NEP Canada ULC v MEC OP LLC

Court of Queen’s Bench of Alberta

Citation: NEP Canada ULC v MEC OP LLC, 2021 ABQB 180

Date: 20210401

Docket: 1201 09690

Registry: Calgary

Between:

NEP Canada ULC

Plaintiff

- and -

MEC OP LLC, MEC OP Transaction I ULC and Merit Energy Company LLC

Defendants

Corrected judgment: A corrigendum was issued on May 21, 2021; the corrections

have been made to the text and the corrigendum is appended to this judgment.

_______________________________________________________

Reasons for Judgment

of the

Honourable Mr. Justice D.B. Nixon

_______________________________________________________

Table of Contents

I. Introduction............................................................................................................................. 8

II. Issues and Claims.................................................................................................................... 9

A. The Issues............................................................................................................................ 9

B. NEP Claims....................................................................................................................... 10

Page: 2

III.

The Parties and Connected Persons .................................................................................. 10

A. Entities Connected to the Plaintiff.................................................................................... 10

1. NEP USA...................................................................................................................... 10

2. NEP Canada (also known as NEP)............................................................................... 10

B. The Defendants ................................................................................................................. 10

1. Merit USA..................................................................................................................... 10

2. Merit LLC..................................................................................................................... 11

3. Merit ULC..................................................................................................................... 11

4. Merit Corporate Chain Summary ................................................................................. 11

C. Individuals Connected to the Defendants ......................................................................... 12

IV.

Business Background........................................................................................................ 12

A. NEP Business Plan............................................................................................................ 12

B. The Transaction Assets – The MEC OpCo Properties ..................................................... 13

C. Merit USA – Decision to Sell Canadian Oil and Gas Assets ........................................... 13

D. Due Diligence ................................................................................................................... 14

E. The RAE Report ............................................................................................................... 14

F. The 2011 SPA – Schedule D ............................................................................................ 14

G. Employees Retained.......................................................................................................... 14

H. NEP Protective Steps – Self-Disclosure and Production Shut-In..................................... 15

V. Overview – Facts and Context.............................................................................................. 15

A. Key Lay Witnesses ........................................................................................................... 15

1. Mr. Plunk ...................................................................................................................... 15

2. Mr. Hagge ..................................................................................................................... 19

3. Mr. Moffitt.................................................................................................................... 22

4. Mr. Carr ........................................................................................................................ 26

5. Mr. Lambert.................................................................................................................. 26

6. Ms. Hall ........................................................................................................................ 27

7. Mr. Terpstra .................................................................................................................. 27

8. Mr. Shihinski ................................................................................................................ 27

B. Expert Witnesses............................................................................................................... 27

1. Ralph David Webster.................................................................................................... 27

Page: 3

2. Daryl Glenn Foley ........................................................................................................ 28

3. Patrick Edmund Keck ................................................................................................... 28

4. Kenneth Brandon Mullen.............................................................................................. 28

5. Deryck Harold Helkaa .................................................................................................. 29

6. Neal Nissim Mizrahi..................................................................................................... 29

7. Nora Tennant Stewart ................................................................................................... 29

8. Ronald Steve Burdylo................................................................................................... 29

9. Alicia Kim Quesnel ...................................................................................................... 30

10.

11.

12.

13.

14.

Theresa Lucy Watson................................................................................................ 30

Alan John Goddard ................................................................................................... 30

Keith Murray Braaten ............................................................................................... 31

Dale Edwin Tremblay............................................................................................... 31

John Williams ........................................................................................................... 31

C. Background – The Parties and Transaction ...................................................................... 32

1. The MEC OpCo Evaluation.......................................................................................... 32

2. The Transaction ............................................................................................................ 33

D. Regulatory Non-Compliance – MEC OpCo..................................................................... 34

1. Pipelines........................................................................................................................ 34

a. Sweet-to-Sour ........................................................................................................... 34

b. Discontinued Pipelines.............................................................................................. 35

c. Depth of Cover.......................................................................................................... 35

2. Facilities........................................................................................................................ 36

a. 9-16 Facility.............................................................................................................. 37

b. 11-20 Facility............................................................................................................ 38

c. 3-3 Facility................................................................................................................ 38

d. 7-4 Facility................................................................................................................ 38

3. Surface Casing Vent Flows........................................................................................... 39

4. Suspension Requirements for Wells – Directive-13..................................................... 39

E. Merit’s Knowledge – Regulatory Non-Compliance......................................................... 40

1. Witness Credibility ....................................................................................................... 40

a. General Comments.................................................................................................... 40

b. NEP’s Lay Witnesses................................................................................................ 40

Mr. Bud Newton ................................................................................................... 41

Page: 4

Ashley Cross ......................................................................................................... 41

Darcy Turner......................................................................................................... 41

Mr. Shihinski and Ms. Hall................................................................................... 41

c. Merit’s Witnesses – Lay and Expert......................................................................... 41

Mr. Hagge ............................................................................................................. 41

Mr. Carr................................................................................................................. 42

Mr. Moffitt............................................................................................................ 43

Mr. Williams......................................................................................................... 44

d. Credibility Assessment – Summary Comments ....................................................... 44

2. Persons of Knowledge .................................................................................................. 44

a. Mr. Lambert .............................................................................................................. 45

b. Mr. Carr..................................................................................................................... 45

c. Mr. Moffitt ................................................................................................................ 45

d. Mr. Hagge ................................................................................................................. 45

e. Mr. Terpstra .............................................................................................................. 46

f. Ms. Hall..................................................................................................................... 46

g. Mr. Shihinski............................................................................................................. 46

h. Mr. Plunk .................................................................................................................. 46

3. Pipelines – Non-Compliance Knowledge..................................................................... 46

a. Sweet-to-Sour ........................................................................................................... 46

b. Discontinued Pipelines.............................................................................................. 54

c. Depth of Cover.......................................................................................................... 55

4. Facilities........................................................................................................................ 55

a. 7-4 Facility................................................................................................................ 55

b. 3-3 Facility................................................................................................................ 55

5. Surface Casing Vent Flows........................................................................................... 55

6. Directive-13 .................................................................................................................. 57

7. Drafting Schedule D ..................................................................................................... 60

8. Conclusion on Merit’s Knowledge............................................................................... 65

F. Merit’s Representations – Regulatory Non-Compliance.................................................. 66

1. Contractual Representations ......................................................................................... 66

2. Due Diligence Calls with Mr. Carnahan....................................................................... 69

a. Mr. Carr..................................................................................................................... 70

Page: 5

b. Ms. Hall..................................................................................................................... 71

3. Divino Meeting – “Just Paperwork”............................................................................. 71

4. Persons of Knowledge Meetings .................................................................................. 72

a. Ms. Hall..................................................................................................................... 72

b. Mr. Shihinski............................................................................................................. 73

c. Mr. Lambert .............................................................................................................. 73

d. Mr. Terpstra .............................................................................................................. 74

VI.

Analysis............................................................................................................................. 74

A. Evidentiary Burden ........................................................................................................... 74

B. The Issues.......................................................................................................................... 74

1. Was there a breach of contract?.................................................................................... 74

a. The Law .................................................................................................................... 75

The Contract – Representations and Warranties................................................... 75

Interpretive Issue – The Term “Potential”............................................................ 76

b. Applying the Law to the Facts .................................................................................. 77

Schedule D – Interpreting the Term “Potential”................................................... 77

The 2011 SPA – Representations and Warranties ................................................ 83

(I) Unqualified Warranties..................................................................................... 83

(II)

Qualified Warranties..................................................................................... 86

(III) Schedule D – Non-Compliances Not Disclosed ........................................... 87

(A) Pipelines....................................................................................................... 88

(B) Facilities....................................................................................................... 90

(C) Directive-13 ................................................................................................. 91

(D) Surface Casing Vent Flows ......................................................................... 92

Conclusion on Breach of Contract.................................................................... 93

2. Was there deceit in this case? ....................................................................................... 93

a. The Law – The elements of deceit............................................................................ 93

Misrepresentation by silence or incomplete disclosure ........................................ 94

Misrepresentation by a half-truth.......................................................................... 95

Plaintiff’s Position ................................................................................................ 95

Defendant’s Position............................................................................................. 96

Page: 6

Judicial Thoughts – The Historical Framework.................................................... 96

b. Applying the Law to the Facts ................................................................................ 101

Admissions of Deceit.......................................................................................... 102

(I)

Ms. Hall....................................................................................................... 102

Mr. Shihinski............................................................................................... 102

(II)

Other Deceit with Admitted Actual Knowledge................................................. 103

Mr. Terpstra................................................................................................. 103

(I)

(II)

Mr. Carr....................................................................................................... 103

(III) Mr. Lambert ................................................................................................ 104

“Potential”....................................................................................................... 104

The Actual Knowledge and Recklessness – Merit Deal Team & Other Persons of

Knowledge.................................................................................................................. 105

(I)

Mr. Carr....................................................................................................... 106

Mr. Hagge ................................................................................................... 107

(II)

(III) Mr. Plunk .................................................................................................... 110

(IV) Mr. Moffitt.................................................................................................. 112

(V)

Other Persons of Knowledge ...................................................................... 116

(VI) Conclusion on Actual Knowledge and Recklessness ................................. 116

Intention .............................................................................................................. 118

Conclusion on Deceit.......................................................................................... 119

3. Was there a conspiracy between Merit ULC (the transaction entity) and Merit USA (its

ultimate corporate parent)? ................................................................................................. 120

a. The Law – What are the elements of conspiracy? .................................................. 120

b. Applying the Law to the Facts ................................................................................ 121

4. Did Merit breach its duty of good faith?..................................................................... 122

a. The Law – What are the elements of good faith? ................................................... 122

b. Applying the Law to the Facts ................................................................................ 123

Vendor Representation and Warranties Re: No Material Violations – Section

4.1(u)........................................................................................................................... 125

Page: 7

Purchaser’s Conditions Re: True and Correct Representations and Warranties of

Vendor – Section 5.1(b).............................................................................................. 125

Maintenance of Assets Until Closing – Sections 9.1(a), (b) and (e)............... 126

5. Is Merit USA subject to vicarious liability? ............................................................... 127

a. The Law – The elements of vicarious liability ....................................................... 127

b. Applying the Law to the Facts ................................................................................ 129

The Merit Deal Team – Their Particulars........................................................... 129

(I)

Mr. Plunk..................................................................................................... 129

Mr. Hagge ................................................................................................... 130

(II)

(III) Mr. Moffitt.................................................................................................. 130

(IV) Mr. Carr....................................................................................................... 130

The Mind and Management of Merit.................................................................. 130

6. Is Merit USA subject to alter ego liability? ................................................................ 134

a. The Law .................................................................................................................. 134

b. Applying the Law to the Facts................................................................................ 136

VII. Damages.......................................................................................................................... 137

A. Revised Claims ............................................................................................................... 137

B. Damages Sought – A Summary...................................................................................... 138

C. Damages – General Comments....................................................................................... 139

1. Damages in Contract................................................................................................... 139

2. Damages in Tort.......................................................................................................... 139

3. Guideline Comments – No Windfall .......................................................................... 139

D. Incremental Evidence...................................................................................................... 139

E. Contractual Restrictions.................................................................................................. 140

F. Remediation.................................................................................................................... 141

1. Pipeline remediation ................................................................................................... 142

a. Sweet-to-Sour ......................................................................................................... 142

b. Depth of cover......................................................................................................... 143

c. Inefficient management........................................................................................... 143

2. Facility Remediation................................................................................................... 144

a. 9-16 Facility............................................................................................................ 145

Page: 8

b. 11-20 Facility.......................................................................................................... 145

c. 7-4 Facility and 3-3 Facility.................................................................................... 145

d. Grandfathering Provisions ...................................................................................... 146

3. Surface Casing Vent Flow and Casing Failure Remediation ..................................... 146

4. Directive-13 Remediation........................................................................................... 147

5. Future Remediation Efforts ........................................................................................ 148

6. De Minimus Default Provisions.................................................................................. 149

7. The Pinchin Report ..................................................................................................... 150

8. Betterment................................................................................................................... 150

9. Conclusion – Remediation Costs................................................................................ 151

F. Loss of Opportunity........................................................................................................ 151

1. Preliminary Issue ........................................................................................................ 153

2. Test for Loss of Opportunity ...................................................................................... 153

3. Application of the Folland Test.................................................................................. 154

4. Remoteness ................................................................................................................. 155

5. Mitigation.................................................................................................................... 157

6. Double recovery.......................................................................................................... 158

7. Quantum of damages .................................................................................................. 159

a. Bookends................................................................................................................. 159

b. Discount .................................................................................................................. 160

8. Conclusion – Loss of Opportunity.............................................................................. 161

G. Shut-in Production Costs ................................................................................................ 162

H. Borrowing Costs ............................................................................................................. 163

I. Punitive Damages ........................................................................................................... 164

J. Conclusion – Damages ................................................................................................... 165

VIII. Conclusions..................................................................................................................... 166

IX.

Costs................................................................................................................................ 167

I. Introduction

This case concerns a contractual dispute. The Plaintiff is NEP Canada ULC (“NEP” or

“NEP Canada”).

Page: 9

There are three Defendants in this action (the “Action”). They are MEC Op LLC (“Merit

LLC”), MEC OP Transaction I ULC (“Merit ULC”) and Merit Energy Company LLC (“Merit

USA”) (collectively, the “Defendants”, and generally referred to as “Merit”).¹

NEP alleges that the Defendants misled and deceived it in the context of the Share

Purchase Agreement dated August 18, 2011 (the “2011 SPA”). In addition to the ancillary causes

of action discussed below, NEP asserts the conduct of the Defendants constituted multiple

breaches of the 2011 SPA, as well as actionable deceit.

In the underlying transaction, NEP acquired the shares of MEC Operating Company ULC

(“MEC OpCo”). The 2011 SPA documented that share acquisition (the “Share Transaction”).

The parties to the 2011 SPA were Merit ULC (the Vendor), NEP (the Purchaser) and

MEC OpCo (being the operating corporation that was acquired). MEC OpCo held the assets that

NEP was targeting.

Under the terms of the 2011 SPA, the Share Transaction closed on September 30, 2011

(the “September 2011 Closing Date”). The assets of MEC OpCo included wells, pipelines and

facilities in various producing oil fields in Central, West Central and Northern Alberta.

The assets specific to the Action involve a number of oil fields in central Alberta. Those

assets include Pembina (the “Pembina Field”), the Leduc-Woodbend (the “Leduc Field”) and

others (collectively, the “Transaction Assets”).

NEP alleges that the Defendants did not truthfully disclose what they knew about the

Transaction Assets. NEP asserts that these entities opted for half-truths. Knowing they would

leave the impression that there were no known problems, the Defendants are alleged to have

promised regulatory compliance, and used vague and misleading words within which they hoped

to conceal actual problems.

In the weeks leading up to the September 2011 Closing Date, NEP asked whether there

were any “huge hidden liabilities lurking”. The individuals representing Merit allegedly stated

that there were none. NEP now asserts that such was not the case, and that it has suffered

numerous wrongs.

In 2018, NEP Canada Corp (“NEP HoldCo”) sold its equity interest in NEP to 1830575

Alberta Ltd (“183Co”) for $479,150,000, subject to adjustments. This 2018 sale of NEP was

effected through the Share and Partnership Interest Purchase and Sale Agreement (the “2018

PSA”).

The 2018 PSA was entered into amongst NEP HoldCo, 183Co and Aspenleaf Energy

Limited (“AspenleafCo”). The 2018 PSA was dated July 9, 2018.

II. Issues and Claims

A. The Issues

Framed in the context of questions, the issues that I address in this case are as follows:

¹Before October 1, 2011, “Merit” generally refers to Merit USA, Merit LLC, Merit ULC and MEC OpCo. After

September 30, 2011, “Merit” generally refers to Merit USA, Merit LLC and Merit ULC, which are also defined as

the Defendants.

Page: 10

1. Was there a breach of contract?

2. Was there deceit in this case?

3. Was there a conspiracy between Merit ULC (the transaction entity) and Merit

USA (its ultimate corporate parent)?

4. Did Merit breach its duty of good faith?

5. Is Merit USA subject to vicarious liability?

6. Is Merit USA subject to alter ego liability?

B. NEP Claims

[13] As a result of the numerous alleged wrongs, NEP asserts that it has suffered significant

damages. NEP seeks aggregate damages in the range of $365,565,024 to $515,181,453, with a

claimed midpoint of $440,373,238.

NEP seeks judgment in the above amounts against the Defendants, jointly and severally,

plus prejudgment interest.

III. The Parties and Connected Persons

The underlying corporate structure is relevant in this litigation. For that reason, I provide

the following overview of the parties and other persons with a connection to the dispute.

A. Entities Connected to the Plaintiff

1. NEP USA

Newton Energy Partners, LLC (“NEP USA”) was incorporated pursuant to the laws of

Delaware.

The President and Chief Executive Officer of both NEP USA and NEP Canada is Mr.

George (Bud) Newton (“Mr. Bud Newton”).

Kayne Anderson Capital Advisors, LP (“Kayne Anderson”) is a private equity firm with

offices in Houston, Texas.

2. NEP Canada (also known as NEP)

As part of the underlying transaction, NEP acquired the shares of MEC OpCo. Shortly

after that acquisition, NEP amalgamated with MEC OpCo.

Subsequent to that amalgamation, NEP carried on business in the oil and gas industry in

Alberta. Its business headquarters was in Calgary.

B. The Defendants

1. Merit USA

As mentioned above, Merit USA is one of the Defendants. It is a Delaware limited

liability company, and it is based in Dallas, Texas.

Page: 11

Merit USA specializes in owning and operating oil and gas assets. It maintains its

ownership interest in those assets through various affiliates and subsidiaries.

2. Merit LLC

Merit LLC is a Delaware limited liability company. Merit LLC is wholly owned by Merit

USA.

3. Merit ULC

Merit ULC is an Alberta unlimited liability corporation. It is an indirect subsidiary of

Merit USA. Merit ULC is wholly owned by Merit LLC.

Merit ULC was formed for the purpose of completing the sale of the shares of MEC

OpCo to NEP Canada. It was the sole shareholder of MEC OpCo before the shares of that

corporation were acquired by NEP Canada.

4. Merit Corporate Chain Summary

In diagram format, the relevant corporate chain of Merit immediately before the Share

Transaction on September 30, 2011 is illustrated as follows:

Page: 12

C. Individuals Connected to the Defendants

At all material times, the following individuals held positions within Merit USA:

a. Mr. Jake Plunk was the Vice President of Business Development.

b. Mr. Chris Hagge was the Vice President, General Counsel and Secretary.

c. Mr. Ben Moffitt was the Corporate Counsel.

At all material times prior to September 30, 2011, Mr. Plunk, Mr. Hagge and Mr. Moffitt

were based in Dallas, Texas. Each of these individuals remained based in Dallas after the

September 2011 Closing Date.

Prior to February 2007, Mr. Gayden Carr was the Vice President of Finance for Merit

USA. He was based in Dallas, Texas at that time.

Between February 2007 and September 30, 2011, Mr. Carr was employed by MEC OpCo

as Vice President and General Manager. During that period, he lived in Calgary, Alberta.

Between September 30, 2011 and December 28, 2011, Mr. Carr was the Vice President

and Chief Financial Officer for NEP Canada. His employment with NEP Canada came to an end

on December 28, 2011.

By way of an email issued by Mr. Hagge on July 21, 2011, certain individuals “in

management positions associated with [its] Canadian assets” were designated by Merit to be

persons of knowledge. Those individuals were Mr. Plunk, Mr. Hagge, Mr. Moffitt, Mr. Carr, Mr.

Jason Shihinski, Ms. Sheri Hall, Ms. Keisha Smith, Mr. Tommy Lambert, Ms. Heather Fofonoff

and Mr. Travis Terpstra, together with all other current officers of Merit ULC (defined as the

“Vendor” in the 2011 SPA) and the officers of MEC OpCo (defined as the “Corporation” in the

2011 SPA) before the September 2011 Closing Date (collectively, “Persons of Knowledge”).

Four of the Persons of Knowledge were designated by Merit to take lead roles on the

divestiture of Merit’s Canadian assets. Those four individuals, whom Merit labels the directing

minds, were Mr. Plunk, Mr. Hagge, Mr. Moffitt and Mr. Carr (collectively, the “Merit Deal

Team”): see also NEP Canada ULC v MEC OP LLC, 2017 ABQB 28 at para 8 [Wilson 2017

NEP Decision].

IV. Business Background

A. NEP Business Plan

Mr. Bud Newton is a petroleum engineer. He has been in the oil and gas industry for 35

years.

In 2010, Mr. Bud Newton and his son, Mr. Mitchell Newton (collectively, the “Newton

Team”), decided to establish their own oil and gas company. The plan of the Newton Team was

to apply the expertise that Mr. Bud Newton had acquired in developing “legacy assets”.

The Newton Team wanted to identify, target, acquire and develop a “legacy asset” of

their own. The commercial strategy conceived by the Newton Team had four steps. In summary,

those four steps were to: (i) identify and acquire an appropriate “legacy asset”; (ii) invest capital

to drill new wells in an aggressive drilling program; (iii) workover the existing and new well

Page: 13

base to increase production and prove up additional reserves; and (iv) sell the “legacy asset”

within three years (collectively, the “Newton Business Plan”).

Financial backing for the Newton Business Plan was needed. Mr. Bud Newton leveraged

a contact at Kayne Anderson to secure funding.

The Newton Business Plan meshed with the Kayne Anderson business model. The

collective objective of Kayne Anderson and the Newton Team was to invest in oil and gas plays

that could generate a 25% return with an exit timeline of approximately three years.

Kayne Anderson and NEP developed economic models for their joint investment with an

exit or realization date of December 2014. However, to persuade Kayne Anderson to buy into the

Newton Business Plan, Mr. Bud Newton had to risk a great deal of his own net worth.

On the strength of the experience and personal financial commitment of Mr. Bud

Newton, Kayne Anderson agreed to provide NEP with an initial investment of $75,000,000. That

investment allowed NEP to seek an investment opportunity.

With the Kayne Anderson commitment in-hand, the Newton Team began the process of

identifying and evaluating “legacy assets” across North America. They were seeking an old oil

field: (i) with multiple producing formations; (ii) where numerous wells had been drilled a long

time ago; and (iii) which had not had much drilling activity in recent decades.

B. The Transaction Assets – The MEC OpCo Properties

Between 2003 and September 30, 2011, MEC OpCo operated the Transaction Assets in

Alberta. A portion of these properties had been acquired from PricewaterhouseCoopers Inc, in its

capacity as the receiver-manager of Probe Exploration Inc.

C. Merit USA – Decision to Sell Canadian Oil and Gas Assets

In December 2010, Merit decided to sell all of its Canadian oil and gas interests. Merit

was going to effect the proposed exit from Canada through a sale of: (i) all of the assets of MEC

OpCo; (ii) all of the shares of MEC OpCo; or (iii) some combination thereof.

Merit USA and MEC OpCo retained the law firm Heenan Blaikie LLP as their Canadian

counsel for the transactions. Mr. Brian Bidyk, from the now-defunct law firm of Heenan Blaikie

LLP, was the primary Canadian counsel involved with the transaction on behalf of Merit.

The Transaction Assets appeared to have the characteristics of the legacy asset that Mr.

Bud Newton was seeking. He was particularly interested in the Leduc Field. The characteristics

of that field were as follows: (i) the Leduc Field was old; (ii) the Leduc Field had a lot of

acreage; and (iii) it appeared that after initial exploration by a major company, very little capital

had been invested in the Leduc Field for development.

Mr. Bud Newton was also attracted to the existing pipeline infrastructure in the Leduc

Field. That infrastructure would assist in moving hydrocarbons from existing and new oil wells

to the point of sale.

In June 2011, NEP made a bid to purchase the Transaction Assets. That offer was in the

form of a purchase of the shares of MEC OpCo, which held the Transaction Assets.

During the summer of 2011, NEP and Merit negotiated the terms of the Share

Transaction. On August 18, 2011, NEP and Merit agreed to the terms of the Share Transaction,

Page: 14

and the 2011 SPA was signed on that date (the “August 2011 Signing Date”). As mentioned

above, the Share Transaction contemplated by the 2011 SPA closed on the September 2011

Closing Date.

D. Due Diligence

NEP was assisted in performing due diligence on MEC OpCo by Niven Fischer Energy

Services Inc (“Niven Fischer”) and Bennett Jones LLP (“Bennett Jones”). The due diligence

pursued by Niven Fischer was overseen by Mr. Brian Carnahan. The due diligence pursued by

Bennett Jones was overseen by Mr. Pat Maguire.

As part of the sales process, Merit established both an electronic data room and a physical

data room, which contained information on MEC OpCo. Upon request, Merit also provided

additional information not contained in the electronic data room or the physical data room.

E. The RAE Report

In 2010, MEC OpCo retained RAE Engineering and Inspection Ltd. (“RAE

Engineering”) to complete various projects with respect to its pipelines. RAE Engineering was a

third-party consultant.

On July 22, 2011, RAE Engineering issued a draft report to MEC OpCo (the “Draft

RAE Report”). That report was forwarded to the attention of Ms. Hall. She was principally in

charge of regulatory matters at MEC OpCo.

F. The 2011 SPA – Schedule D

In negotiating the terms of the Share Transaction, Merit and NEP exchanged multiple

versions of the 2011 SPA (collectively, the “Draft 2011 SPA”).

The Draft 2011 SPA included a Schedule D. Merit provided NEP with the first draft of

Schedule D on July 22, 2011. Both NEP and Merit were involved in the drafting and negotiation

of the wording and contents of Schedule D.

On or about July 27, 2011, Mr. Carnahan had a telephone call with Mr. Carr concerning

Schedule D. The duration of the call was approximately fourteen minutes. During this phone

call, Mr. Carr and Mr. Carnahan discussed the items listed on Schedule D.

Merit provided NEP with a second draft of Schedule D on August 3, 2011. That second

draft incorporated some of the items discussed between Mr. Carnahan and Mr. Carr.

NEP provided Merit with a third draft of Schedule D on August 17, 2011.

Merit provided NEP with a fourth draft of Schedule D on August 18, 2011. This fourth

edition of Schedule D became the final version used in, and attached to, the 2011 SPA.

G. Employees Retained

Following the September 2011 Closing Date, some of the former employees and

contractors of MEC OpCo became employees of, or were contracted by, NEP Canada. These

individuals included Ms. Hall, Mr. Terpstra, Mr. Shihinski, Mr. Carr, Mr. Darcy Turner, Ms.

Sylvia King and Mr. Michael Reinhart.

Of these retained individuals, only Ms. Hall and Mr. Shihinski remained employed by

NEP Canada as of January, 2018.

Page: 15

H. NEP Protective Steps – Self-Disclosure and Production Shut-In

Subsequent to the September 2011 Closing Date, NEP took protective steps concerning

the Transaction Assets. On December 23, 2011, NEP shut-in certain wells in the Leduc Field that

were situated on the north side of the North Saskatchewan River (the “NS River”). By

September 2012, NEP had shut-in the remaining wells in the Leduc Field north of the NS River.

These protective steps were taken for health and safety reasons. The underlying concerns

raised regulatory issues.

During the relevant period, there were changes to the regulatory bodies. Prior to June 17,

2013, the Energy Resources Conservation Board (“ERCB”) was the regulatory body established

under the Energy Resources Conservation Act, RSA 2000, c E-10. On and after June 17, 2013,

the Alberta Energy Regulator (“AER”) was, and is, the regulatory body established under the

Responsible Energy Development Act, SA 2012, c R-17.3 (The ERCB and AER are collectively,

the “Regulator”).

V. Overview – Facts and Context

A. Key Lay Witnesses

The evidence of a number of individuals is relevant to the issues in this case. I focus on

the evidence of eight individuals.

My primary focus is on five individuals. They are: (i) Mr. Plunk, Vice President of

Business Development within Merit USA; (ii) Mr. Hagge, Vice President, General Counsel and

Secretary within Merit USA; (iii) Mr. Moffitt, Corporate Counsel within Merit USA; (iv) Mr.

Carr, Vice President and General Manager of MEC OpCo, prior to the signing of the 2011 SPA;

and (v) Mr. Lambert, Director of Operations of MEC OpCo, prior to the signing of the 2011

SPA.

Both Mr. Carr and Mr. Lambert were employed by Merit USA in Texas prior to

becoming employed with MEC OpCo in 2007 and 2008, respectively. Immediately before the

Share Transaction closed, Mr. Carr reported directly to the President of Merit USA in Dallas,

Texas.

After the Share Transaction, Mr. Carr remained in Alberta and became employed by

NEP. In contrast, Mr. Lambert transitioned back to Texas.

My secondary focus is on three individuals who were employed by MEC OpCo prior to

the Share Transaction. They are: (i) Ms. Hall, who looked after regulatory matters; (ii) Mr.

Shihinski, who looked after Field Operations; and (iii) Mr. Terpstra, who was the Region

Manager.

1. Mr. Plunk

In February 2011, Mr. Plunk informed Mr. Bud Newton that Merit was going to divest

itself of its Canadian assets. Mr. Plunk was the chief business person overseeing the Share

Transaction. He was present at the management presentations that Merit gave to NEP.

In cross-examination, Mr. Plunk testified that it was the role of senior management

within Merit to review the schedules to the 2011 SPA. In further cross-examination, he

Page: 16

confirmed that it was the responsibility of senior management to ensure that the schedules were

accurate.

On July 20, 2011, Mr. Plunk received an email from Mr. Carr (the “Carr July 2011

Email”). The subject of the email was “regulatory issues”. That email stated:

There will be significant dollars associated with these clean-up efforts and we will

need to discuss how to disclose them to Newton as it is probably a larger amount

of expense than they would have seen on past years’ lease operating statements.

The testimony of Mr. Plunk regarding his prior knowledge of the Carr July 2011 Email

fluctuated. In cross-examination, he initially said he had “possibly” read it. Still in cross-

examination, he said that he “most likely didn’t even read it”. He then said that he did not recall

reading it at the time he received it. Within that same cross-examination, he subsequently

claimed to recall reading only a portion of the email.

The evidence is that Mr. Plunk sent an email on July 21, 2011 asking the Persons of

Knowledge to gather information about known regulatory non-compliances (the “Plunk July

2011 Regulatory Email”). He asked the recipients of the email to provide the information to Mr.

Moffitt, Mr. Hagge or himself.

Having made the request for information in the Plunk July 2011 Regulatory Email, Mr.

Plunk acknowledged in cross-examination that the Persons of Knowledge would be responding

to him in respect of that request. The evidence is that Mr. Terpstra responded within hours of

having received the Plunk July 2011 Regulatory Email. In his response, Mr. Terpstra attached a

spreadsheet of non-compliances, including the sweet-to-sour pipeline issue. When asked about

this response from Mr. Terpstra, Mr. Plunk testified in cross-examination that he would not have

opened the attachments.

Mr. Plunk was subjected to cross-examination on his assertion that he would not have

opened the attachments to the responding emails. It was put to him that failing to review the

email and its attachments would have been a dereliction of his duty. He then shifted gears, and

testified that he could not recall whether he reviewed the attachments.

In further cross-examination, Mr. Plunk testified that he understood that it was important

for him to pay attention to the answers from the responding Persons of Knowledge. As part of

that cross-examination, he conceded that by the summer of 2011, he was aware that MEC OpCo

had a project related to pipelines and non-producing wells, and that RAE Engineering had been

retained for that task.

Mr. Plunk also gave equivocal answers in cross-examination as to whether he reviewed

other key emails. The evidence is that he received an email from Mr. Carr in September 2011

enclosing the consolidated comments on Schedule D (the “Carr September 2011 Responding

Email”). Those consolidated comments were from the field staff and Mr. Carr.

Mr. Plunk received the Carr September 2011 Responding Email five days before the

September 2011 Closing Date. That email included particulars concerning the notice from the

Regulator that 67 wells had been identified as being non-compliant with Directive-13 (“D-13”).

That directive governs the suspension and abandonment requirements for inactive wells.

In cross-examination, Mr. Plunk testified that he did not recall reading the Carr

September 2011 Responding Email or other similar emails, including emails marked as being of

Page: 17

high importance. Mr. Plunk also confirmed in cross-examination that he did not read many of

these emails despite the fact that the information in these emails was the specific information that

he expected to be addressed in Schedule D.

Throughout the sales process, Mr. Terpstra had continuing communications with Mr.

Plunk and others, regarding the anticipated Share Transaction.

Ms. Hall testified in direct examination that she had conversations with Mr. Plunk and

others, during the summer of 2011 regarding the scope of the non-compliance concerning the

surface casing vent flows (“SCVF”). She did this in an effort to communicate her knowledge of

the SCVF issue to Mr. Plunk and others.

The evidence is that before signing off on Schedule D, Mr. Bud Newton wanted to meet

with Mr. Carr and Mr. Plunk. This meeting was scheduled in mid-August 2011, and it occurred

at the Divino Restaurant in Calgary (the “Divino Meeting”).

Mr. Carr testified in direct examination that at the Divino Meeting, Mr. Plunk chimed in

and commented on the work that RAE Engineering was doing. Counsel for NEP objected,

arguing that the narrative of Mr. Carr concerning what Mr. Plunk said about RAE Engineering

was hearsay. I allowed counsel for Merit to continue with the questioning, but I stated that I

would not be considering any evidence that was hearsay, unless there was an exception to the

hearsay rule.

As I now consider this testimony, I find that the reference Mr. Carr made to Mr. Plunk’s

comments about RAE Engineering is not hearsay. I make that determination because the subject

testimony from Mr. Carr is only evidencing that Mr. Plunk was aware of RAE Engineering.

In cross-examination, Mr. Carr testified that during the Divino Meeting, Mr. Plunk led

the discussion about what RAE Engineering had been doing. In contrast, in cross-examination,

Mr. Plunk denied having any knowledge of RAE Engineering before the Divino Meeting.

Indeed, during that cross-examination, Mr. Plunk testified that the first time he heard the name

RAE Engineering was at the Divino Meeting.

Given the consistency of the evidence of Mr. Carr in both direct examination and cross-

examination, I accept his testimony on this point. Based on Mr. Carr’s evidence, it would seem

that Mr. Plunk was aware of RAE Engineering before the Divino Meeting, and that he addressed

RAE Engineering at that meeting. The evidence of Mr. Carr concerning that point is not

inconsistent with the Wilson 2017 NEP Decision because that decision only made a finding

concerning Mr. Plunk’s lack of knowledge concerning the Draft RAE Report, which has nothing

to do with: (i) whether Mr. Plunk was aware of RAE Engineering as an operating entity; and (ii)

whether Mr. Plunk addressed that entity in some fashion at the Divino Meeting.

As mentioned above, Mr. Plunk testified that he had not heard of RAE Engineering until

the Divino Meeting. Notwithstanding the Wilson 2017 NEP Decision, the evidence is that Mr.

Plunk received the Draft RAE Report by email. While I accept the finding in the Wilson 2017

NEP Decision, I note that during this trial, Mr. Plunk explained his failure to review the Draft

RAE Report. In particular, Mr. Plunk testified that he failed to review the Draft RAE Report

because he was attending a high school reunion, and was therefore not answering work emails.

While that seems to be a viable explanation, on cross-examination, Mr. Plunk testified

that he had answered multiple work-related emails the day of the high school reunion. He also

testified that he had enough time to address certain emails concerning the fact that “El Paso got

Page: 18

bought by Apollo”, which I infer was irrelevant to the MEC OpCo deal. I note these evidentiary

points because they are inconsistent with the assertion of Mr. Plunk that he was not answering or

addressing work emails on that date.

In cross-examination, Mr. Carr admitted that in September 2011, he was aware of the

effect that the “can of worms” opened by United Hunter Oil & Gas Corp (“United Hunter”)

would have on the Share Transaction, and that he discussed this with Mr. Lambert. Briefly,

United Hunter engages in the exploration of oil and gas properties, and it had engaged in a

project with Merit, out of which, a dispute arose. As the dispute with United Hunter continued,

Mr. Carr involved a number of individuals, including Mr. Plunk.

In direct examination, Mr. Carr testified that he explained to his colleagues in an email

communication, which included Mr. Plunk, that the pipelines that United Hunter was seeking to

tie into, as well as the downstream facilities, were not licensed to carry the sour products that the

subject well would produce. The advice MEC OpCo consistently received from Mr. Lambert

was not to “open a can of worms” with the Regulator while there was a sales process in place.

Otherwise, the pipeline non-compliance would become public.

In cross-examination, Mr. Plunk testified that he was aware that the main concern of a

purchaser is knowing what liabilities they are assuming. In that same cross-examination, he

again confirmed that it would be very important for a purchaser, such as NEP, to know what

liabilities it was assuming in the transaction.

In a later cross-examination, Mr. Plunk testified that he was aware that NEP would be

relying on Merit to ensure that Schedule D was truthful, accurate and complete. Mr. Plunk also

confirmed that as the individual signing the Officer’s Certificate at closing, he expected Schedule

D would incorporate, with specifics, all known instances of non-compliance of which key

employees, like Ms. Hall, were aware. In cross-examination, Mr. Plunk testified that if Merit had

any specific information regarding non-compliances with pipeline licences, SCVFs or suspended

wells, the information would be set out in Schedule D in appropriate detail for the purchaser.

In cross-examination, Mr. Carr testified that he sent the Carr July 2011 Email to Mr.

Plunk and other Persons of Knowledge because he knew that the costs associated with clean-up

of the MEC OpCo assets were both large and undetectable from a review of the information

disclosed to NEP. The Carr July 2011 Email was sent to Mr. Hagge and Mr. Moffitt on July 20,

2011, and Mr. Plunk was copied on the communication.

In cross-examination, Mr. Plunk testified that he knew Mr. Bud Newton was seeking

assurances regarding non-compliance matters and Schedule D.

The evidence is that none of the Persons of Knowledge were permitted to meet with NEP

alone. Mr. Plunk confirmed in direct examination that he personally sat in on some of the

meetings. He stated that he attended those meetings because he “...had been the one that put out

the persons of knowledge e-mail so [he] felt like [he] needed to be there for the meetings”. That

said, he later testified that he never spoke to the Persons of Knowledge about their responses

before he attended the Persons of Knowledge meetings with Mr. Bud Newton on August 16,

2011 (collectively, the “POK Meetings” and individually, the “POK Meeting”).

As a summary comment, the evidence is that under the Newton Business Plan, NEP

planned to drill between 100 and 250 new wells within three years after it purchased the

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Transaction Assets. Mr. Bud Newton communicated these plans to Mr. Plunk before the

September 2011 Closing Date.

Based on the evidence provided by Mr. Plunk, he signed the Officer’s Certification

notwithstanding that he allegedly made no effort to review the information put forward by the

other Persons of Knowledge. That is, given his version of the story, Mr. Plunk made no effort to

compare the data provided by other Persons of Knowledge to what had been disclosed on

Schedule D.

2. Mr. Hagge

Mr. Hagge was the head legal counsel on the Share Transaction. As early as 2009, Mr.

Hagge was included in email communications concerning compliance issues. The evidence is

that in an email dated February 23, 2009, D-13 non-compliance was noted as a “high-

enforcement” issue. The issue was serious enough to “place MEC on Global Refer” status. A

status of that nature would have prevented MEC OpCo from getting approval for new licence

applications, and could lead to production being shut-in. This information was circulated by Mr.

Carr to Mr. Hagge and others.

Mr. Hagge engaged outside counsel to assist with the sale of the Transaction Assets, and

he travelled to Calgary in January 2011. The purpose of that travel was to assist with the sale of

the Canadian assets held by Merit, which included the Transaction Assets.

During the Share Transaction, Mr. Hagge was the legal point-person. He assumed the

role of lead legal counsel on the transaction.

In this role, Mr. Hagge prepared the draft 2011 SPA that was provided to NEP. Based on

the evidence, he was intimately involved in the negotiation and drafting of the 2011 SPA.

Mr. Hagge repeatedly denied any knowledge of the sweet-to-sour issue. This denial was

made despite the evidence that he received communications on the issue from numerous sources,

and Mr. Carr expressly testified to discussing the issue with him on multiple occasions.

In cross-examination, Mr. Hagge acknowledged that Mr. Lambert was the most

knowledgeable person concerning MEC OpCo from an operations perspective. Similarly, in

cross-examination, Mr. Hagge testified that Mr. Shihinski was the most knowledgeable MEC

OpCo employee from a field operations perspective.

Ms. Hall testified in direct examination that during the summer of 2011, she had

conversations regarding the scope of SCVF non-compliance with Mr. Hagge and others. She did

this in an effort to communicate her knowledge of the SCVF issue to him and others. Prior to

circulating the first draft of Schedule D, Mr. Hagge had a discussion concerning a spreadsheet

that indicated the scope of the non-compliance and identified as many as 40 SCVFs.

In cross-examination, Mr. Hagge initially testified he had no “specific” recollection of

reviewing the communications concerning the SCVFs. He then hedged his comments.

Based on my review of his evidence, Mr. Hagge did not deny: (i) having opened the

attachments; and (ii) reviewing Ms. Hall’s email. In reviewing the evidence, I note that on July

26, 2011 at 8:23 am Mr. Hagge sent an email to Mr. Lambert (with copies to Mr. Plunk, Mr. Carr

and Mr. Moffitt) wherein he specifically addressed the SCVFs. In that communication, two key

field staff had informed Mr. Carr that they “guestimated” that there were 30 to 40 SCVFs in the

area. In response to that communication, Mr. Hagge made the following comment in an email:

Page: 20

If there are currently leaks or other non compliance, we need to list it. If we’re

just guessing that there may be leaks in the future, I don’t think it’s appropriate to

list (akin to listing a spill that may occur simply because we produce and transport

oil around our properties). We can catch up more later when I’m back from

Heenan’s offices Thank you

Based on my review of the evidence, there is no indication that Mr. Hagge further

investigated this 30 to 40 SCVF reference. I infer from this communication that Mr. Hagge was

turning a “blind eye” to the SCVF exposure, but that he had been informed of there existence.

Ms. Hall prepared additional notes on Schedule D. She circulated those notes to Mr.

Hagge and others on July 27, 2011 (the “Hall July 2011 SCVF Email”). She attached a copy of

the Draft RAE Report to the Hall July 2011 SCVF Email. In an effort to draw attention to the

Draft RAE Report, Ms. Hall wrote the following at the top of the email – “Added the Sweet-to-

Sour Draft Technical Report”.

In her notes concerning Schedule D that accompanied the Hall July 2011 SCVF Email,

Ms. Hall specifically noted that the best information available indicated that there were between

30 and 40 SCVFs. She also underscored that the sweet-to-sour issue should be properly reflected

in Schedule D by writing the following in red – “Sour Pipeline License Issue (attached draft

report)”.

On July 28, 2011, Ms. Hall forwarded the same email directly to Mr. Carr. By attaching

the Draft RAE Report and referencing it in the body of the Hall July 2011 SCVF Email, Ms. Hall

also brought that report to the attention of Mr. Shihinski and Mr. Terpstra.

Mr. Hagge claims that he missed the Hall July 2011 SCVF Email and its attachment. Mr.

Carr also claims to have missed the Hall July 2011 SCVF Email and its attachment.

In cross-examination, Mr. Hagge admitted that he knew that the cost of repairing a single

SCVF was a material matter that needed to be disclosed to NEP. The evidence is that the repair

cost amount was in the range of $140,000 per well, although the cost could vary significantly.

On August 18, 2011, Mr. Hagge was copied on a communication from Mr. Carr, wherein

Ms. Hall was asked to answer questions raised by Mr. Carnahan concerning an Environment

Canada matter on Schedule D. However, she was expressly directed not to “engage him on any

other items”.

Based on the evidence before me, I find that Ms. Hall was presenting Mr. Hagge with the

“best information” she had available at the time. In contrast, Mr. Hagge was relying on a

“guestimate” comment to avoid addressing the issue on Schedule D.

In cross-examination, Mr. Hagge described Schedule D as a “disclosure schedule”. He

testified that Schedule D was referred to as such because its purpose was to disclose or identify

matters which qualified the representations that pertain to particular subjects. At another juncture

in cross-examination, Mr. Hagge conceded that that Merit needed to accurately disclose on

Schedule D the regulatory non-compliances of which the Persons of Knowledge were aware.

Throughout the sales process, Mr. Terpstra had continuing communications regarding the

transaction with Mr. Hagge and others.

Page: 21

In an email dated July 20, 2011, Mr. Hagge expressed concerns about a statement that

Ms. Hall had made about “unsafe” conditions associated with pipelines. This was a regulatory

issue. Mr. Carr responded with the Carr July 2011 Email.

In cross-examination, Mr. Hagge testified that he made no effort to follow up with the

various Persons of Knowledge to ensure that he had received responses to the request for items

to be disclosed on Schedule D. Further, while Mr. Hagge conceded that he received a number of

responses to his request for information, in cross-examination, he testified that “there’s many

attachments that I didn’t open”.

In cross-examination, Mr. Hagge testified that he was aware that D-13 was on Schedule

D. Notwithstanding that knowledge, he testified that he made no efforts to inform himself on D-

13 or who within MEC OpCo might have the best information in respect of that issue, except to

ask Mr. Moffitt to work on the schedule.

In cross-examination, Mr. Hagge testified he did not bother to investigate whether D-13

was a regulatory or a financial matter. When Mr. Carr sent him an email marked “high

importance” to advise of the notice from the Regulator regarding 67 newly flagged D-13 non-

compliant wells, Mr. Hagge testified that he was not sure if he had read the attachments. Mr.

Hagge had selective recall of reading only certain paragraphs of the email.

In cross-examination, Mr. Hagge testified that he made no efforts to gather information

about the reports of sweet licensed pipelines carrying sour products. In fact, Mr. Hagge said that

he had no awareness of this issue before the September 2011 Closing Date. He made this

statement notwithstanding that the issue was put forward for inclusion on Schedule D multiple

times.

In cross-examination, Mr. Hagge testified that despite having been involved in a number

of conversations and email correspondence involving the sweet-to-sour issue (including the

United Hunter issues), he professed to having no recollection of the matter.

In direct examination, Mr. Carr testified that he explained to his colleagues in an email

communication, which included Mr. Hagge, that the pipelines that United Hunter was seeking to

tie into, as well as the downstream facilities, were not licensed to carry the sour products that the

well would produce. The advice that MEC OpCo consistently received from Mr. Lambert and

agreed with during this time was not to “open a can of worms” with the Regulator while there

was a sales process in place. Otherwise, the pipeline non-compliance would become public.

The evidence is that none of the Persons of Knowledge were permitted to meet with NEP

alone. Mr. Hagge confirmed in direct examination that he personally listened in on some of the

POK Meetings. In his testimony, Mr. Hagge described himself as a “quiet listener”. He stated

that he attended those meetings because Merit was “...at the point of signing any day and if an

issue came up, [he] wanted to hear it so [he] could address it”. That said, he later testified that he

never spoke to the Persons of Knowledge about their responses before he attended those POK

Meetings with Mr. Bud Newton. He also testified that he was not aware that any constraint had

been placed on any individual who was a member of the Persons of Knowledge group.

With Mr. Carr directly beside Ms. Hall and Mr. Hagge on the phone, Mr. Bud Newton

asked Ms. Hall “if there was anything that should be added to Schedule D” and she responded

“No”. On this point, Ms. Hall testified that she had been told Schedule D was the method by

Page: 22

which Merit was going to communicate the regulatory issues. She further stated that she toed the

line because she was between “a rock and a hard place”.

Based on read-ins, Mr. Lambert testified that, in the course of dealing with the United

Hunter dispute, he had a conversation with Mr. Hagge regarding: (i) the sweet-to-sour issues; (ii)

the involvement of RAE Engineering with the sweet-to-sour issues; and (iii) the so-called “can of

worms” that the sweet-to-sour issues would open with the Regulator. I infer from that evidence

that Mr. Hagge was informed of those three issues. Further, my review of email correspondence

from Mr. Hagge to Mr. Carr, dated September 13, 2011, proves, on a balance of probabilities,

that Mr. Hagge had more than a passing knowledge of the challenges associated with United

Hunter.

Based on the evidence before me, Mr. Hagge was designated by Merit as one of the

people trusted and selected to represent the collective mind of “the company”. He was, by his

own correspondence, designated as a Person of Knowledge.

3. Mr. Moffitt

Mr. Moffitt was Associate Counsel of Merit USA at the time of the Share Transaction.

Mr. Moffitt first travelled to Calgary to assist with the Share Transaction in early 2011.

Merit USA brought Mr. Moffitt into the Share Transaction to assist Mr. Hagge with

negotiating and drafting the 2011 SPA. He also prepared other ancillary documents associated

with the 2011 SPA.

The drafting of Schedule D began in May 2011. Mr. Moffitt created the first draft of

Schedule D, and he was responsible for the alterations to that document.

Mr. Moffitt prepared spreadsheets to be populated with known non-compliances and

circulated them to a number of employees within Merit, including Ms. Hall. Mr. Moffitt’s

original email regarding Schedule D described it as a “list of: any notices of default any laws or

contracts; any known issues where MEC could be in default under applicable laws...”.

The response of Ms. Hall to the request to report regulatory non-compliances for

inclusion on Schedule D listed two and a half pages of regulatory non-compliances. The detail in

the email included MEC OpCo’s: (i) D-13 non-compliance requiring downhole work; (ii)

pipeline non-compliance; (iii) improperly abandoned pipelines; and (iv) sour products flowing

through sweet pipelines as separate regulatory non-compliances. That email was then forwarded

from Mr. Lambert to Mr. Hagge and Mr. Moffitt for discussion, albeit in two separate emails.

Mr. Moffitt met with Ms. Hall to discuss known regulatory non-compliances on June 7,

2011. In that meeting, Ms. Hall explained that in the Leduc Field, MEC OpCo had sweet-

licensed lines carrying sour products and that there were public safety concerns arising from that

non-compliance. She also confirmed that there were 20 to 40 unreported SCVFs in the Leduc

Field.

In cross-examination, Mr. Moffitt testified it was important for him to seek specific

details of the non-compliances, given the broad scope of the representation and warranties in the

2011 SPA. The evidence is that Mr. Moffitt was provided with additional information

concerning non-compliance items.

The evidence is that in mid-June 2011, Ms. Hall provided Mr. Moffitt with an email

detailing the non-compliance of MEC OpCo in respect of D-13 and SCVFs (the “Hall June

Page: 23

2011 Email”). Mr. Moffitt subsequently asked for additional details on the comments she had

provided in the Hall June 2011 Email. In responding to that request, Ms. Hall informed Mr.

Moffitt that she did not then have a “complete list of licences that are not compliant”. However,

she advised him that she would request a list of non-compliant pipelines identified by RAE

Engineering.

Amongst the items communicated, the Hall June 2011 Email specifically distinguished

between the Pipeline Integrity Management Program (“PLIMP”) and the pipeline licencing

issue. However, in cross-examination, Mr. Moffitt could not provide the Court any assurance

that he had read the Hall June 2011 Email, notwithstanding that it was a direct response to his

request.

I find the testimony by Mr. Moffitt on this point troubling. He had asked Ms. Hall

specific questions. Since he asked the questions, I infer that he was expecting an answer.

Ms. Hall provided the answer, but Mr. Moffitt testified that he did not recall reading the

response. He provided that testimony to the Court notwithstanding the fact that his primary task

was to draft the schedules to the 2011 SPA.

In contrast, Mr. Moffitt had a specific recollection of reading two separate email

responses from Mr. Carr, one of which informed him that Ms. Hall would be providing a

“detailed response”. Notwithstanding that recollection, in cross-examination, Mr. Moffitt

testified he had no recollection of the portions of email from Mr. Carr that would have alerted

him to the severity of the sweet-to-sour problem, including the cost of compliance.

In cross-examination, Mr. Moffitt testified he had no recollection of opening the

attachments to Mr. Carr’s email. That email attached: (i) the consolidated comments from the

Leduc Field staff; (ii) the RAE Report; and (iii) the email from Ms. Hall referencing the RAE

Report.

I have four comments concerning the testimony of Mr. Moffitt wherein he alleged that he

did not recall opening the attachments to this email.

First, Mr. Moffit provided this testimony notwithstanding he was asking Mr. Carr to

“incorporate” the comments which had been provided by Ms. Hall. That is, Mr. Moffit asked Mr.

Carr to incorporate the very comments that he alleges he did not read.

Second, Mr. Moffit provided this testimony in the context of direct examination. During

the corresponding questioning, it was mentioned that this particular email was the subject matter

of the trial before Justice Wilson. While I accept the findings that were made in the Wilson 2017

NEP Decision, I note that when asked in direct examination where he was when he received the

email on July 28, 2011 at 7:11 pm, Mr. Moffitt answered with great precision. He was with his

wife at a weekly church group meeting.

Third, this was the same email that both Mr. Plunk and Mr. Hagge had no recollection

opening. I find it remarkable that all three of these individuals did not open the same email.

Fourth, in cross-examination, Mr. Moffitt testified that while he did not read the email

from Ms. Hall, he did answer other business emails forthwith on that same day. This was

evidenced by the fact that he responded to an email from Ms. Fofonoff within four minutes of

having received it.

Page: 24

In direct examination, Mr. Moffitt denied that he had ever been aware of any public

safety issues prior to the September 2011 Closing Date. Notwithstanding that denial, in cross-

examination, he testified that after his first meeting with Ms. Hall, he typed the words “Public

Safety concerns” into a schedule which would become the first draft of Schedule D. I view that

as an internal inconsistency.

In cross-examination, Mr. Carr testified he had reviewed the changes Ms. Hall made to

the “regulatory issues.xslx” spreadsheet, and had been alerted to Ms. Hall’s public safety

concerns.

Based on my review of the email communications that are in evidence, the comments of

Ms. Hall regarding safety concerns prompted an exchange of emails amongst Mr. Carr, Mr.

Hagge, Mr. Plunk and Mr. Moffitt. Of particular interest is the email from Mr. Carr to Mr.

Moffitt and Mr. Hagge on Wednesday, July 20, 2011. This was the Carr July 2011 Email, where

it stated that there will be significant dollars associated with the cleanup efforts, and that they

needed to discuss how to disclose the to Mr. Bud Newton.

Concerning the Draft RAE Report, Ms. Hall forwarded the document to Mr. Lambert

directly, and provided a brief summary of its findings in the covering email. She also sent it to

Mr. Terpstra, advising that she would send it to “Tommy/Gayden for direction on desire to

include in any divest schedules (or not)”.

On the following Monday, July 25, 2011, Ms. Hall discussed the Draft RAE Report with

Mr. Carr. He instructed her to send the Draft RAE Report to Mr. Moffitt. She then sent the Draft

RAE Report to Mr. Moffitt, with a covering email specifically noting that the attached report

related to “licence issues with Leduc field”. I find that this email is one of many communications

that Mr. Moffitt received concerning details on pipeline non-compliance. In making this finding,

it is not intended to contradict the determination in the Wilson 2017 NEP Decision. I just note

that Mr. Moffitt received the communication.

In direct examination, Mr. Carr testified that he explained to his colleagues in an email

communication, which included Mr. Moffitt, that the pipelines that United Hunter was seeking to

tie into, as well as the downstream facilities, were not licensed to carry the sour products that the

well would produce. As noted above, the advice that MEC OpCo consistently received from Mr.

Lambert was not to “open a can of worms” with the Regulator while there was a sales process in

place. The apparent concern was that the pipeline non-compliance would become public.

In direct examination, Mr. Moffitt testified that Ms. Hall never raised any issues with the

accuracy of drafts of Schedule D. Notwithstanding that denial, in cross-examination, he

conceded that Ms. Hall had raised issues with respect to whether various drafts of Schedule D

included references to certain items. Based on the evidence before me, I accept that Ms. Hall had

raised issues concerning inaccuracies that she had identified.

Ms. Hall testified in direct examination that during the summer of 2011, she had

conversations regarding the scope of SCVF non-compliance with Mr. Moffitt and others. She did

this in an effort to communicate her knowledge of the SCVF issue to him.

The evidence is that Mr. Moffitt was sent a list of specific wells with SCVFs. I reviewed

the attachment, and the detail therein. In cross-examination, Mr. Moffitt testified that he could

not provide the Court any assurance that he had read the attachment. His specific testimony was

Page: 25

that he did not recall ever seeing this worksheet. He then went on to comment that Ms. Hall

would not have told him about a “guesstimate” if MEC OpCo had a list.

Concerning this particular email and its attachments, I have three comments.

First, counsel for NEP cross-examined Mr. Moffitt on how the word “guesstimate” got

into his head. Mr. Moffitt responded to the question by stating that: (i) he had seen the word

“guesstimate” in other places; and (ii) he did not remember from where he got the word

“guesstimate”.

The word “guesstimate” has importance in this case because it ties into an email that Mr.

Moffitt asserts that he did not read. The narrative in that email was as follows – “As discussed,

Jason and Ed guesstimate 30 to 40 SCVF in the area”.

Second, this is yet another example of Mr. Moffitt allegedly not reading what I view to be

important documents, for which he is responsible.

Third, in earlier cross-examination, Mr. Moffitt conceded to having known that MEC

OpCo had numerous wells that were actually non-compliant with D-13. Notwithstanding that

knowledge, there is no evidence that Mr. Moffitt made any effort to reconcile that knowledge

with the disclosure that is on Schedule D.

On July 27, 2011, Mr. Carr circulated an email to Mr. Moffitt and others, in which he

stated that he would meet with Ms. Hall to discuss incorporating her comments from the Hall

July 2011 SCVF Email. He attached those two documents to his email, being her notes on

Schedule D and the Draft RAE Report.

Mr. Moffitt responded, explaining that he had reviewed the email from Mr. Carr, and

understood that Mr. Carr would be the one to revise Schedule D in order to capture the

comments in the attachments (i.e., Ms. Hall’s email). In cross-examination, Mr. Moffitt testified

that he did not read the contents of the email or the attachments which had come from Ms. Hall,

notwithstanding that he specifically referenced her email.

The testimony of Mr. Moffitt in cross-examination is troubling. His testimony concerning

which email he opened and reviewed follows a pattern. In making these comments, I am mindful

that he is a lawyer. That said, the credibility of Mr. Moffitt was undermined.

Throughout the sales process, Mr. Terpstra had continuing communications regarding the

transaction with Mr. Moffitt and others.

On September 23, 2011, the Regulator issued a notice to MEC OpCo identifying 67 wells

that were offside D-13 (the “Regulator September 2011 D-13 Notice”). That notice was

received by Ms. Hall approximately one week before the September 2011 Closing Date. The

evidence is that Ms. Hall sent Mr. Carr an email concerning this matter on Friday, September 23,

2011. Mr. Carr took this lengthy note and wrote to Mr. Hagge, Mr. Plunk, Mr. Moffitt and Mr.

Lambert to update them on the D-13 non-compliances.

This email from Mr. Carr to Mr. Moffitt and others was sent on Sunday, September 25,

2011 (the “Carr September 2011 Email”). The Carr September 2011 Email specifically

acknowledged that the non-compliances would lead not only to paperwork but “follow up and

associated costs”. Mr. Carr went on to say to Mr. Moffitt and the others that these costs would

“be NEP’s problem for the Central AB assets going forward…”.

Page: 26

When Mr. Carr sent Mr. Moffitt and others the Carr September 2011 Email, he marked it

as being of “high importance”. I infer that Mr. Carr marked the email as being of high

importance because of the obvious significance of the Regulator September 2011 D-13 Notice.

Based on the evidence before me, it is clear that Mr. Moffitt was focused on D-13

compliance. This is supported by a number of communications that were directed to Mr. Moffitt,

including the August 17, 2011 email from Ms. Hall to him alone where she reported to him that

she had “…called over to the ERCB to see what/if any D13 suspension information may be

‘publicly available’”. I infer from this particular email that Mr. Moffitt was concerned with D-13

compliance.

Based on the evidence before me, I also find that Mr. Moffitt was designated by Merit as

one of the people trusted and selected to represent the collective mind of “the company”.

4. Mr. Carr

Mr. Carr moved to Calgary in late 2006, and officially became the Vice President and

General Manager of MEC OpCo on February 1, 2007.

The knowledge that Mr. Carr had concerning the Share Transaction has been touched on

thoroughly above. By way of summary, the following key points evidence his actual knowledge:

(i) the Carr July 2011 Email, where he stated that there will be significant dollars associated with

the cleanup efforts; (ii) despite his claim that he had not read the Draft RAE Report, on Monday,

July 25, 2011, he and Ms. Hall discussed the report, after which he instructed her to send the

report to Mr. Moffitt; (iii) he explained to his colleagues that the pipelines that United Hunter

was seeking to tie into, as well as the downstream facilities, were not licensed to carry the sour

products that the subject well would produce; and (iv) Mr. Carr wrote to Mr. Hagge, Mr. Plunk,

Mr. Moffitt and Mr. Lambert to update them on the Regulator September 2011 D-13 Notice.

Based on the evidence before me, I find that Mr. Carr was designated by Merit as one of

the people trusted and selected to represent the collective mind of “the company”.

5. Mr. Lambert

At the time of the Share Transaction, Mr. Lambert was at second-in-command at MEC

OpCo in Canada. The only person above him within the MEC OpCo organization was Mr. Carr.

While he was the second-in-command at MEC OpCo, the evidence is that Mr. Lambert

was the primary operational individual in Canada. He was the individual to whom everything

was reported.

In cross-examination, Mr. Hagge acknowledged Mr. Lambert to be the most

knowledgeable person concerning the MEC OpCo operations. Merit considered Mr. Lambert

sufficiently important that he was expressly named as an individual within the Persons of

Knowledge. In cross-examination, Mr. Plunk testified that Mr. Lambert assisted in hiring

consultants for the divestiture, including Sproule as the reservoir engineer.

Mr. Mark Teshoian was a partner in Kayne Anderson. In cross-examination, he testified

that Mr. Lambert was “one of the senior guys at MEC involved in the deal”.

Mr. Lambert was selected both to prepare materials for, and be a presenter at, the

presentation that Merit and its investment bankers gave to NEP. This evidence was reinforced by

Page: 27

the cross-examination of Mr. Carr, where he testified that Mr. Lambert was present for many of

the presentations put on by Royal Bank of Canada to market MEC OpCo.

Based on the evidence, it is clear that Mr. Lambert effectively managed all of the field

operations for MEC OpCo. Mr. Lambert also dealt directly with Mr. Teshoian during the

transaction process.

Based on the evidence before me, it is clear that the sale of the Transaction Assets was an

important component of Mr. Lambert’s job. This determination is supported by a comment made

by him during his oral deposition. In particular, Mr. Lambert indicated that the sales efforts

concerning MEC OpCo were a significant component of his job.

6. Ms. Hall

At the time of the Share Transaction, Ms. Hall was the Regulatory Manager for MEC

OpCo, and the most senior regulatory employee at the corporation. Ms. Hall was responsible for

staying on top of regulatory non-compliance issues.

7. Mr. Terpstra

Mr. Terpstra held a senior position as the Region Manager for MEC OpCo in the Leduc

area. In this role, Mr. Terpstra reported to Mr. Lambert and oversaw, among others, Mr.

Shihinski.

8. Mr. Shihinski

Mr. Shihinski was the Operations Manager for MEC OpCo at the time of the Share

Transaction. He was the head of all field operations in the Leduc area.

B. Expert Witnesses

A number of individuals gave evidence during this hearing. Since those experts are

referred to throughout this decision, I thought it appropriate to outline their respective expertise

at this juncture of the decision.

1. Ralph David Webster

[183] Mr. Webster was an expert for NEP. He issued an expert report dated November 30,

2017.

[184] I qualified Mr. Webster as an expert for the purpose of giving opinion evidence in the

following three areas:

a. The operation and remediation of upstream oil and gas pipelines and related

infrastructure within the applicable regulatory framework, including the time,

costs and scope associated with such remediation work.

b. Industry practice regarding acquisition due diligence on upstream oil and gas

pipelines and related infrastructure.

c. The use and application of pipeline operations manuals in pipeline integrity

management within the upstream oil and gas industry, including the meaning

accorded to each term within the industry.

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2. Daryl Glenn Foley

[185] Mr. Foley was an expert for NEP. He issued an expert report dated November 30, 2017.

[186] I qualified Mr. Foley as an expert for the purpose of giving opinion evidence in the

following three areas:

a. The operation and remediation of upstream oil and gas facilities and related

infrastructure, including pipelines, within the applicable regulatory framework,

including time, cost and scope associated with such remediation work.

b. The use and application of pipeline operations manuals and pipeline integrity

management programs within the upstream oil and gas industry, including the

meaning accorded to each term within the industry.

c. Industry practice regarding upstream oil and gas facility.

3. Patrick Edmund Keck

[187] Mr. Keck was an expert for NEP. He issued an expert report dated November 30, 2017, a

Power Point in response to the Report on Surface Casing Vent Flow, Casing Failure and Well

Suspension by Theresa Watson.

[188] I qualified Mr. Keck as an expert for the purpose of giving opinion evidence in the

following four areas:

a. Industry incident rates of SCVFs and casing failures.

b. Industry practice on inspection, monitoring, detection and repair of SCVFs and

casing failures, including wellbores and related infrastructure.

c. Cost associated with the assessment of and repairs to SCVFs and casing failures,

including wellbores and related infrastructure.

d. Industry practice on due diligence of wellbores and related infrastructure, including

SCVFs and casing failures in a purchase and sale transaction.

4. Kenneth Brandon Mullen

[189] Mr. Mullen was an expert for NEP. He issued an expert report dated February 21, 2018.

His expert report was responding to the Report of Dale Tremblay dated November 28, 2017.

[190] I qualified Mr. Mullen as an expert for the purpose of giving opinion evidence in the

following two areas:

a. The availability and costs of drilling and completion equipment and its effect on

drilling programs during the relevant periods.

b. Whether NEP could have completed its original drilling plans as intended.

Page: 29

5. Deryck Harold Helkaa

[191] Mr. Helkaa was an expert for NEP. He issued an expert report dated September 15, 2017

as part of FTI Consulting Inc (“FTI”) and an Expert’s Responding Report dated March 1, 2018

as part of FTI.

[192] I qualified Mr. Helkaa as an expert for the purpose of giving opinion evidence in the

following two areas:

a. The value of NEP and its assets at relevant points in time and market conditions at

relevant points in time.

b. Proper methods for the valuation of oil and gas companies and their assets.

6. Neal Nissim Mizrahi

[193] Mr. Mizrahi was an expert for NEP. He issued an expert report dated September 15, 2017

as part of FTI and an Expert’s Responding Report dated March 1, 2018 as part of FTI.

[194] I qualified Mr. Mizrahi as an expert for the purpose of giving opinion evidence in the

following two areas:

a. The value of NEP and its assets at relevant points in time and market conditions at

relevant points in time.

b. Proper methods for the valuation of oil and gas companies and their assets.

7. Nora Tennant Stewart

[195] Ms. Stewart was an expert for NEP. She issued an Expert’s Responding Report dated

February 22, 2018.

I qualified Ms. Stewart as an expert for the purpose of giving opinion evidence in the

areas of the evaluation of oil and gas reserves, well economics, evaluation of lost or shut-in

production and the proper scope of expertise of independent qualified reserve evaluators.

8. Ronald Steve Burdylo

[197] Mr. Burdylo was an expert for Merit. He issued a Primary Report dated September 15,

2017 and a Rebuttal Report dated November 20, 2017.

[198] I qualified Mr. Burdylo as an expert for the purpose of giving opinion evidence in the

following five areas:

a. The operation and remediation of upstream oil and gas pipelines and related

infrastructure within the applicable regulatory framework.

b. The design, operation, integrity management and maintenance of pipelines.

c. The timing, cost and scope of such remediation, including industry practice

regarding pipeline construction and its planning/estimating.

Page: 30

d. Industry practice regarding due diligence in the proposed acquisition of oil and gas

companies and/or assets and related infrastructure.

e. The use and application of pipeline operations manuals (“POM”) and PLIMP,

within the oil and gas industry, including the understood meaning and scope

ascribed to POM and PLIMP.

9. Alicia Kim Quesnel

[199] Ms. Quesnel was an expert for NEP. She issued an Expert’s Responding Report dated

September 17, 2017.

[200] I qualified Ms. Quesnel as an expert for the purpose of giving opinion evidence in the

area of industry standards and practices surrounding due diligence and disclosure in the context

of purchase and sale transactions generally and in respect of vendors as to the target involving oil

and gas companies and assets comparable to those of MEC OpCo.

10. Theresa Lucy Watson

[201] Ms. Watson was an expert for Merit. She issued an Expert’s Responding Report dated

September 14, 2017.

I qualified Ms. Watson as an expert for the purpose of giving opinion evidence in the

following six areas:

a. Industry incident rates of SCVFs and casing failures in Alberta, including the

public availability of such information.

b. The applicable regulatory requirements to wellbores, including suspended wells.

c. Industry compliance with wellbore regulations.

d. Subject to the caveat that Ms. Watson was not involved with due diligence at the

relevant time, industry practice on due diligence of wellbores and related

infrastructure, including as related to SCVFs and casing failures in a purchase and

sale transaction.

e. Industry practice on the inspection, monitoring, detection and repair of SCVFs and

casing failures, including wellbores and related infrastructure.

f. The cost associated with the assessment of repairs to SCVFs and casing failures,

including wellbores and related infrastructure.

11. Alan John Goddard

[203] Mr. Goddard was an expert for Merit. He issued an undated expert report.

[204] I did not qualify Mr. Goddard as an expert.

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12. Keith Murray Braaten

[205] Mr. Braaten was an expert for Merit. He issued an Expert’s Rebuttal Report dated

November 30, 2017.

[206] I qualified Mr. Braaten as an expert for the purpose of giving opinion evidence in the

following five areas:

a. Oil and gas reservoir engineering.

b. The analysis of well data and production performance.

c. The evaluation of oil and gas reserves and resources.

d. Well economics, including the valuation of lost or shut-in production.

e. Field production plans and economic forecasting.

13. Dale Edwin Tremblay

[207] Mr. Tremblay was an expert for Merit. He issued an Expert’s Rebuttal Report dated

November 28, 2017.

[208] I qualified Mr. Tremblay as an expert for the purpose of giving opinion evidence in the

following four areas:

a. The availability and class of utilizing drilling and completion equipment.

b. The impact of the above on possible drilling programs.

c. The timing of drilling programs.

d. Whether NEP could have completed its alleged drilling plans given the above.

14. John Williams

[209] Mr. Williams was an expert for Merit. He issued an Expert’s Rebuttal Report dated

November 30, 2017.

[210] I qualified Mr. Williams as an expert for the purpose of giving opinion evidence in the

following four areas:

a. The valuation of businesses.

b. The assessment and qualification of economic loss.

Page: 32

c. The calculation of damages relating to the loss of production and loss of

opportunity.

d. Methods of calculating economic loss.

C. Background – The Parties and Transaction

1. The MEC OpCo Evaluation

In 2011, NEP was enticed by the potential outlined in the marketing materials provided

by Merit. It initiated an evaluation stage in its advance toward the Share Transaction.

During the evaluation stage, a purchaser is typically granted access to limited information

in a data room for the purpose of doing “a calculation of how much oil and gas is left in the

ground and what is it worth. What’s it going to cost to produce it. What’s it going to cost to

develop it”.

In the evaluation stage, NEP retained a number of consultants. Niven Fischer was

retained to assess operational issues. Netherland Sewell was retained to perform an independent

analysis of the reserves of MEC OpCo, and perform sensitivity runs.

The evaluation phase is distinguishable from the due diligence phase. During the due

diligence phase, the assumptions made during the evaluation phase are validated.

NEP executed a standard form confidentiality agreement. It was then granted access to

Merit’s virtual data room (the “VDR”).

Merit then gave NEP a presentation. Merit described the formations and “upside” that

they identified in each field.

After the presentations by Merit, Mr. Bud Newton determined that the Leduc Field was

“the legacy asset of Alberta”. He made this initial assessment because of the size, number of

formations, age and the way the Leduc Field had been developed (or not developed) in recent

years.

Mr. Bud Newton was particularly interested in the “upside” or “previously unquantified

opportunity to make more oil and gas” that he saw in the Leduc Field. From his perspective, the

Leduc Field was made up of four producing zones: the Nisku/D2 (the “D2”), the Leduc/D3 (the

“D3”), the Blairmore ZZZ/Ellerslie (the “Blairmore”) and the Wabaman.

While Mr. Bud Newton knew that the D3 was a reliable and established play with

quantifiable upside, he saw considerable potential in drilling the D2. He made that assessment

because 90 percent of MEC OpCo’s production was from the D3, and only two wells were

producing from the D2.

The particular “upside” that NEP saw in the D2 was the opportunity to apply horizontal

drilling techniques to prove additional reserves. Based on his knowledge and experience, he was

hopeful that these additional reserves would be a “home run”.

With the assistance of Netherland Sewell, NEP ran numerous calculations to determine

what the cash flows might be realized from the Transaction Assets. The cash flow projections

were based on different drilling plans, cost inputs, and market conditions. Those calculations

Page: 33

were incorporated into an internal Kayne Anderson model that worked backward from the cash

flow return required and exit date to sell for an appropriate purchase price (the “Waterfall”).

In the eight versions of the Waterfall reviewed at trial, Kayne Anderson forecast an exit

date of December 2014.

Based on its calculations, Kayne Anderson created an internal assessment of the

investment (the “Kayne Assessment”). While Mr. Bud Newton was confident in the “upside” in

the D2, it was not incorporated into the Kayne Assessment because there was limited data

available to establish the economics.

The NEP plan was to drill up and sell the Transaction Assets in some form no later than

2014. NEP calculated that by the target 2014 exit date, the Transaction Assets would need to be

producing approximately 8,000 barrels of oil equivalent per day (“BOE/Day”) to deliver the

return it had promised its investors. NEP set its development goals accordingly.

NEP developed an aggressive, multi-rig drilling plan to reach its production target and

increase the value of the Transaction Assets before selling them. In broad strokes, NEP had

planned to drill between 100 and 250 new wells within three years after it purchased the

Transaction Assets. Mr. Bud Newton communicated these plans to Mr. Plunk, Mr. Carr and his

soon to be employees before the September 2011 Closing Date.

NEP offered to purchase the Transaction Assets for $170,000,000 by way of a share deal.

This offer was based on the evaluation that NEP placed on the Transaction Assets that were held

by MEC OpCo.

After being led to believe that there were legitimate competing offers, NEP increased its

bid to $180,000,000. In cross-examination, Mr. Plunk conceded that there was only one offer. As

a result, Mr. Plunk falsely led NEP to believe there were other legitimate competing offers.

2. The Transaction

The VDR contained a draft version of the 2011 SPA. NEP provided its first comments on

the draft 2011 SPA on June 15, 2011. The parties then began negotiating the terms of the 2011

SPA.

The due diligence process preceded the signing of the 2011 SPA. The due diligence

undertaken by NEP (including public searches, title reviews and site visits) was industry

standard.

To facilitate the unique sequence of the Share Transaction, Merit and NEP entered into

an exclusivity agreement on June 24, 2011. That gave NEP three weeks “to conduct” its title and

environmental due diligence.

NEP could not commence its regulatory due diligence process until the first draft of

disclosure Schedule D was provided to NEP on July 22, 2011. That was the case because NEP

had no idea what non-compliances might exist within the thousands of pipelines, wells and

facilities that comprised the infrastructure which MEC OpCo had been operating for eight years.

On August 18, 2011, the parties signed the final version of the 2011 SPA. The transaction

closed on September 30, 2011.

Page: 34

D. Regulatory Non-Compliance – MEC OpCo

In December 2011, Mr. Bud Newton discovered the Transaction Assets were plagued by

numerous regulatory non-compliances. The evidence is that Ms. Hall revealed the extent of the

sweet-to-sour issue. She also disclosed that many of the non-compliances were well known by

MEC OpCo before the September 2011 Closing Date.

Mr. Bud Newton learned that matters disclosed on Schedule D were not “potential” non-

compliances that could be remedied with some paperwork. Instead, they were actual known non-

compliances that would require a material capital investment to remedy. Upon learning that some

of the regulatory non-compliances posed a threat to the lives of people living in and around

Devon, NEP immediately shut-in all infrastructure and production that posed a danger to health

and safety.

Mr. Bud Newton reviewed Schedule D to ensure that he had not missed the disclosure of

these serious non-compliances. He concluded that he had not missed the disclosure of the non-

compliances.

Mr. Bud Newton emailed Ms. Hall and asked her for the truth. He specifically asked Ms.

Hall to reword Schedule D to reflect the truth.

NEP undertook a review of the infrastructure and facilities that it had acquired with the

acquisition of MEC OpCo. NEP took this step to determine the path forward.

The review by NEP resulted in the discovery of numerous longstanding regulatory non-

compliances inherent in the Transaction Assets. NEP promptly moved to disclose these to the

Regulator through a formal “self-disclosure process”.

1. Pipelines

The review of the pipeline infrastructure acquired by NEP revealed that MEC OpCo: (i)

had operated pipelines in contravention of its licences; (ii) had not properly discontinued or

abandoned pipelines; and (iii) had not maintained proper depth of cover on a number of

pipelines. The evidence is that approximately 90 percent of MEC OpCo’s pipelines were

improperly licensed.

Mr. Kevin Chow was engaged to assist with the self-disclosure of the pipeline issues.

When NEP retained him, Mr. Chow was a partner with Bissett Resource Consultants. He is an

engineer with experience in hazards, project management and emergency management.

He testified in direct examination that his firm had never encountered anything this large

before in terms of regulatory self-disclosure. In fact, Mr. Chow said he had “never seen a field to

get 90 percent wrong...”.

a. Sweet-to-Sour

The Regulator outlines its requirements for pipelines containing sour products in

Directive 56. The directive dictates the materials and methods to be used when constructing a

pipeline containing more than a specified concentration of H2S. They must meet certain

standards.

Pipelines must be licensed for the highest concentration of H2S that they might be

exposed to from any well to which they are connected. In addition to the licencing requirements

for construction materials and methods, any pipeline or facility handling sour products is

Page: 35

required to have an Emergency Response Plan (“ERP”). The ERP is to be reviewed on an annual

basis.

As mentioned above, Mr. Bud Newton first learned of the magnitude of the sweet-to-sour

problem in the Leduc Field in December 2011. That is when Ms. Hall communicated Mr. Kent

Wimble’s risk assessment to him.

Mr. Wimble advised that MEC OpCo had been operating 144 pipelines in excess of their

permitted H2S content. Of those 144 pipelines, 107 pipelines needed an engineering assessment,

and 95 pipelines needed material testing.

Most concerning, three of the non-compliant pipelines ran through Devon. That posed a

serious risk to public safety.

Mr. Chow conducted an analysis of the consequences of a failure in two of those

pipelines by analyzing: (i) the products being carried by the pipelines; (ii) the pressures of the

pipelines; and (iii) the absence of any automated shut-down system. As a result of that review,

Mr. Chow informed NEP that a failure of either of those pipelines could fill the air with deadly

concentration of H2S.

Mr. Chow also provided a visual representation of the danger posed by the pipelines.

That presentation illustrated that the plume released by the pipelines would fill numerous homes

and a school with enough H2S to immediately cause serious health effects. His evidence was that

if a leak occurred, the residents and students would not be able to find shelter in time.

In direct-examination, Mr. Chow described the “large hazard and danger to the public” as

a “ticking time bomb”. He described the health effects, the deaths and inability of NEP to do

anything about it in the event of a leak.

After receiving the assessment from Mr. Chow concerning the risks to the public, Mr.

Bud Newton directed the immediate shut-in of all production north of the NS River. The purpose

of that shut-in was to prevent sour products from being transported through the non-compliant

pipelines in Devon.

b. Discontinued Pipelines

NEP also discovered that MEC OpCo had not discontinued or properly abandoned

pipelines that were no longer in operation. When a pipeline is inactive for more than 12 months,

the operator is required to take appropriate action to isolate it from the rest of the pipeline

network, clean it and protect it from corrosion. The operator is also required to change the status

of the pipeline’s licence with the Regulator. The discontinuation of inactive pipelines is governed

by the Alberta Pipeline Rules, AR 91/2005: Part 10 section 82.

The evidence is that MEC OpCo failed to suspend and properly pig over 220 pipelines.

The further evidence is that MEC OpCo failed to report that 252 of the pipelines listed as active

had not been operated in many years.

c. Depth of Cover

The evidence is that MEC OpCo had not maintained the proper depth of cover over its

pipelines. The depth of cover required for pipelines is governed by section 83 of the Alberta

Pipeline Rules and CSA Z662.

Page: 36

In normal circumstances, the required depth of cover for a pipeline is a minimum of 0.8

meters. The Regulator can compel an operator to maintain the depth of cover on all of its

pipelines, even after abandonment: section 25 of the Pipeline Act, RSA 2000, c P-15. Annual

surveys of pipelines for depth of cover are required.

NEP determined that the pipelines under the NS River did not have proper cover. Indeed,

the pipelines were exposed in the NS River.

NEP also conducted a survey of the depth of cover of the remainder of the pipeline

system. As a result of that survey, NEP identified at least 64 pipelines that were exposed above

ground. This was contrary to the regulations.

The photos taken of the exposed pipelines were in evidence. Those photos reveal that

most of the exposed pipelines were several feet above ground, instead of being appropriately

buried.

Mr. Woloszyn testified as a lay witness. He worked for a company called Oil Country

Locating, which often contracts through a company called Line Finders Ltd. The focus of Mr.

Woloszyn’s employment with these businesses is in the location of pipelines and other utilities.

He testified that he had been involved in locating pipelines in Alberta for approximately 15

years.

Mr. Woloszyn started to work for NEP in 2012, and continued to work for the company

up to the time of trial. He was a lay witness. I found his testimony informative. I also found him

to be creditable and reliable.

In direct examination, Mr. Woloszyn remarked that he had never seen the magnitude of

pipeline exposure that he found in the Leduc Field. He took photographs of the exposed

pipelines. Based on my review of the photographs in evidence, the magnitude of this non-

compliance, and the considerable vegetation that had grown under and around the pipelines make

it difficult to believe that these pipelines were not exposed as at the September 2011 Closing

Date.

Mr. Webster also provided evidence concerning the depth of cover issue. He was

qualified as an expert in this trial. I outlined his qualifications above. I found Mr. Webster to be

an extremely qualified expert, including in respect of the operation and remediation of upstream

oil and gas pipelines and related infrastructure within the applicable regulatory framework.

It was Mr. Webster’s opinion that because of the nature of the exposures and types of

pipelines, it was unlikely that the exposures were recent events. I accept Mr. Webster’s evidence

on this point. His opinion is consistent with my common-sense observations of the photographs

taken by Mr. Woloszyn.

2. Facilities

Directive 56 issued by the Regulator governs the licencing of oil and gas facilities which

handle sour products. The Directive sets out the requirements for safety, recovery of gases and

prevention of releases into the atmosphere.

As part of a licencing application or change, an engineering firm is required to represent

that the particular facility meets all applicable engineering and safety standards. To confirm the

facility meets those standards, an engineer must be able to verify that the equipment and piping

Page: 37

in the facility are fit for sour service. An engineer cannot just assume that they are fit for sour

service.

NEP discovered that a number of the facilities that it had inherited from Merit were not in

compliance. NEP retained Caber Engineering Inc. (“Caber Engineering”) to assess the

regulatory and engineering compliance of the major facilities previously operated by MEC

OpCo.

Caber Engineering used its sour specifications to determine whether each facility was fit

for sour service. It then conducted site visits to inspect the facilities, and reviewed the

documentation available. If, after exhausting all possible avenues for investigation, including

contacting vendors for further information and “entertain[ing] all possible options”, Caber

Engineering was still unable to confirm that a component of the facility was fit for sour service,

it made the reasonable and conservatively safe assumption that it was not and recommended

replacement. This was a judgment call by Caber Engineering.

In the case of the 11-20 Facility, 9-16 Facility, 7-4 Facility and 3-3 Facility, Caber

Engineering determined that the licencing was incorrect. The evidence is that physical changes

had to be made to each of those facilities to operate them in compliance with the relevant

regulations.

The evidence concerning the facilities involved some expert testimony. Mr. Foley was

one such expert. He was qualified as an expert in this trial. I outlined his qualifications above. I

found Mr. Foley to be credible and reliable in the areas within which I qualified him as an expert,

including in respect of the operation and remediation of upstream oil and gas facilities and

related infrastructure within the applicable regulatory framework.

a. 9-16 Facility

The evidence is that 9-16 Facility was licensed as a C350 (sour) Satellite. It needed to be

re-licensed as a D421 Multiwell Battery.

During the re-licencing process, Caber Engineering determined that the flare system at

the 9-16 Facility was not properly designed for sour service. Caber Engineering also identified

that a number of facility components were not suitable for sour service, and concluded that the

design of the facility did not meet regulated spacing requirements.

The purpose of Caber Engineering’s recommendations was to ensure that the facility was

suitable for sour service. The unchallenged opinion of Mr. Foley was that the recommendations

of Caber Engineering were reasonably required to make the facility sour service compliant.

The evidence is that in March 2014, a tank at the 9-16 Facility failed and caused a

release. This failure caused NEP to re-examine the design of both tanks at the 9-16 Facility.

Caber Engineering determined that the pressure vacuum release valves on the tanks had

been set by MEC OpCo above the pressure rating for the tanks themselves in order to operate.

That caused the tank failure.

In addition, Mr. Jeremy Johnson, a Senior Operations Engineer with NEP, determined

that the tanks were not compliant with API650, as required by regulation. He was a lay witness

in this case.

Page: 38

To remedy this issue, the tanks were replaced. The replacement tanks had an appropriate

pressure rating and gas blanketing system.

After the September 2011 Closing Date, NEP also discovered that the 9-16 Facility had

been constructed within the right-of-way for Highway 60. That is, the 9-16 Facility had not been

properly setback from the highway. The evidence is that Alberta Transportation will require the

facility to be relocated for highway expansion in the future.

b. 11-20 Facility

At the September 2011 Closing Date, the 11-20 Facility was licensed as a B030 (sweet)

Multiwell Battery and a D440 Compressor Station. In contrast to its sweet licence, the Multiwell

Battery was receiving sour product. The 11-20 Facility had to be licensed as a sour facility to

comply with regulations.

Caber Engineering assessed the 11-20 Facility. It determined that the flare system,

vapour recovery unit, tanks and numerous valves, fittings and instruments were not suitable for

sour service.

Mr. Foley also determined that the vapour recovery unit was not suitable for sour service

because it would release to atmosphere. Further, the flare knock-out drum did not have the

required secondary containment.

Paralleling the 9-16 Facility, the tanks on the 11-20 Facility property and relief system

were improperly designed. That improper design was a concern because a similar flaw at the 9-

16 Facility had already led to a release.

Mr. Foley opined that it was reasonable to replace all ancillary equipment that could not

be confirmed as sour suitable without materials testing. While the licensed rates of 11-20 Facility

changed, there was no physical work done that resulted in increased capacity. Rather, all the

costs incurred were to meet regulatory compliance, other than perhaps a $5,000 item which I did

not view as material.

c. 3-3 Facility

The 3-3 Facility was not licensed at all. Further, to the knowledge of Merit, it could not

be licensed.

NEP learned after closing that there was no prospect of licencing the 3-3 Facility for sour

service. Caber Engineering did a site visit. It determined that the majority of the components of

the 3-3 Facility were not suitable for sour service. Indeed, through his direct observations of the

3-3 Facility, Mr. Foley confirmed that it had not been designed for sour service.

Based on the evidence, the 3-3 Facility: (i) was not designed for sour service because it

did not have a flare system, as required for sour facilities; and (ii) could not be economically

converted for sour service.

d. 7-4 Facility

The 7-4 Facility was licensed as a sweet compressor station. However, it was handling

sour products. When Caber Engineering attempted to assess the 7-4 Facility for sour suitability,

it found “sparse information”.

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Mr. Foley reviewed the configuration of the 7-4 Facility. He determined that it was more

economical to replace components of the 7-4 Facility than to perform materials testing in an

attempt to qualify them for sour service. He was particularly concerned because there was no

indication where the equipment was sourced, who built the components and how they were

welded.

Based on the evidence, the 7-4 Facility: (i) was not designed for sour service; and (ii) it

was more economical to replace components of the 7-4 Facility than to perform materials testing

given the absence of comprehensive documentation.

3. Surface Casing Vent Flows

A SCVF occurs when either: (i) gas from below the surface migrates up through the

surface casing of the well, and escapes through a vent attached at the wellhead; or (ii) the casing

of the well is compromised and gas from inside the casing migrates up the annulus into the

surface casing, and escapes through the surface casing vent attached at the wellhead.

Interim Directive 2003-01 issued by the Regulator establishes the protocol for the

detection, monitoring and repair of SCVFs and casing failures. All SCVFs must be reported to

the Regulator within 30 days of being identified.

The directive effectively classifies SCVFs into two categories: (i) serious; and (ii) non-

serious. SCVFs that are serious or deemed serious must be repaired within 90 days of being

discovered.

Non-serious SCVFs must be monitored on a yearly basis, for a minimum of five years. A

non-serious SCVF can be resolved by proving to the Regulator that the flow has died out

naturally. However, this can be done only after multiple negative tests over an appropriate period

of time to avoid false negatives.

By April 2012, NEP had discovered 30 wells that had active SCVFs and a further 37

required more testing to confirm. To ensure that its testing regime was not compromised by

winter conditions, NEP continued its SCVF testing program into the summer of 2012.

By July 2012, NEP had completed its testing of wells. Through that testing, it determined

that a total of 41 wells had active SCVFs.

4. Suspension Requirements for Wells – Directive-13

As mentioned above, D-13 governs the suspension and abandonment requirements for

inactive wells. Yearly inspections of well sites are required.

D-13 classifies wells into different risk categories, being low, medium and high. It

outlines how and when inactive wells are to be monitored, reported and suspended. While work

is needed for all D-13 wells, each category of well has different requirements for monitoring,

physical downhole work and reporting to the Regulator.

Low-risk wells do not require any downhole work when they stop producing. However,

after 10 years they are classified as medium-risk wells. Medium and high-risk wells require

actual downhole work, such as the setting of packers and plugs.

NEP reviewed its wells and determined that 291 wells that were not compliant with D-13.

Of those, 120 wells required physical downhole work to bring them into compliance.

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E. Merit’s Knowledge – Regulatory Non-Compliance

NEP only became aware of the substantial non-compliances itemized above months after

the September 2011 Closing Date. An investigation by NEP subsequent to closing revealed that

the employees of MEC OpCo had been raising alarm bells for years. Further, based on the

evidence, all of the regulatory non-compliances that NEP had to self-disclose to the Regulator

had been brought to the attention of the Merit management prior to, or during the process of,

drafting Schedule D.

1. Witness Credibility

a. General Comments

The determination of who knew what and when turns on the record formed by the

contemporaneous documents that are in evidence and testimony of the various witnesses. My

assessment of the credibility of the witnesses is directly relevant to this determination.

In assessing the credibility of a witness, I consider whether the evidence was internally

consistent, whether the evidence was corroborated or contradicted by other witnesses, whether

the evidence was corroborated or contradicted by contemporaneous documents, and the

demeanor of the witness at trial: Bradshaw v Stenner, 2010 BCSC 1398 at para 186, aff’d 2012

BCCA 296.

At trial there was a contrast between the evidence given by NEP’s witnesses and the

evidence given by Merit’s witnesses, both in terms of consistency and demeanor. The evidence

given by the NEP witnesses was generally internally consistent and also consistent with the

contemporaneous documents and other witnesses.

Further, as a general comment, the NEP witnesses were forthright and direct in answering

questions on cross-examination. In contrast, the evidence given by certain witnesses from Merit

frequently changed from discovery to trial, and sometimes from direct to cross-examination.

Some of the witnesses from Merit contradicted each other on material points. In addition,

some of the witnesses from Merit refused to answer direct questions put to them in cross-

examination, preferring to obfuscate. On occasion, I had to direct them to answer.

The rule in Browne v Dunn (1867), 6 R 67, (HL) was touched on during the trial. By

way of review, if counsel intends to impeach a witness, they must give that witness notice of this

intention: see Sopinka, Lederman and Bryant, The Law of Evidence in Canada, 5th ed (Toronto:

LexisNexis, 2018) at para 16.210 [Sopinka]. It is important to note that Browne v Dunn goes to

credibility, and is rooted in fairness: Sopinka at para 16.212.

The rule in Browne v Dunn applies to both cross-examination and closing arguments:

Sopinka at para 16.213. The purpose of the rule is to give the witness notice, and the opportunity

to offer an explanation and to defend their own character. Counsel and the Court were sensitive

to this issue during the trial, and it generated much discussion during the hearing.

b. NEP’s Lay Witnesses

NEP called a number of lay witnesses. Some discussion of those who contradicted the

evidence of the Merit witnesses is instructive.

Page: 41

Mr. Bud Newton

Prior to taking the stand in this trial, Mr. Bud Newton was subjected to 13 days of

discovery. During this trial, he testified for seven days.

Despite his volume of testimony, the evidence provided by Mr. Bud Newton was

consistent. Even through repetitive cross-examination, Mr. Bud Newton answered questions in a

forthright manner, and did not stray into argument or unrelated talking points.

Ashley Cross

Ms. Cross is a former employee of both NEP and MEC OpCo. She is a current employee

of the Regulator. She took time away from her work to give evidence at trial.

Ms. Cross had no reason to mislead the Court or embellish her evidence. The testimony

of Ms. Cross was corroborated by her contemporaneous emails. Her testimony was also

consistent through both her evidence in direct and cross-examination.

Darcy Turner

Mr. Turner was a former employee of both NEP and MEC OpCo. He has not been

employed by either entity for many years.

Mr. Turner is retired. His evidence was corroborated by his contemporaneous

correspondence. He was unwavering in cross-examination.

Mr. Shihinski and Ms. Hall

Both Mr. Shihinski and Ms. Hall were employees of MEC OpCo, and they carried on

their employment with NEP after the Share Transaction. Mr. Shihinski and Ms. Hall gave

evidence at trial that was not only consistent with their discovery evidence, but also consistent

with their own contemporaneous correspondence and evidence of other witnesses at trial.

Mr. Shihinski and Ms. Hall were placed in the difficult position of having to admit to

participating in the deception of their current employer. Both Mr. Shihinski and Ms. Hall were

emotional in respect of their evidence on this point.

Mr. Shihinski was contrite in his admissions. Ms. Hall was visibly upset by her role in

during the sales process. Their willingness to admit wrongdoing, and the demeanor with which

they admitted such wrongdoing reinforce their credibility: R v LRS, 2016 ABCA 307 at paras

14-17.

c. Merit’s Witnesses – Lay and Expert

Mr. Hagge

Merit asserts that Mr. Hagge was credible. The Defendants outline that he was the lead

lawyer and understood that members of the Deal Team had different roles. Merit uses Mr.

Moffitt as an example, pointing out that he took the lead on the schedules. Given that context,

Merit asserts that Mr. Hagge was not involved in every detail. I accept Merit’s position to a

point. However, when I view the aggregate of the evidence before me, I disagree with its

assertion.

Throughout his cross-examination, Mr. Hagge refused to answer straightforward

questions. I found that he attempted to editorialize and argue Merit’s position from the witness

Page: 42

box. Mr. Hagge became so evasive that I had to caution him to answer the questions put to him,

without editorializing.

Of real concern to me, Mr. Hagge repeatedly denied any knowledge of the sweet-to-sour

issue, despite receiving correspondence on the issue from numerous sources. My concern is

heightened by the fact that Mr. Carr expressly testified that he discussed the issue with Mr.

Hagge on numerous occasions.

Another concern that I had of Mr. Hagge was how he dealt with emails. Based on my

assessment of the evidence, he was selective not only in what emails he read, but what portions

of them he read.

Based on my review of the evidence and assessment of his testimony, I find Mr. Hagge

neither credible nor reliable.

Mr. Carr

During his cross-examination, Mr. Carr sometimes failed to answer the questions put to

him. Instead, he migrated to talking points in an apparent attempt to argue the Merit case. On

more than one occasion, I had to direct Mr. Carr to answer the questions put to him in cross-

examination.

His testimony on certain key points shifted. This was illustrated in his answers

concerning: (i) how MEC OpCo handled SCVFs; and (ii) meetings that occurred during the

drafting of Schedule D.

Additional components of Mr. Carr’s testimony caused me concern. His evidence in

respect of his knowledge of the RAE Report changed repeatedly. Three examples evidence my

concerns.

First, Mr. Carr testified that he had no recollection of seeing the RAE Report before his

termination. However, in cross-examination, he conceded that Ms. Hall had actually attended his

office and provided it to him before he authorized its distribution to Mr. Moffitt.

Second, he admitted that he knew that the Hall July 2011 SCVF Email contained the

RAE Report. Further, he admitted that he expected the report would contain specific non-

compliant pipeline licences.

Third, at one point at trial, Mr. Carr testified that MEC OpCo repaired as few as 5 SCVFs

per year. That number grew to 10 to 15 per year, then ballooned to 10 to 20 per year. In cross-

examination, the number dwindled back to no more than 5 to 10 per year. When confronted with

the actual lease operating statements from 2009, Mr. Carr conceded that the lease operating

statements revealed costs for no more than a single SCVF repair.

The testimony given by Mr. Carr was internally inconsistent on occasion. In addition, his

testimony was frequently contradicted by the evidence of other witnesses from Merit. This

contradiction was illustrated in the context of his testimony concerning the Divino Meeting. In

particular, Mr. Carr testified that during the Divino Meeting while they were reviewing Schedule

D, Mr. Plunk led the discussion about what RAE Engineering had been doing. In contrast, Mr.

Plunk denied having any such knowledge at that point in time. Indeed, Mr. Plunk testified that he

only learned of RAE Engineering at the Divino Meeting.

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I was further concerned about the testimony of Mr. Carr because of what I perceived to

be a selective memory. He demonstrated an implausible memory on matters that were apparently

exculpatory. However, he was unable to remember conversations or correspondence regarding

the specifics of regulatory non-compliance or matters that may have been inculpatory.

Based on my review of the evidence and assessment of his testimony, I find Mr. Carr

neither credible nor reliable.

Mr. Moffitt

Mr. Moffitt denied that he had ever been aware of any public safety issues arising from

the Transaction Assets. The evidence does not support the assertion advanced by Mr. Moffitt.

After his first meeting with Ms. Hall, Mr. Moffitt typed the words “EPZ/ERP/public

safety concerns” into what would become the first draft of Schedule D. In cross-examination, he

confirmed that he had created that first schedule. The evidence supports the view that he was

alerted to public safety issues.

Mr. Moffitt was impeached on the broad statement in his direct examination that Ms. Hall

never raised any issues with the accuracy of drafts of Schedule D. He made this assertion

notwithstanding a volume of contemporaneous emails sent by Ms. Hall in which she highlighted

the inaccuracies she had identified. Mr. Moffitt’s credibility was also undermined by his refusal

to admit points of fact that he had already admitted in discovery.

Merit alleges that NEP is unfairly picking on Mr. Moffitt for not having “perfect recall”

of his discovery evidence on this point. With respect, that argument ignores the purpose and

effect of the original evidence, and Mr. Moffitt’s attempt to side-step it.

The impeachment focused on his refusal to make the clear admission that Schedule D

was not something that could just be ignored as some separate legal creature called a “carve-out”

schedule. Rather, it was part of the 2011 SPA as a whole and must be treated in the same manner

as the rest of the contract. The impeachment did not focus on his imperfect recollection, of which

we can all suffer from time to time.

Mr. Moffitt admitted during questioning that Ms. Hall had raised issues as to whether

there was proper disclosure on Schedule D throughout the summer of 2011. Notwithstanding that

admission, during his testimony in the trial he tried to deny that Ms. Hall raised any such issues.

Based on that contradiction, Mr. Moffitt damaged his credibility.

Mr. Moffitt also waffled on exactly when he prepared his notes. He first stated that he

prepared his notes immediately after his meeting with Ms. Hall. He subsequently said he could

not remember when he created the notes, but stated that it was shortly thereafter.

In argument, Merit asserted that it failed to see the importance of that discrepancy. There

may not be much to that discrepancy by itself. It depends on the circumstances. Courts generally

take a dim view of the reliability of notes that are changed or made sometime after the event in

question. In this case, the discrepancy takes on a concerning dimension when I view it in the

context of all of the other elements of the evidence given by Mr. Moffitt.

Merit also suggests that the failure to read or recall emails may be explained by

delegation. I do not accept that proposition generally, and in respect of Mr. Moffitt in particular.

It was his responsibility to prepare the 2011 SPA schedules, and make sure that they were

Page: 44

accurate. Further, his responsibility in this regard is emphasized by the fact that Mr. Plunk and

Mr. Hagge were allegedly delegating matters to Mr. Moffitt.

As such, Mr. Moffitt should have reviewed everything. In contrast, after his June 7, 2011

meeting with Ms. Hall, he could not recall reviewing anything of substance. That fact increases

my concern with regard to the reliability of his testimony, and his credibility.

Further, the assertion by Mr. Moffitt that Ms. Hall and Mr. Carr (both non-lawyers)

would revise Schedule D (a legal disclosure schedule) without any need for him to review it for

accuracy is a real concern for me. The suggestion that Ms. Hall and Mr. Carr were responsible

for that task is not delegation. Rather, it is an abdication of his responsibility.

Based on my review of the evidence and assessment of his testimony, I find Mr. Moffitt

neither credible nor reliable.

Mr. Williams

NEP was very critical of Mr. Williams. While he was qualified as a business valuator,

NEP asserted that it was clear that his true expertise lay elsewhere. Amongst other points, NEP

focused on the fact that Mr. Williams had never even completed a "comprehensive" level

valuation, and had done only three "estimate" level valuations.

NEP further highlighted that Mr. Williams conducted no valuation of any level in this

case. Importantly, NEP also had Mr. Williams reluctantly concede that he had made an error.

Based on my review of the evidence and assessment of his testimony, I find Mr. Williams

credible, but not reliable. To emphasize the point, the error that Mr. Williams made does not

affect his credibility. Only his reliability, and only in this instance.

d. Credibility Assessment – Summary Comments

I acknowledge that Merit asks a simple question in the course of its closing argument.

Whose story is credible – NEP’s story or Merit’s?

Merit asserts that the evidence shows that the answer was the same as found by Justice

Wilson: see Wilson 2017 NEP Decision. In particular, Merit asserts that while cleverly woven

together, there are too many aspects of the version of events advanced by NEP that do not fit

together.

Merits suggests that NEP strains credibility to avoid the consequences of its negotiated

agreement, which limit its rights and remedies in the absence of a finding of deceit.

Merit asserts that it tells a story which is consistent with contemporaneous documents,

common sense and modern-day business practices. For reasons that I detail below, I disagree

with the simplistic approach advanced by Merit.

2. Persons of Knowledge

Under the terms of the 2011 SPA, the Vendor’s knowledge was defined to include the

knowledge of an enumerated group of employees selected by Merit. It is important to remember

that the Vendor under the 2011 SPA is Merit ULC.

Section 1.6 of the 2011 SPA reads as follows:

For all purposes of this Agreement, the knowledge of Vendor consists of the

actual knowledge of: General Manager – Gayden Carr, Land – Heather Fofonoff,

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Accounting – Keisha Smith, Director of Operations – Tommy Lambert, Field

Operations – Jason Shihinski, Regulatory – Sheri Hall and Region Manager –

Travis Terpstra together with all other current officers of Vendor and the

Corporation, after making reasonable inquiry of employees and contractors of the

Corporation having supervisory or managerial responsibility for the matter subject

to the applicable representation or warranty…

The Persons of Knowledge were people in management positions associated with the

Canadian assets held by Merit. The Persons of Knowledge were selected by Merit, as

communicated in an email from Mr. Hagge. Mr. Plunk was copied on that email.

In addition to those expressly named, Mr. Moffitt, Mr. Hagge and Mr. Plunk were all

Persons of Knowledge because they were officers of MEC OpCo.

Based on the evidence before me, Mr. Lambert, Ms. Hall, Mr. Shihinski, Mr. Terpstra

and Mr. Carr were collectively, along with Mr. Moffitt, Mr. Hagge and Mr. Plunk, the

individuals trusted and selected by Merit to represent the collective mind of “the company”.

a. Mr. Lambert

[354] Mr. Lambert moved to Calgary from the Dallas office of Merit USA in 2008. He moved

to become director of operations at MEC OpCo.

[355] Throughout the trial, he was described by various witnesses as one of the senior

participants at MEC OpCo involved in the deal. Even Mr. Carr agreed that Mr. Lambert was a

key person and the “number one guy at MEC in Canada for its operations”.

[356] Merit considered Mr. Lambert sufficiently important that not only was he expressly

named as an individual within the Persons of Knowledge group, he assisted Mr. Plunk with

hiring consultants for the divestiture.

[357] During questioning, Mr. Lambert described the sales efforts of MEC OpCo as a

significant component of his job. He was not called as a witness by Merit.

b. Mr. Carr

[358] In his role as Vice President and General Manager, Mr. Carr was in charge of all of

Merit’s Canadian operations. At the time of the Share Transaction, Mr. Carr reported directly to

the President of Merit USA in Dallas, Texas.

[359] In cross-examination, Mr. Carr testified that his responsibilities within MEC OpCo

included overseeing regulatory compliance.

c. Mr. Moffitt

[360] The evidence is that Mr. Moffitt was responsible for preparing all of the schedules for

2011 SPA. He created the first draft of Schedule D, and was responsible for its alterations.

d. Mr. Hagge

[361] Mr. Hagge was General Counsel for both Merit USA and MEC OpCo, and Vice

President of Merit USA at the time of the Share Transaction. He reported to the Senior Vice-

President and Chief Financial Officer of Merit USA at the time of the Share Transaction.

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[362] During the Share Transaction, Mr. Hagge was the legal point-person and assumed the

role of lead legal counsel on the transaction. In this role, Mr. Hagge prepared the draft 2011 SPA

that was provided to NEP, and was intimately involved in its negotiations and drafting.

e. Mr. Terpstra

[363] Mr. Terpstra was considered sufficiently important that Merit: (i) named him as one of

the members of the Persons of Knowledge group; and (ii) invited him to the presentation that the

Merit management and its investment bankers gave to NEP.

[364] Throughout the sales process, Mr. Terpstra had continuing communications regarding the

transaction with the US-based Persons of Knowledge of Merit. Specifically, those individuals

were Mr. Hagge, Mr. Plunk, and Mr. Moffitt.

f. Ms. Hall

[365] Ms. Hall was responsible for staying on top of regulatory non-compliance issues. As part

of the sales process, Mr. Carr provided recommendations to Mr. Bud Newton regarding which

employees he should retain after closing. Mr. Carr described Ms. Hall as the most valuable

employee at MEC OpCo in operations. In cross-examination, Mr. Carr confirmed that he would

defer to expertise of Ms. Hall in all regulatory matters, including pipelines, SCVFs, facilities and

D-13.

g. Mr. Shihinski

[366] Mr. Carr described Mr. Shihinski as the “top field guy”. Similarly, in cross-examination,

Mr. Hagge conceded that Mr. Shihinski was the most knowledgeable employee from a field

operations point of view.

h. Mr. Plunk

[367] Mr. Plunk was in charge of all the acquisitions and divestitures for Merit. At the time of

the Share Transaction, he was Vice President of Business Development at Merit USA.

3. Pipelines – Non-Compliance Knowledge

a. Sweet-to-Sour

The evidence from all former employees of MEC OpCo was that the broad nature of the

sweet-to-sour licencing issue, the safety risks that it posed and the magnitude and the costs of the

work required to resolve it were widely known throughout the entity. This included management

of MEC OpCo, as well as the employees at the various levels of the organization who made it

their ordinary practice to report regulatory issues up the chain of command.

By August of 2011, the key players at MEC OpCo knew that a large portion of its

pipeline network was operating in contravention of its licences. The key players at MEC OpCo

knew most of those licences could not be amended without incurring significant costs, and that a

number of the pipelines in question posed a risk to public safety.

Ms. Cross went to great lengths to make sure that the Merit management team was aware

of her specific findings, including Ms. Hall, Mr. Shihinski, Mr. Terpstra and Mr. Lambert.

Ms. Cross regularly updated Mr. Lambert and Ms. Hall on her findings on an informal

basis and circulated frequent emails updating them on her findings. This culminated with a

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meeting in which she explained the scope of the licencing problems in the Leduc Field to Ms.

Hall, Mr. Shihinski and Mr. Lambert.

The evidence of Ms. Hall, Mr. Lambert, Mr. Shihinski, and Mr. Terpstra was clear

insofar as they understood that Ms. Cross had undertaken a review of the entire pipeline system

in the Leduc Field to assess licencing non-compliances. The spreadsheets prepared by Ms. Cross

identified numerous pipelines that were carrying sour products in contravention of their sweet

licences.

In cross-examination, Mr. Carr testified that he was aware that Ms. Cross had undertaken

such a review of licencing non-compliances for MEC OpCo and recorded her findings regarding

what specific substances were being transported through which specific pipelines.

Based on the evidence from the contemporaneous documents and the testimony by Ms.

Hall and Mr. Shihinski, the personnel at MEC OpCo were aware that amending the pipeline

licences would require more than paperwork. In particular, the evidence is that the physical

efforts would require an engineering assessment or possibly the installation of liners and the

shutting-in of the Leduc Field.

The read-ins from Mr. Terpstra confirmed that he and others at MEC OpCo had

expressed concerns on more than one occasion that production would need to be shut-in.

The read-ins from Mr. Lambert confirmed that he had a concern for public safety, and

was aware that “dollars and manpower” would be required to achieve compliance. Further, Mr.

Lambert considered the sweet-to-sour issue to be of importance to MEC OpCo, and he indicated

that he had communicated that matter to Mr. Carr. The evidence indicates that this was not a new

revelation. This information had been understood since 2009, and repeatedly communicated to

senior management within Merit.

MEC OpCo’s knowledge of the sweet-to-sour licencing issue dated back to at least 2009,

when Imperial Oil began to take steps to decommission a site it operated in Devon. That site was

known as the 2-34 Imperial Oil Site (the “2-34 Site”).

In cross-examination, Mr. Carr admitted that his knowledge of the sweet-to-sour pipeline

licencing issues dated back to 2009. At that time, several MEC OpCo pipelines connected at a

header located on the 2-34 Site.

The evidence is that to decommission the 2-34 Site, Imperial Oil asked MEC OpCo to

redirect its production from the 2-34 Site. The redirection of its production would have required

MEC OpCo to undertake a series of amendments to existing pipeline licences and possibly apply

for new licences.

The first stage of this project was to determine the licencing statuses of the pipelines

around the 2-34 Site. Ms. Cross was tasked with this job. Upon her initial review of the pipelines

surrounding the 2-34 Site, Ms. Cross identified a number of pipelines that were licensed to carry

sweet products were actually carrying sour products.

Upon making that discovery, Ms. Cross became concerned that these non-compliances

put the public in danger. She even noted the proximity of these pipelines to schools, churches

and hospitals in Devon.

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These concerns were shared by other MEC OpCo employees, including Ms. Hall, Mr.

Lambert, Mr. Shihinski and Mr. Turner. The evidence is that none of those employees expressed

disagreement with that non-compliance information or were confused by it.

Ms. Cross compiled a spreadsheet of her findings in May of 2009. She forwarded her

findings to her superiors, including Ms. Hall and Mr. Shihinski. The spreadsheet prepared by Ms.

Cross at the time identified seven pipelines that were improperly licensed and running through

Devon. Six of those lines were carrying (or could see conditions that would cause the pipelines

to carry) sour products, despite not being licensed to carry any H2S. A seventh line was carrying

H2S in excess of its licensed amount.

At the time of preparing her initial spreadsheet, Ms. Cross was aware that the process of

addressing these pipelines would not be a matter of simple paperwork. Indeed, in her email

enclosing the spreadsheet, she noted that an engineering assessment would be needed, at

minimum. That assessment would include digging up the pipelines for physical inspection, and

the shutting-in of production from a large portion of the field.

The initial discoveries by Ms. Cross in early 2009 caused her to expand the scope of her

investigation of the MEC OpCo pipeline non-compliance. She traced the pipelines which joined

at the 2-34 Site back to the producing wells.

In 2009, Ms. Hall reported to Mr. John Petty. He was an engineer, employed by MEC

OpCo. With the assistance of Ms. Hall and Mr. Petty, Ms. Cross circulated an update on her

broader non-compliance review in June 2009. By that time, Ms. Cross had discovered

approximately 200 non-compliance issues of varying degrees of severity. The evidence is that

the 200 non-compliances were a mixture of various categories.

Ms. Cross had also noted non-compliances with numerous facilities. The non-compliance

included the 3-3 Facility, which she discovered had no licence at all. The 3-3 Facility was

handling sour products.

Ms. Cross noted that these non-compliances may not be able to be independently

resolved without sending up “red flags” with the Regulator. That would risk a production shut-in.

Ms. Cross was aware that a system-wide process of re-licencing these pipelines and

facilities would be lengthy, time consuming and an expensive process. In cross-examination, she

testified that production would have to be shut-in.

In direct examination, Mr. Shihinski and Mr. Turner confirmed that the findings by Ms.

Cross were consistent with their knowledge of the non-compliances in the Leduc Field at the

time.

In October 2009, Ms. Cross circulated an updated version of her spreadsheet, now

incorporating her findings arising from the 3-3 Facility review. This spreadsheet was limited to

major trunk pipelines. This updated sheet identified ten pipelines that were improperly licensed,

nine of which were not licensed to carry any H2S at all.

Ms. Hall had been informed that this could lead the Regulator to undertake a “full field

audit”. Consequently, on October 14, 2009, Ms. Hall had a one-on-one meeting with Mr. Carr, in

which she communicated the findings of Ms. Cross to Mr. Carr in detail. Ms. Hall provided Mr.

Carr with a lengthy summary of the barriers preventing the 3-3 Facility from being licensed.

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In cross-examination, Mr. Carr confirmed this briefing by Ms. Hall. Through his receipt

of this document and this meeting with Ms. Hall, Mr. Carr admitted that he learned that specific

pipelines: (i) were improperly carrying sour products; (ii) might not have been capable of being

re-licensed to carry sour products; and (iii) certainly could not be re-licensed without significant

work being done.

The evidence is that a pipeline ran through Devon. In cross-examination, Mr. Carr

confirmed that he knew of this in October, 2009. He also conceded that Ms. Hall’s knowledge of

what specific information was available at that time was superior to his.

Based on the above evidence, Mr. Carr was informed of the nature and scope of the

sweet-to-sour problem in the Leduc Field no later than October 2009.

By February 2010, after spending 80 percent of her time over an 18-month period

investigating the MEC OpCo pipeline non-compliance issues and reviewing over 1,700

pipelines, Ms. Cross authored the final version of her spreadsheet (the “Cross 2010 Final

Reconciliation Sheet”). She circulated the Cross 2010 Final Reconciliation Sheet within MEC

OpCo.

Based on my review of the evidence, Ms. Cross had identified 64 pipelines that were

transporting H2S in excess of their licences.

In cross-examination, Mr. Carr admitted that as of the first quarter of 2010, he knew that

amendments would be necessary and that there were specific areas of known non-compliance.

He also confirmed in a later cross-examination that he was aware of additional areas of non-

compliance where information still needed to be gathered.

Ms. Cross was confident that the items of concern that she had identified were true

regulatory non-compliances. Her only concern was that there may have been more non-

compliances that she had not been able to identify. In direct examination, both Mr. Shihinski and

Mr. Turner testified that they were similarly confident in her findings.

On May 7, 2010, Ms. Cross convened a meeting at the MEC OpCo office in Calgary to

discuss the findings in her Cross 2010 Final Reconciliation Sheet and the path forward to bring

the licences into compliance. The personnel present at the May 7, 2010 meeting included Mr.

Lambert, Ms. Hall, Mr. Shihinski and Mr. Turner. Ms. Cross also engaged the services of RAE

Engineering to attend the meeting and to assist with what she assumed would be the next step in

her work. Based on the evidence, I infer that Ms. Cross anticipated that she would be

undertaking engineering assessments of the pipelines and applying for the necessary

amendments.

During the May 7, 2010 meeting, Ms. Cross displayed her Cross 2010 Final

Reconciliation Sheet. The group reviewed her findings, with particular focus on the pipelines

that had sweet-to-sour licencing issues. The conversation included how the conversions would

affect operations, the safety risks posed by the improperly licensed pipelines and the work that

would be required to bring them into compliance.

Also projected for review during the meeting was a large map that displayed where the

non-compliant pipelines ran through Devon. Based on my review of the evidence, this prompted

discussions regarding the safety risks posed by these pipelines because of their proximity to a

school, a hospital, a church and a seniors’ housing complex. Notwithstanding that Ms. Hall did

Page: 50

not appreciate the magnitude of the health risk until December 2011, it is clear that the warning

signals were present before the September 2011 Closing Date.

It was confirmed during this meeting that the process of completing the required sweet-

to-sour amendments was not just a paperwork exercise. To the contrary, the process would

involve an engineering assessment to determine the exact location of each pipeline, the exact

flow parameters of each pipeline and the materials and methods used in the construction of each

pipeline. The process would also involve digging up the pipelines to conduct direct assessments

of them.

The meeting participants also discussed that MEC OpCo had limited, if any, pipeline

construction or operation records to assist in completing an engineering assessment. They

discussed that conducting engineering assessments on the pipelines would involve excavating

them, and cutting out sections for testing. This would involve a shut-in of production.

After Ms. Cross presented her findings, the meeting attendees were concerned about both

the safety risk posed by the pipelines in Devon and the scope of work required to achieve

compliance. There was no dispute or confusion over the accuracy of Ms. Cross’ findings or the

work that would be required to achieve compliance.

Based on this evidence, Mr. Lambert and Mr. Shihinski were well aware, as of May 7,

2010, of the scope of the pipeline licencing non-compliance, the safety risks posed by the

improperly licensed pipelines and the significant cost that would be associated with bringing the

pipelines into compliance.

After the May 7, 2010 meeting, Ms. Cross received a proposal from RAE Engineering to

proceed with Phase I of the licence amendment process on 57 specific lines. Since Ms. Cross did

not have the authority to authorize the proposal, she forwarded the proposal to Mr. Lambert. She

copied Ms. Hall and Mr. Shihinski on the email. Mr. Lambert forwarded the proposal to Mr.

Carr.

In cross-examination, Mr. Carr admitted that as at May 2010, he was aware that the MEC

OpCo pipelines were not in compliance and that sour products were running through sweet-

licensed pipelines. He also admitted that Ms. Cross was responsible for addressing those non-

compliances and that RAE Engineering had been engaged to assist her. Indeed, after receiving

the RAE Engineering proposal, he emailed Mr. Lambert and confirmed his approval for this

work.

Mr. Lambert subsequently approved the proposal by signing an Authorization for

Expenditure. He emailed Ms. Cross, stating “We are fine with the costs”, which Ms. Cross

understood to include Mr. Lambert and Mr. Carr.

In cross-examination, Mr. Carr admitted that he knew the time and costs involved would

be high. In particular, he conceded that the cost would be at least “six figures plus” to work with

RAE Engineering on any significant projects going forward.

Based on my review of the above evidence, it is apparent that by May 2010 Mr. Carr, Mr.

Lambert and Ms. Hall understood the scope of non-compliance with respect to pipeline

licencing, and the work that would be required to achieve compliance.

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In August 2010, RAE Engineering issued a report to Ms. Cross confirming the accuracy

of her observations. In particular, RAE Engineering confirmed that there were insufficient

records to complete an engineering assessment on the 57 lines that were being initially assessed.

In October 2010, the Regulator inspected the 12-15 Facility. This inspection was triggered

as a result of a spill that had occurred at that facility in July 2010.

The evidence indicates that the Regulator identified that the H2S content of the line that

leaked did not match its licence. As a result, the Regulator asked MEC OpCo to “[r]eview [its]

system and identify any other lines that may require amendments for the same issue”.

Ms. Hall forwarded this request from the Regulator to both Mr. Lambert and Mr. Carr

because she was concerned about the potential for harsh enforcement by the Regulator. In cross-

examination, Mr. Carr testified that he did not recall if he had read the whole email, as with

many important emails that would otherwise evidence Mr. Carr’s knowledge of the sweet-to-

sour non-compliances.

Despite not remembering the email itself, Mr. Carr did recall discussing the enforcement

action being taken by the Regulator.

To respond to the Regulator’s request, Ms. Hall sought the assistance of Mr. Adam

Maclean and Mr. Wimble of RAE Engineering. In cross-examination, Mr. Carr admitted that he

knew a response to the Regulator was required and was prepared.

On December 17, 2010, Ms. Hall provided a response to the Regulator’s direction. The

response included a spreadsheet labeled “Attachment 2-H2S Content Review.xlsx” (the

“December 2010 H2S Content Review”). The December 2010 H2S Content Review was

prepared by RAE Engineering.

The December 2010 H2S Content Review listed 71 specific pipelines known to be

carrying products that exceeded the H2S content for which they were licensed. While MEC

OpCo was aware that the review of the entire system had not been completed and that there may

be additional similarly situated pipelines that were non-compliant, the company was confident

enough in the accuracy of the information regarding the pipelines specifically identified to

provide it to the Regulator.

In cross-examination, Mr. Carr testified that he would not have allowed information of

this kind to be communicated to the Regulator if he knew it to be inaccurate.

Coincidental with providing the response to the Regulator, Ms. Hall forwarded the

response to Mr. Lambert. Notifying Mr. Lambert in this fashion was in accordance with her

usual practice of keeping him fully informed of all correspondence with the Regulator.

The first substantive technical memorandum from RAE Engineering was delivered to Ms.

Cross in February 2011. It was immediately forwarded to Mr. Lambert, Ms. Hall and Mr.

Shihinski for review.

This first stage of the RAE Engineering work essentially repeated the information

gathering exercise that Ms. Cross had already undertaken. That technical memorandum was a

review of 53 pipelines and listed numerous “Non-Routine” amendments. This was all consistent

with earlier findings by Ms. Cross on the Cross 2010 Final Reconciliation Sheet.

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The evidence is that Ms. Cross went on maternity leave in April 2011. Prior to her

departure, she met with Mr. Lambert, Ms. Hall and Mr. Shihinski to ensure that they each

understood the stage to which the sweet-to-sour project had progressed. Ms. Cross provided a

comprehensive update on the work that RAE Engineering had completed and the amount of

work required before MEC OpCo could proceed with any sweet-to-sour pipeline amendments.

In late April 2011, Ms. Hall wrote to Mr. Lambert and Mr. Terpstra. Based on the

evidence, I infer that the intention of that communication was to ensure that Mr. Terpstra was

aware of the work being undertaken by RAE Engineering. Mr. Lambert was included as a

courtesy. Ms. Hall “had full confidence [Mr. Lambert] was aware of all the services that had

been provided by RAE [Engineering]”.

In her email, Ms. Hall also noted, “Management [is] aware of sweet/sour pipeline issues”.

In direct examination, she explained the “Management” referred to Mr. Carr, Mr. Lambert, and

Mr. Terpstra. Her evidence was Mr. Carr, Mr. Lambert and Mr. Terpstra were all well aware of

the sweet-to-sour issues with pipelines in the Leduc Field. In the case of Mr. Carr and Mr.

Lambert, their knowledge of the issue dated back to 2009.

On July 22, 2011, the Draft RAE Report was issued to Ms. Hall, the content of which

detailed RAE Engineering’s findings to date. Based on a scan of the Draft RAE Report, Ms. Hall

testified that the report confirmed: (i) the earlier findings of Ms. Cross with respect to the extent

of non-compliance; and (ii) that the amendment process would be lengthy, costly and would

involve digging up pipelines and shutting-in production.

Later in the day on July 22, 2011, Ms. Hall forwarded the Draft RAE Report to Mr.

Lambert directly. In her covering email, she provided a brief summary of the findings in the

Draft RAE Report. Ms. Hall also sent the Draft RAE Report to Mr. Terpstra, advising she would

send it to “Tommy [Lambert]/Gayden [Carr] for direction on desire to include in any divest

schedules (or not)”.

On Monday, July 25, 2011, she discussed the Draft RAE Report with Mr. Carr and he

instructed her to send it to Mr. Moffitt. She did so, with a covering email specifically noting that

the attached report related to “licence issues with Leduc field”.

Based on my review of the evidence, the licence issues with Leduc Field had been the

subject of a number of previous emails between Mr. Moffitt and Ms. Hall concerning details on

pipeline non-compliance. In particular, there was an email chain between Mr. Moffitt and Ms.

Hall that touched on the need to obtain details of the pipeline non-compliances.

The evidence is that the Draft RAE Report was again provided to Mr. Terpstra and Mr.

Lambert in the form of an attachment to an invitation to a meeting requested to discuss it. The

read-in evidence from Mr. Terpstra explained that he understood that the Draft RAE Report was

reliable, and had identified approximately 84 pipelines that required considerable work to be

brought into compliance.

While the Draft RAE Report was marked “draft”, Mr. Terpstra and RAE Engineering

considered the document to be in near final form.

Mr. Lambert did not attend the meeting to discuss the Draft RAE Report. Ms. Hall sent

him another email enclosing the RAE Report. This was the third time Mr. Lambert had been

provided with a copy of the Draft RAE Report.

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In her covering email to Mr. Lambert, Ms. Hall explained the contents of the Draft RAE

Report and her comments on it arising from her meeting with Mr. Terpstra. The covering email

also reported that Mr. Adam Maclean and Mr. Keith Sand from RAE Engineering attended the

meeting.

By way of his read-ins, Mr. Lambert admitted that he understood that the Draft RAE

Report listed 84 pipelines requiring amendments, 40 pipelines requiring corrosion assessments

and 25 pipelines requiring material testing. Mr. Lambert confirmed that he had no reason to

doubt those conclusions. Mr. Lambert also acknowledged he was aware that Ms. Hall and Mr.

Terpstra had met with RAE Engineering to discuss the Draft RAE Report.

Ms. Hall believed that it was her role to provide her knowledge of regulatory non-

compliances to management for the purpose of allowing senior management to then make proper

disclosure to NEP. Based on the evidence before me, she specifically sought permission from

Mr. Carr before broadly circulating the Draft RAE Report. After speaking with Mr. Carr about

the RAE Report, Ms. Hall forwarded that document to a number of other Merit employees,

including Mr. Moffitt, Mr. Shihinski, Mr. Terpstra and Mr. Carr.

The arrival of the Draft RAE Report was no surprise. By way of read-ins, Mr. Lambert

confirmed that he was waiting for the Draft RAE Report. As Ms. Hall explained in her

testimony, “Everyone at MEC is completely aware that we have a pipeline issue and it’s been

known for years. So, this is the report that we’ve been waiting for quite a period of time, and this

is not a new or an unknown issue”.

Based on the evidence, Mr. Lambert had considerable dealings in respect of RAE

Engineering. He had been made aware that the report was being prepared for some time.

During the sales process in the summer of 2011, Ms. Hall communicated to Mr. Carr and

others that a report from RAE Engineering would be issued imminently, listing specific pipelines

that were out of compliance.

In cross-examination, Mr. Carr conceded that Ms. Hall and Mr. Lambert had been

regularly updating him on the RAE Engineering progress, and that he knew a report of some

kind would be coming from RAE Engineering. He also acknowledged that Mr. Lambert was the

person most responsible for keeping him up-to-date on the progress of the review by RAE

Engineering.

In direct examination, Mr. Shihinski confirmed that upon receiving the RAE Report, he

reviewed it. The report corroborated his long-established understanding that there was a broad

sweet-to-sour non-compliance issue in the Leduc Field. Mr. Shihinski was aware that

considerable work would be required to remedy the sweet-to-sour non-compliance issue in the

Leduc Field. It was understood production would have to be shut-in to accomplish that corrective

work.

By way of read-ins, Mr. Lambert also confirmed that he understood the affected pipelines

would have to be shut-in during the testing.

By way of read-ins, Mr. Terpstra confirmed that his understanding of the scope of

licencing non-compliance issues gelled when he received the RAE Report. The evidence is that

Mr. Terpstra understood the Draft RAE Report to be reliable and accurate.

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Based on the evidence, MEC OpCo took no steps to amend the licences of sweet-licensed

pipelines carrying sour products prior to the September 2011 Closing Date. The company

remained out of compliance.

By way of read-ins, Mr. Lambert confirmed that, in the course of dealing with the United

Hunter dispute, he communicated the following three issues to Mr. Carr and Mr. Hagge: (i) the

sweet-to-sour issues; (ii) RAE Engineering’s involvement with the sweet-to-sour issues, and (iii)

the “can of worms” that the sweet-to-sour issues would open with the Regulator.

Reaffirming the above, Mr. Carr testified in his direct examination:

...after our work with RAE Engineering over the several months, and practically a

year at that time, we realized there was going to be a problem for them to tie into

the line that they wanted to tie in for that well.

But Tommy was letting me know there was a problem, they were doing some

follow-up, not sure we want United Hunter to tie into a certain line we have at

Leduc. RAE ENGINEERING is letting us know this could be an issue since we’re

still gathering all the information associated with our pipeline system.

I acknowledge that these issues only became a concern at about the time NEP made its

offer to purchase the Transaction Assets in the summer of 2011. In cross-examination, Mr. Carr

testified that if they allowed United Hunter to tie in its well, Merit was concerned that MEC

OpCo might be subject to additional regulatory scrutiny because “you don’t want the ERCB

coming in at any time” during a sale. In particular, Mr. Carr admitted that in September 2011 he

was aware of the effect that the “can of worms” opened by United Hunter would have on the

Share Transaction.

As the dispute with United Hunter continued, Mr. Carr involved Mr. Hagge, Mr. Moffitt

and Mr. Plunk. Mr. Carr explained to them that the pipelines that United Hunter was seeking to

tie into were not licensed to carry the sour products that the well would produce. He had the

same concerns about the licencing of the downstream facilities.

Notwithstanding these concerns, MEC OpCo did not want to “open a can of worms” with

the Regulator while there was a sales process in place. Among others, Mr. Carr, Ms. Hall and

Mr. Lambert referred to the United Hunter can of worms during their respective evidence. The

evidence is that Mr. Hagge received an email with this information, but apparently did not read

the three lines that referenced the sweet-to-sour issue in respect of United Hunter. I infer that

Merit was concerned that the pipeline non-compliance would become public if the Regulator

became involved.

b. Discontinued Pipelines

As a result of the obvious safety risks, the focus of the pipeline review by Ms. Cross was

on sweet-to-sour non-compliance. Notwithstanding that focus, Ms. Cross also identified 210

pipelines that were improperly licensed as operating, when they were actually discontinued or

abandoned.

Ms. Cross had circulated the Cross 2010 Final Reconciliation Sheet within the company.

MEC OpCo convened a meeting of its senior operations managers to discuss its findings. Based

on the evidence, it was common knowledge within MEC OpCo that: (i) the company had

Page: 55

hundreds of pipelines improperly licensed as operating; and (ii) actual field work would be

necessary to bring them into compliance.

c. Depth of Cover

In direct examination, Mr. Shihinski explained that MEC OpCo was aware that its

pipelines that crossed the NS River had insufficient depth of cover. In cross-examination, he

testified that the depth of cover was not a new or unknown issue. He stated that it had been

known for “quite a long time”.

In making that comment in testimony, Mr. Shihinski did not put specific dates to the

“quite a long time” comment. However, based on the evidence, it is evident that MEC OpCo

personnel knew this fact by at least 2009. This was not a new issue.

The depth of cover issue was not restricted to pipelines that crossed the NS River. Mr.

Shihinski also testified that there were a number of pipelines that were exposed in other areas

outside of water courses.

4. Facilities

a. 7-4 Facility

Mr. Shihinski testified that he was aware in August 2011 that the 7-4 Facility was not

properly licensed for sour products. He first became aware of this non-compliance matter as a

result of an audit conducted by a third-party consultant in 2009.

Mr. Shihinski also confirmed that these issues were well known within the company. He

indicated that they were discussed among MEC OpCo employees, including Mr. Michael

Reinhart, Ms. Cross and Mr. Turner.

b. 3-3 Facility

The evidence is that MEC OpCo knew that the 3-3 Facility had been unlicensed since it

began its Canadian operations in 2003. In cross-examination, Mr. Carr testified that he was

personally aware that the 3-3 Facility was not properly licensed (and not licensable) since 2009.

Despite knowing that it was not properly licensed, MEC OpCo operated the 3-3 Facility.

At the time of the Share Transaction, Merit was aware that the 3-3 Facility could not be

licensed until the outstanding pipeline licensing issues of MEC OpCo were resolved. Mr. Carr

confirmed his knowledge of this fact in cross-examination. In particular, the evidence is that in

October 2009, Mr. Carr met with Ms. Hall to discuss MEC OpCo’s application for the 3-3

Facility. He knew that the Regulator would likely not license the 3-3 Facility unless all of the

pipeline and facility licences were both correct and up-to-date.

5. Surface Casing Vent Flows

Prior to the September 2011 Closing Date, MEC OpCo had a general practice of doing

yearly lease inspections at selected well sites. The evidence is that during those lease inspections,

MEC OpCo employees would conduct SCVF tests.

It was also MEC OpCo’s general practice to conduct SCVF tests on wells whenever a

service rig attended a wellsite. However, the evidence is that MEC OpCo did not report SCVFs

in accordance with the regulations or repair them in a timely manner. Further, MEC OpCo did

not keep appropriate records of follow-up testing on wells, as required by the regulations.

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As operations manager, Mr. Shihinski received annual lists of particular wells to be tested

for SCVFs. He coordinated the testing process before compiling the results and returning them to

Ms. Hall.

Mr. Shihinski worked out of the Leduc Field office. The evidence is that the Leduc Field

office kept numerous lists of the detected SCVFs, and periodically forwarded those lists to the

Calgary office for consolidation. Wells on the lists previously had SCVFs, and required follow-

up testing. Notations confirming an SCVF were in relation to the test done on a particular date. A

single negative test was not a sufficient indication that the well no longer had an SCVF.

During the course of 2009 and 2010, the various lists kept by MEC OpCo identified

between 17 and 43 SCVFs. The evidence is that by May 2009, Ms. Hall and Mr. Shihinski were

aware of more than 30 SCVFs in the Leduc Field.

Despite Ms. Hall’s continued efforts to bring MEC OpCo into compliance through to

2010, MEC OpCo ignored the issue until the summer of 2011. That was when Merit began

contemplating the Share Transaction with NEP.

Based on the evidence, Mr. Carr and Mr. Lambert were informed of the SCVFs. Indeed,

as early as May 2011, Ms. Hall informed Mr. Carr and Mr. Lambert that her best information

was that there were between 30 and 40 known SCVFs in the Leduc Field. That said, I

acknowledge that MEC OpCo had no consolidated list of SCVF locations.

In June 2011, Ms. Hall reported to Mr. Lambert that, while she was unable to locate “a

complete list of LSDs for known SCVF in the Leduc Area” (emphasis added), Mr. Kryger had

advised her that between 30 and 40 known SCVFs in the Leduc Field had not yet been

categorized into their risk category by the engineering department. Ms. Hall went on to point out

that SCVFs in the Leduc Field were almost always serious, and that repairing up to 40 of them

would consume a significant portion of the year’s budget.

Ms. Hall expressed the view that the level of SCVF non-compliance was significant

enough to have MEC OpCo placed onto global refer status list by the Regulator. Ms. Hall

testified that Mr. Lambert never expressed doubt, skepticism or confusion to her concerning her

assessment and advice on the SCVF issue.

In July 2011, Ms. Hall and Mr. Shihinski discussed the need to come up with a

comprehensive list of known SCVF locations. In direct examination, Mr. Shihinski testified that

he made inquiries of Ms. Hall with respect to the aforementioned list. Ms. Hall informed Mr.

Shihinski the following:

No full corporate list available. I can circulate you a list reported to the Board of

which I’m aware is incomplete. Advised Tommy/legal team guesstimate 30 to 40

in the Devon area that have NOT been screened for risk assessment.

[Emphasis added.]

Ms. Hall and Mr. Shihinski set out to compile the “all-encompassing” list. They

exchanged numerous emails enclosing lists of wells with SCVFs. That effort identified as many

as 43 wells with SCVFs.

Based on Mr. Shihinski’s lists at the Leduc Field office, he and Ms. Hall resolved that

there were presently as many as 40, but no fewer than 30, SCVFs. In contrast, only 18 SCVFs

had ever been reported to the Regulator in the history of MEC OpCo.

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After the exchange of emails, Mr. Shihinski reviewed all of the lists to which he had

access and attempted to compile a single list of SCVFs in the Leduc Field. He completed that list

in July 2011, and saved the spreadsheet with the name “Gas Vent Leaks July 2011”. The

spreadsheet listed 47 wells with SCVFs.

In cross-examination, Mr. Shihinski admitted that his consolidated list was not perfect.

Five wells listed were duplicates, and the list did not account for the possibility that some of the

SCVFs may have been repaired without documentation.

Mr. Shihinski explained that he accounted for these possibilities by communicating to

Ms. Hall his conclusion that there were as many as 40, but no fewer than 30, wells with SCVFs

in the Leduc Field.

While Mr. Shihinski conceded in cross-examination that he could not find any

correspondence evidencing that he had sent this document to anyone, he testified that he would

not have prepared such a document without at least sharing it with Ms. Hall. I accept that

explanation. Not all communications in life are by way of email.

In July 2011, Ms. Hall sent Mr. Carr two lists of SCVF locations directly. In her covering

email, she explained that the lists attached were not complete, and that the best information from

Mr. Kryger and Mr. Shihinski was that there were likely between 30 and 40 SCVFs in the Leduc

Field.

In addition to the email, Ms. Hall had a number of conversations with Mr. Carr in which

she explained the scope of the SCVF non-compliance in the Leduc Field. Each time she

explained that there may be as many as 40, but no fewer than 30, SCVFs. I acknowledge that she

used the word “guesstimate”.

During the summer of 2011, Ms. Hall had similar conversations with Mr. Moffitt, Mr.

Plunk, Mr. Carr, Mr. Hagge and Mr. Lambert concerning the scope of the SCVF non-compliance

by MEC OpCo. I find that these communications were all in an effort by Ms. Hall to

communicate her knowledge of the SCVF issue “up the food chain”.

The efforts by Ms. Hall and Mr. Shihinski to communicate the scope of the SCVF non-

compliance culminated in their contributions to the drafting of Schedule D. As of August 2011,

the employees of MEC OpCo had determined that there were likely 30 to 40 SCVFs in the Leduc

Field, and certainly no fewer than 30 SCVF in that field.

6. Directive-13

Ms. Hall raised alarm bells within MEC OpCo as early as January and February 2009

regarding the issue of D-13 non-compliance. In her email dated February 9, 2009, Ms. Hall

identified that the D-13 compliance program had fallen off the rails.

MEC OpCo failed to identify a critical component of D-13 Long-Term suspension

requirements. In particular, the company had not recognized that a “(significant) number of

wells” which had not produced in 10 years should have been reclassified to the medium-risk

category.

Ms. Hall also identified that MEC OpCo had “no evidence/paper trail” to establish that

the last inspections in 2006 even took place. Indeed, she was concerned that they had not actually

taken place. In direct examination, she also noted that failing to keep proper records was a

regulatory violation.

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To bring MEC OpCo into compliance with D-13, the company required a large multi-

stage process. That process would include: (i) reviewing the production history of all of its wells

to determine which wells had been inactive for at least 12 months and entered into the D-13

program; (ii) profiling each well to determine whether it should be categorized as low, medium

or high risk; (iii) completing inspections of all low-risk wells; (iv) remedying any deficiencies

identified during the inspection of the low-risk wells; and (v) undertaking the downhole work

required to properly suspend the medium and high-risk wells.

Ms. Hall investigated the scope of the D-13 non-compliance within MEC OpCo. She did

so because of an audit by the Regulator of the 7-23 Facility.

In an email on February 23, 2009, Ms. Hall noted that D-13 non-compliance was a “high-

enforcement” issue. The evidence is that the enforcement issue was serious enough to “place

MEC on Global Refer” status. That designation would prevent MEC OpCo from getting

approval for new licence applications or lead to the shut-in of the MEC OpCo production.

Ms. Hall shared this information with Mr. John Petty, which was then circulated amongst

Mr. Carr, Mr. Lambert and Mr. Hagge.

As a result of the continuing follow-up on the D-13 non-compliance issues, Ms. Hall

came to review a recording sheet used by the MEC OpCo field staff to track action items related

to wells (the “March 2009 D-13 Tracking Sheet”). She forwarded the March 2009 D-13

Tracking Sheet to Mr. Petty on March 20, 2009. The March 2009 D-13 Tracking Sheet identified

over 200 wells that were not compliant with D-13 at that time.

In April 2009, Ms. Hall contacted both the engineering staff and field staff of MEC OpCo

in an attempt to bring the company into D-13 compliance. She specifically raised the issue of

budgeting for the downhole work required to bring a number of the wells into compliance.

However, there were many steps to take before any physical work could actually be completed

because MEC OpCo had not yet undertaken any work towards updating the status of the wells

reported to the Regulator.

Despite the ongoing efforts of Ms. Hall to get MEC OpCo to address its D-13 non-

compliance, no progress was made by June 2009. As a result, Ms. Hall reached out to both Mr.

Lambert and Mr. Petty again to warn of the regulatory risk posed by the non-compliance and to

call MEC OpCo to action.

Ms. Hall specifically noted that MEC OpCo was “significantly out of compliance with

regards to D-13” and had “been out of compliance on this issue for years”. Ms. Hall also

included a document that set out how she believed the D-13 compliance program should be

handled and noted that the 165 non-compliant wells, which had not been assessed as of May

2009, were a ticking enforcement time bomb.

In direct examination, Ms. Hall testified that she believed that any profiling that had been

done in 2006 had not been done properly. She provided this evidence because a number of the

wells had not produced in more than 10 years and would now be classified as medium risk wells

that required actual downhole work. Ms. Hall testified that by June 2009, she was aware of

hundreds of wells that were non-compliant with D-13.

The unwillingness of MEC OpCo to address its D-13 non-compliance continued through

2011. It simply failed to take any material steps to address the hundreds of wells that were not

compliant.

Page: 59

Ms. Hall advised Mr. Lambert in March 2011 that the Regulator was going to begin

auditing D-13 compliance. She specifically noted that “MEC is offside in this area” with “no

significant profiling post 2008 undertaken, no reporting and little action to rectify identified

[downhole] compliance”.

In April 2011, while MEC OpCo gathered information to populate the data room for

bidders, Ms. Hall continued to raise with management that MEC OpCo was out of compliance

with both the reporting and downhole requirements of D-13. She raised this with management

because no work had been done to address the D-13 issue since 2008. Her evidence in direct

examination was that hundreds of wells remained non-compliant.

On September 23, 2011, the Regulator issued a notice to MEC OpCo identifying 67 wells

offside D-13 (the “September 2011 D-13 Notice”). That was only one week prior to the

September 2011 Closing Date.

The September 2011 D-13 Notice directed MEC OpCo to suspend the 67 wells in

accordance with D-13. Those 67 wells had not produced in more than 12 months.

Ms. Hall immediately forwarded the September 2011 D-13 Notice to Mr. Carr. Her

communication to Mr. Carr included an explanatory email outlining the scope of work required

to bring the wells on the list into D-13 compliance. The communication also enclosed a separate

list of over 200 further known non-compliant wells.

Mr. Carr forwarded this lengthy communication from Ms. Hall to Mr. Hagge, Mr. Plunk,

Mr. Moffitt and Mr. Lambert. I infer that Mr. Carr took this step because he wanted to update his

colleagues on the D-13 non-compliances.

In his email to his colleagues, Mr. Carr specifically acknowledged that the non-

compliances would lead not only to paperwork but “follow up and associated costs”. In that same

communication, Mr. Carr stated explicitly that these costs would “be NEP’s problem for the

Central AB assets going forward”.

Ms. Hall reminded Mr. Carr and Mr. Terpstra that the wells identified by the Regulator

were not the only non-compliant wells of MEC OpCo. She also reminded them that there were

hundreds, and that “[i]t has been known since early 2009 that MEC [OpCo] and MMC11 were

not D-13 compliant”.

The evidence is that Ms. Hall undertook considerable efforts over the course of some

years to bring the scope of non-compliance of MEC OpCo to the attention of relevant

management within Merit. I base this determination on my review of the testimony of Ms. Hall

in direct examination, and on the read-in testimony of Mr. Lambert. Further, the testimony of

Ms. Hall was clear that Mr. Carr and management of MEC OpCo were aware of the non-

compliance. As further support, the read-in evidence of Mr. Lambert confirmed that he had

communicated his knowledge of D-13 non-compliance to Mr. Carr by at least February, 2011.

In addition to the testimony of Ms. Hall, the documentary evidence established that Mr.

Lambert, Mr. Terpstra and Mr. Carr were all considering the potential impacts that the D-13 non-

compliances may have on both MEC OpCo’s relations with the Regulator and the Share

Transaction. Multiple documents reveal that Merit was weighing different options for avoiding

the D-13 compliance issues becoming known outside of MEC OpCo.

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The evidence is that Mr. Lambert asked Ms. Hall whether a delay in changing the

statuses of inactive wells would prevent the discovery of their non-compliant status. The read-in

evidence of Mr. Lambert established that he was aware that moving into D-13 compliance would

require actual downhole work.

On or about August 17, 2011, Ms. Hall called the Regulator to see if the D-13 suspension

information may be “publically (sic) available”. Ms. Hall indicated that she made this call to the

Regulator because Mr. Moffitt had asked her whether the D-13 non-compliances could be

discovered through searches of public records. I infer that Mr. Moffitt wanted to determine what

information was publicly available. This inquiry further supports the assertion above that Mr.

Moffitt was aware of the D-13 issue that MEC OpCo had at the time of Share Transaction.

Based on the evidence, Mr. Carr, Mr. Hagge and Mr. Moffitt each had the information to

be: (i) aware of the D-13 compliance issues; and (ii) actively considering what impact the said

issue may have on the Share Transaction.

7. Drafting Schedule D

In cross-examination, Mr. Carr stated, “[a]ny time we gathered information, we sent it on

up”. Based on that testimony, I infer that Mr. Carr was passing all of the regulatory non-

compliance issues of which he was aware up the communication chain so that the appropriate

documents could be prepared, including Schedule D.

In cross-examination, Mr. Carr also testified that the sweet-to-sour licencing issues in

particular were the topic of multiple conversations between himself, Mr. Hagge and Mr. Moffitt.

There was no misunderstanding within Merit regarding the purpose of Schedule D. In

cross-examination, Mr. Plunk testified that he was aware that the main concern of a purchaser is

knowing what liabilities that they are assuming. Similarly, the documents in evidence include an

email from Mr. Hagge dated July 2011 that explicitly acknowledged that same concern. The

individuals copied on that email included. Mr. Carr, Mr. Moffitt and Mr. Plunk.

Further, both Mr. Moffitt and Mr. Hagge described Schedule D as a “disclosure

schedule”, as did Merit’s counsel, Mr. Bidyk (both at trial and at the time of the Share

Transaction).

In cross-examination, Mr. Plunk conceded that he was aware that NEP would be relying

on Merit to ensure that Schedule D was truthful, accurate and complete. Similarly, in cross-

examination, Mr. Carr understood that Merit had an obligation to disclose all regulatory non-

compliances on Schedule D.

In cross-examination, Mr. Bidyk testified that the purpose of Schedule D was to make

sure that Merit made sufficient disclosure such that the representations and warranties in the

agreement were true. Mr. Bidyk also confirmed that Schedule D should have specific references

to non-compliances.

In cross-examination, Mr. Hagge grappled with the concept that Schedule D needed to be

truthful. Mr. Hagge eventually acknowledged that Merit needed to set out accurately on

Schedule D the regulatory non-compliances of which the Persons of Knowledge were aware.

Unlike Mr. Hagge, I found Mr. Plunk was forthright in his answers. In cross-examination,

he readily admitted that Schedule D needed to be as accurate, truthful and complete as possible.

During his continued cross-examination, Mr. Plunk also confirmed that he (the individual

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signing the Officer’s Certificate at closing) expected that Schedule D would incorporate all

known instances of non-compliance of which key employees were aware.

In cross-examination, Mr. Plunk even admitted that he expected that if Merit had any

specific information regarding non-compliances with pipeline licences, SCVFs or suspended

wells, that this information would be set out in Schedule D in sufficient detail that the purchaser

would know about it.

The drafting of Schedule D began in May 2011. Mr. Moffitt prepared spreadsheets to be

populated with known non-compliances and circulated them to a number of employees within

Merit. Ms. Hall was included on this communication.

Mr. Moffitt’s original email regarding Schedule D described it as a “List of: any notices

of default, any laws, or contracts; any known issues where MEC [OpCo] could be in default

under applicable laws”.

Ms. Hall’s email in response to the request from Mr. Moffitt to report regulatory non-

compliances for inclusion on Schedule D listed two and a half pages of regulatory non-

compliances. Her response included: (i) the MEC OpCo D-13 non-compliance, requiring

downhole work; (ii) pipeline non-compliance; (iii) improperly abandoned pipelines; and (iv) sour

products flowing through sweet pipelines as separate regulatory non-compliances.

On May 26, 2011, the email from Ms. Hall was forwarded by Mr. Lambert to Mr. Hagge

and Mr. Moffitt for discussion. Notwithstanding the information that Mr. Lambert had been

provided, he indicated to Mr. Hagge that he thought the related issues were minor.

Mr. Moffitt met with Ms. Hall to discuss known regulatory non-compliances on June 7,

2011. In cross-examination, Mr. Moffitt testified that Ms. Hall had explained that in the Leduc

area, MEC OpCo had sweet-licensed lines carrying sour products and that there were public

safety concerns arising from that non-compliance. She also confirmed that there were 20 to 40

unreported SCVFs in the Leduc Field.

Mr. Moffitt knew it was important for him to seek specific details of the non-

compliances, given the broad scope of the representation and warranties in the 2011 SPA. He

confirmed this during cross-examination.

Following that meeting, Mr. Moffitt prepared a document entitled “regulatory

issues.xslx” and asked Ms. Hall to confirm that it was a complete and accurate list of regulatory

non-compliances. The list prepared by Mr. Moffitt identified a number of pipeline licencing

issues including “flowing sour product through sweet lines (EPZ/ERP/Public Safety concerns)”.

After receiving some comments from Ms. Hall, Mr. Moffitt prepared a revised list and

provided it to Ms. Hall for further comment, copying Mr. Hagge and Mr. Carr. This revised

version continued to identify that MEC OpCo had sour products running through sweet-licensed

pipelines and public safety concerns.

Mr. Moffitt asked Ms. Hall for a list of all non-compliant pipelines. In response, Ms. Hall

made it clear to Mr. Moffitt, Mr. Hagge and Mr. Carr that while she did not have a complete list

of non-compliant pipelines, she would reach out to RAE Engineering and request a list of the

improperly licensed lines that it had identified. As noted elsewhere, RAE Engineering was a

third-party pipeline consultant which MEC OpCo had retained.

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Based on the evidence, the Merit Deal Team knew the information was coming from

RAE Engineering.

The email from Ms. Hall to Mr. Moffitt, dated July 20, 2011, with copies to Mr. Hagge

and Mr. Carr, explained that the management of MEC OpCo was aware of a “block of pipelines

that are licensed incorrectly (sweet) with sour product flowing through (offside with regulators)”.

The evidence is that at no time did Mr. Carr, Mr. Hagge or Mr. Moffitt make any inquiry as to

why RAE Engineering had been retained. Based on the evidence before me, they did not need to

make the inquiry because they were all aware of the mandate of RAE Engineering.

Ms. Hall testified that she did not have a comprehensive list because she had not yet

received the RAE Report. However, she testified that she wanted to make sure Mr. Carr, Mr.

Hagge and Mr. Moffitt were aware that information from RAE Engineering would be provided

as soon as it was available.

In cross-examination, Mr. Carr testified that he understood that Ms. Hall would be getting

a list of non-compliant pipelines that had been identified by RAE Engineering to date. The

knowledge that Mr. Carr had concerning the non-compliant pipelines was further confirmed by

his testimony that he had a 30-minute meeting with Ms. Hall to discuss MEC OpCo’s pipeline

non-compliance and the in-depth work that RAE Engineering was carrying out. Indeed, the

evidence is that he was meeting Ms. Hall while she was preparing her detailed email to the Merit

Deal Team.

In cross-examination, Mr. Carr also testified that he had reviewed Ms. Hall’s changes to

the “regulatory issues.xslx” spreadsheet, and had been alerted to Ms. Hall’s public safety

concerns. Ms. Hall’s comments regarding safety concerns even prompted an exchange of emails

amongst Mr. Carr, Mr. Hagge, Mr. Plunk and Mr. Moffitt.

It was during this exchange of emails that Mr. Carr informed Mr. Hagge, Mr. Plunk and

Mr. Moffitt the following:

There will be significant dollars associated with these clean-up efforts and we will

need to discuss how to disclose them to Newton as it is probably a larger amount

of expense than they would have seen on past years LOSs.²

Fun stuff.

In cross-examination, Mr. Carr testified that he sent this email to Mr. Hagge, Mr. Plunk

and Mr. Moffitt. He also confirmed in his testimony that he knew that the costs associated with

this issue were both large and undetectable from a review of the information disclosed to NEP.

Concerning the SCVF issue, it is apparent that Mr. Moffitt, Mr. Hagge and Mr. Carr were

aware of, or had been provided with information that would alert them to, the scope of the non-

compliance prior to circulating the first draft of Schedule D. Amongst other evidence, the

“regulatory issues.xslx” spreadsheet that Mr. Moffitt provided to Ms. Hall on June 15, 2011

identified as many as 40 SCVFs.

On July 21, 2011, Mr. Plunk circulated an email to Mr. Carr, Mr. Moffitt, Mr. Hagge, Mr.

Lambert, Mr. Terpstra, Ms. Hall, and Mr. Shihinski directly soliciting information for the

purpose of preparing a list of known non-compliances that would comprise Schedule D to the

²The initialism “LOSs” stands for “Lease Operating Statements”.

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2011 SPA. That email enclosed a draft of Schedule D that had been prepared by Mr. Moffitt.

Based on my review of the document, the draft Schedule D contained 12 items of non-

compliances.

Mr. Lambert, Mr. Shihinski and Ms. Hall understood that they were to canvass the

employees that reported to them and report any known issues of regulatory non-compliance to

Mr. Carr, Mr. Moffitt, Mr. Hagge and Mr. Lambert. They believed that the information that they

provided would be added to Schedule D and disclosed to NEP.

Mr. Lambert, Ms. Hall and Mr. Shihinski thought that once they fulfilled their

information-gathering roles, Mr. Hagge and Mr. Moffitt would ensure that the information

provided was properly disclosed in Schedule D. This expectation was confirmed through the

read-ins from Mr. Lambert, and testimony from each of Ms. Hall and Mr. Shihinski in both

direct examination and cross-examination.

Based on the evidence before me, Ms. Hall and Mr. Shihinski left the wording on

Schedule D to Mr. Hagge and Mr. Moffitt. Ms. Hall reinforced this view by stating that she was

not a lawyer, and the actual wording in Schedule D was above her pay grade. I accept her

evidence on that point.

When Ms. Hall received the first draft of Schedule D, she clearly indicated that the draft

did not accurately reflect her knowledge of the regulatory non-compliances in the field. In

particular, the third bullet point made only a vague reference to non-compliance with certain

requirements of D-13. In contrast, in direct examination, Ms. Hall testified that she was aware of

hundreds of non-compliant wells.

In addition, the draft Schedule D did not include any reference to the “known issue of

sour product being in sweet licensed lines”. Further, the draft only listed three SCVFs, when

“[t]here are 30 to 40 known vent flows in the field”.

Ms. Hall responded to Mr. Plunk’s email with an email to Mr. Carr, Mr. Lambert, and

Mr. Terpstra. She stated that the draft of Schedule D was deficient. She again raised the fact that

the draft Schedule D: (i) failed to address the sweet-to-sour non-compliances; and (ii) grossly

under-reported the number of known SCVFs.

The responding email from Ms. Hall specifically suggested that Schedule D be amended

to expressly address the sweet-to-sour issue and accurately reflect 30 to 40 known SCVFs. Mr.

Lambert’s evidence was that these were both well-known issues within MEC OpCo at the time.

In cross-examination, Mr. Carr admitted that he recalled reading Ms. Hall’s email. He

confirmed that the information she provided was accurate.

Mr. Terpstra responded directly to Mr. Hagge, Mr. Plunk and Mr. Moffitt with an email

that enclosed Ms. Hall’s email.

Mr. Hagge testified that he had no “specific” recollection of reviewing the email.

However, he hedged and did not deny having opened the attachments, and reviewing Ms. Hall’s

email. Again, that communication confirmed that the then-current draft of Schedule D did not; (i)

include a reference to the sweet-to-sour licencing issues; or (ii) properly disclose the 30 to 40

known SCVFs in the Leduc Field.

Ms. Hall’s email was also forwarded to Mr. Shihinski. He canvassed the employees that

he supervised for regulatory non-compliance matters to be added to the original draft.

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In his email to his subordinates, Mr. Shihinski expressly asked them to limit their

responses to “major concerns”. He also noted that the draft “Schedule D shows some generalized

items that will cover off some items”, but specifically asked Mr. Turner to comment on “sweet-

to-sour conversion” because it was a completely separate issue from anything listed on the

original draft. The sweet-to-sour conversion was an issue on which Mr. Turner had previously

expressed concern regarding public safety.

Mr. Turner provided comments. He noted that he did not comment on SCVFs, which

were the “biggest issue out here besides the pipeline”. He explained that Mr. Shihinski was in a

better position to do so. To that end, it was Mr. Shihinski’s intention to list the “exact amount of

surface casing vents that we had in the field to the best of our knowledge at the time”, which was

more than the three listed.

Mr. Turner listed additional items, including “[n]on-compliance with regards to pipeline

conversion sweet-to-sour” and “[n]on-compliance due to operating pipelines that are not actually

in operation”. He testified that they were his two biggest concerns.

The sweet-to-sour issue was such a major concern to Mr. Turner that when Mr. Bud

Newton made the decision to shut-in production through Devon, he “felt a big weight come off

[his] shoulders. [He] did sleep at night”. He testified that he personally thanked Mr. Bud Newton

for making the responsible decision.

In direct examination, Mr. Shihinski testified that the items listed by Mr. Turner were

major concerns, which had been known within MEC OpCo for some time. Mr. Shihinski

forwarded Mr. Turner’s updated draft of Schedule D to Mr. Lambert. Mr. Shihinski also emailed

Mr. Lambert to inform him that he concurred with the comments from the field foreman and Ms.

Hall.

Mr. Carr forwarded to Mr. Hagge a specific list of SCVF locations, along with Ms. Hall’s

comments. As I have acknowledged above, the best information indicated that there were 30 to

40 unreported SCVFs in the Leduc Field.

Ms. Hall subsequently prepared additional notes on Schedule D. The evidence is that

those notes were circulated to Mr. Hagge, Mr. Lambert, Mr. Shihinski and Mr. Terpstra on July

27, 2011.

Ms. Hall’s email attached a copy of the RAE Report. To draw attention to the RAE

Report, Ms. Hall noted in the top of the body of the email the reference “Added the Sweet-to-

Sour Draft Technical Report”. Her notes on Schedule D expressly stated that according to the

best information available, there were between 30 and 40 SCVFs. She also noted that the sweet-

to-sour issue should be properly reflected in Schedule D by marking “Sour Pipeline License

Issue (attached draft report)” in red.

The next day, Ms. Hall forwarded the same email directly to Mr. Carr. By attaching the

RAE Report and referencing it in the body of the email, Ms. Hall brought the RAE Report to the

attention of Mr. Shihinski and Mr. Terpstra.

Notwithstanding that the RAE Report was brought to the attention of Mr. Shihinski, Mr.

Hagge and Mr. Terpstra, Mr. Hagge alleged that he missed it. Similarly, in cross-examination,

Mr. Carr also claimed to have missed it. He missed it despite having undertaken to incorporate

the contents of Ms. Hall’s email into Schedule D. I find it remarkable that Mr. Carr remembers

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the detail concerning neutral and exculpatory matters, but has no recollection of having read the

components that are inculpatory.

Mr. Carr subsequently circulated an email to Mr. Plunk, Mr. Hagge, Mr. Moffitt, Mr.

Lambert and Ms. Hall, in which he stated that he would meet with Ms. Hall to discuss

incorporating her comments from her July 27, 2011 email. The evidence is that when he sent that

email to Mr. Plunk, Mr. Hagge, Mr. Moffit and Mr. Lambert, he attached Ms. Hall’s notes on

Schedule D and the RAE Report.

Mr. Moffitt responded, explaining he had reviewed Mr. Carr’s email and understood that

Mr. Carr would be the one to revise Schedule D in order to encompass the comments in the

attachments (i.e., Ms. Hall’s email). Though he specifically referenced Ms. Hall’s email, in

cross-examination Mr. Moffitt testified that he somehow missed reading it and overlooked its

contents.

Mr. Carr and Ms. Hall met to discuss changes to Schedule D. After that meeting, Mr.

Carr provided his revised draft to Ms. Hall, Mr. Hagge, Mr. Moffitt, Mr. Plunk and Mr. Lambert.

The evidence is that Mr. Carr variously asserted that Schedule D was drafted with

“several” other people (including Ms. Hall, Mr. Hagge, Mr. Plunk and Mr. Moffitt). That said,

the evidence of Mr. Carr shifted during the trial, wherein he indicated that perhaps it was only

him and Ms. Hall that were involved in the changes to Schedule D.

Despite not even being able to recall who was present at the drafting session, and despite

the changes he made being completely contrary to the consistent and repeated comments that

Ms. Hall had provided for weeks, Mr. Carr testified that Ms. Hall approved his changes to

Schedule D. Given his ever-changing position, I find Mr. Carr’s evidence unreliable.

The evidence is that Ms. Hall was not responsible for the drafting choices which Mr. Carr

made. She repeatedly said it was up to others to decide on what was disclosed and how it was

disclosed. I find that the evidence of Ms. Hall was consistent with her prior comments and

correspondence. I accept the evidence of Ms. Hall on this point.

8. Conclusion on Merit’s Knowledge

Based on the evidence adduced at trial, NEP has established, on a balance of

probabilities, that the Persons of Knowledge were aware of, or had been provided with

information that would have alerted them to, the regulatory non-compliance issues within MEC

OpCo. The evidence supports the view that the employees of MEC OpCo communicated their

knowledge of non-compliances to the Persons of Knowledge. Further, the evidence establishes

that the issues were discussed at length.

Not only were the issues known, the evidence is that a number of the individuals within

the Persons of Knowledge group understood the magnitude of these issues. The evidence was

that the safety concerns and physical work required to achieve compliance regarding the pipeline

non-compliances were regularly discussed within MEC OpCo and communicated up to

management.

In cross-examination, Mr. Carr testified that the regulations in force at the time required

MEC OpCo to shut-in production until it had the proper licences in place to manage the

production. He also confirmed that he understood those regulations.

Page: 66

In cross-examination, Mr. Hagge testified that he knew that the cost of repairing a single

SCVF ($140,000) was a material matter. The evidence of Mr. Carr was that it cost Merit between

$100,000 and $150,000 (sometimes more) to repair each SCVF, and that the total cost to repair

30 to 40 SCVFs would be between $4,000,000 and $6,000,000.

The evidence is that Mr. Hagge, Mr. Moffitt, Mr. Carr and Mr. Plunk also understood, or

had been provided with information concerning the nature and magnitude of MEC OpCo’s D-13

non-compliance issue. This is supported by the fact that they read and exchanged emails on the

topic only days before the September 2011 Closing Date.

Mr. Carr and Ms. Hall both acknowledged in evidence that they knew the 3-3 Facility

was unlicensed. The evidence is that they also knew 3-3 Facility could not be licensed unless,

and until, the pipeline non-compliance issues were addressed.

In conclusion, if, for some reason, the knowledge communicated to the members of the

Persons of Knowledge (including members of the Merit Deal Team) had faded in their memories,

I infer that the process of preparing Schedule D would have brought it to front of mind of those

individuals as the documents were being prepared for the Share Transaction. I draw that inference

because it is inconceivable to me that all members of the Merit Deal Team would have permanently

forgotten the important non-compliance information which had been provided to them. The

reasonableness of my inference is supported by the fact that nearly every issue of regulatory non-

compliance claimed by NEP was at one time put forward for express inclusion on Schedule D and,

based on my review of the evidence, members of the Deal Team controlled what was included

(and excluded) on that schedule.

That said, I find that there is no evidence that Ms. Hall, Mr. Plunk, Mr. Hagge, Mr.

Moffitt, Mr. Carr, Mr. Lambert, Mr. Terpstra and Mr. Shihinski had any understanding or

appreciation as at the September 2011 Closing Date of the magnitude of the safety and health

issues that existed in respect of the pipeline that was running through Devon.

F. Merit’s Representations – Regulatory Non-Compliance

Notwithstanding the fact that regulatory non-compliances were well known to the

Persons of Knowledge, Merit failed to disclose the known non-compliances. That failure to

disclose occurred on two occasions. First, it was not disclosed on Schedule D. Second, it was not

disclosed when NEP made inquiries during its due diligence process.

1. Contractual Representations

Merit made a number of broad representations and warranties in section 4.1 of the 2011

SPA. Only some of those representations and warranties are qualified by knowledge. Those

include:

4.1 Representations and Warranties of Vendor

Vendor represents and warrants to Purchaser:

(s) No Material Changes: Between May 31, 2011 and the date this Agreement is

executed by the Parties, other than the Permitted Transactions:

(i) there has not been any material adverse change respecting the

Corporation or the Corporation’s business, financial condition,

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ownership, operation or value from the position set forth in the

Corporation’s Financial Statements which would be required to be

reported therein,

(ii) there have been no material facts, transactions, events or

occurrences which, to the knowledge of the Vendor, could

reasonably be expected to result in a material adverse change

respecting the Corporation or the Corporation’s business, financial

condition, ownership, operation or value; and

(iii) other than as disclosed in the Corporation’s Financial

Statements, no liability or obligation of any nature (whether

absolute, accrued, contingent or otherwise) material to the

Corporation has been incurred other than in the ordinary and

normal course of business, consistent with past practice.

(t) Corporation’s Finances:

(i) the Corporation’s lease operating statements, and the

differential information provided by the Vendor to the Purchaser as

set forth in the form attached hereto as Schedule “Q” are accurate

and complete in all material respects;

(ii) except as set forth on Schedule “F”,”V” or “D”, the

Corporation has no long-term liability or obligation of any nature

(whether known or unknown and whether absolute, accrued

contingent, or otherwise) other than Abandonment and

Reclamation Obligations, as determined in accordance with

generally accepted accounting principles in the United States,

consistently applied; and

(iii) on the Closing Date the Corporation shall not have any

obligation or indebtedness for borrowed money.

(u) No Material Violations: Except as set forth on Schedule “D”, the Corporation

has not received notice of any material violation of or investigation relating to any

federal, provincial or local law, regulation or ordinance, or any permit, license or

authorization, with respect to the Assets or its business or operations, nor, to

Vendor’s knowledge, are there any facts, conditions or circumstances which could

reasonably be expected to give rise to such a notice, and the Corporation holds all

Permits, licenses and other authorizations which are required under federal,

provincial or local laws relating to the Corporation’s assets, business or

operations, except where the failure to comply with the foregoing would not have

a material adverse effect on the Corporation.

...

(dd) No Defaults: Except as described in Schedule “D” or “G”:

(i) neither Vendor nor the Corporation has received notice of

default under any Applicable Law or the Title and Operating

Documents, which default remains outstanding as of the date

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hereof, nor, to Vendor’s knowledge, are there any facts, conditions

or circumstances which could reasonably be expected to give rise

to such a notice; and

(ii) the Assets are, and the ownership, operation, development,

maintenance, and use of any of the Assets are, in compliance with

the provisions and requirements of all Applicable Laws, except

where the failure to so comply could not reasonably be expected to

have a material adverse effect on the value of the Corporation or

the Assets, or the conduct of the business of the Corporation in its

ordinary course.

(ee) Compliance with Agreements and Laws: Except as described in Schedule

“D” or “G,” to Vendor’s knowledge there has been no act or omission whereby

the Corporation or Vendor is, or would be, in default under Applicable Law or

any of the Title or Operating Documents, which default would be reasonably

expected to have a material adverse effect on the value of the Scheduled Assets,

the Corporation or the Vendor’s Shares. Except as disclosed in Schedule “U” or

otherwise disclosed on the Corporation’s Financial Statements, to the knowledge

of Vendor, no counterparty to any of the foregoing is in material breach of its

payment, indemnity or any other significant obligation thereunder.

(ff) Financial Commitments: Except as set forth in Schedule “H”, there are no

outstanding authorizations for expenditure or other commitments respecting the

Scheduled Assets pursuant to which capital expenditures of greater than one

hundred thousand Dollars ($100,000) may be required by the Corporation after

the Closing Date.

[Emphasis added.]

Based on the wording of the representations in the 2011 SPA, to be true, any regulatory

non-compliances known to any of the Persons of Knowledge had to be itemized on Schedule D.

The relevant portions of Schedule D are as follows:

...

3. Potential instances of non‐compliance certain requirements of Directive 13

regarding suspension of inactive wells, including but not limited to keeping

records of such compliance and updating status of all wells.

4. The Corporation is in the process of developing a Pipeline Operations Manual

and Pipeline Integrity Management Program (“POM” and “PLIMP” respectively)

to comply with The Oil and Gas Conservation Act, The Pipeline Act, The Alberta

Pipeline Regulation, CSA standards (referenced within Pipeline regulation and

ERCB Directives), Directive 56 Energy Developments (Licensing), Directive 66

Requirements and Procedures for Pipelines, Directive 71 Emergency

Preparedness and Response Requirements for the Petroleum Industry, and

Directive 77 Pipelines – Requirements and Reference Tools, however there are

potential instances of non-compliance under such statutes insofar as it relates to

the development and implementation of PLIMP and other matters similar thereto.

Such potential non‐compliance does not include a failure to report a release from

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a pipeline where required to do so. PLIMP manuals are in place and compliance

efforts largely completed, but due to the large number of segments, particularly at

Leduc, licensing / status / flow direction updates are still in progress.

…

6. Potential instances of non‐compliance with facility license requirements

applicable to the 03‐03‐051‐26W4 Booster Station, the 09‐16‐051‐26W4 and 12‐

13‐053‐18W5 sites. The Corporation is working with EPAP consultant Manfred

James to address 03‐03 site, currently working on the license for 09‐16 site and

reviewing the status of the license for the 12‐13 site. Such potential non‐

compliance does not include a failure to report a release from a pipeline where

required to do so.

…

9. Surface casing vent flow at the following Leduc area wells: 100/7‐32‐49‐

26W4M, 102/6‐29‐49‐25W4M, and 100/6‐30‐50‐26W4M. Potential instances of

non compliance (including but not limited to delayed reporting of repairs) in

relation to Interim Directive 2003‐01 at other wells, although sour SCVF or

observed liquids releases are high priority and are/have been addressed

appropriately.

...

Based on the evidence, Merit failed to disclose its knowledge that MEC OpCo had

hundreds of wells that were known to be D-13 non-compliant. Schedule D also failed to disclose

that dozens of its pipelines were sweet-licensed, notwithstanding that they were known to carry

toxic sour products. Further, Schedule D made no mention of the 200 or more pipelines that

Merit knew were improperly licensed as operating.

Merit claimed that “compliance efforts [were] largely completed” and that “updates

[were] in progress”. The evidence does not support these claims.

While Schedule D disclosed that the 3-3 Facility had “potential” licencing issues, Merit

did not disclose that: (i) the facility was not licensed; and (ii) the facility was known to be

incapable of being licensed.

Schedule D represented that Merit was in the process of obtaining a licence for the 3-3

Facility. Based on my review there is no evidence that any such licencing process was underway.

Schedule D represented that MEC OpCo had only three SCVFs. Based on my review of

the evidence, Merit failed to disclose that MEC OpCo had a list of over 40 SCVFs in the field

that had not been reported to the Regulator.

2. Due Diligence Calls with Mr. Carnahan

As part of the standard regulatory due diligence process, after Merit circulated the first

draft of Schedule D, Mr. Carnahan contacted Mr. Carr and Ms. Hall to obtain additional

information about the items listed. The particulars of those due diligence discussions are relevant

to this case.

Page: 70

a. Mr. Carr

On July 27, 2011, Mr. Carnahan had a telephone call with Mr. Carr to discuss the

questions that he had regarding Schedule D. Mr. Carnahan testified in direct examination that he

took contemporaneous notes of the discussion to memorialize important points.

During the call, Mr. Carnahan asked Mr. Carr for further details on each clause of

Schedule D.

Concerning D-13, Mr. Carr indicated that MEC OpCo was compliant on all sour wells,

but may not be a hundred percent compliant on sweet wells. Contrary to these statements by Mr.

Carr, the evidence is that he knew MEC OpCo was non-compliant on hundreds of wells.

Concerning clause 4 of Schedule D, Mr. Carr informed Mr. Carnahan that Merit was “not

able to say that a hundred percent of the lines were properly licensed”. Mr. Carnahan pressed Mr.

Carr to clarify his answer and Mr. Carr stated that:

...there are lines that are licensed from A to B that are actually operating from B

to A, so the flow direction is incorrectly licensed, and there are pipelines that are

licensed as operating which are in fact suspended.

In cross-examination, Mr. Carr testified that MEC OpCo had submitted licencing change

applications to the Regulator. The evidence was that the anticipated cost to MEC OpCo of that

licencing change was approximately $500,000.

Despite having received a copy of the RAE Report and approved its circulation to Mr.

Moffitt only days before, Mr. Carr made no mention of the work being undertaken by RAE

Engineering on the sweet-to-sour project or the RAE Report itself. In cross-examination, Mr.

Carr testified that he represented to Mr. Carnahan that the work remaining to be done on

pipelines was finishing some paperwork and manuals.

Based on the evidence, the answers that Mr. Carr gave to the effect that MEC OpCo had

submitted licencing change applications to the Regulator were false.

Concerning the 3-3 Facility, Mr. Carr represented that the licencing was in progress and

that a consultant was working on having it grandfathered. In cross-examination, Mr. Carr

conceded that he did not disclose that he had been advised years earlier that the 3-3 Facility

could not be relicensed without bringing the rest of the pipeline gathering system into

compliance. He conceded that instead, he focused his response to Mr. Carnahan’s questions on

having the Enhanced Production Audit Program (“EPAP”) of the Regulator work with MEC

OpCo to achieve some grandfathering. Based on my review of his evidence, Mr. Carr provided

half-truths in response to NEP’s due diligence questions.

Concerning clause 9 of Schedule D, Mr. Carr informed Mr. Carnahan that the three

SCVFs listed were non-serious, and all SCVFs on sour wells or with liquid releases had been

repaired. In that discussion, Mr. Carr also indicated to Mr. Carnahan that there were wells where

the reporting of SCVFs or repairs was delayed.

In cross-examination, Mr. Carr testified that he did not disclose to Mr. Carnahan that his

best information from his field staff was that there were 30 to 40 SCVFs in the Leduc Field.

Based on this admission, it is evident that Mr. Carr did not disclose the full extent of his

knowledge concerning the SCVFs. This particular non-disclosure had the effect of shielding in

the range of $3 million to $6 million in repairs.

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Based on the evidence, Mr. Carr led Mr. Carnahan to believe that clauses of Schedule D

were in the nature of “paperwork/record keeping that may need to be followed up on”. In short,

Mr. Carr minimized the problems and his knowledge of them. The phone call was only 15

minutes long, as that was all that was required for Mr. Carr to mislead Mr. Carnahan into

believing there were no real regulatory problems.

b. Ms. Hall

On August 18, 2011, Ms. Hall was asked to contact Mr. Carnahan to answer questions

that he had regarding a clause in Schedule D related to an Environment Canada matter. The

evidence is that Mr. Carr directed Ms. Hall not to “engage him on any other items”. This

instruction from Mr. Carr to Ms. Hall was in keeping with what she had previously been told.

Mr. Hagge was copied on the correspondence to Ms. Hall wherein she was instructed not

to engage Mr. Carnahan on any other items. Ms. Hall followed the instructions of her superiors.

By following those instructions, she withheld from NEP her knowledge concerning pipeline

licencing issues, facilities licencing issues, D-13 non-compliance and unreported SCVFs.

3. Divino Meeting – “Just Paperwork”

As mentioned above, Mr. Bud Newton wanted to meet with Mr. Carr and Mr. Plunk: (i)

in anticipation of the POK Meetings; and (ii) before signing off on Schedule D. He wanted to

meet in an informal setting, which gave rise to the Divino Meeting. This meeting took place in

mid-August 2011.

Mr. Bud Newton had a specific objective at this meeting. He wanted to seek clarity on

what each clause of Schedule D meant.

In cross-examination, both Mr. Carr and Mr. Plunk testified that they knew Mr. Bud

Newton was seeking assurances regarding non-compliance matters and Schedule D. Mr. Carr

knew that Mr. Bud Newton would give weight to these representations.

When Mr. Bud Newton arrived for the Divino Meeting, he had a copy of the most recent

version of Schedule D with him. He used that document as an agenda to ask Mr. Plunk and Mr.

Carr about each of the clauses in the schedule.

Mr. Plunk and Mr. Carr downplayed the impact of the issues on Schedule D. In the

course of seeking his comfort, Mr. Bud Newton asked them the following specific questions:

a. “Are these real issues that involve real dollars or are we talking about paperwork

issues?”

b. “Is there any other hidden lurking liability out here like a nuclear waste dump?”

Notwithstanding Mr. Bud Newton’s broad but direct inquiry and Mr. Carr’s knowledge

of many non-compliances, Mr. Bud Newton was assured that the items in Schedule D were just

paperwork issues and “that there were no huge hidden liabilities lurking anywhere”. While Mr.

Plunk may not have had the depth of knowledge that Mr. Carr had, he had been provided with

the information that would have alerted him to the subject non-compliance. He just needed to

open the communications, and read them.

Later in the evening during the Divino Meeting, Mr. Bud Newton asked Mr. Carr again

“if there was (sic) any huge hidden type liabilities that [he] was aware of that [Mr. Bud Newton]

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needed to know about”. At this point, despite all of the specific instances of serious non-

compliance that had been brought to his attention, Mr. Carr made the following broad and

unequivocal representations:

No, … we’ve shown you everything we know and disclosed things in due

diligence, Schedule D, and during the sales process.

Anything you need to be aware of you’ve had access to during due diligence or

it’s been disclosed in the share purchase agreement or Schedule D.

[Emphasis added.]

Based on the evidence, Mr. Bud Newton took Mr. Carr and Mr. Plunk at their word.

4. Persons of Knowledge Meetings

On August 16, 2011, NEP met with each of the Persons of Knowledge. There were a

series of POK Meetings, and the individuals were asked questions about the assets of MEC

OpCo.

In preparation for the POK Meetings, Ms. Hall sought guidance on what she was

permitted to discuss during this upcoming session. In response to her inquiry, Mr. Carr circulated

an email to all of the Persons of Knowledge. The evidence is that the email sent by Mr. Carr

included an attachment, which was the form of Schedule D that was going to be disclosed to

NEP.

The evidence established that none of the individuals within the Persons of Knowledge

group were permitted to meet with NEP alone during the POK Meetings, with the exception of

those who were also members of the Merit Deal Team. Based on the evidence, either Mr. Carr or

Mr. Plunk sat in on all of the POK Meetings. The further evidence is that Mr. Hagge, and

sometimes Mr. Moffitt, listened in by phone.

Based on the evidence, numerous regulatory non-compliance issues afflicting the Leduc

Field were confirmed by, and discussed amongst, the Persons of Knowledge during the process

of drafting Schedule D. Despite having long-standing knowledge of the numerous regulatory

non-compliance issues that beset the Leduc Field, none of the Persons of Knowledge disclosed

any of this information to NEP during the POK Meetings. In direct examination, Mr. Carr

confirmed that there was no disclosure of these regulatory non-compliance issues.

Based on the evidence, there was no disclosure of this important information to NEP,

notwithstanding the fact that Mr. Bud Newton asked whether there was anything else that should

be disclosed.

a. Ms. Hall

The evidence is that Ms. Hall had been told she was not to speak to anyone about the

MEC OpCo regulatory issues of which she was aware. Being cognizant of that instruction, she

contacted Mr. Carr for instructions on what she was permitted to discuss. She sought this advice

and direction before the POK Meeting with Mr. Bud Newton.

Ms. Hall understood from the response that “Schedule D is how the company is going to

communicate regulatory issues and you better toe the line, lady”. As a result, Ms. Hall felt that:

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...if [she didn’t] stick to Schedule D, this meeting is going to be shut down like

that…[she’s] going to be fired, and then [she had] no idea who MEC is going to

talk to in [the] industry and whether [she was] ever going to get another job.

During the POK Meeting, Mr. Carr was directly beside her and Mr. Hagge on the phone.

It was in this context that Mr. Bud Newton asked Ms. Hall “if there was anything that should be

added to Schedule D”. She responded, “No”.

In the circumstances of the POK Meeting, Ms. Hall was between a rock and hard place.

As a result, Ms. Hall toed the Merit line. I accept the version of events that Ms. Hall put forth in

evidence.

b. Mr. Shihinski

The POK Meeting between Mr. Bud Newton and Mr. Shihinski was by phone. The

evidence is that Mr. Carr was on the line.

Mr. Shihinski understood that the purpose of the meeting was to allow Mr. Bud Newton

to ask questions concerning Schedule D. Mr. Bud Newton asked Mr. Shihinski if he “had

anything else to add as far as Schedule D” or “anything else that he should be made aware of”.

Mr. Shihinski had reviewed the draft of Schedule D. In direct examination, Mr. Shihinski

testified that during his review, he noted the following:

It was incorrect to what the field had sent in…It only stated three surface casing

vent flows. We did have a conservative estimate of 30 to 40 that we had listed.

There was also no mention of the sweet-to-sour pipeline conversion issues in the

field.

Notwithstanding that evidence, during the POK Meeting, Mr. Shihinski told Mr. Bud

Newton that he “had nothing else to add”.

Concerning the POK Meeting, Mr. Shihinski was “caught in a tough spot”. He was

between the interest of his current employer and his possible future employer. Mr. Shihinski toed

the Merit line. I accept the version of events that Mr. Shihinski put forth in evidence.

c. Mr. Lambert

In questioning, Mr. Lambert stated he understood that the purpose of the POK Meetings

“was to disclose anything we knew” concerning Schedule D. Mr. Lambert also stated that when

he sat in front of Mr. Bud Newton during the POK Meeting he had a copy of Schedule D in his

hand.

Mr. Bud Newton asked Mr. Lambert, “[I]s there anything else on Schedule D I need to

know about”, to which Mr. Lambert answered, “[N]ot to my knowledge”. In questioning, Mr.

Lambert stated that his POK Meeting with Mr. Bud Newton lasted only 10 seconds.

The evidence is that Ms. Hall and other employees at MEC OpCo continually advised

Mr. Lambert of the numerous regulatory non-compliance issues in the Leduc Field. Indeed, the

evidence is that Mr. Lambert had been advised of those non-compliance issues for a period of

time leading up to the September 2011 Closing Date. This evidence is in contrast to the answer

that Mr. Lambert gave to Mr. Bud Newton at the POK Meeting.

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Based on my review of the evidence, Mr. Lambert was continually advised of numerous

regulatory non-compliance issues in the Leduc Field for years leading up to the September 2011

Closing Date. This determination is supported by the evidence of Ms. Hall on this point, and her

evidence was never challenged. This finding is also supported by the evidence, which indicates

that Mr. Lambert received the RAE Report five times.

Based on my review of Schedule D, it is evident that the non-compliance issues of which

Mr. Lambert was aware were not listed on that document. Despite the meeting allegedly lasting

only 10 seconds, Mr. Lambert was provided with the opportunity to tell Mr. Bud Newton the

truth concerning Schedule D. I find that Mr. Lambert did not tell the truth.

d. Mr. Terpstra

Based on the evidence, Mr. Terpstra had knowledge of MEC OpCo’s non-compliances.

He had particular knowledge on the sweet-to-sour non-compliance issue.

The evidence is that Mr. Terpstra received the RAE Report multiple times before the

September 2011 Closing Date.

When Mr. Terpstra was asked by Mr. Bud Newton at the POK Meeting if he had

anything to disclose, he stated that there was nothing else. Based on my review of the evidence, I

find that Mr. Terpstra did not tell the truth.

VI. Analysis

A. Evidentiary Burden

The parties in this action assert different focuses concerning the evidentiary burden that

must be met by NEP.

The standard of proof in all civil claims is the balance of probabilities. This standard of

proof is applied to determine whether it is more likely than not that an alleged event occurred.

Contrary to the suggestion made by counsel for Merit during its opening statements, there

is no heightened standard of proof or search for “clear” or “convincing” evidence in cases of

fraud and deceit: FH v McDougall, 2008 SCC 53 at paras 39, 40 and 49 [McDougall]. In

particular, the Supreme Court of Canada opined the following at para 40:

I think it is time to say, once and for all in Canada, that there is only one civil

standard of proof at common law and that is proof on a balance of probabilities.

As with any hearing in this Court, the facts are the most important aspect of the case. The

rules of evidence control the facts that come before the Court: Sopinka at para 1.1. In this case,

the findings turn on the facts in evidence, the wording in the 2011 SPA, certain fundamental

principles in law and common sense.

B. The Issues

1. Was there a breach of contract?

The dispute between NEP and Merit engages: (i) the terms of the 2011 SPA; (ii) the

interpretation of the provisions of the 2011 SPA; and (iii) a reflection on what representations

and warranties were made within that agreement. In considering matters, I am guided by

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principles of contractual interpretation arising from the common law and the contractual

parameters that arise from the 2011 SPA itself.

a. The Law

Generally, a commercial enterprise cannot make an intentional representation designed to

persuade another party to enter into a contract, and then rely on the contract to escape liability

flowing from the fact that the representation is untrue: Zippy Print Enterprises Ltd v Pawliuk,

1994 CanLII 1756 (BC CA) at para 41 [Zippy Print].³While a carefully worded exclusion clause

may provide some protection to a vendor, the wording in the contract and the context of the deal

would have to be carefully considered: Zippy Print at para 41.

The Contract – Representations and Warranties

The liability for the damages flowing from a false representation can be excluded by a

properly framed exclusion clause, provided that both parties: (i) have considered such a clause;

and (ii) intend the clause should limit liability flowing from the representation: Zippy Print at

para 42. However, the exclusion clause will not operate to exclude liability under the terms of a

contract in the face of an explicit representation which induced the making of the contract. In

those circumstances, the more specific term, namely the explicit representation, will prevail.

Under section 4.1 of the 2011 SPA, Merit represented and warranted that the Transaction

Assets were in compliance with all relevant regulations. This brings the definition of

representations and warranties into play.

The terms “representations” and “warranties” have been judicially defined as follows:

A “warranty” may be distinguished from a “representation”. Black’s Law

Dictionary, 6^thed.[...] states at page 1586 that a warranty is a “promise that a

proposition of fact is true”. A warranty is intended to relieve the promise[e] of

any duty to ascertain the truth of facts herself, and is tantamount to a promise to

indemnify the promisee for any loss if the fact warranted proves to be untrue

(Black’s Law Dictionary, supra, at 1586). A representation, on the other hand, is

an express or implied statement made before or at the time the contract was

executed, “in regard to some past or existing fact, circumstances, or state of facts

pertinent to the contract, which is influential in bringing about the agreement:

(Black’s Law Dictionary, supra, at 1586). In other words, a breach of

representation could be a “fundamental breach” of a contract: Anne of Green

Gables Licensing Authority Inc v Avonlea Traditions Inc, 2000 CarswellOnt

731 at para 203 (SC) [Anne of Green Gables].

I summarize these two concepts as follows. First, a representation is the statement of fact

that induces one to enter the contract. Second, a warranty is the promise about a certain state of

affairs. It is a promise that something is true.

If a breach of a representation is established, it can result in damages as well as rescission

of the agreement. If a breach of representation is established, that could constitute a

³While the BC Court of Appeal in Zippy Print made this comment in the context of the Parol evidence rule and an

entire agreement clause, this principle has broader application.

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“fundamental breach” of a contract: Anne of Green Gables at para 203. Of relevance in this

case, an inaccurate representation may give rise to a misrepresentation claim for damages.

If breach of a warranty is established, that constitutes a breach of the underlying contract.

That entitles the innocent party to damages, based upon the breach. The vendor is liable

regardless of whether the purchaser could have determined that the warranty was untrue. That is

the case because liability in contract is strict: North Sun Mortgage Corp v Crossley, 2002

ABQB 66 at para 26 (Masters); Eagle Resources Ltd v MacDonald, 2001 ABCA 264 at para 17;

Northern & Central Gas Corp v Hillcrest Collieries Ltd, 1975 CarswellAlta (SC) at para 169

[Hillcrest].

Interpretive Issue – The Term “Potential”

[631] Another interpretive issue to consider is how can an ambiguous term be an exception to an

otherwise unambiguous representation? This question involves the use of the word “potential” in

the context of Schedule D, and how that term is to be interpreted.

[632] As stated by the Supreme Court of Canada, when interpreting a contract, courts “must read

the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent

with 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 [Sattva]. Surrounding

circumstances are background facts known or background facts that reasonably ought to have been

known to both parties at or before the formation of the contract: Sattva at para 58.

[633] The scope of the objective factual matrix is, however, circumscribed by an important

principle: surrounding circumstances do not include the contracting parties’ subjective intentions

and cannot be used to add to, detract from, vary or otherwise overwhelm the written words within

the agreement: Sattva at paras 57 and 59. This approach is consistent with the Parol evidence rule

because it preserves and promotes the objectives of finality and certainty: Sattva at para 60.

[634] The Alberta Court of Appeal has concluded that while evidence of pre-contract

negotiations is sometimes admissible as part of the surrounding circumstances, evidence of the

parties’ subjective intentions is always inadmissible: Alberta Union of Provincial Employees v

Alberta Health Services, 2020 ABCA 4 at para 27 [AUPE]; IFP Technologies (Canada) Inc v

EnCana Midstream and Marketing, 2017 ABCA 157 at para 79 [IFP Technologies]. The concept

of subjective intention includes both direct and indirect evidence about what a party thought a term

or a phrase in a contract meant: AUPE at para 31.

Evidence of prior negotiations or draft agreements is relevant insofar as that evidence

shows the factual matrix: IFP Technologies at para 85; see also, GR Hall, Canadian Contractual

Interpretation Law, 4th ed (Markham: LexisNexis, 2020) at 428 [Hall]. Such a factual matrix

cannot speak to the subjective intentions of the contracting parties, but can include: (i) the

genesis, aim or purpose of the contract; (ii) the nature of the relationship created by the contract;

and (iii) the nature or custom of the market or industry in which the contract was formed: Sattva

at paras 47-48; IFP Technologies at para 83.

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b. Applying the Law to the Facts

Schedule D – Interpreting the Term “Potential”

[636] An important issue in this case is whether the evidence of prior negotiations, drafts and

discussions leading up to the final version of Schedule D should be considered as part of the

interpretive process. Not surprisingly, Merit and NEP take diametrically opposing views on the

issue.

[637] Merit submits that the use of prior negotiations and discussions in interpreting the contract

at hand is necessary because such evidence fundamentally underpins the objective meaning of the

contract. On the other hand, NEP argues that what Merit describes as surrounding circumstances

are, in reality, evidence of subjective intentions and, therefore, cannot be admitted into the

contractual interpretative exercise undertaken by this Court.

[638] Specifically, Merit argues that prior drafts and discussions between the two parties show

that they knew, or ought to have known, that the word “potential” in Schedule D encompassed

instances of non-compliance that actually existed as well as unknown, possible instances of non-

compliance. In support of its position, Merit points to the following, and I address each point:

(a) Merit asserts that NEP was aware of, and specifically sought out, the legacy nature of the

Leduc Field, which had been run by an operator (MEC OpCo) who had not invested in

development. Merit established this by the evidence of Mr. Michael Newton and Mr.

Randy Green.

This evidence confirms the essence of the Newton Business Plan. I do not accept that this

evidence assists Merit in establishing its view that the meaning of “potential” included instances

of known non-compliance.

(b) Merit asserts that Mr. Carnahan was unsure what “potential noncompliance” meant in the

first draft of Schedule D, and stated in direct examination that he had not seen the term

“potential” used in that context. Merit asserts that in a later cross-examination, Mr.

Carnahan conceded that he understood that actual instances of non-compliance existed

with respect to items 1-4, 6 and 9 listed on Schedule D. During that cross-examination,

Mr. Carnahan testified that he communicated this understanding to Mr. Bud Newton.

Further, in his cross-examination, Mr. Bud Newton confirmed that Mr. Carnahan had

provided him with due diligence updates at a meeting on August 15, 2011.

I reviewed that testimony. I agree that one could construe the evidence to support the

assertions made by Merit. That said, I find the nexus to be weak. Further, there are no details in

evidence as to what was discussed and no reference to the magnitude of the non-compliances. As

a result, I give little weight to this evidence.

(c) Merit asserts that Mr. Carr told Mr. Carnahan that Schedule D was purposefully “very

general”, and included all potential knowledge of non-compliance. Merit also asserts that

Mr. Carr testified in the direct examination that Mr. Carnahan indicated he understood

and had told NEP that this meant there were actual instances of noncompliance.

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While I acknowledge that testimony by Mr. Carr, he also stated during the same stage of

this evidence that “…I said it was my understanding [you, Mr. Carnahan, have] been working on

Schedule D to qualify certain reps where we have to show our knowledge of potential issues of

non-compliance associated with the assets in regards to certain items in the reps and warranties.

So that was a very general purpose of the Schedule D, and we’d been gathering information from

field and Calgary personnel to populate the schedule”.

In that statement, Mr. Carr is suggesting that NEP is working on Schedule D to qualify

certain representations where MEC OpCo, generally, and the Persons of Knowledge,

specifically, have to show knowledge of “potential” issues. I find that statement of Mr. Carr to be

self-serving, and misleading. I do not accept it for the proposition that Merit is advancing.

Further, I do not accept that the cross-examination of Mr. Bud Newton wherein he admitted to

receiving due diligence reports as evidence that he understood the meaning of “potential” to

include instances of known non-compliance.

(d) Merit asserts that Mr. Maguire knew MEC OpCo had pipeline non-compliance issues. He

also allegedly told NEP that Schedule D was “broad”, “uncertain” and “qualified”, which

created a risk for NEP that could “have a consequence that wasn’t anticipated”. Merit

further asserts that Mr. Maguire understood that “potential” in Schedule D broadened the

exceptions to section 4.1 of the 2011 SPA, and that Mr. Maguire was ultimately

comfortable that Mr. Bud Newton and NEP understood the 2011 SPA and how it worked.

I accept those assertions by Merit, but only to a point. Concerning the term “potential”,

Mr. Maguire stated in cross-examination “…that you know, ‘potential’ is different than ‘actual’

or ‘likely’ or something like that. It’s – ‘potential’, you know, seems to impart it may or may not

be the case, we don’t know, and that was the sort of uncertainty around what exactly it meant”.

Based on that testimony, I find that Mr. Maguire made it clear that the term “potential” is not to

be equated with “actual knowledge”.

Concerning the assertion from Merit that Mr. Maguire was comfortable that Mr. Bud

Newton and NEP understood the 2011 SPA and how it worked, I assume that is a reference to

the allegation that Schedule D is a “carve-out”. I accept that proposition also, provided that there

is appropriate disclosure in Schedule D. In my view, there was no such appropriate disclosure.

(e) Merit asserts that other legal counsel to NEP understood that Schedule D was broad in

scope.

Mr. Blake Williams was on the due diligence team in connection with regulatory and

environmental matters. He was a member of the Bennett Jones team. The read-in of Mr. Blake

Williams indicates that he thought Schedule D was very broad. Concerning the use of the word

“potential”, he stated that “…it was nearly impossible to identify what was being accepted (sic)

from the reps and warranties”. He later went on to state that he “…understood that this

[S]chedule [D] was to be exceptions to the reps and warranties”. However, when it was put to

Mr. Williams that “[t]his was not a schedule where there was any obligation on MEC to make

full and complete disclosure of issues”, he deposed, “I can’t answer that”. Merit tried to pin him

on further questioning, but Mr. Williams would only answer that he was not sure what was

meant by the words “potential instances” and that he had raised that point for Mr. Maguire to

consider.

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Ms. Chelsea Nickels was on the due diligence team in connection with regulatory and

environmental matters. She was a member of the Bennett Jones team. The read-in from Ms.

Nickels indicates that she was aware that Mr. Maguire wanted to push back on the overly

inclusive language in Schedule D. On further questioning, Ms. Nickels confirmed that she

thought Mr. Maguire wanted to narrow the language in that schedule.

(f) Merit asserts that NEP understood and accepted that the wording of Schedule D “gutted”

certain representations and warranties in section 4.1 of the 2011 SPA. In particular, Merit

argues Mr. Bud Newton understood that Schedule D was “overly broad” and overly

“vague”, and that the use of the word “potential” included what “might be… could be”.

In cross-examination, Mr. Bud Newton acknowledged that NEP needed to seek more

clarity because of the vague disclosure in, and wording of, Schedule D. On further cross-

examination concerning the use of the term “potential” in Schedule D, Mr. Bud Newton was

asked if he understood the use of the word “potential” meant possible. He answered, “To me you

write down what you know, you list what you know…”. Mr. Bud Newton was pressed on it

further in cross-examination. He replied, “Yeah, that’s why I ask (sic) about it”. In a later cross-

examination of Mr. Bud Newton, he was asked if he had told MEC OpCo that they should list

the SCVFs. He answered, “Tell anybody at MEC what?” I infer that Mr. Bud Newton answered

the question in that manner because he was surprised that Merit would suggest that he had an

obligation to ask employees of the Defendants to make disclosure of known non-compliances.

(g) Merit asserts that NEP immediately undertook a self-audit of its Transaction Assets to

determine exactly what non-compliances it had purchased under the 2011 SPA.

I reviewed the evidence that Merit referred to on this point. It was an email from Ms. Hall

to a Mr. Kent Wimble on December 22, 2011. That was the day on which Mr. Bud Newton

became aware of the substantive safety concerns with the Transaction Assets. In response to Ms.

Hall’s question, Mr. Wimble answered that the self-audit commenced on October 26, 2011. I

find that there is no reference in that email evidence to suggest that the focus of the self-audit

was to identify what non-compliances had been acquired by NEP when it purchased the

Transaction Assets. In making this point, I note that self-audits can occur for many reasons.

(h) Merit asserts that after NEP received the Wimble Report and Chow Report, Mr. Bud

Newton himself used “potential” to describe the known non-compliances internally and

to the Regulator.

I reviewed the email that Mr. Bud Newton issued to staff concerning this matter.

Concerning the correspondence from NEP to its staff, I acknowledge that he used the term

“potential” when he referred to non-compliance situations. Concerning the correspondence from

NEP to the Regulator, I also acknowledge the use of the term “potential”.

In both cases, the use of the word potential is understandable for two reasons. First, the

email to NEP staff was dated Thursday, December 29, 2011. That was just one week after Mr.

Bud Newton had been alerted to the non-compliance issues. Given the intervening Christmas

break, there had been a mere two clear business days since he had been notified of the matter. In

the circumstances, I infer that he had not been able to fully review matters which would justify,

in my view, the use of the term “potential”. Second, the communications to the Regulator could

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attract enforcement action and penalties. As a result, the use of the term “potential” is not an

outright admission of guilt. In that context, it was a sensible use of the term.

[651] In maintaining that the above communications constitute surrounding circumstances that

show the relevant factual matrix in relation to the formation of the contract, Merit relies on a

number of cases, including 1079268 Ontario Inc v GoodLife Fitness Centres Inc, 2017 ONCA

12 [GoodLife], Filkow et al v D’Arcy & Deacon LLP, 2019 MBCA 61 [Deacon], and NOV

Enerflow ULC v Enerflow Industries Inc, 2020 ABQB 347 [NOV].

[652] On the other hand, NEP primarily cites AUPE to contend that the various iterations of

Schedule D, as well as comments by Mr. Carnahan and other representatives of NEP are not

surrounding circumstances but instead, evidence of subjective understanding. As such, NEP

submits that the evidence does not form part of the factual matrix and is inadmissible.

[653] In my assessment of matters, I reviewed the case authorities cited by Merit. Based on my

review, those cases are of little assistance to the position advanced by the Defendants. My

comments on the three primary cases are as follows.

[654] First, in GoodLife, the email correspondence between the parties unequivocally

demonstrated that the purpose of the lease was to facilitate the use of the entire building by

Goodlife, including the basement. These facts were part of the factual matrix because they spoke

to the genesis and the aim of the contract in dispute.

[655] Second, in Deacon, the evidence of discussions leading up to the final settlement

agreement shed light on the existing accounting practice and, in particular, the aim of the

agreement itself. Those particulars do not reflect the intent of the parties.

[656] Third, in NOV, the draft and final disclosure letters contained a crucial yet unambiguous

characterization of a key term. This characterization served as an objective, mutually-agreed

background fact in framing an important contractual term, and its interpretation. In that case, the

subject term had been included in the disclosure letter from the outset, it never changed and there

was no evidence that NOV Counsel ever took issue with the term. As stated in NOV, the reference

to the background provided context. It did not, and was not intended to, provide evidence of

negotiations: at para 483.

[657] As I review the context, the facts in the present case are more analogous to those in AUPE.

In AUPE, the primary issue was whether “Operational Restructuring” meant the existing

“Operational Best Practices” (“OBP”) program within Alberta Health Services (“AHS”).

[658] AHS argued that they were essentially one and the same. In contrast, AUPE was of the

view that the arbitrator relied on the subjective intention of the parties to restrict the scope of an

otherwise expansive term.

[659] Notably, the arbitrator in the AUPE case considered, among others, the following four

factors: (i) AHS informed AUPE of its intention to limit the negotiations to job-related

consequences arising from the OBP program only; (ii) AHS told AUPE that its mandate was

limited to negotiating about the OBP program only; (iii) AHS acknowledged that it could rebrand

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the OBP program and call it something else; and (iv) AUPE told AHS that they were not prepared

to only limit their negotiations to the OBP program.

[660] The Alberta Court of Appeal classified the above as indirect evidence of what AHS and

AUPE subjectively intended the phrase “Operational Restructuring” to mean: AUPE at para 51.

Accordingly, it was unreasonable for the arbitrator to consider the evidence in interpreting the

phrase in dispute. The appellate Court added that, arguably, each party knew that the other had a

different view of the meaning of “Operational Restructuring” but avoided direct clarification of

the language because they were under pressure to reach an agreement. Put differently, they agreed

to the words, but not what the words meant: AUPE at para 57.

[661] The nature of the dispute regarding how Merit and NEP understood the term “potential” in

Schedule D is not dissimilar to the situation in AUPE. As a result, I find that the evidence of prior

discussions and comments between Merit and NEP is adduced primarily to show the parties’

subjective intentions. While Mr. Carnahan testified that he was aware of actual instances of non-

compliance with regards to clauses 1, 2, 3, 4, 6 and 9 in Schedule D, there was no discussion,

negotiation or clarification of the term “potential” between the parties. Since there was never an

express discussion or agreement on the meaning of “potential” between Merit and NEP, it is

dubious that there ever was an objective and mutual understanding of the term between the parties.

[662] As discussed above, comments made by Mr. Carnahan or other representatives of NEP

with respect to actual instances of non-compliance do not speak directly to the understanding that

NEP had of the word “potential”.

[663] Only upon significant extrapolation and under various presumptions can Merit conclude

that the two parties were ad idem with regards to the scope of “potential” as it appears in Schedule

D. The prior discussions and comments in the present case are not surrounding circumstances that

objectively frame the factual matrix in which the 2011 SPA was formed. Rather, they are indirect

evidence of the subjective intentions and presumptions of Merit with regards to the understanding

held by NEP.

[664] To take the comments of Mr. Carnahan or other representatives of NEP concerning the

alleged breadth of Schedule D and his awareness of actual instances of non-compliance, and use

them as a basis to conclude that Merit and NEP both mutually and objectively understood

“potential” to encompass known and unknown instances of non-compliance would be to ignore

the clear legal principles set out in AUPE. Further, from a practical and policy point of view, if

courts begin to accept this kind of evidence to aid their interpretation, contracting parties may be

encouraged to posture to create a record for future arbitration instead of making best efforts to

achieve bargaining consensus: see AUPE at para 30.

[665] Based on the facts and analysis, I find that the prior discussions and comments amongst

the representatives of Merit and NEP are inadmissible as an interpretive aid concerning the term

“potential” insofar as they show the subjective intentions of the parties.

[666] Now, I turn to the interpretive exercise itself. The plain or ordinary meaning of the word

“potential” is both clear and consistent. Black’s Law Dictionary defines the term “potential” as

“[c]apable of coming into being; possible if the necessary conditions exist”: Bryan A Garner,

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Black’s Law Dictionary, 11th ed (St. Paul, MN: Thomson Reuters, 2019) at 1413. Other

dictionaries such as Merriam-Webster similarly places a particular emphasis on the “possibility”

and “capability” of existence, and not actual existence.

[667] In fact, when asked to define “potential”, I expect that an ordinary person in a commercial

context is unlikely to depart significantly from the dictionary definition of the word. In my view,

the ordinary meaning of the term invites speculation into the future, and this conclusion does not

offend the relevant commercial reality.

[668] Based on my analysis, I find that the word “potential”, as it is used in Schedule D, is not

ambiguous. The language is not reasonably susceptible of more than one meaning, and, therefore,

this is not an instance where Parol evidence is necessary to determine the correct interpretation:

IFP at para 87.

[669] That said, a contract is not made in a vacuum. Words alone do not have an immutable or

absolute meaning. Accordingly, they must be interpreted in the context of the whole contract as

well as the surrounding circumstances: Sattva at para 47. Having done so, I find that the relevant

provisions within the 2011 SPA and the objective background facts support the conclusion that

“potential” in Schedule D signifies something that could possibly exist in the future but not yet in

existence in the present moment.

[670] To the extent possible, contractual interpretation must give effect to all parts of the

agreement, meaning no provision of an agreement should be interpreted to be redundant. In this

process, courts may construe one term as a qualification of another term that appears in the

contract: 1103785 Alberta Ltd v ExxonMobil Canada Ltd, 2008 ABQB 581 at para 19.

[671] The difficulty in the case at hand arises from the fact that the term “potential” is nowhere

defined. Nevertheless, there are provisions elsewhere in the 2011 SPA that elucidate the scope of

“potential”. For example, section 4.1(t)(ii) of the 2011 SPA sets out the limits concerning the

liabilities and obligations of MEC OpCo. That contractual provision states “except as set forth on

Schedule “F”, “V” or “D”, the Corporation [which is MEC OpCo] has no long-term liability or

obligation of any nature (whether known or unknown and whether absolute, accrued contingent,

or otherwise)…” (emphasis added).

[672] When describing the limitation of representations and warranties, section 4.2(f) of the 2011

SPA again expressly qualifies the scope as “whether now existing or hereafter arising”. In

instances where Merit wished to include known and existing liabilities and claims, it did so by

using clear language.

[673] Read objectively in the context of the 2011 SPA as a whole, I am not persuaded that

“potential instances of non-compliance” in Schedule D encompasses known and existing instances

of non-compliance. If Merit wished to include actual instances of non-compliance under Schedule

D, I infer from the manner in which other sections within the 2011 SPA were drafted that its choice

of language would have reflected such intentions, by clearly stating “known or unknown instances

of non-compliance”, “non-compliance instances now existing or hereafter arising” or some other

phrase to that effect.

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[674] The factual matrix regarding the genesis and aim of Schedule D is also germane. As

evidenced by words within section 4 of the 2011 SPA, the purpose of Schedule D is to provide

exceptions to the representations and warranties made by the Vendor and MEC OpCo. During his

direct examination, Mr. Carr testified that initially, the term “potential” only appeared in clause 7

of Schedule D. That clause 7 dealt with air emission monthly reporting requirements concerning a

particular gas plant facility. Subsequently, the term “potential” was added to numerous other

clauses, apparently to broaden the language.

[675] Based on the evidence before this Court, Merit initially employed “potential” to broaden

its protection from liability. Similar to such reasoning for clause 7, the use of “potential” in clauses

1, 2, 3, 4, 6 and 9 was due to the fact that Merit did not wish to provide specific instances of non-

compliance, thereby shielding itself from future claims of non-compliance, should they emerge as

a result of a more scrupulous investigation. The term “potential” was chosen deliberately to be

future-facing, and not grounded on extant instances.

[676] Given the surrounding circumstances, to interpret “potential” to capture known and

existing matters would be illogical.

[677] One of the arguments of Merit is that because certain clauses in Schedule D provide

examples of non-compliance (such as the failure to keep records under Directive 13), “potential

instances of non-compliance” necessarily encompasses actual instances of non-compliance. I do

not accept this argument. Considering my discussion above, the examples in Schedule D, read

objectively in the relevant factual matrix and in the context of the contract as a whole, are best

characterized as possible examples of non-compliance contemplated by Merit prior to and at the

time of the contract formation.

[678] Based on my analysis of the contract as a whole, the ordinary and grammatical meaning of

the term “potential” and the surrounding circumstances, I find that “potential instances of non-

compliance” as it appears in Schedule D signifies possible but not yet extant instances of non-

compliance. The term does not capture known and existing instances of non-compliance.

The 2011 SPA – Representations and Warranties

I turn to review the “representations” and “warranties” granted by Merit under the 2011

SPA.

Some of the warranties in the 2011 SPA are qualified by the knowledge of the Persons of

Knowledge (the “Qualified Warranties”). Other warranties are not qualified by the knowledge

of the Persons of Knowledge (the “Unqualified Warranties”).

Merit warranted that the Qualified Warranties and the Unqualified Warranties

(collectively, the “Contractual Warranties”) would be true as at both the August 2011 Signing

Date and the September 2011 Closing Date under sections 4.4 and 5.1(b) of the 2011 SPA.

(I) Unqualified Warranties

Based on my reading of sections 4.1(s), (t), (u), (dd)(ii) and (ff) of the 2011 SPA, I find

that they contain Unqualified Warranties. The text of each of those provisions is as follows:

4.1 Representations and Warranties of Vendor

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