Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62

Court of Queen ’ s Bench of Alberta Citation: Nexxtep Resources Ltd. v. Talisman Energy Inc., 2012 ABQB 62 Date: 20120124 Docket: 0601 03847 Registry: Calgary Between: Nexxtep Resources Ltd. Plaintiff - and - Talisman Energy Inc., as Managing Partner for Talisman Energy Canada, a partnership, and Talisman Energy Canada, and Omers Energy Inc. Defendants - and - Talisman Energy Canada by its Managing Partner Talisman Energy Inc. Plaintiffs by Counterclaim - and - Nexxtep Resources Ltd. Defendant by Counterclaim _______________________________________________________

Reasons for Judgment of the Honourable Mr. Justice G.H. Poelman _______________________________________________________ TABLE OF CONTENTS I. Introduction.............................................................................................................. Page: 3 II. Meaning of the Purchase and Sale Agreement.................................................. Page: 4 A. Overview of Contractual

Interpretation Principles................................... Page: 4 B. Words of the Purchase and Sale Agreement......................................... Page: 4 1. The Assets...................................................................................... Page: 4 2. Petroleum and Natural Gas Rights............................................... Page: 4 3. The Tangibles................................................................................. Page: 6 4. Miscellaneous Interests................................................................. Page: 6 5.

Other Provisions............................................................................. Page: 6 C. Factual Matrix............................................................................................. Page: 7 1. Legal Principles............................................................................. Page: 7 2. The Evidence.................................................................................. Page: 9 (

a) The Transaction.................................................................. Page: 9 (

b) Factual and Regulatory Context..................................... Page: 13 (

c) Findings............................................................................ Page: 15 D. Conclusions on Meaning of Contract..................................................... Page: 17 III. Ambiguity.............................................................................................................. Page: 19 IV. Rectification.......................................................................................................... Page: 19 V. Conclusion on Liability........................................................................................ Page: 21 VI.

Damages.............................................................................................................. Page: 21 A. Introduction............................................................................................... Page: 21 B. Measure of Damages............................................................................. Page: 21 1. Legal Principles........................................................................... Page: 21 2. Findings........................................................................................ Page: 22 C.

Assessment of Damages....................................................................... Page: 23

1. Period of Damages..................................................................... Page: 23 2. Calculation of Damages............................................................. Page: 24 (

a) General............................................................................. Page: 24 (

b) Net Operating Revenues................................................. Page: 24 (

c) Deductions for Capital.................................................... Page: 25 (

d) Expenses of Board Hearing........................................... Page: 26 VII.

Summary and Relief............................................................................................ Page: 27 I. Introduction [ 1 ] By written contract dated and executed March 31, 2004, entitled “Purchase and Sale Agreement” (“PSA”), Talisman Energy Canada (“Talisman”) agreed to sell to Nexxtep Resources Ltd. (“Nexxtep”) certain “Assets” in the Leedale area of Alberta for $3.95 million.

They included petroleum and natural gas (“PNG”) rights defined as being under a certain surface location and within the “base of Mannville to base of Pekisko” zone plus their associated “Tangibles” (equipment for production, transportation and processing) and “Miscellaneous Interests” (property, contractual rights, records and data relating to the PNG rights and tangibles). [ 2 ] When the contract was executed there were two producing wells below the designated surface location: 1.

A vertical well produced “sweet gas” from a pool designated by the Energy Resources Conservation Board (and believed by both parties) to be within the “base of Cardium to base of Mannville” zone. 2. A horizontal well produced “sour gas” from a pool designated by the Board (and believed by the parties) to be within the lower “base of Mannville to base of Pekisko” zone. The horizontal well’s zone was immediately below the vertical well’s zone. The PSA used the proper surface location and the description “base of Mannville to base of Pekisko” when referring to the PNG rights conveyed within the relevant

section of lands. [ 3 ] Nearly two years after the PSA was executed, Nexxtep concluded from internal investigations of data that the vertical well was producing from a pool below the base of the Mannville, within the “base of Mannville to base of Pekisko” zone. After a contested hearing, the Board agreed and redesignated the pool from which the vertical well was producing as being below the base of the Mannville zone. [ 4 ] These basic facts raise the question of whether the PSA should be interpreted as conveying the pool from which the vertical well produced as of March 31, 2004.

Answering that question requires consideration of the proper approach to interpreting these parties’ contract, including what extra-textual facts should be considered. On those questions depends whether Nexxtep’s action against Talisman in trespass and conversion, for producing gas from a pool over which Nexxtep claims ownership, should succeed. II. Meaning of the Purchase and Sale Agreement A. Overview of Contractual

Interpretation Principles [ 5 ] The objective of contractual

interpretation is to ascertain what the parties objectively intended by their bargain, when they

made it. Primacy is given to the parties’ words, particularly in a written contract, because it is presumed that the parties chose words that embodied their intentions. [ 6 ] However, the objective remains the determination of the parties’ intention, not the meaning of words in a document. Thus, the authorities give guidelines for the consideration of the “factual matrix” or “surrounding circumstances” to help determine the parties’ contractual intention as would be determined by a reasonable person so situated.

In other words, extra-textual evidence is used to help understand what the parties meant by the words they used. [ 7 ] The concern here is only with determining the parties’ intention, objectively understood. If after that process it is found that there is ambiguity about what was intended, parol evidence may be considered.

That is a different stage of analysis, and the facts to be considered when resolving ambiguity about the parties’ intention may be different from those admissible on the question of interpreting their words. [ 8 ] Finally, where the evidence clearly demonstrates that the parties’ objective contractual intention is not correctly embodied in their words, the court may use its equitable jurisdiction to correct or “rectify” the words of the contract. A plea of rectification involves yet another stage of analysis and different categories of evidence and standards of proof. B.

Words of the Purchase and Sale Agreement 1. The Assets [ 9 ] The principal terms of the PSA logically begin with

article 2 by which the parties agreed to sell and purchase “the Assets” for $3,950,000.00 (as adjusted) on March 31, 2004. The agreement includes three types of assets, namely petroleum and natural gas rights, tangibles and miscellaneous interests. 2. Petroleum and Natural Gas Rights [ 10 ] The PSA defines petroleum and natural gas rights to include, first, the “Lands.” Those, in turn, mean the lands on

Schedule “A,” and the petroleum and natural gas within those lands. [ 11 ]

Schedule “A” lists ten properties. For each of the ten properties, there are the following nine descriptions: • Lease . The document identifies the Crown lease under which each property is held. Some leases apply to more than one of the scheduled properties. • MRE. Talisman used the term “mineral right equities” or “MRE” to designate different groups of owners and shares of ownership at different vertical “splits” or zones within a particular Crown lease for a surface location.

Typically, the original Crown lessee made contracts with third parties who could earn interests in designated zones by conducting operations on the lands. Many contracts, with many parties, could generate a variety of ownership groups and interests in different zones held under the Crown lease. For the property in dispute,

Section 16, Township 43, Range 4, W5M, Talisman had three vertical splits or MREs – and

Schedule “A” to the PSA designates the one being conveyed as MRE 4. • Legal Description.

Schedule “A” indicates the surface location for each property by legal description, and the subsurface location by zone. For the property in dispute,

Schedule “A” gives the surface legal description followed by the words “PNG base of Mannville to base of Pekisko.” • Interest.

Schedule “A” sets out the ownership interest conveyed, by type (royalty or working interest) and percentage. For the

interest in

Section 16, the

Schedule disclosed a gross overriding royalty before payout, convertible after payout to a 34.462% working interest. • Permitted Encumbrances. The

Schedule disclosed the type of royalty encumbrance on the interest conveyed. • Vendor Operated. The

Schedule indicated, by “yes” or “no,” whether Talisman was the operator of the interest conveyed. For the relevant

Section 16 interest, the

Schedule showed that it was not the operator. • Contracts. The

Schedule identified contracts with non-Crown third parties which affected the interest being conveyed. For MRE 4, three contracts were identified – one of them being a farm-out agreement specifically referable to the drilling of the horizontal well and the resulting 34.462% working interest held by Talisman. • Well UWI (TEC wells only). The

Schedule identified by “unique well identifier” the wells relating to the interests being conveyed. It identified only the horizontal well for MRE 4. 3. The Tangibles [ 12 ] The parties also agreed that Talisman would convey to Nexxtep “all tangible and depreciable property and assets” on or about the conveyed lands that were or would be used to produce, process, transport and market oil or gas produced from the lands. Among other things, the sold tangibles included “use of Facilities Agreement for Outside Gas in Wilson Creek Area dated July 30, 2000," and specific wells identified on a

schedule (including the horizontal well, but not the vertical well). The July 30, 2000 agreement was not introduced into evidence, and the few brief references to it in the documents do not enable me to make a finding regarding any particular relevance it may have to interpreting the PSA. 4. Miscellaneous Interests [ 13 ] Finally, the conveyed assets included various contracts, property rights, records and data relating to the petroleum and natural gas rights and tangibles. Certain schedules list some of the miscellaneous interests included in this category.

Contracts related to operation and production of the vertical well are not included. 5. Other Provisions [ 14 ] There are two other provisions in the PSA that, in my view, are significant to construing the contractual intention of the parties. [ 15 ]

Section 7.1(

e) makes Talisman’s obligation to sell subject to the condition precedent that Nexxtep has executed a release and quit claim relating to Nexxtep’s Offers to Purchase made to Talisman dated May 1, 2003 and December 15, 2003, and to an action it had commenced in this Court on March 10, 2004. The relevance of this provision will become apparent later. [ 16 ]

Section 10.11 is an “entire agreement” clause. It is heavily relied upon by Nexxtep, and it will therefore be useful to include it for later reference: The provisions contained in any and all documents and agreements collateral hereto shall at all times be read subject to the provisions of this Agreement and, in the event of conflict, the provisions of this Agreement shall prevail. This Agreement shall not be varied in its terms or amended by oral agreement or by representations or otherwise other than by an instrument in writing dated subsequent to the

date hereof, executed by a duly authorized representative of each Party. This Agreement supersedes all other agreements, documents, writings and verbal understandings among the Parties relating to the subject matter hereof, including, without limitation, the Offers to Purchase made to Vendor dated May 1, 3003 and December 15, 2003, and expresses the entire agreement of the Parties with respect to the subject matter hereof. C. Factual Matrix 1.

Legal Principles [ 17 ] The factual matrix of a contract is properly considered as part of the interpretive task of ascertaining the parties’ intentions having regard to the relevant background context known to the parties. [1] In other words, no special justification is needed to consider extra-textual evidence, provided it is within the prescribed limitations.

Indeed, as already seen, some of the PSA’s words (MRE, for example) cannot be understood at all without such evidence. [ 18 ] Talisman submits that the history of the parties’ dealings with respect to the sale of Leedale area assets is part of the factual matrix. Nexxtep’s position in oral argument was that this is not properly part of the factual matrix (although its written argument is less clear on this point).

Part of the tension between the parties’ positions is over what is excluded by the principle that factual matrix evidence should not include “prior negotiations.” [ 19 ] The function of factual matrix evidence helps define its scope. Lord Wilberforce is credited with first using the term “matrix of facts” in Prenn v. Simmonds , where he explained that “we must . . . enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view.” [2] Later, in Reardon Smith Line Ltd. v.

Hansen-Tangen , he recognized the difficulty of defining the scope of what he then referred to as “surrounding circumstances,” but offered that “it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.” [3] He emphasized that this evidence was to be used only to arrive at the intention of the parties objectively – that is, as it would appear to reasonable persons in the same situation. [ 20 ] Lord Wilberforce’s expositions of the function of factual matrix evidence are part of our law.

In Gainers Inc. v.

Pocklington Holdings Inc. , while strongly cautioning against considering subjective intention, the Court of Appeal used the term “armchair rule” as letting “the courts see what the authors of the contract knew when they wrote it, in order indirectly to assist in resolving any difficulties in what certain words of the contract refer to.” [4] The court explained that knowing what the parties knew could help determine what the parties were referring to by their words, and found Reardon Smith to be a good explanation of the doctrine – it “lets the court find what a reasonable person would have thought was the aim of the transaction, if that person knew the facts available to the parties.” [5] The Court of Appeal also adopted the statement of Lord Hoffman, succinctly summarizing the use and purpose of factual matrix evidence in relation to words in a document: The construction of a document is not a game with words.

It is an attempt to discover what a reasonable person would have understood the parties to mean.

And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objectives which it was intended to achieve. [6] Or, in Conrad J.A.’s words, “it is from the whole of the document coupled with the surrounding circumstances that the general intention of the party or parties is to be ascertained.” [7] [ 21 ] The authorities, hold, however, that evidence of the factual matrix should not include the parties’ negotiations. [8] Lord Wilberforce explained that evidence of prior negotiations is not admitted because it is not helpful, rather than for technical reasons or efficiency.

Where negotiations are difficult, positions change until the parties achieve consensus. Evidence of the use of different expressions or the same expressions does not usually help

interpretation of the contract’s words, and may occur in a context of different surrounding circumstances. [9]

[ 22 ] Evidence of the factual matrix may therefore be considered to the extent it is instructive as to the genesis of the transaction; its background and context; the subject matter meant to be described by the words; and the aim, commercial purpose and practical objectives sought to be achieved. It will not be helpful to consider how, in their negotiations, the parties might have modified the contractual language or changed their bargaining positions. [ 23 ] I stated earlier that the objective of contractual

interpretation is to ascertain what the parties objectively intended by their bargain as of when they made it. The Judicial Committee of the Privy Council applied this principle when interpreting the meaning of a grant of land made by Louis XIV of France in 1693. The area of grant was described as one league in depth around a certain lake, but later geographical surveys showed that there was a chain of three lakes rather than what at the time of grant was thought to be one lake.

Lord Salvesen summarized the issue as “whether the subject of the grant consists simply of the upper lake at the higher level as the Crown contends . . . , or as the appellants contend, embraces the whole 3 sheets of water with their connecting channels.” [10] He reached this conclusion not by interpreting what the words of the grant meant when applied to circumstances existing at the time of judgment.

Rather, he held: This question must be determined, not by reference to accurate geographical conditions as they have now been ascertained, but on a construction of the grant itself as applied to the knowledge of the locality which was then available. [11] 2. The Evidence (

a) The Transaction [ 24 ] The “genesis of the transaction” was in 2002, when Talisman put out a marketing package indicating that it desired to dispose of non-core assets, namely its interests in the Leedale area of Alberta (Townships 42, 43, 44, Ranges 3, 4, 5, W5M). Talisman provided Nexxtep with information about its land interests and operations in the area. The parties entered into a May 1, 2003 letter agreement (referred to in

section 10.11 of the PSA) which provided for the sale by Talisman to Nexxtep of all of Talisman’s oil and gas interests in the area. It was subject to internal approvals by both parties. [ 25 ]

Schedule “A” to the letter agreement listed all of Talisman’s interests in the area. It included all of Talisman’s MREs in

Section 16 (1, 3 and 4). It disclosed that Talisman had a 72.4763% working interest in the MRE 1 zone (base of Cardium to base of Mannville) with production coming from the vertical well.

For the MRE 4 zone (base of Mannville to base of Pekisko), it disclosed that Talisman had a royalty interest convertible to a 34.4262% working interest after payout, with production coming from the horizontal well. [ 26 ] There followed exchanges of information, due diligence and preparations for financing, but the transaction stalled – because (according to the testimony and documents) Talisman’s senior management would not allow disposal of producing assets without acquiring replacement properties elsewhere to offset loss of production.

To address this hurdle, the parties entered into a letter agreement dated December 15, 2003 (also referred to in

section 10.11 of the PSA) being much to the same effect, but contemplating a possible two- stage transaction with approximately one-third of the assets to be conveyed by January 31, 2004 and the remaining two-thirds by March 31, 2004. [ 27 ] Daniel Krayzel, Nexxtep’s president, testified about his involvement in suggesting a two- stage transaction. On his instructions, John Caffrey (a senior engineering consultant for Nexxtep) prepared a table that organized Talisman interests according to who operated the wells and their related infrastructure.

Thus, it grouped together five wells operated by Calpine, others operated by Talisman, and others operated by different parties. In the discussions surrounding the December letter agreement, the table was presented to Talisman representatives. Mr. Krayzel testified that the five Calpine-operated wells, together with the land interests, lines and infrastructure, would represent about one-third of the transaction. [ 28 ] Daniel Tesarski of Talisman testified that he met with Mr. Krayzel on or about December 15, 2003.

He confirmed that Nexxtep presented the table at this meeting, separating the wells according to those operated by Talisman and those operated by Calpine, in support of Nexxtep’s strategy that the transaction could be completed in two stages – the non-Talisman-operated wells being in the first stage, representing approximately one-third of overall value; and the balance of the wells and value being in the second stage. Mr. Tesarski observed that, in his view, Nexxtep had been very creative by proposing a plan based on dividing assets according to their

infrastructure rather than land. [ 29 ] The December 15, 2003 letter agreement included a land

schedule in a different format from the earlier letter agreement, but it listed the same three MREs in

Section 16, with the same associated ownership interests and wells. [ 30 ] The targeted January 31, 2004 closing of a first-stage transaction did not occur. Nexxtep issued demand letters, and followed them up with a statement of claim (commencing the action described in

section 10.11 of the PSA). It claimed all of Talisman’s interests in the Leedale area, describing them by attaching the land

schedule from the December 15, 2003 letter agreement. [ 31 ] The evidence for the period of approximately March 2004 establishes, in my view, that the parties were still attempting to conclude a transaction relating to all of the Leedale area assets in two stages, with the first stage including only the assets relating to the five Calpine-operated wells. The information provided by Talisman in response to Nexxtep’s inquiries focussed on the Calpine wells, and that was also the focus of Nexxtep’s internal evaluations. The parties did not conduct due diligence on the vertical well or its production.

In order to obtain financing, Nexxtep commissioned an evaluation that was specifically directed to the five Calpine wells and their respective producing zones. A second “stage 2” draft evaluation which included the vertical well and its presumed producing zone (Lower Mannville C pool) was not finalized. [ 32 ] The parties were in regular communication to the end of March 2004. On March 24, Mr. Krayzel proposed including additional zones on the land

schedule for the transaction closing March 31, 2004. Thus, for

Section 16, in addition to MRE 4 (base of Mannville to base of Pekisko) with the horizontal well operated by Calpine, MREs 1 and 3 would be added, together with their associated wells and producing zones – including base of Cardium to base of Mannville with the vertical well and its associated production. In a March 24, 3:24 pm e-mail he sent to Darwin Luft of Talisman, he wrote: Please provide a complete land

schedule for both parcels as well as facilities, infrastructure, wells, pipelines, contracts, afe’s. Calpine land

schedule shall include all rights in the particular section(s), please revise as per original [land] schedule. [ 33 ] Dan Tesarski of Talisman responded promptly at 3:49 pm, firmly rejecting the addition of more zones: We will commence with providing the additional schedules, albeit this may take several days to pull together. The first Closing contemplates the Calpine-operated wells as listed on the Land

Schedule and only includes the producing zones from those sections which Calpine operates and which go to the Calpine-operated Plant. You will recall that we argued that point because from a Land Admin point of view, it would be preferable not to split these Leases. However, by including the other zones, the deal would have to include production from at least three other wells. This would have blown the 1/3 - 2/3 split out the window with the increased value being in excess of 50% of the total deal. Accordingly, you argued that the deal should be split along considerations of infrastructure and Field Operations as opposed to Land considerations. The Land

Schedule for the first Closing is correct as it stands. The second Land

Schedule for the additional Leedale interests will include the other zones in these sections. [ 34 ] Mr. Krayzel responded to Talisman’s position on what would be included in the transaction later the same day:

I am afraid we don’t have “a few days” to pull it together. Please have your people to produce those reports. Leedale - other assets, if the lands (Calpine ones) are in the other package, it is ok with us. The email is cryptic and poorly worded. However, considered in context of the correspondence chain and the testimony of Mr. Krayzel and Mr. Tesarski, I find that Mr. Krayzel confirmed agreement with Mr. Tesarski’s position. The first stage of the transaction would close with the only interests being those operated by Calpine – in

Section 16, this included the zone believed to be produced by the horizontal well but not the zone believed to be produced by the vertical well. In a second stage, other interests in sections where Calpine operated an interest would be conveyed. Thus, in

Section 16, zones other than the one containing the horizontal well would then be sold to Nexxtep. [ 35 ] Eric Myketyn, a landman consulting to Nexxtep on the transaction, testified that he had a conversation with Mr. Tesarski on March 24. Mr. Myketyn’s notes indicate that Mr. Tesarski “indicated the lands are severed as a result of the Calpine asset split.” [ 36 ] The parties were unable to reach agreement on a two-stage transaction. On the morning of March 31, 2004, Mr. Krayzel took the initiative by telephoning Mr. Luft to see whether a business deal could be completed solely on a smaller group of assets.

He testified that “we proposed to close on the first portion of the assets being the non-operated assets operated by Calpine at that point, and we selected . . . those assets as being higher quality to us, being managed by one operator going to . . . one place for processing, having good . . . upside potential.” The PSA was finalized and executed by the end of March 31. [ 37 ] The purchase price was, of course, an important part of the PSA. The amount paid for assets is not always helpful in interpreting a contract.

However, courts will consider the amount paid if it helps determine what the parties intended to convey. [12] For that purpose, the purchase price in the PSA is instructive. [ 38 ] When the parties were attempting to conclude a transaction for all of Talisman’s Leedale assets, they seem to have valued them in the range of $15.3 to $16.3 million. The May 1, 2003 letter agreement, which contemplated a sale of all of these assets, had a purchase price of $15.8 million. Mr. Caffrey’s reserves report for Nexxtep, prepared as of March 1, 2003, valued proven reserves at approximately $16.3 million.

The table prepared by Mr. Caffrey for discussions with Talisman in December 2003 showed a net present value of approximately $15.3 million for all of the assets. [ 39 ] The Calpine-operated assets (including the horizontal well but not the vertical well) were valued by Mr.

Caffrey at approximately $5.6 million in his December 2003 table, $1.26 million of which was attributed to the horizontal well. (In accordance with Nexxtep’s “one-third – two-thirds” two-stage proposal, the Calpine assets comprised approximately one-third of the total Leedale area assets by value.) The valuations done by the parties shortly before the March 2004 closing showed valuations for the Calpine assets as follows: • Talisman valued the Calpine-operated assets at approximately $5.5 million, of which $795,000.00 was attributed to valuation of the horizontal well’s production. • The evaluation commissioned by Nexxtep showed a $4.8 million valuation for the five Calpine-operated properties, $703,000.00 of which was attributed to the horizontal well. [ 40 ] By comparison, production from the vertical well was estimated at approximately $2.7 million in Mr.

Caffrey’s December 2003 table. In the valuations obtained shortly before the March 2004 closing, Talisman’s value for the vertical well production was $1.7 million, while Nexxtep’s was $1.6 million. [ 41 ] Mr. Luft testified, on behalf of Talisman, that the $3.95 million purchase price in the PSA represented an attribution of value to the Calpine-operated assets, with a discount to reflect settlement of the action commenced by Nexxtep for Talisman’s failure to complete the initial agreements for sale of all of the Leedale assets.

Not surprisingly, there is no direct correlation between either party’s valuation of the Calpine-operated assets and the purchase price. Using rough averages between the parties’ pre-PSA evaluations, the vertical well’s value exceeded 30% of the value of the Calpine-operated assets (which included the horizontal, but not the vertical well), and over 40% of the PSA purchase price.

The materiality of the vertical well’s value (on both parties’ evaluations) is an indication that it was not intended to be added to the Calpine-operated assets in the conveyance. (Of course, this is consistent with the subjective beliefs of both parties on March 31, 1984 that the vertical well’s producing zone was not captured in the assets conveyed in the PSA. Neither the price nor subjective beliefs are determinative for purposes of

interpretation.)

(

b) Factual and Regulatory Context [ 42 ] The narrative of the parties’ dealings leading to execution of the PSA is an important part of the factual matrix because it illumines their commercial objectives. In addition, the factual and regulatory framework is part of the background or context within which the parties made their bargain. [ 43 ] The production of oil and gas in Alberta is highly regulated, primarily through the Oil and Gas Conservation Act [13] and its regulations, administered and enforced by the Energy Resources Conservation Board. The purposes of the Act are expressly set out in

section 4, as follows: 4 The purposes of this Act are (

a) to effect the conservation of, and to prevent the waste of, the oil and gas resources of Alberta; (

b) to secure the observance of safe and efficient practices in the locating, spacing, drilling, equipping, constructing, completing, reworking, testing, operating, maintenance, repair, suspension and abandonment of wells and facilities and in operations for the production of oil and gas or the storage or disposal of substances; (

c) to provide for the economic, orderly and efficient development in the public interest of the oil and gas resources of Alberta; (

d) to afford each owner the opportunity of obtaining the owner’s share of the production of oil or gas from any pool. [...] [ 44 ] A part owner of a pool (natural underground reservoir), such as that from which the vertical well produces, cannot produce oil or gas without consent of co-owners or the Board’s order, and the Board will have regard to many factors in determining the most effective and efficient means by which to produce oil or gas. [ 45 ] The expert evidence of Trevor Williams on behalf of Talisman, which I accept, was that customary industry practice is that when a producing property is purchased the wellbore is acquired along with it.

In his view, it would be highly unlikely that a purchaser would acquire producing property without the wellbore because of the consequent need to incur additional capital costs to recover the reserves. He acknowledged that a wellbore could be split from a known producing zone in a transaction, but he had never seen it. Nexxtep acknowledged in argument that it would be very unusual and unexpected to transfer a producing zone without the production equipment and facilities, but it would not be impossible. [ 46 ] Lyle H.

Burk, who testified as an expert on behalf of Nexxtep, put forward several possible means by which sweet gas from the pool produced by the vertical well could be produced by Nexxtep without owning the vertical well. The gas could be used as part of a “gas lift scheme” to enhance recovery of sour gas from the deeper Pekisko formation (either to assist or replace the existing plunger lift system); or the horizontal well could be re-completed as a “dual producer,” by flowing the sweet gas through the annulus space while the Pekisko sour gas was produced through the tubing. [ 47 ] While Mr.

Burk has extensive experience in the oil and gas industry, his experience in regulatory matters involving the Board is limited. Further, while he considered what he described as “safe and regulatory compliant” options for producing the sweet gas, he did not address the necessary involvement of other parties who own interests in the sweet gas pool and the horizontal well used to produce Pekisko sour gas.

[ 48 ] Talisman’s expert, Gerry J. DeSorcy, has extensive experience with such matters, including many years as a member and then chair of the Board. In his opinion, which I accept, the options identified by Nexxtep for production of the sweet gas other than through the vertical well (in which it claims no interest) raise complex and problematic considerations. First, the interests of the other owners of the sweet gas pool (including the leftover Talisman interest, which Nexxtep does not claim) need to be consulted and, absent agreement, a regulatory application would be required.

Second, on a regulatory application the Board would consider the advisability and implication of adding facilities to produce sweet gas when adequate production facilities are already in place; the effectiveness of draining the reserves by the proposed method; and the risk of inadvertently establishing communication between the sweet and sour pools by producing them through the horizontal well as a dual producer. [ 49 ] The main points that I draw from Mr.

DeSorcy’s report, as relevant to the issues before me, are as follows: • While it is impossible to predict what the Board would decide, it is unlikely that it would allow production from the sweet gas pool through both the vertical well and the horizontal well. • It would be difficult for Nexxtep to convince the Board that re-completion of the horizontal well would be more in the “public interest” than production through the existing vertical well.

It is more likely that, if Nexxtep was successful in a compulsory pooling application, production would occur through the vertical well and the Board would allocate appropriate costs of that well and related infrastructure among all parties. • The complexity of the situation, caused by the existence of two wells and different groups of working interest owners, make it difficult to predict the outcome of any Board application. (

c) Findings [ 50 ] From the facts and context described above, I summarize my findings on the relevant commercial context within which the PSA must be interpreted in the following points: 1. The parties’ initial objective, as reflected in the first letter agreement, was to transfer all of Talisman’s interests in the Leedale area to Nexxtep, subject to internal approvals. That became problematic because Talisman’s internal approvals did not allow disposal of producing assets without acquiring replacement properties to offset the loss of production. 2.

By the time the December 15, 2003 letter agreement was executed, the initial objectives were maintained but a two-stage transaction was contemplated to give Talisman additional time to acquire replacement properties. The parties worked towards the objective of initially transferring one-third of the value of the Leedale assets by January 31, 2004, with the balance by March 31, 2004. 3. Nexxtep took the initiative in suggesting the value split, as a way to move forward within Talisman’s parameters.

It prepared a proposed division of the subject assets by dividing the properties and their producing wells into those operated by Talisman and those operated by Calpine. 4. There was again no satisfactory progress, with the result that Nexxtep commenced a lawsuit demanding all of Talisman’s interest in the Leedale area, based on the December 15, 2003 letter agreement.

Discussions following Nexxtep’s statement of claim focussed on a two-stage transaction (one-third of the value first, followed by the balance), with each party conducting evaluations based on two separate packages: one comprising the Calpine-operated wells (including the horizontal well), the other the balance of the wells (including the vertical well operated by Talisman). 5. On March 24, 2004, Nexxtep attempted to expand the land

schedule to include vertical splits within

Section 16 other than the Calpine-operated well – thus adding the vertical well operated by Talisman. That would have significantly increased the value of the first-stage transaction, and was therefore rejected by Talisman.

6. When the entire transaction seemed to fall apart on March 30, it was resurrected on the basis that it would close as only one transaction, comprising the assets operated by Calpine. Nexxtep agreed to abandon its claim to all the additional Talisman assets in the Leedale area. [ 51 ] The subject matter of the transaction, the commercial purpose, aim and practical objectives sought to be achieved clearly emerge from this evidence. The parties wanted to complete the sale of a portion of Talisman’s Leedale assets that would not exceed Talisman’s internal requirements to replace producing assets. They found a method to do that (largely by Nexxtep’s initiative) in segregating the

Section 16 assets according to operatorship, wells and infrastructure: MRE 4 (among other properties) was operated by Calpine, produced from its own well and used a transportation and processing infrastructure distinct from the vertical well. MRE 1 (along with other properties) produced from its own well, was operated by Talisman and had a separate transportation and processing infrastructure.

Of fundamental importance was that on both parties’ evaluations and pricing strategies, the first stage could not include the MRE 1 without “blowing the 1/3 - 2/3 split out the window.” So, while price is seldom determinative as an interpretive aid, in this case it was critical to what could be included in the stage 1 transaction and ultimately the only transaction, and in assisting to determine the subject matter of the contract. [ 52 ] I have not considered as part of the factual matrix events that occurred after closing. They are relevant, if at all, only as parol evidence to resolve ambiguity.

I have also not considered evidence adduced by witnesses of both parties as to their “understanding” at various stages of their dealings. As I said during the trial, such evidence falls into the prohibited category of subjective intention at best, and in any event a parties’ internal understanding of something is seldom relevant to any issue. [14] [ 53 ] I have also not considered negotiations by the parties before execution of the PSA in the sense referred to by McEachern C.J.

B.C. [15] It would be unhelpful, as Lord Wilberforce held, to consider the nuances of parties’ changing positions and variations between drafts of contracts. However, in this case I find that communications between the parties relevant to the basic objectives and subject matter of the contract are probative and are part of the context that gives meaning to the words they chose. D.

Conclusions on Meaning of Contract [ 54 ] Nexxtep fairly conceded in argument that when the PSA was signed both parties believed that the vertical well was producing from a pool above the base of the Mannville, and therefore outside the zone conveyed in the PSA. That was part of the knowledge base on which the parties were dealing, “what the authors of the contract knew when they wrote it.” [16] Their mutual objective was to transfer certain mineral interests and associated wells and other interests which, for

Section 16, meant interests below the base of the Mannville, along with Talisman’s interest in the horizontal well and related facilities. The agreement was specifically structured in this way to enable its value to fall within the parameters that would permit internal approval at Talisman. [ 55 ] Does this finding do such violence to the words of the PSA that it overwhelms them or contradicts them – things evidence of a factual matrix may not do? [17] In my view, it does not. [ 56 ] A contract must be interpreted as of the time it was made.

What would a reasonable person conclude that the words meant, having regard to the contract as a whole, used in the context of and with the knowledge of the parties at the time? Reference to the contract’s words and the factual matrix are complementary tasks, to be undertaken together. [ 57 ] The PSA as a whole shows an intention to transfer Talisman’s entire interest in each of the MREs identified on the schedule, along with the associated wells and rights to other facilities necessary to produce, transport and market the substances. Nexxtep’s proposed

interpretation would result in it acquiring only a part of Talisman’s interest in the pool from which the vertical well produces, because it is limited to the 34.4262% working interest it acquired as set out in

Schedule “A” of the PSA. That interest corresponds exactly to Talisman’s interest in MRE 4, but is less than Talisman’s 72.4763% working interest in the sweet gas pool that was thought to form part of MRE 1 and is now claimed by Nexxtep. [ 58 ] Further, Nexxtep would not acquire an interest in the vertical well, but only in the pool from which it produces; and thus it would have to seek consent from other interest owners or Board approval to produce from the pool in which it claims ownership.

Nexxtep called expert evidence about how it might produce through or along side the horizontal well, but as I have found, that would also involve interests of co-owners in the sweet gas pool and a different group of co-owners in the horizontal wellbore.

[ 59 ] Nexxtep submits, in effect, that the March 31, 2004 contractual intention of the parties as reflected in the PSA (even though it acknowledges that neither of them subjectively understood this then) was that: 1. Nexxtep acquired 34% of the zone described as “base of Mannville to base of Pekisko,” including the sweet gas pool previously produced through the vertical well; 2. Nexxtep did not acquire the vertical well, and thus obtained no present means to produce the sweet gas interest it purchased; and 3.

Most of the ownership in the sweet gas pool was left to Talisman and other co-owners, with no present means for them to produce their interests, as they could no longer use the vertical well. That result is contrary to the intention of the parties as manifested by the PSA read as a whole within its proper factual matrix.

Nexxtep hangs everything on six words (“PNG base Mannville to base Pekisko”) in one box of the land schedule; it ignores the other parts of the PSA that show an intention to convey tangibles and miscellaneous interests along with petroleum and natural gas rights, and the evidence that leads through two letter agreements and a statement of claim expressly referred to in the PSA. A reasonable person looking at the entire PSA and the factual matrix would conclude that the intended subject of conveyance with respect to

Section 16 rights was Talisman’s entire 34.4262% working interest in the petroleum and natural gas rights below the base of the Mannville zone, but excluding the pool from which the vertical well produced. The words they used meant exactly that on March 31, 2004. III. Ambiguity [ 60 ] If the PSA in its factual matrix cannot be interpreted as I have concluded, then I find that it “is of doubtful meaning or application and that extrinsic evidence may be admitted not only to demonstrate the ambiguity but to assist in clearing it up.” [18] [ 61 ] At best, Nexxtep’s position on what the words “PNG base of Mannville to base of Pekisko” in the land

schedule mean leads, when applied to present facts, to tension between those words and the rest of the document and the factual matrix, and therefore to ambiguity.

The reasons for my finding on this point are set out above. [ 62 ] Where an ambiguity exists, evidence of subsequent conduct may be considered to resolve it. [19] The undisputed evidence, well documented, is that between the March 31, 2004 closing of the PSA and Nexxtep’s first notice of alleged trespass on March 6, 2006, Nexxtep approached Talisman on several occasions seeking to purchase the vertical well, its production and rights to the zone from which it produced. Those efforts clearly resolve any ambiguity that may be left if only the PSA and the factual matrix as of March 31, 2004 are considered.

For nearly two years following the transaction, both parties believed that the rights purchased by Nexxtep did not include any ownership in the vertical well or the pool from which it produced. IV. Rectification [ 63 ] As a further alternative to my finding that Nexxtep’s claim fails on a proper

interpretation of the PSA (with or without ambiguity), I consider Talisman’s plea of rectification. [ 64 ] Rectification is available for either a mutual (or common) mistake where both parties had a different intention than the one recorded in their contract; or a unilateral mistake, where only one party made the mistake. [20] In my view, only the first type of rectification is potentially available. [ 65 ] The evidence does not support a finding that the parties had different contractual intentions as of March 31, 2004, when the PSA was executed. Mr. Krayzel testified that Nexxtep was looking for an “upside” in the transaction, and appeared to suggest (without

saying so expressly) that this meant a discovery that the vertical well’s producing pool was below the Mannville zone was within Nexxtep’s contractual intentions. In my view, the testimony of Mr. Krayzel, Mr. Prenioslo and Mr. Caffrey and the relevant documents show that Nexxtep neither found nor included a valuation in

Section 16 for any “upside” potential outside of the known producing zones and wells. Mr. Krayzel’s testimony that Nexxtep was looking for an “upside” is, at best, too subjective, general and unsubstantiated by the documentary record to found a basis for contractual intention; and at worst, is a weak after-the-fact justification for retaining an unexpected asset. [ 66 ] Courts are understandably sceptical of claims that the parties’ real agreement was something other than recorded by the words of their contract, properly interpreted in the factual matrix.

The “high hurdles” established by the Supreme Court of Canada in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. are instructive filters for rectification claims, but may not be entirely applicable to claims based on mutual mistake. The Court set the hurdles out explicitly as applying to the facts of the unilateral mistake case before it. [21] Nevertheless, it is clear that a high standard of proof is required for rectification to be ordered, [22] and that the Court must be able to put into words the contract that was mistakenly recorded. A useful, concise

summary of the test for rectification, which I adopt as a correct statement of the law, is given by Fridman, as follows: What must be shown by a party claiming rectification, either in a suit for such remedy, or by way of a defence to an action on a contract, is a mistake in putting down the parties’ intentions, and some earlier agreement which shows that there was such a mistake.

There must be a written document that does not reflect the true agreement of the parties, and proof of a common intention of the parties at the time of signing, not reflected in the document. [23] [ 67 ] Evidence of the parties’ conduct after execution of the written contract is admissible to show the true intention behind the bargain. [24] The efforts Nexxtep made after execution of the PSA to purchase the vertical well, to which I referred when addressing ambiguity, is also compelling to establish part of the evidentiary basis for an Order of Rectification. [ 68 ] The findings I made above with respect to the factual matrix and parol evidence resolving ambiguity lead me as well to the conclusion that the mutual contractual intention of Talisman and Nexxtep was to convey Talisman’s entire 34.4262% working interest in the petroleum and natural gas rights in

Section 16 below the base of the Mannville zone, but excluding the pool from which the vertical well produced. If the principles of contractual

interpretation do not permit the PSA to be interpreted at law to achieve that result, then there must be an order in equity rectifying the document in accordance with the aforesaid words. V. Conclusion on Liability [ 69 ] For the reasons given above, I find that Nexxtep’s action for trespass fails. The PSA, when interpreted as a whole and in its proper context, conveyed Talisman’s entire 34.4262% working interest in the petroleum and natural gas rights below the base of the Mannville zone, but excluding the pool from which the vertical well produced. If, despite my

interpretation, that result cannot be achieved by contractual construction then equity will accomplish the same result by rectification, because it reflects the common intention of the parties on March 31, 2004. VI. Damages A. Introduction [ 70 ] The parties have both approached the issue of damages on the assumption that if Talisman’s contractual arguments fail, Nexxtep is entitled to damages according to the rules in trespass cases. There are aspects of the case that might be more apt to a conversion action, which Nexxtep pleaded in the alternative.

However, for present purposes there are no significant differences between the applicable damages principles for these causes of action, and as both parties have approached the case in trespass I will do the same. B. Measure of Damages

1. Legal Principles [ 71 ] Damages for a trespass or a conversion involving the wrongful taking of natural resources are assessed on either a restitutionary or a compensatory basis. [25] A restitutionary award is designed to ensure that a wrongdoer does not profit from its wrong, and thus operates to remove any benefit or gain from it, applying (according to how egregious the wrongdoer’s conduct has been) either a “mild” or “harsh” rule of damages.

The compensatory approach focuses instead on the Plaintiff, as is more consistent with other measures of damages in tort and contract, by seeking to place it in the position it would have been in but for the tort. [ 72 ] The authorities make it difficult to draw much distinction between the “mild” form of restitutionary damages and the compensatory measure of damages.

In general, it may be said that the courts will gravitate towards a restitutionary approach where there is something in the Defendant’s conduct making it proper not only to ensure compensation to the Plaintiff, but to strip away from the Defendant any possible reward of its wrongdoing. 2. Findings [ 73 ] To paraphrase Kent J. in Freyberg v.

Fletcher Challenge Oil & Gas Inc. , [26] to make an award that focuses on Talisman’s conduct (and thus determine damages based on the restitutionary measure) would require that I find conduct sufficiently reprehensible to ignore the possibility that Nexxtep would be over compensated. [ 74 ] The conduct of Talisman on which Nexxtep relies may be summarized as follows: a. After Nexxtep notified Talisman of the alleged trespass, Talisman said it would do a thorough engineering and geological review but within twenty-four hours dismissed the merits of Nexxtep’s claim.

It never produced the results of this analysis. b. Talisman pleaded that the Board’s designation order substantively proclaimed that the vertical well was producing from above the base of the Mannville zone; that the Board’s designations are binding on the parties and Nexxtep had not availed itself of the statutory procedures for challenging or amending the order; and that the action should therefore be dismissed as a collateral attack on the Board’s order.

Despite this pleading, Talisman then attempted to stay the Board proceedings commenced by Nexxtep, and later sought to appeal a Board order that ruled in Nexxtep’s favour. c. Omers continued the trespass after acquiring Talisman’s interest in the vertical well on February 1, 2007, despite having full knowledge of the circumstances surrounding the alleged trespass. These will be addressed in order. [ 75 ] In my view, the absence of information about Talisman’s initial review is of little moment.

The parties agreed to a consent order providing that they are bound, for purposes of this action, by the Board’s re-designation order. Further, the zone from which the vertical well produced is not the only or the determining issue for the parties’ rights in this action. As these reasons demonstrate, more fundamentally the question is whether the parties’ contract, properly understood or rectified, conveyed the vertical well’s producing zone to Nexxtep.

Finally, it appears from the submissions of both parties that the case management justice, Kenny J., rejected Nexxtep’s application to produce the requested information, upholding Talisman’s claim of privilege. (Nexxtep argues that her determination is not binding for trial purposes – a point that I cannot accept in the absence of a renewed application in different circumstances, or an appeal.) [ 76 ] Talisman’s plea regarding the Board’s order relates to

section 33 of the Oil and Gas Conservation Act , [27] which provides for the Board’s power to designate the area that is to be allocated to a well in connection with fixing allowable production. Subsection (2) provides that “if a dispute arises in the application of a pool or zone designation made by the Board, the dispute shall be referred to the Board and its decision on it is final.”

[ 77 ] Talisman’s strategy in its proceedings before the Board (and extensions thereof) and this action appears to have been two-fold. First, if it could succeed before the Board in resisting Nexxtep’s technical arguments that the vertical well should be designated as producing from below the base of the Mannville, then the facts would remain as understood by the parties at March 31, 2004 and no contractual issues would arise. Talisman’s position before the Board was unsuccessful, but that does not mean it had no merit.

The hearing was held in two parts, the Board took over six months to issue its decision, and there was a significant amount of expert testimony. Ultimately, the Board granted Nexxtep’s application for redesignation, but there was a split decision (two against one) in which the two geologist Board panel members disagreed about the technical evidence. Those circumstances do not allow me to conclude that Talisman’s conduct in contesting the redesignation application justifies application of a harsher rule of damages. [ 78 ] Finally, the allegations about Omers’ knowledge and conduct add nothing to the analysis.

Nexxtep is correct that it purchased with knowledge of the circumstances, but its role in these proceedings has been represented by Talisman. It can have no more culpability than Talisman. [ 79 ] I therefore find that Talisman’s conduct, even if its contractual position is not ultimately justified, does not require that damages be determined on anything other than an compensatory basis. It pursued a legal position that was consistent with both parties’ belief about ownership of production from the vertical well.

Its position had at least arguable merit when considered historically, technically and legally. [ 80 ] Therefore, in my view damages should be measured on a compensatory basis. C. Assessment of Damages 1. Period of Damages [ 81 ] To measure damages, it is first necessary to identify the date on which they begin. Nexxtep argues they began upon execution of the PSA, which was also its effective date. Talisman’s position is that damages could not begin until the Board issued its redesignation order on August 7, 2009, because such orders are not retroactive. [ 82 ] In my view, Nexxtep’s position is correct.

As Talisman necessarily recognizes in other aspects of its argument, the Board’s order (which went against it) is not determinative of the parties’ contractual rights. Talisman cannot have it both ways. If Talisman conveyed the vertical well’s producing zone to Nexxtep, then it lacked the ownership rights to continue producing. Its lack of knowledge, and the continued sanction of a Board designation that the well was producing from the Lower Mannville until August 7, 2009, goes only to the measure of damages the court should apply. In Costello v.

Calgary (City) (No. 2) [28] , Picard J.A. held that “a trespass occurs, regardless of consciousness of wrongdoing, if the Defendant intends to conduct itself in a certain manner and exercises its volition to do so.” [29] Liability does not depend on proof of some fault, other than volitional conduct, on the part of the Defendant. [ 83 ] Nexxtep did not make a claim for or adduce evidence in support of damages for the period after the vertical well was shut in by the Board. 2. Calculation of Damages (

a) General [ 84 ] The compensatory measure of damages requires the court to put Nexxtep in the position it would have enjoyed had Talisman not committed the act assumed to have been wrongful, namely production of gas through the vertical well from March 31, 2004, until it was shut in as a result of the Board’s order on August 11, 2009. Of course, the evidence cannot recreate what would have occurred had Talisman ceased production on March 31, 2004. All that can be done is to construct a reasonable means of compensating Nexxtep for the produced gas, less appropriate costs.

[ 85 ] Nexxtep’s approach to damages calculation is based on the opinions of Mr. Burke, who (as noted earlier) supported the view that Nexxtep did not require the existing wellbore or any associated gathering and processing facilities. This approach entails, I find, a significant risk that Nexxtep would be better off with a damages award than having kept the gas, because it incurs low capital costs for producing and bringing it to market. (

b) Net Operating Revenues [ 86 ] The proper approach to determining damages, using the compensable measure, requires me to first determine Nexxtep’s 34.426% share of net operating revenues (gross revenues, less royalties, operating expenses and processing operating expenses.) For that purpose, I accept Mr. White’s calculations. He is the only expert who made the necessary calculations for all of these deductions. (Mr. Burke acknowledged in his surrebuttal report that Mr.

White’s assumed charges for processing were reasonable if using a facility in which the gas owner did not share an interest.) The net revenues, before any inflationary adjustment, are $1,649,892.00 for the March 31, 2004 to August 11, 2009 period. (

c) Deductions for Capital [ 87 ] Mr. Burke’s initial report made no deductions for any capital costs. His surrebuttal report (considerably longer than his first report) proposed as an alternative the deduction of capital costs associated with producing the gas alongside the horizontal well or using the gas as part of a gas lift scheme to enhance recovery of sour gas from the deeper Pekisko formation. As I found earlier, these are speculative options which would face significant hurdles.

They are not, in my view, a reasonable basis on which to assess damages. [ 88 ] Alternatively, Nexxtep argues that if the vertical well must be used, the capital costs of that method of production (incurred as early as 1980) had been completely depreciated over the years and are not a relevant factor. Again, I find that is not a reasonable basis for calculating damages.

Furthermore, it seems very doubtful that the owners of the vertical well would agree to allow, or the Board would order, Nexxtep to have access without making any contribution to the facilities. [ 89 ] In my view, for assessment purposes, it must be assumed that the gas would have been produced through the vertical well.

As I found earlier, while it is difficult to predict what might have occurred through the negotiation and Board approval process, the evidence leads me to conclude that production would most likely occur through the vertical well (rather than the horizontal well) and the Board would allocate appropriate costs of the means of that production among all interested parties.

In fact, there is a reasonable argument that Nexxtep could not have produced at all for some time because of the complexity of negotiations and regulatory approvals caused by the sale of a resource without its means of production, but that does not change the fact that it is entitled to compensation if Talisman wrongfully produced the gas. [ 90 ] Unfortunately, Talisman’s position presents challenges of its own. It argues that Nexxtep must “pay” (by deduction against net production revenue) according to detailed calculations performed by Robert White of PricewaterhouseCoopers, under three scenarios.

Scenario one assumes that damages are recoverable only for the four-day period from the Board’s order on August 7, 2009 to the date of shut-in, August 11, 2009. Scenario two assumes that Nexxtep is entitled to damages for gas produced from April 2004 through shut-in, but only after a deduction for 100% of the capital costs of drilling its own vertical well. Both of those scenarios generate “damages” that are significantly negative in value, and in my view are not reasonable. First, I have already found that damages must be calculated from execution of the PSA.

Second, it is not reasonable to assume a separate vertical well into the same producing pool, nor would it be commercially reasonable even if feasible from technical and regulatory perspectives. [ 91 ] Mr. White’s scenario three comes closer to the outlines of a reasonable approach. It assumes that Nexxtep would be obligated to pay 34.426% (the interest it claims in the pool from which the vertical well produces) of the actual historical costs of the well, the assumed cost of the other facilities, as inflated to current values. However, when Mr.

White applies his preferred means of calculation to this scenario, he again generates largely negative damages. His approach was critiqued by Scott Lawritsen of Meyers Norris Penny in a surrebuttal report (he did not testify). In my view, there is considerable merit in Mr. Lawritsen’s criticism that Mr. White’s approach “effectively expenses the entire capital amount for a well that is 31 years old over a 65 month period (i.e. from March 2004 through August 2009).

This does not take into consideration the 24 years of existence of the well prior to March 31, 2004, nor the continued life expectancy of the well....” Mr. Lawritsen also critiqued Mr. White’s addition of a charge related to a return on capital. In my view, Mr. White’s approach is an overly aggressive application of capital to a short period of production, giving a result that is neither commercially sensible or reasonable for the purpose of calculating damages.

[ 92 ] If Nexxtep is entitled to damages, they must be calculated with a reasonable deduction for the use of the capital facilities for the wells, gathering and processing facilities. Unfortunately, the evidence does not allow me to make anything other than an arbitrary determination of what that deduction would be because of the widely divergent positions of the parties, and the understandably reduced amount of attention that was paid to this issue at trial.

It would be unfair to both parties for me to make an arbitrary determination on such an important factor in the calculation of damages. [ 93 ] Regretfully, therefore, if Nexxtep is entitled to damages, there must be a further hearing to enable the court to make an assessment. Hopefully, my findings and directions will expedite that process. (

d) Expenses of Board Hearing [ 94 ] Finally, Nexxtep requests compensation for the expenses of the Board hearing. The Board did not award costs of the hearing to either party, which is consistent with its governing legislation and rules of practice.

Nexxtep now seeks recovery of its Board hearing expenses as a form of damages. [ 95 ] Its claim must rest on the theory that if its contractual claim is ultimately proved true and therefore Talisman was a trespasser, the Board proceedings were a necessary step because the technical designation of the vertical well’s producing zone was an essential factual underpinning of the claim. In other words, Talisman’s position required Nexxtep to establish two fundamental elements to succeed in its action. First, the vertical well was producing from a pool below the base of the Mannville zone.

Second, the PSA, properly interpreted or rectified, conveyed that pool to Nexxtep. The first element was in dispute, because Talisman did not accept Nexxtep’s

interpretation of the data. Nexxtep’s position had to be proved, either in this action or before the Board (which Talisman accepted as determinative for purposes of this action). [ 96 ] There is merit in Nexxtep’s claim for compensation for Board proceedings, but in my view it should be considered as an element of litigation costs if Nexxtep ultimately succeeds in this action. To award compensation as damages would in effect give Nexxtep costs as between a solicitor and client for an important element of the overall claim.

Compensation for Board proceedings should be addressed in the context of an overall determination of costs entitlement and amount. Therefore, I do not include expenses of the Board proceedings in damages for provisional purposes. VII.

Summary and Relief [ 97 ] In brief, I find that Nexxtep’s action in trespass or conversion (or breach of contract, in the further alternative) against Talisman fails and its claim is dismissed. The parties have leave to speak to costs, if necessary. Heard on the 13, 14, 15, 16, 20, 21, 22 days of June, and October 13, 2011. Dated at the City of Calgary, Alberta this 24 th day of January, 2012.

G.H. Poelman J.C.Q.B.A. Appearances: G. Scott. Watson Gregory W. Jaycock Shannon L. Kelley Parlee McLaws LLP for the Plaintiff/Defendant by Counterclaim R.W. Block, Q.C./Michael A. Marion Borden Ladner Gervais LLP for the Defendants/Plaintiffs by Counterclaim [1] ATCO Electric Ltd v. Alberta (Energy and Utilities Board), 2004 ABCA 215, 361 A.R. 1 at para. 76. [2] [1971] 3 All E.R. 237 (H.L.) at 239 - 40. [3] [1976] 3 All E.R. 570 (H.L.) at 574. [4] 2000 ABCA 151, 255 A.R. 373 at para. 21. [5] Ibid. at para. 22. [6] Jumbo King Ltd. v.

Faithful Properties Ltd., [1999] HKCFAR 279; quoted by Conrad J.A. in Omers Energy Inc. v. Alberta(Energy Resources Conservation Board), 2011 ABCA 251 at para. 34. [7] Omers, supra, at para. 33. Suncor Inc. v. Norcen International Ltd. (1988), (AB KB), 89 A.R. 200. [8] Prenn v. Simmonds, supra, note 2 at 241. [9] Ibid. at 240. [10] Price Bros. & Co., Ltd. v. The King, (UK JCPC), [1926] 3 D.L.R. 642 (J.C.P.C.) at 644. [11] Ibid. [12] Augdome Corp. v. Gray, (SCC), [1975] 2 S.C.R. 354 at 368. [13] RSA 2000, c. O-6. [14] Supra note 4 at para. 20. [15] Langley Lo-Cost Builders Ltd. v. 474835 B.C.

Ltd., 2000 BCCA 365, 5 B.L.R. (3d) 31 at para. 29.

[16] Gainers, supra note 4 at para. 21. [17] Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd., 2010 ABCA 126, 477 A.R. 112 at para. 20; leave to appeal to SCCrefused, [2010], S.C.C.A. No. 234; Herron v. Hunting Chase Inc., 2003 ABCA 219, 330 A.R. 53 at para. 15; Gainers, supra note 4 atpara. 23. [18] Qualico Developments Ltd. v. Calgary (City) (1987), (AB KB), 81 A.R. 161 (Q.B.) at 168. [19] Scurry-Rainbow Oil Ltd. v. Kasha (1996), 1996 ABCA 206 , 184 A.R. 177 (C.A.) at para. 45; leave to appeal to SCCrefused, [1996] S.C.C.A. No. 391. [20] Performance Industries Ltd. v.

Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 at para. 31. [21] Ibid. [22] Ibid. at paras 41 - 43, and cases there cited. [23] Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Thomson Carswell, 2006) at 829 (footnote omitted). [24] Smith v. Hemeon, (NS SC), [1953] 4 D.L.R. 157 (N.S.S.C.); Barrett v. Krebs (1995), (ABKB), 164 A.R. 218 (Q.B.) at para. 26. affd. (1996), 1996 ABCA 41 , 181 A.R. 132 (C.A.). [25] Freyberg v. Fletcher Challenge Oil & Gas Inc., 2007 ABQB 353, 428 A.R. 102 at paras. 98 - 130; Montreal Trust Co. v.Williston Wildcatters Corp., 2004 SKCA 116, 254 Sask.

R. 38 at paras. 72 - 80 and paras. 108 - 110; leave to appeal to SCC dismissed[2004] S.C.C.A. No. 474. [26] Supra note 25 at para. 131. [27] RSA 2000, c. O-6. [28] 1997 ABCA 281, 209 A.R. 1, leave to appeal to SCC refused (1998), 212 A.R. 398 (S.C.C.). [29] Ibid. at 465.