BA Energy Inc. (Re) (Samson Controls Inc.), 2011 ABQB 142

Court of Queen ’ s Bench of Alberta Citation: BA Energy Inc. (Re) (Samson Controls Inc.) 2011 ABQB 142 Date: 20110309 Docket: 0801 16292 Registry: Calgary In the Matter of

Section 193 of the Alberta Business Corporations Act , R.S.A. 2000, c. B-9, as amended; and in the matter of the Judicature Act , R.S.A. 2000, c. J-2, as amended, And in the Matter of a Proposed Arrangement involving Value Creation Inc., BA Energy Inc. and the holders of common shares of Value Creation Inc. And in the Matter of the Companies ’ Creditors Arrangement Act , R.S.C . 1985, c. C-36, as amended; and in the Matter of BA Energy Inc. _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Introduction [ 1 ] This Application deals with the

interpretation of substantively identical provisions in purchase orders for machinery entered into between sophisticated commercial parties. The clauses at issue provide the purchaser with the right to return purchased materials that are surplus to project requirements, subject to a re-stocking fee. [ 2 ] BA Energy Inc., the purchaser, seeks to rely on this provision to return delivered equipment and obtain a refund of money paid. Samson Controls Inc., the vendor, has refused to accept return of the equipment, and seeks payment of a remaining outstanding invoice and storage costs for equipment not yet accepted by BA Energy.

Facts [ 3 ] As part of a plan to construct the Heartland Upgrader northeast of Edmonton, BA Energy, through its agent, entered into four orders (with subsequent change orders) for the purchase of forty-eight on/off ball valves with accompanying actuators and accessories (the “Valves”).

Three of the purchase orders were dated November 23, 2006 and one was dated February 15, 2007. [ 4 ] The purchase orders include a surplus return clause which reads as follows: All material (in like new, resalable condition) surplus to project requirements shall be accepted for return, freight prepaid to Seller’s Warehouse, subject to a 20% re-stocking charge. [ 5 ] The purchase orders also include termination and cancellation clauses.

The termination clause provides that the purchaser may terminate the order at any time and will be relieved of further obligations “except for the payment of the balance outstanding for the goods received or work performed to the time of termination, plus all proper costs incurred by Seller resulting directly from termination.” [ 6 ] The cancellation clause reads as follows: Cancellation charges for cancelling the Purchase Order after authorization to proceed with procurement of materials and to fabricate or manufacture.

Milestone Events Cancellation Charges 2-4 weeks 20% 4-8 weeks 40% 8-16 weeks 60% [ 7 ] BA Energy authorized Samson to proceed with not only procurement but with the fabrication and manufacture of the Valves. Samson began the process of procuring the necessary materials and manufacturing the Valves in or about January 2007. [ 8 ] Thirty-seven of the Valves had been manufactured, paid for and delivered to BA Energy by May 21, 2008.

They have been stored at the Heartland Upgrader site. [ 9 ] In July, 2007 and again in October, 2007, BA Energy attempted to cancel the orders for some of the Valves, but Samson refused to do so, suggesting that a “restocking charge” of 100% of the purchase price would be applied to certain of the orders. In November, 2008, BA Energy inquired whether Samson would buy back or resell any of the Valves but Samson refused on the basis that the Valves were a custom order. [ 10 ] On or about December 24, 2008, Samson advised BA Energy that the remaining eleven Valves had arrived in Canada and were ready for pick-up.

The eleven Valves have remained in storage with a third party and Samson has incurred delivery and storage charges for them. [ 11 ] In late 2008, BA Energy was forced, due largely to the global economic crisis, to halt construction of the Heartland Upgrader. On December 30, 2008, BA Energy sought and obtained an Initial Order under the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36, as amended (the “CCAA”). All work on the upgrader had ceased by January, 2009. [ 12 ] On February 27, 2009, BA Energy advised Samson that the Valves were surplus to BA Energy’s project requirements. BA

Energy requested that Samson accept the return of the Valves by freight prepaid to Samson’s warehouse and issue a refund of$1,875,255.20 (being the money already paid for the Valves minus a 20% re-stocking fee). [13] On March 13, 2009, Samson refused to accept return of the Valves. Samson issued invoices to BA Energy for the last elevenValves in the amount of $195,279.54. Analysis Principles of Contractual

Interpretation [14] In Kensington Energy Ltd. v. B & G Ltd., 2008 Carswell Alta 528, the Alberta Court of Appeal provided the followingsynopsis of the law with respect to the legal principles to be followed in the

interpretation of a contract: When interpreting a contract, the court should give expression to the intention of the parties. If the wording of a contract is unambiguous,the court should not give it a meaning different from that which is expressed by its clear terms, unless the contract is unreasonable or hasan effect contrary to the intention of the parties: Scott v. Wawanesa Mutual Insurance Co., (SCC), [1989] 1 S.C.R. 1445 at 1467, (1989) 59 D.L.R. (4th) 660. When possible, effect is to be given to all the terms of a contract.

The various parts of acontract are not to be read in isolation, but are to be interpreted in the context of the parties’ intentions as evident from the contract as awhole. A word or phrase of debatable import may achieve a clear meaning when the entire document is read: BG Checo International Ltd. v. British Columbia Hydro and Power Authority, (SCC), [1993] 1 S.C.R. 12 at 23-24, (1993) 99 D.L.R. (4th) 577. [15] Thus, individual provisions of a contract, such as the surplus return provision at issue, are not to be read in isolation, butinstead must be read in harmony with the whole of the contract.

Whenever possible, meaning should be given to all provisions. No termin a contract should be found to be meaningless or redundant: National Trust Co. V. Mead (SCC), [1990] 2 S.C.R. 410 atpara. 31. Are the Valves “material”? [16] Samson submits that the Valves are not “material” as referenced in the surplus return clause, and that thus the clause does notapply to them. This

interpretation does not accord with the purchase orders read as a whole in the context of the surrounding factualmatrix. As BA Energy points out, the finished Valves are the sole subject matter of the purchase orders, and are in fact listed in theschedule of “Material Description” included in the purchase orders. They were the only “material” purchased by BA Energy fromSamson. [17] Samson also submits that it is relevant in this context that the provision setting out graduated cancellation charges had longsince expired.

The surplus return clause is not linked to the cancellation charge clause either by express language or necessaryimplication: it is readily conceivable that material that otherwise meets the requirement of the surplus return clause would not bediscovered to be “surplus to project requirements” until long after the cancellation charge clause ceases to be operable. [18] Samson also submits that the termination clause of the contract should pre-dominate since, it argues, there is no sense inhaving a termination clause in a contract if the material can be returned at any time.

However, the surplus return clause does not permitthe return of material at any time, but only if it meets the conditions of the clause. [19] Samson also suggests that the distinction between “material” and “goods” in the payment terms clause of the purchase ordersis relevant. The term in such clause is actually “material for production”, and refers to the production process within Samson and not theValves as delivered and subsequently sought to be returned.

The distinction does not aid in interpreting the meaning of the surplus returnclause. [20] The Valves were what BA Energy purchased under its contract with Samson, and for the surplus return clause to have any

meaning, “material” must include the Valves as fabricated and delivered. The clause includes the words “return, freight prepaid”, supporting the

interpretation that it operates with respect to items manufactured by Samson and delivered to the customer. Are the Valves “like new”? [ 21 ] Samson submits that, for the Valves to be considered “like new”, they must have been properly maintained, inspected and kept in mechanical and operational condition.

Samson is critical of the conditions in which some of the Valves have been stored at the Heartland Upgrader site. [ 22 ] Samson concedes that it has no knowledge of the actual condition of the Valves, other than the observations of one of its representatives from a brief visit to the site, but submits that BA Energy cannot attest to the fact that the Valves are “like new” since it relies only on an opinion to that effect by one of their employees (whom, Samson says, lacks the proper qualifications to give such an opinion) and the opinion of a consultant company on preservation and maintenance protocols generally. [ 23 ] BA Energy notes that the Valves have never been used and have been stored in their original shipping crates.

The employee in question who opined that the Valves are in good condition is the employee tasked with quality assurance and preservation duties for the company. BA Energy’s storage and maintenance protocols have been independently evaluated as “superior” and maintained by a consultant that specializes in industrial-based insurance services. This consultant insures all equipment on site, and thus has a financial interest in the preservation of the Valves. BA Energy’s representative, Mr.

Carillo, testified on cross-examination on affidavit that the Valves were included in the consultant’s inspection and report. [ 24 ] Mr. Carillo also testified that BA Energy’s storage procedures have substantively complied with Samson’s prescribed storage requirements, other than the fact that BA Energy failed to retain the services of a Samson representative to inspect the Valves for warranty purposes. [ 25 ] The warranty issue is a red herring. When BA Energy first sought to return the Valves in February, 2009, the warranty had not expired on any of them.

As BA Energy submits, Samson’s refusal to accept the return of the Valves and the resulting passage of time leading to the expiry of warranty periods cannot be the basis for a refusal to accept an otherwise valid return of surplus material.

The lack of warranty does not mean the Valves are no longer “like new”: it merely means that the contractual obligations and benefits of a warranty between these two parties are no longer in force. [ 26 ] I find that BA Energy has adduced sufficient evidence to establish on a balance of probabilities that the Valves are “like new”, and that Samson has not countered that evidence in any effective manner.

Had Samson accepted the return of the Valves in February, 2009 and found them to be damaged by poor maintenance or preservation, it may have been able to establish otherwise, but it did not do so, and is thus unable to effectively challenge the evidence adduced by BA Energy on this issue. Are the Valves in “resalable condition”? [ 27 ] Samson also submits that the Valves are not in “resalable condition” because they are unique and custom-fabricated to BA Energy’s specifications. Even if the Valves are unique, they are the only product purchased from Samson by BA Energy.

However, the Samson representative testified on cross-examination that the fully-assembled Valves would never have been in “resalable condition” given their unique characteristics. In order that the surplus return clause be given any meaning, the fact that the Valves may be unique cannot prevent them from being subject to the clause. [ 28 ] The evidence is that the Valves are fitted with a metal seat rather than a “soft” seat and that a special coating material was applied to them for pressure and temperature purposes.

Samson does not dispute this, but argues that these changes made the Valves expensive. [ 29 ] It is also in evidence that Samson received inquiries about the possibility of purchasing the Valves from an Italian customer.

The Samson representative, Ms. Jensen, stated that the sale did not materialize because of the Valves’ “unique design, inadequate storage procedures and the substantial expiring of the manufacturer’s warranty”. On cross-examination, she said that the Valves were “over designed for what the customer was looking for, and with no or little warranty being left available on [them]”. Samson refused to provide copies of any written communication between the Italian customer and Samson to BA Energy. The issue of the lack of warranty between BA Energy and Samson has already been discussed.

That a customer may not be interested in purchasing material because Samson will not provide a new warranty does not make the material unsaleable. [ 30 ] I am not persuaded by the evidence that the unique aspects of the Valves make them unsaleable, either by reason of the enhancements that were made or the lack of warranty. [ 31 ] Samson also submits that it would be necessary for a Samson representative to assess the condition of the Valves in order to satisfy itself that they are functional and thus resalable.

However, I am satisfied from the evidence before me that BA Energy has made out a prima facie case that the Valves are in resalable condition. Samson has not provided evidence to counter or contradict the prima facie case. [ 32 ] In

summary, all of the arguments made by Samson with respect to the meaning of “material”, “like new” and “resalable condition”, if successful and taken to their logical conclusion, would have rendered the surplus return clause redundant and meaningless, contrary to principles of contractual

interpretation. However, the issue of whether the Valves are surplus to project requirements is different. Are the Valves “surplus to project requirements”? [ 33 ] BA Energy takes the position where that its financial circumstances resulted in the Valves becoming “surplus to project requirements”. [ 34 ] As BA Energy itself notes, “surplus” means “an amount left over when requirements have been met ... exceeding what is needed or used”: Oxford Concise English Dictionary , 9 th edition (Oxford: Clarendon Press).

Because of BA Energy’s financial position, the Heartland Project was put on hold and construction was halted. Mr. Carillo testified that the future of the project is uncertain, that it may or may not proceed after the restructuring is complete. Mr.

Carillo made it clear in his cross-examination on affidavit that the Valves were redundant “at this time”, that BA Energy was disposing of everything it could as part of the restructuring in order to come up with a plan that would be accepted by its creditors, but that at some time in the future, BA Energy may be in a position where it would have to re-order components, including valves, in order to complete construction of the upgrader facility. [ 35 ] Mr.

Carillo testified as follows: Q. ... and I take it that those purchase orders, which pertain to these valves, are surplus to the project requirements simply because BA Energy is in insolvency currently, and it’s surplus because the project isn’t moving forward at this time? A. Yes. Q. And is that what you’ve been doing with the other components of the upgrader? A.

Most of the components that we have on site ... we put ... on sale through an auction ... we were selling everything ... that was either critical or not critical assets to BA, because we needed to monetize the company. [ 36 ] Samson submits that “surplus to project requirements” cannot be interpreted to encompass any eventuality but must be restricted to situations where the material is no longer required for the project, as constructed or being constructed. I must agree. To give the phrase the

interpretation sought by BA Energy would be to create an entirely new cancellation or termination clause in the purchase orders that would be inconsistent with existing provisions. It is this context that limits the surplus return clause to situations of

operational or physical surplus. While the clause is intended to give a purchaser flexibility in the event of changes or unforseen events in the construction of projects that are often complex and innovative in an engineering and design sense, that flexibility cannot be interpreted to extend to financial difficulties that lead to a halt in construction. As conceded by BA Energy, the Valves are only surplus at this time . The project as constructed may well require the Valves, or valves similar to them, if it is eventually completed. In that sense, the Valves cannot be considered “surplus to project requirements”.

Conclusion [ 37 ] I find, therefore, that BA Energy cannot rely on the surplus return clause to compel Samson to accept return of the Valves, or to pay a refund of $1,875,255.20. The invoiced amount of $195,279.43 for the eleven Valves not yet delivered must be paid. [ 38 ] The remaining question is whether BA Energy must pay storage costs for the Valves not yet delivered. There is nothing in the documentation between the parties that requires the payment of storage costs.

Samson was aware from about July, 2007 that BA Energy was seeking to cancel its orders for at least fourteen of the Valves, and became aware as of November 7, 2008 that BA Energy wished Samson to buy back or re-sell some of the Valves. Despite this, Samson advised BA Energy on about December 24, 2008 that the Valves were ready for pick-up from its warehouse facility in Toronto. The initial order in the CCAA proceedings was granted on December 30, 2008.

With knowledge of this state of affairs, Samson moved the eleven Valves from its warehouse facility to an offsite warehouse facility at the end of March, 2008. [ 39 ] BA Energy is not contractually responsible for storage costs. If it must pay such costs to obtain possession of the Valves, it is entitled to set off the amount of such costs against the $195,279.54 owing to Samson. [ 40 ] If the parties are unable to agree on costs, I will hear submissions on that issue. Dated at the City of Calgary, Alberta this 9 th day of March, 2011. B.E. Romaine J.C.Q.B.A. Appearances: Stanley Carscallen, Q.C.

Carscallen Leitch LLP for Samson Controls Inc. Howard A. Gorman and Kyle D. Kashuba

Macleod Dixon LLP for BA Energy Inc.