Talisman Energy Inc. v. Esprit Exploration Ltd., 2013 ABQB 132

Court of Queen ’ s Bench of Alberta Citation: Talisman Energy Inc. v. Esprit Exploration Ltd., 2013 ABQB 132 Date: 20130228 Docket: 0701 06149, 1001 12780 Registry: Calgary

Between: Action No.: 0701 06149 Talisman Energy Inc. Plaintiff - and - Esprit Exploration Ltd. and Primewest Energy Inc. Defendants And Between: Action No.: 1001 12780 TAQA North Ltd. Plaintiff/Defendant by Counterclaim - and - Pengrowth Corporation and Talisman Energy Inc . Defendants - and - Talisman Energy Inc. Plaintiff by Counterclaim - and - Talisman Energy Inc. and Pengrowth Corporation Third Party Defendants

_______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Sal J. LoVecchio _______________________________________________________ Introduction [ 1 ] In 2000, Canadian 88 Energy Corp. was in serious financial difficulty. To help alleviate its difficulties, Canadian 88 decided to dispose of some of its non-core assets and retained Waterous Securities Inc. [1] to assist in this process.

Waterous, with the assistance of Canadian 88, prepared an Initial Memorandum [2] describing the oil and natural gas properties offered for sale and Waterous then circulated the IM to prospective purchasers. [ 2 ] About the same time, Talisman Energy Inc. had decided for its own strategic reasons that access to a facility colloquially known as the East Crossfield Gas Conditioning Plant [3] was necessary or a considerable volume of its natural gas reserves in the area could be shut in. [ 3 ] Canadian 88's interest in this facility was one of the non-core assets listed for sale.

To use the words of Pierre Leroux a senior Talisman executive, when he heard that an interest in this facility was available, “by all means get it for cheap, but get it” [4] . [ 4 ] Well, Talisman did get it and some 12 years later I am being asked to determine whether Talisman also got the interest of Canadian 88 in the sulphur stockpiles located at the facility.

Background The Parties to These Two Actions and The Proceedings [ 5 ] Talisman commenced Action No: 0701-06149 in 2007 when it filed a Statement of Claim seeking amongst other things a declaration that it did not acquire the interest of Canadian 88 in the sulphur stockpiles. The Defendants in this Action were Esprit Exploration Ltd. and Prime West Energy Inc.

Effective March 26, 2003, Canadian 88 had changed its name to Esprit and Prime West was the operator of the East Crossfield Gas Conditioning Plant at the time of the sale. [ 6 ] Esprit filed a Defence in the Action suggesting that it was entitled to immunity in respect of the claims advanced and, alternatively, that Talisman acquired the interest of Canadian 88 in the sulphur stockpiles. [ 7 ] Esprit is now Pengrowth Corporation by virtue of an amalgamation completed January 1, 2010 and it was Pengrowth that conducted the trial.

In this decision, I often say either Canadian 88, Esprit or Pengrowth did this or that at a certain time even though in a strict legal sense only Pengrowth subsists today. I do so for context. [ 8 ] On August 26, 2010, TAQA North Ltd. commenced Action No: 1001-12780. TAQA is the successor to Prime West by

virtue of a Plan of Arrangement completed on January 16, 2008 and a subsequent amalgamation effective January 1, 2009. In this Action, TAQA says it does not really matter to it which of Talisman or Pengrowth is responsible for the costs associated with the disputed interests but would one or the other of them pay.

As with Pengrowth, I use either TAQA or Pengrowth for context. [ 9 ] Pengrowth and Talisman have each defended this Action saying to TAQA don’t talk to me talk to the other. [ 10 ] By agreement among Talisman, Pengrowth and TAQA [5] , TAQA agreed to be bound by the declaration of ownership sought by Talisman in Action No: 0701-06149 and, as a consequence, TAQA did not actively participate in the trial. The Non-Core Asset Sale Process [ 11 ] While the process followed by Waterous has been utilized in the industry for some time, a brief review of it is necessary to illustrate how we got to where we are.

I also say this because one of the alternative submissions of Talisman raises the issue of less than full disclosure about the sulphur stockpiles. As noted, Waterous prepared with the assistance of Canadian 88 the IM. Waterous then sent the IM to a number of industry players who it thought might have an interest in the assets offered for sale. [ 12 ] The Table of Contents of the IM has a heading “Properties” and under this heading 7 properties are listed.

Number 3 is entitled the “EAST CROSSFIELD/LONE PINE CREEK PROPERTIES’. [ 13 ] As expected, the main body of the IM then goes on to provide additional information about this property [6] . Under the heading “Overview”, four paras. appear. The first notes Canadian 88's interest in four units. Two are of relevance : (1) the East Crossfield Unit - Crossfield Formation; and (2) the East Crossfield Unit - Elkton Formation. [ 14 ] The second para. notes that Canadian 88 interest in these units is 4.81915% in the East Crossfield Unit - Crossfield Formation and 1.374657% in the East Crossfield Unit - Elkton Formation.

It goes on to say that in conjunction with these unit interests “Canadian 88 has a 4.81915% position in the PrimeWest operated East Crossfield D-1 Gas Plant and a 1.374657% position in Elkton facility of this plant” [7] . As will become more significant later, the IM states that the East Crossfield Unit - Elkton Formation is depleted. [ 15 ] The 4.81915% interest is on occasion in certain of the materials filed as part of Exhibit 2 shown as 4.819 13 %. [Underlining added by me for emphasis] I have assumed the correct number is the 15 number. [ 16 ] Immediately following this Overview is a

Section entitled “Lands”. It runs for some 12 ps. and for most individuals reading it sleep would likely be induced. There is then a small

section on the “Production and Reserves” of the Lands. This is followed by a

section entitled “Facilities” and a repeat of the percentage interests noted above appears. [ 17 ] The next

section of importance is

Section 3.7 entitled “Marketing” [8] . This

section notes that the products from all four Units are marketed jointly. More specifically, the gas production is sold to TransCanada Energy, the propane and butane is sold to PrimeWest, the condensate to Coast Energy and the sulphur to Petrosol. There is a note that additional details will be provided in the Data Room. [ 18 ] For the reason already noted, Talisman emerged as an interested party for this property.

To gain additional information about this property, Talisman entered into a confidentiality agreement with Waterous and Talisman was then given access to the Data Room which contained a Data Book [9] . [ 19 ] The Data Book contained the procedure to be followed by prospective bidders [10] a draft form of no-binding letter of intent [11] and a draft form of Purchase and Sale Agreement [12] . While the procedure indicated that use of the forms provided for a non-binding letter of intent and a formal Agreement of Purchase and sale was preferred, it was not required.

[ 20 ] On August 2, 2012, Talisman sent to Waterous (but addressed to Canadian 88) a signed non-binding letter of intent. Talisman did not use the form provided in the Data Book. After a little back and forth about the price, whether or not Canadian 88 might retain a 1% interest in the facility and whether or not certain seismic, geological and geophysical reports were included, the non-binding letter of intent in the form proposed by Talisman was accepted by Canadian 88 [13] . [ 21 ] Talisman then commenced its due diligence.

As part of that process, Talisman asked a number of questions about the assets and Waterous and/or Canadian 88 provided answers. Talisman does not suggest that any inquiries it made were not adequately or truth fully answered. As I said earlier, Talisman does however suggest the disclosure by Canadian 88 in the IM and the Data Book about the interest of Canadian 88 in the sulphur stockpiles is inadequate. I will be returning to this point later. [ 22 ] While the due diligence process was underway, outside Counsel for Talisman namely, Ms.

Chrysten Perry of Macleod Dixon negotiated with Kevin Wolters for Canadian 88 a formal agreement of purchase and sale. As appears from the questioning “Read Ins” of Mr. Wolters [14] , he obtained an LLB from the University of British Columbia in 1987, he articled at Atkinson McMahon in Calgary, was an associate there for several months, was a legal editor at Carswell and eventually got into land consulting.

At the time this deal was done, he was a land consultant to Canadian 88 and was no longer on the list of practising lawyers in Alberta. [ 23 ] Neither side (and quite properly so) called them as witnesses to give evidence about their negotiations leading to the final wording of the formal agreement of purchase and sale as such evidence would have been inadmissible. [ 24 ] Talisman did not mark up the draft form of Purchase and Sale Agreement contained in the Data Book but rather, like the LOI, sent a different form. While there are many similarities, there are also some differences in the two documents.

What is before me is the formal Agreement of Purchase and Sale the parties signed which embodies the final agreed wording [15] . [ 25 ] The closing contemplated by the PSA occurred, Canadian 88 got some much needed cash and Talisman got what it wanted namely it became one of the “Owners” of the “Plant” and Talisman was now able to have its sour natural gas from natural gas fields other than those it acquired as part of the deal with Canadian 88 conditioned at the facility. [ 26 ] As I said, some 12 years later I have been asked to answer a number of questions arising out of these actions.

They appear in para. 2 of the Consent Order of this Court dated February 28, 2012 [16] . At this juncture, I intend to only repeat the first as the answer to the others largely flows from that given to the first. [ 27 ] The Question - “Did Talisman acquire Pengrowth’s interest in the East Crossfield sulphur stockpile or sulphur block (the “Disputed Interest”) pursuant to the August 1, 2000 Purchase and Sale Agreement entered into between Talisman and Pengrowth (the “PSA”) or otherwise?”.

While the question suggests it is possible for Talisman to have acquired the Disputed Interest “otherwise” than through the PSA that line of argument was not pursued other than indirectly as part of Pengrowth’s argument that Talisman on occasion acted like it had acquired the Disputed Interest. [ 28 ] To answer the question will require the Court to interpret the PSA and in so doing to determine whether or not the Disputed Interest was one of the “Assets” purchased. Before I do, some history of how the facility came to be, the agreements governing its operation and what it does may be useful.

Some History of the Facility and the Key Agreements and Documents [ 29 ] In the mid 60s, a number of companies had various oil and gas properties with established natural gas reserves in the East Crossfield area. In such circumstances, they often unitized their interests as this permitted a more orderly production of the reserves for their mutual benefit.

[ 30 ] They did just that by entering into an agreement entitled the Unit Agreement - East Crossfield Unit [17] . This agreement provided for the development of unitized zones and the recovery of unitized substances from certain defined areas. [ 31 ] Before natural gas (and in particular sour natural gas) may be marketed, it is necessary for it to be conditioned. Accordingly, the Unit Agreement participants entered into yet another agreement.

They entered into an agreement to construct, own, operate and maintain a gas conditioning plant. [ 32 ] The function of the plant was to condition natural gas for sale and in so doing to extract by-products from the natural gas. The agreement is Exhibit 2 Tab 6 and it will be referred to by me as the COO and the facility built is today colloquially known as the East Crossfield Gas Conditioning Plant. As noted, TAQA is now the Operator. [ 33 ] The COO contemplated the existence of four distinct facilities and they are each defined.

They are the Gathering System, the Liquid Facilities, the Plant and the Sulphur Facilities. Neither the Liquid Facilities nor the Gathering System is a part of this dispute. [ 34 ] The Plant is defined as those certain facilities constructed by the Owners of it (being the Elkton Owners and the D-1 Owners as defined in the COO) on a tract of land therein described for the purpose of conditioning Natural Gas.

Natural Gas means gas delivered to the intake manifold of the Plant for conditioning. [ 35 ] The Sulphur Facilities were defined as “those facilities utilized for the purpose of delivering Natural Gas from the D-1 (Crossfield) Formation or any other source in substitution therefor to the Plant and extracting handling and storing of Plant Products from the said Natural Gas”. As will be seen below, this definition was modified. [ 36 ] After conditioning, several products emerge.

They are defined as the Plant Products and they encompass “all components which may be extracted from the Natural Gas but not limited to natural gasoline, butanes, propane, sulphur or any mixture thereof, exclusive however of Residue Gas and those products lost or consumed as fuel in the operation of the Plant”. [ 37 ] It is not in doubt that for the purposes of my analysis Canadian 88 and subsequently Talisman would be a D-1 Owner under the COO. [ 38 ] Clause 6 of the COO provides that the Plant and the Sulphur Facilities will be owned by the Owners as tenants in common.

The undivided percentage interest of each Owner appears in a

schedule to the COO. It is

Schedule A and the Operator circulated from time to time revised

Schedule A’s as interests were assigned from the original group to others. On the other hand, the ownership of Plant Products, which as just noted includes produced sulphur, is dealt with differently. [ 39 ] More specifically, Clause 7(4) of the COO provides that Plant Products are owned “by each D-1 Owner in accordance with its tract participation as set forth from time to time in Exhibit “B” to the Unit Agreement – East Crossfield Unit.

Accordingly, since the COO was first executed, Facilities ownership and Plant Product ownership were referenced differently. [ 40 ] While the COO seems to contemplate the storage of Plant Products including sulphur at the Sulphur Facilities, it did not have any specific provisions governing a change in the ownership of stored sulphur and it did not provide any provisions to deal with costs relating to sulphur storage. [ 41 ] The Agreement has been amended from time to time and only a few of the amendments have any impact on the issues I must decide.

The first being the 1986 Amendment and the second being the proposed1994 Amendment. Why? [ 42 ] Michael Meyers an executive with TAQA gave evidence at the trial. His evidence was not the source of any real controversy and he provided some important historical context to these amendments.

[ 43 ] He indicated that by 1977 significant sulphur stockpiles were in existence, including sulphur owned by non-parties to the COO with no interest in the Plant or the Sulphur Facilities and that for a number of years activity at the sulphur stockpiles had ceased. Activity resumed in the mid 1980s.

However, as the sulphur stockpiles contained Plant Products belonging to both Owners and “Non- Owners”, some significant ownership, cost sharing and recording issues arose. [ 44 ] Most significantly for the purposes of this determination, the percentage ownership of an Owner of the Plant and the Sulphur Facilities and their ownership of sulphur stored could be and often were different for two obvious reasons.

Not all Owners stored sulphur and the sulphur stockpiles contained sulphur belonging to Non-Owners. [ 45 ] To attempt to manage these issues in an orderly fashion, the 1986 Amendment [18] to the COO established the Solid Sulphur Storage Procedure. This procedure is

Schedule “C” to the 1986 Amendment. By necessity, the parties to the SSSP included not only the Owners but also the Non-Owners who each had sulphur stored in a sulphur stockpile. [ 46 ] The SSSP has a number of

definitions.

For this determination, the following are of import for an understanding of what exactly is the Disputed Interest. [ 47 ] A “sulphur block” or “block” is defined as “that portion of the sulphur stockpile excluding the base pad which is comprised of sulphur in storage”. [ 48 ] A “sulphur stockpile” is defined as “the area, usually rectangular is shape, which is comprised of the base pad and the sulphur block, available for sulphur storage at the Sulphur Facilities”. [ 49 ] “Sulphur” is defined as “that portion of the Plant Products which is comprised of liquid sulphur but which is stored in solid form and liquid sulphur processed in other plants which is transported to the Sulphur Facilities...”. [ 50 ] The SSSP has a number of provisions and the most important for my analysis are: (

i) Clause 201 which states that the sulphur stored in the sulphur blocks will be owned by the party having right to the same; (ii) Clause 203 which states that the parties owning sulphur in a block may assign that interest [19] ; (iii) Clause 204 which provides for a survey reconciliation (from time to time) of the sulphur stored so as to enable the then parties to have a more precise reading of their particular volume of the commodity and percentage share of the costs; (iv) Clause 502 which suggests that sulphur stored at the stockpile is “inventory” and not a facility; and (

v) Subclause 7(6) which says that in the event of any conflict between the provisions of this amendment to the COO and the COO respecting the matters addressed in the amendment, the provisions of the amendment prevail. [ 51 ] Mr. Meyers also indicated that by 1992 several of the distinct stockpiles had been removed and the revenues paid to the owners of the sulphur. [ 52 ] In 1994, the Operator under the COO proposed a further amendment to the COO [20] . From the evidence I heard, it would appear this amendment was never formally adopted by the Owners.

[ 53 ] The 1994 Amendment appears to maintain many of the key concepts that were in the 1986 SSSP, including: (

i) Facilities ownership and sulphur ownership being distinct; (ii) a separate agreement involving both Owners of the Plant and Non-Owners for the management of the stockpiles; and (iii) a separate system for stockpile costs and ownership transfer. [ 54 ] It also proposed some differences. It removed any distinction between the “base pad” and “block” component of a stockpile and, therefore, removed the previous deeming of the base pad ownership. It also proposed that the definition of Sulphur Facilities in the COO be replaced.

The new Sulphur Facilities definition would make it clear that “sulphur stockpiles” are specifically excluded from what comprises the Sulphur Facilities [21] . [ 55 ] The TAQA Action refers to this proposed 1994 Amendment. The fact that it was never formally adopted by the Owners would appear to be of little consequence. I say appear as there is significant evidence that the 1994 Amendment was, in fact, adopted in 1995, and their has been no suggestion made by either side that it should not be treated as adopted. Also, Mr.

Meyers said TAQA has been fulfilling is functions as Operator in accordance with its dictates. [ 56 ] From the evidence of Mr. Meyers and some of the Agreed Exhibits, the remaining history of the sulphur stockpile emerges. In the mid-1990s, there was further pouring but from April 1998 until the stockpile was remelted after 2005, the stockpile was static. At the time of the PSA, the stockpile had been static for 2 years. [ 57 ] The Operator maintained records to attempt to track the volume and ownership of sulphur inventory in the stockpile. When these Operator records are compared to the various

Schedule A’s to the COO the following is confirmed as of August 1, 2000: (

i) there were parties owning an interest in the stockpiles that did not have an interest in the Plant and the Sulphur Facilities; (ii) there were parties having an interest in the Plant and the Sulphur Facilities who did not have an interest in the stockpiles; and (iii) for those who owned an interest in both the stockpiles and the Plant and the Sulphur Facilities, those percentage interests were not necessarily the same. [ 58 ] The evidence of Mr.

Meyers also suggests these inventory tracking records were not always provided to the owners of the stockpiles. [ 59 ] Given that it is thus likely Canadian 88 never received them, it is not surprising that Neil Dalby, who gave evidence on behalf of Talisman, indicated that these inventory tracking records of the Operator were not in the records Talisman received from Canadian 88. It may also be a reasonable inference that they were not in the Data Room. [ 60 ] As noted, Clause 203 of the SSSP (as amended in 1994/5) anticipates that an interest, which in this case would be the Disputed Interest, may be assigned.

Did the PSA cause that to happen? Discussion and Analysis Overview of Contractual

Interpretation Principles [ 61 ] Talisman and Pengrowth each agree that the goal of contractual

interpretation is to find the

interpretation which promotes or advances the true interest of the parties at the time the contract was made and that the PSA should be interpreted in accordance with well-established principles of contractual

interpretation. [ 62 ] In the written submission of Talisman a number of these principles were outlined. There is no need to list all of them or to quote from the long list of authorities they provide. A very succinct overview of these principles was written in the very recent decision by my brother Justice Poelman in the Nexxtep Resources case [22] being one of the authorities listed. By coincidence, Talisman was a Defendant. The decision of Justice Poelman was affirmed by our Court of Appeal in a decision released after this case was argued [23] .

[ 63 ] Justice Poelman had this to say on the subject: “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. 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. 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.

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.” [24] [ 64 ] I adopt the words of Justice Poelman. [ 65 ] As primacy is given to the words used by the parties, the starting point for my discussion and analysis must be the PSA. The PSA [ 66 ] The PSA is very clear as to the subject matter of the agreement.

Canadian 88 agreed to sell and Talisman agreed to purchase the “Assets”. As would be expected, Assets is a defined term in the PSA. The Assets Definition in the PSA [ 67 ] The definition reads: “Assets ” means the Petroleum and Natural Gas Rights, the Miscellaneous Interests and the Tangibles... [ 68 ] The Asset definition goes on to provide for exclusions should certain Right of First Refusal be exercised.

This exception from the definition which was not included above is irrelevant in this analysis. [ 69 ] The Petroleum and Natural Gas Rights, the Miscellaneous Interests and the Tangibles are also defined. [ 70 ] It has not been argued nor from my perspective could it be construed that the Disputed Interest is Petroleum and Natural Gas

Rights. That leaves the Miscellaneous Interests and the Tangibles. Let me deal with the Tangibles first. The Tangibles [ 71 ] The Tangibles are defined in Clause 1.1(kk) of the PSA. Three items are listed and I will come back to first. [ 72 ] Item (ii) is the Facilities Interest including the Unit Interest. Item (iii) is the Pipeline Interest. [ 73 ] The Facilities Interest, the Unit Interest and the Pipeline Interest are also defined terms in the PSA. Only the Facilities Interest is a possible source for inclusion of the Disputed Interest. [ 74 ] The Facilities Interest is defined by reference to the definition of “Facilities”. In the PSA, the Facilities are described in

Schedule B to the PSA.

Schedule B details amongst other facilities the “4.81915% interest of Canadian 88 in the East Crossfield Gas Conditioning Plant”. [ 75 ] No separate mention is made of the Sulphur Facilities even though for the purposes of the COO it is clear that the Plant does not include the Sulphur Facilities. [ 76 ] It is here that what Justice Poelman referred to as the factual matrix or the surrounding circumstances first becomes relevant. [ 77 ] Exhibit 2 Tab 7 is a collection of

Schedule “A’s from 1971 to 2012. As may be seen from a review of them, who had an interest, what they had an interest in and their percentage interest changed from time to time. There is no magic in that fact. What is of significance is a change in reporting that occurred in 1997. Pengrowth addressed this change in Argument. [ 78 ] More specifically, (and as appears from the Notice to Admit filed in these proceedings - see in particular para. 36) prior to January 1, 1997 Exhibit A of the COO (it should read

Schedule “A”) tabulated interests as follows: Elkton Owners, Liquids and Gathering System, D-1 Owners, Sulphur Facilities and East Crossfield Gas Conditioning Plant. However, effective in 1997, the Operator was led to understand that ownership flowing from the Elkton Unit was removed from the plant. As a result, from March 1997 onwards it was the understanding of the Operator that the ownership of the Plant and ownership of the Sulphur Facilities under the COO were common. [ 79 ] Pengrowth suggests this is significant and I agree it is.

By that I mean, what flows from this change is the belief on the part of the Operator that future transfers of an interest in the Plant by an Owner (read D-1 Owner) should also be seen as a transfer of their interest in the Sulphur Facilities even though, as just noted, in the COO the definition of the Plant excludes the Sulphur Facilities. [ 80 ] This means the reference to a transfer of the “4.81915% interest of Canadian 88 in the East Crossfield Gas Conditioning Plant” in the PSA should be understood as a transfer of the interest of Canadian 88 in both the Plant and the Sulphur Facilities.

As will be seen below, when Canadian 88 bought these interests from Amaco in 1995, the Plant and the Sulphur Facilities where listed separately even though the percentage interest of the vendor in each was the same. [ 81 ] Pengrowth wants me to take one additional step and infer that the Disputed Interest should also be understood as part of the Facilities definition. One of the reasons for so doing Pengrowth argues is the behaviour of Talisman referred to below.

Should I do so? [ 82 ] I am satisfied that from a business perspective, the subjective intention of Canadian 88 was to dispose of whatever it owned in the area. When one is on a non-core asset disposal mission, it simply does not make any sense to retain one of the by-products of your previous production. Mr. Moore said as much in his evidence. That is particularly so when that by-product has no residual value. If anything, at the time, it may have had a negative value. It is interesting to note that was also the assumption on which the Operator had

managed the records. [ 83 ] During his testimony, Mr. Meyers was shown a letter. It became Exhibit 4. The same letter is also Exhibit 2 Tab 78. The letter is dated December 22, 2004. The letter was sent by Primewest in its capacity as Operator of the Facilities.

The purpose of the letter was “to inform all Owners of Inventory in the East Crossfield 09-14-028-01W5 Sulphur Stockpile of errors in the billing of Stockpile Owner share of operating costs incurred since January 2000". [The emphasis is mine and the stockpile reference is simply a more technical description of the Disputed Interest] [ 84 ] Penwest went on to explain why the errors in billing had occurred and what they proposed as a solution. The explanation for the error in billing is significant. Penwest indicated that billing for stockpile costs based on “Plant Interests” had two fundamental errors.

First some stockpile owners were not plant owners and, perhaps more germane to my analysis, second, that after 1994, the stockpile interest of the Owners did not always align with their Plant Percentage Interest. The reason being certain of them removed inventory from the stockpile prior to 1994 (being the time when the SSSP was amended). As a consequence, most stockpile Owners had a stockpile percentage interest that was inevitably higher than their Plant Percentage Interest.

Canadian 88 was just such an Owner. [ 85 ] The precise stockpile percentage interest of Canadian 88 was never made clear to me including the “15" versus “13" discrepancy noted earlier. I do not want that statement to be seen as a criticism of the parties or their Counsel. The simple fact is the number moved around a little and some certainty in the precise number was part of what the Operator was trying to achieve. As will be seen, some of this uncertainty even extended into the records of Talisman.

I saw at least two numbers and as will be seen below 5.37167%, 6.78715% and 6.92537% appear in certain Talisman records. The point of significance in this analysis (without regard to whatever the precise number was for Canadian 88) was it different from and higher than Canadian 88's Plant Interest percentage of 4.81915%? The answer is clearly yes. [ 86 ] Furthermore, the SSSP, as amended, treats these two interests as distinct. [ 87 ] It is some of those problems that Pengrowth suggests should now be used against Talisman. In the cross of Mr. Luft and Mr.

Dalby, Pengrowth went to great length to establish that Talisman had in fact paid invoices for stockpile charges. That was not disputed. [ 88 ] Perhaps a little more problematic is the fact that when Talisman distributed some information about a potential sale of what they had acquired from Canadian 88 (along with the interest Talisman had acquired through the Highridge acquisition discussed in greater detail later in this decision) a few members of the Talisman team may have thought they had an interest in the stockpiles.

For this, reference should be made to some spreadsheets prepared by Talisman staff which are Exhibit 2 Tab 72. [ 89 ] What was equally clear from the responses of these two witnesses was, when they did a little more checking, Talisman believed they made those payments in error. As Mr. Dalby said, the accounting department and the land department were not always on the same page. He was equally adamant that the spreadsheet he sent out (Exhibit 2 Tab 72) which suggested Talisman had a 6.78715% stockpile interest at East Crossfield was a mistake.

While the actions of Talisman take one partly down an estoppel road, in the end, the words used in the PSA must govern. [ 90 ] When the forgoing is considered, I am satisfied that it is clear and unambiguous that this part of the Facilities definition in the PSA should be understood as referencing both the Plant and the Sulphur Facilities even though the COO says they are distinct. [ 91 ] However, the Plant and the Sulphur Facilities are, as their names would suggest, permanent structures in which conditioning occurs. Sulphur is a by-product of that process.

Storing it at the structure from which it emerged does not make it part of that structure particularly when the SSSP suggests it is inventory that is being stored in a distinct area away from (albeit adjacent to) the Plant and the Sulphur Facilities. [ 92 ] As a result, I do not find under this branch of the analysis that the Disputed Interest was intended to be encompassed by this part of the definition of the Facilities in the PSA. I must now return to Item (i).

[ 93 ] Item (

i) is “tangible depreciable property and assets which are situate in, on or about the Lands…and which are used in connection with production, gathering, processing, injection, removing, transmission or treatment of Petroleum Substances…but excluding equipment beyond the point of entry into a gathering system, plant or other facility”. [ 94 ] Talisman says the Disputed Interest does not fall within this part of the definition either.

Talisman gives four reasons for this conclusion. [ 95 ] First - Talisman says the Stockpile is not “depreciable property” because it does not decrease in value as it is used like machinery or equipment. They cite B.A. Garner, Black’s Law Dictionary, 8th ed. (St. Paul, MN: Thomson West, 2004) at p. 473, definition of “depreciable property to support this proposition. I agree. [ 96 ] Second - Talisman says to be a Tangible it must be situate in, on or about the Lands. Lands is a defined term in the PSA and it is limited to the geographic area associated with the Petroleum and Natural Gas Rights.

Again, I agree the Disputed Interest cannot be seen as situate “in” or “on” the Lands. That leaves “or about” the Lands. For me it would be a huge stretch to capture the Disputed Interest as a Tangible through the word “about”. [ 97 ] Third - Talisman says the Disputed Interest is beyond the point of entry into a gathering system, plant or other facility so by the very definition of a Tangible it must be excluded.

Again, I agree and finally. [ 98 ] Four - Talisman says the assets included in this definition contemplate that they are being used in connection with various operations. [ 99 ] In my view, this latter point would open the door for inclusion in this part of the Tangibles definition if the sulphur was used in any way as a consumable commodity in the operations contemplated by the COO.

Unfortunately for Pengrowth, there was no evidence that sulphur was used in any way as a consumable commodity in the operations contemplated by the COO. [ 100 ] Quite simply, the Disputed Interest is the stored form of one of the Plant Products which emerge from the conditioning of Natural Gas and it is being stored pending direction from its owner on what to do with it. [ 101 ] As regards the Tangibles definition, I find that there is no ambiguity in the words used nor were there any words used which would bring the Disputed Interest into the Tangibles part of the Assets definition.

The Miscellaneous Interests [ 102 ] I must now address whether or not the Disputed Interest should be seen as the subject matter of the Miscellaneous Interests definition. [ 103 ] Talisman and Pengrowth come at this question in quite different ways.

Before going into their submissions, it would be useful to see precisely what the PSA says on the subject. [ 104 ] In the PSA, Miscellaneous Interests are defined as “… the right, title, estate and interest of the Vendor in and to all property, assets and rights (other than Petroleum and Natural Gas Rights and the Tangibles) pertaining to, but only to the extent they pertain to , the Petroleum and Natural Gas Rights, the Tangibles or any lands with which the Lands have been pooled or unitized, including without limitation, the interest of the Vendor in the following…”.[Emphasis added by me]. [ 105 ] The definition then goes on to list a number of things.

What is important is that the list is not exhaustive as the list begins with the words “including, without limitation, the interest of the Vendor (read Canadian 88) in the following:...”.

[ 106 ] As the list is not exhaustive, Talisman initially focuses on the lead operative language which is more generic but in the same breath this generic language is also qualified by the expression “pertaining to, but only to the extent they pertain to”. [ 107 ] Talisman submits the Disputed Interest is not “pertaining to” and does not “pertain to” the PNG Rights and the Tangibles or any lands with which the Lands have been pooled or unitized. [ 108 ] The use of the words “pertaining to” have been held to mean that there must be a “relationship of dependence of some substance” [25] .

As additional authority for this proposition, Talisman also cites Atlas Industries Ltd. v. Minister of National Revenue [26] . [ 109 ] In the Atlas case, the Court had to interpret the words “incident to or pertains to an active business”.

The Court held that the operations of the business ought to have “some reliance on the property in the sense that recourse is had to it regularly or from time to time or that it exists as a back-up asset to be called on in support of those operations when the need arises”. [ 110 ] For me, the logic surrounding what additional items may be picked up by the pertaining to notion is not unlike the discussion just had above about the Facilities definition. Put in this context the question becomes - is there some reliance upon or necessity for sulphur in the ongoing operations?

If there is, I could see it as pertaining to something that is clearly part of the Assets definition. [ 111 ] No part of the operations relies on the Disputed Interest in the sense that the conditioning process requires the use of sulphur as a fuel, feedstock or otherwise. Sulphur emerges as a by-product of conditioning and is either sold at that time or stored pending further direction from its owner and as a result there is no such reliance or necessity. [ 112 ] However, Pengrowth focuses on a different part of the Miscellaneous Interests definition. [ 113 ] Subclause (

i) of the Miscellaneous Interests definition lists a number of agreements. One of them is the COO. By acquiring the entire interest of Canadian 88 in the COO and later being novated into the COO, Pengrowth says Talisman was able too become an Owner under the COO and replace Canadian 88.

That is true as by definition in the COO “any party to it” is an Owner and there is little doubt the assignment of the COO by Canadian 88 to Talisman coupled with a novation made Talisman a party to the COO. [ 114 ] Pengrowth then says by acquiring the entire interest of Canadian 88 in the COO and being novated into the COO, thereby becoming an Owner, Talisman assumed responsibility for all future costs relating to the Plant and the Sulphur Interest . [Emphasis added by me] I added the emphasis as the written materials of Pengrowth assigned a meaning to those terms that was not precisely the same as those used by Talisman in its materials or me in this decision. [ 115 ] By that I mean, the “Plant” in the Pengrowth submissions is used in the same colloquial way I used it in my opening and not the technical one given in the COO.

By the “Sulphur Interest” Pengrowth is actually referring to the sulphur stockpiles or, in the vernacular of this determination, the Disputed Interest. While nothing turns on this slightly different use of terminology, it is important for the reader to understand where this leads us in the submissions of Pengrowth particularly as regards the submissions on the “Sulphur Interest”. [ 116 ]

Article 9 of the PSA contains a “General Indemnity” and an “Environmental Indemnity”. A detailed analysis of these provisions is not necessary. They are very broad and I suspect they were intended to be so. They reinforce the point Pengrowth is making in relation to the assumption of responsibility by Talisman of the obligations of Canadian 88 after the “Effective Date” (being 8:00 am Calgary time on August 1, 2000). [ 117 ] Talisman has not suggested that it did not take on responsibility in place of Canadian 88 for the “Plant”.

Acquiring the Disputed Interest by an assignment of the COO and thereby taking on responsibility for costs associated with the Disputed Interest after the Effective Date is a different matter.

[ 118 ] So the question becomes twofold. Does the assignment and novation of the COO without more in and of itself operate to convey the Disputed Interest? Or, is it possible to argue Talisman is somehow responsible to indemnify Canadian 88 for its obligations is respect of the Disputed Interest through the operation of the indemnity provisions in the PSA even if Talisman did not acquire it? [ 119 ] Let me deal with the second question first. [ 120 ] The indemnities in the PSA are clear and unambiguous. They are only in relation to the Assets.

So, if the Disputed Interest is not an Asset, the indemnity provisions cannot help Pengrowth. By the same token, I am at a loss to understand how an assumption of the COO should be seen as requiring Talisman to assume responsibility for the costs associated with the storage of an asset retained by the vendor. [ 121 ] This is simply not logical. Part of the Agreed Exhibits are copies of some notes kept by Mr. Kyllo leading up to the purchase of the Assets by his employer Talisman [27] . Mr. Kyllo referred to these notes in response to questions from each side.

From these questions and the notes, it would appear that at one time in the negotiations Canadian 88 considered retaining a 1% interest in the what was being offered for sale. That did not happen. [ 122 ] Suppose it had. Would Pengrowth now be saying to bad for you. As you are now an Owner, by novation you are now responsible for all of my obligations under the COO including those associated with the retained interest? I raise this hypothetical only to reemphasize the point that the assumption of obligations by becoming a party to an agreement must be put in context. Like the indemnities.

You give them because you are taking over the asset and the only responsibilities you assume are those associated with the assets acquired. Which brings me to the first point and the submissions of Talisman. [ 123 ] Talisman accepts that the COO, as a contract, is included as a specifically listed Miscellaneous Interest. [ 124 ] However, Talisman also says the inclusion of this contract as a Miscellaneous Interest does not mean you eliminate the distinction between benefits and burdens nor the necessity to treat them distinctly. I would have phrased the issue differently.

I would have said documents by which you convey ownership and agreements by which your interest in them may be managed should not be merged but remain distinct. [ 125 ] At the closing contemplated by the PSA, Talisman and Canadian 88 executed a number of agreements and delivered a number of documents. One of the agreements was an Assignment Agreement for the COO [28] .

Pengrowth says in their materials it was an assignment of both the COO and the SSSP. [ 126 ] In the first “WHEREAS” of the Assignment Agreement, the Assignor (being Canadian 88) states that it is a party to an agreement including all amendments thereto. That agreement is the COO and, as the SSSP was created by way of amendment to the COO, it should also be seen as included in the assignment.

The second “WHEREAS” states that Assignor has agreed to assign and that the Assignee (being Talisman) has agreed to accept such assignment. [ 127 ] In the operative provisions of the Assignment, the first three must be considered. [ 128 ] Clause 1 assigns the COO. Clause 2 is an acceptance of the assignment of the COO and a recognition by the Assignee that after the Effective Date, the Assignee is taking the place of the Assignor as regards the Assignors responsibilities under the COO. Clause 3 is a further assurances provision.

It obligates the Assignor to from time to time do such further acts as may be necessary for the “purpose of vesting in the Assignee the Assigned Interest hereby assigned and conveyed”. The “Assigned Interest” as per

Schedule “A” to the Assignment Agreement is - “Vendor’s entire interest : 4.81915% plant interest”. No specific mention is made of the Disputed Interest. [ 129 ] They also entered into a Conveyance Agreement [29] . The form of Conveyance Agreement they were to enter into was set forth in

Schedule “J” to the PSA. This agreement does precisely what one might expect. It is the instrument by which title to the Assets (as defined in the PSA) is conveyed by Canadian 88 to Talisman. How does this all tie together?

[ 130 ] Clause 21 of the COO has a few rules about the assignment of interests. It says that the interest of any Owner “to this Agreement (being a reference to the COO), in and to the Plant , the Liquids Facilities, the Gathering Facilities and the Sulphur Facilities may be assigned in whole or in part, provided however that said interest is assigned with the corresponding working interest in the East Crossfield Unit”.

I added the emphasis to highlight the point the COO treats an assignments of an interest in the COO and the assignment of an interests the facilities as two distinct matters being consistent with the distinction I made above. [ 131 ] Clause 21 has been part of the COO since its inception, The SSSP, as amended, has not. As previously noted, it only came into effect in 1986 and it did not amend Clause 21 of the COO.

Furthermore, no provision of the SSSP requires assignments of interests in sulphur, sulphur stockpiles or sulphur blocks to be made along with the disposition of any other interests a party to the SSSP may have in the Plant, the Liquids Facilities, the Gathering Facilities and the Sulphur Facilities. This means sulphur, sulphur stockpile and sulphur block interests may or may not be assigned as part of more encompassing transaction.

It will of course depend on the circumstances and that is why we are here. [ 132 ] The lack of a requirement to link sulphur, sulphur stockpiles and sulphur blocks to the other interests is understandable. The activities of the Owners up to the conditioning stage are all linked. [ 133 ] The Owners trace their lineage to the Unit. All of the parties to the SSSP may or may not be part of that lineage. Some were not and there was a cost for being an outsider. The Non-Owners did not have the same access as Owners and they paid a premium to have their Natural Gas conditioned.

That was why Talisman wanted to become and Owner. [ 134 ] In this case, the following is clear. Talisman acquired the Plant (which as carefully argued by Pengrowth must now be seen as synonymous with the Sulphur Facilities), the Gathering Facilities and, to use the vernacular of the COO, the corresponding working interest in the East Crossfield Unit [30] . As Talisman acquired these interests, Clause 21(2) of the COO comes into play. [ 135 ] Clause 21(2) says that any assignment of the interests noted above is not binding until: (

i) the successor in title to the vending Owner executes and delivers to the Operator a counterpart of the COO (Clause 21(2)(a)); and (ii) a “certified copy of the instrument evidencing” a change in Plant ownership is delivered to the Operator (Clause 21(b)). After these two things are done, the Operator is obligated to update

Schedule A to the COO (Clause 21(c)). In this way (through

Schedule

A) the COO will always speak positively and in the present tense to identify the Owners of the Plant/Sulphur Facilities and their percentage interest in those facilities. What about the sulphur stockpiles? [ 136 ] They are by definition not part of the Plant or the Sulphur Facilities as the COO expressly provides that the sulphur extracted as a by-product on conditioning is one of the Plant Products which is owned by the parties whose natural gas was conditioned.

If there was doubt about their distinct identity, that doubt was removed by the amendment to the Sulphur Facilities definition contained in the 1995 amendment to the COO and SSSP. [ 137 ] Furthermore, whether or not it is stored depends on the directions given by the party who owns it to the Operator.

If it is to be stored, its storage, as part of a sulphur stockpile or block, is governed by the SSSP. [ 138 ] One of the provisions of 1986 Amendment to the COO (which, as noted, gave rise to the SSSP), detailed who were the owners and what their percentage interest was in the base pads as at a certain point in time. They were set out in

Schedule B. Canadian 88 was not an Owner at that time and this provision expressly did not address ownership in a block or stockpile on top of the base pads (Clause 201). [ 139 ] The 1995 amendment to the SSSP removed the deemed ownership of the base pads. All ownership of the stockpiles was based on whomever had the rights to the sulphur (Clause 201), again simply confirming that whomever owned the sulphur that was poured onto a stockpile owned an interest in the total stockpile. The exact percentage interest was based on volumes.

[ 140 ] Neither the SSSP (or the COO) included any provisions for the updating of the base pad or block ownership over time through the updating and inserting of a new

Schedule B or any other schedule. This is a critical difference between the ownership interests in the Plant as set out in

Schedule A to the COO and ownership interests in the sulphur stockpiles. This means that even if the SSSP is considered part of the COO, it does not identify the present owners of the sulphur stockpiles. [ 141 ] Talisman suggests there are many other provisions within the PSA which confirm Talisman’s

interpretation. [ 142 ] First - there is no specific reference to them anywhere in the PSA and the industry norm at the time was that if a sulphur stockpile was included in a transaction, it would be expressly addressed. I agree there was no specific reference in the PSA.

I am not sure I agree with the suggestion there was an industry norm at the time on how they should be dealt with but more on that below. [ 143 ] Second - there is no evidence of consents being sought relating to the Disputed Interest (including under Clause 203 of the SSSP) and, when the notice of the transaction was given to the Operator, there is no reference to Disputed Interest being included in the transaction in the documents received by Talisman from Canadian 88. [ 144 ] Finally - there is no reference to the Disputed Interest in the Interim or Final Statement of Adjustments [31] .

This is all true but not necessarily fatal to the position of Pengrowth. While the notices could all be given later, the fact none were contemplated by the closing conditions in the PSA (unlike the notices for the Plant and the COO required by Clause 21(2) of the COO) is consistent with the notion the Disputed Interest was not intended to be included in the transaction. [ 145 ] Each side sought recognition of a witness as an expert. Talisman introduced John Mannix, B.A. (Geography) and Pengrowth introduced Bruce C. Gordon, P. Land.

Both were recognized as being qualified to give evidence on the custom, norm and practice of the oil and gas industry in the context of acquisitions and divestitures. In the case of Mr. Gordon, Pengrowth sought a small refinement to his qualification. As Mr. Gordon had been part of a number of transactions in which Waterous had been involved, Pengrowth suggested he brought a slightly greater familiarity to this situation. In my view, that would go more to weight than qualification but nothing really turns on this small point. [ 146 ] Unfortunately, these experts were not really helpful.

Their evidence was directed to the practice in transactions of this nature and more specifically to (

i) whether or not a purchase and sale agreement would normally use either words of specific inclusion or exclusion when dealing with sulphur and (ii) would one expect in a sale of this type would sulphur normally be include in it. [ 147 ] When all is said and done they both ultimately said it depends on what the PSA says and that is what I must decide. [ 148 ] When all of this is considered, Talisman has it right. [ 149 ] Clause 21 of the COO clearly treats an assignment of the COO and an assignment of an interest in the facilities as distinct and quite logically so.

The COO was entered into by the Owners and only Owners are parties to it. You do not become an Owner of the facilities it governs the operation of by signing it but rather because you acquired an interest in those facilities beforehand. It is this fact which requires a purchaser to become a party to it.

When put in this context, the assignment to and novation into the COO by Talisman should not be understood as a transfer of the Disputed Interest by Canadian 88 to Talisman. [ 150 ] Rather, by becoming a party to the COO, the Owner is simply satisfying the condition in the COO that it do so because it had been acquired, in our case through the Conveyance, an interest in the subject matter of Clause 21 of the COO. [ 151 ] As regards the Miscellaneous Interest definition, I find that there is no ambiguity in the words used nor were there any words used which would bring the Disputed Interest into the Miscellaneous Interests part of the Assets definition.

The Elephant in the Room

[ 152 ] There is another way to get at the same conclusion but it involves an evidentiary question. [ 153 ] As already noted, Exhibit 2 Tab 11 is the Data Book that prospective purchasers were given access to as part of the bid procedure. Exhibit 2 Tab 11 - ps. 242 to 266 is the form of a Purchase and Sale Agreement proposed by Canadian 88. The question - may I refer to this document in interpreting the PSA? [ 154 ] Talisman says I may and Pengrowth says I may not. They both agree, I may refer to it if the PSA is ambiguous on the question of inclusion of the sulphur stockpiles in the assets acquired by Talisman.

We have already been down that road as I have found no ambiguity in the PSA on this issue. [ 155 ] Talisman did not use this form. Instead, like the LOI, Talisman drafted a different form and sent it to Canadian 88. This was not contrary to the bid procedure.

As noted, the bid procedure anticipates that this might happen but it warned a prospective purchaser that such a departure may put their bid in a slightly less favourable light. [ 156 ] So the evidentiary question becomes, to use the words of Justice Poelman, is the Draft PSA contained in the Data Book part of the “factual matrix” or “surrounding circumstances” and thus available to me 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 or perhaps in this case words they did not use. [ 157 ] In the draft Purchase and Sale Agreement contained in the Data Book, ”Miscellaneous Interests” is a defined term. Just as in the PSA it enumerates a number of items and as one might expect they are to a large extent similar to those which appear in the PSA. There is one very significant difference. [ 158 ] The Miscellaneous Interests definition in the draft is

Article 1.01 - i). Sub (iv) of this definition reads “all Petroleum Substances produced beyond the wellhead but not sold and in storage or tanks at the Effective Date”. Petroleum Substances is also defined. The definition is found in

Article 1.01 -

m) and sulphur is a specifically enumerated Petroleum Substance. [ 159 ] Had the words in

Article 1.01 - i) (iv) of the draft PSA made their way into the PSA, there is little doubt in my mind that Talisman would now be the proud owner of the Disputed Interests. But the words do not appear in the PSA. Should this fact be considered by me? To answer that question I intend to return to the words of Justice Poelman. [ 160 ] In paras.19 to 23 of his Nexxtep decision he said: “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.” [32] 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.” [33] 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.

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.” [34] 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.” [35] 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. [36] 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.” [37] The authorities, hold, however, that evidence of the factual matrix should not include the parties’ negotiations. [38] 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. [39] 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. 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.” [40] 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. [41] [ 161 ] When

Article 1.01- i)(iv) of the draft is considered, there is little doubt Canadian 88 knew how to ensure that the Disputed Interests were part of the Assets sold to Talisman. [ 162 ] There is equally little doubt Talisman knew it was going to be in the sulphur business as a result of buying the Assets. Darwin Luft gave evidence on this point on behalf of Talisman. At the relevant time, he was the Manager - Asset Realization for Talisman and as such had the primary corporate responsibility for an acquisition like this. [ 163 ] His evidence was not controversial. He knew there were sulphur stockpiles at the site.

He also knew that sulphur would be a by- product of production and that Talisman would have to address this issue. His solution was quite straight forward. Talisman would sell all sulphur generated from future production at the time it was produced so it would never be necessary for Talisman to store sulphur in solid form as part of a block. [ 164 ] He also acknowledged that Talisman also had a very small indirect interest in the sulphur stockpiles at the Plant. In 1998, Talisman acquired a company named Highridge Exploration Ltd. This company had a 0.05066% interest in the sulphur stockpiles at the

Plant. When Talisman sold the interest in the Plant it acquired from Canadian 88 in 2006, it also sold this interest. [ 165 ] The practice of selling sulphur at the time of production was also known to Canadian 88. In fact, Canadian 88 engaged in such a practice. As noted, it was specifically mentioned in the Marketing

section of the Data Book and evidence of the Petrosul arrangement for the purchase of East Crossfield sulphur from Canadian 88 is Exhibit 2 Tab 38. [ 166 ] But perhaps more troublesome to the Pengrowth position is Exhibit 2 Tab 27. [ 167 ] Canadian 88 acquired the Assets in 1997. Exhibit 2 Tab 27 is a copy of the Letter of Intent for that transaction. It is dated April 25, 1997 and it is signed by Mr. Moore. The lead para. of this LOI says that Canadian 88 is interested in acquiring “Amaco’s residual interests in the East Crossfield Conditioning Plant (“Plant”), Sulphur Handling Facilities and Sulphur Inventory which are more particularly set out in

Schedule “A” attached to this letter”. [Emphasis added by me] [ 168 ] When the reader goes to

Schedule “A”, you find the following: ASSETS Plant Interest D-1 Owners Sufur (sic) Facilities 34.58034% East Crossfield Conditioning Plant 34.58034% East Crossfield Sulphur Base Pad and Waste Sulphur Allocation34.58034% Other Interests Approximate East Crossfield Plant Sulphur Inventory 100,000 tonnes [ 169 ] Given what Canadian 88 indicated they were interested in acquiring and how they described it, I am not surprised the Draft PSA defined the Miscellaneous Interests the way it did. [ 170 ] No objection was raised by Pengrowth when Exhibit 2 Tab 27 was put to Mr. Moore.

I suspect that was not an oversight on the part of Counsel for Pengrowth. This LOI was not in any way part of the Talisman/Canadian 88 PSA process. As such, it is part of the factual matrix known to Canadian 88 at the time Canadian 88 entered into the PSA. So it must be seen in a different light than the draft Purchase and Sale Agreement. When that light is cast upon the PSA, a dark shadow is cast upon the position of Pengrowth. [ 171 ] There is more. The Data Book contains an Engineering Report of McDaniel & Associates Consultants Ltd [42] .

It is a valuation based on the price assumptions contained in it of the assets being sold. Sulphur is one of the items valued. That does not really help Pengrowth as it is only sulphur associated with future production. The existing sulphur stockpile interest of Canadian 88 is not mentioned or valued in any way. [ 172 ] Talisman gave the McDaniel Report to its Engineering Consultants - Ashton Jenkins Mann and asked them for their assessment of the value of the assets. Laurel L. Schmidt P. Geol. gave evidence at the trial. She did all of the hard work.

As part of her work, she used the McDaniel Report as a building block, she reviewed the IM, the Data Book and the Land Records provided and then prepared a report for Talisman [43] .

[ 173 ] In the Ashton Report, she did not assign any value to the interest of Canadian 88 in the sulphur stockpile as she did not even know it had one. She also indicated that had she known there was one, it would have been addressed in a separate part of the evaluation and there would have been a plan for how to deal with it. Like the McDaniel Report, the Ashton Report values sulphur.

Again, that valuation addresses only the sulphur by-product associated with future production. [ 174 ] I reached my conclusions under the Tangibles and the Miscellaneous Interests discussion without reference to the Draft PSA, Exhibit 2 Tab 27, the McDaniel Report or the Ashton Report.

That being said, I am satisfied that Exhibit 2 Tab 27, the McDaniel Report and the Ashton Report are part of the factual matrix or surrounding circumstances and that the Draft PSA should also be considered a part of the factual matrix or surrounding circumstances. [ 175 ] When they are added to the equation, the position of Talisman is even stronger. In deciding to include the Draft PSA as part of the evidence considered, I want to make it clear that my conclusions would be the same even if my decision to include it was wrong.

The Remaining Issues [ 176 ] Each of Talisman and Pengrowth have raises some additional issues. I intend to address those raised by Pengrowth first. The Limitations Submission [ 177 ] Pengrowth argues that the claim of Talisman is not in essence declaratory in nature but rather remedial. Pengrowth takes this position as it says a declaratory order will be “hollow” to Talisman without further legal execution or intervention. More specifically, Pengrowth says Talisman requires an additional order that Pengrowth is liable for all amounts charged to Talisman in respect of the Disputed Interest.

This has two aspects - amounts charged by TAQA which have already been paid and amounts claimed by TAQA for past expenses which have not been paid. There is a third aspect and that relates to future amounts due. [ 178 ] Talisman says the Esprit Action is clear in that it only seeks declarations against Esprit and does not seek to recover any money from Esprit. That is true in relation to Action No. 0701-06149.

The water gets a little more cloudy when TAQA Action No. 1001-12780 becomes part of the equation. [ 179 ] In its defence to the TAQA Action, Talisman does not seek the recovery of any money from TAQA but rather it seeks a declaration that it did not buy the Disputed Interest and as a result it is not liable for any costs associated with the Disputed Interest. In the alternative, Talisman also raises an estoppel by misrepresentation argument and a limitation argument. In each case they are directed at TAQA and not Esprit.

The only money reference in the defence to the TAQA Action come as a final alternative defence. Talisman says in the event they were to found to be liable for any costs (and Talisman acknowledges they have already paid some) they want a credit recognized to that extent. Unfortunately, that is not the end of the matter. [ 180 ] Talisman made a Counterclaim in the TAQA Action and in its Counterclaim it seeks recovery of $128,531.51 plus interest from TAQA which it says it paid in error. The TAQA Action named both Talisman and Pengrowth has Defendants.

Each of Talisman and Pengrowth made a Third Party Claim against the other. Talisman in its Defence to the Third Party Claim of Pengrowth and its own Third Party Claim against Pengrowth says to Pengrowth if we have to pay TAQA we want to recover that amount from you. [ 181 ] As noted, Exhibit 2 Tab 1 is a Consent Order.

Para. 1 of the Order says that the two Actions are to be tried at the same time and para. 2 says that certain preliminary issues will be heard first by way of a trial. [ 182 ] Again as noted, the first such preliminary issue to be decided is purely declaratory in nature, namely did Talisman acquire the Disputed Interest. Having consented to this way of proceeding, it seems to me disingenuous on the part of Pengrowth to now say Talisman is statute barred from seeking that declaration because there may be a remedial aspect to this litigation down the road.

[ 183 ] In the alternative, Talisman also says even if this claim is seen as remedial in nature the earliest time a limitation period relating to the Esprit Action could have commenced running was September 18, 2006 as this was the first time that Esprit advised Talisman that it disagreed with the position of Talisman that it did not acquire an interest in the sulphur stockpiles in the Canadian 88 transaction. [ 184 ] The only evidence on this timing was given by Mr. Dalby and it was unchallenged.

As this was only evidence on the first time Talisman knew or ought to have known that it had any claim against Esprit or that a proceeding of some nature might be warranted, the claim would not be statute barred in any event. [ 185 ] The limitation argument of Pengrowth is rejected. The Misrepresentation Submission [ 186 ] As an alternative, Talisman submits that were it found to have acquired the Disputed Interest that Pengrowth is nonetheless liable to Talisman for misrepresentation. With respect, I also find this submission rather disingenuous as well.

Why? [ 187 ] Talisman wants me to rule that the Draft PSA should be considered by me in interpreting the PSA. As already noted, one of those provisions, if included, would have been fatal to their position. That seems to me to be a heads I win tails you lose argument. [ 188 ] In addition, Talisman is not a neophyte in the industry. [ 189 ] Talisman knew all about sulphur as a by-product from production of Petroleum Substances from that area. Mr Luft was very clear on the subject.

He also confirmed in cross-examination that Talisman had an experienced due diligence team and there was no suggestion by any Talisman witness that they were denied access to any information as part of their due diligence process. If that were not enough, Talisman indirectly through Highridge was an Owner so if they did not have actual knowledge they ought to have known about the sulphur stockpiles or to use the words of Mr. Gordon at least have asked a few more questions. [ 190 ] The misrepresentation argument of Talisman is rejected.

Conclusion [ 191 ] As a result of the forgoing, my answer to the preliminary issues set out in the Consent Order would be as follows: Issue 1 - Did Talisman acquire the Disputed Interest pursuant to the PSA? Answer - Talisman did not acquire the Disputed Interest pursuant to the PSA. Issue 2 - If the Disputed Interest was not purchased by Talisman: (

i) is Talisman nonetheless liable to pay all or some of the net costs associated with the Disputed Interest as a result of the Environmental Indemnity contained in the PSA? Answer - As between Talisman and Pengrowth, Talisman is not liable to pay all or some of the net costs associated with the Disputed

Interest as a result of the Environmental Indemnity contained in the PSA. (ii) is Talisman nonetheless liable to pay all or some of the net costs associated with the Disputed Interest pursuant to the October 26, 2000 Assignment Agreement between Pengrowth and Talisman? Answer - As between Talisman and Pengrowth, Talisman is not liable to pay all or some of the net costs associated with the Disputed Interest pursuant to the October 26, 2000 Assignment Agreement between Pengrowth and Talisman. (iii) In view of my answers under (

i) and (ii), this question need not be answered. That being said, if I were wrong in my answers to those questions and Talisman was required to bear the costs associated with its storage, it would only be fair for Talisman to receive the benefit of any revenue associated with the disposition the Disputed Interest. Issue 3 - If the Disputed Interest was purchased by Talisman is Pengrowth liable Talisman for some or all of the costs or expenses associated with the Disputed Interest pursuant to breach of representations and warranties in the PSA, representation made at the time of the PSA or otherwise?

Answer - In view of my answer under Issue 1, this question need not be answered. That being said, if I were wrong in my answer to that question, there was no misrepresentation made by Canadian 88 either in the PSA or beforehand and for that reason or otherwise Pengrowth would not be liable to Talisman for some or all of the costs or expenses associated with the Disputed Interest. Issue 4 - Are any of the claims of Talisman or Pengrowth against each other statute barred? As noted above, Talisman in its Counterclaim in the TAQA Action seeks recovery of an amount it says it paid in error to the Operator.

In answering Issue 4, I want it to be clear that I am expressing no view on the right of Talisman to recover that amount from TAQA or the right of Talisman to recover that amount from Pengrowth were it unsuccessful in the recovery that amount from TAQA. Answer - The right of Talisman to seek the declarations sought in the Action No. 0701 06149 is not statute barred. [ 192 ] In view of my answer to Issue 4, as between Talisman and Pengrowth, it follows that Pengrowth will be required to have a few conversations with TAQA about outstanding billings for sulphur storage.

By necessity, Talisman will have to be part of that discussion as they appear to have some cash on the table that they say they paid in error. Costs [ 193 ] The issue of costs was not argued and I leave it to Talisman and Pengrowth whether or not they wish me to address this issue some time in the future. Heard on the 14 th to the 19th and the 21 to the 24 th days of January, 2013. Dated at the City of Calgary, Alberta this 28 th day of February, 2013.

Sal J. LoVecchio J.C.Q.B.A. Appearances: Michael A. Marion / Chidinma B. Thompson Borden, Ladner Gervais LLP for Talisman Energy Inc. Michael P. Theroux / Alison Gray / Laura M. Gill Bennett Jones LLP for Pengrowth Corporation Michael D.

Aasen Bryan and Company Calgary LLP for TAQA North Ltd. [1] Waterous & Co. appears in the header of the introductory letter but Waterous Securities Inc. is mentioned in the body of the letter as the exclusive agent retained by Canadian 88. [2] Exhibit 2 Tab 10. [3] I say colloquially as what constitutes the “ Plant ” will be the object of a very specific definition in the agreement governing the operations of the plant. [4] Exhibit 2 Tab 43. [5] Exhibit 2 Tab 2. [6] Exhibit 2 Tab 10 - ps. 057 to 080 [7] Ibid - p. 058. [8] Ibid - p. 078. [9] Exhibit 2 Tab 11. [10] See Exhibit 2 Tab 11 - p. 238. [11] Ibid - ps. 239-241.

[12] Ibid - ps. 242-266. [13] Exhibit 2 Tab 15(C). [14] Exhibit 7. [15] Exhibit 2 Tab 8. [16] Exhibit 2 Tab 1. [17] Exhibit 2 Tab 4. [18] Exhibit 2 Tab 8. [19] The SSSP has provisions respecting notices of assignments, the provision of undertakings and the like. It is not in dispute that someof these formalities were not complied with.

It has not been argued that a failure to comply with these formalities would make anotherwise valid assignment of the Disputed Interest invalid. [20] Exhibit 2 Tab 22. [21] Exhibit 2 Tab 22 - p. 002. [22] 2012 ABQB 62. [23] 2013 ABCA 40. [24] Supra 23 - Paras. 5 to 8. [25] Anadarko Canada Corp. v. Canadian Natural Resources Ltd. 2006 ABQB 590 at para. 38. [26] (TCC), [1986] 2 C.T.C 2392, 86 D.T.C. 1756 (TCC) [27] The Notes are Exhibit 2 Tab 45. [28] Exhibit 2 Tab 15(

t) Ps. 007-009. [29] Exhibit 2 Tab 15(g) [30] See Exhibit 2 Tab 66 and Tab 68 [31] Exhibit 2, Tab 15(f) (Interim Statement of Adjustments) and Tab 67 (Final Statement of Adjustments) [32] [1971] 3 All E.R. 237 (H.L.) at 239 - 40. [33] [1976] 3 All E.R. 570 (H.L.) at 574. [34] 2000 ABCA 151, 255 A.R. 373 at para. 21. [35] Ibid. at para. 22. [36] 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. [37] Omers, supra, at para. 33. Suncor Inc. v.

Norcen International Ltd. (1988), (AB KB), 89 A.R. 200. [38] Prenn v. Simmonds, supra, note 2 at 241. [39] Ibid. at 240. [40] Price Bros. & Co., Ltd. v. The King, (UK JCPC), [1926] 3 D.L.R. 642 (J.C.P.C.) at 644. [41] Ibid. [42] Exhibit 2 Tab 11 - ps. 022 to 109.

[43] The Ashton Report is Exhibit 2 Tab 41.