Bellatrix Exploration Ltd. v. Penn West Petroleum Ltd., 2011 ABQB 551

Court of Queen ’ s Bench of Alberta Citation: Bellatrix Exploration Ltd. v. Penn West Petroleum Ltd., 2011 ABQB 551 Date: 20110908 Docket: 1001 05556 Registry: Calgary Between: Bellatrix Exploration Ltd. Plaintiff Defendant by Counterclaim - and - Penn West Petroleum Ltd. Defendant Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of J.B. Hanebury, Master in Chambers _______________________________________________________ [ 1 ] Before the court are cross applications.

Bellatrix Exploration Ltd. has included certain documents in its affidavit of records that Penn West Petroleum Ltd. argues are subject to settlement privilege and should be removed from Bellatrix’s production. Bellatrix, the party who first used the term “without prejudice in its communications, argues there is no settlement privilege, or if there is, that it should be waived so that it can refute a limitation defence raised by Penn West.

[ 2 ] Bellatrix also seeks an order requiring Penn West to produce all relevant and material records in its possession between March, 2009, and the time at which Penn West retained litigation counsel. [ 3 ] Discussions between counsel have narrowed the time frame in issue to the period May 21 to August 7, 2009. FACTS [ 4 ] Bellatrix commenced this action for monies it says are owed to it by Penn West. It says it is entitled to a share of the natural gas transported and processed at a Penn West processing facility (Minnehik Buck Lake) pursuant to a transportation and processing agreement.

It also says it is owed money for its working interest in the non-associated gas production from certain wells (Hoosier) in Saskatchewan. [ 5 ] Penn West has counterclaimed and is seeking additional gathering and processing fees related to the processing of Bellatrix’s gas pursuant to the transportation and processing agreement. [ 6 ] Discussions aimed at determining the amounts owing by Penn West began in 2006 and apparently proceeded very slowly. Meetings occurred in 2007 and, Bellatrix alleges, it had difficulty getting a proper accounting from Penn West. [ 7 ] Eventually, Mr.

Chisholm, Vice-President and COO of True, as Bellatrix was then known, [1] sent an e-mail to Mark Fitzgerald, Senior Vice-President of Penn West on March 18, 2009, stating: ....True is currently sitting with a large accrual on our books for revenue + volumes owed to us from Penn West as a result of shrinkage issues etc. at the Minnehik Buck Lake facility. I would like to expedite this matter to a point of settlement so we can both get this matter off our “Things to Do” list.

My first intent is to travel to the facility and tour it and get a feel for the energy balance across it and then upon my return to Calgary sit down with the Production Accountants and get a walk thru of how the balances and allocations are done and a validation of the magnitude of this matter. I would appreciate it, if you can route me to the individual who may be able to work with me on bringing closure to this issue. The Minnehik Buck Lake shrinkage matter has a significant aging factor associated with it, the data I saw from the auditors was as far back as prior to 2004. [ 8 ] Mr.

Fitzgerald responded on April 1, 2009, advising as to where matters stood and that there was ongoing work being done. Mr Chisholm responded by email stating that he hoped they’d get the “right scenario” on the table and “then get it to satisfactory closure.” [ 9 ] On April 27, 2009, a formal letter was sent from Mr. Chisholm to Mr. Fitzgerald stating that True would appreciate “your assistance in the resolution of three separate and significant matters”. The letter expresses some frustration that there are no concrete timelines for financial reimbursement.

True estimates it is owed $3,500,000.00 for the Minnehik Buck Lake adjustment and $1,000,000.00 for the missing natural gas production from Hoosier. It notes that the Minnehik Buck Lake matter has been subject to regular discussion “for many years”. [ 10 ] On May 21, 2009, Mr. Chisholm sent Mr. Fitzgerald an email marked “Without Prejudice”. It is this email and the subsequent correspondence that is in issue. It said:

Mark, it is unfortunate that I need to send this e-mail that has a tone of disappointment. However True after many months/years of no resolution is being financially impacted by a no action plan by Penn West on resolving operational/financial issues...True is no longer prepared to leave uncollected net dollars owed to True as a source of funding for Penn West operations. ... Mark, the original strategy in house was to deal with this Minnehik Buck Lake issue at management levels due to the efficiencies and good business judgment that should occur.

The delay in response has been discussed at the President and Board level and it was felt that the age factor and material amount of money owed to True must be dealt with under a “time is of the essence” approach. In closing I have been advised that we must investigate legal remedies and take the recommended action. My preference is to avoid this time consuming type of mediation and propose a good faith effort on both parties part with a settlement date to be in the immediate future. ...

True looks forward to resolving these matters. [ 11 ] Not surprisingly, this triggered a “Without Prejudice” response from True on May 27, 2009. It sets out Penn West’s “position” on the concerns raised by True in relation to three issues, two of which are the subject of this action. It states in relation to Hoosier that “the review...should be complete by June 15 th and amounts owed by PWT will be paid at that time.” [ 12 ] This letter resulted in some email correspondence between employees in the companies setting out calculations.

This correspondence was not marked “without prejudice” and talks of the resolution of the issue and the need to get paid. [ 13 ] The next formal correspondence is from Mr. Fitzgerald of Penn West to Mr. Chisholm of True. It is dated June 22, 2009, and is marked “Without Prejudice”. It contains an update on the work done in relation to the claimed adjustments and sets out a net amount owing to Penn West of over $2,000,000.00 for the two matters in issue. [ 14 ] This letter generated a brief email response from Mr. Chisholm to Mr.

Fitzgerald on June 23, 2009, to “see how matters are on your side of the table.” It is not marked “without prejudice” and says that the Hoosier issue is being reviewed by engineering and “a resolution is being considered and hopefully it can result in closure and settlement.” The Minnehik Buck Lake “rework update of recent suggests it is moving along...and it would be great to get this resolved or moved further toward closure as well.” [ 15 ] On June 25, 2009, a Penn West employee send an email to a True employee marked “Without Prejudice”.

It refers to the June 22, 2009 Penn West letter and attaches some pages of relevant data. [ 16 ] On July 21, 2009, Ms. Meakin of Penn West wrote to Mr. Lee of True asking who could meet with Penn West to discuss some of the data. Her letter was marked “Without Prejudice” and included a binder of data. [ 17 ] The parties then held a meeting on July 29, 2009.

The minutes were finalized between them and state: “Began the meeting indicating that all discussion was ‘Without Prejudice’ in accordance with previous correspondence from Penn West (PW) to True.” True’s representative agreed that the minutes were “reasonable” and no request was made to alter this statement. In the course of reviewing the minutes Penn West notes in an email, that with some forthcoming information, an “agreement on the financial settlement of some of the items can then take place.” A date of August 14, 2009 is set. On August 6, 2009, True Energy then advises it cannot meet that date.

[ 18 ] True retained litigation counsel in relation to this matter on August 7, 2009. The documents in dispute are dated between May 21, 2009, and August 7, 2009. [ 19 ] Both Penn West and Bellatrix filed affidavit evidence. [ 20 ] Mr. Mevel of Penn West states that he has been informed by Mr. Fitzgerald that from the time of receiving Mr. Chisholm’s email of March 18, 2009, his intent was to work toward a possible settlement of the disputes and that any discussions toward this intent “would be confidential and ‘Without Prejudice.’” [ 21 ] Mr.

Mevel states that Penn West’s response to the May 21, 2009, “Without Prejudice” email was specifically marked “Without Prejudice” in accordance with Mr. Fitzgerald’s understanding that the ongoing discussions were for the purposes of settlement only. He notes that the exchanges of correspondence went on past the period in issue, and did ultimately result in offers being made. However, no settlement was effected as this action resulted. [ 22 ] Mr. Wood of Penn West, senior legal counsel, also filed an affidavit.

He states that Penn West sought legal advice as early as November 15, 2006, from its vice-president legal, in respect of some of the matters in issue, and discussed the applicability of limitations defences. [2] [ 23 ] Mr. Lee of Bellatrix filed an affidavit. He states that he was personally involved in the discussions in issue and reported to Mr. Chisholm. He states: True did not retain litigation counsel in connection with the Plant-Related Claims until August 7, 2009. Until then, True did not perceive there to be a potentially litigious dispute in regards to the True Claims.

Accordingly, True did not send its communications to Penn West on a “without prejudice” basis. The sole exception to this was the May 21, 2009 email sent by Mr. Chisholm to Mr. Fitzgerald of Penn West...I am advised....that he sent this e-mail on a “without prejudice” basis because he wanted to encourage a constructive dialogue in an effort to achieve a business resolution of the True Claims, but that at the same time he was aware that the amounts which were owing by Penn West would first have to be finalized... ...

Although Penn West sent a few of its communications to True during the timeframe in question on a “without prejudice” basis....this was of no significance to True as it did not view these communications as being concerned with the resolution of a potentially litigious dispute. Rather, they were concerned with determining the amounts which were owing as between the two companies, including the amounts owing on account of the True Claims. This was a continuation of the process which had been ongoing for a number of years.

Similarly...the note [in the minutes] that the discussion had been held on a “without prejudice” basis was meaningless to me as there was nothing discussed at the meeting which gave me any indication that there may have been a potentially litigious dispute brewing between the parties. From my perspective the sole purpose of the meeting was to review and discuss a large volume of data which had been produced by Penn West and thereby determine the amounts which were owing as between True and Penn West, including the amounts owing on account of the True Claims.

POSITION OF THE PARTIES [ 24 ] Bellatrix, the party who first used “without prejudice” in its correspondence, argues that the documentation between May 21, 2009, and August 7, 2009, is not privileged. There was no intention to start a legal action, only a desire to undertake some “sabre

rattling” in order to ensure that Penn West treated the matter seriously and expeditiously. If the documentation is privileged, it arguesthat justice requires that the privilege be lifted for the limited purpose of allowing it to respond to the limitations defence raised by PennWest. [25] Penn West argues that it is clear that the documentation was subject to settlement privilege and it always believed that to bethe purpose of the discussions. Furthermore, the privilege cannot be lifted by the Court. It must be waived by the agreement of bothparties and that has not occurred.

ISSUES [26] There are two issues to be addressed: Is the documentation between May 21, 2009, and August 7, 2009 privileged; and, if it is,can and should that privilege be waived to allow Bellatrix to respond to the argument that its claim is statute barred?

ANALYSIS [27] The courts have generally recognized three types of privilege: legal advice privilege which attaches to communicationsbetween a solicitor and his or her client; litigation privilege, which attaches to records produced for the dominant purpose of furtheringlitigation; and settlement privilege, which attaches to communications made in furtherance of settlement: Hansraj v. Ao, 2002 ABQB385 at paras. 10-13, privilege analysis aff’d 2004 ABCA 223 at paras. 8-10, 20. Generally, the protection afforded settlement privilege isnot as stringent as that granted to solicitor-client privilege: Histed v.

Law Society (Manitoba), 2005 MBCA 106. [28] The purpose behind settlement privilege is the encouragement of settlement and therefore it allows the parties to exchangecorrespondence with a view to resolving their disputes without fear that their comments will be held against them at a later date.

It isrecognized that to be effective, settlement discussions often require candour, which settlement privilege allows: Hansraj para. 13. [29] Furthermore, if a settlement is reached the discussions are superseded by the contract, and if no settlement is reached, the negotiations are irrelevant to the litigation: The Law of Evidence in Canada, Sopinka, Lederman & Bryant, (3rd ed.) (Markham, Ont:LexisNexis Canada Inc. 2009) at para. 14.316.

As has been noted by the court, the other basis for settlement privilege is the express orimplied agreement of the parties themselves that communications in the course of their negotiations should not be admissible in evidenceif a contested hearing follows: Meyers v. Dunphy, (2007) 2007 NLCA 1 , 262 Nfld. & PEIR 173 at para. 19. [30] In Costello v.

Calgary (1994) (AB KB), 153 A.R. 161 (Q.B.) the court adopted the tripartite test for settlement privilege found in The Law of Evidence in Canada, 3rd ed. (Markham: LexisNexis, 2009) p. 1033: a litigious dispute must bein existence or within contemplation; the communication must be made with the express or implied intention that it would not bedisclosed to the court in the event negotiations failed; and, the purpose of the communication must be to attempt to effect a settlement. [31] The use of the words “without prejudice” is not determinative of the issue of settlement privilege.

However, it is evidence of aparty’s specific intent to keep the correspondence confidential under the second requirement of the test. Those words signify the “flag oftruce” under which negotiations may be safely carried on: Hansraj, paras. 14-16. [32] The correspondence in issue does not have to contain an actual offer of settlement in order for the privilege to attach.Correspondence that invites compromise, or outlines approaches that might be taken to settlement, or refers in some other indirect way tosettlement, is also privileged.

Documents prepared by a party to develop a settlement offer, including draft documents, are alsoprivileged. [33] In Hansraj, at para. 20, the Court noted that “the privilege is clearly an important one, and in cases of doubt as to whether thecorrespondence does relate to the negotiations, the Court should undoubtedly err on the side of protecting the privilege.” [34] The onus is on the party who asserts the privilege, to prove that the tripartite test for settlement privilege has been met: Blue

Line Hockey Acquisition Co. v. Orca Bay Hockey Ltd. Partnership 2007 BCSC 143, para. 104, quoting from Cytrynbaum v. GineautHoldings Ltd. 2006 BCSC 468 at para. 26. [35] Bellatrix argues that Penn West has not met the requirements of the test. Bellatrix says that a litigious dispute must be inexistence or in contemplation and the mere existence of a dispute is insufficient. Only when the dispute has become “litigious” does theprivilege arise: Blue Line, para. 103-104.

Litigation is found to be reasonably contemplated when a “reasonable person, with the sameknowledge of the situation as one or both of the parties, would find it unlikely that the dispute will be resolved without it”: Ross RiverDena Council v. Canada (Attorney General) 2009 YKSC 4, quoting Keefer Laundry Ltd. v. Pellerin Milnor Corp. 2006 BCSC 1180 atpara. 97. [36] What the parties had, says Bellatrix, was simply a commercial dispute and the letters sought to find a business resolution tothat dispute.

There was no evidence of litigation counsel being retained by either party nor that the correspondence was drafted undertheir tutelage. [37] However, what Bellatrix now says it intended at the time it sent the “without prejudice” correspondence is not determinativeof the issue. As noted in Hansraj, the first step is to consider the content of the documents and their context. They establish that therewas a dispute between the parties.

It is evident that Bellatrix believed that funds were owed by Penn West and it was becomingincreasingly frustrated by the lackadaisical approach of Penn West to the resolution of the claim. A review of the correspondence makesit clear that Bellatrix had become convinced that it needed to threaten Penn West to get its attention. A reasonable person, readingBellatrix’s correspondence of May 21, 2009, would think that legal steps, including litigation, were being contemplated. Bellatrix did nottell Penn West that it wasn’t serious or was just bluffing.

The first requirement of the test has been met. [38] Bellatrix then argues that the correspondence must be written “truly for the purpose of attempting to effect a settlement”,failing which the letter does not attract settlement privilege: Phillips v. Rodgers, (AB KB), [1988] 62 Alta. L.R. (2d)146 (ABQB) para. 12, quoting from The Law of Evidence in Civil Cases, Sopinka and Lederman, p. 198. The purpose of thecorrespondence in this case, Bellatrix argues, was not to effect settlement.

It was in the nature of routine correspondence that wasnecessary to ultimately reach a business resolution of the matters in issue. [39] Firstly, a settlement is a business resolution of a matter. For good business reasons parties may accept liability where theyotherwise wouldn’t, or offer payment where they would otherwise refuse. Parties may not wish to incur the time and expense oflitigation, or they may wish to maintain a valued relationship with a supplier or a customer, or want to avoid risking damage to theirstanding in the business community.

There are many business reasons to resolve and settle a potential claim. [40] A review of the correspondence indicates that its overall purpose was to settle the threatened litigious dispute between theparties. This dispute was data intensive and the data needed to be obtained, communicated and reviewed before settlement could occur.That does not mean that the exchange of correspondence and the meeting between the parties was not to effect settlement.

It was. [41] This is not a case, like some, where, from the start every piece of correspondence between the parties is marked “withoutprejudice.” On May 21, 2009, Bellatrix chose to put an entirely different cast on the discussions between the parties, a situation whichPenn West accepted. As noted by Slatter J., as he then was, in Hansraj, parties need to understand if the flag of truce is flying. Bellatrixcannot threaten litigation, fly the flag of truce and then backtrack and claim it didn’t really mean it. As noted by Slatter J., the court musterr on the side of caution.

To do otherwise in this situation could lead to the kind of mischief found in the tale of the boy who cried“wolf”. Parties would have no idea when they could negotiate frankly and openly without the risk of having their words come back tohaunt them. [42] The documentation in issue is subject to settlement privilege. [43] Bellatrix next argues that the privilege should be waived for the narrow purpose of allowing it to respond to the allegation ofPenn West that Bellatrix’s claim is out of time and barred by the Limitation Act, R.S.A. 2000, c.

L-12. [44] Upon occasion, the Courts have acknowledged that certain circumstances, such as the passage of a limitation period, might

permit a limited waiver of settlement privilege: Dos Santos (Committee of ) v. Sun Life Assurance Co. of Canada 2005 BCCA 4, atpara. 14 quoting from Middlekamp v. Fraser Valley Real Estate Board (1992) (BC CA), 71 B.C.L.R. (2d) 276(B.C.C.A.) at para. 20. These exceptions can be considered by the Court when they are argued to be necessary for the proper dispositionof litigation. [45] In Dos Santos the Court held that to establish an exception the party seeking to lift the privilege must show that a competingpublic interest out-weighs the public interest in encouraging settlement.

In the circumstances of the case the documents must be bothrelevant and necessary to a compelling or overriding interest of justice. [46] The Court in that case considered whether requiring the production of documents in such a situation would put a chill onsettlement negotiations, and found that it would not. Access to the documents in issue was allowed to enable the insurer to determinewhat the plaintiff had actually received in compensation for lost earnings.

This was done to ensure that double recovery did not occur. [47] An exception has also been granted to discourage perjury when someone involved in settlement discussions stated that falseevidence had been given about the execution of an agreement: Berry v. Cypost Corp., 2003 BCSC 1827. In the course of its decision theCourt in that case listed and classified the known exceptions and referred to a number of cases in British Columbia where the privilegehad been lifted to permit a consideration of s. 5 of the B.C.

Limitation Act which extends limitation periods where there has been writtenconfirmation of the cause of action: Belanger v. Gilbert, (1984) (BC CA), 6 W.W.R. 474 (B.C.C.A.); Carfra v. Rader,(1994) 99 B.C.L.R. (2d) 311 (Master); Low v. Petro-Canada Inc., 2001 BCSC 251 , [2001] B.C.J. No. 318 ((B.C.S.C. [InChambers]); Unger v.

Fortin, (1997), (BC SC), 33 B.C.L.R. (3d) 97 (B.C.S.C.). [48] Settlement privilege has been waived to allow a party to respond to an application to dismiss an action due to the passage oftime: Saan Stores Ltd. v. 328995 Alberta Ltd. 2006 55 C.L.R. (3d) 298 (Y.T.S.C.). [49] A detailed analysis of the case law considering when settlement privilege will be lifted is found in Meyers v. Dunphy 2007NLCA 1, paragraphs 12 - 27.

In that case there was an extensive disclaimer on most of the correspondence that said that thecorrespondence was “without prejudice and is not to be taken as acknowledging or confirming any cause of action your client may haveagainst our insured for the purposes of extending the applicable limitation period.” At issue in that case was whether correspondenceotherwise protected by settlement privilege should be admitted to respond to a limitations plea. [50] From its consideration of the case law the Court found that without prejudice communications are admissible where exclusionof the communication would facilitate an abuse of the privilege, or another compelling or overriding interest of justice requires theiradmission: [para.27]. [51] After reviewing prior case law the Court noted that while a number of decisions have stated that the privilege may be liftedfor the purposes of a response to a limitations defence, admitting such correspondence to respond to a limitations defence is not “anestablished exception to the settlement privilege”: [para. 52].

However, the Court acknowledged that there would be situations wheresuch an exception is justified, such as where questionable conduct was in issue. [52] In light of the specific content of the disclaimer which excluded reliance on the correspondence to confirm a cause of actionfor limitation purposes, the Court held that, absent some special reason, the settlement privilege in that case should be maintained. [53] While there are no cases on point in Alberta, two cases are of some assistance.

In Hansraj, the court noted that there are a fewexceptions to the rule of settlement privilege and gave, as an example in application to strike proceedings for want of prosecution and theformer rule 11 of the Alberta Rules of Court that dealt with the expiration of a statement of claim. [54] Macleod J. tangentially considered the issue in Ignition Energy Ltd. v. Direct Energy Marketing Ltd., 2009 ABQB 605.

Heheld that when material related to a settlement or its negotiation is relevant to the litigation, other than to establish one party’s liability forthe conduct in issue or to show the weakness of a party’s claim, settlement privilege does not bar production. In other words, unless the policy reasons underlying privilege will be violated, settlement privilege need not be enforced.[3] He held that the documents in issuewere not protected by privilege.

[ 55 ] From a review of this case law, the logical approach to take in this case is to consider whether the lifting of the privilege can be justified in light of the underlying goals of settlement privilege found in the case law. The law promotes settlement. Therefore it permits the parties to exchange correspondence in an attempt to resolve their disputes. Effective negotiations require that the parties are able to candidly exchange their views without any fear that their comments, offers or admissions will be held against them later.

As well, an implied contract between the parties to this effect is acknowledged by the courts. If settlement efforts fail the correspondence may not be used in evidence. [ 56 ] In light of the rationale behind settlement privilege, is there a compelling or overriding interest of justice that would permit the disputed documentation to be admitted for the limited purposes of responding to the limitations defence found in paragraphs 13 and 21 of the Statement of Defence? [ 57 ] In my view, there is no requirement for unconscionable conduct as mentioned in Meyers .

The better view is to weigh the overall interests of justice. Does justice require the admission of this documentation to permit Bellatrix to respond to these allegations? [ 58 ] I cannot see that permitting this documentation to be considered for this limited purpose would eviscerate the public policy foundation underpinning settlement privilege. Settlement privilege is usually understood as a means of protecting a party from the revelation to the court of offers or admissions as to the weaknesses or vulnerabilities found in its case.

Allowing the documentation to be used for the limited purpose requested would not violate this acknowledged protection. [ 59 ] In this case discussions had been dragging on for several years and the threat of litigation was used to try to motivate the Defendant to deal with the matter more expeditiously. It seems manifestly unfair that any subsequent acknowledgement of the possible existence of the claim cannot be used for the limited purpose of responding to an argument that the claim is statutorily barred.

The limitation issue, of which Penn West was apparently aware, was not part of the merits of the case; it was not part of the substance of what was being negotiated. It does not appear to have ever been discussed or even mentioned. Had the limitation issue been part of the negotiations the situation would be different. [ 60 ] Finally, I note that should settlement privilege not be lifted in a situation such as this, it could actually put a chill on settlement negotiations and undermine the goal of promoting settlement.

Parties might hesitate to rely on the apparent good faith negotiations of their business colleagues and feel required to rush to litigation. [ 61 ] In the facts of this case it is in the overall public interest to permit the correspondence to be used for the limited purpose of responding to the defences raised in paragraphs 13 and 21 of the Statement of Defence. CONCLUSION [ 62 ] The documentation over which Penn West claims settlement privilege, which comprises documentation found in the records of both parties during the period May 21, 2009, to August 7, 2009, is protected by settlement privilege.

However, insofar as this documentation is necessary to respond to the limitations defence raised by Penn West, it is producible, but for that purpose only. [ 63 ] Should costs not be agreed to, the parties may speak to costs before November 30, 2011. Heard on the 21 st day of June, 2011 and the 5 th day of July, 2011. Dated at the City of Calgary, Alberta this 8 th day of September, 2011.

J.B. Hanebury M.C.C.Q.B.A. Appearances: Eugene J. Bondar Gillian Barnett MacLeod Dixon LLP for the Plaintiff (Defendant by Counterclaim) Michael P.

Theroux Laurel Lui Bennett Jones LLP for the Defendant (Plaintiff by Counterclaim) [1] Some of the documentation in issue is in the name of True Energy Inc., the company that was Bellatrix’s predecessor until an amalgamation in November, 2010. [2] No concern was raised by Bellatrix that Penn West investigated and negotiated the issues slowly and in bad faith in order to eventually raise the limitations defence. [3] This appears to be the approach used in the United States under the Federal Rule of Evidence 408, 28 U.S.C.A. which states that the rule does not require the exclusion of settlement negotiations if the evidence is offered for purposes not prohibited.

Prohibited purposes include proof of liability or amount of a claim. However, the admissibility of settlement negotiations at discovery appears to be broader than that allowed at trial.