Cardero Coal Ltd. v Carbon Creek Partnership

IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation:

Cardero Coal Ltd. v. Carbon Creek

Partnership,

2022 BCSC 253

Date: 20220217

Docket: S159680

Registry: Vancouver

Between:

And

Cardero Coal Ltd.

Plaintiff/Defendant by Counterclaim

Carbon Creek Partnership

Defendant/Plaintiff by Counterclaim

- and -

Docket: S160477

Registry: Vancouver

Between:

And

Peace River Partnership

Cardero Coal Ltd.

Plaintiff

Defendant

Before: The Honourable Mr. Justice Branch

Reasons for Judgment

Counsel for Plaintiff:

S. Stephens

Counsel for Defendant:

P.T. Linder, Q.C.

Cardero Coal Ltd. v. Carbon Creek Partnership

Place and Date of Trial:

Page 2

Vancouver, B.C.

October 12-22, 28-29, 2021

Place and Date of Judgment:

Vancouver, B.C.

February 17, 2022

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 3

Table of Contents

I. INTRODUCTION ................................................................................................ 5

II. BACKGROUND ................................................................................................. 5

The Carbon Creek Coal Deposit ............................................................................ 5

Project History........................................................................................................ 5

Utah Mines’ Exploratory Efforts.............................................................................. 6

The Johnson Application........................................................................................ 6

The Burns Applications .......................................................................................... 6

The Coalhunter Approach ...................................................................................... 7

Coalhunter Seeks Assistance................................................................................. 8

The Agreements..................................................................................................... 8

The Project Comes Together ............................................................................... 16

CDU Takes Control of Coalhunter........................................................................ 18

2011-2012 Exploration by Cardero....................................................................... 18

The Coal Price Collapse and its Effect on the Ability to Raise Funds................... 19

The Failed Sprott Financing ................................................................................. 21

The Amending Agreement.................................................................................... 21

June 2013 Meeting............................................................................................... 23

Kopple Financing.................................................................................................. 23

October 2013 Meeting.......................................................................................... 23

November 2013 Discussions................................................................................ 24

December 2013 Presentation............................................................................... 24

March 2014 JDS Report....................................................................................... 25

March 2014 Management Committee Meeting..................................................... 26

The Surrender and Abandonment........................................................................ 27

Post-Surrender Fallout ......................................................................................... 28

Acquisition of Coal Licence Applications from Anglo American ........................... 29

September 2014 Norwest Report......................................................................... 30

September 16, 2014 Management Committee Meeting....................................... 30

October 15, 2014 Telephone Call......................................................................... 31

Late 2014-Early 2015 Developments ................................................................... 32

CCP’s July 27, 2015 Letter Enclosing Draft Notices of Default ............................ 32

Cardero’s August 2015 Notice of Default ............................................................. 33

Establishment of a Coal Reserve ......................................................................... 34

Cardero Coal Ltd. v. Carbon Creek Partnership

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January 2016: CCP Delivers its Notice of Default ................................................ 34

Mountain Caribou Deferral Area Established ....................................................... 35

II. EXPERT EVIDENCE........................................................................................ 35

Pat Akers’ Primary Report.................................................................................... 35

Robert Farmer and William Wolf’s Reports .......................................................... 37

Pat Akers’ Reply Report ....................................................................................... 40

III.

IV.

V.

ISSUES......................................................................................................... 41

LEGAL PRINCIPLES.................................................................................... 42

ANALYSIS.................................................................................................... 44

A. Did Cardero Breach the JVA by Abandoning the Freehold Lease? ................. 44

1. The Nature of the Alleged Breach................................................................. 44

2. The Language of the Abandonment Clause ................................................. 45

3. The Alleged Restriction of the Right to Abandon to the Area of Interest....... 45

4. The Effect of the Trust Provisions................................................................. 46

5. The Guidance Provided by the Lease........................................................... 47

6. The Effect of the Witness Testimony ............................................................ 49

7. The Duty of Good Faith and the Duties of the Manager Generally ............... 51

8. The Effect of the Subsequent Increase in the Benchmark Price................... 53

9. The Lack of a PEA........................................................................................ 53

10. The Lack of a Viable Path Forward After Abandonment............................. 54

11. The Failure to Maintain the Lease in Good Standing.................................. 54

12. Failure to Obtain Management Committee Approval .................................. 55

13. Other Alleged Breaches by Cardero ........................................................... 56

13. Conclusion on Cardero’s Alleged Breach of the JVA.................................. 56

B. Did Cardero Breach the Lease?....................................................................... 56

C. Did Cardero Breach a Fiduciary Duty? ............................................................ 59

D. Did CCP Breach the JVA?............................................................................... 60

E. Notice Issues ................................................................................................... 64

1. Was Cardero’s Surrender Notice Under the Lease Effective?...................... 64

2. Was Cardero’s August 24, 2015 Letter Effective Notice under the JVA? ..... 65

3. Was CCP’s July 27, 2015 Letter Effective Notice under the JVA?................ 67

4. Is CCP Estopped from Raising Breaches of the JVA or the Lease as a Result

of its Delay Providing Notice............................................................................. 68

F. Remedy and Damages..................................................................................... 71

VI.

CONCLUSION.............................................................................................. 72

Cardero Coal Ltd. v. Carbon Creek Partnership

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I.

INTRODUCTION

These two actions seek a determination of the rights of the parties in relation

[1]

to a coal mining development project in northern British Columbia (the “Project”).

[2] Cardero Coal Ltd. (“Cardero”) is the plaintiff in the first action (S159680)

against Carbon Creek Partnership (“CCP”) (the “JVA action”). Peace River

Partnership (“PRP”) is the plaintiff in the second action (S160477) brought against

Cardero (the “Lease Action”). Given the overlap in their ownership and

representation, CCP and PRP will be referred to collectively as the “Partnerships”.

[3]

By order pronounced April 13, 2018, Master Harper ordered that the JVA

Action and the Lease Action be tried together.

II.

BACKGROUND

The Carbon Creek Coal Deposit

[4]

Carbon Creek is approximately 60 kilometers northwest of Chetwynd and 40

kilometers west of Hudson’s Hope, in the vicinity of Williston Lake. It has long been

recognized that this area contains substantial coal deposits. A coal deposit was first

discovered in the early 1900s.

Project History

[5]

In 1924, Senator Patrick Burns obtained certain rights to a landholding in the

Carbon Creek area as part of an agreement with a debtor of his. In 1956-57, a Burns

family company exercised an option through which it acquired freehold title to the

lands and undersurface rights to Crown Granted District Lots 319 to 328 (the

“Freehold”). Mining on freehold lands enjoys an advantage in that it does not require

the issuance of a Crown coal licence or lease for exploration or mining.

[6]

Pursuant to Quit Claim deeds executed in favour of the Burns Foundation

Limited in 1971, the original debtor’s successors did retain a 50% interest in any

royalties earned from the Freehold.

Cardero Coal Ltd. v. Carbon Creek Partnership

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Utah Mines’ Exploratory Efforts

[7]

From 1970 to 1981 Utah Construction & Mining Co. (“Utah Mines”) explored

the Freehold and adjacent Crown lands pursuant to an agreement with certain Burns

family corporations. Based on its early results, Utah Mines issued a prospectus

proposing a metallurgical coal development. The prospectus reported the discovery

of in-place coal reserves of 120 million tonnes (“MT”) from which the company

projected 67 MT of recoverable reserves. The prospectus also identified the location

of underground and open pit reserve targets, as well as preliminary mine blocks.

[8]

In 1976, Utah Mines issued a revised coal tonnage estimate of 143 MT.

[9]

After a period of inactivity, Utah Mines’ coal licence applications lapsed. Its

work resulted in 46 boxes of exploration data coming into the Burns family’s

possession.

The Johnson Application

[10] In or around 2004, Alan Johnson filed a coal licence application that also

purported to cover parts of the Freehold, as well as areas adjacent to it (the

“Johnson Application”).

The Burns Applications

[11] By 2004, the Freehold was controlled by P. Burns Resources Ltd. (“Burns”).

[12] In 2005, Burns submitted ten coal licence applications (the “Burns

Applications”) to the B.C. Ministry of Energy and Mines (the “Ministry”). Taken

together, the Freehold (2,600 hectares or “ha”), the additional area covered by the

Burns Applications (11,310 ha), and the net additional area covered by the Johnson

Application (3,540 ha) comprised a contiguous parcel of 17,450 ha.

[13] When filing its applications, Burns discovered the existence of the Johnson

Application. In response, Burns commenced litigation against Mr. Johnson seeking

to invalidate the Johnson Application on the basis that it improperly sought to include

Cardero Coal Ltd. v. Carbon Creek Partnership

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the Freehold (the “Johnson Litigation”). The existence of the Johnson Litigation

prevented development of the Project for some time.

The Coalhunter Approach

[14] Coalhunter Ltd. was a company controlled by Michael Hunter. I will use both

“Coalhunter “and “Cardero” for this entity, as its name later changed to that of the

JVA Action plaintiff, Cardero Coal Ltd.

[15] Michael Hunter has over 20 years experience in the B.C. coal industry,

including with equipment operations, hiring, budgeting, management of field

operations, First Nations consultation, and regulatory compliance.

[16] In about 2010, Mr. Hunter met with Mr. Johnson and discussed whether there

was a way to resolve the Johnson Litigation so that the Project could move forward.

Mr. Hunter offered to act on Mr. Johnson’s behalf in trying to resolve the dispute with

Burns. In March 2010, Coalhunter entered into a letter of intent with Mr. Johnson

which contemplated Coalhunter receiving an option to acquire the Johnson

Application.

[17] Armed with this letter of intent, Mr. Hunter approached Burns, then

represented by Larry Horan—the Partnerships’ primary witness at trial. Mr. Hunter

proposed unifying the various interests and claims so that the Project could move

forward. On or around May 11, 2018, Memoranda of Understanding (“MOUs”) were

executed between Burns and Coalhunter that would have the effect of ending the

Johnson Litigation and providing a roadmap to move the Project forward.

[18] The MOUs provided, inter alia, that Coalhunter would be responsible to make

the following payments to the Partnerships: $1 million at closing to each of CCP and

PRP, $2.5 million to each of CCP and PRP by November 15, 2010, and $2.5 million

to each of CCP and PRP by November 15, 2011.

[19] As part of implementing the MOUs, Burns had created the separate

Partnerships in order to accommodate the fact that there was a different group of

Cardero Coal Ltd. v. Carbon Creek Partnership

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individuals with an interest in the proceeds of the Freehold as opposed to the other

Burns properties. However, Burns controlled the day-to-day operations of both

Partnerships.

[20] With MOUs now in place, on May 18, 2010, Mr. Hunter executed Coalhunter’s

option with Mr. Johnson. Under this agreement, Coalhunter acquired the rights to the

Johnson Application for consideration including a non-refundable deposit of $75,000,

a first option payment of $275,000, a second payment of $5 million, and the

provision of certain shares and options in Coalhunter.

Coalhunter Seeks Assistance

[21] Coalhunter did not have the funds necessary to meet its immediate financial

obligations under these various agreements. Consequently, Coalhunter sought out

financial assistance. Coalhunter made presentations to several investors without

success. Eventually, Mr. Hunter approached Keith Henderson at the publiclytraded

company, Cardero Resource Corp. (“CDU”). Coalhunter’s presentation to Mr.

Henderson included the following assertions:

a) Production was projected to start in 2012 to 2013, with full production

estimated for 2014 to 2015.

b) Development costs and capital expenditures were estimated at $95 million.

[22] Although Mr. Henderson was of the view that these projections were overly

optimistic, he believed the deal on offer was too good to pass up. Shortly after the

presentation, CDU agreed to purchase 49% of Coalhunter’s shares in consideration

for $3.6 million.

The Agreements

[23] With the comfort of financial support from CDU, Mr. Hunter pushed the

Project forward. Two formal agreements were executed between the newly created

Partnerships and Coalhunter on June 15, 2010.

Cardero Coal Ltd. v. Carbon Creek Partnership

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[24] The first agreement created a joint venture between Coalhunter and CCP (the

“JVA” for the agreement and the “Joint Venture” for the relationship generally). In

general terms, Coalhunter agreed to assume 100% of the costs of exploration,

development, mining, and marketing in return for a 75% interest in the Project.

Coalhunter would hold any interests of the JVA and would operate as its manager.

CCP was given shares in Coalhunter, as well as the power to appoint a Coalhunter

director. The key terms defined in the JVA are as follows:

 “Coal Licenses” is defined as the “coal licences which may be issued by the

MEMPR pursuant to the Coal Licence Applications, and including any Coal

Tenures into which the same may be converted, but not including any coal

licences abandoned pursuant to section 5.10 of this Agreement”.

 “Coal Tenures” is defined as “a coal licence, coal lease or other form of

tenure to a coal property”.

 “Common Operation” is defined as: “…the performance of Exploration,

Development and Production on or for the Premises for the Co-Owners as

tenants in common by the Manager acting under the direction and control of

the Management Committee to the extent provided by this Agreement.”

 “Laws” is defined to include the Carbon Creek Coal Lease, the common law

and principles of equity.

 “Losses” is defined as damages, liabilities and legal costs incurred on a

solicitor and own client basis.

 “Premises” is defined as follows:

… the Coal Licence Applications, any Coal Licences once

issued, any Crown Coal Leases once issued, Coalhunter's

interest in the Carbon Creek coal lease once granted by the

Peace River Partnership, any other Coal Tenures issued in

respect of any of the foregoing, and all lands, leases, interests

in land and, coal, mines and plants and the production

therefrom, buildings, machinery equipment, materials,

supplies, inventories of Production, Products, cash rights'

Cardero Coal Ltd. v. Carbon Creek Partnership

powers, privileges, accounts and other property, real or

Page 10

personal, movable; immovable, tangible or intangible, of

whatever nature or kind hereafter acquired and at any time

held, by or for the Co-Owners as tenants in common under or

pursuant to this Agreement

[25] The other relevant terms of the JVA are as follows:

 Pursuant to Article 3.3, any waiver must be in writing.

 Pursuant to Article 4.6, CCP is given 25% carried interest. CCP has a right to

receive 25% of the net proceeds of production from the Premises but is not

required to make any contribution towards exploration, development, mining,

and marketing costs.

 Pursuant to Article 4.8, the parties covenant to make all of their interests in

each of the coal tenures available exclusively for the purposes of the Joint

Venture.

 Pursuant to Article 4.9, each Co-Owner has the right to take in kind its

proportionate share of its interest in coal and coal by-products.

 Pursuant to Articles 4.10-4.12, “if and when any” of the Johnson Licenses,

Coalhunter Licences, or Carbon Creek Partnership Licenses (referred to

above as the Burns Applications) are issued and transferred to Coalhunter,

they would form part of the Premises and “shall be held by Coalhunter in trust

for the benefit of the Carbon Creek Joint Venture for so long as the Carbon

Creek Joint Venture remains in effect”.

 Pursuant to Article 4.13, similar terms are established for the Freehold

(referred to in the JVA as the “Carbon Creek Coal Lease”):

If and when the Carbon Creek Coal Lease is granted to

Coalhunter, the Carbon Creek Coal Lease shall form part of

the Premises and the interest of Coalhunter therein shall be

held by Coalhunter in trust for the benefit of the Carbon Creek

Joint Venture for so long as the Carbon Creek Joint Venture

remains in effect.

Cardero Coal Ltd. v. Carbon Creek Partnership

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 Article 5.2 governs the Co-Owners' Relationship, stating:

Nothing contained herein shall be deemed to constitute any

Co Owner, in its capacity as such, the partner, agent or legal

representative of any other Co Owner, or to create any

fiduciary relationship between them, for any purpose

whatsoever.

 Article 5.5 governs the relationship of the Freehold with other the properties,

stating:

Except as provided in section 5.6, if the Premises are brought

into commercial production, the Premises shall not be

operated as a single operation with other mining properties

owned by third parties or in which the Manager or a Co-Owner

has an interest.

 Article 5.6 provides that the Freehold may be operated as a single operation

with other properties:

If the Premises are brought into production, the Premises may

be operated as a single operation with the Peace River

Partnership Lands.

 Pursuant to Article 5.8, if either party seeks to acquire a property with a larger

“Area of Interest” outside the current properties, then the other owner will be

given the right to participate in that additional investment, in which case that

additional property would become part of the Premises.

 Pursuant to Article 5.10, Cardero has the option to abandon the Project (the

“Abandonment Clause”). This clause states:

If the Manager wishes to abandon or permit to lapse any of the

Coal Tenures comprised in the Premises, it may, provided that

it gives notice of its intention in writing to the Co-Owners and,

if one or more of the Co-Owners shall so request in writing

within fourteen (14) days of such notice, transfers such Coal

Tenures to those Co-Owners as tenants in common in

accordance with their respective Interests. All costs of such

transfers shall be home by such Co• Owners, including

transfer taxes or other taxes payable in respect thereof. Any

Coal Tenures so abandoned or transferred shall cease to be

Cardero Coal Ltd. v. Carbon Creek Partnership

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subject to this Agreement, except with respect to obligations or

liabilities theretofore accrued.

 Article 5.11 establishes that the Manager of the Project is an independent

contractor, providing:

In the conduct of the Common Operation, the Manager shall

act strictly as an independent contractor and not as an agent

of the Co-Owners or any of them except as specifically

authorized in this Agreement.

 Articles 6.1-6.2 establish the Management Committee. The Committee is

constituted to make decisions required to be made by the Co-Owners with

respect to the Common Operation, with Coalhunter appointing three of the

four voting members.

 Pursuant to Article 6.11, Management Committee decisions are binding on all

parties.

 Pursuant to Article 8.1, Coalhunter is the Manager of the Project.

 Pursuant to Article 8.2, as the Manager, Coalhunter is to conduct the

Common Operation, and specifically is instructed as follows:

Subject at all times to the direction and control of the

Management Committee, the Manager shall conduct the

Common Operation and do all things necessary or appropriate

for the proper conduct thereof in accordance with the Work

Plans and in compliance with all applicable Laws and in a

sound and miner-like manner in accordance with sound mining

and engineering practices…

[…]

(b)

Maintenance of Premises in Good Standing – Perform

or cause to be performed all of the obligations of the Co-

Owners, the performance of which is required in order to

maintain in good standing all mines, Coal Tenures, surface

and equipment leases and rights, conditional sales contracts,

and similar agreements and property rights constituting a part

of the Premises and shall maintain the Premises free of any

liens which might otherwise arise as a result of carrying on the

Common Operation except inchoate liens, liens for payments

not then due and liens being contested in good faith.

Cardero Coal Ltd. v. Carbon Creek Partnership

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 Pursuant to Article 11.1, any Co-Owner wishing to withdraw from the

Common Operation can elect to offer the other Co-Owner its Interest in the

Joint Venture for $1.00. If the other Co-Owner declines to purchase the

Interest, “the Agreement shall be deemed terminated”.

 Article 12.1 provides that, upon any default by a Co-Owner in the

performance of any obligation under the agreement, and the failure to cure

such default within 30 days, then the defaulting party will be deemed to have

assigned and conveyed its interest to the other Co-owner and shall be paid

fair market value for such interest, with the value to be determined by

arbitration.

 Article 15.1 establishes a force majeure clause, excluding the non-

performance of certain acts beyond the reasonable control of a party by

reason of force majeure, but expressly excluded “lack of funds”.

 Article 16.1 provides that the JVA is in effect so long as any two of the original

parties continue to own any interest or have obligations thereunder.

 Pursuant to Article 19.2, the parties agree to indemnify the other from any

“Losses” incurred as a result of the default of the other.

 Article 21.1 sets out the level of engagement and participation in the

operation of the Partnership expected of the parties:

Each party shall promptly do and provide all acts and things

and shall promptly execute and deliver such deeds, bills of

sale, assignments, endorsement and instruments and

evidences of transfer and other documents and shall give such

further assurances as shall be necessary or appropriate in

connection with the performance of this Agreement. The

parties agree to co-operate fully in apply for all necessary

governmental approvals and permits. Each party shall give to

the Manager from time to time such powers of attorney and

other evidences of authority as shall be necessary to enable

the Manager to perform its duties hereunder.

Cardero Coal Ltd. v. Carbon Creek Partnership

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[26] Under the second agreement, Coalhunter was granted an option to enter into

a coal lease for the Freehold with PRP (the “Coal Lease Option Agreement”). In

order to maintain its option, Coalhunter was responsible for three payments to PRP

totalling $6 million. Upon exercising the option, Coalhunter would acquire from PRP

the sole and exclusive licence and authority to work all mines, seams and beds of

coal in, on, and under the Freehold. Coalhunter would also be required to pay a 5%

royalty to PRP on production, with a first minimum annual royalty becoming payable

starting June 15, 2016. Other key terms of the underlying lease (the “Lease”) are as

follows:

 Pursuant to Article 1.1 (s), “Losses” is defined as “claims losses, demands,

judgments, liabilities, expenses, damages, fines, charges and costs (including

legal costs incurred on a solicitor and own client basis)”.

 Pursuant to Article 2.1, PRP grants Coalhunter the exclusive right to mine

coal in and under the Freehold.

 Pursuant to Article 2.2, Coalhunter holds the lease for a term of five years,

expiring on June 15, 2017. The Lease will renew annually so long as

Coalhunter complied with its terms.

 Pursuant to Article 5.6, Coalhunter has no obligation to mine or work the

Freehold.

 Article 20.1 stipulates what occurs should Coalhunter fail to perform its

obligations under the Lease:

Failure to Perform

In the event of the occurrence with respect to Coalhunter of

any one or more of the following:

(a)

Coalhunter has failed to obtain on or before June 15,

2013, all permits and approvals required under

applicable Laws for the operation of a mine on the

Lands, provided that if the Peace River Partnership,

acting reasonably, considers that the failure to obtain

any permit or approval which has not been obtained by

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Coalhunter is due to circumstances beyond the control

of Coalhunter and that Coalhunter has made all

reasonable efforts to obtain such permit or approval,

such failure shall not be a termination event unless and

until any such permit is refused;

(b)

(c)

Coalhunter has failed for whatever reason, whether or

not beyond Coalhunter's control, to commence

Commercial Production on the Lands by June 15,

2017; or

from and after June 15, 2017, Coalhunter fails to

achieve Annual Production of at least five hundred

thousand (500,000) metric tonnes for a period of three

(3) consecutive years;

then the Peace River Partnership, without prejudice to any

other remedy it may have, shall have the right to terminate this

Lease.

 Article 21.1 provides what will occur in the event of default by any party. This

clause provides that in the default of the payment of any indebtedness, “and

the failure of the party to cure any such default in the payment of any monies

required hereby within thirty (30) days after receipt of written notice”, the other

party shall “without prejudice to any other remedy it may have… have the

right to terminate th[e] Lease”.

 Article 23.1 provides Coalhunter with a right to surrender the lands under the

Lease, stating:

Notwithstanding anything herein contained, Coalhunter may,

at any time, upon giving the Peace River Partnership sixty (60)

days prior written notice thereof determine or surrender all of

its right, title and interest in all of the Lands or in any legal

section of the Lands whereupon this Lease shall terminate as

to the part so surrendered.

 Pursuant to Article 24.1, in the event that the Lease was terminated,

Coalhunter will remain liable to PRP for any “due and unpaid… Royalty or

Minimum Royalty” amounts “as if such termination had not occurred”.

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 Pursuant to Article 30.1, Coalhunter agrees to indemnify and hold harmless

PRP from any Losses incurred by PRP as a result of “any breach of this

Lease by Coalhunter”.

 Article 33.12 governs the relationship of the parties, stating:

Nothing contained herein, nor the holding of any interest

acquired hereunder, shall be deemed to constitute Coalhunter

or the Peace River Partnership, the partner, agent or legal

representative of the other or to create any fiduciary

relationship between them for any purpose whatsoever.

[27] All of the agreements included “entire agreement” clauses.

[28] With the execution of the agreements, Lawrence Talbot, General Counsel for

CDU, provided Mr. Horan with bank drafts for the initial two $1 million payments

required under the Coal Lease Option Agreement and the JVA.

The Project Comes Together

[29] The properties subject to the various agreements are set out in the map

below:

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Page 17

[30] In the original of this judgment, the Freehold is outlined in green, the Johnson

Application licences outside of the Freehold are in red, and the Burns Applications

are in black. The map does not show the boundary of the Area of Interest, but it

extends outwards from the outlined areas.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 18

CDU Takes Control of Coalhunter

[31] In the spring of 2011, CDU acquired the balance of Coalhunter’s shares

through a plan of arrangement and changed the company’s name to Cardero Coal

Ltd.

2011-2012 Exploration by Cardero

[32] Cardero analyzed the Utah Mines information, but found that its usefulness

was limited, as it was not compliant with National Instrument 43-101 (“NI 43-101”),

and thus did not meet the requirements to raise funds through debt or equity.

[33] On December 6, 2011, Cardero’s consultant, Norwest Corporation

(“Norwest”), produced a preliminary economic assessment (“PEA”), in accordance

with NI 43-101, which largely confirmed Utah Mines’ work.

[34] Over the course of 2011 and 2012, Cardero conducted additional drilling.

Although never publicly published, these studies expanded the projected resource to

531 MT measured, and indicated another 215 MT, for a total of 746 MT.

[35] In late 2012, the Johnson Application was converted into four new coal

licences.

[36] On November 6, 2012, Norwest produced a pre-feasibility study (“PFS”) with

an effective date of September 2012 and which was in accordance with NI 43-101.

Among other things, the PFS established that:

a) there were no fatal flaws associated with the Project;

b) the deposit was understood to be comprised of the most valuable hard coking

coal (“HCC”) (60%), 34% soft coking coal (“SCC”), and 6% thermal coal;

c) the projected resource was 468 MT measured and indicated, and 232 MT

inferred (total of 700 MT);

d) 62% of the mineable coal was recoverable from the Freehold;

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 19

e) the required capital costs (excluding the cost of leasing equipment) would be

$839 million over the life of the mine; and

f) the total projected net cash flow to Coalhunter, after payback and accounting

for the carried interest of CCP, was estimated to be roughly $2.1 billion USD

over the life of any mine.

[37] I note that the PFS did not incorporate the results of the 2012 drilling.

[38] Comforted by this information, Coalhunter exercised its option on the

Freehold by executing the Lease on November 7, 2012.

[39] On November 8, 2012, CDU reported the key results of the PFS in a press

release, including the finding that the base case net present value at an 8% discount

rate for Cardero’s interest was projected to yield a 23.7% internal rate of return

(“IRR”).

[40] All things being equal, the next logical step for Cardero should have been to

complete a full feasibility study. But all things did not remain equal. The unfortunate

change in the landscape was a dramatic drop in coal prices. No feasibility study was

ever completed.

The Coal Price Collapse and its Effect on the Ability to Raise Funds

[41] When the JVA and Coal Lease Option Agreement were entered into in June

2010, the key industry benchmark for the price of HCC was approximately $200-

$220 per tonne. In 2011, this price rose to $220-$330 per tonne. For the purposes of

the PFS, the potential price was estimated using a low of $165, a base of $200, and

a high of $217 per tonne. The projected average realized price for coal from Carbon

Creek, given the assumed split of the types of coal available, was $185 per tonne.

[42] By the time of the publication of the PFS, the price had fallen to $174 per

tonne. Prices continued to falter thereafter, which had a serious impact on Cardero’s

ability to raise funds.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 20

[43] Mr. Henderson, the witness with the most experience in mining and marketing

coal, testified that institutional lenders require an IRR in excess of 20% to consider

providing project financing for coal mine development. Private equity firms typically

require an even higher IRR in the range of 30%. The 2011 analysis showed an

estimated IRR of 29.3%. The 2012 PFS’s base case resulted in an estimated IRR of

24%. However, if the low case illustrated in the PFS were to materialize—an

average price at $143 per tonne—the IRR would fall to 13%, well below what

investors or lenders would require. Unfortunately, that is precisely what happened.

[44]

By mid-2013, the benchmark price for coal fell to $145-$150 per tonne. That

pricing equated to an average coal price from the Project of only approximately $125

per tonne. As such, the price of coal was, by that point, significantly below the worst-

case scenario contemplated in the PFS. Likewise, the price was well below what Mr.

Henderson testified was necessary to attract investors. The price then continued to

fall steadily over the subsequent two years. A chart of the downward path of the

benchmark price through to the end of 2015 follows:

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 21

[45] Based on these diminished prices, Mr. Henderson foresaw that it would be

extremely difficult to raise the capital necessary to move the Project forward to full

production. This is exactly what occurred.

The Failed Sprott Financing

[46] Cardero attempted to secure a smaller facility from Sprott Resource Lending

Corp. (“Sprott”) that, combined with equity funding, would hopefully provide sufficient

funding to see the Project through its feasibility study stage. However, the potential

Sprott facility collapsed when CCP declined to make its 25% beneficial interest in the

Joint Venture’s assets available for Sprott’s security. Without the Sprott funding,

Cardero was in dire financial circumstances.

The Amending Agreement

[47] By this point, it became clear to all of the parties that the June 15, 2013

deadline in the Lease for receiving the necessary permits would not be met. Mr.

Hunter and Mr. Horan entered into negotiations to address this issue. Before their

discussions could be concluded, Mr. Hunter left Cardero’s employ. Thereafter,

Cardero attempted to negotiate a more wide-ranging set of amendments, but Mr.

Horan was only willing to agree to the more limited terms discussed with Mr. Hunter.

[48] Given the approaching June 15, 2013 permitting deadline, Mr. Henderson felt

that Cardero had no choice but to sign and return the proposed amending

agreements, notwithstanding that Cardero also viewed the later June 2017

production deadline, as well as other provisions, as problematic to the development

of the Project. In an agreement dated May 1, 2013 (the “Lease Amending

Agreement”), the parties replaced the June 15, 2013 permitting deadline with a new

obligation on the part of Cardero to pay advanced royalties (that would be set off

against future royalties when production commenced). The required advance royalty

payments to PRP were as follows:

a) June 2, 2013: $500,000;

b) June 2, 2014: $2.5 million;

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 22

c) June 2, 2015: $2.5 million;

d) June 2, 2016: $2.5 million;

e) June 2, 2017: $2.5 million; and

f) June 2 of each year thereafter: $3.5 million

(the “Advance Royalty Payments”).

[49] Cardero was given an election to defer the payment of certain of these

amounts:

4.2(e) … Peace River Partnership agrees to accept payment of the amount

due on the following terms and conditions:

(i) all or any portion of the Advance Royalty due on June 2, 2013,

such payment may be extended by Cardero Coal by notice in writing

to Peace River Partnership given not less than 15 days prior to June

2, 2013, to anytime between June 2, 2013 and June 2, 2014,

[…]

(iii) notwithstanding an extension pursuant to clause 4.2(e)(i) or (ii),

the full amount of the Advance Royalty and all accrued but unpaid

interest to the date of the occurrence of any default described in

Section 21.1 shall immediately become due and payable on that

date…

[50]

The JVA was amended by changing the terms of the buy-out provision

following a default. The provision converted the right of the non-defaulting party to

buy-out the other’s interest from an obligation to an option (the “JVA Amending

Agreement”). Mr. Horan testified that he needed this new optional term because he

realized that a mandatory buy-out might prove prohibitively expensive for the

Partnerships.

[51] When he returned the executed amending agreements on May 31, 2013,

Cardero’s General Counsel, Mr. Talbot, also served notice of Cardero’s election “to

defer the payment of the CAD 500,000 Advance Royalty Payment due June 2, 2013

until June 2, 2014, and will therefore commence to pay 6% interest thereon…”.

Cardero recorded the first Advance Royalty Payment of $500,000 as an “Accounts

Payable” in its internal accounting records as of June 2, 2013. The interest on the

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 23

amount was recorded as “interest on Loan” with the notation “$500,000 for one year

@ 6%.”

June 2013 Meeting

[52] In June 2013, Mr. Henderson, now Cardero’s President and CEO, made a

presentation to the Joint Venture’s Management Committee. The presentation

outlined the progress Cardero had made to date, but also highlighted the challenges

created by the deteriorating market conditions. Mr. Henderson reported that market

feedback with respect to providing financing for the Project was negative. A

financing consultant advised that mining stock prices were at historic lows and were

continuing a long descent.

Kopple Financing

[53] By mid-to-late 2013, it was becoming clear that the June 2017 production

deadline in the Lease could also not be met. Further exploration and a feasibility

study remained to be performed and completed. Various permits, including an

Environmental Assessment Certificate and a permit under the Mines Act, R.S.B.C.

1996, c. 293, still had to be obtained.

[54] Cardero was in a dire cash position by this point, given the inability to obtain

financing. Staff were let go and most of the senior management team left.

[55] Cardero did manage to obtain limited interim financing from Luxor Capital

Group LP (“Luxor”). However, Luxor almost immediately asserted that Cardero was

in default of the agreement and threatened to enforce its security.

[56] Cardero was able to obtain replacement financing from Robert Kopple, an

American venture capitalist. Mr. Kopple’s financial relationship with Cardero began

in or around August 2013 and continues through to the present.

October 2013 Meeting

[57] On October 23, 2013, another Joint Venture Management Committee

meeting was held. Cardero’s presentation at the meeting emphasized the concerns

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 24

previously expressed with respect to coal prices. By this point, the average price had

deteriorated to $126 per tonne. This pricing yielded a projected IRR of only 5.7%—

well below what financiers required.

[58] The presentation noted that third parties had already assumed that there

would be a four-year hiatus in efforts to develop the Project. The presentation also

noted that, quite apart from trying to time the price forecasts, it would also make

sense to only bring the mine into production in about 2022 or 2023, given the

projection that global demand would start to exceed supply at about that time.

[59] There is some dispute between the parties about whether the possibility of

splitting the Coal Tenures between the Freehold and the other properties was

discussed at this meeting or the follow up meetings discussed below. I expect that

this is an example of each party giving and hearing the same message differently.

Over this period, Cardero was trying to emphasize that the Project was worth more if

it was kept together, in the hope that this would convince the Partnerships to make

concessions in order to keep the Project together in a more economically feasible

structure. The Partnerships appear to have heard this message as a rosy prediction

that the Project (as a whole) was still viable, at least in the long run. That said,

Cardero obviously needed to make decisions and secure financing in the short term.

This created an obvious tension.

November 2013 Discussions

[60] In November 2013, Mr. Horan and Mr. Henderson had a phone call in which

they discussed the need to push out the production deadline contained in the

Freehold’s Lease. Given the lack of progress in the discussions on this point,

Cardero began analyzing what the Project might look like without the Freehold.

December 2013 Presentation

[61] Given that Mr. Horan declined to accept the amendments to the agreements

that Cardero was looking for, Cardero asked to make a presentation to Burns’ full

board of directors. This meeting took place on December 4, 2013. Mr. Henderson

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 25

noted that the coal price assumptions in the PFS no longer reflected reality. He

indicated that the coal market would need to improve in order for Cardero to be able

to secure project financing. Forecasts were provided that showed that a price

rebound was not expected until at least 2019. The presentation also noted that,

given prevailing market prices, the Project had a minimal IRR. Finally, the

presentation addressed other challenges facing the Project, including increasing

First Nations opposition.

[62] Cardero outlined its recommendation to defer production until at least 2023

and noted the difficulty of securing financing for any project coming online sooner

than that. In terms of keeping the ball rolling, however, Cardero proposed at least

preparing a re-stated PFS incorporating data from the 2012 drilling program, as well

as incorporating mine optimization plans that had been developed. Cardero also

proposed advancing the coal licence applications and acquiring additional coal

interests in the vicinity.

March 2014 JDS Report

[63] JDS Energy & Mining Inc. (“JDS”) provided Cardero with a report on March 3,

2014 which analyzed the Project both with and without the Freehold (the “JDS

Report”). JDS determined that the Freehold and the other Coal Tenures could each

produce slightly in excess of 39.5 MT of saleable product. It noted that the other

properties had a significantly greater volume of HCC (46.459 MT versus 25.845 MT)

and surface mineable HCC (22.823 MT versus 12.594 MT) relative to the Freehold.

The reported IRR for Cardero’s 75% interest with the tenures kept together, and

using an 8% discount rate, ranged from 2% to 13%, with associated net present

values ranging from negative $219 million to $111 million. JDS assessed that if the

market returned to the PFS’ projected pricing levels, Cardero’s 75% interest in the

other properties would have an IRR of 31% and a net present value (“NPV”) of $462

million at an 8% discount rate.It would result in $597 million being paid to CCP on

account of its interest on an undiscounted basis. However, this particular report was

not admitted for the truth of its contents given that no expert testified in support of

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 26

the opinions set out therein. Rather, it was only admitted to help explain the parties’

subsequent conduct in response to this new information.

March 2014 Management Committee Meeting

[64] On March 11, 2014, the parties held another Management Committee

meeting. Cardero asserted that no investors would support the Project if the

Freehold stood to be lost due to the terms of the Lease and its approaching, but

unachievable, June 2017 production deadline. Cardero also advised that it could not

justify making any Advance Royalty Payments if such payments would effectively be

wasted. They would be wasted if the Freehold reverted to PRP pursuant to the

terms of the Lease when the unachievable June 2017 deadline in the Lease was not

met.

[65] Mr. Horan requested a letter from Cardero addressing the production

deadline and Cardero’s proposed moratorium on Advance Royalty Payments.

Cardero provided a letter on March 13, 2014 stating:

We have previously discussed the June 15, 2017 deadline for achieving

commercial production from the Lease lands contained in 20.1(a) of the

Lease Agreement, and I think it is fair to say that that both Cardero Coal and

PRP believe that it needs to be moved out at least 5 years in order to make

the overall Carbon Creek project financeable and to allow the worldwide

metallurgical coal market to recover. The 2017 date has been, and will

continue to be, a significant barrier to Cardero Resource raising finance and it

is frequently raised as an issue by analysts reviewing the Carbon Creek

project. It is also a barrier to the sale of Carbon Creek as a single asset, if

that is what the parties, together, chose to do.

… Due to the inability to secure the required financing at current coal prices,

Cardero Coal is unable to make the June 2, 2014 $500,000 advance royalty

payment…

[…]

… Unfortunately, Michael [Hunter] agreed to something that, in today’s coal

market, is just not financeable.

[66] Cardero requested a 5-year moratorium on the Advance Royalty Payments.

Cardero noted that if the requested amendments to the Lease were not accepted,

then Cardero anticipated having to withdraw from the Lease “with extreme regret

and as a last resort.”

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 27

[67] On March 24, 2014, Cardero sent a letter to Mr. Horan confirming the parties’

agreement that Cardero could deliver a notice of surrender of the Lease as late as

April 30, 2014. On March 27, 2014, the Partnerships accepted Cardero’s position.

[68] On April 17, 2014, CDU’s CEO and President, Henrik van Alphen, sent a

letter to Mr. Horan identifying the benefits of keeping the Coal Tenures together, and

reiterating the amendments Cardero required in order to allow that to happen.

Cardero sought to encourage PRP’s agreement to the proposed amendments by

offering to modify the Advanced Royalty Payments such that they would apply to all

coal from the Project, rather than just from the Freehold.

[69] On April 28, 2014, Mr. Horan emailed Cardero with a counter proposal. Mr.

Horan’s proposal left the June 2, 2013 and 2014 Advance Royalty Payments in

place, but accepted reductions to $2 million in June 2015, and to $2.5 million

thereafter. This proposal would still have required payments from Cardero to PRP

totalling $22 million between June 2014 and June 2022. This was not acceptable to

Cardero.

The Surrender and Abandonment

[70] Given the inability of the parties to agree on terms that would extend the

Lease’s 2017 deadline, on April 30, 2014, Cardero purported to issue a notice of

surrender under section 23.1 of the Lease, effective May 30, 2014 (the “Surrender

Notice”). Cardero also issued a notice of abandonment of the Lease pursuant to

section 10.5 of the JVA (the “Abandonment Notice”).

[71] This letter also included a proposal to amend the Lease by extending the

production deadline to 2022 and reducing the annual Advance Royalty Payments to

$300,000 until June 2019. PRP did not accept this proposal.

[72] The abandonment and surrender were not part of that year’s work plan

prepared by Cardero, and no prior consent was sought from CCP or PRP.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 28

Post-Surrender Fallout

[73] On May 6, 2014, Mr. Horan emailed Mr. van Alphen in connection with their

verbal discussions wherein Mr. Horan offered to extend the date for commercial

production to 2022 and to tie the Advance Royalty Payments to the benchmark price

of hard coking coal for the years 2015-2022. Mr. van Alphen responded on May 15,

2014, rejecting Mr. Horan’s proposal. Mr. Henderson testified that, notwithstanding

that Mr. Kopple was prepared to support Cardero, without a moratorium on Advance

Royalty Payments and an extension of the 2017 deadline for commercial production,

he could not recommend that Mr. Kopple finance the pending Advance Royalty

Payments. Mr. Kopple testified that while he had the funds available to finance the

Advance Royalty Payments if necessary, Mr. Henderson recommended against this.

[74] On May 21, 2014, Cardero advised Mr. Horan that it had renewed the coal

licences and paid the associated fees, that it would be preparing assessment reports

for the remaining Coal Tenures and provided notice that Cardero had applied for a

coal licence with respect to a small gap in the Joint Venture’s tenures. CCP elected

to participate in this acquisition pursuant to Article 5.8 of the JVA by letter dated

June 9, 2014.

[75] Cardero did not make the Advance Royalty Payment of $500,000 on June 2,

2014, or thereafter.

[76] At that time, CDU issued a press release announcing that Cardero had

withdrawn from the Coal Lease. The release stated that: “In the context of this

market, the making of the scheduled aggregate $12.5 million in advance royalty

payments over the coming 5 years was simply not justifiable and not in the best

interests of Cardero [CDU] shareholders.”

[77] On June 10, 2014, Mr. Henderson emailed Mr. Horan a proposed letter to the

Ministry confirming Cardero’s ability to speak for CCP, asking for Mr. Horan’s

comment. The letter was drafted for Mr. van Alphen’s signature. Mr. Henderson

testified that he had been informed by Ministry staff that it needed confirmation of

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 29

Cardero’s authority to deal with the applications, given the uncertainty created by the

historical Johnson Litigation. Mr. Horan did not respond to Mr. Henderson’s email.

[78] On June 17, 2014, Mr. Henderson called Mr. Horan to follow up on this issue.

Mr. Horan replied that CCP would not be cooperating with Cardero because he

believed the $500,000 of Advance Royalty Payments was owing to PRP and he

wanted it paid. He said that he would be sending a letter to Mr. Henderson outlining

his view of Cardero’s obligations on termination of the Lease. Mr. Horan also

suggested there had been a potential breach of the JVA by Cardero. Finally, Mr.

Horan said he had concerns with the validity of the Surrender Notice, as well as

concerns as to whether Cardero had the right to terminate the Coal Lease at all.

[79] On July 8, 2014, Cardero filed the assessment reports required to maintain

the Joint Venture’s remaining Coal Tenures in good standing. Cardero also prepared

and delivered a 2014 work plan. This outlined a plan for completion of the

assessment reports, completion of a new NI 43-101, efforts to advance pending coal

licence applications, acquisition of additional coal interests, and further technical

modelling and planning.

[80] On July 17, 2014, Mr. Horan sent a letter to Mr. Henderson requesting

performance of the obligations that arose from Cardero’s surrender. PRP also

demanded the $500,000 Advance Royalty Payment.

[81] On July 31, 2014, Cardero confirmed that it had performed its post-surrender

obligations. Mr. Henderson also noted that Mr. Horan and Mr. van Alphen had

agreed that the issue of the unpaid royalties would be discussed at the next Joint

Venture Management Committee meeting in September 2014.

Acquisition of Coal Licence Applications from Anglo American

[82] In August 2014, Cardero entered into a contract with a subsidiary of Anglo

American, plc, to acquire additional coal interests for the Joint Venture. Cardero paid

$235,000 to acquire the coal licence applications.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 30

[83] After receiving notice of this proposed transaction, Mr. Horan requested a

copy of the agreement to assess whether CCP would elect to participate in the

acquisition. Mr. Horan confirmed at trial that he understood he only had a right to

request a copy of this agreement pursuant to the JVA. CCP did not elect to

participate in these additional acquisitions.

September 2014 Norwest Report

[84] On September 12, 2014, Cardero received a new report from Norwest valuing

the Project without the Freehold. The report estimated a resource of 290 MT

measured and indicated, and 161 MT inferred.

September 16, 2014 Management Committee Meeting

[85] The next Management Committee meeting was scheduled for September 16,

2014. Cardero delivered notice of its acquisition of the coal licence applications from

the Anglo American subsidiary and discussed opportunities to potentially acquire

additional Coal Tenures. Cardero described its ongoing efforts and strategy to

advance the other coal licence applications. Mr. Henderson again advised Mr. Horan

that the Ministry had requested CCP’s approval for the advancement of the coal

licence applications. The Management Committee determined that CCP would

prepare a letter to the Ministry confirming Cardero’s authority to deal with the coal

licence applications.

[86] At the meeting, Mr. Horan requested a letter from Cardero addressing its

legal position on the $500,000 Advance Royalty Payment.

[87] The Management Committee also decided the following:

a) CCP would review the insurance binder and, if acceptable, sign an

acknowledgement confirming it was accepted as being in compliance with the

JVA.

b) CCP would review a proposed amending agreement to modify the Manager’s

accounting responsibilities and provide comments, if any.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 31

c) CCP would review a proposed modified Management Committee resolution

dealing with the reporting schedule.

d) The parties would execute a resolution in respect of the 2014 work plan.

[88] The minutes identified these action items. Mr. Henderson sent Mr. Horan a

copy of the minutes by email on September 19, 2014. However, aside from signing

the work plan resolution, Mr. Horan did not act on the other items assigned to CCP.

The work plan authorized Cardero, as Manager, to “[liaise] with the Assistant Deputy

Minister and Minerals Titles staff to move certain coal licence Applications (‘Burns

Applications’) forward towards issuance of coal licences.”

October 15, 2014 Telephone Call

[89] On October 15, 2014, Mr. Henderson and Mr. Horan spoke again. Mr. Horan

again made it clear that CCP would not be signing anything and would no longer

cooperate in relation to Joint Venture business until the $500,000 Advance Royalty

Payment issue was addressed. After the call, Mr. Henderson sent an email summary

to Mr. Kopple and Mr. van Alphen. Among other things, that email reports that Mr.

Horan said that he “is not going to sign anything…” and that the JVA “is not

important to” the Burns Group.

[90] On cross-examination, Mr. Horan confirmed the sworn statement in

paragraph 76 of his affidavit dated December 1, 2017 that, in essence, “… it is true

that on that call I advised [Mr. Henderson] that CCP would not be cooperating with

Cardero’s plans to manage the joint venture lands…”

[91] In the Partnerships’ final argument, the Partnerships made the following

acknowledgement:

On October 15, 2014, Mr. Horan and Mr. Henderson had a telephone call

wherein Mr. Horan advised that he would not be signing anything until

Cardero had dealt with the issue of the payment of the $500,000 Advance

Royalty payment. Mr. Horan wanted to see Cardero’s legal position in writing

so that he could provide it to their lawyers and determine whether or not to

sue Cardero. Mr. Horan believed that CCP, as a silent partner with a Carried

Interest, had no duty to cooperate or participate in the management of the

Joint Venture.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 32

Late 2014-Early 2015 Developments

[92] On December 11, 2014, Norwest delivered a report in accordance with NI 43-

101 reviewing the status of the Joint Venture without the Freehold. The report

confirmed a coal resource on the remaining tenures of 290 MT measured and

indicated, and 161 MT inferred.

[93] On January 30, 2015, Cardero delivered a letter to PRP outlining its position

in respect of the Advance Royalty Payments. Essentially, Cardero interpreted Article

4.2(e)(i) of the Lease Amending Agreement as deferring the due date rather than the

payment date. Given that this due date had not yet passed when the surrender

occurred, Cardero’s position was that the amount was not payable.

[94] In March 2015, Mr. Horan invoked the existence of the JVA as the basis to

obtain a copy of a confidential agreement between Cardero and a firm which owned

and operated a nearby bulk export marine terminal, Ridley Terminals Inc., from Mr.

Henderson.

[95] Mr. Horan testified that CCP formed the view that Cardero had breached the

JVA by terminating the Lease by at least late March or early April 2015. However,

CCP did not deliver a notice of default under Article 12.1 of the JVA at that time.

[96] In May 2015, Cardero filed reports and paid fees necessary to keep the

remaining Coal Tenures in good standing. Cardero also prepared and circulated a

new work plan. The work plan referenced Cardero’s intention to still try to advance

the remaining coal licence applications within the JVA. It also updated CCP on the

progress of the audit CCP had requested.

CCP’s July 27, 2015 Letter Enclosing Draft Notices of Default

[97] On July 27, 2015, a “without prejudice” letter was sent by Mr. Horan to

Cardero attaching draft letters, including a draft notice of termination of the JVA.

[98] The draft letters state, inter alia, “[a]s you are aware, Cardero terminated the

Coal Lease effective May 30, 2014.” The letters assert a claim for both the $500,000

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 33

Advance Royalty Payment and the subsequent $2,000,000 Advance Royalty

Payment.

[99] The cover letter concludes:

We thought you and Mr. Kopp[le] might be interested in discussing these

matters on a without prejudice basis before we delivered these letters to you.

Please let us know by Wednesday, July 29, 2015 at 4:00 pm MDT whether

you are interested in doing so and the proposed date for this meeting (which

should be within fourteen (14) days of this correspondence). Should we not

hear from you by that time we will send the attached letters.

[100] No meeting date was provided by Cardero within the time provided, and CCP

did not deliver final versions of the draft letters to Cardero.

Cardero’s August 2015 Notice of Default

[101] On August 9, 2015, Mr. Henderson sent Mr. Horan a package of materials for

the Management Committee meeting scheduled for August 12, 2015. Mr. Horan

advised Mr. Kopple that he did not think Mr. Kopple should attend this meeting,

given their ongoing dispute, until the two of them had had an opportunity to meet

and discuss matters.

[102] On August 24, 2015, Cardero delivered a notice of default to CCP under the

JVA based on CCP’s alleged failure to:

a) draft the letter to the Ministry;

b) review and approve the insurance policy;

c) review amendments to the JVA to modify the Manager’s accounting

responsibilities; and

d) review the minutes of the Management Committee meetings.

[103] While the letter was marked “Without Prejudice”, it included no settlement

offer. The letter did go on to suggest that a meeting with Mr. Kopple would be useful.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 34

The letter closed by providing notice of the Management Committee meeting

scheduled for September 3, 2015.

[104] Cardero then took steps to schedule a Management Committee meeting for

September 3, 2015. However, since CCP refused to attend, no quorum was

achieved. The meeting was therefore adjourned and reconvened in Vancouver on

September 15, 2015. Again, CCP failed to attend. However, pursuant to fallback

terms in the JVA, quorum was achieved this time even without CCP. The

Management Committee passed various resolutions in connection with the 2015

work plan and other outstanding matters. All items of business at the meeting

passed unanimously, including approval of the insurance policy for the Joint

Venture, approving amendments to the JVA to modify the Manager’s accounting

responsibilities, and approving the minutes of the September 16, 2014 Management

Committee meeting. In relation to the letter to the Ministry, the Minutes note that

“unless the CCP provided authorization for the Manager to act on their behalf, there

was in fact nothing that the Manager could do to change that situation”.

[105] On November 20, 2015, Cardero delivered a notice to CCP indicating that,

given CCP’s breaches of the JVA, Cardero was making an election under Article

12.1 of the JVA to acquire CCP’s interest in the Joint Venture. Cardero filed its

notice of civil claim on the same date. CCP did not accept that there was a valid

basis for Cardero to acquire its interest.

Establishment of a Coal Reserve

[106] On January 8, 2016, the parties learned that the Chief Gold Commissioner

had established a coal land reserve under s. 21(2) of the Coal Act, S.B.C. 2004, c.

15, in the area surrounding the Project, including lands covered by a number of the

remaining Coal Tenures within the JVA.

January 2016: CCP Delivers its Notice of Default

[107] On January 18, 2016, CCP finally delivered a formal notice of default to

Cardero under the JVA. CCP’s notice stated that it “constitutes written notice of

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 35

default pursuant to Section 12.1(a) of the [JVA].” The default identified in the letter

was Cardero’s decision to irrevocably surrender its interest and terminate the Lease

with PRP. CCP filed the JVA Action the same day.

Mountain Caribou Deferral Area Established

[108] On May 31, 2019, a provincial Order in Council was issued establishing the

Mountain Caribou Partnership Coal Licence Deferral Area over a portion of the

remaining Coal Tenures. This order prohibits coal development within the prescribed

area.

[109] There have been no material updates in the development of the Project since

this last event, as the parties have been focussed on this litigation.

II.

EXPERT EVIDENCE

Pat Akers’ Primary Report

[110] Pat Akers was presented as an expert witness by Cardero. Mr. Akers has a

Bachelor of Science in Accounting. He has worked in mining for more than 20 years

and he has evaluated mine expansions and new mining opportunities. Mr. Akers has

personal knowledge of this Project, having served as a project manager for Norwest

in respect of the PFS and the December 2014 Technical Report. Mr. Akers led

Norwest’s team and organized the work of the engineers and geologists reporting to

him.

[111] In his report, Mr. Akers opined on the steps a reasonable and prudent mining

operator in Cardero’s position would have taken in relation to the Lease and JVA.

[112] Mr. Akers summarized the difficult situation facing Cardero as follows:

In valuing a royalty, or in this case, an NPI which is essentially the same

thing, the economic viability of the underlying mining operation must be

demonstrated. Without an economically viable mine, there is no net profit,

hence no net profits interest. As noted previously, the Carbon Creek Coal

Project was not economically viable based on the coal prices that existed in

the 2013 through Q2 2016 timeframe. It is clear that the mine could not be

and was not developed due to the collapse and free fall of metallurgical coal

prices for three and a half years from 2013 through Q2 2016. Prices fell from

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 36

about US $225 at the end of 2012 to less than US $100 by the end of 2015.

Capital was simply not available and even if it was, it would not have been

prudent to invest those sums of money at that time. As we noted previously,

during this period, mines were being idled or permanently closed, projects

were being shelved and coal companies were going bankrupt including

Peabody, Arch Coal Company, and Alpha Natural Resources. In addition,

there were other inherent risks associated with the development of the project

including permitting and First Nations agreements which could have caused

significant delays in the development schedule.

[113] Mr. Akers concluded as follows:

 A prudent mining operator would not make an advance royalty payment

of millions of dollars knowing that it was highly unlikely the production

requirement could be met which would allow PRP to cancel the Coal

Lease and keep the advance royalty payments…

 The same is true for the subsequent advance royalty payments due in

2015, 2016, and 2017. A prudent mining operator would not pay the

additional advance royalty payments totaling $10.0M when it was highly

unlikely that the date for initial production could be met. Any prudent

mining operator in Cardero’s position would have to consider pursuing the

Joint Venture on the coal licence areas alone.

 In addition, potential investors would not be willing to invest in the project

without a change in Section 20 of the Coal Lease because it would put

their investment at significant risk, PRP could cancel the lease at their

discretion if the June 2017 production date was not met. This created an

unacceptable risk for any prudent investor.

 Given this difficult situation, it is our opinion that Cardero’s actions were

consistent with those that would have been taken by a prudent mining

operator and were in the best interests of the Joint Venture. This is

because they knew in May 2014 that the advance royalty payment due in

June 2014 would most likely be forfeited (or at the very least be lost or

have no value based on the unilateral actions of PRP) because it was

almost certain that the production deadline of June 2017 could not be

met. This meant that the lease would be subject to termination even if

they had made the June 2014 advance royalty payment.

 Based on the information management had at the time, including the JDS

report and the updated geologic model, and dependent on the outcome of

the further analysis discussed in the next section of this report, there was

a significant prospect of a smaller though profitable project on the Coal

Licence areas.

[114] In cross-examination, Mr. Akers was asked whether a prudent mining

operator would pay reduced Advance Royalty Payments in consideration for an

extension of the production deadline to June 2022. Mr. Akers said that such facts

would not change the Project’s risk profile, and a prudent mining operator would

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 37

simply not make material annual payments to maintain the Lease in circumstances

where the return was so uncertain.

[115] The Partnerships are critical of Mr. Akers qualifications, given that his

expertise is in accounting. However, I find that this is precisely the type of individual

who could properly assess Cardero’s economic decision-making. Cardero, as

Manager, had to consider the overall economics of the Project, not simply whether

there was a solid volume of coal in the ground. If the bottom line facing the Project

meant that the coal could not be sold at a high enough price to overcome its costs

and expenses, then the Project’s viability would be in question. Such an analysis is

largely financial, although certainly guided by the underlying technical information.

[116] The Partnerships are also critical of Mr. Akers’ report on the basis that he was

asked to assume that Cardero sought, but was unable to successfully secure,

financing for the Joint Venture. I find that this assumption is consistent with the facts

presented at trial.

[117] Finally, the Partnerships are critical of the fact that Mr. Akers was asked to

assume that an extension of the June 2017 production deadline was not available.

Once again, I find that this assumption fits the evidence. While there was a proposal

from the Partnerships to extend the deadline, it was on terms that Cardero did not

accept. The reality on the ground for Cardero, as it made its decision whether or not

to surrender and abandon, was that the June 2017 deadline was staring down the

Joint Venture. It was reasonable for Cardero, as Manager, to act on the basis of the

world as it was, not on how it could have been if the Co-Owners had been able to

come to terms on an extension. The Manager was bound to do the best it could

under the existing JVA, not under the terms of a possible amendment.

Robert Farmer and William Wolf’s Reports

[118] Robert Farmer and William Wolf from J.T. Boyd Company were jointly

tendered as experts by the Partnerships. They were qualified as experts in the

following areas:

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 38

a) Mr. Farmer, in geologic modeling, resource and reserve estimation,

underground and surface mine design, production and financial modeling,

and feasibility of coal mining operation; and

b) Mr. Wolf, in energy and minerals markets, mine feasibility, economic analysis,

and valuation of coal mining operations for the purposes of damages

assessment.

[119] These experts were asked to assess the effect of abandoning the Freehold,

and to determine the amount required to put CCP in the position it would have been

if Cardero had developed a coal mine and put it into commercial production by June

15, 2017.

[120] Mr. Farmer concluded that “[s]ubject to further review, it is BOYD’s opinion

that development of an economically feasible mine on the Property without the

Freehold Lands would have been unlikely.” He opined as follows:

a) Cardero relinquished those portions of the coal deposit (i.e., the Freehold) for

which the "location, quantity, grade, geological characteristics and continuity"

are not substantially based on extrapolation and therefore have higher

geologic assurance.

b) Cardero removed over half of the product coal tonnes associated with the

mine plans presented in the November 2012 PFS. Potential mining

operations on the remaining portions (i.e., the non-Freehold Lands) would

likely result in lower annual production rates (and reduced revenues) and/or a

shorter mine life (reduced payback time).

c) Cardero sterilized (i.e., made inaccessible or not mineable due to mining

limitations) those coal resources located at or near the coal interests'

boundaries.

d) Cardero surrendered the privately-owned fee simple parcels where mining

would not have required a coal licence or Crown Coal Lease.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 39

e) Cardero lost most of the large contiguous areas of potentially open-pit or

underground mineable coal, which are more conducive to mining at higher

productivity rates over longer periods of time.

f) Cardero segregated the remaining portions of the mine plans presented in the

November 2012 PFS into smaller isolated pockets with generally poorer

geologic conditions and limited access that will not support higher productivity

mining methods and the sustained mine production and operational flexibility

required to ensure financial success.

g) Cardero’s decision hindered access to the property, thus adding significant

costs to any potential operation.

[121] As such, Mr. Farmer concluded that a positive economic outcome for the

remaining properties without the Freehold is unlikely.

[122] Mr. Farmer did not expressly analyze the effect of the June 2017 production

deadline and the requirement for the Advance Royalty Payments. Mr. Farmer also

did not consider the depressed coal market at the relevant time, nor did he analyze

the difficulty in securing project financing, despite his assessment that financing in

excess of $777 million would be required.

[123] Mr. Wolf’s work related to the calculation of damages. Mr. Wolf was directed

how to perform the assessment:

Please do so based on both the mine plan contemplated under the Norwest

Cash Flow Model and under the JDS Cash Flow Model, utilizing actual coal

prices to date, applying a reasonable forecast for future coal prices, and

discounting future cash flow at an 8% and 10% discount factor.

[124] Mr. Wolf ran two damages scenarios. Under the earlier Norwest cash flow

model, he determined that the value of CCP’s 25% carried interest, as of the date of

trial, using a 10% discount rate, would be $88,803,615 USD. Mr. Wolf then ran the

same calculation under the later optimized financial model prepared by JDS, which

yielded a net present value for CCP’s 25% carried interest of $132,878,355 USD.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 40

[125] Mr. Wolf also ran a damages calculation associated with the loss of the

Freehold Lands alone. In doing so, he arrived at a net present value for CCP’s

carried Interest in the Freehold Lands, at a 10% discount rate, under the Norwest

model, at $55,324,652 USD, and under the JDS model, at $82,783,215 USD.

[126] Mr. Wolf assumed that the development and financing risks were

manageable, including assuming that Cardero was able to prove the feasibility of the

Project in accordance with NI 43-101, obtain rights of way for power, transportation,

infrastructure, and road, among other things, successfully complete an

environmental assessment, overcome any litigation that would ensue, and make all

necessary transportation and First Nations agreements required. Mr. Wolf performed

his calculations based on benchmark prices, although Mr. Henderson’s evidence

was that the quality of the coal at the Project required a discount from the

benchmark.

Pat Akers’ Reply Report

[127] Mr. Akers’ reply report commented on the approach taken by Mr. Wolf as

follows, inter alia:

[The] cash flow model developed to support the Income Approach would be

based on different assumptions regarding price risk and volatility, project

risks, production risks, availability of capital, capital structure of the entity, the

cost of capital, and the risk associated with the provisions of Section 20 of the

Coal Lease agreement. For a project such as this, the valuation model would

have a much higher discount rate and a different cash flow stream.

A compounding factor in addition to the risks noted above is demonstrated in

Tables 1 through 3 of the Boyd report which shows that the simple pay-back

period for this project using their assumptions is approximately twelve years.

This means it is twelve years before the initial investment in the property is

recovered. The longer this period is, the higher risk of the project and

therefore the higher the discount rate would be. In addition, this long pay-

back period would deter many investors. While it varies from investor to

investor, it is our opinion that reasonable pay-back periods range from three

to six years depending on other risk factors associated with the investment.

For the reasons noted above, it is our opinion that the assumptions and

approach used by Boyd in their assessment of estimate of CCP’s damages

are not valid. In addition, as noted in our report titled “Independent Expert

Report on the Carbon Creek Property” dated January 9, 2020 it is our opinion

that CCP did not incur any damages because a net profits interest has no

value if the underlying mining operation is not economically viable.

Cardero Coal Ltd. v. Carbon Creek Partnership

III. ISSUES

Page 41

[128] In the JVA Action, Cardero asserts that CCP breached the JVA by, among

other things:

a) failing to comply with decisions of the Joint Venture’s Management

Committee contrary to Article 6.11;

b) refusing to make its interest in its Coal Tenures available to the Joint Venture

contrary to Article 4.8; and

c) refusing to participate in the Joint Venture at all or cooperate in any of the

Joint Venture’s business contrary to Article 21.1.

[129] If any of those defaults are found, Cardero seeks confirmation that it is

entitled to purchase CCP’s interest in the Joint Venture pursuant to Article 12.1(e) of

the JVA.

[130] In its counterclaim in the JVA Action, CCP alleges that it was Cardero that

breached the JVA by abandoning the Freehold contrary to its obligation to maintain

the property in trust for the Joint Venture pursuant to Article 4.13.

[131] Cardero responds by denying any breach, but also alleging that CCP is

estopped from advancing this argument because it failed to give notice of default

under the JVA for almost two years. Cardero notes that it expended further funds on

the Joint Venture during this period.

[132] In the Lease Action, PRP asserts that, as a result of its breaches of the

Lease, Cardero should be held liable to PRP for the unpaid Advance Royalty

Payments of $2.5 million, plus interest. PRP says that Cardero should also be held

liable for damages sufficient to put the Partnerships in the position they would have

been in had Cardero performed its obligations and built the mine. CCP also seeks a

declaration that, given Cardero’s breaches, it should be entitled to acquire Cardero’s

interest in the remaining Joint Venture lands.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 42

[133] Cardero responds that no Advanced Royalty Payment was made because the

surrender occurred before Advance Royalty Payments first came due on June 2,

2014. Cardero argues that, given the wording of Article 24.1 of the Lease, no

Advance Royalty Payment is payable after termination.

IV.

LEGAL PRINCIPLES

[134] This case turns primarily on questions of contractual interpretation. In general,

Cardero seeks a more “black letter” interpretation of the agreements, whereas the

Partnerships propose an approach that incorporates a broader consideration of the

surrounding factual circumstances and the intentions of the parties.

[135] The tension created by these two approaches was addressed by the

Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC

53. In this decision, the court described the proper approach as follows:

[57]

While the surrounding circumstances will be considered in interpreting

the terms of a contract, they must never be allowed to overwhelm the words

of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30).

The goal of examining such evidence is to deepen a decision-maker's

understanding of the mutual and objective intentions of the parties as

expressed in the words of the contract. The interpretation of a written

contractual provision must always be grounded in the text and read in light of

the entire contract (Hall, at pp. 15 and 30-32). While the surrounding

circumstances are relied upon in the interpretative process, courts cannot use

them to deviate from the text such that the court effectively creates a new

agreement…

[58] The nature of the evidence that can be relied upon under the rubric of

"surrounding circumstances" will necessarily vary from case to case. It does,

however, have its limits. It should consist only of objective evidence of the

background facts at the time of the execution of the contract (King, at paras.

66 and 70), that is, knowledge that was or reasonably ought to have been

within the knowledge of both parties at or before the date of contracting…

[Emphasis added.]

[136] The Supreme Court of Canada recently clarified in Corner Brook (City) v.

Bailey, 2021 SCC 29, that the “knowledge that was or reasonably ought to have

been within the knowledge of the parties” does not include their subjective

intentions:

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 43

[20] This Court set out the current approach to contractual interpretation in

Sattva. Sattva directs courts to “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”:

para. 47. This Court explained that “[t]he meaning of words is often derived

from a number of contextual factors, including the purpose of the agreement

and the nature of the relationship created by the agreement”, but that the

surrounding circumstances “must never be allowed to overwhelm the words of

that agreement”: paras. 48 and 57. “While the surrounding circumstances are

relied upon in the interpretive process, courts cannot use them to deviate from

the text such that the court effectively creates a new agreement”: para. 57. This

Court also clarified that the relevant surrounding circumstances “consist only

of objective evidence of the background facts at the time of the execution of

the contract . . . , that is, knowledge that was or reasonably ought to have been

within the knowledge of both parties at or before the date of contracting”: para.

58.

[…]

[25]

First, the Blackmore Rule does not allow consideration of the

subjective intention of the parties. While it is not immediately obvious what

"specially in the contemplation of the parties" means, La Forest J.A. (as he

then was) held in White v. Central Trust Co. (1984), 54 N.B.R. (2d) 293

(C.A.), that this does not refer to the subjective intention of the parties, but

merely permits courts to look to the surrounding circumstances to give

meaning to the words the parties used. He stated that "[b]y referring to what

was in the contemplation of the parties, Lord Westbury was, of course, not

opening the door to adducing evidence of what was actually going on in their

minds, still less to making inferences about it": para. 33. It is well-established

that the Blackmore Rule does not allow courts to consider the subjective

intentions of the parties…

[137] As the B.C. Court of Appeal explained in 1001790 BC Ltd. v. 0996530 BC

Ltd., 2021 BCCA 321, surrounding circumstances are considered where there is

some ambiguity:

[42]

What the parties indicated to the outside world is to be determined

within the four corners of the contract itself. What either party subjectively

understood or misunderstood is irrelevant in the absence of fraud or

misrepresentation (see, for instance, Shaw Production Way Holdings Inc v

Sunvault Energy, Inc, 2018 BCSC 926 at paras 139 et seq, aff’d 2019 BCCA

72). Where there is some ambiguity in the terms, the court may have regard

to the surrounding circumstances, but these must never be allowed to

overwhelm the words of the agreement. The interpretation of a written

contract “must always be grounded in the text and read in the light of the

entire contract”: see Sattva at para 57.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 44

[138] The existence of an “entire agreement” clause—such as was in place here—

does not undermine the search for objective intent and does not override any need

to consider the surrounding circumstances or factual matrix evidence: IFP

Technologies (Canada) Inc. v EnCana Midstream and Marketing, 2017 ABCA 157 at

para. 124 (“IFP Technologies”). As the court explained in this case:

[124] The mere existence of an “entire agreement” provision does not mean

that the words chosen beyond that entire agreement provision admit of one

interpretation only. The purpose of considering the surrounding

circumstances is not to add to, contradict or vary the terms of the agreement

but rather use them as an interpretive aid to determine the meaning of the

words in dispute. Where parties have concluded an agreement and a court is

left to sort out the parties’ objective intentions, it cannot be prevented from

considering the surrounding circumstances by a provision that is itself based

on the assumption that the agreement is clear – when it is not.

[139] This case also engages a consideration of how agreements that are

negotiated together should be interpreted. As the court explained in Samson Cree

Nation v. O’Reilly & Associés, 2014 ABCA 268 at para. 82, “[w]here… the same

parties make two or more contracts at the same time on the same or related topics,

the court interprets them together, not in isolation.” Moreover, the contracts “are to

be interpreted, if possible, to make the parts work harmoniously to achieve the

overall goal, not to make the parts clash”: Samson Cree Nation at para. 82.

V.

ANALYSIS

A. Did Cardero Breach the JVA by Abandoning the Freehold Lease?

1. The Nature of the Alleged Breach

[140] It should be noted that PRP does not argue that Cardero’s decision to

surrender the Freehold was a breach of the Lease. This was a reasonable

concession given the clear language of Article 23.1 of the Lease. However, CCP

argues that Cardero breached the JVA by:

a) abandoning a property outside the scope of the JVA’s abandonment clause

Article 5.10;

b) failing to maintain the Lease in good standing contrary to Article 8.2(b); and

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 45

c) failing to hold the Lease “in trust for the benefit of the Carbon Creek Joint

Venture for so long as the Carbon Creek Joint Venture remains in effect”,

contrary to Article 4.13.

2. The Language of the Abandonment Clause

[141] As in any contract case, it is important to start with the words of the

agreement. Cardero relies on the fact that it had the right under Article 5.10 of the

JVA to abandon “any of the Coal Tenures comprised in the Premises”.

[142] The definition of a “Coal Tenure” in the JVA is very broad, being “a coal

licence, coal lease or other form of tenure to a coal property.” The definition of

“Premises” under the JVA expressly includes “Coalhunter’s interest in the Carbon

Creek Coal Lease once granted by the Peace River Partnership”.

[143] Hence, on the face of the Abandonment Clause alone, the Freehold clearly

fits within the scope of properties that could be abandoned. However, the

Partnerships argue that, when viewed within the broader context of the other JVA

terms, as well as with a consideration of the surrounding circumstances, the

Abandonment Clause should be interpreted to exclude the Freehold.

3. The Alleged Restriction of the Right to Abandon to the Area of

Interest

[144] The Partnerships rely on the placement of the Abandonment Clause within

the JVA. In particular, the Partnerships argue that the preceding clauses make it

clear that the right to abandon was intended to apply only to the Area of Interest,

relying on the fact that Article 5.8 discusses the acquisition of interests within the

Area of Interest.

[145] I find that this argument is flawed for a number of reasons:

a) There is nothing in Article 5.10 that makes it subject to, or controlled by,

Article 5.8.

b) The clause between the two noted articles, Article 5.9, deals with a range of

properties “deemed to form part of the Premises”, which expressly includes

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 46

“the interest of Coalhunter in the Carbon Creek Coal Lease, if and when

granted to Coalhunter by the Peace River Partnership”. Hence, if anything, an

argument based on clause placement alone would suggest that Article 5.10

would be controlled more by Article 5.9 than the more distant Article 5.8.

c) Section 5, in which Article 5.10 is contained, refers broadly to the

“Relationship of the Parties” and deals with a variety of matters not restricted

to the Area of Interest. Headings in a contract are part of the language

chosen by the parties and can inform the interpretation of the provisions that

follow, provided the wording of the contract is not inconsistent with such an

interpretation: Neely v. MacDonald, 2014 ONCA 874 at para. 11. See also:

Yongfeng Holdings Inc. v. Zheng, 2019 BCSC 1534 at para. 104; Meszaros v.

Hendry, Swinton, McKenzie Insurance Services (Westshore) Inc., 2015

BCSC 1423 at para. 211.

d) If anything, the fact that Article 5.8 refers to the “Area of Interest”, but Article

5.10 makes the choice to use the separate and broader term “Premises”,

suggests that this distinction mattered.

4. The Effect of the Trust Provisions

[146] Next, CCP argues that Article 4.13 of the JVA prohibits abandonment by

requiring that the Freehold remain in trust. However, Article 4.13 states only that

Cardero holds “the interest of Coalhunter therein” in trust for the Joint Venture. It

imposes no obligation on Cardero to maintain its interest in any specific Coal

Tenure. Rather, where Cardero has a present interest, then that interest is held in

trust for the Joint Venture.

[147] Further, interpreting the contract as a whole, it would be a strange thing for

one clause to negate a right expressly provided by another clause, unless such was

expressly set out. The JVA’s terms illustrate that its drafters were well aware of the

usual mechanism for making one clause subject to another (see e.g., Articles 5.4,

5.5, 5.7, and 5.8). But the authors did not make Article 5.10 subject to Article 4.13.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 47

[148] CCP also argues that Article 5.10 could not apply to the Freehold because

the alleged trust obligation in Article 4.13 is: “obligations or liabilities theretofore

accrued”, which is expressly excluded from the operation of Article 5.10. However, I

find that this quoted language from the final sentence of Article 5.10 applies to a

tenure that has already been abandoned. The identified “obligations or liabilities”

must be those tied to abandoned property. This sentence cannot have been

intended to invalidate the initial abandonment itself. This interpretation is consistent

with the fact that the sentence uses verbs in the past tense (e.g., “abandoned or

transferred”), signalling that those acts have already taken place when the parties

carry on to assess the residual and related “obligations and liabilities theretofore

accrued”. In other words, what is maintained is other obligations and liabilities

related to abandoned property, not the property itself.

[149] This interpretation does not negate the need for, or the force of, the trust

language in Articles 4.10-4.13. These provisions were obviously required given that

certain property interests were going to be held in the name of one party to the Joint

Venture and not the other. In such circumstances, it makes sense to ensure that the

other party’s interests are protected in relation to the property held for the Joint

Venture. Article 5.10 then deals with how property can be removed from the

properties held by the Joint Venture. Once a property is properly removed, there is

no purpose to be served by the trust obligations. The removed property then comes

under the exclusive control of the party who ends up with ownership, here being the

Partnerships. There is no residual trust obligation controlling either the Partnerships

or Cardero in relation to abandoned property

5. The Guidance Provided by the Lease

[150] The Partnerships argued that the JVA should be read in conjunction with the

Lease. In their final argument, they state “[i]n June of 2010, PRP, CCP and

Coalhunter, entered into three intertwined agreements: the JVA, the Coal Lease

Option Agreement and, ultimately, the Carbon Creek Coal Lease.” As noted above,

where the same parties make two contracts relating to the same subject matter, the

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 48

court should interpret them together and, to the extent possible, in a manner which

allows the two contracts to operate harmoniously.

[151] In terms of the interaction between the agreements, CCP asserts that “[b]y

design, the surrender of the Coal Lease triggered defaults under the JVA.”.

[152] I find that it would be very problematic to have an act expressly sanctioned by

one agreement to constitute a breach of a related agreement. That would be an

unusual and flawed design rendering harmonious interpretation impossible. I do not

agree that this is an objectively reasonable interpretation of the agreements when

read together.

[153] Article 5.6 of the Lease confirms that there was no obligation on Cardero’s

part to mine the Freehold. However, many of the Partnerships’ arguments make this

express right not to mine illusory. The Partnerships’ arguments make it difficult to

see how Cardero could have satisfied its obligations under the JVA without moving

forward with a mine. Indeed, the Partnerships assert as follows in their final

argument:

Once Cardero exercised the option to enter into the Coal Lease, it was

obligated to meet the deadline for Commercial Production by June 15, 2017.

This meant that it was committed to build a mine on the Freehold Lands.

[154] The Partnerships suggest that the only proper option for Cardero, if it no

longer wanted to proceed with a mine on the Freehold, was to withdraw from the

JVA completely for $1.00 under Article11.1. However, for the reasons expressed

above and below, I do not accept that this was the only alternative available to

Cardero in these circumstances. The JVA contemplates that some, but not all, of the

Coal Tenures might be kept within the Joint Venture while allowing the abandonment

of others. A single property abandonment did not require complete withdrawal from

the JVA.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 49

6. The Effect of the Witness Testimony

[155] Moving out from the written agreements to a broader review of the

surrounding circumstances, the Partnerships seek to rely on Mr. Horan and Mr.

Hunter’s testimony. Specifically, the Partnerships rely on:

a) Mr. Horan and Mr. Hunter’s stated intention in their preparation of the trust

clauses to ensure that all of the properties, including the Freehold, were kept

together. They explained that splitting up the lands would concern investors,

since they were properly and best treated as one deposit and one mine.

b) Mr. Hunter’s testimony that, if the Lease were ever surrendered, the

relationship would be broken, Cardero would have to give back the lands to

Burns, and Cardero would only be entitled to receive fair value.

c) Mr. Hunter’s testimony that the right to abandon was only put in the

agreements to allow Coalhunter to avoid having to mine and process inferior

coal within the Area of Interest.

[156] There are several problems with these arguments:

a) They do not reflect the plain meaning of the language of the agreements.

b) I have not found the presence of an ambiguity that would drive a need to

consider surrounding circumstances.

c) The arguments run contrary to the principle that the subjective intentions of

the parties are not relevant when objectively interpreting a contract: Leemhuis

v. Kardash Plumbing Ltd., 2020 BCCA 99 at para. 15.

d) The Partnerships’ interpretation could result in a situation where a Coal

Tenure could cease to be managed as part of the JVA (given the exercise of

the Manager’s right to abandon), but the Co-Owner would remain bound to

hold that same Coal Tenure in trust for the Joint Venture. I agree with

Cardero that it is illogical to require a Co-Owner to hold a Coal Tenure in trust

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 50

for the benefit of the Joint Venture in circumstances where that Coal Tenure

no longer forms part of the Joint Venture.

e) If it were so vital that the Freehold be and remain part of the Joint Venture,

why did the negotiating parties allow for:

i.

the possibility that it would not be included as part of the Joint

Venture through the use of the “if and when” language in Article

4.13, and

ii.

the provision of the option in the original Coal Lease Option

Agreement?

[157] The partnerships did not just rely on the testimony of witnesses who testified

at trial, but also on the absence of testimony from certain potential witnesses. CCP

argued that an adverse inference should be drawn from the fact that Cardero did not

call Mr. van Alphen or Angus Christie, former Chief Operating Officer of Cardero. Mr.

Christie authored the JDS Report relied upon by Cardero to justify the surrender of

the Coal Lease. Mr. Christie was also present at the March 2014 meeting.

[158] However, as the Court of Appeal explained in Rohl v. British Columbia

(Superintendent of Motor Vehicles), 2018 BCCA 316, whether to draw an adverse

inference based on a failure to call a witness is within the discretion of the judge:

para. 4. I decline to draw such an inference. While the exercise of this discretion

may be called for where a party fails to call a witness who “in the circumstances

would be expected to favour the party and the witness would have knowledge of the

facts in dispute”, the identified witnesses do not warrant such a finding: Rohl at

para. 1. Cardero was able to advance all of its arguments based on the wording of

the relevant agreements rather than having to resort to calling further evidence of

the parties’ intentions. Accordingly, evidence from the above-noted individuals was

not necessary to advance Cardero’s case, and Cardero should not be punished for

deciding not to offer their testimony.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 51

7. The Duty of Good Faith and the Duties of the Manager Generally

[159] CCP argues that Cardero violated its duty of good faith in the context of the

exercise of any discretion it held to abandon, relying on the principles set out in

Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021

SCC 7 at paras. 63, 69-71.

[160] I find no breach of any such duty. Cardero, as Manager, was entitled to

assess the viability of proceeding with the Freehold. Cardero could assess the

situation globally. Viewed globally, Cardero reasonably determined that it was going

to be virtually impossible to secure financing for a project that required that

production occur within a timeline that any objective observer would understand was

unrealistic, and where substantial Advance Royalty Payments were coming due. Mr.

Akers’ report supports this conclusion.

[161] CCP argued that Cardero, as Manager, could not act exclusively in the

interests of Cardero. While that may be correct, Cardero was also not obligated to

disregard the challenges facing the Project as a whole—of which the inability to

secure additional financing was a large component. This Project was going to

require hundreds of millions in financing. If the terms of the Lease were standing in

the way of securing financing—which the evidence suggests was the case, at least

in part—then this was a legitimate reason for the Manager to consider whether it

was wise to hold onto the Freehold.

[162] Lack of available funds may not have qualified as force majeure, but that

does not mean that the Manager could not consider economic pressures as a

reason to exercise its discretion to abandon a particular Coal Tenure. Clearly, a

decision on abandonment would almost always be made on grounds of financial

viability. Indeed, it is difficult to understand why the abandonment right would be

exercised other than by reason of the Manager determining that a particular Coal

Tenure was no longer a financially beneficial component of the Project.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 52

[163] It is true that hard economic times did not excuse the non-performance of the

JVA, but Cardero was only purporting to exercise a right that was contained within

the JVA.

[164] The Partnerships suggest that the decision to abandon was unsupportable,

as the Project remained economically viable with the Freehold. CCP notes that, in

the April 17, 2014 letter, Mr. van Alphen indicated that, even with coal prices at the

lows experienced in early 2014, the NPV of Cardero’s Interest was $200 million USD

(using an 8% discount rate), and CCP and PRP’s interests would have had a

combined NPV of $168 million USD. CCP argues that, as part of a Project with a

global positive NPV of $368 million USD, the Lease was not an uneconomic or a

“useless” Coal Tenure.

[165] I find that this argument disregards the economic reality facing such coal

mining exploration efforts. Like other high-risk endeavours, the hope is that the gains

on certain projects outstrip the losses on other projects. As such, gains on the

winners have to be high in order to offset losses on the (more frequent) losers. I

accept Mr. Henderson’s evidence that, given this reality, a rate of return in the range

of 20-30% needed to be projected in order to interest financiers. By the time the

abandonment right was exercised, the reality was that the projected rate of return

was far below 20-30%. The reported lack of response to Mr. Henderson’s

fundraising efforts is evidence of that reality. Cardero’s decision is supported by Mr.

Akers’ evidence of how a reasonable and prudent miner would act in the

circumstances.

[166] It is important to put oneself in the shoes of the Manager at the relevant time.

The Lease provided that, if Cardero did not achieve production on the Freehold by

June 2017, PRP would have been entitled to terminate the Lease to the Freehold.

But it was not possible, or indeed prudent, for the Joint Venture to meet that timeline.

No agreement could be reached on pushing this date back. Absent such an

amendment, the Manager had to treat this as a real deadline. However, since the

deadline was clearly unachievable, any further expenditures in respect of the

Cardero Coal Ltd. v. Carbon Creek Partnership

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Freehold stood to be wasted. As Manager, these were all legitimate factors for

Cardero to consider.

[167] The Manager was required to act “for the Co-Owners as tenants in common”.

That did not require the Manager to ignore all necessary inflows and outflows. It did

not allow the Manager to consider only Cardero’s interests, but nor did it require the

Manager to consider only CCP’s interest. The Partnerships’ arguments come close

to a suggestion of the latter: if CCP could still make money if a mine was built, then

the Manager had to keep the Freehold and build a mine. But that is not the proper

test to be applied to the Manager’s conduct.

8. The Effect of the Subsequent Increase in the Benchmark Price

[168] The Partnerships note that the price of coal started to increase from 2016

onwards, and that Mr. Akers admitted that the Project would be financeable at the

present benchmark price. However, Cardero as Manager was dealing with the

economic reality in 2014. At the time, prices were extremely low, and financing was

generally unavailable.

[169] The Partnerships’ argument on this point asks the court to examine the

Manager’s decision with the benefit of hindsight. If it was known with some certainty

that the price of coal was going to rebound, as it has done, financiers would

presumably have been beating down Cardero’s door to fund the Project. But the

financiers did not know the future, nor did anyone else. Nor should the court assess

Cardero’s conduct with the benefit of such hindsight.

9. The Lack of a PEA

[170] The Partnerships suggest that a prudent mine operator would have

conducted a PEA on the residual Coal Tenures prior to relinquishing the Freehold.

However, based on the information before me, I do not see that a PEA would have

changed the economic reality faced by the Manager. It simply did not make

economic sense to maintain the Freehold given the terms of the Lease and

prevailing economic conditions.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 54

10. The Lack of a Viable Path Forward After Abandonment

[171] The Partnerships argue that the Manager’s decision to abandon was

improper because what remained within the Joint Venture was not viable. They rely

on Mr. Farmer’s analysis in this respect.

[172] I disagree. After shedding the deadlines and Advanced Royalty Payments

obligations associated with the Lease, the Joint Venture still controlled Coal Tenures

that could eventually have resulted in a viable—though smaller—Project, if and

when coal prices recovered. Although the Ministry’s establishment of protected

areas in 2016 and 2019 undercut such viability, there is no evidence that the

intention to protect certain of these lands was known to Cardero when the

abandonment right was exercised.

11. The Failure to Maintain the Lease in Good Standing

[173] The Partnerships argue that Cardero breached the JVA by not keeping the

Lease in good standing, as required by Article 8.2(b) of the JVA. This clause

requires the Manager to maintain the Coal Tenures free of any liens and to take the

necessary steps to maintain them in good standing. I find that it does not impose an

obligation on the Manager to maintain all Coal Tenures. Again, such an obligation

would be difficult to rationalize with Article 5.10, which expressly permits

abandonment. If the obligation to “maintain [the Premises] in good standing” meant

that Cardero could not abandon properties, then it would largely render the

Abandonment Clause meaningless—a result that should be avoided: British

Columbia (Attorney General) v. Malik, 2009 BCCA 202 at para. 32.

[174] I agree with Cardero that it did not breach of the JVA by failing to make the

payments necessary to keep the Lease in good standing. The Lease was no longer

part of the Joint Venture as a result of the surrender. Any Advance Royalty

Payments were owing under the Lease, not the JVA. The JVA does not provide that

a breach of the Lease is automatically a breach of the JVA.

Cardero Coal Ltd. v. Carbon Creek Partnership

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12. Failure to Obtain Management Committee Approval

[175] The Partnerships allege that Cardero should have obtained Management

Committee approval before the abandonment, pursuant to Article 8.2. I disagree. I

find that the introductory language of Article 8.2 was not intended to suggest that the

Manager could not make decisions without advanced approval. Rather, the

Management Committee had discretionary power to direct and control the Manager.

However, the Management Committee took no steps to exercise this discretion in

relation to the abandonment. Perhaps CCP could have brought forward a motion to

the Management Committee preventing the exercise of the abandonment right, but it

did not do so. The reason for this is obvious, and also has the practical effect of

undermining the argument: CCP only controlled 25% of the votes on the committee.

CCP simply could not compel its desired result.

[176] The Partnerships also argue that the Manager acted inconsistently with

“laws”, contrary to its obligation under Article 8.2, given that:

a) “laws” is defined to include the Lease;

b) Article 31.1 of the Lease prohibits Coalhunter from assigning its interest in

the Lease without the consent of PRP, which consent may be arbitrarily

withheld;

c) as the abandonment clause requires the Manager to offer to transfer the Coal

Lease as a precondition to abandonment, the Manager required the consent

of PRP in order to proceed with abandonment; and

d) Cardero did not seek PRP’s consent, nor would such consent have been

forthcoming.

[177] I find that characterizing the abandonment as an “assignment” simply

because the terms required a Co-Owner to offer its rights in the abandoned property

to the other is a tortured interpretation. Article 31.1 was clearly intended to apply to a

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 56

true assignment to another party, not to negate the express internal right to

surrender and abandon.

13. Other Alleged Breaches by Cardero

[178] Although not the focus of submissions at trial, CCP did plead certain other

miscellaneous breaches of the JVA.

[179] CCP pleads that Cardero breached the JVA by delegating certain duties as

Manager through CDU’s plan of arrangement in 2015. However, the JVA did not

prohibit Cardero from subcontracting functions to CDU. Cardero remained legally

responsible to make sure that any such obligations were fulfilled. Furthermore, the

key individuals carrying out its management services did not change.

[180] Similarly, CCP’s claim that Cardero had no or insufficient staff, expertise, or

resources, must fail. There was insufficient evidence to support this plea.

13. Conclusion on Cardero’s Alleged Breach of the JVA

[181] I find that CCP has not established any breach of the JVA by Cardero.

B. Did Cardero Breach the Lease?

[182] As noted, the Partnerships do not allege that the surrender of the Lease itself

was a breach of the Lease. However, they allege that Cardero breached the Lease

by failing to pay the Advance Royalty Payments owing.

[183] Pursuant to the Amending Agreement, the first Advance Royalty Payment of

$500,000 was due on June 2, 2013 and the second payment of $2 million was due

on June 2, 2014.

[184] Pursuant to Article 4.2(3)(i) of the Lease, PRP agreed to “accept payment of

the amount due on the following terms and conditions”:

all or any portion of the Advance Royalty due on June 2, 2013, such payment

may be extended by Cardero Coal by notice in writing to Peace River

Partnership given not less than 15 days prior to June 2, 2013, to anytime

between June 2, 2013 and June 2, 2014….

Cardero Coal Ltd. v. Carbon Creek Partnership

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[185] The commercial context for these amendments to the Lease was that

Cardero could not fulfil its obligation to obtain the necessary permits and approvals

by June 15, 2013, which would otherwise have enabled PRP to terminate the Lease.

In return for PRP waiving this requirement, Cardero agreed to make the Advance

Royalty Payments.

[186] Cardero delivered its Notice of Surrender on April 30, 2014, which purported

to be effective May 30, 2014. I analyze the effectiveness of this notice below. In this

section, I assume that notice was effective. With that assumption, the effect of the

surrender was to terminate the Lease. So what becomes of the promised Advance

Royalty Payments in this scenario?

[187] One might have expected this situation to be governed by Article 24.1, which

provides that, on termination, Cardero remains liable for any Royalty, Minimum

Royalty, taxes rates and assessments then “due and unpaid with respect to the

Lands”. However:

a) “Minimum Royalty” is defined as including the payments owing under Article

4.1. But the Amending Agreement provides for the new Advance Royalty

Payments through the operation of a new Article 4.2; and

b) “Royalty” is defined by reference to Article 3.1, which refers only to the royalty

payable on production.

[188] This suggests to me that there may have been a drafting oversight, in that

when the amendments were drafted, the parties neglected to tie this new type of

royalty to the treatment of the other royalty types.

[189] That said, this possible drafting oversight is of minimal consequence. The

mere fact that the Advance Royalty Payments were not included in Article 24.1 does

not mean that PRP was left without a legal remedy for a breach of any obligation to

pay such royalties. I find that the $500,000 was owing under general contract

principles of contract, if not pursuant to Article 24.1 specifically.

Cardero Coal Ltd. v. Carbon Creek Partnership

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[190] The Lease was terminated on May 31, 2014. I find that this decision did not

have the effect of negating any accrued or vested rights held by PRP as of that date.

I agree with PRP that the first $500,000 Advance Royalty Payment was already due

as of that date. It was just the payment thereof that had been deferred.

[191] The most reasonable interpretation of the Lease is that obligations that had

already accrued must be paid. There is a distinction in the Amending Agreement

between the underlying indebtedness obligation, which is the date on which such

obligation accrues, and the date by which payment must be made: Videocon Global

Ltd v. Goldman Sachs International, [2016] EWCA Civ 130 at para. 53. This

distinction between “due” and “payable” has been recognized in Canadian decisions:

Canada (Attorney General) v. Reliance Insurance Co. (2008), 40 B.L.R. (4th) 204

(Ont. Sup. Ct. J.). at para. 33. British Columbia courts have defined “debt” similarly.

In Coast Capital Savings Credit Union v. British Columbia, 2011 BCCA 20, the court

held that “debt” includes “a sum of money which is certainly, and at all events,

payable without regard to the fact whether it be payable now or at a future time”:

para. 57. Indeed, Cardero’s General Counsel, Mr. Talbot, appears to have

understood that it was only the “payment” that was being deferred, not the “due”

date. When he returned the executed Amending Agreement on May 31, 2013, Mr.

Talbot served notice of Cardero’s election “to defer the payment of the CAD

$500,000 Advance Royalty Payment due June 2, 2013 until June 2, 2014, and will

therefore commence to pay 6% interest thereon…” (emphasis added). Cardero

could not avoid its accrued obligation simply by surrendering the Freehold before the

extended payment date. Looking to the surrounding circumstances, PRP provided

the extension to ease Cardero’s cash flow problems, not to give Cardero the power

to negate its accrued obligations.

[192] However, this same analysis also drives the necessary conclusion that

Cardero had no obligation to make the next $2 million Advance Royalty Payment, as

that obligation was not “due” as of the surrender date of May 31, 2014. Rather, this

payment only became due on June 1, 2014.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 59

[193] PRP argued that the surrender was not effective until it acknowledged the

surrender by letter dated July 17, 2014. Article 23.1 does not require that PRP

acknowledge a surrender in order for it to become effective. Rather, the Lease

simply provides that Cardero may “at any time, upon giving [PRP]… prior written

notice… surrender all of its right, title and interest” in the identified lands. In my view,

the plain meaning of this provision is that the only condition necessary to give effect

to the surrender is notice is given in writing. Were that not the case, the Partnerships

could have withheld their acknowledgment through to the due dates of future

Advance Royalty Payments, which would make no sense. Under such an

interpretation, Cardero’s right to surrender lands under the Lease would only be

effectively exercisable at the discretion of the Partnerships. In my view, this would

render Cardero’s right to surrender illusory at best.

[194] Likewise, I find that the doctrine of repudiation has no purchase here. As

discussed above and below, the Surrender Notice was effective, so there was no

repudiation of the Lease by Cardero.

C. Did Cardero Breach a Fiduciary Duty?

[195] While this theory was not advanced with any vigour in their final argument,

fiduciary duty is raised in the Partnerships’ pleadings. So, to the extent that there

was no breach of the JVA per se, was there at least a breach of a separate fiduciary

duty obligation? I say not. Article 5.2 of the JVA specifically disclaimed the existence

of any fiduciary duty as between the Co-Owners, as does Article 33.12 of the Lease.

Furthermore, Cardero and CCP were sophisticated commercial parties engaged in

an arm’s length commercial transaction. Rarely do courts impose superadded

fiduciary duties in this context: Litwin Construction (1973) Ltd. v. Pan (1988), 29

B.C.L.R. (2d) 88 (C.A.) at 104.

[196] In addition, Article 5.11 of the JVA confirmed that the Manager was an

“independent contractor” and not an agent of the joint venturers. Article 8.1

addressed the duties required of the Manager in detail and imposed obligations to

take “necessary or appropriate” steps in a “sound and miner like manner.” The

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 60

standard of care established by the JVA is not a fiduciary standard. There is no

discussion in the JVA or the Lease of Cardero assuming a duty to act in the best

interests of the Partnerships: Alberta v. Elder Advocates of Alberta Society, 2011

SCC 24 at paras. 30-32.

[197] Given that the parties are sophisticated, arm’s-length entities with relatively

equal bargaining power and who negotiated their respective rights and

responsibilities under the JVA, there is no basis to superimpose additional fiduciary

obligations: Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999] 1 S.C.R. 142 at para.

30; Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co., 2001 ABQB

803 at paras. 197-214; Litwin Construction (1973) Ltd. at 104; Visagie v. TVX Gold

Inc. (2000), 187 D.L.R. (4th) 193 (Ont. C.A.) at paras. 25-30.

[198] It is true that Articles 4.10 through 4.13 of the JVA impose certain trust

obligations, but I have already concluded above that these limited terms did not

prevent abandonment.

[199] Finally, even if Cardero owed fiduciary duties to CCP, abandonment of the

Lease would not constitute a breach of those duties, particularly given that the Lease

and the JVA expressly authorized the surrender of the Lease and abandonment of

any Coal Tenure.

D. Did CCP Breach the JVA?

[200] I find that CCP breached the JVA by refusing to provide written confirmation

of Cardero’s authority to deal with the Ministry in respect of various coal tenures,

refusing to follow Management Committee decisions, and asserting it would no

longer cooperate with the Joint Venture operations generally.

[201] Mr. Horan effectively sought to use CCP’s cooperation under the JVA as

leverage to help secure the $500,000 Advance Royalty Payment under the Lease.

However, that was the wrong tool for the job. The fact that Cardero had breached

the Lease with PRP did not give CCP the right to breach the JVA with Cardero.

Rather PRP could or should have pursued its remedies under the Lease. In the

Cardero Coal Ltd. v. Carbon Creek Partnership

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meantime, there was still an active Joint Venture that needed to be managed in

relation to the properties beyond the Freehold.

[202] Put another way, the end of the Lease with PRP did not give CCP the right to

walk away from its responsibilities under the JVA.

[203] CCP’s obligations under the JVA may have been limited, but they were real,

and they were breached.

[204] Article 21.1 sets out CCP’s obligation to do all things and promptly execute all

documents as necessary, and specifically obligates CCP to fully cooperate in

applying for all government approvals and permits. Despite this contractual

obligation, in October 2014, Mr. Horan advised that CCP would not cooperate or

sign anything. Specifically, Mr. Horan refused to provide a letter to the Ministry

authorizing Cardero, as Manager, to deal with government authorities to convert

pending coal licence applications into coal licences. According to Mr. Henderson’s

evidence, which I find was credible, this letter was needed to maximize the

prospects that the licences for drilling would be granted. Only CCP could effectively

provide the necessary assurance as to CCP’s position. CCP’s failure to cooperate in

providing this letter was a breach of Article 21.1 of the JVA.

[205] While it may have been possible for the Manager to secure Ministry approvals

without the letter from CCP, the evidence suggests it would have been easier with

CCP’s direct communication. To the extent that CCP suggests that Mr. Henderson’s

evidence about the request for a CCP letter should be viewed with “extreme

skepticism”, I reject that suggestion. I accept Mr. Henderson’s evidence. His conduct

subsequent to that alleged Ministry advice is consistent with such a communication

having been received from the Ministry. If Mr. Henderson could have sent the letter

himself, he presumably would have. I cannot find that Mr. Henderson was engaged

in “three-dimensional chess”, in terms of setting up the potential for a later breach

allegation against CCP, and for no other purpose. Indeed, any such “set up” would

have been rendered completely ineffective if Mr. Horan had simply signed his name

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 62

to the proposed letter. If it was all an effort to entrap CCP in a breach, it was very

poorly designed, as the scheme would have fallen apart with one stroke of a pen.

[206] I find that CCP also breached the requirement in Article 6.11(a) that the

parties abide by decisions of the Management Committee. At the September 2014

Management Committee meeting, various action items were assigned to CCP.

However, CCP failed to take steps to address many of the tasks assigned to it. In

particular, CCP failed to:

a) review the insurance binder provided and either provide comments or, if

acceptable, sign an acknowledgement;

b) review and provide comments on the proposed amending agreement

concerning Cardero’s accounting responsibilities and, once approved,

execute the agreed form of amending agreement;

c) review and provide comments on the proposed form of Management

Committee resolution dealing with the financial reporting schedule and once

approved, execute the agreed form of resolution; and

d) provide a letter acknowledging the potential existence of three core sheds on

the Freehold and confirm the Joint Venture’s ownership of same.

[207] I note that CCP refused to attend or participate in any Management

Committee meetings after September 16, 2014, but CCP had an obligation to “do

and provide all acts and things… as shall be necessary or appropriate in connection

with the performance of this Agreement.” I find that its decision to stop cooperating

with its Joint Venture partner was a breach of this obligation. It was not “appropriate”

to hinder the conduct of the Joint Venture through such a complete lack of

cooperation and engagement.

[208] CCP failed to cure its defaults within 60 days of receiving Cardero’s August

24, 2015 notice of default (assuming this notice was effective, which is addressed

below).

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 63

[209] CCP says it was not obligated to do any of the things set forth in the notice,

given that three of the alleged defaults were cured by unanimous vote at the

subsequent November 2015 Management Committee meeting, and the Manager

was authorized by CCP to cure the last item pursuant the approved work plan.

[210] However, I find that the fact that the Management Committee and the

Manager were simply “making the best of a bad situation” by trying to keep the Joint

Venture moving forward notwithstanding CCP’s failure to cooperate. These efforts

do not negate or cure CCP’s breaches of the JVA. Further, these limited mitigatory

steps did not change the overarching difficulty that CCP had declared itself unwilling

to participate in Joint Venture business generally. This changed the fundamental

character of the relationship.

[211] CCP took a gamble in attempting to exercise its relatively limited leverage

under the JVA by refusing to cooperate in order to achieve results it sought under

the Lease (i.e., immediate payment of the Advance Royalty Payments, or a possible

unwinding of the surrender). CCP then “doubled down” on this gamble by declining

to cure its relatively minor breaches once it was put on notice of same. It lost both

rolls of the dice and must now face the consequences of those losses.

[212] The fact that CCP’s breaches were relatively minor in the broader context of

the Project’s development does not change the analysis. Article 12.1 of the JVA

does not distinguish between major and minor breaches—rather it refers to a breach

of “any obligation”. If there is a breach, the other party has to give notice and provide

an opportunity to cure before any other rights are triggered. As such, the parties

effectively managed the prospect of minor breaches by providing for the opportunity

to cure such breaches. Presumably, in the normal course, once notified of a minor

breach, the defaulting party would see the wisdom of simply curing the failing rather

than risking further remedies being sought against it. But that is not what occurred

here.

[213] While the operation of Article 12.1 arguably leads to somewhat severe

outcomes, the parties’ agency in designing the effect of any breach through the

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 64

terms of the JVA must be respected. Furthermore, it should be noted that the

otherwise harsh effect of Article 12.1 is muted by the fact that the breaching party is

still given a right to compensation for their interest in the JVA notwithstanding their

breach.

E. Notice Issues

1. Was Cardero’s Surrender Notice Under the Lease Effective?

[214] The Partnerships argue that Cardero’s Surrender Notice was ineffective

because it failed to surrender all of Cardero’s right, title, and interest in all of the

lands.

[215] The Partnerships also argue that, in order to be effective, a notice of

termination must be clear, unambiguous and unconditional. Notices of termination

under a lease must be strictly construed and effected in strict compliance with their

provisions—a termination notice which contains conditions is ineffective: Arnold v.

2261324 Manitoba Ltd., [1995] 1 W.W.R. 305 at paras. 30-36 (Man. C.A.).

[216] The Partnerships argue that the Surrender Notice was conditional and

therefore ineffective.

[217] I do not accept these arguments:

a) The Surrender Notice covered the entirety of the lands covered by the Lease.

b) The mere fact that the letter also outlined a path whereby Cardero was

prepared to agree to new terms under which its valid surrender would no

longer be operative does not mean that the Surrender Notice was ineffective.

c) Absent a new agreement between the parties, the Surrender Notice would

have its intended legal force.

d) The Lease was always subject to possible amendment by the parties. It had

been amended on one prior occasion. But on this point, the Partnerships

declined to agree to new terms sought by Cardero, and vice versa.

Cardero Coal Ltd. v. Carbon Creek Partnership

Page 65

e) The parties conducted themselves as though the Surrender Notice was

effective thereafter. For example, in the draft letter attached to their July 27,

2015 correspondence, the Partnerships state, “[a]s you are aware, Cardero

terminated the Lease effective May 30, 2014”.

[218] I find that Cardero’s Surrender Notice was effective.

2. Was Cardero’s August 24, 2015 Letter Effective Notice under the JVA?

[219] The Partnerships also assert that Cardero’s August 24, 2015 letter providing

notice of default under the JVA was ineffective because it was styled as a “without

prejudice” communication.

[220] However, where notice is given pursuant to and in compliance with a

contractual obligation to give notice before taking further steps, the mere presence

of the words “without prejudice” will not necessarily vitiate the effect of the notice:

312630 British Columbia Ltd. v. Alta Surety Co. (1995), 10 B.C.L.R. (3d) 84 at paras.

7-9 (C.A.). The test for settlement privilege requires that:

a) a litigious dispute must be in existence or within contemplation;

b) the communication must be made with the express or implied intention that it

would not be disclosed to the court in the event negotiations failed; and

c) the purpose of the communication must be to attempt to affect a settlement:

Cowichan Tribes v. Canada (Attorney General), 2020 BCSC 1507 at para. 74.

[221] I find that the August 24, 2015 letter is not protected by settlement privilege

given the absence of a settlement offer. No litigation was pending at this time and, if

the defaults had been cured, no litigation would have been necessary. Cardero was

unambiguously enforcing its legal rights without proposing a settlement or

concession. The following extracts from the letter highlight this point:

VARIOUS ALLEGATIONS OF BREACH BY CARDERO COAL

Cardero Coal Ltd. v. Carbon Creek Partnership

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We continue to believe that none of the issues raised in your correspondence

of July 27, or in your correspondence of August 12, or in your e-mail of

August 21, have merit.

[…]

It is out view that the termination of the Coal Lease by the Manager was

carried out in full compliance with both the Coal Lease and the JV

Agreement, does not otherwise offend the JV Agreement and therefore

cannot be a breach of the JV Agreement. The question of remedies

therefor[e] becomes moot. Our position as previously stated continues to be

the case.

[…]

BREACH OF THE JOINT VENTURE BY CARBON CREEK PARTNERSHIP

We find that we must raise certain breaches of the JV Agreement by Carbon

Creek Partnership. In this regard we refer to you to section 4.8 and 5.4 of the

JV Agreement… as well as Section 21.1…

[…]

NEXT STEPS

In accordance with Section 12.1(a) of the JV Agreement, we hereby provide

notices of a breach to Carbon Creek Partnership and require that such

defaults be cured on or before October 23, 2015, failing which it is

acknowledged that Cardero Coal as the non-defaulting partner, shall have the

right pursuant to 12.1€ of the JV Agreement to acquire the Interest of the

Carbon Creek Partnership, which Mr. Kopple is very much interested in

considering.

[222] The only language that could arguably be read as raising the potential for

settlement is the following paragraph:

We continue to be of the view that it would be useful for the parties to meet to

discuss the Carbon Creek Joint Venture together with Mr. Kopple who is an

invaluable component to our operation. We agree that it is not in any of the

parties’ interest to maintain the status quo for the reasons outlined above.

[223] I do not view this paragraph as undermining the provision of contractual

notice. Recall that there was a 60-day period for CCP to remedy its defaults. As

such, there remained a real possibility that the Joint Venture would continue past 60

days, and it was at least going to subsist for the next 60 days. There is nothing

inappropriate about encouraging further discussion during this period. Such

encouragement did not undermine the clear position taken in the first part of the

letter.

Cardero Coal Ltd. v. Carbon Creek Partnership

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[224] Further, even if any part of the notice were somehow subject to settlement

privilege, which is not the case, that portion may be severed and redacted from the

portion effecting notice under to Article 12.1(a) of the JVA: Kenton Farm Corp. v. J

and N Steel Builders Co. (1990), 71 Man. R. (2d) 229 (Q.B.) at para. 5. I find that

this would be an appropriate case to make such a redaction if required.

3. Was CCP’s July 27, 2015 Letter Effective Notice under the JVA?

[225] My analysis of this particular issue is obiter, as I have already concluded that

there was no breach of the JVA by Cardero for which notice needed to be given. In

the event that my conclusion on Cardero’s breach of the JVA is wrong, I set out my

findings on this point in the alternative.

[226] The notices attached to Mr. Horan’s July 27, 2015 letter were expressly

identified as “drafts”. Further, the cover letter stated “[w]e thought you and Mr.

Kopp[le] might be interested in discussing these matters on a without prejudice basis

before we delivered these letters to you” (emphasis added). Given that the cover

letter itself treated the drafts as not having yet been “delivered”, it is difficult to see

how they could be treated as proper notice under the JVA. Mr. Horan confirmed that

final signed copies of these drafts were never delivered, despite the passing of the

July 29, 2015 deadline set out in the letter.

[227] In Pioneer Hi-Bred International, Inc. v. Richardson International Limited,

2010 MBQB 161 at para. 58, the court stated:

Notice need be clear and concise as its time period for termination has

started as of a given letter. Such clarity should leave no doubt in the mind of

the other party of the possible and expected consequences of non-

compliance.

[228] Given the qualified language in the cover letter, it cannot be said that the July

27, 2015 letter qualified as a “clear and concise” notice that the time period for

termination had started.

[229] I find that the first effective notice of CCP’s claim of breach under the JVA

was its January 18, 2016 letter and the filing of the JVA Action that same day.

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[230] Cardero argues that CCP’s delay in providing notice under the JVA means

that CCP is estopped from raising any JVA breaches. It is to that issue I turn next.

4. Is CCP Estopped from Raising Breaches of the JVA or the Lease as a

Result of its Delay Providing Notice

[231] Insofar as this estoppel issue relates to any claim for breach of the JVA by

Cardero, the following analysis is also obiter. However, it is also arguably material to

the claim for breach of the Lease.

[232] In Hongkong Bank of Canada v. Watson (1993), 89 B.C.L.R. (2d) 71 (C.A.),

the Court of Appeal held that a default notice must be issued within a reasonable

period of time, which time depends on the circumstances of the case: para. 21. In

finding that the notice was reasonable in the circumstances of that case, the Court of

Appeal considered whether the debtor suffered any prejudice by not having prior

notice of the default. See also: Kingdom Construction Limited v. Regional

Municipality of Niagara, 2018 ONSC 29 at paras.115-116.

[233] The principle of estoppel is a flexible concept. Its purpose is to avoid

unconscionable results. It is based on the principle that when parties to a transaction

have proceeded on the basis of an underlying assumption on which they have

conducted their dealings, neither will be allowed to go back on that assumption when

it would be unfair or unjust to do so: Erickson v. Jones, 2008 BCCA 379 at para. 57.

[234] Estoppel by convention arises where: (a) the parties’ dealings are based on a

shared assumption of fact or law; (b) where a party conducts itself in reliance on that

shared assumption resulting in a change of its position; and (c) it would be unjust or

unfair to allow one of the parties to resile or depart from the common assumption:

Ryan v. Moore, 2005 SCC 38 at para. 59.

[235] Estoppel by representation will be found where:

a) a representation or conduct amounting to a representation intended to induce

a course of conduct on the part of a person to whom the representation is

made;

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b) an act or omission resulting from the representation, whether actual or by

conduct, by the person to whom the representation is made; and

c) there is detriment to such person as a consequence of the act or omission

Costco Wholesale Canada Inc. v. Cazalet, 2008 BCSC 952 at para. 28.

[236] For estoppel by misrepresentation to operate, the parties must be of “a like

mind” at the material time, and this is not so if the nature of the assumption is in

doubt: Grasshopper Solar Corporation v. Independent Electricity System Operator,

2020 ONCA 499 at para. 56.

[237] I find that there is no notice delivery or estoppel problem preventing PRP from

advancing its claim for Advanced Royalty Payments under the Lease. This was

simply a demand “in the default of payment”. There is no issue of Cardero being

deprived of an earlier opportunity to cure. Even if one treats the filing of the Lease

Action as their first formal demand under the Lease, Cardero nonetheless failed to

cure within 30 days. Further, there is no indication that Cardero would have cured

earlier had it been given the opportunity to do so.

[238] Recall that PRP is not challenging the surrender itself. In relation to the

Advance Royalty Payments, there is no doubt that Cardero was already well aware

of PRP’s position on the $500,000.

[239] In these circumstances, I find that the provision of notice of PRP’s claim

under the Lease was not so delayed that it cannot be enforced as the result of

estoppel.

[240] Turning to CCP’s claim for breach of the JVA, it is understandable why an

agreement would grant the non-defaulting party some time to issue notice. The non-

defaulting party’s options in the event of a default may present onerous obligations.

Accordingly, the non-defaulting party may wish to see how matters develop prior to

exercising these rights. In this case, for example, it is clear why CCP may have

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wanted to take some time to see how matters developed after any default occurred

before electing to move forward with the right to buy-out Cardero’s interest.

[241] Mr. Horan waited to issue CCP’s notice of default under the JVA because he

says he was originally unsure as to CCP’s legal right. He also wanted to negotiate

with Mr. Kopple to see if the Joint Venture could be salvaged. These reasons for

delay were reasonable and understandable: Le Soleil Hotel & Suites Ltd. v. Le Soleil

Management Inc., 2009 BCSC 1303 at para. 421.

[242] Mr. Horan advised Mr. Henderson that he believed Cardero was in default of

the JVA on June 17, 2014 and October 15, 2014. He also sent draft default notices

on July 27, 2015. There can be little doubt that Cardero understood that CCP’s

position was that Cardero was in breach of the JVA prior to January 18, 2016.

[243] It is difficult to apply the relevant legal test in the absence of a finding of

specific breaches of the JVA by Cardero against which the test can be applied.

However, notwithstanding that difficulty, I find that Cardero has not established a

basis for an estoppel plea against CCP, even assuming any alleged breaches had

been made out:

a) Mr. Horan never made a positive statement that could reasonably be

interpreted as an intention on the part of CCP to not pursue its rights under

the JVA.

b) There is no evidence of a shared understanding that CCP would not advance

a claim under the JVA. Indeed, CCP’s decision to stop cooperating was a

clear signal that CCP viewed the JVA as having been breached.

c) There was sufficient evidence as to CCP’s concerns about the JVA, such that

Cardero could not reasonably assume that no action would be brought.

d) There is little evidence of Cardero having acted to its detriment based upon

CCP’s alleged express or implied representation that JVA claims would not

be pursued. There is no evidence that Cardero would have sought to “un-

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surrender the lease” or “un-abandon the Freehold” had CCP sought a remedy

under the JVA at an earlier date. Cardero never changed its legal position. In

March 2014, it took the position that it was entitled to surrender the Coal

Lease, not make the Advance Royalty Payments, and carry on with the Joint

Venture over the remaining lands. That remained its position from that point

onward and is still its position today.

e) The work that was done by Cardero on the Joint Venture during the relevant

period was not particularly extensive and presumably added value that could

still be recaptured by Cardero through the Article 12.1 buyout process.

[244] In these circumstances, there is no unfairness or injustice in allowing the

Partnerships to continue with its claim for breach of the JVA and Lease.

[245] The waiver argument would fall for the same reason, but also fails because

Article 3.3 of the JVA required that any waiver be in writing.

F. Remedy and Damages

[246] As a result of Cardero’s breach of the Lease, I find that PRP is entitled to an

award of $500,000 plus contractual interest. PRP is also entitled to an award for any

“Losses” incurred as a result of this breach. Subject to my direction on costs below, I

direct that any necessary residual determination of the amount of such additional

“Losses” be referred to the Registrar for assessment and certification.

[247] As a result of CCP’s breaches of the JVA, I confirm that Cardero’s election

under Article 12.1 was effective, and that it is thus entitled to purchase CCP’s

remaining interest in the Joint Venture pursuant to process set out in Article 12.1(e)

of the JVA. Cardero is also entitled to an award for any “Losses” incurred as a result

of the identified breaches. Again, subject to my direction on costs below, I direct that

any necessary residual determination of the amount of any such “Losses” be

referred to the Registrar for assessment and certification.

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[248] Given my findings above, it is not necessary to determine what remedies

would have been available to CCP had I found a breach of the JVA by Cardero.

Absent a finding of specific breaches, it is impossible and impractical to determine

what damages would have arisen from undetermined breaches.

[249] Given that I have not found a breach of Cardero’s obligations under the JVA,

it is also unnecessary to consider:

a) Cardero’s alternative argument that any breach of its duty as Manager does

not entitle CCP to invoke the buyout remedy under Article 12.1; or

b) Cardero’s alternative argument that CCP failed to mitigate its losses.

VI.

CONCLUSION

[250] PRP is entitled to judgment in the Lease Action, as set out above.

[251] Cardero is entitled to judgment in the JVA Action, as set out above.

[252] All other claims in both actions are dismissed.

[253] In relation to costs, if the parties are unable to agree on same within 30 days,

they may file written submissions on the following schedule:

a) Cardero’s Submission: written submissions of 20 pages or less may be filed

within 60 days of this judgment;

b) Partnerships’ Response: written submissions of 20 pages or less within 30

days of receipt of the Cardero Submission; and

c) Cardero’s Reply: written submissions of 5 pages or less within 15 days of

receipt of the Partnerships’ Response.

[254] The submissions on costs may include any argument the parties wish to

make on the proper interaction of the appropriate costs award with each parties’

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potential entitlement to solicitor and own client fee “Losses” pursuant to their

respective breaches of the agreements.

______________________________________

The Honourable Mr. Justice Branch