Indutech Canada Limited v. Gibbs Pipe Distributors Ltd., 2011 ABQB 38

Court of Queen’s Bench of Alberta Citation: Indutech Canada Limited v. Gibbs Pipe Distributors Ltd., 2011 ABQB 38 Date: 20110131 Docket: 0401 09099 Registry: Calgary Between: Indutech Canada Limited Plaintiff (Defendant by Counterclaim) - and - Gibbs Pipe Distributors Ltd., Barry Gibbs Sales Limited, 724192 Alberta Ltd., 974038 Alberta Ltd., Borealis Fabrication Ltd., Barry Gibbs, Guy Gibbs, ABC Corp., Cladtech Canada Inc., Barry Kossowan, Kossowan Holdings Inc. and 1036795 Alberta Ltd. Defendants - and - Gibbs Pipe Distributors Ltd.

Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice B.E. Romaine _______________________________________________________

Introduction.............................................................................................................................. Page: 4 Facts .. Page: 4 Overview..................................................................................................................... Page: 4 Indutech’s Business...................................................................................................... Page: 6 Relationship Between Indutech and the Gibbs Group...................................................

Page: 11 The Agency Agreements............................................................................................. Page: 12 The Millenium Project................................................................................................. Page: 18 Expert Witnesses........................................................................................................ Page: 19 Allan Nelson.................................................................................................. Page: 19 Kevin Copeland.............................................................................................

Page: 24 Gordon Smith................................................................................................. Page: 27 The Gibbs Group Witnesses....................................................................................... Page: 28 Gene Dunphy................................................................................................. Page: 28 Barry Gibbs................................................................................................... Page: 31 Stephan Holland.............................................................................................

Page: 32 Guy Gibbs...................................................................................................... Page: 34 Tracey Kohlsmith....................................................................................................... Page: 42 Mike Lundquist.......................................................................................................... Page: 44 Jim Nowakowski....................................................................................................... Page: 46 Barry Kossowan and the Cladtech Defendants............................................................

Page: 46 Alleged Breaches of Agency Agreements................................................................................ Page: 50 A. Lack of involvement of Barry Gibbs in Indutech.............................................. Page: 50 B. Unauthorized changes to Indutech quotes........................................................ Page: 51 C. Exceeding maximum mark-up of 5% on buy/sell arrangements......................... Page: 51 D. Contacting competitors................................................................................... Page: 53 E.

Triten exception and Capitan exclusion............................................................ Page: 53 F. Bulk welding wire supplied to Indutech’s competitors...................................... Page: 54 G. Diverting work to Indutech’s competitors........................................................ Page: 57 H. The Millenium Project and diverted sales......................................................... Page: 62 Analysis of Law...................................................................................................................... Page: 69 I.

Breach of Contract......................................................................................... Page: 69

II. Agency and Breach of Fiduciary Obligations................................................... Page: 72 III. Doctrine of Knowing Assistance..................................................................... Page: 82 IV. Inducing Breach of Contract........................................................................... Page: 87 V. Unlawful Interference with Economic Relations................................................ Page: 92 VI. Conspiracy to Injure.......................................................................................

Page: 92 Calculation of Damages.......................................................................................................... Page: 95 A. Damages for Breach of Contract..................................................................... Page: 95 1. Compensation for Loss of Business Opportunity................................. Page: 96 2. Restitution Page: 99 3. Disgorgement................................................................................... Page: 100 B. Damages for Breach of Fiduciary Duty and other Torts................................. Page: 103 (

a) Equitable Compensation................................................................... Page: 104 (

b) Disgorgement/Account of Profits....................................................... Page: 107 C. Punitive Damages......................................................................................... Page: 109 Counter Claim...................................................................................................................... Page: 114 Costs.. Page: 115 Appendix A......................................................................................................................... Page: 117

Introduction [ 1 ] The Plaintiff Indutech Canada Limited (“Indutech”) manufactures specialized steel products, mainly Naspipe hardened straight pipe, induction bends and chromium carbide products for sale to petroleum producers in the Alberta oilsands. [ 2 ] The Defendants Gibbs Pipe Distributors Ltd. (“GPD”) and Barry Gibbs Sales Limited (“BGS”) (together with Guy Gibbs, Barry Gibbs, 724192 Alberta Ltd., and Borealis Fabrication Ltd., “the Gibbs Group”) are related individuals and companies that for a number of years marketed and sold Indutech’s products in the oilsands, pursuant to two agency agreements. [ 3 ] Indutech alleges that the actions taken by GPD and BGS breached the agency agreements and the fiduciary and good faith duties owed by GPD and BGS to Indutech, in particular, as they relate to the steps taken to set-up Cladtech Canada Inc., a competitor in the business.

Indutech further alleges that the individual defendants (Guy Gibbs, Barry Gibbs and Barry Kossowan), and through them, their corporations, induced the breach of the agency agreements by assisting in the set-up of Cladtech and by other conduct. [ 4 ] Indutech alleges that Guy Gibbs, Barry Gibbs and Barry Kossowan, and corporations they control were co-conspirators with respect to the aforementioned breaches of duty, knowingly assisted in the breaches of fiduciary duty and unlawfully interfered with the economic relations of Indutech. [ 5 ] Indutech also alleges that BGS, GPD and the Gibbs Group defendants further breached the terms of the agency agreements and seeks damages or disgorgement of profits or restitution in connection with the following: 1. the prohibited supply of bulk welding wire to competitors; 2. the diversion of sales to third parties, including Cladtech;

3. the receipt of remuneration greater than the 5% mark-up allowed under the agency agreements; and 4. the loss of sales and the recovery of commissions and profits related to what is referred to as the Millenium Project. [ 6 ] GPD has filed a counterclaim alleging that it is owed commissions pursuant to the 2002 agency agreement. Facts Overview [ 7 ] As noted previously, Indutech manufactures specialized steel products. In particular, Indutech applies chromium carbide weld overlay (“CCO”) to the inside of pipe to combat abrasion.

Components of piping systems applied with CCO are described from time to time as “spools”. [ 8 ] The relationship between Indutech and GPD and BGS was governed by two agency agreements, the first dated May 15, 2000 and the second dated November 14, 2002 (collectively, the “Agency Agreements”). Indutech filed the Statement of Claim in this matter on June 11, 2004, thereby terminating the November 14, 2002 Agency Agreement. [ 9 ] In February, 2002, Guy Gibbs, who during times material to this action was the controlling mind of GPD and BGS, and Barry Kossowan took steps to form 974038 Alberta Ltd. (“974038"). Mr.

Gibbs and Mr. Kossowan each owned 50% of the shares of 974038 Alberta Ltd. [ 10 ] From April through December of 2002, 974038 acquired equipment that was capable of producing the same CCO that forms the bulk of Indutech’s business. [ 11 ] On November 25, 2002, Mr. Kossowan incorporated Cladtech Canada Inc. (“Cladtech”), a company wholly owned by Mr. Kossowan. Cladtech was incorporated in order to lease the CCO equipment acquired by 974038. [ 12 ] On March 17, 2003, Mr.

Kossowan and Guy Gibbs incorporated 1036795 Alberta Ltd. (“1036795"). 974038 then transferred all of its assets to 1036795, specifically, the machines to be used to manufacture CCO spools. Kossowan Holdings Inc. (“Kossowan Holdings”), a corporation controlled by Mr.

Kossowan, owned 50% of the shares of 1036795 and held the other 50% of the shares in trust for and on behalf of 724192 Alberta Ltd. (“724192"). 724192 is a holding company whose sole director and shareholder is Guy Gibbs and which owns all of the shares of BGS and GPD. [ 13 ] On December 8, 2003, 1036795 entered into an equipment operating agreement with Cladtech that essentially provided for the lease of the CCO manufacturing equipment to Cladtech in perpetuity.

Cladtech began operations in July of 2003 as a direct competitor to Indutech in the manufacture of CCO spools. [ 14 ] A chart illustrating the various defendants and their inter-relationship is attached as Appendix A to these reasons. In 2007, 1036795 sold all of the CCO machines for approximately $1.5 million. A

summary of the damages claimed by Indutech, the causes of which will be explained in more detail later in these reasons, is as follows: Category of Claim Commissions/ Gross Margins Damages 1. Repayment of 4% commission paid by Indutech to GPD $864,999.40

2. Profits wrongfully earned by the Gibbs Group from the supply of bulk welding wire $309,554.00 3. Profits wrongfully earned by the Gibbs Group for mark-ups in excess of 5% $286,337.00 4. Profits that Indutech would have earned on diverted work, excluding the Millenium Project $335,527.00 $530,289.00 5. Millenium Project - 2000 (

a) Fees and profits wrongfully earned by the Gibbs Group through purchase orders issued to it by Millenium Construction Contractors (

b) Commissions wrongfully earned by the Gibbs Group for work diverted to Triten/Bendtec (

c) Profits Indutech would have earned on Sales Order 50-418 for 24 spools at a value calculated as follows $737,194.00 - 22,116.00 (3% BGS Commission) $715,078.00 $257,428.00 Net Profit to Indutech @ 36% $292,876.00 $273,848.60 $257,428.00 6. Loss of 2004 revenue from MSI (Suncor) re: termination of BGS as Agent: $150,000.00 loss in sales $54,000.00 net profit to Indutech @ 36% $ 54,000.00 7. Profits Indutech would have earned on work diverted to Cladtech (a subset of the BGS diversions) $ 39,462.84 8.

Punitive Damages $150,000.00 [1] GPD filed a counterclaim and alleges that it is owed commissions pursuant to the 2002 Agency Agreement that Indutech has failed to pay. Indutech’s Business [2] Derek Wolstenholme, the President of Indutech, testified that Indutech was incorporated in 1986 and that he acquired the company in 1990. He has forty years of experience in the specialized steel business. Mr. Wolstenholme is the sole shareholder of Indutech and directs and controls the business. All departments report to him. He described his management style as “hands-on” and said

he was involved in all parts of the business, particularly pricing and productivity. [3] Mr. Wolstenholme testified that Indutech started to become seriously involved in manufacturing CCO products for the oilsands in 1992 and 1993, although he started to procure the appropriate machinery when he acquired the company in 1990. He testified extensively about Indutech’s development in this area and its current capabilities. The following is a

summary of the testimony given on behalf of Indutech by Mr. Wolstenholme, the Vice President of Finance and Operations Jenny McGowan, the Sales Manager Brent Olsen and, the Quality Assurance Manager Colin Cann (collectively, the “Indutech in-house witnesses”), all of which I accept as credible and accurate except where specifically stated otherwise. [4] Indutech’s shop floor is about 35,000 square feet and includes facilities for fabrication. The Indutech workforce was fairly stable between 2000 and 2004, with approximately 20 shop employees.

All of these employees are cross-trained in different disciplines and are capable of working both the CCO machines and the induction benders. Indutech also has additional employees in management, finance and administration. [5] Indutech is capable of working with pipe of 4" to 36" in diameter, although about 70% of the product ordered by oilsands customers is 28" or 30" pipe. [6] Indutech is unique in that it is the only company in Canada with an integrated facility that includes induction bending, CCO and fabrication.

There is some difference of opinion with respect to Indutech’s capabilities in fabrication and its history of undertaking work in that area, which will be described later in these reasons. Because it is fully-integrated, Indutech avoids using subcontractors where possible for the dual reasons of quality control and maximization of profit. [7] Between 2000 and 2004, Indutech had the only machine in Canada capable of producing induction bends. Indutech had an additional induction bending machine in storage during this time that it did not use.

Indutech generally operated the induction bender five to six days per week between 2000 and 2004. [8] In 2000, Indutech had two machines capable of applying CCO to straight pipe (CCO spools), one of which was equipped with two welding heads in order to increase production.

There were also four elbow machines in operation at that time, increasing to six by 2006, some with multiple heads. [9] In commenting on Indutech’s overall production capacity, Allan Nelson, an expert in production capacity issues who testified for Indutech at trial, made the following comments in his report: Indutech has demonstrated over the years that it has increased its manufacturing capacity with the installation of additional plant machinery and improvements to existing machines.

As market demand dictates, utilization of existing machinery is increased up to the point where any machine in the plant can be operating 24 hours a day, 7 days a week, in order to meet demand. If this demand is short- term, Indutech will increase overtime and

schedule shifts to meet the demand with existing machinery. If market conditions show that demand is likely to be sustained over the long term, Indutech will adjust shift hours, as required, and install upgrades to improve existing machines, and, as required, install additional machines to increase total plant capacity. A clear illustration of this practice is shown by the productivity of induction bending and the chronological progression of installed CCO welding capacity, as previously discussed.

The increase in production is also aided by the fact that Indutech is ISO 9000-2001 certified; therefore, each process is fully documented and efficient. The cross-training of personnel allows added flexibility to the production process and increases plant productivity.

The manufacturing and scheduling system employed by Indutech further allows it to quickly respond to market demand by temporarily increasing plant utilization, and then sustainably increasing their overall capacity as long-term market conditions require. [10] Between 2000 and 2004, approximately 70% of Indutech’s sales was attributable to induction bends, CCO spools and CCO bends. Of these sales, approximately 90% was sold to oilsands customers pursuant to the Agency Agreements. [11] Since 1999, Indutech’s primary customers have been Syncrude, Suncor, Albian Sands, and, since 2005, CNRL.

Indutech has been the major supplier to many of the large projects in the oilsands, including Suncor’s Millenium Project in 2000, Syncrude’s Aurora Project in 2000 and 2001, Albian Sands’ Muskeg River Project in 2001 to 2002, Syncrude’s UE1 Project in 2003 to 2004, Syncrude’s SWQRL Project in 2004 to 2005, and various CNRL projects from late 2006 to 2007.

[12] Mr. Wolstenholme testified that, while there were three major suppliers of CCO spools to the oilsands, Indutech was the dominant supplier of CCO bends for Syncrude and a significant supplier for Suncor between 2000 and 2004. [13] Bid inquiries were directed to Indutech primarily through the Gibbs Group, although some customers sent inquiries directly to Indutech (including, at some point, Syncrude, which began dealing directly with Indutech at Syncrude’s request). Inquiries came primarily via phone, fax or e-mail.

The Gibbs Group defendants submit that the relationship between Indutech and the Gibbs Group was a “highly verbal culture”, but I do not accept that characterization in so far as it relates to bid inquiries. If an inquiry came via phone, Indutech’s sales staff would normally follow-up with a fax or e-mail. The Indutech estimators would then quote on the bid inquiry. Mr. Wolstenholme and Ms. McGowan testified that they would have known if quotes were being given informally because of their level of involvement with the sales staff, and I accept this testimony.

There will be further reference in these reasons to the allegations made by the Gibbs Group defendants with respect to an Indutech employee, John Gabel, in this regard. [14] The Indutech in-house witnesses testified that it was Indutech’s policy to take as much work as possible and only rarely decline to quote. Indutech’s policy was to adjust its capacity to meet demand.

This was based on the understanding that not all jobs on which it bid were actually obtained, Indutech’s shop load varied, projects were often delayed (which would result in a more distant delivery date being acceptable) and Indutech’s competitors were often similarly unable to provide the product requested as quickly as requested. As a result, the sales staff was instructed to bid on every inquiry, regardless of Indutech’s current capacity. This edict was clearly understood by all Indutech employees and, Indutech submits, by Guy Gibbs. [ 15 ] Mr.

Olsen was the senior estimator at Indutech in the years 2000 and 2001 and is now the sales manager. As senior estimator, he had direct contact with customers and the BGS people. Mr. Olsen was one of a group of three or four estimators headed by Mr. Gabel who was at that time the sales manager. [ 16 ] Mr. Olsen testified that communication within the estimator group was very good. His primary contact at BGS was Mr. Lundquist but from time to time he also was in contact with Guy Gibbs. [ 17 ] Mr.

Olsen testified that he was unaware of any occasion between 2000 and 2004 where Indutech declined to quote on a bid inquiry. Various factors, such as the availability of materials or work-in-progress, may have impacted the delivery time quoted, but would not affect the decision to quote. In the words of Mr. Olsen, if Indutech could build it, it would quote it. Mr. Olsen could not recall Indutech ever missing a deadline to submit a quote. [ 18 ] The only circumstances where Indutech would decline to bid on inquiries was where Indutech (

a) couldn’t meet the client’s specifications; (

b) couldn’t come to an agreement with the client on a critical delivery date; or (

c) didn’t perform the type of work requested. Where Indutech declined to bid due to a failure to come to agreement on a critical delivery date, this would be discussed with Mr. Wolstenholme regardless of the size of the inquiry. I accept Mr. Olsen’s testimony as credible and accurate. [ 19 ] Michael Gibbs, brother to Guy Gibbs and an employee of the Gibbs Group at the relevant time handled approximately one-third of the bid inquiries on behalf of BGS.

He testified on examination for discovery that he could not recall any specific instance where Indutech indicated that it could not deliver product within a prescribed time frame. The Gibbs Group defendants submit otherwise and this is discussed later in these reasons. [ 20 ] All quotes provided by Indutech included a price, which would be based on market conditions and delivery requirements (which dictated whether overtime was necessary). The price could also be affected by the size of the order, and in particular, the similarity of the pieces within a job, due to the impact on equipment set-up time.

There was no price list for Indutech’s products sold in the oilsands area. Indutech’s prices were whatever the market could bear, and it relied solely on the Gibbs Group to provide it with feedback for pricing purposes. [ 21 ] Quotes provided by Indutech would also contain an estimated delivery date, based on a consideration of work-in-progress, receipt of the customer’s purchase order, material availability and customer urgency.

All estimated delivery dates were stated to be confirmed when the order was placed, given that Indutech’s work-in-progress may have changed prior to the customer actually issuing the purchase order. If Indutech was unable to meet a previously quoted deadline when the purchase order was issued, the customer was advised and discussions would ensue.

[ 22 ] In order to keep all managers apprised of work-in-progress and delivery dates, Indutech relied on its production meetings, which were attended by the sales manager, quality assurance manager, production supervisor, senior estimator, vice president and shipper/receiver. The production meetings were approximately one to one and a half hours long, and took place three times per week (or daily during peak times). These production meetings were described as being very effective and important by those Indutech employees who participated, other than by Mr.

Holland, whose testimony will be discussed later in these reasons. [ 23 ] Various factors impacted Indutech’s scheduling of the work, including when information was received from the customer, the availability of materials, the requirement from time to time of laboratory testing, the re-ranking of priorities of work by the customer (which was described by the Indutech witnesses as a frequent occurrence), changes in customer specifications, and the occasional requirement of customer approval of Indutech’s manufacturing procedures. Indutech often had to adjust its scheduling in response to these external factors.

Indutech employed the use of white boards that recorded Indutech’s work-in-progress. These white boards would be manually revised as necessary in the production meetings to reflect changing circumstances. The Indutech in-house witnesses testified that the white boards were also of assistance in identifying bottlenecks, in which case Indutech’s managers would add overtime or reassign shop employees. [ 24 ] The Indutech in-house witnesses also testified that Indutech occasionally had problems with deliveries for various reasons, many of which they said were beyond Indutech’s control.

However, they testified that late deliveries at no time caused any work to be removed from Indutech’s facility. The defendants submit otherwise, and their allegations with respect to late deliveries are referred to elsewhere in these reasons. [ 25 ] According to the Indutech in-house witnesses, Indutech’s induction bending machine had more capacity than was being used at all relevant times and was capable of producing additional bends in any given year. Mr.

Wolstenholme testified that there was nothing to prevent Indutech from adding welding heads to its CCO machines and that this was done when needed to add to capacity. He noted that Indutech had more than enough capacity in terms of CCO work and could add to it, as it later did with the CNRL work. [ 26 ] Mr. Wolstenholme testified that between 2000 and 2004, Indutech was using 80 to 90% of its production capacity, meaning labour and fixed assets, with respect to CCO. His objective was to increase capacity as the need arose. Mr.

Wolstenholme described this as a “cash conservation strategy”, as he did not want unused excess capacity. In the short term, Indutech could increase its capacity by adjusting its work week to increase overtime work and, if necessary, could add a midnight shift. The defendants suggested that Indutech was complacent with respect to sales volume and the requirements of change, but that does not accord with Mr. Wolstenholme’s evidence of careful, prudent adjustments to accommodate increased demand.

It is noteworthy that in a fax from Guy Gibbs to John Gabel with respect to the negotiation of commission rates dated September 24, 2001, Mr. Gibbs states at one point that “you have asked me what we will do to increase sales for Indutech products”. What follows is a recitation of steps that BGS will undertake to “keep [Indutech] the number one supplier to the Tar Sands”. In the second half of 2000 during the time of the Millenium Project, Indutech worked some additional shifts, including approximately 45 - 55% of available weekends and a few midnight shifts.

The Indutech in- house witnesses testified that Indutech had sufficient personnel to add a midnight shift and, if required, work 45 to 55% more weekend shifts than what was in fact worked during this period of time. This evidence was disputed. Relationship Between Indutech and the Gibbs Group [ 27 ] The relationship between Indutech and the Gibbs Group began in 1988, before Mr. Wolstenholme acquired the company. At all times between 1988 and 2004, the Gibbs Group acted for Indutech as its sole representative and exclusive sales agent in the oilsands. [ 28 ] Mr.

Wolstenholme met with Barry Gibbs, Guy Gibbs’ father, in 1998 when he first started to become interested in the oilsands work. Mr. Wolstenholme testified that he knew that Barry Gibbs had experience and involvement with the oilsands. Later, Guy Gibbs became involved but, Mr. Wolstenholme insisted during negotiations on the Agency Agreements that Barry Gibbs be involved with Indutech. As described later, the Agency Agreements required the active involvement of Barry Gibbs in Indutech’s sales activities. [ 29 ] Mr.

Wolstenholme testified that there was always an understanding between Indutech and the Gibbs Group, although written agreements did not always exist or follow immediately one after the other. This was conceded by the Gibbs Group. [ 30 ] The Gibbs Group was required to provide all market information to Indutech, including information about customers, competitors and anticipated projects. Both Mr. Wolstenholme and Guy Gibbs stated that the Gibbs Group was Indutech’s “eyes and ears in the tar sands”.

They also agreed that the Gibbs Group provided advice to Indutech, including what the market would bear in terms of pricing

and scheduling for certain products. Under the terms of the Agency Agreements, the Gibbs Group was to liaise with both customers and the major engineering firms to ensure that Indutech was at the top of the bidding list of every procurement department. The Indutech in- house witnesses testified that it was clearly expected that the Gibbs Group would forward every inquiry to Indutech without exception. [ 31 ] The Gibbs Group had complete access to Indutech’s facility. In the words of Mr. Wolstenholme, the Gibbs Group had the “run of the shop”.

There were no restrictions with respect to which Indutech employees the Gibbs Group were permitted to speak with: anyone at the Gibbs Group could speak with anyone at Indutech (including Mr. Wolstenholme) at any time. The Gibbs Group was regularly in touch with Ms. McGowan (daily or weekly) about various matters, as well as the Indutech estimators.

Guy Gibbs even attended several of Indutech’s production meetings. [ 32 ] The Indutech in-house witnesses testified that the Gibbs Group was entrusted with knowledge of various confidential matters critical to Indutech’s business, including scheduling, pricing, product non-conformances, manufacturing difficulties and work that was the subject of an unsuccessful bid. Indutech discussed its future plans with the Gibbs Group.

Barry Gibbs testified that he understood that he and the Gibbs Group had an obligation to act in Indutech’s best interests. [ 33 ] There is little dispute from the evidence that both Indutech and the Gibbs Group were cognizant of the extremely close relationship between their respective companies. By way of example, Jim Nowakowski of JNE Welding, who was called as a witness by the Gibbs Group, testified that when he introduced himself to Jack Brownlee, a Gibbs Group employee, Mr.

Brownlee described the Gibbs Group as the acting sales arm of Indutech. [ 34 ] Indutech initially dealt solely with BGS but at some point received notification that Indutech would also be dealing with GPD. BGS and GPD share the same office space. [ 35 ] The current sole director of BGS and GPD is Guy Gibbs. At all material times, Barry Gibbs was president of BGS, and from 2002 was a director of BGS. The employees of BGS and GPD act on behalf of both corporations as the need arises. [ 36 ] Mr.

Wolstenholme testified that whether Indutech worked with BGS or GPD or both was not a cause for concern to Indutech, provided that both companies were acting in the best interests of Indutech. Mr. Wolstenholme, Mr. Olsen and Ms. McGowan testified that they made no distinction between BGS and GPD. [ 37 ] At a certain point in time, it became apparent to Indutech that the Gibbs Group was using GPD when acting for Indutech on a commission basis and BGS when acting in a buy/sell arrangement with Indutech.

The Agency Agreements The 2000 Agency Agreement [ 38 ] The 2000 Agency Agreement was entered into between Indutech and GPD and all other related entities, such as but not limited to BGS, which collectively were defined as the “Agent”. It was executed on May 15, 2000 by Mr.

Wolstenholme on behalf of Indutech and by Guy Gibbs on behalf of the Agent. [ 39 ] The 2000 Agency Agreement includes the following relevant terms (emphasized terms in bold): Indutech manufactures and/or supplies the Product (as hereinafter defined) and wishes to use the services of the Agent as its agent for the solicitation of orders for the Product into the Territory (as hereinafter defined) and the Agent is desirous of so acting, all on the following terms and conditions: . . . 1. In this Agreement:

1.1 The “Territory” means: 1.1.1 Syncrude operations Fort McMurray Suncor operations Fort McMurray

a) The City of Fort McMurray;

b) a circle having a radius of 200 mile radius from the centre of Fort McMurray, Alberta 1.2 The “Product” means: 1.2.1 Naspipe - hardened straight pipe 1.2.2 Naspipe - hardened bends and hardened fabricated fittings 1.2.3 Indulay - chrome carbide overlay products 1.2.4 Induction Bends (excluding bends used for gas and oil extraction and transmission) 2. Indutech hereby appoints the Agent as its representative in respect of Product categories set out above in Paragraph 1.2. 3. It is the intention of the parties hereto that the Agent shall represent Indutech to customers or potential customers in the Territory.

To give effect to this intention: 3.1 The Agent shall refer all enquires or purchase orders received from customers or potential customers in the Territory set out in Paragraph 1.1 to Indutech. (see 2) 3.2 Indutech shall at its own option issue to such customers or would be customers all quotations in respect of such orders or inquiries. Any change to these quotations must have Indutech’s full agreement. 4.

During this Agreement: 4.1 The Agent will keep Indutech informed as to the nature and extent of its sales activities and will promote, exploit and diligently seek orders to Indutech’s satisfaction, throughout the Territory as set out in paragraph 1.1. The Agent will also provide information as may be reasonably required by Indutech to have an up to date appreciation of the market situation for the Products in the Territory as set out in paragraphs 1.1 and 1.2. This Agreement is non-transferable.

The Agent shall not: 4.2.2 Solicit or sell Products outside the Territory as set out in the Agreement. 4.2.3 Engage otherwise than pursuant to this Agreement directly or indirectly in, the sale of Products in the Territory (para. 1.1) that will compete or is likely to compete with the Products as defined in para. 1.2. 4.2.4 If Indutech receives an enquiry and is unable to produce the Product at Indutech’s facility, engage an approved subcontractor to produce the Product or produce the Product by using Indutech’s workforce then the Agent can seek, with Indutech’s agreement, alternate sources for that enquiry.

No commission will be due and payable to Indutech. 4.2.5 If the Agent is required to solicit another supplier to supply Product that Indutech can supply, providing para. 4.2.4 does not apply, then Indutech would receive a commission similar to what the Agent would normally have been paid by Indutech. The commission amount will be agreed to in advance by Indutech and the Agent.

4.3 The Agent will not engage directly or indirectly in any activities that would be detrimental to Indutech’s sales volume, sales potential, sales margins or its competitive position. Examples are, but not limited to, the following: 4.3.1 Proactively communicate with a direct competitor or a company considering being a competitor to Indutech on replacements for the Products covered by this Agreement. 4.3.2 Seek alternative sources for the Products covered by this Agreement.

The exception is Triten Corporation for the production of straight overlayed pipe and segmented overlayed bends providing the straight overlayed pipe and segmented overlayed bends are manufactured and supplied directly by Triten Houston and not through the Captain [sic] Welding Technologies location in Calgary, Alberta. (see Appendix B) 4.3.3 Supply to any party or individual , excluding those parties or individuals which are already customers of the Agent, or anyone considering being a competitor to Indutech, any welding wire that can be used in the manufacture of Products covered by this Agreement .

Should the Agent determine that he is capable to supply welding wire to any party or individual, then the Agent will disclose this consideration to Indutech. Indutech will determine whether this arrangement is damaging to Indutech or in breach of this Agreement.

The Agent will, prior to the date of execution of this Agreement, provide a list of those parties which are being supplied with welding wire by the Agent. 4.4 All expenditures by the Agent in performing his obligations under this Agreement shall be to his own account. 4.5 The Agent will fully investigate and keep Indutech fully informed of any complaints received from customers in the Territory as set out in para. 1.1 and provide such reports to Indutech. 4.6 Barry Gibbs will be personally involved in the Agent’s business operation and have a significant involvement in the direct selling activities associated with the Products as listed in para. 1.2. 6.

It is the intention that this Agreement shall run for a period of 2 years commencing July 1, 1999. 9.

The Agent agrees: ... 9.2 Not to disclose any of the information used in the business operation of Indutech, specifically but not limited to any matters relating to: the design of its specialized equipment, details of its manufacturing procedures and processes, selling prices, costs, material chemistry, material, raw material sources, technical developments associated with any of Indutech’s present and future products and services, at any time in the future to any current or potential competitor or third party, or use it at any time in the future to compete with Indutech in the design, manufacture, or sale of any of its specialized products and services. [ 40 ] The 2000 Agency Agreement expired by its terms on July 1, 2001, and the 2002 Agency Agreement was not executed until November 14, 2002, 16 ½ months later.

There is no dispute that the main reason for the delay in executing a formal replacement agreement was that the parties were negotiating the commission rate. It is also not disputed that the parties always understood that the prior agreement applied until the new contract was signed. This understanding was confirmed in a conversation between Mr.

Wolstenholme and Guy Gibbs around the time the 2000 Agency Agreement would have expired. [ 41 ] During the period of time between the 2000 Agency Agreement and the 2002 Agency Agreement, there was no change in the manner in which Indutech and the Gibbs Group conducted business. The only difference was the commission rate. Barry Gibbs could not even recall any delay between the execution of the 2000 Agency Agreement and the 2002 Agency Agreement, and acknowledged that it was “business as usual”.

The 2002 Agency Agreement [ 42 ] The 2002 Agency Agreement is identical in many respects to the 2000 Agency Agreement, with, however, the following notable changes: 1. A new clause was added at 3.3 as follows: 3.3 The Agent will endeavour to improve its representation to all clients in the territory. Appendix A furnishes the basis of the selling and representational arrangements and should wherever possible be improved and developed by the Agent and Indutech. 2.

Clause 3.3 of the 2000 Agency Agreement was renumbered 3.4, and revised as follows: 3.4 Commissions: Commission will be 4% on all products outlined in Paragraph 1.2, based on purchase order value. The commission relates to Product price only and excludes engineering design/consulting, freight, tax, duty, storage, external coating, and any other such non-product costs. For clarification, commission will be paid on hydro testing. 3.

Clause 4 was substantially the same as in the 2000 Agency Agreement, but is repeated with slightly changed language: 4.3 The Agent will not engage directly or indirectly in any activities that would be detrimental to Indutech’s sales volume, sales potential, sales margins or its competitive position. Examples are, but not limited to, the following: 4.3.3 Supply to any party or individual, or any one considering being a competitor to Indutech, any bulk welding wire that can be used in the manufacture of Products covered in this Agreement.

Should the Agent determine that he is capable of supplying welding wire to any party or individual, the Agent will disclose this consideration to Indutech. Indutech will determine whether this arrangement is damaging to Indutech and in breach of this Agreement.

Bulk wire is defined as wire that is used for the major internal overlayed portion of the product but excludes face welding and repair wire. ... 4.5 If the Agent, as a result of the direction of the user or intermediary, has to place orders direct on Indutech for the product covered by this Agreement, the Agent will communicate all the details of the product quantities involved to Indutech. The Agent will always give Indutech the opportunity to bid on all of the work involved. To give weight to this arrangement, Indutech will always be the preferred supplier and, wherever possible, the exclusive supplier.

The normal practice of bidding such work is that Indutech will bid to the Agent less the applicable commission. The Agent, in turn, will mark up 5% in its bid to the customer.

4.6 All expenditures by the Agent in performing his obligations hereunder shall be for his own account. 4.9 Each party hereto undertakes to notify the other party forthwith in writing of the existence of a breach or alleged breach hereunder by that other party. The offending party shall have the opportunity where applicable to remedy the said breach to the satisfaction of the other party within fourteen days of such notice being issued. Failing to do so the offended or first party shall be entitled to treat this Agreement as terminated at the date the breach was notified .

Termination of the Agreement through breach hereunder shall not absolve the party so breaking the Agreement from any liability thereby arising hereunder. [ 43 ] The 2002 Agency Agreement was executed on November 14, 2002 by Mr. Wolstenholme on behalf of Indutech and Barry Gibbs on behalf of the Gibbs Group. Mr. Wolstenholme testified that Guy Gibbs was also present. [ 44 ] According to Mr.

Wolstenholme, the Gibbs Group at some point prior to the execution of the 2002 Agency Agreement represented to Indutech that it sometimes had situations where the Gibbs Group was selling a package of products, some of which Indutech did not have the ability to produce, and that it was thus required to sell the products directly or would risk losing the job. Specifically, the Gibbs Group suggested that Syncrude wanted to deal with BGS on a buy/sell basis, (a representation that Mr. Wolstenholme later determined to be false).

The 2002 Agency Agreement thus included para. 4.5 dealing with these “buy-sell arrangements”, which indicated that Indutech would bid to the Agent less the applicable commission and that the Agent would mark-up its bid to the customer by 5%. Mr. Wolstenholme testified that he insisted on the inclusion of this clause because he was concerned about and wanted to control the price for Indutech’s product in the marketplace. His goal was to optimize profit within Indutech. [ 45 ] All of the Indutech in-house witnesses gave their evidence clearly, honestly and without hesitation.

They were credible, well prepared and unshaken by cross-examination. [ 46 ] In 2003, Jack Brownlee, a Gibbs Group employee, advised Mr. Wolstenholme that the Gibbs Group was contracting with Indutech’s competitors. This was a surprise to Indutech. The Indutech in-house witnesses indicated that Indutech had no knowledge that the Gibbs Group was presenting options to customers in terms of obtaining multiple quotes. Initially, Mr. Wolstenholme did not believe Mr.

Brownlee, but later he confronted Guy Gibbs, who denied breaching the Agency Agreements. [ 47 ] When Indutech developed a further understanding of the activities of the Gibbs Group, it terminated the relationship on June 11, 2004 by filing and serving the Statement of Claim in this action. The Millenium Project [ 48 ] The uncontroverted facts with respect to the Millenium Project are as follows. Suncor in 1999 began planning construction of a bitumen production facility in Fort McMurray, Alberta.

The project was known throughout the industry as the Millenium Project. [ 49 ] Suncor retained the engineering firms of SNC-Lavalin Inc; and Bantrel Inc; with respect to the design of the extraction plant. Suncor also appointed an agent, Millenium Construction Contractors (“MCC”) to organize, procure and coordinate the supply of all labour, materials, equipment and services for the design and construction of the plant. MCC was comprised of a consortium of firms including Bantrel Inc.

SNC-Lavalin Inc. and Suncor. [ 50 ] The Millenium Project commenced in August of 1999 with preliminary design and engineering work and was finalized sometime shortly after May of 2001. [ 51 ] In about April, 2000, SNC-Lavalin asked Indutech to provide pricing for budgetary purposes for the project. Indutech did so and copied its budget pricing to BGS. In April 2000, MCC entered into an agreement with BGS whereby BGS was put in charge of issuing purchase orders with respect to CCO spools, induction bends and straight pipe for the Project.

Indutech received only a portion of the overall work on the Project. [ 52 ] The alleged breaches of the Agency Agreement with respect to the Millenium Project are described in detail later in these reasons. In

summary, Indutech alleges that the Gibbs Group ignored its obligations to Indutech under the 2000 Agency Agreement (executed on

May 14, 2000) while acting for MCC, particularly with respect to referring all inquiries to Indutech, keeping Indutech informed as to the extent of the agent’s sales activities, engaging in activities detrimental to Indutech’s sales volume and competitive position, proactively communicating with competitors and seeking alternative sources for the products covered by the Agency Agreement. Expert Witnesses Allan Nelson [ 53 ] Allan R. Nelson, P.

Eng. was called as an expert witness by Indutech to give opinion evidence in the field of general metal fabrication, welding and automatic welding, plant production and plant production capacity. [ 54 ] Mr. Nelson has about 58 years of experience as a professional engineer. Since 1966, he has been a consultant specializing in machine design and insurance investigations with respect to manufacturing, gas, oil and petro-chemical plants. He has extensive experience in the oilsands industry and he has designed machinery for a wide range of industries. While the Gibb’s Group did not contest his qualifications, Mr.

Nelson was cross-examined on his experience with respect to capacity assessment and with a company like Indutech. Mr. Nelson testified that he had been consulting with respect to plant capacity for about 40 years, including with respect to production problems. About 40% of those consultations were with respect to industries that included welding. He stated that, while Indutech was a specific kind of industry, the analysis of production capacity was essentially the same for other industries.

He advised that he had familiarized himself with Indutech’s process and that he was very familiar with the process of automatic welding and hard- surface cladding. I found Mr. Nelson qualified to give opinion evidence in the fields in which he was sought to be qualified. [ 55 ] Mr. Nelson was asked to assess the manufacturing production capacity of Indutech from 2000 to 2006, and to comment on whether or not Indutech had the capacity necessary to have handled an increase in work during the period 2000 to 2004. [ 56 ] In addition to reviewing and viewing the manufacturing process, Mr.

Nelson attended a production meeting at Indutech. He was complimentary about Indutech’s white-board system, which he felt worked well. Mr. Nelson also viewed the fabrication facilities at Indutech. [ 57 ] In his report, Mr. Nelson noted that the white board system established a series of mile- posts used to chart the progress of customer orders and to integrate all of the orders into production. It enabled contracted work to be separated into various functions, such as bending, chromium carbide overlay, and fabrication.

This, he noted, establishes the workload in each of the areas of production based on delivery dates and allow Indutech to accommodate changes to previously issued customer designs. It also allows the schedulers to group production by sizes, etc. to maximize manufacturing efficiencies. Mr. Nelson noted that the cross-training of personnel further allows Indutech to reorganize production to address changing work loads. [ 58 ] Mr. Nelson stated that his approach in assessing capacity was to look at Indutech’s production over a number of years.

He reviewed Indutech’s ability to vary production by using a number of machines to deal with changing circumstances or accommodate additional work. [ 59 ] In order to assess Indutech’s induction bending capacity, Mr. Nelson referred in particular to the 2001 year, which represented the company’s largest output, and used this year as a baseline for comparison to previous and subsequent years. He then took the output of the primary operator of the bending machine for the year, being 1,369 bends, which equates to 0.494 bends per hour on average. Mr.

Nelson was of the opinion that this rate of 0.494 bends per hour should be indicative of the typical bending capacity of Indutech, recognizing that there will be some variance depending on the angle and diameter of a particular bend. [ 60 ] Mr. Nelson calculated from the shift and payroll data of Indutech the bend operator hours for the two other part-time operators of the bending machine, using the primary operator’s rate of production to come up with a total number of bend operator hours, and then calculated the total number of bends produced in the year 2001, being 2,493. Mr.

Nelson conceded that the developed length of the pipe was a variable that could not be compared directly, but stated that one could reasonably expect the same type of variation in developed length from year to year. [ 61 ] Mr. Nelson then used the 2001 bend production figure as a comparison with overall production in other years, and concluded that there was no reason why Indutech could not have produced the same number of bends in any other year.

[ 62 ] Mr. Nelson noted that hours of work at Indutech could conceivably vary from a minimum of 40 hours per week over 50 weeks for 2,000 hours in a year based on a single shift of 8 hours per day to a maximum of approximately 140 hours/week or 7,000 hours per year, based on two 10 hour shifts working 7 days per week. He also noted that, with a small increase in infrastructure, the second induction bender owned by Indutech could be placed in service. Mr.

Nelson conceded that, if the second bender was put in service, this may require additional shop space. [ 63 ] He was of the opinion that, since in 2001 approximately 5,048 hours were utilized to produce 2,493 bends, a further increase in production would be attainable if more hours were involved on the bending machine. [ 64 ] Using this methodology, Mr. Nelson compared bend machine production and utilization for the years 2000 to 2006, using 2001 as the benchmark year of production.

He concluded that Indutech could have significantly increased its output in years 2000 and 2002 to 2006 and met the production capacity of 2001. [ 65 ] Mr. Nelson also received and assessed Indutech’s equipment and technical advances in machinery for the CCO process, and noted Indutech’s history of converting existing machinery and adding new machinery to increase output. [ 66 ] Mr.

Nelson commented in his report that, similar to improvements in CCO processes for straight pipe, Indutech’s continuous innovation in equipment and processes has resulted in ongoing increases to CCO capacity for elbows and bends, with very little increase in infrastructure and overhead costs, and no increase in plant footprint. [ 67 ] He also noted that, over the years, Indutech added equipment and modified existing machines to meet customer requirements and increase production capacity. [ 68 ] Mr. Nelson then assessed Indutech’s capacity for CCO welding.

He noted that there are two main mechanical factors that determine CCO production capacity. The first is the number of machines installed. Mr. Nelson stated that this is determined primarily by plant space available for CCO operations and the CCO demand. Mr. Nelson stated in his report that the amount of plant space dedicated to CCO, as with the space dedicated to all other operations in the plant, is evaluated and adjusted by Indutech over the long term, based on orders and market conditions.

He was of the opinion that availability of labour for CCO operations was generally not a limiting factor in CCO production capacity, because of Indutech’s practice of cross-training employees. [ 69 ] Mr. Nelson’s second mechanical factor in assessing CCO production capacity was the number of welding heads per machine, since production capacity per machine increases with the number of weld heads.

He noted that over the years, Indutech had upgraded two machines to have multiple heads, and that others could also have been converted as required by production demands, which he testified was not significantly difficult. [ 70 ] Mr. Nelson was of the opinion that Indutech’s total CCO production capacity at any point in time can be assessed based on data discussed with Indutech’s personnel for CCO machines, and the characteristics and number of heads of each machine in operation.

Data he used for his analysis included the total weld time, known as “arc hours”, or each machine configuration welding the same, and the known size of pipe spool or bend. One arc hour is one hour of time while the arc is struck on a welding machine. It only accounts for the actual time welding and does not include setup time before and after welding, or time spent while the welding head is travelling back to the start position. Therefore, the data compares only the baseline capacities of machines set up with varying numbers of heads. [ 71 ] Mr.

Nelson testified that he used deposit rates (arc hours) because that represents the process that is being conducted at the Indutech plant and is a measure of productivity of a machine plant. He also felt it was an appropriate measure as it was independent of whether the pipe being processed was straight or elbow. [ 72 ] Mr. Nelson took data with respect to arc hours and deposit rates on each of Indutech’s machines, using a 30" pipe, 141 inches in length and a double pass of CCO, as being typical of the diameter of pipe used in the oilsands. He also used comparable information for the elbow welding machines.

Using this data, he measured total plant CCO capacity for all of the plant’s machines from 2000 to 2006. This capacity was measured in square metres of deposit per arc hour (m 2 /arc hr.) From this, Mr. Nelson determined theoretical plant capacity for the same period of time assuming the conversion of all straight welding machines operational in those years to multiple heads.

[ 73 ] The resulting table indicates that Indutech had considerable excess capacity throughout the years 2000 - 2006, if it had reconfigured existing machines to meet production demand. [ 74 ] Mr. Nelson noted that, since Indutech had a multiple-head machine operating in 2000, it was reasonable to infer that Indutech possessed the technology and expertise to institute any or all of the preceding increases to CCO capacity at any time after 2000, had it been aware of market demand for such capacity.

He noted that the machine conversions could be achieved within two to three months of notification of the need for more capacity. [ 75 ] Mr. Nelson in his report indicated that, while CCO deposit rates may vary if a more sophisticated and comprehensive time study was performed, the work that he had done illustrates that significant efficiencies can be achieved by increasing the number of welding heads, and that Indutech had the ability to increase manpower in any year to meet production requirements.

He noted that arc hours represented a verifiable number and that other factors he may arguably have taken into account were all highly variable. [ 76 ] The Gibbs Group criticize Mr. Nelson’s opinion that Indutech could have made technical improvements as theoretical. Mr. Nelson based this opinion on Indutech’s history of adding welding heads to machines to improve productivity, and his assumption in that regard has a basis in fact. [ 77 ] The Gibbs Group also alleges that tear down and set up time, maintenance, breakdown, operator error and manpower challenges, which it submits that Mr.

Nelson did not take into account, would reduce any calculation of production capacity. This ignores the fact that Mr. Nelson’s calculations were based on production data from a specific year, which implies that these kinds of factors would have occurred during the time of analysis. At any rate, Mr. Nelson’s opinion was that, by adding welding heads, machines and shifts, Indutech was able to more than double its original capacity for CCO manufacture. [ 78 ] If this excess capacity is reduced for purposes of contingencies by even as much as 25%, there would still be significant excess capacity.

It is noteworthy that Mr. Lundquist, a Gibbs Group employee who was very involved with Indutech, acknowledged that Indutech’s machines ran well. [ 79 ] The Gibbs Group in their arguments with respect to production capacity mischaracterize Mr. Wolstenholme’s evidence with respect to both his theory of expansion and Indutech’s concern for delivery dates. The Gibbs Group defendants also criticize Mr. Nelson for not attempting to evaluate capacity at the particular place and time that the Millenium Project was occurring, with information as to what was actually happening in Indutech’s plant at the time.

While Indutech has records of sales orders, shift records and payroll records, it did not keep the kind of records that would allow a capacity analysis on a daily or weekly basis. The white board information was constantly in flux and was not preserved, and the analysis would be dependent on a number of factors that would make a real time analysis extremely difficult and expensive. [ 80 ] The Cladtech defendants also submit that the Nelson report is flawed because it is based merely on a single production factor. As Mr.

Nelson pointed out, deposit of CCO on pipe is Indutech’s essential business, and I accept that it is a reasonable and verifiable measure of productivity. As he also pointed out, even though Indutech’s sales records were available, as were shift records, too many variables existed for him to do a real time study of the production process. There is no persuasive evidence to suggest that such a process would produce results that would cast doubt on the arc-hour analysis. [ 81 ] The Cladtech defendants submit that I should prefer the evidence of Ms. Kohlsmith, Mr. Nowakowski, Mr. Holland and Mr.

Dunphy with respect to Indutech’s production capacity. The weaknesses of the evidence of these witnesses will be addressed later in these reasons. [ 82 ] I do not accept Ms. Kohlsmith’s evidence as being credible and Mr. Holland’s evidence was suspect. As noted by Indutech, Mr. Dunphy acknowledged on cross-examination that he could not comment on whether or not Indutech met its delivery dates on the Millenium Project. Mr. Nowakowski confirmed that on the one job on which he had dealt directly with Indutech, a design change impacted delivery time.

I do not accept that the evidence establishes that Indutech was “always full” as alleged by the Kossowan defendants. [ 83 ] The Cladtech defendants submit that payroll evidence indicates that there was little or no ability for Indutech to increase productivity through additional hours. To the contrary, a careful review of that evidence indicates a capacity for additional overtime and

a stable, cross-trained labour force. [ 84 ] The Cladtech defendants also made arguments with respect to equipment placement based on Indutech’s financial statements. These arguments do not survive analysis or scrutiny and ignore the evidence. [ 85 ] Indutech’s revenues post-2004, particularly in the years 2006 and 2007 when it had had the opportunity to recover from its loss of a sales agent, show a substantial increase, which supports Mr. Nelson’s opinion. Kevin Copeland [ 86 ] Kevin M.

Copeland, CA•IFA, CIP, was called by Indutech to give expert opinion evidence in the fields of investigative and forensic accounting, business interruption and earnings losses. [ 87 ] Mr. Copeland obtained a specialist designation in investigative and forensic accounting (CA•IFA) from the Canadian Institute of Chartered Accountants in 2000. He has focused his accounting career in loss measurement for insurance and litigation purposes since 1992, and is the partner in charge of the Calgary office of LBC International. Mr.

Copeland testified that he had performed about 600 assessments over the seventeen years of his career, with about 50 being in general manufacturing. [ 88 ] Mr. Copeland gave his opinion with respect to the quantum of financial benefits allegedly unlawfully obtained by some of the defendants and the quantum of lost profits allegedly suffered by Indutech. [ 89 ] In his report of May 22, 2009, Mr.

Copeland stated based upon the information and documents reviewed, the explanations provided to him, and subject to certain assumptions noted in that opinion that: a. the financial benefit unlawfully obtained by the Gibbs Group as a result of alleged breach of contractual and fiduciary duties amounted to approximately $2,610,000 and of this amount approximately $68,472 specifically related to the diversion of sales to Cladtech; b. the lost profits suffered by Indutech as a result of alleged breach of contractual and fiduciary duties by the Gibbs Group amounted to approximately $2,120,000 and of this amount approximately $177,728 specifically related to the diversion of sales to Cladtech. [ 90 ] Mr.

Copeland opined that the profits earned by the Gibbs Group through alleged breaches of the Agency Agreements were as follows as of the date of his report: Accounting for Profits Commissions paid to GPD by Indutech $ 718,156 Mark-ups greater than 5% $ 328,516 Sale of Bulk Welding Wire $ 279,554 Diverted Sales, including to Cladtech $ 440,880 Diverted Sales - Millenium Project $ 533,361 Extra Commissions on Diverted Sales - Millenium Project $ 289,439 Total $2,609,906

[ 91 ] He found that Indutech made the following commission payments to the Gibbs Group between January 2000 and June 2004: Amount January 2000 to November 2002 inclusive $ 423,512 December 2002 to June 2004 inclusive $ 294,644 Commissions paid January 2000 to June 2004 inclusive $ 718,156 [ 92 ] Indutech’s loss of profit for the period in question was broken down as follows in the report: Loss of Profit to Indutech Diverted Sales, including to Cladtech $ 823,970 Diverted Sales - Millenium Project $1,291,819 Total $2,115,789 [ 93 ] Mr.

Copeland’s calculation of loss of profit was based on the assumption that Indutech would have been able to obtain the contracts for and complete all jobs identified as diverted sales and diverted sales specifically related to Suncor’s Millenium Project. [ 94 ] He stated that the assumption that Indutech could have obtained the contracts for the diverted sales appeared reasonable because BGS was able to secure all of these contracts for third parties and presumably could have done so for Indutech.

He noted that if some contracts could not have been obtained by Indutech the loss of profit would be reduced accordingly. [ 95 ] Mr. Copeland noted that the assumption that all the jobs could have been completed by Indutech was supported by the report prepared by Mr. Nelson, and commented that, should it be determined that any of the diverted jobs could not have been completed by Indutech due to capacity issues, the loss of profit would be reduced accordingly. [ 96 ] With respect to diverted sales, Mr.

Copeland assumed that there would be a 5% mark-up in the total diverted sales and that Indutech’s marginal costs (including cost of sales, both material and labour, associated plant costs and related selling costs) would be 64%, giving a 36% profit margin, which Mr. Copeland testified was conservative and reasonable. [ 97 ] With respect to the Millenium Project, Mr. Copeland relied on Indutech’s advice as to the capacity it believed it had to produce additional beds, being an increase of 301 over the 68 actually produced, and additional straight spool pieces, being 426 spools. Mr.

Copeland again factored in the 5% mark-up and deducted marginal costs. [ 98 ] Mr. Copeland did not attempt to quantify any loss of revenue to Indutech as a result of Indutech not having an agent for sales in Fort McMurray after the 2002 Agency Agreement was terminated in June of 2004. [ 99 ] After reviewing a rebuttal report prepared by an expert witness retained by the Gibbs Group, Gordon Smith, Mr. Copeland issued a responding rebuttal report. While disagreeing with Mr. Smith’s report in the main, Mr.

Copeland accepted the following small number of corrections: a revised estimate of financial benefits obtained by the Gibbs Group (accounting for profits) resulting from the alleged breach of contractual and fiduciary duties to $2,540,000; and a small change to his loss of profits calculation to Indutech to $2,090,00.

[ 100 ] Mr. Copeland admitted that he relied on schedules and summaries of alleged breaches prepared by Indutech, although he reviewed the supporting documents provided for these schedules. He testified that he did so because Indutech understood its business much better than he could. He said he was satisfied with the methodology he used, taking revenue less basic costs and other expenses, as it made sense. [ 101 ] Mr. Copeland conceded that he assumed that all orders that had not gone to Indutech would have gone to it, and that he had not performed a marketplace analysis to test the validity of this assumption.

He commented that he did not think that that kind of analysis would have helped in this case. He also noted that, while he did not factor in Indutech’s general success rate in obtaining work from quotes, his analysis was done in the context of bid inquiries that the Gibbs Group had actually been able to obtain for quote. [ 102 ] Mr. Copeland also conceded that he did not take into account general and administrative costs, testifying that, in his view, they were not relevant to his analysis as these costs were not incremental to additional sales by Indutech. Mr.

Copeland pointed out that general and administrative costs would not be impacted one way or another by the addition of revenue. He conceded that warranty work may have a slight impact, but said that in his view, looking at historical trends, this number would be very low. [ 103 ] Indutech, after the evidence at trial had been presented, amended its original schedules of loss and damage (on which Mr. Copeland had relied) and issued a revised spreadsheet of damages based on the testimony of all of the witnesses. [ 104 ] Mr.

Copeland did not hold himself out as preparing the schedules and alleged summaries of breaches he relied upon in his initial report, freely conceding that he relied upon Indutech’s employees in that regard. What he did, however, was to apply a 36% profit margin to this information. Mr. Copeland reviewed costs disclosed in five years of Indutech’s financial statements, from October 31, 2000 to October 30, 2004, to determine the figure of 64% in marginal costs and 36% in profit margin. [ 105 ] Mr.

Copeland was cross-examined extensively on the marginal costs he included and did not include to come to these figures, and his decisions with respect to these issues were reasonable, supportable and unshaken by the cross-examination or by the opinion of Mr. Smith. I accept Mr. Copeland’s opinion with respect to the costs that should be taken into account in the determination of profit margin as being reasonable, sensible and based on discussions with Indutech. [ 106 ] Mr.

Copeland also commented that the audited financial statements include all of Indutech’s business, and thus do not reflect margins on specific products but noted that, since he understood from Indutech that margins on CCO and induction bends are larger than on naspipe products, the average profit margin of 36% is a conservative estimate of what Indutech would have earned in diverted sales. Mr.

Copeland’s determination of an appropriate profit margin percentage is based on his qualification as an expert with specialized knowledge and experience and is outside the expertise and experience of the trier of fact. [ 107 ] The schedules and summaries relied upon by Mr. Copeland in his report were painstakingly presented in evidence by Ms. McGowan and were the subject of extensive cross-examination and comment by Guy Gibbs in his evidence. That they were amended after all the evidence had been adduced is no reflection on the credibility of Ms.

McGowan, but merely a result of the clarification of a number of matters by other witnesses and decisions made by Indutech on the categories of damages it intended to pursue after a full hearing of the evidence. Gordon Smith [ 108 ] Gordon Smith, C.A., CBU, CMC was called by the Gibbs Group to give expert opinion evidence in the fields of forensic and investigative accounting and damages quantification. Mr. Smith heads up the Financial Advisory Services Group of the Edmonton office of Deloitte & Touche. He was asked to comment on Mr.

Copeland’s report, specifically to review the methodology of calculating the losses. Mr. Smith did not set out an alternative damages position. [ 109 ] Mr. Smith met with Guy Gibbs, who advised him of his concerns with the Copeland report. Mr. Smith testified that he approached Guy Gibbs’ criticisms in a sceptical manner. Mr. Smith did not review the whole of the underlying documentation, merely reviewing examples as he requested them from Mr. Gibbs. [ 110 ] Mr. Smith suggested that certain alleged losses did not occur within the period covered by the Agency Agreements.

He was apparently not informed that the 2000 Agency Agreement was considered by the parties to have continued in force until it was replaced

by the 2002 Agency Agreement. His criticism of the Copeland report in this respect was thus incorrect. [ 111 ] Mr. Smith also criticized the Copeland report for claiming losses relating to the 5% mark-up prior to November 14, 2002 when the 5% mark-up provision appeared in the second Agency Agreement. The total amount claimed with respect to a mark-up of more than 5% prior to November 14, 2002 is $11,244. On cross-examination Mr. Smith conceded that there were only three such mark-ups of any significance prior to the 2002 Agency Agreement.

I have in any event accepted the submission that pre-2002 mark-ups of more than 5% should not be included in Indutech’s claim for incidental damages. [ 112 ] Mr. Smith identified a duplication error which Mr. Copeland accepted and corrected in his second report. [ 113 ] Mr. Smith gave the opinion that the Copeland report wrongly included diverted sales for fabricated products that were unrelated to Indutech’s products. Mr. Copeland and Indutech do not agree with Mr. Smith’s

interpretation of the Agency Agreements. The issue of fabrication is dealt with later in these reasons. [ 114 ] Mr. Smith suggested that Mr. Copeland was inconsistent in his loss assumptions, as he allowed the deduction of a 5% mark-up in certain calculations, but calculates a commission amount for disgorgement in others. I am satisfied that this relates to the type of claim for damages made, and is not an error. [ 115 ] Mr. Smith suggested arguments with respect to the sale of bulk welding wire that I did not find persuasive or sustainable. He also submitted that Mr.

Copeland made certain “data errors”, most of which Mr. Copeland disagreed with, and I accept Mr. Copeland’s explanations of these calculations. Mr. Copeland did, however, accept Mr. Smith’s comments with respect to an error in exchange rates and a missed job cancellation, and amended his report accordingly. [ 116 ] Mr. Smith purported to give an opinion on production capacity, which was not within his expertise. [ 117 ] Many of Mr. Smith’s comments and criticisms of Mr. Copeland’s report were discredited under cross-examination. His critique does not affect my acceptance of Mr.

Copeland’s 36% profit margin opinion or the methodology employed by Mr. Copeland in his report as a whole. The Gibbs Group Witnesses Gene Dunphy [ 118 ] Gene Dunphy, currently the Manager of Materials Procurement for Suncor at its Firebag oilsands project, was called by the Gibbs Group defendants. Mr. Dunphy was a buyer for the MCC joint venture in 2000 and became intensely involved in the Millenium Project. [ 119 ] Mr. Dunphy testified that he was called by his management in April, 2000, given several construction work packages involving CCO spools and told that they were needed on site in December of 2000. Mr.

Dunphy’s manager introduced him to Barry and Guy Gibbs, advising him that the Gibbs were interested in bidding on the project and that they “knew everything there was to know” about CCO. He was told that Barry Gibbs had been instrumental in developing a tool to overlay pipe, and that he and his company would be working with MCC, advising on where to place work. [ 120 ] Mr. Dunphy testified that the arrangement with BGS was “cost plus”, and that BGS submitted monthly detailed invoices. MCC would submit purchase orders to BGS, which would in turn issue purchase orders to various companies.

BGS would have to submit copies of these purchase orders to MCC to show the costs that were actually incurred. [ 121 ] Mr. Dunphy testified that MCC did not care where BGS placed the orders for work, as long as the supplier was on the Suncor approved list. MCC relied entirely on BGS to tell MCC which manufactures had capacity to do various aspects of the work. MCC also relied on BGS to follow up on and update MCC on delivery dates. The 2000 Agency Agreement was executed on May 15, 2000, about

the time or shortly after BGS began to work on the Millenium Project. [ 122 ] Mr. Dunphy worked closely with BGS on this project, and clearly had a high regard for the work it did for MCC. He was in daily contact by telephone with Guy Gibbs and there were formal meetings once a week. Mr. Dunphy conceded, however, that his memory of events was somewhat vague after the passing of time. [ 123 ] Mr.

Dunphy said that, while initially no one had a full idea of how much work was going to be involved, over time the working group realized that there was not enough capacity in the market place and that they would have to go elsewhere for product. MCC asked BGS whether they knew of other producers. The working group was told by MCC senior management to source new shops, and to help them to submit their qualifications for approval as suppliers. Mr. Dunphy confirmed that Barry Gibbs flew around the country, “finding new shops”. Mr.

Dunphy advised Guy Gibbs in an e-mail dated September 19, 2000, that MCC had received approval to utilize Capitan for CCO and would be seeking similar approval for Triten Corporation. [ 124 ] Mr. Dunphy was clearly under a great deal of pressure to get the work done. He testified that he was not aware of any other contractual commitments BGS had, other than the work for MCC. [ 125 ] Mr.

Dunphy testified that he visited Indutech three or four times starting in July 2000, in the company of a SNC Lavalin representative and Guy Gibbs, to try to find out why orders were not arriving on time, to see what steps Indutech was taking to improve deliveries and to try to get a detailed delivery schedule. He recalled meeting with Mr. Gabel and said he was sure he met with Ms. McGowan once or twice and was introduced to Mr. Wolstenholme once. Mr. Dunphy testified that he found the meetings frustrating, that he never did receive a detailed delivery

schedule and that he was surprised at how Mr. Gabel treated them, as he was usually disgruntled and late for the meetings. Mr. Dunphy testified that the Indutech people said they would put on extra shifts but “from memory”, he didn’t think they did. Mr. Dunphy said that there were discussions at the working team level near the end of the Millenium Project about the possibility of removing work from Indutech and placing it elsewhere, but that, after examining this, they concluded that the project would suffer more from this and that deliveries would have gotten worse rather than better.

He said that BGS advised them not to remove work from Indutech because there were no additional shops anywhere else. [ 126 ] Mr. Dunphy said that he wasn’t sure if all of the work on the project came in on time, but that he really couldn’t remember. [ 127 ] Mr. Dunphy testified that, in an effort to control costs, MCC decided to buy materials itself in bulk and ship the material to the vendors to be manufactured. He acknowledged that this sometimes caused problems and delay, and that sometimes vendors would eventually be told to buy the materials themselves. Mr.

Dunphy also acknowledged that there were numerous revisions to the project over the summer and fall of 2000 that had the effect of delaying ability to produce the spools. He had no recollection at the time of trial about the number of spools manufactured by Indutech or the actual dates the spools were delivered to the site. He could not recall if he was notified in early September 2000 that Indutech was waiting for materials and drawings. Mr. Dunphy was referred to an email from Indutech’s sales manager, Mr. Gabel, to Guy Gibbs dated September 8, 2000 in which Mr.

Gabel advised that Indutech “urgently needs” materials and drawings on spools that it was working on, refers to previous requests for information on August 31, 2000, asks for confirmation of certain design details, and concludes as follows: Urgent We need a purchase order indicating the unit prices and spool requirements as quoted for above orders. I have been told that we require this by Monday September 11, 2000 latest or stoppage of work-in-progress will occur and consequent delays to these contracts. [ 128 ] Mr.

Dunphy was also referred to a fax from another supplier to the Millenium Project, Almac, Wear Technologies Ltd., to BGS dated November 16, 2000 indicating that it would be late on delivery of spools because of equipment breakdown, but also because of loss of welders due to high demand in the industry and unavailability of welders for hire. He was referred to a letter from Bendtec in the United States dated September 7, 2000 indicating delays in commencement of production because Bendtec was unaware of additional specifications that had to be met. Mr.

Dunphy indicated that typically he didn’t expect to be involved in this level of detail and would rely on BGS to deal with these things. [ 129 ] Mr. Dunphy was also referred to an email from Capitan Overlay Technologies Inc. in Calgary dated October 30, 2000 indicating that, as a result of not receiving necessary material, its work would be delayed. Mr. Dunphy conceded on cross-examination that there were in fact late deliveries on the project.

[ 130 ] Mr. Dunphy was asked to review an exhibit setting out a

summary of work completed by Indutech for the Millenium Project, and was asked if there was any reason to doubt the delivery dates set out in the exhibit. He agreed that there was not. The

summary indicates that Indutech met all delivery dates stated in the purchase orders for the work it did. [ 131 ] Mr. Dunphy was a credible witness, but it was apparent that he held only overall impre

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