly categorized as

overhead at some other time and in light of some other accounting practice.

[218] As discussed earlier, the structure of the NPI Agreement creates benefits and risks for

each party. In general, it should be interpreted to allow the operator to deduct any legitimately

incurred expenses associated with “exploring, developing, drilling, testing, completing,

equipping, operating and maintaining” the properties, unless the expense is excluded by other

provisions of the NPI Agreement. At the same time, the NPI holder ought to be protected from

abuse or exploitation by the operator.

[219] A definition of overhead which reflects the general understanding of that concept, and

which allows particular expenses to be characterized based on industry practices and accounting

procedures as they evolve over time, is consistent with this overall structure. It ensures the

operator can deduct all legitimate expenses associated with operating the Rocanville Properties,

while also ensuring the net profit interest holder does not get treated unfairly, through being

charged with what are essentially administrative and corporate costs. Freezing the meaning of

overhead at a point in time would not accomplish this goal; it risks creating a windfall to either

the operator or the net profit interest holder, depending on the particular rule and the particular

expense in question. Accurate and fair calculation of the net profits is what the NPI Agreement

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aims to achieve, and this approach to overhead helps ensure that it does so. Linking the NPI

Agreement to a dated set of rules and practices that it does not in fact incorporate, would not.

[220] The Defendants also relied on the interpretation of Clause III.C advanced by Ms.

LaRocque, that the two examples in the second half of the clause constitute the entirety of the

overhead that is recoverable.

[221] In my view Ms. LaRocque’s interpretation is not consistent with the language of Clause

III.C read in its entirety, and in the context of the NPI Agreement as a whole. The effect of it

would be to render the first sentence of the Clause largely superfluous, since what would be

included in the $1250 cap is not administrative supervision and overhead, but only those two

particular types of expenses. In addition, while not artfully drafted, Clause III.C seems intended

to follow the ordinary drafting structure of a general proposition followed by illustrative

examples. In my view that is what the parties intended: to cap the charges for administrative

supervision and overhead, including but not limited to the specific exclusions enumerated in the

second half of the Clause.

[222] As a consequence of my interpretation of the NPI Agreement, the Plaintiffs have not

discharged their onus of demonstrating a breach by the Defendants with respect to the charging

for overhead. The evidence from Mr. Moller and in the form of undertaking responses shows that

the Defendants did not comply with the PASWC 1976 Accounting Procedures and his

understanding of industry practices in 1977, but it does not establish on the balance of

probabilities that the Defendants otherwise included overhead in operating expenses.

[223] I note in this respect that the Defendants benefit here from the lack of considered

attention they gave to their obligations under the NPI Agreement. Clause III.C of the NPI

Agreement required them to apply ordinary industry practices and accounting procedures and, in

part because the contracts and administration department did not review the accounting, and the

accounting group did not receive guidance from the contracts and administration department

about what the NPI Agreement requires, the Defendants did just that.

[224] I also observe that in reaching this conclusion I am not in a position to make a positive

determination that the Defendants have properly ensured that overhead expenses, as defined

here, were not included in operating expenses. Drawing that conclusion would require evidence

about what constitutes appropriate accounting for administrative supervision and overhead based

on industry practice and accounting procedures today, as well as more detailed information about

the particular expenses allocated between overhead and operating by the Defendants. It would

require something analogous to an audit, which the evidence before this Court does not permit.

[225] Nonetheless, and to reiterate, I find that the Plaintiffs have failed to discharge the burden

of showing that overhead expenses were improperly included in the NPI Agreement accounts.

[226] Because of this conclusion, I do not analyze or consider the Defendants’ position that the

Plaintiffs’ overhead claim is statute barred for the period prior to August 2008.

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CCTA Tax

Did the Defendants breach the NPI Agreement by charging the CCTA Tax to the

NPI Account?

[227] Throughout the period in dispute the Defendants have deducted from resource revenue

amounts payable under the Saskatchewan Corporation Capital Tax Act, SS 1979-1980, c. C-

38.1, as amended, which they called the “Saskatchewan Gov’t Surcharge”, but which I think is

more precisely described as the CCTA Tax.

[228] The Plaintiffs dispute the inclusion of these amounts. They submit that Clause III.B.1,

which defines the proceeds incorporated in “net profits”, permits only taxes on production to be

deducted from the profits payable. Further, they submit that the CCTA Tax is not a tax on

production.

[229] The Defendants largely agree with the Plaintiffs’ interpretation of Clause III.B.1,

although they also submit that any interpretation that would result in the Plaintiffs receiving a

windfall ought to be rejected – that is, the NPI Agreement ought not to be interpreted so as to

result in the Defendants paying increased taxes as a result of production from the Rocanville

Properties, while being unable to pass those tax payments on to the Plaintiffs.

[230] The Defendants’ primary submission, however, is that the Plaintiffs have

mischaracterized the CCTA Tax. The Defendants submit that the CCTA Tax is a “tax thereon”

with respect to the “Proceeds actually paid” and thus deductible pursuant to Clause III.B.1.

[231] I agree with the parties that Clause III.B.1 only permits the deduction of taxes on

production. Clause III.B.1 says:

B. “Net profits”, as such term is used in this Paragraph III shall be the amount by

which the total of:

1. Proceeds actually paid to TRITON, its successors and assigns, for oil, gas and

other minerals produced, saved and sold from the attributable to the SUBJECT

PROPERTIES (after deducting therefrom (i) all payments made on royalties,

overriding royalties, and other payments out of production to which the same are

presently subject, and (ii) all taxes thereon other than income taxes)…

[232] The word “thereon” has an ordinary meaning: in plain language it just means “on”.

Clause III.B.1 permits the deduction of taxes on the “proceeds actually paid” to the Defendants.

[233] The question, and where the Plaintiffs and Defendants I think would disagree, is as to

whether taxes on the proceeds includes only taxes where the proceeds are the subject matter of

the taxation, or whether it also includes taxes affected by the amount of proceeds. That is, to be

chargeable under Clause III.B.1, is it sufficient that the proceeds affect the amount of tax, or

must the proceeds be the subject matter of the tax?

[234] In my view, in drafting Clause III.B.1 the parties intended that proceeds be the subject

matter of the tax, and not merely affected by it. That intention can be seen in the exclusion of

income taxes. Income taxes are taxed affected by the amount of proceeds received by the

Defendants, but they are not taxes on the proceeds, and are thus not properly deducted.

[235] The Defendants might respond by saying that the exclusion of income taxes means,

rather, that income taxes are taxes on the proceeds; however, the parties decided to exclude them

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for other reasons. Thus, taxes on proceeds otherwise includes taxes like income taxes, that are

affected by the amount of production; it excludes only income taxes by virtue of having done so

explicitly.

[236] While I agree that Clause III.B.1 is not carefully drafted, in my view the parties expressly

excluded income taxes not because they are taxes on proceeds but are nonetheless excluded;

rather, they excluded income taxes to communicate, by reference to the most obvious and

important example of this type of tax, that taxes simply affected by the amount of production do

not fall within the scope of Clause III.B.1.

[237] I find support for this interpretation in the fact that Clause III.B.1 deals with royalties,

“other payments out of production” and taxes. Read in its entirety, the purpose of the provision is

to permit the deduction of charges levied directly on production, namely royalties, payments out

of production, and taxes on production; taxes merely affected by production, like income taxes,

cannot be deducted.

[238] I also find support for this interpretation in the overall structure of the NPI Agreement.

Permitting the deduction of taxes directly on the proceeds ensures that the operator can deduct

legitimately incurred expenses associated with producing from the Rocanville Properties; at the

same time, however, excluding taxes incurred by the operator that are affected by production, but

that are also affected by factors unrelated to production, protects the net profit interest holders

from incurring risks or costs unrelated to the actual production. Taxes on proceeds are likely to

be straight flow through costs and relatively transparent; other taxes that are merely affected by

the proceeds, like income taxes, are not.

[239] That leads to the next question, which is as to the nature of the CCTA Tax. In my view,

the CCTA Tax is not a tax on production of the type deductible under Clause III.B.1 of the NPI

Agreement.

[240] Identifying the nature of the CCTA Tax requires identifying “the intent of the legislator

having regard to the text, its context, and other indicators of the legislative purpose”: Canada

Trustco Mortgage Co v R, 2005 SCC 54 at para 40. The Courts must identify the purpose of the

provisions by taking “a unified textual, contextual and purposive approach to statutory

interpretation”: Lipson v R, 2009 SCC 1 at para 26.

[241] Taking this approach shows the CCTA Tax to be a corporate tax determined by reference

to the resource corporation’s production, and not to be a tax on production per se.

[242] The CCTA creates a statutory scheme for taxing corporations based on their size and

their relationship to Saskatchewan.

[243] Under the CCTA corporations must pay taxes based on the amount of their taxable paid-

up capital, with different calculations being used for resident corporations and non-resident

corporations: CCTA ss 3, 7-9, 13. Pursuant to s. 13.1, resources corporations must pay, “in

addition” to the tax payable on its taxable paid-up capital, a percentage of its “value of resource

sales in the fiscal year”: CCTA s. 13.1. For fiscal years commencing after July 1, 2008, the

amount of tax payable by the resource corporation is the difference between “3.0% of the

resource corporation’s value of resources sales in that fiscal year or portion of that fiscal year”

and the “tax payable, if any, by the resource corporation pursuant to this Act determined in

accordance with subsection 13(1)…for the corresponding year”: CCTA s. 13.1. Corporations file

an annual return with respect to the corporate taxes owed, including resource taxes, and make

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payments based in monthly installments as estimated by the corporation: CCTA s. 17 and s. 24.

Corporations with gross assets of less than $100,000,000 can make additional deductions from

the taxes owing under the CCTA (whether based on capital or resource production) based on the

percentage of their employees employed in Saskatchewan: CCTA s. 14.1; Corporation Capital

Tax Act Regulations, C-38.1 Reg 1, s. 8.1.

[244] The CCTA creates a unified statutory scheme for charging taxes to corporations, based

on measures for assessing the size and activities of the corporation in Saskatchewan, which for

resource corporations includes their paid-up capital and their resource production. Under that

scheme resource production is a metric for assessing the size and activities of the corporation for

the purposes of taxing that corporation; production is not itself the subject of the taxation.

[245] Support for this perspective on the CCTA Tax can be found in the Hansard debates from

that time. While Hansard debates are of limited weight, they are admissible as relevant to the

background and purpose of the legislation: HL v Canada (Attorney General), 2005 SCC 25 at

para 106. When the CCTA was first introduced in 1980, the Hansard debates indicated that the

government was motivated to ensure “that large oil and gas companies” contribute “their fair

share to the general revenues of government”. Then, when the resource surcharge was introduced

in 1988, the government noted that this was to address the problem that arose because of

“interprovincial corporations allocating income and capital to lower taxing jurisdictions”. Those

debates confirm what the statutory structure of the CCTA reveals, which is that the scheme of

the CCTA, including the resource surcharge, was to create a methodology to ensure that resource

corporations operating in Saskatchewan contributed to government revenues.

[246] To put it slightly differently, s. 13.1 of the CCTA creates a tax on corporations that

produce resources, and that tax is affected by the amount of resources they produce, but it is not

a tax on the resources themselves. It is a corporate tax, not a resource tax. Section 13.1 itself

makes this clear – the tax is calculated as the difference between the resource surcharge and the

capital tax. It can also be seen in the structure of the CCTA as a whole, which creates an overall

scheme for the taxation of corporations, and in particular resource corporations, operating in the

province of Saskatchewan.

[247] The Defendants describe characterizing the CCTA Tax through the overall scheme of the

CCTA as a “triumph of form over substance” (citing Crown Parking Company Ltd v Calgary

(City), 1994 ABCA 244 at para 14 but with emphasis added by Defendants). That seems to me,

however, to ignore the clear direction from the Supreme Court that statutory interpretation must

always look at provisions in their statutory context. Section 13.1 does not exist or operate in

isolation; it is fully integrated with the other provisions of the CCTA, and its purpose and subject

cannot be identified without considering the legislation as a whole.

[248] Further, this approach to characterization of the subject-matter of the CCTA Tax is

consistent with the approach set out by the Supreme Court in AG BC v Canada Trust Co, [1980]

2 SCR 466 at 486 (para 47). While in a very different context, that case emphasized that to

characterize the subject-matter of the tax, the Court must consider not just the charging

provisions, but also the legislation as a whole. It also seems analogous to the point made by the

Supreme Court in Kerr v Canada (Superintendent of Income Tax), [1942] SCR 435 at 439

(para 12). where the Court said when concluding that an income tax is a tax on a person, not on

income: “In that case the income is used merely as just standard or yard-stick to use the

expression of counsel for the Attorney-General of Alberta for computing the amount of the tax”.

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Here, similarly, the resource amounts are a standard or yard-stick used to tax the corporation, and

are not themselves the subject-matter of the tax. See also: Victuni Aktiengesellschaft v Quebec

(Minister of Revenue), [1980] 1 SCR 580 at 583.

[249] I acknowledge the Defendants’ point, that the context of these cases is very different.

None of them is directly on point or governs the characterization of the CCTA Tax, and some of

them rely on factors not applicable here. Nonetheless, they do two things that are important.

First, they show that in assessing the subject-matter of a taxation statute the analysis cannot stop

at the thing which affects the amount of the tax (e.g., income or production). Second, they show

that assessing the subject-matter of a taxation statute must be based, as with statutory

interpretation in general, on the charging section looked at in light of the statute as a whole.

When that is done, the subject-matter of the CCTA Tax, which is the corporation itself, becomes

clear.

[250] The Defendants emphasize, I think fairly, that the reality under the CCTA is that the

taxes payable under that statute are entirely (at least for a larger corporation) set by the taxes

calculated on production, by virtue of the fact that since 2008 the capital tax rate has been zero

percent. Under s. 13.1 of the CCTA, the difference between the resource surcharge and the

capital tax is always equal to the resource surcharge, because the capital tax is zero.

[251] That current choice to set the capital tax rate at zero – even if it has now persisted for

over a decade – does not, however, change the overall structure and intent of the statutory

scheme which gives rise to the CCTA Tax. The option remains open to the Saskatchewan

government to set the capital tax rate at the level they choose, and the provision in s. 13.1 to

calculate the tax owing as the positive difference between the two amounts remains in effect. The

nature of a statutory scheme cannot change over time depending on the tax rate used by the

government. A zero rate is not equivalent to repeal or statutory amendment, and the Defendants’

argument would make it so.

[252] The Defendants also dispute the relevance of the small business deduction given under s.

14.1 of the CCTA for showing that the CCTA Tax is a tax on corporations, not a tax on resource

proceeds. They note the various ways in which taxation statutes can offer deductions unrelated to

the tax itself. I accept their general observation on this point and agree that this deduction is not

determinative of the characterization of the CCTA Tax. I also accept the Defendants’ point that

the payment of the CCTA Tax by instalments, and the absence of lien rights, are not

determinative. But they are all relevant. And they, along with the rest of the CCTA, and

especially the terms of s. 13.1 making the tax payable dependent on both the resource surcharge

and the capital tax, reveal that the CCTA Tax is part of the Saskatchewan government’s scheme

for taxing resource corporations, not part of a scheme for taxing resources produced in

Saskatchewan.

[253] The Defendants accuse the Plaintiffs of irrationality because the Plaintiffs challenge the

resource surcharge but accept the Freehold Production Tax. The Defendants submit that the two

taxes are “virtually identical” (emphasis in original) so that it makes no sense to challenge one

but accept the other. Even if the Defendants are correct, however, I am not sure how that is

relevant to, or advances, my interpretation of the subject matter of the CCTA Tax, and its

inclusion in the NPI Agreement. Answering that question depends on the interpretation of the

NPI Agreement and the CCTA, not on its similarity to, or difference from, the Freehold

Production Tax, or on whether the Defendants are acting irrationally or inconsistently.

Page: 43

[254] I also am not persuaded by the Defendants’ reliance on Cogema Resources Inc v R, 2004

TCC 750 at para. 15, aff’d 2005 FCA 316. In that case the Tax Court held that the CCTA Tax is

a tax on resource sales, not a “tax paid in relation to production” and non-deductible from

income taxes by virtue of s. 18(1)(m) of the Income Tax Act RSC 1985 c. 1 for the 1996 taxation

year. Justice Beaubier relied on provisions that show that the tax is levied at the point of sale not

at the point of production. He noted that if the producer kept the resource – in that case

yellowcake – and used it to manufacture another product, such as uranium rods, the surcharge

would not be applicable.

[255] In making that decision, however, Justice Beaubier did not consider the issue before me,

which is the subject matter of the CCTA Tax. The issues are wholly distinct. Had he reached the

opposite result, deciding that the tax was calculated on production not sales, the Defendants’

submissions would not change; they would simply submit that the CCTA Tax is a tax on

production, and not a tax on corporations. The Plaintiffs’ submissions would also be unchanged;

they would say that the CCTA Tax is a tax on corporations and not a tax on production. I am not

assisted in answering the question before me – is the CCTA Tax a tax on the resource or a tax on

the corporation – by the specification that the calculation of the CCTA Tax depends on sales not

production. Either answer to that question is consistent with either answer to the one before me.

[256] What Cogema does suggest, however, is why the parties to the NPI Agreement excluded

taxes not directed at resource proceeds from Clause III.B.1. Because it indicates that, at least in

1996, the CCTA Tax may have been deductible from the payor’s income taxes. If that was and

remains the case, then it is possible that the Defendants were able to deduct the CCTA Tax from

the income taxes they paid, including the CCTA Tax that they also charged to the NPI

Agreement account. I emphasize that I have no idea how the Defendants dealt with the CCTA

Tax in relation to their income taxes. But the point is, neither do the Plaintiffs, and neither could

the Plaintiffs. Taxes on a corporation rather than on proceeds are affected by a multiplicity of

complex factors; the ultimate liability of the payor will be affected by facts specific to the payor

and to the interaction of a variety of schemes of taxation. There is no transparent or clear way to

ensure that the cost of those sorts of taxes are accurately passed through to the net profit interest

agreement holder. Structurally and through the language of Clause III.B.1 the NPI Agreement

protects the net profit interest holder from the flow through of those opaque and unspecified

types of charges.

[257] In sum, therefore, I find that the CCTA Tax was not properly included as a deduction

from proceeds of the Rocanville Properties production in the NPI Agreement accounts, and that

the Defendants breached the NPI Agreement by doing so.

Is any or all of the CCTA Tax Claim Statute Barred?

[258] Section 3(1) of the Limitations Act, RSA 2000, c L-12 provides.

Subject to subsections (1.1) and (1.2) and sections 3.1 and 11, if a claimant does

not seek a remedial order within

(a) 2 years after the date on which the claimant first knew, or in the

circumstances ought to have known,

(i) that the injury for which the claimant seeks a

remedial order had occurred,

Page: 44

(ii) that the injury was attributable to conduct of the

defendant, and

(iii) that the injury, assuming liability on the part of

the defendant, warrants bringing a proceeding,

or

(b) 10 years after the claim arose,

whichever period expires first, the defendant, on pleading this Act as a defence, is

entitled to immunity from liability in respect of the claim.

[259] This provision means that a claim must be brought within two years of the claimant

knowing or being “reasonably able to discover that: (i) the injury occurred; (ii) the injury was

attributable to the conduct of the defendant; and (iii) the injury warrants bringing a proceeding”:

De Shazo v. Nations Energy Co., 2005 ABCA 241 at para 28.

[260] The claimant must know sufficient facts on which an action could be brought, or those

facts must be discoverable: Riddell Kurczaba Architecture Engineering Interior Design Ltd. v

Governors of the University of Calgary, 2018 ABQB 11, aff’d 2019 ABCA 195, at para. 69.

[261] This does not require that the claimant have clear or perfect information, but only that

they have sufficient knowledge to warrant making reasonable inquiries. At that point the

claimant must make reasonable inquiries in assessing and pursuing its claim: Geophysical

Service Incorporated v Encana Corporation, 2018 ABCA 384 at para 20, citing Canadian

Natural Resources Limited v Jensen Resources Ltd., 2013 ABCA 399 at para 41.

[262] The clear information must, however, be more than mere suspicion that something has

occurred; the claimant must have “some support for his suspicion” for the limitation period to

begin: Stack v Hildebrand, 2010 ABCA 108 at para 14.

[263] Once the relevant knowledge – of the injury, that it was attributable to the defendant, and

that it would be worth pursuing in law – has been established, the claimant’s “lack of knowledge

of the law giving rise to a right to sue” will not excuse their lack of due diligence in pursuing

their claim: Stewart Estate v 1088294 Alberta Ltd., 2015 ABCA 357 at para 175.

[264] Having said that, however, if a claimant makes inquiries of the other side, and is given

inaccurate or deceptive information, that must be taken into account in determining when the

limitation period begins: Milota v Momentive Specialty Chemicals Canada, Inc, 2019 ABQB

117 at para 84-85.

[265] In a case of an ongoing contractual relationship with periodic payments, generally

speaking each failure to make a payment in accordance with the contractual obligations is a new

injury beginning a new cause of action: Fernandes v Jennings Capital Inc, 2016 ABQB 594 at

para 80-82. Whether that is the case, however, depends on the particular circumstances of the

case and contract: Pedersen v Soyka, 2014 ABCA 179 at para 17.

[266] Applying this law to the CCTA Tax, I find the Plaintiffs’ claim to be statute barred for

the period prior to August 6, 2008. The injury they suffered was that the Defendants charged

them for the CCTA Tax when doing so was not permitted by the terms of the NPI Agreement.

Page: 45

All of the facts relevant to that injury were known to them at the time that it occurred – that the

amounts were being charged, that they were arose from a surcharge imposed by the

Saskatchewan government, and the terms of the NPI Agreement that governed whether those

amounts were properly recoverable. The only thing that they did not know was a matter of

contractual interpretation and the law – the proper interpretation of Clause III.B.1 of the NPI

Agreement, and whether the CCTA Tax could properly be characterized as a tax on the proceeds.

Those things were easily followed up on through consultation with a lawyer, and through legal

research.

[267] The parties had some dispute before me over the admissibility of a preserved website

from the time period in question. While I tend to agree with the Defendants that that website was

admissible, it ultimately does not matter. Because law is, as a matter of principle and practice,

publicly available and reviewable. The website might speak to the effortlessness with which it

could be discovered, but the discoverability requirement is not one of effortless discoverability; it

is one of discoverability after the exercise of some diligence on the part of the claimants.

[268] The claimants in this case, while not immersed in the Canadian oil and gas industry, were

sophisticated and educated, and one of them was a lawyer. They considered retaining legal

counsel and decided not to do so largely because of cost. In my view once the Plaintiffs knew

that a surcharge from the Saskatchewan government was being included on the NPI Agreement

accounts they had the facts necessary to know that they had been injured, that the injury was by

the Defendants and that it was worth pursuing in a proceeding. They could be expected at that

point, as a matter of due diligence, to review the NPI Agreement and to investigate the

Saskatchewan law, consulting with a lawyer if necessary, to decide whether to bring the claim.

[269] There are, however, multiple limitation periods for the purposes of the CCTA Tax.

Every time the Defendants charged the Plaintiffs for the CCTA Tax contrary to the terms of

Clause III.B.1, they committed a new legal wrong and inflicted a new injury on the Plaintiffs. As

a result, and as acknowledged by the Defendants, the Plaintiffs claim is not statute barred in

relation to any amounts deducted with respect to the CCTA Tax for the period after August 6,

2008. The CCTA Tax was not a one-time breach of the NPI Agreement, it was a recurring

periodic breach, and each time it occurred a new limitation period began.

[270] The Plaintiffs make six arguments against the application of the limitation period here.

[271] First, they say that the conduct of the Defendants misled the Plaintiffs about the nature of

the CCTA Tax, which extends the limitation period. They rely on Mr. King’s evidence that he

inquired in 1995 about the nature of the surcharge and was told that it was a “resource tax”. They

also rely on how the CCTA Tax was presented in the NPI Agreements accounts, as a deduction

from revenue, as contributing to a misimpression that the tax was properly included as akin to a

production tax. As a result of those inaccurate and misleading representations, the two-year

limitation period ought not to apply.

[272] Second, they rely on the various steps taken by Mr. King and his employee Mr. Wegner

to review and verify the amounts incorporated in the NPI Agreement account, and submit that

their failure to identify this problem (and the issues related to the Cherry Hill Transaction and

overhead) demonstrate that due diligence could not in fact reveal that the Defendants had caused

an injury that was worth pursuing in law.

Page: 46

[273] Third, they submit that every time an NPI Agreement account was reissued, the limitation

period restarts for every item on the reissued account, even if that particular item was not

adjusted.

[274] Fourth, even when a statement is not reissued, they argue that because the NPI

Agreement account is cumulative, every new account statement incorporates and reiterates the

past accounting, thereby effectively restarting the limitation period in relation to that past

accounting. They argue that, as a consequence, the only limitation period applicable to the

Plaintiffs’ claim is the ultimate 10-year limitation set out in s. 3(1)(b).

[275] Fifth, and relatedly, they submit that when Crescent Point took over the NPI Agreement

in 2014, it had an obligation under the newly created contract to confirm and verify the

accounting. As a result, the limitation period in relation to Crescent Point did not commence

until it acquired its interest in the NPI Agreement and failed to complete the proper accounting.

[276] Finally, the Plaintiffs rely on the fact that the Defendants took the position that they could

adjust any prior NPI Agreement account statement without regard to the passage of time. They

note that in some cases NPI Agreement accounts have been adjusted as much as seven years after

they were originally issued.

[277] In my view none of those arguments extend the limitation period for the CCTA Tax.

[278] The statement made to Mr. King, and the way the CCTA Tax was recorded on the NPI

Agreement accounts, do not change the fact that the Plaintiffs knew that a Saskatchewan

government surcharge was being deducted by the Defendants, or remove the obligation of the

Plaintiffs to review the legitimacy of amounts being incorporated. The public availability of the

law on the CCTA Tax, and that the Plaintiffs had the NPI Agreement, meant they had the ability

from the time the CCTA Tax was first included to independently ascertain its legitimacy, and

they ought to have done so.

[279] The statements made by the Defendants to Mr. King, and the inclusion on the NPI

Agreement account, reflect the Defendants’ view of the resource surcharge. The statements were

not deceptive, and accurately reflected the Defendants’ own assessment, even if mistaken. They

also did not take away the knowledge that the Plaintiffs had or could have easily obtained: that

these amounts were being charged by the Defendants and ought not to have been charged given

the terms of the NPI Agreement and of the CCTA. As such, the statements to Mr. King and the

treatment of the resource surcharge on the NPI Agreement accounts do not remove the Plaintiffs’

obligation to exercise due diligence with respect to the legitimacy of those charges. They do not

stop the limitation period from operating as it otherwise would.

[280] I also do not see the Plaintiffs’ unfortunately ineffectual efforts to review the NPI

Agreement as proof that more effectual efforts were impossible, or that the errors could not

reasonably have been ascertained by persons in their position. The Plaintiffs chose not to retain

counsel or conduct an audit, in significant part because of the expense; that was their choice to

make, but that choice does not shield them from the obligation of due diligence or from the

ordinary operation of the two-year limitation period.

[281] I do not accept the Plaintiffs’ argument that any time an NPI Agreement account is

reissued, the limitation period restarts for every item included on the reissued statement, even if

unchanged from what was there before. I cannot see any reason why the adjustment of one item

on an account statement would shift the ordinary operation of limitation periods for the amounts

Page: 47

not corrected. It does not change the pre-existing knowledge of the claimant necessary to start

the limitation period from running and it does not undermine or shift the claimant’s obligation to

exercise due diligence in relation to those claims. Once the limitation period has otherwise

started to run because of the claimant’s knowledge, and nothing has changed about the nature of

the particular claim, the claimant’s ability to pursue that claim is not prejudiced or affected by

the issuance of a statement adjusted for unrelated reasons. As noted in Riddell, the claimants

need sufficient facts, they do not need perfect facts.

[282] I agree with the Defendants that a relevant aspect of the limitations analysis is that the

claims made by the Plaintiffs relate to categories of costs, not to the calculation of specific costs.

The knowledge required to identify the injury, attribute it to the Defendants and assess the worth

of proceeding does not depend on any particular revenue statement issued by the Defendants; the

knowledge arises once the inclusion of the disputed category of costs has been identified. As a

consequence, the reissuance of account statements, unless adjusting the CCTA Tax itself, does

not restart the limitation period.

[283] I also agree with the Defendants that there is no need for the purpose of limitations for

the Plaintiffs to have final and conclusive information about the NPI Agreement accounts. As

earlier noted, they simply need to have “sufficient facts [that are] known or discoverable upon

which an action could be brought”: Riddell at para 69. Given the nature of the claims in this case

– which dispute categories of costs, not particular cost calculations – sufficient knowledge was

held by the Plaintiffs when the initial NPI Agreement revenue statement showing the deduction

of the CCTA Tax was issued; final account statements for the relevant time period did not affect

the substance and nature of the Plaintiffs’ claim (unlike in Pederson v Soyka, 2014 ABCA 179)

and were not required for s. 3 of the Limitations Act to apply.

[284] For similar reasons, I also do not accept that the cumulative nature of the NPI Agreement

account means that every time a new NPI Agreement revenue statement that incorporates earlier

accounting is issued the limitation period restarts. That interpretation requires, in essence, a

finding that in issuing the new revenue statement the Defendants commit a new and distinct legal

wrong. That position is unsustainable. It artificially extends and overstates the wrong the

Defendants commit. Yes, the Defendants breached the contract in including the CCTA Tax. And

until that contract breach is corrected it will be reflected in some way in the cumulative account.

But that the injury is ongoing and not corrected does not create a new injury; it is the

continuation of a prior legal wrong, not the commission of a new one.

[285] The Plaintiffs say that each time a new revenue statement is issued “a new ‘injury’ is

suffered” so as to restart the limitation period. However, s. 3(1)(a)(i) of the Limitations Act does

not refer to an “injury”, it refers to “the injury for which the claimant seeks a remedial order”. In

this case, the injury for which the Plaintiffs seek a remedial order is the Defendants’ inclusion of

the CCTA Tax in the NPI Agreement accounts; they do not seek a remedial order for the

reissuance of accounts reflecting that original inclusion. The limitation period thus runs from the

injury suffered at the point of the original inclusion of the CCTA Tax, not from the point of each

statement in some way affected by that inclusion.

[286] With respect to Crescent Point, as discussed below, the Assignment and Novation

Agreement dated September 30, 2014 makes Crescent Point liable for the breaches of contract

established by this litigation. The Plaintiffs seem to be arguing, however, that Crescent Point has

a broader liability – “There can be no limitation defence to claims against CPG”. While the basis

Page: 48

for this argument is not entirely clear, the allegation seems to be that Crescent Point had an

obligation to do a historical accounting and audit to identify and correct the previously existing

contract breaches at the point that it entered into the Assignment and Novation Agreement. That

it failed to do so creates new injury that gives rise to a new limitation period.

[287] This argument suffers, however, from the same problem as did the Plaintiffs’ submission

on the reissuance of the accounts. The injury for which the Plaintiffs seek a remedial order is the

original inclusion of the CCTA Tax; it is not Crescent Point’s failure to complete a historical

accounting. In short, while I am satisfied that Crescent Point is as liable as Lightstream was

under the NPI Agreement, I see no basis for saying that they have greater liability, or that they

caused an additional injury relevant to the calculation of the limitation period by failing to redo

all of the NPI Agreement accounts to that point.

[288] The Plaintiffs rely on the decision of this Court in United Canso Oil & Gas Ltd v

Washoe Northern Inc, [1992] AWLD 180; however at least in this respect the case is

distinguishable. In United Canso the Court did not allow the successor corporation to benefit

from the limitation period in part because the successor corporation did not take on the liabilities

of the prior contracting party: “The Husky defendants transferred no liabilities to Asamera and

Asamera transferred no liabilities to Lasmer save as related to the Gas Purchase Contract.

Neither Asamera or Lasmer can shelter under any limitation defence that the Husky defendants

may have had regarding its own liabilities during its period of managing operatorship”: United

Canso at para 289.

[289] Here, by contrast, Crescent Point has taken on the liabilities of Lightstream by virtue of

Clause 2 of the Novation and Assignment agreement. As a result, it can benefit from limitation

period defences to that liability in the same manner as was available to Lightstream. That it did

not independently identify or correct errors at the time it took over the NPI Agreement does not

change the analysis because, as noted, it does not create a distinct injury for which the Plaintiffs

have sought a remedial order. The 4^thAmended Statement of Claim states that Crescent Point

has adopted the previous accounting, but it does not allege an independent legal wrong and

injury by Crescent Point in relation to the failure to correct and update the prior accounting.

[290] Finally, with respect to the Defendants issuing updated NPI Agreement accounts and

revenue statements for periods of time greater than two years, I do not accept that that alters the

application of the Limitations Act. This argument goes beyond the claim that a revised NPI

Agreement revenue statement restarts the limitation period. It amounts to an argument that, by

issuing revised NPI Agreement revenue statements more than two years after the statements

were originally issued, the Defendants have waived the application of the Limitations Act. The

Plaintiffs as I read it assert waiver of the limitation by the conduct of the Defendants and

detrimental reliance by the Plaintiffs – “The parties’ practice confirms that the Hudsons would

never reasonably expect that they had to commence a claim within any particular time-frame to

preserve limitations”.

[291] To put it slightly differently, the Plaintiffs claim that the Defendants are estopped from

relying on the application of the limitation period by virtue of their conduct in reissuing NPI

Agreement revenue statements, and by the Plaintiffs’ reliance on the representation implicit in

that conduct.

[292] The Supreme Court of Canada has recognized that a party can be so estopped: Maracle v

Travellers Indemnity Co. of Canada [1991] 2 SCR 50. That estoppel requires, however, that

Page: 49

The party relying on the doctrine must establish that the other party has, by words

or conduct, made a promise or assurance which was intended to affect their legal

relationship and to be acted on. Furthermore, the representee must establish that,

in reliance on the representation, he acted on it or in some way changed his

position: Maracle at para 13.

[293] In my view, the Defendants’ periodic revisions to the NPI Agreement accounts, which

occurred in the ordinary course and for reasons unrelated to the subject matter of this litigation,

are not sufficient to constitute a promise or assurance intended to affect their legal relationship

with the Plaintiffs with respect to limitation periods. Nor am I satisfied that the Plaintiffs

changed their conduct in reliance on any such representation. The facts before me show that the

Plaintiffs simply did not appreciate – although they had knowledge sufficient for them to do so –

that a legal wrong had occurred in relation to the CCTA Tax charges. They did not appreciate

that they had a claim but choose not to pursue it because they were waiting for the final accounts;

rather, because they did not investigate the facts available to them, they did not appreciate they

had a claim.

[294] I thus allow the Plaintiffs claim for breach of contract in relation to the calculation of the

CCTA Tax for the period after August 6, 2008 but not for the period prior to that date. Based on

Schedule 5 to the Expert Report of Derek Malcolm, that means that the Defendants between

August 2008 and December 2015, have improperly deducted $1,477,252 from the NPI

Agreement account.

2015: 119,480

2014: 190,180

2013: 213,456

2012: 198,836

2011: 228,944

2010: 206,848

2009: 204,762

2008: 10,513 (Dec); 17,525 (Nov) 21,168 (Oct) 29,260 (Sept) 36,280 (Aug)

Cherry Hill Allocation Timing Issue

Facts

[295] In 1999 Real Resources acquired four wells from Cherry Hill. Three of the wells acquired

were within the NPI Agreement area; however, Real Resources assigned the wells to a different

account and did not allocate revenues and expenses from the wells, or the cost of acquiring them,

to the NPI Agreement account. Real Resources did not realize that it had made this error until

2006. Once it identified the error, it made a single adjustment to the NPI Agreement accounts to

reflect all financial balances associated with the three Cherry Hill wells from 1999 to 2006. It did

not go back and adjust each of the NPI Agreement revenue statements issued between 1999 and

2006 to reflect the financial balances associated with the Cherry Hill wells in those months.

[296] By way of an e-mail dated December 18, 2006, Ms. Clark sent Mr. King’s employee, Ms.

Thom-Troutt, an amended NPI Agreement revenue statement which reflected the “Cherryhill

Acquisition Nov 99 – Aug 2006”. It listed the revenues, deductions from revenues, expense and

capital costs associated with the Cherry Hill acquisition. The net effect of the Cherry Hill

adjustment on the NPI Agreement account was a positive adjustment that reduced the negative

Page: 50

net profit carryover from $3,610,317.05 for August 2006 to $2,961.464.20 for September 2006.

The NPI Agreement account was in a negative net carryover position at this time because of the

3D seismic shoot.

[297] By way of an e-mail dated June 7, 2007, Ms. Clark sent to Ms. Thom-Troutt, and also to

Andrew and Chris Hudson, a breakdown of all of the financial balances associated with the

Cherry Hill wells from 1999-2006. It identified the three wells and the net income earned from

those wells between 1999 and 2006, along with the acquisition costs and capital expenditures.

That document listed the net income less acquisition costs and capital expenditures as $727,473.

The breakdown further provided all of the information normally included on NPI Agreement

revenue statements (revenue, deductions from revenue, expenses and capital costs) for each well

for each month between 1999 and 2006.

[298] In an e-mail sent in response on that same day, Ms. Thom-Troutt thanked Ms. Clark

enthusiastically (all caps) and added “Frank-Paul will be reviewing the information and will be

in touch”. Mr. King said that he reviewed this information. Since the information was sent

directly to Andrew and Chris Hudson, I accept that they also would have at least had the

opportunity to review it.

[299] Nonetheless, in 2006 the Plaintiffs did not raise any issues with the Defendants with

respect to this method of accounting for the Defendants’ error in failing to include the Cherry

Hill wells in 1999. In explaining why the adjustment had not raised any concerns, Mr. King said

It did not concern me at all because my -- my assumption - not my understanding

but my assumption -- was that we simply had an acquisition that had a closing

date subsequent to an effective date of purchase and that this had closed at one

time recently and it was being added to the NPI account.

[300] Ms. Clark testified that she applied the adjustment to August 2006 because she was

instructed to do so. She said that she did not make any independent determination about what

revenue, expenses or capital were related to Cherry Hill, and she did not have any involvement in

the calculations of the amounts allocated in 2006 with respect to Cherry Hill. She was given the

information by a financial accountant, Ms. Sharnau, who gave her the aggregate amounts to be

included in the NPI Agreement accounts.

[301] Ms. Clark confirmed that she did not go back to the 1999-2006 NPI Agreement revenue

statements and update the numbers in those monthly statements to reflect the revenues and

expenses associated with the Cherry Hill transaction.

[302] The Cherry Hill issue came up again in June 2009, when TriStar was the counterparty to

the NPI Agreement. At that time TriStar realized they had an outstanding account payable

indicating that payments were owed to the Hudsons as a result of the Cherry Hill acquisition. Ms.

Clark testified that the amount was carried over from Real Resources’ financial systems but was

not identified or addressed by TriStar until 2009.

[303] In an e-mail dated June 30, 2009 Mr. Lawrence Fisher addressed the existence of the

Cherry Hill accounts payable. He said:

Hi Kristin and Filippo,

Page: 51

Unfortunately, I was not able to connect with Shawn. I did speak with Erin

Buschert and Shyanne Woroniuk, who both worked with the Hudson NPI file

over the years.

The bottom line is that we are not going to issue a cheque for the Cherryhill

acquisition. We are going to count the proceeds against the NPI account. Here are

my reasonings:

1. We did not purposefully withhold the proceeds for the 3 wells from the

Cherryhill acquisition that were intertwined with the Hudson’s NPI. It is my

understanding that this was discovered in 2006.

2. They have been receiving full accounting statements, and were/are aware of the

acquisition.

3. Related to Point 2 above, we are beyond the 2-year Statute of Limitations for a

potential civil action.

4. The Hudson’s have been given the benefit of a draw-down on the NPI account

by including the acquisition in the account. We therefore can remove it as a

payable because the amount cannot be in both places (ie. drawn-down on the NPI

account as well as a payable).

I trust this is all you require.

[304] Mr. Fisher said that he raised the statute of limitations not based on legal expertise, but

because “certainly in my normal business knowledge, if you will, and certainly it’s a common

shield in a – in any type of liability action”. With respect to the fourth point, he noted that if you

give an adjustment credit it effectively gives the funds to the Plaintiffs by reducing the amount of

time it takes to put the account back into a positive position.

[305] Mr. Angelini responded in an e-mail dated June 30, 2009, “Thanks Lawrence. It sounds

like we are satisfied that there is no liability owing to the Hudsons at this time, so we will reverse

it”. Later that day, however, he said that “Shawn McDonald just called me and I’ve asked

Lawrence to speak with him ASAP to ensure nothing different”. Mr. Fisher responded by e-mail,

“Shawn agreed with my points but also want to add that it is more likely than not that the

Hudson’s would have difficulty trying to collect if they even desired to collect the monies.

Therefore, there is very little risk with the course we have decided to take on this issue”.

[306] Mr. Fisher testified that the view in June 2009 of the payable was that it was clearly a

mistake because you cannot both adjust the NPI Agreement account to reflect the transaction,

and also have a payable. He said that he knows that they had not purposefully withheld the

proceeds.

[307] Following this consideration of the issue, TriStar deleted the account payable and no

payment was made to the Hudsons.

[308] Ms. Clark testified that ultimately the decision to delete was made by Mr. Fisher,

although she said that she agreed with it, and that she understood Mr. Angelini did as well. She

noted that outstanding accounts payable are not unusual, especially when you take over the

records from another company.

Page: 52

Analysis

[309] The Plaintiffs claim that the Defendants breached their legal duties by correcting the

failure to include the Cherry Hill wells in a single adjustment, rather than going back and

amending each of the revenue statements provided to the Plaintiffs between 1999 and 2006.

They say that this breach injured them because, had the Defendants made the adjustment, the

Plaintiffs would have received a payout, since prior to 2006 the NPI Agreement accounts were

not in a negative position. By making a single adjustment the Defendants reduced the negative

net profit carryover associated with the NPI Agreement accounts, but they did not have to make

a payment to the Plaintiffs.

[310] The Plaintiffs also claim that the Cherry Hill adjustment is not statute barred by virtue of

the arguments about the structure and accounting for the NPI Agreement earlier discussed in

relation to the CCTA Tax. They also rely on the Defendants’ reconsideration of the Cherry Hill

adjustment in relation to the accounts payable in 2009 as delaying the commencement of the

limitation period.

[311] While not challenged by the Defendants (who focused their Cherry Hill submissions on

the limitations issue) I have some difficulties with the Plaintiffs’ substantive position. I accept

that the Defendants ought to have incorporated the Cherry Hill wells from the time they were

acquired in 1999, and that not doing so contravened the terms of the NPI Agreement. I also

accept that, once they realized their error, they were required to correct it. I am less convinced,

however, that the only proper way for them to do so was through adjusting each of the previously

issued revenue statements.

[312] The problem with that method is that while it may work in circumstances where the

adjustment results in the Defendants owing money to the Plaintiffs, it would be ineffective in

circumstances where the adjustment results in the Defendants having overpaid the Plaintiffs.

Specifically, if the Defendants realized they had failed to include an acquisition expense in the

NPI Agreement account in a reporting period where they had issued cheques to the Plaintiffs,

could the Defendants ask the Plaintiffs to refund what had previously been paid? This seems

impractical, particularly since both Andrew and Chris Hudson testified to financial

circumstances that would make it difficult for them to provide that refund.

[313] That means that, if the Plaintiffs’ position is accepted, the Defendants have to make

adjustments to each revenue statement where doing so is to the benefit of the Plaintiffs but must

make a single later adjustment where the benefit would be to themselves (or pursue the Plaintiffs

in debt).

[314] The Plaintiffs might respond that this inequality reflects the Defendants’ sole ability to

control the accounting and correct mistakes; however, I am reluctant to accept an interpretation

of the NPI Agreement that cannot be applied consistently across the variety of circumstances in

which the Defendants may discover errors in the accounting.

[315] I note in this respect that the NPI Agreement does not explicitly speak to this issue. It

provides in Clause III.E that the Defendants must issue quarterly revenue statements and pay out

such net profits as are realized in that quarter – they must issue “a statement in detail setting forth

the revenue received, the costs and expenses incurred, and the status of such net profits account”.

Further, they must pay “for such net profits realized during each particular quarter-annual

period”. Clearly the Defendants failed to comply with that Clause by not properly recording the

Page: 53

Cherry Hill adjustment. That Clause does not, though, direct the method by which the

Defendants should correct their non-compliance.

[316] I also observe that, while I have some concerns with how the Defendants managed the

NPI Agreement, even the most diligent operator will occasionally make a mistake. The type of

error that occurred here, where wells were coded into the wrong account, is the type of human

error that is simply going to occur from time to time. The Defendants did what they ought to

have done – they corrected the error as soon as they realized that it had been made. Their choice

to do so in a single adjustment was defensible and not obviously inconsistent with the terms of

the NPI Agreement.

[317] Ultimately, though, I do not need to decide whether the Defendants acted improperly in

correcting the Cherry Hill error through a single adjustment because I agree with the Defendants

that the Plaintiffs’ claim in this respect is statute barred.

[318] The Plaintiffs had actual knowledge of the Cherry Hill adjustment, and in particular that

the adjustment had been made on a cumulative basis, by June 2007 at the latest. I recognize that

the Defendants never explicitly told the Plaintiffs that this was an adjustment to correct an error

for wells that had not been included; however, the Plaintiffs knew that the Defendants issued

corrections to the NPI Agreement accounts. They knew that the adjustment was for the 1999-

2006 period. They knew the wells to which it applied, and they knew the revenues and expenses

for each of those wells broken down on a month-by-month basis for the six-year period. While

Mr. King was an honest witness, I find his explanation that he thought this was a transaction that

closed in or near 2006, but with an effective date of 1999, implausible. Given the atypical nature

of a transaction with an effective date seven years prior to closing, the regular corrections to the

NPI Agreement, and the type of information provided by the Defendants about the adjustment,

this was not a reasonable assumption, and I am not satisfied that Mr. King made it. I think it

likely that he simply does not accurately recall what he thought at that time.

[319] The Plaintiffs submit that there “is no evidence that the decision to simply apply the

amount owing to the Hudsons as a draw down on the then negative balance in the account

instead of making a payment to them, was ever discussed or clearly explained”. They observe

that the Hudsons “are not accounting or production accounting experts” who could assess the

significance of this information to identify that the amounts had been allocated in a way

detrimental to them. They note that as late as June 11, 2008 Mr. Wegner asked for information

with respect to the wells acquired during the Cherry Hill acquisition and whether those wells

were still owned by TriStar.

[320] The difficulty with this argument, however, is that it posits a level of information beyond

what the Limitations Act and the case law requires. The Plaintiffs needed only to have sufficient

information to justify making reasonable inquires. They do not need to know the law that would

have given them the right to sue. Here the Plaintiffs knew that a significant adjustment had been

made covering the period from 1999 to 2006. That was sufficient information to justify making

further inquiries and, in particular, making further inquiries about why an adjustment for a seven

year period was done as a single entry. At no point, however, did the Plaintiffs ask questions of

that type. The questions asked, such as about the number of the wells acquired and whether they

are still owned, did not get to the injury that the Plaintiffs now assert.

[321] In finding this information to be sufficient I recognize that the Plaintiffs are not

accounting or production accounting experts. The Plaintiffs are, however, educated and familiar

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with the operation of businesses; they know how to read an accounting document and financial

statement. They also by that point had many years of experience as parties to the NPI

Agreement, and with the type of adjustments that took place on the NPI Agreement accounts

from time to time. Further, the disputed conduct here was not especially technical and was

obvious on the face of the document: this was a single adjustment covering seven years. The

Plaintiffs knew enough to make inquires of an accountant or lawyer as to whether that sort of

adjustment was appropriate from an accounting or legal point of view.

[322] I thus find that by June 7, 2007 the Plaintiffs had the information they needed to know

that the Defendants had inflicted the injury for which they now seek a remedial order, and to

assess whether it was worth bringing a proceeding. That means that, absent any other

consideration, their claim became statute barred by June 7, 2009.

[323] I do not accept any of the submissions made by the Plaintiffs to support extending the

limitation period past that date.

[324] For the reasons set out with respect to the CCTA Tax, I reject the Plaintiffs’ position that

the limitation period ought to be generally extended by virtue of the reissuing of NPI Agreement

accounts, the cumulative nature of the NPI Agreement accounting, or the Defendants’ practice of

adjusting accounts back for a period longer than two years. I also, again for the reasons

previously set out, reject the suggestion that Crescent Point cannot take advantage of limitation

periods available to Real Resources or Lightstream (bearing in mind the corporate evolution

from Real Resources to Lightstream)

[325] I also do not accept that the internal discussions about the accounts payable in 2009

extend the limitation period. I imagine that the Plaintiffs find the internal correspondence, and in

particular Mr. Fisher’s e-mail, disquieting. It gives the impression that the Defendants did not

pay out funds to the Plaintiffs because they could ‘get away with it’ given the limitation period.

Read in its entirety, however, that is not the central point of Mr. Fisher’s e-mail. His central point

is the one he makes last, which is that the Defendants had already corrected this mistake “by

including the acquisition in the account” and it could not properly be paid twice.

[326] In 2009 the Defendants did revisit the issue of the adjustment for the Cherry Hill

acquisition. They concluded that they had dealt with the issue adequately by virtue of the 2006

adjustment. In my view that conclusion, even if it were in error, does not constitute a new or

additional action in relation to the Cherry Hill adjustment so as to restart the limitation period.

The 2009 discussion was analogous to the filing of a statement of defence; it was an assertion

that what was done previously was sufficient, not something new or additional being done.

[327] Further, nothing in the 2009 discussions changed the information or knowledge that the

Plaintiffs had in June 7, 2007. By June 7, 2007 the Plaintiffs had sufficient knowledge to make

reasonable inquiries about whether the Cherry Hill adjustment had been made correctly. The

2009 internal discussions, which reiterated the Defendants’ position that they had made the

adjustment correctly, did not add any relevant new information, or detract from the sufficiency or

relevance of the information previously available.

[328] As a result, I do not find that the 2009 discussion change the limitation period, and I find

the Plaintiffs claim in relation to the Cherry Hill adjustment, even if it could be made out, to be

statute barred.

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Arista Allocation Issue

Facts

Evidentiary Issues

[329] One challenge for this trial was the limited evidence with respect to TriStar’s acquisition

of Arista. Mr. Wallis, who testified about his role in TriStar’s acquisition of Arista, had minimal

specific or present recollection with respect to the transaction. There were few documents related

to the matters to which he testified. Mr. Wallis testified about what he would have ordinarily

done in a corporate transaction. As noted through cross-examination, however, Mr. Wallis has

had extensive transactional experience since the Arista acquisition, so it is unclear whether the

practices to which he attested were practices of TriStar or of later ventures with which he was

involved.

[330] Mr. Kimber, who also testified about his role in TriStar’s acquisition, similarly had no

specific or present recollection with respect to what happened with the Arista acquisition. He

also has been involved in many subsequent transactions and valuations since the Arista

acquisition. In cross-examination he noted that his testimony was largely based on the

documentation with which he had been provided.

[331] Other witnesses for the Defendants, Mr. McDonald, Ms. Way, Mr. Fisher and Ms. Clark,

had no involvement in the Arista acquisition until the point of allocating the costs of that

acquisition to the NPI Agreement account.

[332] Moreover, there is limited documentary evidence with respect to the transaction. There

are no documents related to, for example, TriStar’s bid for Arista, the negotiations between

TriStar and Arista, how TriStar calculated the amount of its bid or its price, minutes of Board

meetings considering the transaction, TriStar’s accretion models, or minutes or notes of meetings

by TriStar’s executive about the bid and acquisition process. TriStar also has limited

documentation with respect to the basis on which it allocated part of the purchase price to the

NPI Agreement.

[333] I have considered whether to draw an adverse inference against the Defendants as a result

of the gaps in the evidentiary evidence. I note that Mr. Wallis acknowledged in cross-

examination that normally they would have kept records related to acquisitions. Mr. Fisher

testified that Petrobakken and Lightstream had access to the records of Real Resources in

compiling the documentary evidence.

[334] A trial judge has discretion about whether to draw inferences from an absence of

evidence, provided that the overall record justifies the drawing of such an inference: Stikeman

Elliott LLP v 2083878 Alberta Ltd, 2019 ABCA 274 at para 51; Pfeifer v Westfair Foods Ltd,

2004 ABCA 422 at para 20.

[335] Here, while I am troubled by the gaps in the documentary evidence provided by the

Defendants, I am not satisfied that the circumstances warrant drawing an adverse inference. The

Defendants produced a broad range of factual witnesses who, in my estimation, provided honest

testimony to the best of their recollection. I accept that the documentary evidence they did not

provide was documentary evidence that they did not have.

[336] At the same time, however, the gaps in the documentary evidence cannot be ignored or

treated as inconsequential. I do not draw any adverse inferences from gaps in the evidentiary

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record, but I must make findings of fact and draw inferences based only on the evidence before

me. I cannot draw inferences or make findings of fact based on evidence that might have been

provided but that was not.

[337] The salience of this observation – which risks stating the obvious – will become apparent

in the analysis below, and in particular in relation to inferences invited by the Defendants about

the basis on which TriStar and Arista identified and negotiated the price paid by TriStar to

acquire Arista, and about the method used by TriStar to allocate the acquisition cost and

expenses to the NPI Agreement account. I do not make the inferences suggested by the

Defendants because the evidence actually in front of me does not justify those inferences being

made.

The Arista Acquisition – Key Events

[338] Arista was an oil and gas company with assets based primarily in SE Saskatchewan. In

the fall of 2007 Arista began looking for a company to acquire it. It published an information

memorandum prepared by First Energy in November 2007, and invited bids to be submitted by

December 5, 2007 (“Information Memorandum”). It also made available to prospective

purchasers a reserve evaluation report prepared by AJM Petroleum Consultants with an effective

date of September 30, 2007 (“AJM”; “AJM Report”)

[339] The most significant of Arista’s assets were its interests in the Fertile area of SE

Saskatchewan, a portion of which it owned jointly with Bulldog Resources Inc. (“Bulldog”).

[340] Arista also owned assets in the Welwyn area of Saskatchewan, which fell within the

lands covered by the NPI Agreement (“Welwyn assets”). According to the Information

Memorandum, there were two producing vertical wells in Welwyn with production of 60 Bbl/d,

but Arista had identified four additional drilling locations and had drilled one horizontal well

which was awaiting completion

[341] Following Arista’s release of the Information Memorandum, TriStar began working on a

bid for Arista. It also began the process of acquiring Bulldog. Its interest in both companies arose

from its interest in acquiring the Fertile assets.

[342] Bulldog had also obtained a reserve report in relation to the Fertile assets prepared by

GLJ Petroleum Consultants with an effective date of September 30, 2007 (“GLJ”; “GLJ

Report”).

[343] TriStar submitted a bid for Arista on December 5, 2007. No documents exist with respect

to this bid or its amount, and no witnesses recalled the nature or amount of the bid that was

made.

[344] In the process of preparing for TriStar to make its bid, Mr. Kimber of TriStar prepared his

own reserve evaluation report dated December 3, 2007 (“December 3 Report”). In addition, as

detailed below under the heading “Information About Arista….”, throughout this period TriStar

was provided with a variety of information from First Energy and Arista about Arista’s ongoing

drilling activities and results.

[345] On December 11, 2007 Mr. Kimber prepared an updated reserve evaluation report

(“December 11 Report”). The version of that report submitted as evidence in this proceeding did

not, in contrast to the December 3 Report, contain well or property level details of his evaluation.

Page: 57

[346] TriStar and Arista entered into an Arrangement Agreement dated December 17, 2007.

The Plan of Arrangement specified a purchase price of $212,000,000. It permitted some

adjustment of the purchase price depending on the amount of Arista’s net debt. Mr. Wallis

testified, however, that he did not recall any adjustment of the purchase price being necessary.

[347] TriStar issued a press release dated December 17, 2007, stating that it was acquiring

Arista through an arrangement agreement pursuant to which it would acquire all of the issued

and outstanding common shares of Arista for $212,000,000 in cash, including assumed net debt

(“Arrangement Agreement”).

[348] First Energy provided a fairness opinion to Arista dated December 17, 2007 (“Fairness

Opinion”).

[349] By way of a letter dated December 21, 2007 Tristar received an independent assessment

and evaluation of the Fertile property prepared by GLJ. Based on an e-mail dated December 20,

2007, GLJ prepared this evaluation from an evaluation it had previously completed for Bulldog

effective September 30, 2007 and, using the same pricing, “adjusted the working interests where

necessary, recalculated the payout balance on the pipeline, rechecked the process income and op

costs and royalty burdens”. TriStar also received an updated independent assessment from AJM

excluding the property Arista held with Bulldog.

[350] On or about December 21, 2007 TriStar issued Form 51-102F3, its material change report

(“Material Change Report”). The date of the material change was December 17, 2007 – the date

of the Arrangement Agreement being entered into with Arista. The Material Change Report

identified the acquisition price as $212,000,000 in cash, including assumed debt and subject to

adjustment in certain circumstances. The notes to the Material Change Report stated that the

“Under the terms of the Arrangement, TriStar will pay consideration of $215 million, consisting

of cash and net debt assumed, for all issued and outstanding common shares of Arista”. This

document was filed on SEDAR and available to the public.

[351] The Material Change Report provided information about the value of the reserves being

acquired by combining the updated GLJ and AJM reports – it used the updated GLJ Report with

respect to the jointly held Fertile assets, but the updated AJM Report with respect to the

remainder of Arista’s assets (“Combined GLJ/AJM Report”). This allowed consistency with the

public disclosure in relation to the Bulldog acquisition.

[352] TriStar published a further press release dated January 11, 2008 announcing that it had

completed its deal subscription receipt financing and had generated $205,000,000, a portion of

which would be used to fund its purchase of Arista. This press release was made public and was

available on SEDAR

[353] On January 14, 2008 Arista filed materials in Court in support of the proposed

arrangement between Arista and TriStar. The materials filed included an affidavit of Douglas

Chisholm, the Vice-President of Operations for Arista sworn January 8, 2008. The Chisholm

Affidavit included a copy of the plan of arrangement and also the Fairness Opinion.

[354] The Arista transaction closed on January 18, 2008. Arista became a wholly owned

subsidiary of TriStar called TriStar AE Limited.

[355] On January 18, 2008 TriStar issued a press release to announce the closing. It announced

that it had successfully acquired Arista through a plan of arrangement under the Business

Page: 58

Corporations act for cash consideration of approximately $212 million including the assumption

of Arista’s net debt. The press release was made public and was available on SEDAR.

Information About Arista Available During the TriStar-Arista Negotiations

[356] The evidence presented at trial shows that TriStar and Arista had available information to

them relevant to the transaction in the form of: 1) reserve evaluation reports prepared by third-

party evaluators and, in particular, AJM and GLJ; 2) internal reserve evaluation reports prepared

by Mr. Kimber; 3) information provided by Arista updating TriStar on its drilling and

development activities, and its production results from those activities.

[357] The AJM Report, which was commissioned by Arista, is dated November 1, 2007 and is

effective September 30, 2007. It provides a summary of total corporate reserves and value using

both forecast prices and costs and constant prices and costs as at the effective date. The estimates

were completed in accordance with the Canadian Oil and Gas Evaluation Handbook (COGEH)

and National Instrument 51-101 (NI 51-101). It did not assign any value to non-reserve lands.

[358] AJM was a petroleum consulting company who assessed reserves and did consulting. It

employed reservoir engineers, geologists and geophysicists in a multidisciplinary team to

evaluate reserves for different companies. It, like other evaluation houses, would use its

independent expertise and existing guidelines to identify the value of reserves. Both Mr.

Gouveia, the Plaintiffs’ expert, and the Defendants’ expert, Mr. Haugen, described AJM as a

competent and independent reserve evaluator.

[359] AJM’s Report included validation by those who prepared it that it had been completed in

accordance with COGEH. It also included a standard representation letter from Arista, dated

October 29, 2007, where it listed the information that had been made available to AJM and that

that information was consistent with what had been reported by Arista for public disclosure and

annual audit purposes.

[360] The AJM Report indicated that there were two producing wells in the Welwyn assets, and

that there were four proven undeveloped drilling locations.

[361] It valued the Welwyn assets as having proved plus probable reserves based on forecast

pricing as worth $4,928,400 assuming a discount rate of 5%, and $4,039,400 assuming a

discount rate of 10%. It valued the Arista reserves as a whole as worth $484,699,100 assuming a

discount rate of 5% and $351,291,100 assuming a discount rate of 10%. It thus assessed the

Welwyn assets as 1.15% of the total value of the Arista assets using a 10% discount rate and as

1.02% of the total value of the Arista assets using a 5% discount rate.

[362] On December 3, 2007 Mr. Kimber circulated his evaluation of Bulldog and Arista to the

TriStar executive group. The December 3 Report had an effective date of December 31, 2007 to

reflect roughly when the transaction would close. Mr. Kimber estimated the total proved plus

probable reserves available from Arista as having a net present value of $201,668,000 assuming

a 5% discount rate and $164,873,000 assuming a 10% discount rate.

[363] Mr. Kimber identified the proved plus probable reserves in the Welwyn assets as worth

$1,406,000 at a 5% discount rate, and $1,288,000 at a 10% discount rate, but listed only the two

wells currently in production. He listed only those wells because they were the wells producing

at that time. He did not identify the four prospective wells identified by AJM, although he would

have known about them. He does not know who made the decision not to include those wells in

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this report, and at this time can only confirm – by looking at the report – that they were not in

fact included.

[364] The December 3 Report assessed the Welwyn assets as representing 0.078% of the total

value of the Arista assets at a 10% discount rate, and at 0.007% of the total value of the Arista

assets at a 5% discount rate.

[365] While Mr. Kimber could not recall preparing this reserve report, he provided a detailed

explanation of the method he used for preparing such reports, and I accept that he would have

used this general method in preparing the December 3 Report. Some of the documents

introduced in evidence also showed the information that he had available to him.

[366] Mr. Kimber is not an engineer, although he completed the engineering science tech

program at SAIT, and he has extensive experience in preparing engineering evaluations. Mr.

Kimber emphasized that his reports were prepared in accordance with COGEH and NI 51-01 to

ensure that the results that he produced would be able to be later confirmed by third party

evaluators. Mr. Kimber was familiar with the rules for recognizing reserves provided for by NI

51-01. His focus was on identifying the value of the current production, and of some of the

booked and unbooked upside related to production, to be used by management in identifying the

appropriate purchase price.

[367] Mr. Kimber would begin by identifying the producing wells, and analyzing signs of

quality, decline rate and productivity. Using materials from the vendor such as a well list, land

schedules and a land plat, he would identify all of the company’s producing properties. He would

create a well-list and load it into his evaluation software, along with all public sources of data

with respect to each well, including its production history. The production information would be

obtained through AccuMap Oil and Gas Mapping Software, which has oil, gas and water

information for every well in the industry as submitted to the central provincial regulatory

boards. Mr. Kimber noted that sometimes production information would also be provided by the

company who owns the assets being acquired; he would not obtain production information from

a third-party reserve evaluation unless he had to – for example, where the information was not

otherwise available from the vendor.

[368] In this case, Mr. Kimber had been provided with a complete well list for Arista, including

wells in the Welwyn assets, as of December 3, 2007.

[369] Mr. Kimber used MOSAIC software, which is a database that allows modeling of an oil

and gas company, and its production, hedging, operating costs, capital costs, well locations,

drilling programs and scheduling, and any other relevant information. The publicly available

production information could be linked to MOSAIC once the well information was uploaded.

MOSAIC permitted separation of reserves into different categories of proved, possible or

probable. It also allowed for reports to be generated for different categories or combinations of

categories.

[370] Mr. Kimber would complete decline reserve analysis on different wells to allow more

accurate prediction of future performance; for new wells he would use analogue comparators to

predict future production. If no analogue was available, he would perform more detailed

reservoir analysis in conjunction with a geologist. Mr. Kimber also took into account other

information, such as whether the company was in the process of upgrading facilities or trying to

improve existing wells or drilling development wells in an existing pool. Mr. Kimber took into

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account capital costs for wells that needed to be drilled but did not take into account undeveloped

land values. His evaluation focused on what had been done, what remained to be done and other

potential sources of value. He also considered abandonment obligations.

[371] Mr. Kimber also considered economic parameters related to the nature of the vendor’s

working interests, applicable royalties and other encumbrances. Sometimes this information

could be obtained from a third-party engineering report, because the third-party would have had

more time to go through the land schedules to find royalties and other encumbrances; using the

third-party evaluator in this way was useful when operating under time constraints.

[372] Once the information has been entered into MOSAIC, Mr. Kimber would analyze it

relative to the monthly operating statements to see whether the net production information in

those documents lined up with the information produced by his MOSAIC analysis, and to

confirm the royalty rates and operating costs.

[373] Having compiled the well data through MOSAIC, Mr. Kimber would then select an

effective date and a price forecast. The effective date was generally chosen to coincide with the

likely closing date. Normally he would use a price forecast provided from the third-party

engineers – i.e., Sproule – although sometimes he would use more than one price deck to allow

for comparison. He noted in his testimony that changing the price forecast can cause variations

of as much as 10% with respect to the predicted net present value of the wells.

[374] Once he had the well data, effective date and price forecast, Mr. Kimber could run the

numbers to generate reports showing production forecasts, net present value, and cash flow per

well per year. He would apply a range of discount rates, from 5-20%, to calculate the net present

values.

[375] Once the reports were generated, Mr. Kimber would compare them to third-party reserve

reports to analyze differences and to consider whether those differences arose because he had

missed something, or whether they were just a result of variations in interpretation. He would not

look at third-party reports prior to doing his analysis because he wanted to approach it with no

set viewpoint.

[376] At that point Mr. Kimber would circulate his evaluation to the executive group to assist

them in their identification of the appropriate bid price.

[377] Given this thorough assessment method, the efforts to comply with COGEH and NI 51-

01, Mr. Kimber’s obvious expertise, and TriStar’s interest in identifying as accurately as possible

the appropriate purchase price for the Arista assets, I am satisfied that Mr. Kimber’s December 3

Report was a bona fide and professionally prepared estimate of the value of the Arista assets as

of December 3^rdakin to what would have been done by a third-party evaluator. I also accept,

however, Mr. Kimber’s evidence that the December 3 Report was only a preliminary report.

[378] Following the preparation of the December 3 Report, TriStar was provided with

information from Arista in relation to its well development and, in particular, with respect to new

wells that had been drilled and the initial production from those new wells. Specifically, TriStar

received information from Arista up to December 11, 2007 that indicated additional drilling and

production from the Welwyn assets.

[379] In an e-mail dated December 11, 2007 Mr. Kimber provided the TriStar executive team

with an updated resource evaluation, the December 11 Report. In his e-mail he noted that “Most

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of the production missing in the first Arista run was due to their new 91/05-10 well in

Welwyn/Rocanville that averaged ˜250 bopd thru November”.

[380] The December 11 Report identified proved plus probable reserves, with a net present

value of $211,248,000 with a 5% discount rate, and $173,635,000 with a 10% discount rate. The

Welwyn assets were valued at $5,796,000 with a 5% discount rate and $5,290,000 with a 10%

discount rate.

[381] The December 11 Report assessed the Welwyn assets as representing 3.05% of the total

value of the Arista assets at a 10% discount rate, and at 2.74% of the total value at a 5% discount

rate.

[382] Unlike the December 3 Report, the December 11 Report did not include well or property

level detail. It listed the total number of wells considered for Arista as a whole, but not the wells

included for the different properties, including with respect to the Welwyn assets. The total

number of wells considered in the December 11 Report increased to 68 from the 60 included in

the December 3 Report, but Mr. Kimber could not confirm of what the 8 additional wells were

comprised, or how many wells he had included from the Welwyn properties.

[383] The parties disputed how many of the six wells ultimately in production on the Welwyn

properties prior to closing were captured by Mr. Kimber’s December 11 Report, or would have

been taken into account by Mr. Kimber or TriStar subsequent to the preparation of the December

11 Report. The parties also disputed whether and to what extent Mr. Kimber was aware of the

significant and immediate decline of production that occurred in the newly drilled wells on the

Welwyn properties.

[384] The documentary evidence shows that Arista provided Mr. Kimber and TriStar with

regular updates showing the drilling activities on the Welwyn properties and with respect to the

production from the newly drilled wells. Mr. Kimber also confirmed that he was interested in

receiving this information, paid attention to what it said and adjusted his reports based on the

information received.

[385] The documentary evidence further shows that Mr. Kimber was given information by

December 11^thto show that four wells were in production on the Welwyn properties by the end

of November, that a fifth well had come on production in early December, and that a sixth was

awaiting completion. In addition, the production data and other documentary evidence shows

that Mr. Kimber was aware by December 11 of the steep drop in initial production from the wells

that had come on-line by that time.

[386] Mr. Kimber himself could not recall how many of the Welwyn wells were included in the

December 11 Report, although he opined based on the documents that only one additional well

had been included (that is, that he had included a total of three wells). In cross-examination, he

acknowledged that the production numbers from the two reports suggested that some of the eight

new wells he had included were in Welwyn, and that the numbers were consistent with the

production data from at least four wells in the Welwyn assets having been included.

[387] The Plaintiffs’ expert, Mr. Gouveia, compared the December 3 and December 11 Reports

and, based on that comparison, concluded that Mr. Kimber had included all six of the wells on

the Welwyn properties in the December 11 Report, and that Mr. Kimber had properly accounted

for the steep decline rate with respect to those wells.

Page: 62

[388] The Defendants’ expert, Mr. Haugen, initially estimated that the December 11 Report

added one additional well on the Welwyn properties, for a total of three, but in his testimony

acknowledged that it may have included two of the new wells, for a total of four. He

acknowledged under cross-examination that a fifth well was on production on the Welwyn

properties prior to the December 11 Report being prepared, and that TriStar knew that the sixth

well was at or near completion. In his view, however, those two wells could not have been

included because you could not match reasonable forecasts for those wells with the amounts in

the December 11 Report.

[389] Ultimately, I do not view the question of whether Mr. Kimber included all six of the

wells, or fully accounted for the drop in production, as significant. Mr. Kimber’s December 11

Report, like the December 3 Report, was a bona fide and professionally prepared estimate of the

value of the Arista assets as of December 11^th, akin to what would have been done by a third-

party evaluator. Further, the December 11 Report played a significant part in determining the

price ultimately agreed to between TriStar and Arista. The December 11 Report’s significance to

the negotiation of the Arista acquisition did not – and does not – depend on how closely it

reflects what actually occurred prior to closing with respect to the Welwyn assets. The

significance of the December 11 Report is that it played an important role in determining the

price paid for Arista, including the amount paid for the Welwyn assets, not whether or not it

provided the most accurate valuation of those assets.

[390] Having said that, however, I find that the December 11 Report included the five Welwyn

wells that were producing by early December 2007, but likely did not include the sixth well that

was not yet on production. I make this finding based on Mr. Gouveia’s analysis, the documentary

record with respect to the information available to TriStar up to December 11, 2007, Mr.

Kimber’s description of his method for preparing the reports, and the differences in the reserve

estimates and well counts contained in the December 3 and December 11 Reports. I also find that

the December 11 Report took into account the early drops in production associated with the

wells that it included.

[391] I have considered Mr. Kimber’s assessment that he only incorporated three wells but

ultimately do not accept or rely on that assessment. Mr. Kimber does not have any independent

recollection of what he incorporated into the December 11 Report, and had not engaged with the

documentary evidence in sufficient detail to have reliably reconstructed what was and was not

included in the December 11 Report

[392] I do not accept the evidence of Mr. Haugen with respect to the December 11 Report

because his analysis was less congruent with the documentary record than Mr. Gouveia’s. In

addition, I have some concerns about Mr. Haugen’s independence relative to Mr. Gouveia’s. In

his testimony Mr. Haugen was, as counsel for the Defendants acknowledged in oral argument,

occasionally combative, resisting the concession of points even after they became obvious, and

was at points contemptuous of counsel for the Plaintiffs. I accept his expertise and rely on his

evidence in several respects, but I give it less weight than that of Mr. Gouveia and, where they

disagree, prefer the evidence of Mr. Gouveia.

[393] I note as well that the Defendants do not strenuously resist the conclusion that the

December 11 Report included more than three wells. They say in their written argument only

that the December 11 Report included “reserves from at least three of the six wells” and that it

was “unclear” whether it included any additional wells.

Page: 63

[394] After the December 11 Report, TriStar received further assessments from AJM and GLJ;

these were not newly prepared assessments but were rather modifications and amendments from

the reports AJM and GLJ had earlier provided.

[395] GLJ explained in an e-mail dated December 20, 2007 that it prepared its further

evaluation from an evaluation it had previously completed for Bulldog effective September 30,

2007. It confirmed that, using the same pricing, it had “adjusted the working interests where

necessary, recalculated the payout balance on the pipeline, rechecked the process income and op

costs and royalty burdens”. In its December 21 Report GLJ identified the before tax present

value of the portion of the Arista assets it assessed at a net present value of $156,000,000 using a

5% discount rate and $133,000,000 using a 10% discount rate.

[396] In the updated AJM report, which excluded the property Arista held with Bulldog, AJM

identified the working interest before royalties of the proved plus probable reserves as having a

net present value based on forecast prices as 78,215,300 at a 5% discount rate and 58,845,800

based at a 10% discount rate. It identified the net present value of the Welwyn assets at

$4,928,400 at a 5% discount rate and $4,039,400 at a 10% discount rate.

[397] The Combined GLJ/AJM Report contained NI 51-01 compliant reserve numbers and

were referenced in TriStar’s Material Change Report. The Combined GLJ/AJM Report assessed

the Welwyn assets as representing 2.1% of the total value of the Arista assets at both a 5% and

10% discount rate.

[398] Thus, at the time of entering into the Arrangement Agreement TriStar and Arista had

available professionally prepared reserve evaluations with respect to the Arista assets which

showed the following about the Arista assets in general and the Welwyn assets in particular

based on "proved plus probable additional reserves"¹:

Arista Total Arista Total Welwyn

Welwyn

Proportion Proportion

NPV – 5%

NPV – 10% NPV – 5% NPV –

Welwyn – Welwyn –

10%

5%

10%

AJM

484,699,100 351,291,100 4,928,400 4,039,400 1.02%

1.15%

December 201,668,000 164,873,000 1,406,000 1,288,000 .007%

3

.078%

3.05%

2.11%

December 211,248,000 173,635,000 5,796,000 5,290,000 2.74%

11

AJM/GLJ 234,215,300 191,845,800 4,928,400 4,039,400 2.10%

[399] It should be noted that these reserve evaluations are not directly comparable insofar as the

AJM and AJM/GLJ reports evaluated the Arista assets as of September 30, 2007, whereas at

least Mr. Kimber’s December 11, 2007 report took into account subsequent information about

¹Because of the length and complexity of the reserve evaluations, and for the convenience of the parties, these

numbers were obtained from Exhibit pages: PB008379_0019 (AJM); PB006786_0003 and PB006786_0027

(December 3); PB006798_015; PB006798_0022 (December 11); PB001598_0006 and PB006814_0010 (AJM/GLJ)

Page: 64

Arista’s development activities and production. Also, it should be noted that all of these

evaluations were based on pricing forecasts as of September 30, 2007.

[400] Neither Mr. Gouveia nor Mr. Haugen raised any issues with these evaluations in relation

to their compliance with COGEH and NI 51-01. They validated both AJM and GLJ as

independent and reputable professional valuators. Both assessed Mr. Kimber as having

performed a competent and professional evaluation. They identified the differences between the

evaluation reports as arising because the process of reserve evaluation involves a significant

amount of professional judgment and interpretation to predict the amount and timing of future

production from a well. Reserve evaluations have an empirical component – where a well is

located, when it was drilled, its past production – but they also involve professional judgment on

matters such as depletion curves and rates, appropriate analogue wells, the amount of the

available resource, likely future operating costs and future commodity prices.

[401] As observed by Mr. Gouveia, reserve evaluations reflect opinion and the unpredictability

associated with oil and gas exploration, development and markets. An evaluator may, for

example, identify a proved undeveloped location based on adjacent wells, but if the location has

a thin oil column over water, there remains a possibility that the operator will fail to drill the

horizontal well successfully, and will produce little or no oil as a result. In addition, the

significant unpredictability of oil prices means that the present values assigned in a reserve

evaluation at a particular time may prove to be quite inaccurate should oil prices not act in the

way predicted at that time the evaluation was completed. He noted that in general an evaluation

of reserves based on multiple evaluations completed by different evaluators is more likely to be

accurate simply because it averages out the ordinary human biases that different evaluations

reflect.

[402] After reflecting on Mr. Gouveia and Mr. Haugen’s evidence, and reviewing the reserve

evaluations (both those discussed here and the post-closing Sproule Report), the closest analogy

in my mind to a reserve evaluation is a handicapper’s prediction of a horse race based on the data

contained in a racing form. A racing form contains facts about each horse in the race and its past

performance, and the handicapper makes a prediction about what will happen in the race through

interpreting those facts based on their judgment and experience. Different handicappers will

make quite different predictions – even ones with similar degrees of overall success and

competence. Further, their predictions may or may not come to pass – horses and their riders do

not always perform as expected. Analogously, the reserve evaluator predicts the future value of

oil and gas reserves based on their interpretation of facts about the reserves through their

judgment and experience. Different evaluators will make quite different predictions – even ones

with similar degrees of overall success and competence. Their predictions may or may not come

to pass given the unpredictability of oil and gas exploration and development, and the oil and gas

markets.

[403] None of the reserve evaluations included amounts for undeveloped lands. The earliest

document indicating a value for undeveloped land acquired from Arista was attached to an e-

mail dated January 3, 2008 sent by Ms. Colleen Remenda of TriStar to Mr. Wallis. It indicated

that the undeveloped land value contained in the Arista assets was $6,382,400. At some point –

which is unknown – Seaton Jordan provided an independent third-party evaluation of the

undeveloped lands of $4,097,751 effective December 31, 2007. No copy of the Seaton Jordan

report was submitted in evidence. An e-mail sent by Mr. Wallis in February 2009 disputed the

Seaton Jordan valuation and estimated the market value of the undeveloped land as $7,791,618.

Page: 65

[404] Everyone agrees that none of the undeveloped lands fall within the Welwyn properties.

How was the price of the Arista acquisition determined?

[405] Identifying the basis on which TriStar and Arista determined the purchase price for the

Arista acquisition has some evidentiary challenges. As earlier noted, no evidence was produced

at trial with respect to internal Arista discussions or considerations, the negotiation process, the

bid made by TriStar, or TriStar Board consideration or discussions.

[406] I was provided with the reserve evaluations available to the parties at the time of the

transaction, the information provided to the public and the courts with respect to the transaction,

and some e-mails and documents from TriStar and Arista documenting information provided by

Arista as well as TriStar’s internal discussions related to the transaction.

[407] Mr. Wallis testified about how he would normally have approached the identification of a

purchase price; unlike with Mr. Kimber’s discussion of his reserve evaluation methodology,

however, the documentary evidence did not substantiate Mr. Wallis’s account.

[408] Mr. Gouveia provided a detailed reconstruction of how the price could have been

identified using the available reserve evaluation data and documentation, his opinion and

professional experience, and some supporting documentation and industry surveys of the Society

of Petroleum Evaluation Engineers (“SPEE”). This was intended to provide a basis for allocating

the purchase price to the Welwyn assets; however, Mr. Gouveia also gave his opinion about how

he thought TriStar would have approached the acquisition.

[409] Mr. Haugen commented on Mr. Gouveia’s reconstruction, and also provided his own

evidence about how reserve evaluations will affect an oil and gas acquisition.

[410] Mr. White provided an opinion based on his professional experience about how, as a

matter of economics and industry practice, prices are identified in the oil and gas industry. Mr.

White’s opinion spoke primarily to the question of how to identify the cost and expense of

acquiring the Welwyn assets; however, in doing so he also considered this question, of how

parties like TriStar and Arista would have identified and agreed upon a purchase price for the

assets.

[411] Mr. Dyack commented on Mr. White’s opinion and provided his own evidence about

how management will identify the price to be paid in an oil and gas acquisition.

[412] Despite some disagreement between the witnesses on some of the particulars, and the

limits in the evidentiary record, the evidence as a whole supports the following observations

about how the Arista acquisition price was identified and negotiated.

[413] This was a transaction between arm’s length parties based on each party’s identification

of the value of the transaction, and the negotiations between them. The ultimate purchase price

depended on what the purchaser (TriStar) was willing to pay and what the vendor (Arista) was

willing to accept.

[414] In identifying and negotiating the purchase price, the parties relied significantly on

existing engineering information about the estimated reserves. This included engineering

evaluations of the amount of the reserves, the likelihood of those amounts being realized, when

they would be realized, and the cost of realizing them.

Page: 66

[415] The parties took into account economic factors in relation to the reserves – how, in the

words of Mr. White, “to convert estimated reserves and production into cash flow that a

company or investor would expect to earn”.

[416] The parties took into account tangible assets and liabilities not included in the reserve

evaluation reports, such as undeveloped land, available tax pools and asset retirement

obligations.

[417] The parties may have taken into account economic factors beyond the conversion of

reserves into cash flow. Mr. Wallis testified that he would rely on accretion models to determine

the effect of the acquisition on share value and, in particular, to assess the production or cash

flow per share that would arise from the transaction. On being asked about the accretion model,

Mr. White explained that a company like TriStar would be looking to increase the value of the

company’s shares so as to allow it to better raise capital or to increase the chance of being

acquired by a bigger corporation. That in turn required the company to acquire a certain volume

of assets, such that by doing so it would be more valuable as a whole than the sum of its parts;

the motivation to acquire assets could lead the company to pay an acquisition premium beyond

the pure economic assessment of how to convert the estimated reserves and production into cash

flow.

[418] While, however, economic factors beyond the conversion of reserves into cash flow may

have played a role in setting the price for Arista, we have insufficient evidence to identify what

those economic factors were or how they affected the identification and negotiation of the

purchase price. Any conclusion on the influence of those factors would be largely speculative;

we do not know whether and to what extent they affected the amount TriStar was willing to pay

to acquire Arista, and which Arista was willing to accept.

[419] In any event, the most significant driver of price in an oil and gas corporate transaction,

including the Arista acquisition, is the assessment of the economic value of the target’s reserves

based on engineering analysis performed prior to or at the time of the transaction.

[420] TriStar’s primary goal in acquiring Arista was to acquire the Fertile field, which was

Arista’s biggest asset and described in its Information Memorandum as the focus of its

operations. In addition, TriStar was interested in acquiring Arista in part because it was

interested in acquiring Bulldog, and Arista and Bulldog had joint interests in Fertile. Further,

TriStar saw the Fertile field as a unique and valuable asset; Mr. Wallis described it at the time

and in his testimony as the type of asset that TriStar would want to acquire. In a November 19,

2007 e-mail Mr. Wallis said that they should submit bids on both Bulldog and Arista, noting that

“That Fertile pool is a very unique opportunity and if we could ever get our hands on it I think

we would be happier every year”. In his testimony Mr. Wallis said that the Fertile pool was the

business driver for the Arista and Bulldog transactions, and that there was a particular upside

because of being able to acquire both companies’ interests in the Fertile Pool. Mr. Kimber

similarly said that he remembered Mr. Strachan being most interested in Fertile.

[421] The Welwyn assets were not a significant focus of the Arista acquisition. As suggested

by Mr. Kimber’s December 11 Report, TriStar did not ignore the Welwyn assets and tried to

accurately assess them in light of ongoing development and new production, but it was buying

Arista to acquire Fertile, not Welwyn.

Page: 67

[422] TriStar and Arista negotiated a purchase price relying on what they knew about the

economic value of Arista’s reserves at the time they negotiated and concluded the transaction.

The best evidence of TriStar and Arista’s knowledge of the economic value of Arista’s reserves

is found in the engineering reports available to them at the time they negotiated the purchase

price, namely, the AJM, GLJ and December 11 Reports.

[423] Mr. White suggested that the information and analysis contained in the post-closing

Sproule Report from March 2008 would have reflected the thinking that was available at the time

TriStar and Arista negotiated the price and concluded the transaction. He suggested that it was

possible to infer that this was the type of knowledge TriStar and Arista had at that time,

particularly by the time of closing in January 2008.

[424] I reject Mr. White’s suggested inference as it is not supported by the evidence

contemporaneous with the transaction, and ignores the evidence that is contemporaneous,

namely the AJM, GLJ and December 11 Reports. I cannot see a connection between the

information about the Arista assets in the contemporaneous evidentiary record and the

information and analysis in the Sproule Report. It seems far more likely that the information and

analysis contained in reserve evaluations that existed and were available to Arista and TriStar

accurately reflects their information and analysis at that time, than that information and analysis

contained in a reserve evaluation that did not yet exist does.

[425] I am satisfied that TriStar did not apply reserve adjustment factors to the reserve

evaluations available to it to assess and value more specifically the reserves in the Arista assets

for the purpose of identifying and negotiating the purchase price.

[426] Mr. Gouveia opined that once a reserve evaluation is completed, a company will adjust

that evaluation to reflect the uncertainties it necessarily contains in relation to production and

price. In particular, it will apply a reserve adjustment factor to reflect the known uncertainties in

relation to a particular property. Where, for example, a reserve is proven, developed and on-

production it would normally be subject to a 1.0 reserve adjustment factor, to reflect the

confidence that can be ascribed to the evaluation of that asset. Where, on the other hand, a

reserve is probable and undeveloped it will be subject to a reserve adjustment factor in the range

of .25 to .30 (i.e., a predicted discounted cash flow of $1000 would be reduced to $250-300) to

reflect the likelihood that the evaluation is inaccurate.

[427] While Mr. Gouveia provided evidence in support of the use of reserve adjustment factors,

the weight of the evidence before me, including from the other experts and the fact witnesses,

was that such factors were not used or relied upon by the parties in identifying or negotiating the

price to be paid. As a general matter, Mr. Gouveia’s reserve adjustment factor methodology is

neither consistent with the speed with which the Arista transaction occurred, nor with my overall

sense of the operational practices of TriStar at that time. TriStar was working hard to understand

the assets it was acquiring, but it did that through obtaining Mr. Kimber’s independent

assessment of the assets, not through a further reserve adjustment factor analysis.

[428] In general, I am not prepared to adopt any of Mr. Gouveia’s reconstruction scenarios as

accurately reflecting how the price of the Arista acquisition was identified and negotiated. The

basis on which Arista and TriStar identified and negotiated the purchase price is a factual issue

that must be decided based on the factual evidence and on sustainable inferences from that

factual evidence, informed by expert opinion where appropriate. It cannot be based on a largely

hypothetical reconstruction of the past, even if that hypothetical reconstruction is based on

Page: 68

evidence and supported by an expert opinion. As a result, while I have used, and will use

elsewhere, information and opinion provided by Mr. Gouveia in his evidence, and consider

whether his reconstruction scenarios should be used as the basis for allocating the cost and

expense of the Arista acquisition under the NPI Agreement, I do not adopt any of his scenarios as

accurately reflecting how the Arista acquisition price was identified and negotiated.

[429] To be fair, Mr. Gouveia’s evidence was not introduced as evidence of what TriStar

actually did; rather, it was introduced to provide various methods for allocating the Arista

purchase price to the Welwyn assets. Mr. Gouveia was certified as an expert with respect to the

role of reserves and resource valuation in the allocation of costs incurred in the asset acquisition

process, not as an expert in reconstructing how TriStar in fact did this asset acquisition. He

acknowledged that he did not know how they had identified and negotiated the price. At the

same time, however, his evidence at various points made claims about what might or was likely

to have occurred in the identification and negotiation of the price for Arista, such that I think it

important to be clear that I do not accept his evidence for that purpose.

Post-Closing Evaluation and Reporting

[430] After the Arista acquisition closed in January 2008, TriStar sought an independent

reserve evaluation for the purposes of accurately recording the acquisition on its financial

statements. TriStar typically retained Sproule to compile the TriStar year-end reserve

evaluations, and it retained Sproule to evaluate the Arista acquisition.

[431] The Sproule valuation was effective December 31, 2007, and based on information

available at that time, but was completed for TriStar in March 2008 (“Sproule Report”). Sproule

identified the net present value using forecast prices as $230,316,100 at a 5% discount rate and

$194,922,100 at a 10% discount rate. Sproule evaluated the Welwyn assets as having a net

present value of proved plus probable before tax as $14,363,100 based on a 5% discount rate and

$12,569,500 based on a 10% discount rate.²

[432] The Sproule Report assessed the Welwyn assets as representing 6.24% of the total value

of the Arista assets at a 5% discount rate and 6.45% at a 10% discount rate.

[433] Mr. Wallis did not have a specific recollection of what was provided to Sproule for the

purpose of preparing this report but said that TriStar’s practice was to provide Sproule with land

information, including working interests, encumbrances and production. He said that they would

meet Sproule to share the company’s technical view of assets, primarily relating to additional

drilling locations, and would provide them with Mr. Kimber’s work to allow them to understand

TriStar’s perspective on the reserves. Mr. Wallis testified that he did not recall any disagreement

at TriStar with the Sproule Report, although normally Sproule’s assessment would not entirely

accord with the company’s own perspective.

[434] Mr. Kimber testified that he was not involved in the creation of the Sproule Report.

[435] The Annual Information Form dated March 28, 2008 contained a statement of TriStar’s

reserves data based on the information in the Sproule TriStar Report and the Sproule Acquired

Properties Report; the latter document evaluated the oil and natural gas reserves attributable to

Kinwest, Arista and Bulldog.

²PB003745_0017; PB003745_0057

Page: 69

[436] By way of a letter dated March 9, 2009 TriStar released its 2008 audited financial

statements. The statements were available on SEDAR. The financial statements listed TriStar’s

property and equipment in total, and also contained information about the Arista acquisition. It

said that TriStar paid consideration of $215,000,000 “consisting of working capital, bank loan,

the fair value of financial instruments acquired and estimated transaction costs”. It accounted for

the acquisition using “the purchase method of accounting” which indicated that the consideration

paid for Arista included cash of $167,485,000 and transaction costs of $2,600,000 for a total of

$170,085,000. It listed the following as the assets acquired:

Net assets received, fair market

value

Property and equipment

Working capital

Goodwill

$196,270,000

($34,941,000)

$62,044,000

($11,522,000)

$1,518,000

($1,313,000)

($41,971,000)

$170,085,000

Bank loan

Fair value of financial instruments

Asset retirement obligations

Future income taxes

Total

Allocation of Arista Acquisition to NPI Agreement Account

Evidence re the Allocation Decision

[437] On or about February 5, 2008, Mr. McDonald e-mailed Mr. Kimber saying “Know your

[sic] busy but when you get a minute we need a value allocated to the lands from the Keystone,

Arista and Bulldog transactions for the lands set out in the attached mineral property reports.

These amounts will form part of a payout account for our file C01119, an NPI in the area”

[438] The attached mineral property report was generated by the land department at Arista on

January 16, 2008. The report indicates the mineral interest in each tract of land, the companies

involved, the applicable encumbrances and the wells. It indicated that Arista had a 100%

working interest and that it was subject to a 15% freehold royalty. The document had

handwriting on it next to some of the wells.

[439] On or about March 6, 2008 Mr. Kimber sent Mr. McDonald a preliminary allocation of

the Arista transaction to the Rocanville NPI. The draft allocation listed four wells. It set out the

development on the wells, the current net production, and the remaining oil reserves. It identified

the value of those four wells as $7,830,000 based on the Sproule Report using a 10% discount

rate. It left blank columns to add future development and undeveloped land values

[440] Mr. Kimber only included four wells due to a miscommunication between him and Mr.

McDonald, for which Mr. McDonald took responsibility. The Welwyn assets had six wells that

were within the NPI Area.

[441] To prepare this preliminary allocation all Mr. Kimber did was pull information from the

Sproule Report. He did not consider or take into account the price negotiated between TriStar

and Arista for the purchase of the Arista assets. Mr. Kimber believes that he was instructed to

pull the numbers from Sproule. He thought this decision was logical because Sproule was the

Page: 70

most current report and based on the most up-to-date information. Also, it had been used for the

preparation of the financial statements.

[442] Mr. Kimber said he used a net present value based on a 10% discount rate because 10% is

the default value in reserve evaluations.

[443] As noted above, the Sproule Report set the net present value of the Arista assets using

forecast prices as $230,316,100 at a 5% discount rate and $194,922,100 at a 10% discount rate.

[444] Mr. Wallis believed that he would have played a central role in determining what

amounts of the Arista acquisition were allocated to the NPI Agreement, although he did not have

any specific recollection of doing so. He testified that while they did not do this sort of allocation

in the context of net profit interest agreements (since the NPI Agreement was the only one to

which they were a party), they did do this sort of allocation in the context of rights of first

refusal. For rights of first refusal they had to make a bona fide estimate of value in relation to the

portion of an acquisition subject to a right of first refusal. The difference, Mr. Wallis noted, was

that allocation for rights of first refusal always had to be done before the acquisition was

complete in order to determine whether the right was going to be exercised prior to the closing of

the transaction. Here they would not have felt under any time constraint because the Hudson

family would not have to make any election with respect to the allocation; since the allocation

would impact the size of the Hudson’s payout, Mr. Wallis suggested, it would have been

important to get it right rather than to rush through it. He acknowledged in cross-examination,

however, that he had no present recollection as to why they waited to do the allocation.

[445] Mr. McDonald did not recall what he did with the document prepared by Mr. Kimber;

however, by way of an e-mail dated April 7, 2008 Mr. McDonald provided an excel spreadsheet

showing the calculation of the allocation of the Arista acquisition to the NPI Agreement account.

The calculation included four wells. It set out the net present value for those wells “Based on

Sproule Dec 31, 2007 evaluation of Arista Energy Limited” and a discount rate of 10%. It then

identified the net present value of the total of the wells at a discount rate of 5% of $8,977,000.

[446] It is not clear from this document why the amount identified at a 5% discount rate was

$8,977,000 rather than $8,976,000 which would have matched Sproule’s assessment at a 5%

discount rate; however a spreadsheet from 2010, discussed below, suggests that this was simply a

transcription error, that at some point $8,976,000 was mis-typed as $8,977,000, and that error

was never corrected.

[447] Mr. McDonald said that he sent this to Mr. Wallis because that was the standard practice.

He did not speak to Mr. Wallis about it, or at least does not recall doing so. He does not know

who added the line identifying the applicable discount rate as 5% but said that he had no

involvement in identifying the 5% discount rate. On being told that Lightstream had said in

response to an undertaking that its information was that Mr. McDonald had added the discount

rate numbers, Mr. McDonald denied that that was the case.

[448] Mr. McDonald did not know whether a formal approval was required for the allocation of

costs; he was just protecting himself by keeping Mr. Wallis aware of what was going on. He

believes that in the ordinary course he would have spoken with Mr. Wallis about this, but he

does not specifically recall any such conversation. He said that he recalls Mr. Wallis being

satisfied with the process.

Page: 71

[449] Mr. McDonald testified that the information contained in his April 7, 2008 e-mail was

related to the purchase price in some way, but he had no information about how it was related.

[450] Mr. McDonald did the calculation of the undeveloped land values, which he valued at

$100 per acre. He was given no guidance on how to evaluate the undeveloped lands, and he

acquired the necessary information himself. He does not recall seeing the January 3, 2008 e-mail

from Ms. Remenda with respect to the undeveloped land values.

[451] In relation to Mr. McDonald’s April 7, 2008 email Mr. Wallis posited that they would

also have considered the aggregate value of Arista and determining how much of the total should

be allocated to the NPI Agreement account, although he acknowledged that this is not apparent

from Mr. McDonald’s Excel spreadsheet.

[452] Mr. Wallis did not recall what happened after this spreadsheet was received. He said that

it would have been typical to have discussions within TriStar management about what to do. He

said that they would have been trying to identify the bona fide estimate of the Arista acquisition

related to the NPI Area, and that the spreadsheet would have been used in that discussion. He

testified that they would not have considered evaluations other than Sproule, as the Sproule

Report would have most closely reflected TriStar’s view of the assets and was prepared at

TriStar’s request using information TriStar gave to Sproule effective December 31, 2007. They

did not discuss or consider using or trying to replicate the process that TriStar used to arrive at

the purchase price, as that was more subjective information and Sproule would have been the

most comprehensive compilation of TriStar’s view as of December 31, 2007.

[453] Mr. Wallis testified that the TriStar management team would have discussed the

methodology for the allocation and arrived at a number, although he had no specific recollection

of those discussions and there is no documentation to show that such discussions took place. Mr.

Wallis confirmed that the actual allocation was a net present value derived from Sproule’s

evaluation and using a 5% discount rate. He did not know why a 5% discount rate was used but

he said that the discount rates used generally reflected their assessment of the certainty of the

assets in question, including the percentage of proved versus probable reserves. The net present

value was affected by the level of certainty associated with the reserves.

[454] In cross-examination Mr. Wallis acknowledged that the 5% discount rate was applied to

all of the Welwyn assets, and did not appear to separate them out for different types. He also

acknowledged that Tristar’s cost of debt, cost of equity and weighted cost of capital were all

greater than 5% at this time.

[455] Mr. Wallis testified that he would have understood the impact that this would have on the

NPI Agreement accounts.

[456] Mr. Wallis maintained in his testimony that he believed that they would have related the

allocation to the purchase price. He acknowledged that the spreadsheet did not show that, and

that he had no specific recollection of that being done beyond his understanding of their usual

practice. When pressed Mr. Wallis acknowledged that it looked like Mr. McDonald had just

provided an aggregate of Sproule’s evaluation of those wells and that the spreadsheet prepared

by Mr. McDonald contained no allocation based on the price paid.

[457] Mr. Kimber testified that he had no involvement in the creation of Mr. McDonald’s

spreadsheet.

Page: 72

[458] In August 2008 TriStar allocated a capital expenditure of $8,977,000 to the NPI

Agreement account in respect of the Arista acquisition.

[459] In 2010 Petrobakken revisited the Arista allocation.

[460] By way of an e-mail dated April 16, 2010 Ms. Telang wrote to Ms. Clark because she

wanted to confirm some information with respect to the Arista allocation, and noting that if her

information was correct, Ms. Telang was going to be moving the Arista account from

$9,119,542.82 to $15,750,000 as of year-end 2009. Ms. Clark testified that she was aware that

this change was to reflect a further allocation related to the Arista transaction.

[461] In May 2010 TriStar adjusted the NPI Agreement account to capture the two Arista wells

that had not been allocated in 2008, increasing the amount allocated for the Arista acquisition by

$5,387,000 to bring the total amount of reserves allocated to $14,364,000.

[462] It is not clear why the amount allocated was $14,364,000 as opposed to the $14,363,000

contained in the Sproule Report; however, a spreadsheet setting out the allocation³suggests that

this was a mistake; the document lists the “NPV5 eff. December 31/07” for the four wells

allocated in 2008 at $8,976,000 but then two rows below in the same column changes that

number to $8,977,000 at “NPV @ 5%”. The document does not explain why the amount changes

from $8,976,000 in one row to $8,977,000 in the same column two rows below, which suggests

that this was simply a typographical error.

[463] In 2011, after the commencement of this litigation, Mr. McDonald sent an e-mail dated

October 24, 2011 to Mr. Fisher of a meeting he had had with Luke Kimber regarding the Arista

allocation to the NPI Agreement account. The e-mail reported that Mr. Kimber did not remember

the calculation of the Arista allocation, but said “after talking about it he indicated the following

methodology was applied”:

1. talk to the landman in the area and determine the market price of

undeveloped land. If there was Seaton Jordan he would have started there,

and then got the area landmans opinion of the Seaton Jordan numbers and

made whatever adjustments he thought were appropriate.

2. for the developed land, he would have started with the reserve report

numbers for the area, then he would find the fraction that the reserve

report value was to the total value of the reserve report (lands acquired).

3. Luke would then take the premium paid for the company and multiply this

by the fraction set out in 2 above. This amount would then be added to the

value for the area.

4. the last step would be any adjustment due to managements view of

potential upside for the area being evaluated.

[464] Mr. Kimber testified that he has no reason to believe that he told Mr. McDonald he

followed the methodology set out in this e-mail. He confirmed that the spreadsheet created by

him in the spring of 2008 is not consistent with him having followed any of these steps, but

instead shows that he simply tabulated the values set out in the Sproule Report. He did not do

anything with undeveloped land, and he did not calculate values for the developed land based on

³PB000624

Page: 73

a proportionate value of the purchase price. He suspects that Mr. McDonald’s summary simply

reflects Mr. Kimber’s explanation of what would normally happen with a right of first refusal

calculation.

[465] Mr. McDonald said that he did not recall creating this e-mail, although he did recall

having lunch with Mr. Kimber and that Mr. Fisher had asked him to talk to Mr. Kimber. In cross-

examination he confirmed the e-mail’s statement that he had a conversation with Mr. Kimber

three years after the allocation was completed, and Mr. Kimber told him that he did not

remember how it was done.

[466] Mr. Fisher said that he did not speak to Mr. Kimber about this or confirm whether it was

accurate. Mr. Fisher had no information about how the allocation was done to the NPI

Agreement account and did not investigate at any stage.

Evidence re Communication of Arista Allocation to the Plaintiffs

[467] The allocation of the Arista acquisition was first communicated to the Hudsons in 2008.

[468] By way of an e-mail dated August 7, 2008 Kristin Clarke provided Mr. Wegner financial

documents that he had requested related to the NPI Agreement. Those documents included the

2008 NPI Agreement revenue statements and indicated a capital cost for February 2008 of

$8,977,000. Ms. Clark testified that she had no involvement with the Arista acquisition other

than inputting this amount into the spreadsheet; she input the amount on the instructions of Mr.

McDonald. She was provided information from Mr. McDonald by way of an e-mail dated June

18, 2008.

[469] On or about September 3, 2008 Ms. Clark sent an e-mail to Mr. McDonald noting that

Mr. Wegner was requesting further information regarding the $8,977,000 capital expenditure.

She asked Mr. McDonald to “either reply to him or confirm with me what the expenditure is for?

Also want to go over with you what information we are willing to provide”.

[470] On or about September 4, 2008 Mr. McDonald replied that he would put something

together for her by the following week. Ms. Clark confirmed in her testimony that she did not

herself have any knowledge at this time about how the number came to be, and that the decision

with respect to sending back-up was with the land department.

[471] On October 1, 2008 Ms. Clark sent an e-mail to Mr. Wegner noting that she had received

a message from him (Wegner) and was waiting to hear from Mr. McDonald with respect to back-

up for the $8,977,000 expenditure. She testified that she was waiting for Mr. McDonald to

provide additional information on the allocation methodology so that she could forward it to Mr.

Wegner.

[472] By way of a letter to Ms. Hudson-King dated October 8, 2008, attached to an e-mail from

Ms. Clark, TriStar responded to Mr. Wegner’s request for information. The letter, which Ms.

Clark testified was prepared by Mr. McDonald, advised Ms. Hudson-King that

This transaction included the acquisition of producing properties within the AMI.

The capital included in the payout account includes a reasonable allocation of the

total purchase price for this corporate acquisition to the lands, production and

reserves included in the AMI..

Page: 74

The letter attached a copy of TriStar’s January 18, 2008 press release in relation to the Arista

acquisition. The letter did not provide any information about the methodology used by Tristar to

determine what would constitute a reasonable allocation.

[473] A draft of this letter had been circulated between Mr. McDonald and Fisher in early

September. This was the first time Mr. Fisher had looked at the NPI Agreement. At that time Mr.

Fisher had no information about how the Arista transaction had been allocated.

[474] A draft of the letter was provided to Mr. Wallis by way of an e-mail dated September 16,

2008. Mr. Wallis did not recall whether he made any comments on the draft letter. Mr. Wallis

acknowledged in cross-examination that the letter did not explain to Ms. Hudson-King that the

allocation appeared to have been done based on the Sproule Report.

[475] Ms. Clark confirmed that no other information was provided to the Hudsons, beyond a

well plat of the wells in the NPI Agreement area that was sent to them in November 2008. Mr.

McDonald suggested that no other information could be provided because of competition and

confidentiality concerns. He acknowledged, however, that he did not take any steps to investigate

whether these concerns were reasonable or could be otherwise addressed such as by using a

confidentiality agreement.

[476] Mr. McDonald said that he believed the statement in the letter that this was a “reasonable

allocation of the total purchase price” was true at the time he made it, but that he was mistaken

because two of the wells had not been included. He viewed the allocation as bona fide because it

was done by capable people who knew their work and the area; he relied on Mr. Kimber and Mr.

Hassler, and had faith in the process. This was the process they relied on in various contexts,

including for audited financial statements.

[477] In May 2010 Ms. Clark sent an updated NPI Agreement account to the Plaintiffs. On

May 7, 2010 she sent a new NPI summary for 2009. The new summary showed a significant

increase in the deficit in the NPI Agreement account. Her covering e-mail said,

I need to go back and redo the 2008 summary to include a few wells that were

missed and also to include some additional capital costs and additional

acquisition/land reserve values. I will get the updated 2008 summary to you on

Monday.

[478] The e-mail did not explain that the additional capital costs arose from the Arista

acquisition.

[479] Mr. Wegner immediately wrote to Ms. Clark requesting additional information, and in

particular in related to the additional wells being included.

[480] On May 17, 2010, Ms. Clark sent the revised summaries for 2008 and 2009. Her covering

e-mail said

Here are revised summaries for 2008 and 2009. I have passed your request for

more information on to our land group. Shyanne Way, who is the area landman

for Rocanville, said she hoped to have something for you by Friday.

[481] Neither Ms. Clark nor Ms. Way provided any meaningful additional information to the

Plaintiffs about the additional Arista allocation. On May 26, 2010 Ms. Way sent an updated land

plat and a current well list for the NPI area. No further information was provided to the Plaintiffs

prior to the commencement of this action in August 2010.

Page: 75

Allocation of the Arista Acquisition

[482] Based on this evidence, I find that TriStar and later Petrobakken identified the amounts to

be assigned to the NPI Agreement account by taking the fair market value of the Welwyn assets

identified in the Sproule Report calculated using a 5% discount rate. They allocated part of the

amount in 2008, at $8,977,000 and added in the rest of the amount of $5,387,000 in May 2010.

This increased the total amount allocated for the Arista reserves to the NPI Agreement account to

$14,364,000. The Sproule Report had evaluated the Welwyn assets at $14,363,100 using a 5%

discount rate; as previously noted, the small disparity seems to be because TriStar mistakenly

allocated $8,977,000 in 2008 instead of $8,976,000.

[483] Neither TriStar nor Petrobakken made any effort to connect the amount allocated to the

price paid for Arista, even though doing so would ordinarily have been part of their allocation

process, as is evident in the reference to the “premium paid by the company” in the e-mail

summary prepared by Mr. McDonald in 2011, and in their own description of the allocation in

the letter sent to Ms. Hudson-King.

[484] The Defendants in their written argument suggest that while the spreadsheet does not

reference the purchase price,

The management team has access to additional information, including the

purchase price and total value of the Arista reserves. The absence of this

information from the allocation spreadsheets does not prove that TriStar failed to

follow its normal practice of allocating a reasonable portion of the purchase price.

[485] I reject this suggestion, and the inference it invites me to draw. It is purely speculative.

Mr. Wallis has no independent recollection of what he did. Mr. Wallis thinks price is the type of

thing he would have considered but has no memory or documentary evidence to show that he did

so. Nothing in the documentary record suggests that management considered the price.

[486] Rather, the documentary record before me shows that TriStar identified the amount to

allocate using the Sproule Report fair market value estimate calculated at a 5% discount rate –

the statement on Mr. MacDonald’s spreadsheet “Based on Sproule Dec 31, 2007 evaluation of

Arista Energy Limited” means what it says: the numbers allocated were from the Sproule Report.

Notably, the amount identified by Sproule was the exact amount allocated to the NPI Agreement

account, subject only to the $1000 typographical error.

[487] I see no reason to ignore what the documentary evidence plainly shows: the amount

allocated to the Plaintiffs was based exclusively on the Sproule Report. The Defendants

effectively ask that I ignore the documentary evidence and the natural inference to be drawn

from it on the basis of Mr. Wallis’s account of TriStar’s normal practice. I will not do so. Rather,

I find that TriStar ignored its normal practice to allocate the amount to the NPI Agreement based

only on the Sproule Report.

[488] TriStar also did not take into account any of the reserve reports that were actually

available and relied upon at the time of the Arista transaction. I do not accept Mr. Wallis’s

suggestion that there were bona fide reasons for only considering the later produced Sproule

Report. That suggestion was not based on any contemporaneous evidence or current memory of

what had occurred. Rather, I find that TriStar chose the Sproule Report because it was the

document front of mind and readily at hand.

Page: 76

[489] While no witness would take responsibility for choosing the 5% discount rate, and

various witnesses (including Mr. Haugen) tried to come up with ex post facto justifications for it,

I find that TriStar chose the 5% discount rate because it produced a higher number to allocate to

the NPI Agreement account. TriStar did not have any legitimate justification for doing so. The

5% discount rate had no basis in industry practice for reporting reserve evaluations, or the actual

financial circumstances of TriStar.

[490] I do not accept the evidence of Mr. Haugen that the 5% discount rate could be justified by

the particular assets in question. I reject this suggestion because Mr. Gouveia disagrees with it,

and also because the evidence does not show that this actually informed the decision the

Defendants made at the time. No witness remembers, and no document shows, a reasoned

analysis supporting the selection of the 5% discount rate based on the nature of the Welwyn

assets. The fact that Mr. Kimber, the most credible of the Defendants’ witnesses, and the most

knowledgeable about the reserves, chose a 10% discount rate in the first instance is telling. He

assumed the default rate ought to apply.

[491] I also find that in doing the allocation TriStar and Petrobakken did not turn their mind to

the requirements of the NPI Agreement. They did not account for language of Clause IV and its

requirement that the amounts allocated to the NPI Agreement be the “cost and expense” of the

transaction.

[492] Finally, I find that the description of the allocation in the letter to Ms. Hudson-King, that

this was “a reasonable allocation of the total purchase price for this corporate acquisition to the

lands, production and reserves included in the AMI” was untrue and misleading. TriStar did not

take into account the total purchase price. It did not allocate that purchase price at all. TriStar did

not follow their normal practice as explained by Mr. Wallis or as described in the 2011 e-mail

from Mr. McDonald. What they did was something entirely different – charging to the account a

number taken straight from a reserve evaluation report that was not connected either by time of

preparation or by overall amount to the purchase price paid – recall that Sproule at a 5% discount

rate valued the Arista assets $230,316,100 and at a 10% discount rate valued the Arista assets at

$194,922,100.

[493] I also find that the e-mails sent by Ms. Clark in 2010, and the subsequent information

provided by Petrobakken at that time, did not identify the basis for the further allocation. The e-

mails and information provided were not misleading, but nor were they candid – they simply did

not contain any information about the allocation at all.

[494] I am not, however, prepared to find on the evidence before me that the letter to Ms.

Hudson-King was a deliberate attempt to deceive the Plaintiffs. Specifically, I am not prepared to

find that TriStar and Petrobakken knew that these statements were untrue and made them

anyway in an intentional effort to hide from the Plaintiffs what had been done.

[495] While the evidence of Mr. McDonald, Mr. Wallis and Mr. Fisher was sometimes vague,

and inclined to reconstruct the past in a way designed to give the impression that their decisions

were rational and fair, none of the witnesses were dishonest. They were all ultimately willing to

acknowledge the gaps or weaknesses in the position they took. Based on their evidence before

me, and the overall course of their dealings with the Defendants, I can accept that they were

careless and financially self-interested, and that they did not consider the consequences of their

actions, but I do not believe that they would have knowingly and deliberately deceived the

Hudsons.

Page: 77

[496] What they said in the letter was misleading. The information it provided was not candid

or accurate. Had they turned their mind to it and acted reasonably, they would have known that

their communications were incomplete, inaccurate and would mislead the Plaintiffs about what

they had done. As discussed below, I find their communications with the Plaintiffs about the

allocation violated the NPI Agreement and, in particular, the duty of honest performance.

Nonetheless, I do not accept the Plaintiffs’ position either that TriStar deliberately tried to

deceive the Plaintiffs, or that it did so for ulterior motives related to buying out the Plaintiffs’

interest in the NPI Agreement assets.

[497] On that latter point, I am not satisfied on the evidence that Real Resources or TriStar ever

formed a serious or specific intention to buy out the Plaintiffs, nor that they put a plan in place to

further their ability to do so.

[498] In sum, TriStar and Petrobakken allocated these amounts to the NPI Agreement by

identifying the Sproule valuation at a 5% discount rate because doing so was easy and better for

the company. They did not consider what the NPI Agreement required. They did not take into

account the “the total purchase price for this corporate acquisition to the lands, production and

reserves included in the AMI”, as they claimed in their letter. They made no effort to

communicate to the Plaintiffs, either in 2008 or in 2010, the actual basis for the allocation.

Analysis

Did TriStar’s allocation of the Arista Acquisition to the NPI Agreement

account comply with the NPI Agreement?

[499] Through the charges to the NPI Agreement account in 2008 and 2010, TriStar and

Petrobakken allocated $14,364,000 to the NPI Agreement to reflect the amounts associated with

the Arista acquisition. The Plaintiffs submit that doing so violated Clause IV of the NPI

Agreement.

[500] For ease of reference, Clause IV provides:

If while there remains in force and effect any lease acquired by TRITON pursuant

to the Rocanville Agreement TRITON acquired any additional interest in the oil,

gas or other minerlas [sic] in and under lands within two (2) miles of any of the

lands covered by and of the leases described in Part I of Exhibit “A” to the

Rocanville Agreement, such additional interest shall constitute a part of the

SUBJECT PROPERTIES for all purposes hereof, including the computation of

net profits pursuant to Paragraph III hereof, and the cost and expense incurred by

TRITON in the acquisition thereof shall constitute a cost and expense in the

computation of net profits.

[501] The interpretive question in relation to Clause IV, and the central dispute between the

parties, is as to the meaning of “cost and expense incurred”. The Defendants say that Clause IV

is satisfied provided that they made a bona fide estimate of the value of the Welwyn assets – that

is, that cost and expense can be equated to value. The Plaintiffs disagree. They say that “cost and

expense incurred” means price, and that to comply with Clause IV the Defendants had to

identify, using an appropriate price allocation methodology, the price paid for the Welwyn

assets.

[502] Even if I accept the Defendants interpretation of Clause IV, I do not accept that they

engaged in a bona fide estimate of the value of the Welwyn assets. Even if cost and expense

Page: 78

means value, the most accurate evidence about the value of the Welwyn assets was the price paid

for Arista. That is an actual market price, arising from negotiations between arm’s length third

parties. To ascertain the value of the Welwyn assets without consideration of the purchase price

could not create a bona fide estimate of value.

[503] Further, the use of a reserve evaluation with a 5% discount rate, when the Sproule Report

at a 5% discount rate put the Arista assets at $230,316,100 – an amount considerably higher than

the purchase price for Arista as a whole – was not a bona fide estimate of value. Again, I reject

the Defendants’ suggestion that I infer that the use of a 5% discount rate flowed from a

considered assessment of the nature of the Welwyn assets; the evidence does not support

drawing that inference.

[504] The Defendants assert that the cost and expense was not known, and could not be

allocated, prior to closing. That may be true, but I am not sure why it is relevant. The issue with

the Defendants’ conduct is not when they allocated the cost and expense of the Welwyn assets; it

is the basis on which they did so.

[505] I also find that, given the normal variability of reserve evaluations, even if looking only

for a bona fide estimate of value, TriStar should have considered the other reserve evaluations.

As noted, there is nothing wrong with the Sproule Report – Sproule is reputable, it was COGEH

compliant and so on – but even the Defendants’ own witness Mr. Haugen reached a number

27.8% lower than that contained in Sproule when he re-evaluated the Welwyn assets. The

evidence before me made it clear that reserve evaluations are opinions about what will occur

based in fact, not facts about what has occurred. As such, when a party has a number of reserve

evaluations, best practices would suggest that a bona fide estimate of value would consider more

than one of them. If I accepted the Defendants’ interpretation of Clause IV, and if there were no

other issues with their valuation, the sole reliance on Sproule might not be sufficient to constitute

a breach of Clause IV. It is nonetheless a concern with the approach they took.

[506] As such, I find that TriStar and Petrobakken did not comply with Clause IV even based

on the Defendants’ own interpretation of that Clause.

[507] I also, however, do not accept the Defendants’ interpretation of Clause IV. The words

“cost and expense incurred” have an ordinary and grammatical meaning, and also one recognized

in law, which is “what I had to spend to get something”. If I ask you what something cost, or

what your expenses were to get it, I am not asking what it is worth. I am not trying to ascertain

its value; I am trying to find out what you had to give up to get it. If in response to the question,

“what did that ring cost?” you answered “it was appraised at $5000” I would think you had

misunderstood the question.

[508] Dictionary definitions, and importantly dictionary definitions contemporaneous with the

negotiation of the NPI Agreement, support this ordinary understanding.

[509] The 1977 edition of the Concise Oxford Dictionary defined cost as the “Price (to be) paid

for thing…”: Sykes et al, eds, The Concise Oxford Dictionary of Current English, 6th ed

(London: Oxford University Press, 1976) (1977 reprint) at 230.

[510] The 1972 Oxford English Dictionary defined it as:

a. That which must be given or surrendered in order to acquire, produce,

accomplish, or maintain something; the price paid for a thing. …

Page: 79

†b. Outlay, expenditure, expense. Obs. …

†c. pl. Expenses, charges. Obs. exc. as in 2. …

d. That which a thing originally cost. …

[emphasis added] Murray et al, eds, The Oxford English Dictionary (Oxford:

Clarendon Press, 1933) (1961 reprint) vol 2 at 1034, as amended in RW

Burchfield, ed, A Supplement to the Oxford English Dictionary (Oxford:

Clarendon Press, 1972) at 649

[511] An American dictionary from 1976 defined cost as:

1a: the amount or equivalent paid or given or charged or engaged to be paid or

given for anything bought or taken in barter or for service rendered: charge, price

b: whatever must be given, sacrificed, suffered, or forgone to secure a benefit or

accomplish a result …

2: loss, deprivation, or suffering as the necessary price of something gained or as

the unavoidable result or penalty of an action …

3: the expenditure or outlay of money, time, or labor …

4 costs pl: expenses incurred in litigation …

5: an item of outlay incurred in the operation of a business enterprise (as for the

purchase of raw materials, labor, services, supplies) including depreciation and

amortization of capital assets …

6: something that is sacrificed to obtain something else …

[emphasis added] Gove ed, Webster’s Third New International Dictionary of the

English Language, Unabridged (Springfield, MA: G&C Merriam Co, 1976)

[512] Dictionary definitions have to be used with care and cannot be uncritically accepted:

Mission City Holdings Ltd v Jim Pattison Industries Ltd, 2000 BCCA 302 at paras 22-25. But

their consensus on the meaning of “cost” supports the position that by “cost and expense

incurred” the parties to the NPI Agreement meant simply: what did the acquiring party give up to

get the assets acquired?

[513] The Federal Court of Appeal provided a helpful explanation of this meaning of “cost” in

Kettle River Sawmills Ltd v R, [1994] 1 CTC 182 (Fed CA), leave to appeal ref’d, [1994] 2 SCR

vii. In that case the Court considered whether the capital cost of a license ought to be determined

based on what the taxpayer actually paid for it, or on its market value. The Appeal Division

reversed the trial judge’s decision using market value, holding that cost and value are not the

same. With respect to the meaning of cost it said at para 29:

In the first place, both tax law and the common use of language draw a clear

distinction between cost and value. Cost means the money or money's worth

which is given up by somebody to get something. It is generally viewed as an

objectively determinable historical fact, the answer to the question "how much

Page: 80

was paid?". Value, on the other hand, contains a far higher component of

subjectivity and judgment. One of the classic tests involves positing a

hypothetical buyer who does not have to buy and a hypothetical seller who does

not have to sell. But there are many cases, notably where there is no readily

determinable market, where not even that degree of objectivity is attainable. To

put the matter at its simplest, cost is what you have paid for something, value is

what another will give you for it; the two are not synonymous [emphasis added].

[514] In reversing the trial judge’s decision in Kettle River, the Appeal Division suggested that

his error arose from a misinterpretation of an earlier decision from the Exchequer Court by Chief

Justice Jackett who explained how to treat evidence of an asset’s value when assessing its capital

cost to the taxpayer:

… in any particular case, there may arise a question as to what evidence is

admissible. Where the value of the thing given for the capital asset in question can

be determined with the same kind of effort as is required to value the capital asset

itself, I should have thought that the Court would not look kindly on attempts to

lead evidence as to the value of the capital asset in lieu of, or in addition to,

evidence as to the value of what was given for it. On the other hand, when the

value of what was given is almost impossible to determine and the value of the

capital asset is almost beyond the realm of controversy, it may well be that the

only practicable basis for determining the value of what was given is to look at

the value of the capital asset: D’Auteuil Lumber Co v Minister of National

Revenue, [1970] Ex CR 414 at para 15.

[515] In a much earlier decision arising in the context of builder’s liens, the Ontario Court of

Appeal explained the relationship between the words “cost”, “expense”, “value” and “price”. It

concluded that cost and expense refer to what you have paid to get something – “what a thing

costs or occasions to be laid out”: Hickey v Stalker (1923), [1924] 1 DLR 440 at 446-447

(ONCA).

[516] I am not bound by these authorities, and by citing them I do not suggest that the words

“cost and expense” are legal terms of art. But, like the dictionaries, the case law supports my

identification of the ordinary and grammatical meaning of the “cost and expense incurred” to

obtain something, which is that it refers to the consideration actually given to obtain that thing.

[517] As a result, to comply with Clause IV of the NPI Agreement TriStar had to make a bona

fide effort to identify the amount it paid to acquire the Welwyn assets, and then allocate that

amount to the NPI Agreement account. The starting point for TriStar had to be the price paid for

Arista, and the focus had to be on identifying what portion of that price, at the time it was

identified and negotiated, was paid for the Welwyn assets.

[518] The broader context of the NPI Agreement supports this view. The Defendants as

operators of the NPI Area assets should be entitled to recover from the Plaintiffs the amounts

they paid to obtain assets within the NPI Agreement area. They are a legitimately incurred

expense – “an objectively determinable historical fact” and one the Plaintiffs, as the net profit

interest holders, ought to be required to pay. But at the same time, the net profit interest holders

should not be required to make payments based on something with the “subjectivity and

judgment” of a value based assessment. The NPI Agreement as a whole protects the net profit

Page: 81

interest holders from charges at a remove from the NPI Agreement assets, that are primarily

incurred for corporate purposes, or that are malleable or speculative.

[519] Based on this interpretation, TriStar and Petrobakken breached Clause IV. They did not

make any effort to identify the amount paid to acquire the Welwyn assets, instead selecting an

amount based only on a valuation unavailable at the time the price was identified and negotiated

and which, in relation to the Arista assets as a whole, did not reflect the price paid.

[520] The Defendants’ response to this analysis is to emphasize that Mr. White’s evidence that

there is no price for the Welwyn assets. There is no “objectively determinable historical fact” in

relation to the cost and expense of the Welwyn assets: Kettle River at para 29. The price that

exists is for Arista, not for Welwyn. As such, they submit that Clause IV allowed them to

allocate as they did – in this case, and perhaps more generally, cost and expense can and should

consider value.

[521] While they did not cite this case the Defendants would, I think, argue that this is the very

type of scenario referred to at para 15 of D’Auteuil Lumber Co:

On the other hand, when the value of what was given is almost impossible to

determine and the value of the capital asset is almost beyond the realm of

controversy, it may well be that the only practicable basis for determining the

value of what was given is to look at the value of the capital asset.

[522] From the Defendants’ point of view, unless the allocation is based on an estimate of the

value of the Welwyn assets, the Plaintiffs may enjoy a windfall, receiving the benefit of that

value without having paid for it. Basing the allocation on the assessed value of the assets ensures,

in the words of Mr. Wallis, the “best estimate of what portion of the Arista Acquisition costs

related to the NPI account or the NPI area."

[523] There are a few issues with the Defendants’ argument in this respect.

[524] The Defendants confuse a challenge in implementing a contract with interpretation of a

contract. The challenge of identifying the cost and expense of an asset acquired in a corporate

transaction does not change the ordinary and grammatical meaning of “cost and expense” as

understood in the context of the NPI Agreement as a whole. Identifying the cost and expense

means identifying the consideration paid for the Welwyn assets; that doing so is difficult does

not change the nature of the relevant inquiry.

[525] In addition, the Defendants’ argument overstates the difficulty of identifying the cost and

expense of the Welwyn assets in the context of the corporate transaction. In this case the parties

– and this Court – have the considerable benefit of an arm’s length free market transaction as a

starting point for the allocation. While that cost has to be allocated, which adds some complexity,

that cost is nonetheless an “objectively determinable historical fact” from which to start.

[526] The Defendants cited cases related to rights of first refusal for the proposition that the

proper basis for allocation is a “bona fide estimate of the value of the portion of the package

subject to the ROFR”: Bearspaw Petroleum Ltd v ConocoPhillips Western Canada

Partnership, 2009 ABQB 202. In doing so, however, they do not engage with the difference

between the circumstances of a right of first refusal and the allocation of the Arista acquisition.

[527] Specifically, on the facts of the Arista allocation there is no risk that the purchaser and

vendor assessed the relative worth of the properties in part to avoid the effect of the right of first

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refusal: Apex Corp v Ceco Developments Ltd, 2005 ABQB 656 at para 185-186; Chase

Manhattan at para 30-34. Here, based on the evidence and reasonable inferences from that

evidence, Arista did not know about the NPI Agreement at all, and TriStar did not turn its mind

to the effect of the NPI Agreement on the transaction until after the price had been determined.

The information about the Arista assets contained in the reserve evaluations available to Arista

and TriStar was not prepared with any knowledge of, let alone to frustrate, the NPI Agreement.

As a result, using those evaluations and the negotiated purchase price would not give rise to the

risks that can arise in the context of a right of first refusal.

[528] The Defendants’ position favouring assignment of value over allocation of price does not

reflect the fact that, while challenging, the allocation of a package price to different assets in the

package is neither impossible nor really that unusual. Even in basic real estate transactions,

parties may have to allocate the purchase price between the land and the buildings (given the

buildings are depreciable and the land is not). Here, based on the expert evidence of Mr. White

and Mr. Dyack, and the evidence about the information available to the parties at the time of the

transaction, the tools for allocating the purchase price were available to TriStar and Petrobakken,

and are available to this Court.

[529] The Defendants submit that allocating the purchase price for Arista would be fictional

and speculative, and in that way improper; they describe it as “simulating the negotiation process

to manufacture a fictitious price of a subset of assets acquired through a corporate acquisition”.

[530] There are two issues with this submission. First, it does not engage with the speculative

and inherently contestable nature of reserve valuations. Every witness with knowledge of reserve

evaluations testified to the fact that those evaluations will vary significantly depending on the

assumptions and judgment of the people who perform them. As noted, Mr. Haugen’s valuation

was 27.8% lower than that of the Sproule Report his evidence was submitted to validate. Relying

only on a reserve evaluation does not make the process not fictional or speculative; it simply

takes out the one piece of reliable objective data about value that we have, namely the arm’s

length negotiated purchase price agreed to by Arista and TriStar.

[531] Second, given the agreement between Mr. White and Mr. Dyack on this point, and also

the methodology identified by the Defendants in 2011 (in the e-mail from Mr. McDonald) there

are accepted methodologies for allocating a purchase price. Those methodologies require

inferences from the evidence, and interpretation of the NPI Agreement, but that does not make

them speculative or fictitious.

[532] The recurring and central submission of the Defendants against the use of price to

allocate the Arista acquisition, and in defence of their reliance on the Sproule Report, is, “there

was no price for the NPI Area assets” [emphasis in original]. They submit that management did

not turn its mind to the price of the Welwyn assets because there was no reason to do so; its

focus was on acquiring the entire company. As a consequence, it would be wrong to allocate the

Arista acquisition to the NPI Agreement based on “price”: there is no price to allocate.

[533] I do see the Defendants point as a matter of precise language; the price includes the

Welwyn assets, but those assets were not independently ‘priced’ or paid for. I do not, though, see

how that observation helps either the Defendants or this Court. Again, it confuses a difficulty in

applying Clause IV in these circumstances with identifying what Clause IV requires. Whether or

not the Welwyn assets were independently priced or paid for, I still have to determine, based on

the evidence before me, what TriStar paid to get them. Further, I reject the idea that something

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has to be independently priced or paid for to it have a price or – more precisely here – a cost. As

a matter of common sense, if someone told me they paid $500,000 for a house and land, I would

not view it as impossible to identify the respective cost of the house and land simply because

they were purchased for a single price, and nor would I view the price paid for both as unrelated

to the cost of each. Indeed, I would, as I do here, view the price paid for both as the best and

most relevant evidence of the cost of each.

[534] Finally, based on Mr. White’s evidence, the Defendants submit that the total amount

allocated to the NPI Agreement account was reasonable. Mr. White was able, using different

allocation methods, and relying on the Sproule Report, to generate a number in the ballpark of

that used by TriStar in 2008 and 2010.

[535] There are two problems with using Mr. White’s evidence in this way. First, as discussed

below, I do not accept a number of aspects of Mr. White’s analysis (although I do accept the

legitimacy of his basic methods and approach). Second, that it may be possible through other

means to create a number similar to TriStar and Petrobakken’s does not remove the fundamental

methodological problem with what TriStar and Petrobakken did, and its inconsistency with

Clause IV of the NPI Agreement.

[536] Clause IV of the NPI Agreement required TriStar and Petrobakken to identify the

amounts they paid to acquire the Welwyn assets. They did not do so. They extracted from the

Sproule Report the fair market value of the Welwyn assets at a 5% discount rate and included

that amount in the NPI Agreement account. They did not allocate, or even attempt to allocate, the

cost expended by TriStar to acquire the Welwyn assets, which is what allocating the “cost and

expense incurred” required them to do. By making an allocation without reference to the price

paid for Arista they breached their obligations under the NPI Agreement.

[537] Further, in the alternative, even if the NPI Agreement only required TriStar to make a

bona fide estimate of value, for the reasons earlier set out, I do not accept their submission that

that is what they did here.

Did the Arista Allocation and TriStar and Petrobakken’s Communication

with the Plaintiffs Violate their Duty of Honest Performance?

[538] As explained above, the duty of honest performance requires a party to a contract to be

honest and candid, to provide a sufficiently full and accurate account of their conduct so that the

other side is not misled about whether the contract has been fulfilled. It also requires a party to a

contract not to shirk or evade its contractual responsibilities in a way that “undermines the

interests of the other party”: IFP Technologies at para 192.

[539] TriStar and Petrobakken breached these duties with respect to the Arista acquisition.

They did not make a meaningful effort to identify what Clause IV of the NPI Agreement

required, or to fulfill those requirements. They simply picked a number close to hand that

advanced their own interests without regard to those of the Plaintiffs. Doing so did not pay

appropriate regard to the interests of the NPI Agreement holders and undermined those interests.

[540] Further, the information they provided to the parties – saying in the first instance that this

was “a reasonable allocation of the total purchase price for this corporate acquisition to the lands,

production and reserves” and then later providing no information at all about how the allocation

had been done – was neither honest nor candid. I have accepted that TriStar did not deliberately

set out to deceive the Plaintiffs; however, they also made no effort to be honest or candid, and

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the information they provided was in fact inaccurate and misleading. By their actions they did

deceive the Plaintiffs, and the evidence does not show that they took any meaningful steps to

avoid that deception even though they could have done so.

[541] Because of the lack of effort to comply with Clause IV of the NPI Agreement, and the

lack of honesty and candour in their communication with the Plaintiffs, I find that TriStar and

Petrobakken breached their duty of honest performance under the NPI Agreement.

What amount should have been allocated to the NPI Agreement account with

respect to the Arista acquisition?

[542] Having found that TriStar violated Clause IV because it did not make a bona fide effort to

identify the amount paid to acquire the Welwyn assets, leads to the obvious follow-up question:

what would have been sufficient to satisfy Clause IV?

Evidence

[543] Mr. Gouveia, Mr. White and Mr. Dyack all opined on the appropriate method for

allocating the price paid for Arista to the Welwyn assets.

[544] Mr. Gouveia set out four scenarios each of which he said reflected a reasonable

methodology for allocating the cost and expense associated with the Arista transaction. Each was

an approximation of the price paid for the Welwyn assets based on a reverse engineering of the

price using different components.

[545] In each case Mr. Gouveia used a source from the time of the Arista acquisition – such as

the AJM report – to identify the nature and extent of the reserves being acquired, and the

predicted cash flow based on a discount rate of 10%. He then applied reserve adjustment factors

to the reserves identified based on type (proved producing vs. probable, for example). He then

made further adjustments to reflect information known by closing but that would not have been

known at the time the source was prepared. These adjustments varied between scenarios, and the

source used. They included adding in discounted cash flow amounts for additional predicted

wells or for undeveloped land that had not been previously included. Those additions were then

also subject to reserve adjustment factors. The final amount derived after the application of

reserve adjustment factors and adjustments was then compared to the purchase price. The

difference between the adjusted reserve amounts and the purchase price was defined as the

acquisition premium. Mr. Gouveia then suggested that the amount to be allocated to the NPI

Agreement was the adjusted value assigned to the Welwyn assets multiplied by the acquisition

premium.

[546] Mr. Gouveia described this as an engineering assessment, not an accounting or financial

assessment. In his view, however, the bulk of the value acquired in this sort of transaction is

identified through the engineering perspective. In his view, the assets drove the price.

[547] The amount that ought to have been allocated to the NPI Agreement account using his

four different scenarios was, Mr. Gouveia opined, between $2,834,707 (his preferred view) and

$4,784,262.

[548] Mr. White identified two methods for allocating the Arista acquisition to the NPI

Agreement assets.

[549] The first, “direct” method, derives a discount rate through comparing the predicted cash

flows from the Sproule Report to the actual purchase price, and then applying that derived

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discount rate to the value of the NPI Agreement assets as identified in the Sproule Report, less

production between December 31, 2007 and the closing date of January 18, 2008.

[550] In the direct method Mr. White did not deduct undeveloped land values or incorporate

stub period production or the asset reclamation obligations, simply for the purpose of simplicity

and because it makes no meaningful difference in the outcome. The discount rate would round to

7% regardless.

[551] The direct method could be used with any reserve report. Mr. White used the Sproule

Report, but the method could be done based on any reserve report contemporaneous with the

purchase price.

[552] The second, “indirect” method, involves identifying each of the component parts of the

price paid for the Arista acquisition, determining if those amounts are properly allocated to the

NPI Agreement, and then, for those parts that are, multiplying them by the proportion of the

Welwyn assets to the total assets acquired from Arista as set out in a reserve evaluation. Mr.

White used the Sproule Report but, again, any contemporaneous reserve evaluation could be

used with this method.

[553] Mr. Dyack agreed with Mr. White’s indirect method, although disagreeing with aspects

of how Mr. White himself used it. Mr. Dyack rejected the direct method because it did not allow

for any distinction between components of the purchase price that may or may not relate to the

acquisition of assets in general, or to the NPI Agreement assets in particular. He described the

direct method as a “black box” that clouds the analysis, and that ought not to be used.

[554] In his 2011 e-mail purporting to record his conversation with Mr. Kimber, Mr. McDonald

outlined the following method for allocation:

1. Determine the market price of undeveloped land in the NPI Area;

2. For the developed land, identify the proportion of the assets that fall

within the NPI Area to the assets as a whole;

3. Identify the premium paid for the assets and multiply those by the

proportion of NPI Agreement assets to the assets as a whole.

4. The amount to be assigned is the value of the undeveloped land and the

assets plus their proportionate share of the premium paid, adjusted to

reflect management’s view of potential upside in the area covered by the

NPI Agreement.

Analysis

[555] In assessing which (if any) of these allocation methods is appropriate, the starting point is

Clause IV of the NPI Agreement.

[556] Based on my interpretation of Clause IV as set out earlier, TriStar had some constraints

as well as some margin for manoeuvre in applying that Clause. The constraints were:

1. The goal of the allocation must be to identify what TriStar paid for the Welwyn

assets.

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2. The starting point must be the price paid for Arista and identifying which portion

of that price could reasonably be allocated to the Welwyn assets.

3. The allocation must be based on the information available to and relied upon by

Arista or TriStar at the time the purchase price was identified and negotiated.

Subject to these constraints, however, TriStar could have used a variety of approaches to the

allocation.

[557] While, as will be clear, I reject a number of the particulars of Mr. White’s analysis, either

his direct or indirect methods could be used in a way compliant with these constraints. Similarly,

a method akin to that set out by Mr. McDonald in his 2011 e-mail could be used. To comply with

Clause IV TriStar simply had to make a bona fide effort to determine the amount they spent to

acquire the Welwyn assets. This required them to respect the constraints just set out, but it does

not mean there was only one way they could have done it.

[558] With that noted, in my view the evidence before me best supports using Mr. White’s

indirect allocation method, in which the purchase price is identified in total, broken down into its

constituent parts, and then those parts are allocated to the Welwyn assets a) based on whether

they have any relationship to the Welwyn assets; and b), if they do, based on the relative

proportion of the proved and probable reserves in the Welwyn assets to the proved and probable

reserves in the Arista assets as a whole (using an appropriate discount rate, as discussed below).

[559] Both Mr. White for the Defendants and Mr. Dyack for the Plaintiffs supported the use of

the indirect approach. Further, it is directionally consistent with Mr. McDonald’s 2011 e-mail as

paraphrased above. As a result, the indirect method reflects both a consensus view of the parties’

experts, as well as what the Defendants internally viewed as appropriate.

[560] The indirect method also begins with the price paid for the assets, which is consistent

with the purpose and focus of Clause IV itself. In addition, the indirect method accords with both

an expert view but also with a lay understanding of how price allocation ought to occur; it is

straightforward and does not require any particular sophistication to apply. It fits with how an

ordinary business person, who understands commercial concepts but is not an expert accountant

or economist, would expect allocation to be done: you take the price, figure out what it is made

up of, and then divide it proportionally taking into account who got which assets and liabilities.

That simplicity fits with the overall structure of the NPI Agreement, which sets out basic

principles rather than complex methodologies for calculating profits.

[561] Mr. White’s direct method does not have that same simplicity. The direct method

involves deriving a discount rate through comparing the predicted cash flows from a reserve

evaluation to the actual purchase price, and then applying that derived discount rate to the value

of the NPI Agreement assets as identified by the reserve evaluation, less production between the

date of the reserve evaluation and the closing date of January 18, 2008. It could be used,

provided a reserve evaluation (or evaluations) consistent with the constraints previously

identified was used, but its complexity makes it less appropriate. Further, it does not have the

consensus acceptance of the indirect method. Mr. Dyack makes a reasonable point when he

describes it as a black box.

[562] Also, while the direct methodology does use the purchase price, it centres the valuation of

the assets. The purchase price is used to calculate a discount rate from which the appropriate

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valuation can be chosen, rather than the valuation being used as a measure to allocate the

purchase price; in my view the latter approach is more consistent with the goal of Clause IV.

[563] The method set out in the 2011 e-mail is not particularly well articulated or clear, and in

my view its basic premise is incorporated by using the indirect approach.

[564] I also do not view the Gouveia approach as appropriate for implementing Clause IV, at

least in relation to this transaction. The Defendants characterize his approach as speculative and

fictional. I do not agree with the Defendants’ characterization although, as discussed above, I

agree that Mr. Gouveia’s analysis does not reflect what TriStar actually did in identifying and

negotiating the purchase price for the Arista acquisition. Nonetheless, it is not speculative or

fictious because its intent is not to describe what actually occurred but is rather to identify a

methodology for allocating the purchase price, along the lines of the direct or indirect method.

The difference is that the Gouveia method focuses exclusively on the engineering perspective; it

allocates the price as an engineer would.

[565] Having said that, I agree with the Defendants that it ought not to be adopted as an

allocation methodology. I do not think the evidence in general supports the premises that have to

be accepted for me to accept his methodology: that the price was driven primarily from an

engineering perspective, or that the price was identified or negotiated based on reserve

adjustment factors being applied to the reserve valuations.

[566] I set out my conclusion that reserve adjustment factors were not used by TriStar in the

acquisition process previously. While that fact does not theoretically prevent them from being

used in an after the fact allocation, I think it makes doing so problematic. It introduces a type of

thinking and analysis into the allocation process that is detached from how the parties actually

acted or thought. It separates the allocation from the actual process of identifying and negotiating

the purchase price; it is, in that sense, analogous to using the Sproule Report – using numbers or

information that did not actually affect the identification and negotiation of the purchase price.

For that reason, I do not think a process relying on reserve adjustment factors ought to be

adopted.

[567] With respect to Mr. Gouveia’s emphasis on the engineering perspective, I do accept, as

discussed above, that the perceived value of the assets being acquired was the most significant

factor in determining the purchase price. At the same time, however, I also accept that the goals

of the transaction were corporate and economic: to maximize the share value, including the cash

flow per share. As a result, while the parties identifying and negotiating the purchase price were

very interested in the value of the assets – as reflected by TriStar having Mr. Kimber do his own

professional evaluation of them – I do not think they got to the purchase price through drilling

down even further to parse more precisely what the assets were worth. I think once they had the

general analysis and information available to them from AJM, GLJ and Mr. Kimber they had

what they needed, and negotiated the purchase price with an eye to maximizing the financial and

economic benefits of that information.

[568] Finally, I view the Gouveia method as unduly complex, and inconsistent with a common

sense understanding of how a price ought to be allocated. An ordinary businessperson,

unschooled in the nuances of reserve evaluations and their detailed application to a particular set

of oil and gas assets, would be unable to apply it. Any method adopted should be capable of

application by anyone familiar with the basic facts of the Arista acquisition: the price paid, the

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general nature of the assets acquired, and the information available to the parties at the time the

price was identified and negotiated. The Gouveia method would require much more than that.

[569] Thus, the application of Clause IV here will proceed based on the indirect method,

subject to the constraints Clause IV imposes. That raises, however, some additional questions

that must be answered:

1. What reserve evaluation ought to be used when applying the indirect

method?

2. What discount rate should be used in determining the proportionate value

of the Welwyn assets from that reserve evaluation?

3. What was the purchase price for the Arista acquisition?

4. What amount of the purchase price was to acquire undeveloped land?

5. What amount of the purchase price, if any, was to acquire value unrelated

to the Welwyn assets or undeveloped land – for example, to acquire tax

pools?

6. Should the amount allocated be reduced to account for asset retirement

obligations?

7. Should pre-closing production be taken into account in allocating the

purchase price?

8. Should transaction costs or interest expenses be allocated to the NPI

Agreement account and, if so, how much were those transaction costs and

interest expenses?

Which reserve evaluation?

Expert Evidence

[570] All of the expert witnesses testified as to which reserve evaluation ought to be used to

allocate the Arista purchase price. Their testimony has been discussed earlier, particularly in

relation to the information that was available about Arista, and how the price for Arista was

identified and negotiated. The review here focuses on some additional points made by the

experts on the reserve evaluations.

[571] Before doing so, however, I reiterate and emphasize that while the experts disagreed as to

which evaluation was appropriate, they all agreed that each evaluation was professionally and

competently prepared in compliance with COGEH and NI 51-101. They also agreed that the

variation between evaluations was largely because of the role of professional judgment in

assessing reserves, and the unpredictable nature of oil and gas exploration, development and

prices.

[572] Mr. Gouveia opined on all of the reserve evaluations. He argued that the Sproule Report

ought not to be used as a basis for allocating the Arista purchase. He criticized both its method

and approach. In his view the Sproule Report did not sufficiently account for the sharp decline

associated with production in the Birdbear reservoir that would affect the wells in the Welwyn

area. In Mr. Gouveia’s view,

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[A]creage with limited to marginal growth potential, such as the NPI Area

acreage, would have attracted less attention and would likely have required a

discount to consummate a sale. In my opinion, industry would not, and in fact, it

appears from the above, TriStar did not, get excited over the 280 bopd 5-10

Birdbear horizon horizontal well in the NPI Area given the thin oil pay over water

and industry’s limited experience and poor results with that horizon.

[573] Despite TriStar having information about the rapid declines in production from Arista’s

Welwyn wells, the Sproule Report did not capture “the most recent production performance

reports which were available to TriStar as Operator, and which showed a sharp decline in

production”. As a result, Sproule has “early dramatic overestimates” which resulted in it

“significantly overvalu[ing] the NPI asset” and created “an inflated allocation to the NPI

Account”.

[574] In addition, Mr. Gouveia said that Sproule failed to conduct “a volumetric reality check

on its production versus time forecasts” and consequently identified a recovery efficiency which

is “too high and not technically possible”. Sproule also identified operating costs for the Welwyn

wells which, while consistent with industry standard, are lower than the operating costs

previously reported by TriStar on the NPI Agreement accounts and thus likely understated the

operating costs associated with these assets when operated by TriStar. That further meant that

Sproule predicted economic production for longer than would have been the case had it reflected

the operating expenses traditionally reported by TriStar.

[575] Ultimately Mr. Gouveia concluded: “In my opinion, the allocation of the Arista NPI

Costs to the NPI Account should have been based on the objective information available to

TriStar at the time it generated the winning bid for the Arista Transaction, and not the 2008

Sproule Report, which is inaccurate and problematic for the reasons set out previously.”

[576] Mr. Gouveia thought the AJM Report, the AJM/GLJ Report or the December 3 and 11

Reports were appropriate for allocation purposes because they were used by TriStar in its

valuation of Arista at the time the price was negotiated, including – in the case of the third party

reports – in documents it issued to the public. His scenarios incorporated each of these reports;

his preferred scenario used the AJM Report.

[577] Mr. Dyack largely agreed with Mr. Gouveia about which reserve evaluations ought to be

used. In his opinion the best information for determining the cost and expense in acquiring the

Welwyn assets is the information that was available to TriStar in making its bid, which includes

the December 11 Report, the AJM Report and the AJM/GLJ Reports.

[578] Mr. Dyack rejected the use of the Sproule report because it does not reflect the

information about the assets that was known to TriStar and Arista at the time the transaction was

entered into. As he put it,

The significance of the differences between the Sproule Report and the TriStar

[December 11] and AJM Reports is concerning – simply the difference in

volumes [of reserves] appears to indicate that the information contained in the

Sproule Report differed from the information available to Management at around

the time of the December Press release and the Material Change Report…

To the extent that the Sproule and Haugen Reports include information about

wells producing differently than TriStar management had expected is problematic

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because (i) this information does not appear to have been used by TriStar

management or their experts; and (ii) this information does not appear to have

been publicly disclosed to TriStar shareholders prior to or after the December

Press Release or the Material Change Report. If this information was not

considered in valuation updates or disclosed to the public, it appears to be either

hindsight information or information that was given little weight by TriStar

management.

[579] By contrast, Mr. Haugen said that the Sproule Report ought to be used for allocation

purposes. He analyzed the different reserve evaluations at a high level and, as well, completed

his own independent assessment of the Welwyn assets as of December 31, 2007. His conclusions

following that analysis were:

1. The Sproule Report contains a reasonable assessment of the value of the Total

Arista Assets and the Arista NPI Area Assets at the time of the Arista Acquisition;

2. The AJM Report is not the best indicator of the value of the Total Arista Assets,

the value of the Arista NPI Area Assets, or TriStar’s successful bid value. Rather,

the best indicator of the value of the Total Arista Assets and the Arista NPI Area

Assets at the time of the acquisition is the Sproule Report, and the best indicator

of TriStar’s bidding intentions as related to the Total Arista Assets is the

December 11 Report.

3. Mr. Haugen’s independent evaluation results in a valuation that is comparable to

the Sproule Report and significantly higher than the AJM Report.

[580] Mr. Haugen assessed the reserve evaluations through a high level review in which he

assessed the reasonableness of their assumptions, analysis and conclusions. In addition, he did

his own assessment of the Welwyn assets. Based on his high level review he determined that the

Sproule Report was reasonable, and he identified the AJM Report as an outlier in its results, as

having weaknesses in its analysis and as deficient for the Welwyn assets because not including

development in the fourth quarter of 2007. In terms of Welwyn, Mr. Haugen’s independent

assessment of the Welwyn assets evaluated those assets at a value 27.8% lower than the value

given to them by Sproule.

[581] Mr. Haugen reviewed the differences between the AJM and Sproule Reports. He

identified these as: 1) the fourth quarter 2007 drilling on the Welwyn assets which meant that

Sproule excluded capital that AJM included; 2) the different price forecasts; 3) the different well

type decline forecast. He concluded that Sproule was more accurate than AJM because of the

“removal of capital invested before the Arrangement Agreement date, utilization of TriStar’s

intended price forecast, and utilization of a more reasonable type well and prediction of longer-

term production decline performance”

[582] Mr. Haugen acknowledged in cross-examination that if the AJM report was used by

TriStar during the bid process it was at least some indicator of the price paid, although he

maintained that he did not believe it was a significant part of TriStar’s strategy. He agreed that

the TriStar internal evaluations were more of an indicator of the price paid than AJM, but he

emphasized the due diligence that occurred between December 11 and December 17 which may

have shifted the price away from the internal reserve evaluations.

[583] With respect to his observation in his expert report that the December 11 Report was the

best indicator of TriStar’s bidding intentions, Mr. Haugen said in his testimony that he was not

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suggesting that he knew that this evaluation was underlying TriStar’s bid; all he was suggesting

was that it reflected the information they had at the time. The December 11 Report is simply the

last published material available to understand how TriStar was evaluating the Arista assets, but

it is not conclusive because so much came after.

[584] Mr. White assumed in his evidence that reserve values ought to be taken from the Sproule

Report. He justified the assumption because a) Sproule is well-respected and well-known; b) the

effective date of the Sproule report is December 31, 2007, which is close to the closing date; c)

TriStar engaged Sproule, which meant that Sproule’s Report reflected the “purchaser

perspectives”, including its likely capital expenditures; d) TriStar used Sproule for its 2008

financial reporting, and it was accepted by TriStar’s auditors; e) Sproule reflected TriStar’s

conclusions and the outcome of the Arista acquisition; f) Mr. Haugen analyzed Sproule and

found it to be reliable; f) Sproule used more up-to-date pricing information.

[585] Mr. White opined that a third-party assessment is more appropriate to use than an internal

assessment and analysis. He also had concerns with vendor analysis, which he thought needed to

be taken with “a grain of salt” in a purchase and sale situation.

[586] Mr. White suggested that the information contained in the Sproule Report would have

reflected the thinking that was available at the time TriStar and Arista negotiated the price, and

that he could infer that this was the type of knowledge they had, although he acknowledged that

he had no first-hand knowledge about what they knew. As earlier explained in identifying how

the price for Arista was reached, I reject Mr. White’s suggested inference on this point.

Analysis

[587] In my view, the reserve evaluations that ought to be used are the Combined GLJ/AJM

Report and the December 11 Report; the proportion of the Welwyn assets to the total Arista

assets ought to be based on an average of the proportion identified in those reports.

[588] I do not accept that the Sproule Report ought to be used. This is not because of the

deficiencies raised by Mr. Gouveia. The Sproule Report is a competently prepared and

independent assessment of the Arista assets and is as substantively valid as the others. Based on

Mr. Gouveia’s analysis I accept that the Sproule Report is no better than the others and is no

more reliable or likely to be right in its predictions. But I do not reject it on its merits. Rather, I

reject the Sproule Report because, based on the evidence before me, it cannot be connected to the

identification and negotiation of the price paid for Arista by TriStar. We have no evidence

beyond the speculation of the Defendants’ experts, to suggest that either TriStar or Arista knew

the information contained in the Sproule Report or had reached similar conclusions based on

their own analysis.

[589] By contrast, the Combined GLJ/AJM Report and the December 11 Report best represent

the information about the assets used by Arista and TriStar in identifying and negotiating the

purchase price for the Arista assets in general, and for the Welwyn assets in particular. We know

that TriStar and Arista had that information during the transaction, and we know that they relied

upon it in reporting the transaction to the public and to their shareholders. Those reports best

show the proportionate amount of the purchase price that, had Arista and TriStar turned their

mind to it during the transaction, they would have allocated to the Welwyn assets.

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[590] In their argument the Defendants submit that I ought not to take into account any of the

AJM Report, the Combined GLJ/AJM Report or the December 11 internal evaluation in

allocating the purchase price.

[591] The Defendants challenge the AJM Report because the amount it applied to the Arista

assets was so much higher than the final purchase price, and because they say that TriStar did not

make significant use of it. They further submit that the fact that the AJM and GLJ Reports were

used in the press release and Material Change Report ought to be given no significance. They

were used because TriStar was required to use a third-party evaluation. They were accurate only

up to September 30, 2007. They did not disclose prices or reserve value for the Welwyn assets or

any properties other than Fertile (which was the only property assessed by GLJ), and “shed no

light on the cost of the NPI assets”. Similarly, they submit that the use of the AJM Report in the

Arista Fairness Opinion or documents in relation to the approval of the plan of arrangement have

no significance because they do not show that the AJM Report was accurate or that it was relied

on by TriStar in the transaction.

[592] The Defendants challenge the use of the December 11 Report because they say that

management did not use it to set the price, and it did not capture all of the value associated with

the assets.

[593] I do not accept the Defendants’ position with respect to any of these reports.

[594] The AJM Report must be taken into account because it is the best evidence we have

about how Arista assessed and valued its assets. Arista’s assessment and valuation of its assets is

a key part of how the purchase price was identified and negotiated and, as such, is relevant to

how it should be allocated. The heart of an arm’s length market transaction is that it is a

compromise between the two parties who agree to it, and the only available evidence about how

one of those parties viewed its own assets at the time of the negotiation ought not to be ignored.

To ignore the AJM Report would do just that.

[595] Further, I view that the fact that the Combined GLJ/AJM Report was used in TriStar’s

public reporting of the transaction, and the AJM Report was used in Arista’s Fairness Opinion to

its Board, as justifying my reliance upon them. That use demonstrates that the AJM Report and

the Combined GLJ/AJM Report were available to TriStar and Arista, and that they were viewed

by them as sufficiently reliable and related to the purchase price to make them appropriate for

explaining the transaction to the public and their stakeholders. In its December 17, 2007 Fairness

Opinion, First Energy said:

Arista has no knowledge of any material adverse change to the oil and gas

reserves of Arista from that disclosed in the AJM Report other than production in

the ordinary course or other than as set forth in the Arista Disclosure Letter.

It takes the public disclosure and board reporting processes too lightly to suggest that parties can

claim information to be relevant to the legitimacy and fairness of the transaction in that context,

but then after the fact can claim that they meant nothing by it.

[596] That the AJM Report and the Combined GLJ/AJM Report were current as of September

30, 2007 is not significant. That time is proximate to the time of the negotiations, and the parties

would have no reason to disregard the information as stale or unhelpful based on that effective

date. In any event, the question is not whether the AJM Report and the Combined GLJ/AJM

Report were the most accurate or reliable valuations of the Arista assets; the question is whether

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they were used by TriStar and Arista in the identification and negotiation of the purchase price,

and I am satisfied on the evidence that they were.

[597] I use the Combined GLJ/AJM Report in favour of the AJM report for two reasons. First,

I view it as appropriate only to use one report based on AJM’s analysis. Otherwise, as the

Defendants noted in oral argument, AJM’s analysis of Welwyn is given extra weight. As a result,

even though arguably all three reports – the AJM Report, the Combined GLJ/AJM Report and

the December 11 Report – contain information used to identify and negotiate the purchase price,

and as such are relevant to its allocation, I have removed one from consideration to avoid

double-counting. Second, the incorporation of the GLJ Report addresses the issue that the

Defendants do fairly identify, which is the divergence between the AJM Report and the final

purchase price. If I can only use either the AJM Report or the Combined GLJ/AJM Report, I am

satisfied that it is appropriate to use the one closest to the purchase price ultimately agreed to.

[598] I am satisfied that the Combined GLJ/AJM Report reflects Arista and TriStar’s

assessment of the Arista assets in general, and the Welwyn assets in particular, at the time they

negotiated the purchase price. As such, it is appropriately used in the indirect allocation

methodology.

[599] I use the December 11 Report because I disagree with the Defendants’ claim that it has

no direct relationship to the purchase price identified and negotiated by TriStar. I accept that it

does not have an exclusive relationship with the purchase price, and that other factors were taken

into account by TriStar. However, as explained earlier, I find that TriStar’s primary focus in the

acquisition was on Arista’s assets, and that it relied upon Mr. Kimber’s assessment of those

assets in deciding the price to pay for them. Mr. Kimber’s assessment of the Arista assets, both in

absolute terms and in their component parts, played a central role in the identification and

negotiation of the Arista acquisition purchase price.

[600] I also disagree with the Defendants’ claim that Mr. Kimber did not capture all the known

value associated with the Welwyn assets. As set out above, I am satisfied that he captured at least

5 of the 6 wells on production prior to December 31, 2007. He was kept apprised of Arista’s

drilling activities and production numbers and took those into account. His Report provided an

accurate assessment of the Welwyn Assets as of the time of the identification and negotiation of

the price for the Arista acquisition.

[601] Even if Mr. Kimber did not capture all the known value in Welwyn, however, that would

not preclude consideration of the December 11 Report. Provided the December 11 Report is – as

I have found it to be – a professionally prepared and legitimate assessment of the value of the

assets as of the time the price for those assets was identified and negotiated, then it is a relevant

and appropriate basis for allocating that price. The price paid for Arista, and the amount of that

price associated with the Welwyn assets, was based on Mr. Kimber’s assessment and that of

AJM and GLJ. If Arista and TriStar thought the Welwyn assets less valuable than they actually

were, then they would have identified and negotiated a lower price for those assets and it is that

lower price that would be properly flowed through to the Plaintiffs through Clause IV of the NPI

Agreement. The NPI Agreement requires the Plaintiffs to be charged what the assets cost, not

what they ended up being worth – even if, as could easily occur with an oil and gas property,

they ended up being worth less than was paid for them.

[602] I am not concluding that the Combined GLJ/AJM Report – or the December 11 Report –

are the best or most accurate assessments of the Welwyn and Arista assets. I am not picking any

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one report over another on its merits, and do not believe doing so is possible. Reserve

evaluations are, by their nature, not proof of anything other than the opinion and judgment of

those who prepared them about what is likely to occur. They are a prediction based on judgment,

and like any prediction represent a chance, not a certainty. The question before me is not “which

evaluation is best”? The question is, which evaluation played a significant role in the

identification and negotiation of the Arista acquisition price? And the answer to that question in

my view is clear: the December 11 Report and the Combined GLJ/AJM Report.

[603] The proportion of the Welwyn assets relative to the Arista assets as a whole based on an

average of the two reports is 2.42% at a 5% discount rate ((2.74 +2.1)/2) and 2.58% at a 10%

discount rate ((3.05+2.11)/2)

Discount Rate

[604] In his testimony Mr. Gouveia explained discount rates as how the company identifies

what it will pay today for future cash flows; it is how a company takes future cash flows back to

today’s dollars. The higher the discount rate, the lower the appropriate acquisition cost for an

asset (i.e., the less one should have to pay for it). Regulators require companies to use a 10%

discount rate in evaluating future cash flows.

[605] Mr. Gouveia said that for a company such as TriStar, a 10% discount rate ought to be

used. He observed that larger companies will identify a specific cost of capital based on their

averaged weighted cost of capital adjusted appropriately for risk; for smaller companies,

however, it is easier to simply assign a 10% discount rate. He noted that surveys done by SPEE

in 2007 and 2008 revealed that 10% was by far the most commonly used discount rate by

consultants and other SPEE members.

[606] He opined that a 5% discount rate would be inappropriate. The industry in general tends

to use 10% discount rates as demonstrated by the SPEE survey; a junior oil and gas company

like TriStar should if anything be higher than the industry average not markedly below it.

[607] Mr. Gouveia rejected TriStar’s stated position that the lower discount rate is justified

because of the mature steady production and low rate of decline associated with the acquired

assets, because that description simply does not match the performance of the Welwyn assets.

[608] Mr. Haugen defended the use of a 5% discount rate in relation to the assets because, in

his view, “the horizontal wells have excellent margins and present excellent investment

opportunities”. In his view, the “Birdbear horizontal well development at Rocanville is properly

characterized as a long life, low rate asset that could easily warrant a discount rate application of

5 percent in an asset acquisition setting”. He asserted that TriStar’s bid “had a corresponding

discount level that is well below 10% when measured against the values in the TriStar

Evaluations and the Sproule Report”.

[609] Mr. White agreed that the 5% discount rate used by TriStar was “not consistent with the

intersection of the Sproule Report and the price paid”. He also acknowledged that the TriStar

annual report from 2008 indicated that TriStar’s credited adjusted risk-free rate was 8.5%. He

also acknowledged that with a credit adjusted risk-free rate of 8.5% a company’s weighted

average cost of capital would be in excess of that.

[610] Mr. White defended a 7% discount rate; however, he did so by comparing the price paid

for Arista with the asset values identified in the Sproule Report using his direct methodology.

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That analysis is not helpful in deciding the appropriate discount rate to use given my conclusion

that the Sproule Report is not appropriate for the allocation process.

[611] I find that the proportionate allocation should be identified based on a 10% discount rate.

I rely on the evidence of Mr. Gouveia with respect to industry practices in general and in relation

to a company of the size and nature of TriStar, and on Mr. White’s agreement that a 5% discount

rate was not justified. I also prefer Mr. Gouveia’s assessment of the Welwyn assets to that of Mr.

Haugen, particularly as the evidence does not suggest – and indeed the Defendants’ witnesses

categorically denied – that TriStar and Arista assigned different discount rates or adjustment

factors to the different Arista assets.

What was the purchase price?

[612] Based on the December 17, 2007 Arrangement Agreement, and the January 18, 2008

press release, I find that the purchase price for Arista was $212,000,000.

[613] The Defendants submit that the purchase price for Arista was $215,000,000.

[614] Mr. White opined that acquisition costs should be understood “as the amounts paid to

acquire an interest in the Arista NPI Area Assets” and that the total purchase price associated

with the Arista acquisition was $215,000,000. He noted that in the Material Change Report,

while it listed the purchase price on the first page as $212,000,000, the information in the notes

of that document indicated that TriStar would pay consideration of $215,000,0000 (“Under the

terms of the Arrangement, TriStar will pay consideration of $215 million, consisting of cash and

net debt assumed for for [sic] all issued and outstanding common shares of Arista”.)

[615] They Defendants also rely on TriStar’s 2008 Financial Statements which said in the notes

that “TriStar paid consideration of $215 million, consisting of working capital, bank loan, the

fair value of financial instruments acquired and estimated transaction costs, for all issued and

outstanding common shares of Arista”.

[616] As explained below, transaction costs that are properly documented and incurred for the

purposes of acquiring the Welwyn assets may be allocated to the NPI Agreement under Clause

IV. In this case, the properly allocated transaction costs are $3,000,000.

[617] That does not, however, make transaction costs part of the price paid. Transaction costs

are part of the cost and expense of acquiring the asset, but they are not part of the purchase price.

The purchase price is that agreed to by TriStar and Arista and reported to the public by TriStar

on the first page of the Material Change Report, and in the January 18, 2008 press release,

namely $212,000,000

Undeveloped land

[618] The parties accept that the undeveloped land acquired in the Arista transaction is not

related to the Welwyn assets and should not be allocated to the NPI Agreement. The issue is with

respect to the assessment of the undeveloped land.

[619] The evidence on the assessment of the undeveloped land is problematic. The best

evidence of TriStar’s thinking at the time of the transaction is the internal e-mail of Ms.

Remanda and the attached document indicating the value of the undeveloped land was worth

$6,382,400 based on $200 per acre. However, unlike with Mr. Kimber’s reserve evaluations, I

have no way of knowing whether that estimate was legitimate or appropriately prepared. I also

do not know whether it reflected Arista’s view of the asset, or only TriStar’s.

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[620] The other evidence I have is an e-mail from Mr. Wallis saying that Seaton Jordan

provided an independent third-party evaluation of the undeveloped lands of $4,097,751 effective

December 31, 2007. I have, however, no copy of that report or information about when it was

prepared. As noted by Mr. Dyack, there is no evidence to show that Seaton Jordan was available

at the time of the acquisition. In addition, in that e-mail Mr. Wallis disputes its merits.

[621] These deficiencies prevent an entirely satisfactory resolution of this issue. In my view,

however, in this case the frailties of the Seaton Jordan number are fewer than the frailties of

relying on an internal e-mail and spreadsheet about which I have only minimal information. As

Mr. White noted, Seaton Jordan is a prominent land valuator and a credible source for an

estimated land value. As a result, I use the Seaton Jordan amount of $4,097,751 in the indirect

methodology calculation.

Allocation of Goodwill and Tax Pools

[622] I find that the amount of the purchase price allocated to the NPI Agreement ought not to

be reduced on the basis that the price incorporated a premium unrelated to the Welwyn assets. In

particular, I reject the Plaintiffs’ submission that the NPI Agreement should be allocated less

than its proportionate share of the difference between the assessed value of the assets and the

purchase price (the “upside” or “goodwill”) because the upside of the transaction related

primarily to the acquisition of the Fertile Pool. I also reject the Plaintiffs’ submission that the

NPI agreement should be allocated less than its proportionate share of the upside because some

of the upside was for the purpose of acquiring tax pools, which only benefited TriStar.

[623] With respect to Fertile, the Plaintiffs’ submission conflates the motive for the transaction

with the negotiation of the price for the transaction. While those things may be properly

conflated in some cases, the evidence does not justify doing so here. I accept that TriStar was

motivated to acquire the Fertile pool, but I do not have sufficient evidence to say that that

motivation distorted the negotiation of the purchase price so that they applied a greater premium

to the Fertile assets than to the other assets acquired from Arista.

[624] I note in this respect that the Plaintiffs say that the Welwyn assets “were not a major

piece of TriStar’s Arista evaluation”; however, the evidence shows that Mr. Kimber took care to

update his December 11 Report to account for new information about the Welwyn assets. I have

found that Mr. Kimber’s December 11 Report incorporated at least five of the six Welwyn wells

ultimately on production before December 31, 2007. Having done so, I am not prepared to say

that TriStar did not pay attention to the Welwyn assets in its evaluation of Arista.

[625] Further both Mr. White and Mr. Dyack agreed that the goodwill in this transaction (that

is, the difference between the purchase price and the assessed value of the Arista assets) ought to

be categorized as related to the assets acquired from Arista, and neither viewed that goodwill as

related to only part of the Arista assets.

[626] I note Mr. Wallis’s evidence that the company had corporate goals related to share value,

and that the price was not driven by the reserve evaluations TriStar had at that time. Mr. White

also acknowledged that companies may have corporate concerns – for example, being engaged in

asset acquisition so that the company looks attractive for takeover. I accept that TriStar may have

had goals that went beyond the acquisition of Arista’s assets; however, I have no evidence on

which to quantify the impact of those goals on the purchase price. I accept Mr. White and Mr.

Dyack’s evidence that this transaction was primarily driven by the assets acquired.

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[627] With respect to adjusting the allocation to remove amounts paid to acquire tax pools, Mr.

Gouveia testified that in his experience companies asked for tax pool information and factored it

into the price paid to acquire an asset or company. He acknowledged, however, that he is not a

tax expert and he does not know how specifically TriStar and Arista would have taken that

information into account in determining the amount paid in the Arista acquisition. His point was

simply that they do have value and will affect the amount the company was prepared to pay for

the assets.

[628] Mr. Gouveia also emphasized that to the extent a price was paid for tax pools the benefit

of that would accrue entirely to the corporate entity and would not be enjoyed by the Plaintiffs as

counter-parties to the NPI Agreement, and so ought not to be charged to the NPI Agreement

account.

[629] Mr. White disagreed with Mr. Gouveia. He argued that in an asset transaction “tax pools

do not create an incremental value in excess of the purchase price as they are already included in

the overall announced transaction price. He did note that a “fundamental principle of

valuation…is that a transaction with more income tax attributes…has more value because the

purchaser pays less future income tax”. He also noted, however, that in a corporate transaction

tax pools are not “stepped up” as they are for an asset transaction, which generally means that an

asset is less valuable in a share transaction than it would be in an asset transaction. Further, in

this case the available tax pools were significantly less than the reserve value, which should

lower the value of the assets, not increase them.

[630] Mr. Dyack agreed with Mr. White that no adjustment needed to be made to account for

the tax pools.

[631] Based on this evidence, while I accept that the availability of tax pools may have had

some effect on the purchase price, I do not accept Mr. Gouveia’s quantification of that effect.

The information about the tax pools on which the Plaintiffs rely is not sufficient to show that

their value, or even any meaningful portion of it, transferred directly to the identification and

negotiation of the purchase price.

[632] As Mr. White explained, tax pools have significantly less value in a corporate transaction

and may in effect be incorporated in the asset valuation already, so that the parties do not directly

assign any extra value to the tax pools in identifying and negotiating the purchase price. Mr.

White acknowledged that the purchase price might have been lower had there been fewer tax

pools available, or higher had more tax pools been available. But that generic observation does

not translate into an evidentiary basis for concluding whether, or how much, Arista’s tax pools

affected the purchase price. The evidence before me does not justify allocating a portion of the

purchase price to tax pools.

Asset Retirement Obligations

[633] In his report Mr. White posited that the value of the assets acquired was reduced by virtue

of asset retirement obligations associated with the Arista assets. He identified the amount of

$1,313,000 from TriStar’s 2008 financial statements. While not using the same number as Mr.

White, TriStar’s Material Change report also noted the existence of asset retirement obligations

in relation to the Arista assets. It attached unaudited financial statements for Arista as of

September 30, 2007; those unaudited financial statements listed the asset retirement obligations

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as $1,430,488. As such, the asset retirement obligations and their approximate amount were

known to the parties at the time they entered into the Arrangement Agreement.

[634] Mr. White treated the asset retirement obligation as a negative entry in the allocation of

the purchase price. If part of this amount was allocated to the NPI Agreement account, it would

decrease the cost of the Welwyn assets to the net profit interest holders. Mr. White opined,

however, that no such amount should be allocated to the NPI Agreement account. He based that

opinion on the observation that it was unclear how much of this amount related to the Welwyn

assets and because the NPI Agreement did not allow for asset retirement obligations to be

recovered from the net profit interest holders “until the related abandonment costs are incurred”.

[635] Mr. Dyack disagreed, opining that the NPI Assets should also be allocated an amount for

the asset retirement obligations. In his view Mr. White’s assumption that there would be no such

obligations associated with those assets is “overly conservative and results in a higher value of

the NPI assets”. Since the assets had been operating for many years “it is unlikely that there are

no existing abandonment liabilities associated with them”. He also said that the amount of the

asset retirement obligations should have been the amount identified in the Material Change

Report ($1,430,888) rather than the amount identified in the later prepared 2008 financial

statements ($1,310,000).

[636] In my view no deduction ought to be made for the asset retirement obligations. This is

not, however, for the reasons given by Mr. White.

[637] With respect to Mr. White’s reasons, I do not view it as appropriate to connect the asset

retirement obligations to some of Arista’s oil and gas assets, but not to others. In the absence of

any information specifying the assets to which the asset retirement obligations related, the logical

assumption is that they related to all of them, not to all of them except the Welwyn assets. I have

no evidence to suggest that the Welwyn oil and gas assets are unique or different from the other

Arista oil and gas assets so as not to give rise to asset retirement obligations. It seems much more

plausible, as Mr. Dyack suggests, that the Welwyn assets are no different from any other oil and

gas assets and give rise to the asset retirement obligations ordinarily associated with such assets

and reflected in the “asset retirement obligation” amount.

[638] Further, Mr. White’s argument that the asset retirement obligation should not be allocated

because they cannot be charged to the NPI Agreement account “until the related abandonment

costs are incurred” seems problematic. No one pays abandonment costs until they are incurred.

But – at least from an accounting perspective – the value of the asset obtained is nonetheless

reduced to reflect the “asset retirement obligation”. The point is that, notionally, an asset is worth

less now because it gives rise to retirement obligations in the future. But that they are not payable

until the future does not change the relevance of the discount that exists now to the value of the

asset.

[639] Nonetheless, I do not accept that any deduction ought to be made for asset retirement

obligations. This is because the asset retirement obligations amounts at issue here speak to the

value of the assets obtained; they do not speak to the cost and expense incurred for acquiring

those assets.

[640] When Arista and TriStar identified and negotiated the purchase price for Arista they

knew that Arista’s assets had asset retirement obligations. They would have taken those amounts

into account in assessing the value of those assets, and in identifying and negotiating the price.

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The price paid thus already includes an adjustment for asset retirement obligations, and there is

no need for a further adjustment of the price to reflect them.

[641] The only reason to make an adjustment for asset retirement obligations would be if, as

Mr. White posited, some of the Arista assets have such obligations and others do not. The

adjustment would affect the proportionate value of the assets contained in the reserve evaluation

and, in that way, affect the allocation. As just explained, however, I do not accept the premise

that some of the Arista assets had asset retirement obligations and others did not.

[642] As a result, I do not incorporate any amount for asset retirement obligations in my

calculation of the allocation from the indirect methodology – either as an adjustment to the price

or to the proportionate value of the Welwyn assets.

Pre-closing Production

[643] Mr. White’s report also made an adjustment to reflect production between the effective

date of the Sproule Report and the closing date of the transaction. This adjustment, which was

based only an estimate, is not necessary given that I use the reserve reports only for the purposes

of identifying the proportionate value of the Welwyn assets at the time the price was identified

and negotiated by Arista and TriStar. I thus make no adjustment to reflect pre-closing

production.

Transaction Costs and Interest Expenses

[644] Because Clause IV includes cost and expenses incurred to acquire an asset, I am satisfied

that it allows the Defendants to recover more than the price paid for an asset. There are, however,

two limits to the recovery.

[645] First, the other expenses must have been incurred for asset acquisition purposes, not for

corporate purposes. This arises from the meaning of Clause IV but also from the overall structure

of the NPI Agreement. Costs and expenses that cannot be directly connected to asset acquisition

are too difficult to measure and track, and too susceptible to abuse, to be permitted charges to the

NPI Agreement account.

[646] Second, the amount of the other expenses must be established through proper

documentation and supporting evidence.

[647] Are transaction costs and interest expenses associated with the Arista acquisition

expenses incurred for asset acquisition purposes and, if so, have they been properly established

by the evidence so as to be recoverable?

[648] In his evidence, Mr. White opined that transaction fees are the “amounts expended to

facilitate or complete the acquisition of the NPI Area interest” and that interest charges are the

“estimated interest amounts calculated on debt incurred or assumed arising from the Arista

Acquisition”.

[649] Mr. White distinguished between the amount of transaction fees included in the purchase

price and those that were not. He viewed both as recoverable; the former were simply

recoverable directly as acquisition costs, while the latter were incurred as transaction expenses.

[650] Mr. White said that the additional transaction fees incurred by TriStar related to its share

subscription expenses. Based on an internal spreadsheet produced in the litigation, Mr. White

estimated the total transaction costs and the proportion that could be attributed to the Arista

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acquisition (since the funds raised were not all used for Arista). He then reduced that amount

further based on his identification of amounts that had already been included in the purchase

price, and then incorporated that amount in his indirect methodology.

[651] Based on his observation and experience, Mr. White opined that the total amount of the

estimated transaction fees were within the range of what would be normal and expected for this

kind of transaction in this time period. It would not be practically possible to do a transaction of

this kind without some transaction fees.

[652] Mr. White acknowledged that the “exact amount of the transaction fees in this matter are

somewhat difficult to identify”. As noted, his estimates relied on an internally prepared

spreadsheet to which no witness directly testified, and which were not supported by third-party

documentation – for example, law firm invoices.

[653] With respect to interest expenses, Mr. White identified various liabilities, including

liabilities assumed from Arista as part of the purchase price, that would give rise to interest that

ought to be allocated and charged to the NPI Agreement account. He calculated that loan

amount, then derived interest rates between 2008 and 2015, determined the ongoing balance to

which it ought to apply, and used the Sproule Report to identify the proportion of that amount

that should be allocated to the NPI Agreement account.

[654] Mr. White’s assessment of interest expenses was not based on loan agreements, bank

statements or like documentation; rather, using financial statements and internal spreadsheets he

made assumptions about bank debt, stock options and negative working capital incurred, about

their relationship to the Arista acquisition, about the likely interest applicable and about whether

or not they would have been paid. From those assumptions he calculated the interest expense

associated with the Arista acquisition. His evidence is, in short, a conclusion derived from series

of inferences and assumptions based on documentary evidence which he reviewed, and which

was provided to the Court, but about which nothing is known beyond the content of the

documents themselves.

[655] Mr. White acknowledged that he did not know whether Crescent Point had in fact

assumed debt when purchasing the assets from TriStar.

[656] Mr. White appeared to identify the recoverability of interest in Clause III.A of the NPI

Agreement (which refers to “interest paid by TRITON on loans and advances made to it by a

lending institution for funds paid to Rocanville Corporation as such consideration”). Clause III.A

is the clause which sets out the amounts to be recovered by Triton before it is obligated to pay

out any net profits. Mr. White emphasized, however, that the recoverability of interest under the

NPI Agreement was a question of legal interpretation for this Court to decide.

[657] Mr. White identified the interest charges as:

Total interest charges approximating $223,000 over the January 18, 2008 to

December 31, 2015 time period related to the $11.5 million of bank debt assumed

by TriStar in the Arista Acquisition. There is no information that indicates such

amounts were ever paid.

Total interest charges of approximately $550,000 associated with debt assumed

by TriStar arising from the monetization of the stock option obligations of $28.4

million.

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Total interest charges of approximately $123,000 associated with debt ultimately

arising from the net negative working capital of $6.5 million assumed by TriStar

as part of the Arista Acquisition.

Total Interest Charge recoveries of approximately $29,000 associated with the

financial instrument assets of about $1.5 million assumed by TriStar as part of the

Arista acquisition.

[658] Mr. Dyack viewed transaction costs and interest expenses as a buyer-specific corporate

cost. The amount of the transaction costs varies with the size of a company, its cash in hand and

its internal resources (such as in-house legal counsel). Those factors are unrelated to an asset’s

value or cost, or the price paid for it, and as such are not properly allocated to the NPI

Agreement assets. Mr. Dyack also observed that transaction fees were paid to third parties such

as lawyers and investment bankers, not to the prior owners of the Arista asset.

[659] In my view, a portion of the transaction costs associated with the Arista acquisition could

be recovered under Clause IV of the NPI Agreement. It would be difficult to purchase an asset

without at least some transaction costs related to hiring lawyers, accountants or other

professionals; they are a legitimate expense associated with the asset acquisition. They are also

costs that, because they are likely to be incurred in relation to third parties, can be properly

documented and quantified so as to provide assurance to the NPI Agreement holder that they are

expenses related to the acquisition of assets.

[660] The issue, however, is with respect to the amount of the transaction costs that ought to be

recovered in relation to the Arista acquisition – that is, with respect to how much of those

expenses were incurred to acquire Arista in general and the Welwyn assets in particular, rather

than being incurred for corporate purposes, and the amount of such expenses.

[661] The evidence does not support recovery of the level of transaction costs incorporated by

Mr. White in his analysis. I accept that some transaction costs were incurred. I accept that they

might approximate the level set out in the spreadsheet on which Mr. White relies. But I also

accept that they might not. Without any contextual evidence or supporting documentation, the

contents of that spreadsheet cannot be confirmed or verified. Nor can the purpose for which the

transaction costs were incurred be established. They might have been incurred for corporate

purposes of the type emphasized by Mr. Wallis, rather than for the purpose of acquiring the

Arista assets. The internally generated spreadsheet – about which I know nothing beyond its

contents – is extremely limited evidence. That Mr. White has taken that spreadsheet and

incorporated it into his opinion neither changes its limited nature nor makes it sufficient to justify

the factual conclusions that, through Mr. White’s opinion evidence, the Defendants ask this

Court to reach.

[662] The best evidence of the transaction costs associated with the Arista acquisition comes

rather from the Material Change Report and TriStar’s 2008 Financial Statements. Those

documents suggest that the transaction costs associated with the Arista acquisition that should be

incorporated into the indirect methodology are $3,000,000.

[663] The Material Change Report identifies the price as $212,000,000 and the total

consideration as $215,000,000. The financial statements say that TriStar’s total consideration

was $215,000,000 including “estimated transaction costs”. When compared to the stated

purchase price of $212,000,000 that puts the estimated transaction costs at $3,000,000. The

Page: 102

financial statements go on to account for the consideration paid as made up 98.5% cash and 1.5%

transaction costs: using the “purchase method of accounting” the consideration is $170,085,000

of which $167,485,000 is cash and $2,600,000 is transaction costs (i.e., 98.5%/1.5%). Applying

that ratio to $215,000,000 would make the cash consideration $211,775,000 and the transaction

costs $3,225,000, which supports the use of $3,000,000 to reflect the amount of those costs.

[664] With respect to interest expenses, the analysis is more difficult. Interest expenses may

result from an acquisition. But it is also possible to finance an acquisition without debt; as Mr.

Dyack notes, this is an expense that depends on the circumstances of the corporation. Further,

interest expenses are not a one-time expense; they are ongoing, and their quantum over time

depends on the choices and circumstances of the corporation. I note that in general interest

expenses are not a listed expense recoverable under the NPI Agreement. I do not accept Mr.

White’s reliance on Clause III.A which relates to the initial acquisition of the NPI Agreement

assets from the Rocanville Corporation. No other clause explicitly identifies interest as a

recoverable expense.

[665] I do accept that some asset acquisitions may involve debt, and that debt gives rise to

interest, such that interest may be considered an expense arising from an asset acquisition. The

problem is that acquisitions may also not involve debt, and interest expenses do not crystallize at

the point of acquisition. The amount of interest expenses and their calculation arises only over

time.

[666] Ultimately, I am satisfied that Clause IV allows the NPI Agreement account to be

charged for interest expenses incurred to finance an asset acquisition, provided that those

expenses are properly documented and accounted for. The interest expenses must be charged as

they are incurred, on a year to year basis, as a “cost and expense in the computation of net

profits”, as Clause IV expressly provides. In other words, interest expenses arising from an asset

acquisition are, by virtue of Clause IV, a properly charged cost and expense under Clause III.B at

the point that they are incurred. They are not, however, properly incorporated in a price

allocation because they are not a one-time expense that can be known at the point an asset is

acquired.

[667] This leaves open the possibility that the Defendants could adjust the NPI Agreement

accounts between 2008 and 2015 to recover the portion of interest expenses actually incurred

during that time period. They can only do so, however, based on actual evidence that such

expenses were incurred and arose as a result of the Arista acquisition.

[668] The opinion of Mr. White does not constitute such evidence. Mr. White’s calculations of

the interest expenses are based on assumptions and deductions from general information about

the debts incurred by TriStar to acquire Arista, and the corporate history of TriStar. As noted,

they rely heavily on deduction and extrapolation from historical documents, without any

meaningful evidence being before this Court about those documents. I do not doubt Mr. White’s

expertise, but the issue here is one of fact, not opinion: what amounts of interest did TriStar and

its successor corporations pay as a result of their acquisition of the Arista assets between 2008

and 2015? His opinion, based on his own review of part of the historical record, does not

establish those facts as true, however carefully done.

[669] In sum, while I view interest expenses arising from the Arista acquisition as recoverable,

I do not view them as properly incorporated in the price allocation calculation. Nor do I view the

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evidence before me as sufficient to establish the amount of interest paid by the Defendants as a

result of the Arista acquisition between 2008 and 2015.

[670] As a result, I have added $3,000,000 in transaction fees to the purchase price for the

purposes of the price allocation but have not included any amounts in relation to interest

expenses.

Application of the Indirect Methodology

[671] Based on the foregoing, the appropriate amount to be allocated to the NPI Agreement

account with respect to the Welwyn assets was $5,441,278.

[672] This amount is calculated by multiplying 2.58% times the purchase price ($212,000,000)

less the undeveloped land value ($4,097,751) plus transaction costs ($3,000,000).

[673] The effect of this calculation is that TriStar and Petrobakken allocated $8,922,722 more

to the NPI Agreement account than they ought to have allocated with respect to the acquisition of

the Welwyn assets ($14,364,000 less $5,441,278).

Remedies

[674] The Plaintiffs have established that the Defendants breached the NPI Agreement; they are

entitled to damages equal to “the value…they would have received had the contract been

performed”: Bank of America (Canada) v Mutual Trust Co., 2002 SCC 43 at para 25.

[675] What that means in this case is that the Plaintiffs are entitled to an adjustment to the NPI

Agreement account to reflect the improper charging for the CCTA Tax from August 2008 to

2015, and to correct the excessive allocation for the cost and expense associated with the Arista

acquisition.

[676] Mathematically, that means the Defendants must recalculate the amounts owed under the

NPI Agreement account to remove the following CCTA Tax charges from the NPI Agreement

accounts.

2015: 119,480

2014: 190,180

2013: 213,456

2012: 198,836

2011: 228,944

2010: 206,848

2009: 204,762

2008: 10,513 (Dec); 17,525 (Nov) 21,168 (Oct) 29,260 (Sept) 36,280 (Aug)

[677] In addition, they must recalculate the amounts owed under the NPI Agreement account to

remove $8,922,722 charged to the account as of August 2008.

[678] The amount of remedy to which the Plaintiffs are entitled is straightforward. The

additional question with respect to remedy, is as to which of the Defendants is liable to pay this

amount. In particular, can the Plaintiffs require Crescent Point to make these adjustments and

pay them any resulting amounts owed even though Crescent Point was not the party who made

the improper account entries prior to September 30, 2014?

Page: 104

[679] Based on the terms of the Assignment and Novation Agreement, the Plaintiffs can claim

these amounts from Crescent Point.

[680] Under clause 2 of the Assignment and Novation Agreement, Crescent Point assumes not

only the “obligations” of Lightstream but also its “liabilities”. This makes the Assignment and

Novation Agreement broader than, for example, the agreement at issue in United Canso, which

required only that the Assignee would “perform the duties and obligations” of the prior parties:

United Canso at para 285.

[681] As of September 30, 2014, the effective date of the Assignment and Novation

Agreement, Lightstream was liable to the Plaintiffs for these amounts.

[682] Lightstream is a direct successor to TriStar. TriStar amalgamated with Petrobakken and

continued as Petrobakken until it changed its name to Lightstream. All of the contract breaches

prior to September 30, 2014 giving rise to the Plaintiffs’ remedy were committed by one of

TriStar, Petrobakken, Lightstream.

[683] As of September 30, 2014, Lightstream was liable to the Plaintiffs for those breaches of

contract. The contract breaches had occurred. Lightstream or its predecessor corporations were

responsible for them. The Plaintiffs had commenced their action for contract breach. Crescent

Point knew that the Plaintiffs had done so. Other than awaiting final adjudication by this Court,

by September 30, 2014 Lightstream’s liability for breach of contract had crystallized: Re Tozzo

and Excess Insurance Co. Ltd. (1977) 17 OR (2d) 737 at 741.

[684] By entering into the Assignment and Novation Agreement, Crescent Point expressly

agreed to take on those liabilities, and I find that it has done so. It is liable to the Plaintiffs for the

entirety of the remedy to which the Plaintiffs here have shown themselves to be entitled.

[685] I also award the Plaintiffs pre-judgment interest under s. 2(1) of the Judgment Interest

Act, RSA 2000, c J-1.

[686] If necessary, the parties may arrange to appear before me to speak to costs.

Heard on the 9^thto 20^thand 30^thdays of September, the 1^stto 11^thand 15^thto 16^thdays of October

and the 11^thday of December, 2019.

Dated at the City of Calgary, Alberta this 27^thday of February, 2020.

A. Woolley

J.C.Q.B.A.

Page: 105

Appearances:

Michael A. Marion

Loni da Costa

Myles Fish

Borden Ladner Gervais LLP

for the Plaintiffs

Douglas T. Yoshida,

Timothy Froese

Ryan MacIsaac

Lyndsey Delamont

Nicole Fitz-Simon

McCarthy Tétrault LLP

for the Defendants