NOV Enerflow ULC v Enerflow Industries Inc, 2015 ABQB 759

Court of Queen ’ s Bench of Alberta Citation: NOV Enerflow ULC v Enerflow Industries Inc, 2015 ABQB 759 Date: 20151207 Docket: 1401 02364 Registry: Calgary Between: NOV Enerflow ULC (formerly NOV Pressure Pumping ULC), Grant Prideco, Inc., and Dreco Holding ULC Plaintiffs - and - Enerflow Industries Inc. (an Alberta corporation), Willind Holdings Inc., LGL Two Holdings Ltd., MKW Two Holdings Ltd., Larmar Holdings Inc. (an Alberta corporation), LGL One Holdings Ltd., MKW One Holdings Ltd., Lindholm Family Holdings Ltd., Lindholm Family Trust, Williamson Family Holdings Ltd., Williamson Family Trust, Larry Lindholm and Mark Williamson Defendants _______________________________________________________ Memorandum of Decision of the Honourable Mr.

Justice J.T. McCarthy _______________________________________________________

Facts [ 1 ] This action began on March 3, 2014 with the filing of the Statement of Claim, which has been amended once already. On August 11, 2015, the plaintiffs (NOV) applied to amend their Amended Statement of Claim. The facts giving rise to this action bear repeating: NOV brought an action against the defendants (Enerflow Canada) for misrepresentation and breach of contract. The parties entered into a Purchase and Sale Agreement (PSA) on March 4, 2012 in which Enerflow Canada made a variety of representations and warranties as part of the sale of its business to NOV. The deal closed May 11, 2012.

NOV subsequently retained Kevin Pitzel to review its books. In February 2015, his investigation raised concerns regarding outstanding purchase commitments and excess inventory that preceded the Closing Date. Issues: Should the Court grant NOV’s application to amend its statement of claim in whole or in part? Are the amendments opposed by Enerflow Canada hopeless? Credit Notes, Financial Statements, and Inventory Amendments (

i) Does the Court have jurisdiction to adjudicate the amended claims? a. Is the remedy that NOV requests an adjustment of the Purchase Price or an Indemnified Loss? (ii) Even if the Court has jurisdiction, have the claims now advanced already been adjusted for? Purchase Commitment Amendments (iii) Is there sufficient evidence to support the allegation that the purchase commitments were made outside the ordinary course of business with no disclosure? Expiration of the Representations and Warranties (iv) Have the representations and warranties that NOV alleges to have been breached expired?

Conclusion [ 2 ] The Court grants leave for NOV to amend the Amended Statement of Claim as proposed except to the extent that the proposed amendments refer to or are premised on breaches of articles 8.12 and 8.15 of the PSA. The representations and warranties contained in articles 8.12 and 8.15 have expired under the terms of the PSA. Thus, any claims in respect thereof are hopeless. A. Enerflow Canada consents to certain amendments [ 3 ] Enerflow Canada does not dispute every amendment proposed by NOV [FTR Oral Argument, Courtroom 1403 (30 September 2015) at 10:20:36].

To that extent, the amendments are allowed: see Alberta Rules of Court , Alta Reg 124/2010, s 3.62(1)(c). Amendments to the following paragraphs are therefore granted in whole: 12, 13A, 15, 16, 18–20, 46, and 47. B. Enerflow Canada opposes other amendments [ 4 ] Enerflow Canada’s opposition to the other proposed amendments rests on three grounds: (

i) Amendments to claims regarding credit notes and inventory, which allege breaches of articles 8.11, 8.12, and 8.24 of the PSA, seek to adjust the purchase price. According to Enerflow Canada, this Court lacks jurisdiction to adjust the purchase price under the PSA’s terms and, furthermore, the parties have already adjusted the purchase price to account for any difference in credit notes and inventory.

To that extent, the amendments are hopeless [paras 39(f), (g), (h), (i), (j), (k), 42(a), 43(d)]; (ii) The amendments regarding “Purchase Commitments” are hopeless because they are based on the allegation that Enerflow Canada did not disclose its Purchase Commitments for Twin Disc transmissions and FMC Quintuplex pumps.

Enerflow Canada argues that, as a matter of fact, documentary evidence clearly shows Enerflow Canada disclosed these commitments during due diligence, so the claim cannot succeed at trial [paras 39(l), 43(e)]; and (iii) Amendments that add claims for breaches of Enerflow Canada’s representations and warranties at PSA articles 8.11, 8.12, 8.15, and 8.24 are hopeless because the impugned representations and warranties have expired per

article 10.1 [paras 17, 39 allege breaches, 42, 43 seek remedies for those breaches] [Written Brief of the Respondents at paras 112-114; Confidential Key Book of References of the Applicants at tab 51]. C. NOV argues the amendments clarify the issues in dispute and particularize its claims

[ 5 ] By contrast, NOV asserts that the amendments are necessary to clarify issues in the action and that they would not prejudice Enerflow Canada. It suggests that some of the amendments are ancillary (e.g. changes to NOV’s prayer for relief) and that the substantive amendments merely particularize claims and causes of action contained in the original Statement of Claim. NOV relies on the Affidavits of Tom Hewitt, NOV’s current business manager, dated August 11, 2015, June 4, 2015, and September 5, 2014.

Schedule B to this Application to Amend Pleadings identifies the evidence that NOV relies upon to support each amendment. The Law [ 6 ] Both parties acknowledge that this Court has a broad discretion in choosing to allow or refuse amendments to pleadings: Alberta Rules of Court , Alta Reg 124/2010, s 3.65(1). The test was correctly set out by Wittmann C.J.Q.B. in Attila Dogan Construction and Installation Co Inc v AMEC Americas Ltd , 2013 ABQB 525 at para 13 , 565 AR 1, aff’d 2014 ABCA 74 , 569 AR 308 [ Attila (QB)]: Generally, any pleading may be amended, no matter how careless or late the party seeking the amendment, subject to four major exceptions, which are: (

a) The amendment would cause serious prejudice to the opposing party, not compensable in costs; (

b) The amendment requested is hopeless [in that it would have been struck if it had been contained in the original pleading]; (

c) Unless permitted by statute, the amendment seeks to add a new party or new cause of action after the expiry of a limitation period; and (

d) There is an element of bad faith associated with the failure to plead the amendment in the first instance. [ 7 ] Enerflow Canada does not suggest it would suffer serious, non-compensable prejudice as a result of these amendments. It does not argue that the Limitations Act , RSA 2000, c L-12 bars any of the proposed amendments. Furthermore, there is no evidence that NOV proposes these amendments in bad faith, or that its failure to bring them earlier was the result of bad faith.

Enerflow Canada’s opposition to the amendments noted above rests solely on the second exception in Attila (QB) —namely, that the amendments are hopeless and would have been struck if they had been contained in NOV’s original pleading. [ 8 ] Attila (QB) describes the standard of proof to amend pleadings.

Unless an amendment alleges fraud or other dishonourable conduct, the amount of evidence required to support it is “low.” No evidence is required if the amendment is “purely ancillary.” The requirement for “modest” evidence applies in particular to amendments that allege new substantive facts, and “[a]lthough only modest evidence need be provided, it must have some foundation in fact”: Attila (QB) , supra at paras 14–16 . Leave to amend pleadings is generally granted when the amendments add particulars, rather than entirely new causes of action.

The applicants bear the burden of adducing a modest amount of evidence. [ 9 ] To demonstrate that an amendment is “hopeless” is a high standard: Kasko Estate v Lethbridge Regional Hospital , 2006 ABQB 280 at para 26 , 393 AR 28. In Balm v 351 2061 Canada Ltd , 2003 ABCA 98 at para 12 , 327 AR 149 , Côté J.A. held that even a doubtful plea should be allowed if it is arguable. However, if some critical issue would result in the pleading being struck in the first instance, it is hopeless and ought not to be allowed.

Alberta Rules of Court , Alta Reg 124/2010, s 3.68(2) sets out the conditions precedent before this Court will normally exercise its discretion to strike all or part of a pleading:

(2) The conditions for the order are one or more of the following: (

a) the Court has no jurisdiction; (

b) a commencement document or pleading discloses no reasonable claim or defence to a claim; (

c) a commencement document or pleading is frivolous, irrelevant or improper; (

d) a commencement document or pleading constitutes an abuse of process; (

e) an irregularity in a commencement document or pleading is so prejudicial to the claim that it is sufficient to defeat the claim. [ 10 ] A claim may also be hopeless to the extent that it does not meet the minimum, modest evidentiary threshold required to support amendments or if the amendment is “so inconsistent with the record that it could fairly be described as ‘hopeless’”: see Attila Dogan Construction & Installation Co v AMEC Americas Ltd , 2014 ABCA 74 at para 27 , 569 AR 308 [ Attila (CA)]. To that end, this Court is entitled to engage in a limited assessment of the evidence.

The Court need not take the evidence at face value. An amendment will not necessarily be granted simply because some evidence is provided to support each proposed amendment. At the same time, the mere presence of contradictory evidence does not automatically preclude amendment: Attila (CA) , supra at para 29. Whether a claim is hopeless or not is properly adjudicated before trial: see Bouvry Exports Calgary Ltd v ING Insurance Co of Canada , 2008 ABQB 61 at para 11 , 439 AR 281 [ Bouvry ]. The defendants expressly rely on 3.68(2)(

a) and (

d) in arguing that NOV’s proposed amendments are hopeless.[Brief of the Defendants/Respondents at para 42 (23 September 2015)]. (

i) Does the Court have jurisdiction to adjudicate the amended claims? [ 11 ] The Court has no jurisdiction to alter the Purchase Price by revising the Adjusted Working Capital or Adjusted Inventory amounts. [ 12 ] Enerflow Canada argues that the claims at paras 39(f), (g), (h), (i), (j), (k), 42(a), and 43(

d) effectively ask this Court to

adjust the Purchase Price, which according to

article 4.1 of the PSA shall be adjusted only as set forth in articles 6 and 7. It further points to

article 7.1(

c) for the proposition that the adjustments, as determined by the Independent Accountants, shall be final, binding, and conclusive. Thus, according to Enerflow Canada, this Court lacks jurisdiction to adjudicate these claims. Alternatively, Enerflow Canada asserts that the parties have already adjusted the Purchase Price for the deficiencies in inventory and credit notes and, to that extent, such claims are not actionable Indemnified Losses. [ 13 ] If

article 7.1(

c) of the PSA were interpreted strictly, then the only element that the parties intended would be final and conclusive such as to oust this Court’s jurisdiction are determinations made by the Independent Accountants on the specific issues that the parties referred to them. Arguably, the Court would retain jurisdiction to hear claims with respect to those issues not objected to in the first instance or not referred to and finally determined by the Independent Accountants. However, if the Court adopted such an

interpretation it would lead to an absurd result: the seller could give the buyer notice of its objection to the Adjusted Working Capital and the Adjusted Inventory calculated by the buyer on frivolous or disingenuous grounds in order to retain the option of going to Court on other grounds if things later went awry, as they did here. [ 14 ] This absurdity, coupled with the well-established principle of contractual

interpretation that alternative dispute resolution clauses are to be given a large and liberal

interpretation (see Geoff R Hall, Canadian Contractual

Interpretation Law , 2d ed (Markham, Ont: LexisNexis, 2012) at 95–96), and the fact that this dispute involves large, sophisticated, commercial parties with legal representatives who would have been aware of the legal consequences of such ADR clauses, suggests that the parties did not intend that the Adjusted Working Capital and Adjusted Inventory could be further adjusted—by this Court or otherwise—after receiving the Independent Accountants’ determination.

The PSA established a framework according to which the seller had a time-limited opportunity to object to the buyer’s working capital and inventory calculations and to reasonably state all grounds for such objection, failing which the buyer’s numbers were to be conclusive. In other words, those issues not objected to and not referred to the Independent Accountants were not disputed and became binding. Only if the Independent Accountants failed to determine the issues referred to it might this Court have jurisdiction to vary the Adjusted Working Capital and Adjusted Inventory.

Such is not the case before this Court. Thus, I agree with Enerflow Canada that this Court lacks jurisdiction to adjust the Purchase Price by recalculating the Adjusted Working Capital and Adjusted Inventory amounts; however, that does not necessarily render NOV’s credit note and inventory claims hopeless. a.

Is the remedy that NOV requests an adjustment of the Purchase Price or an Indemnified Loss? [ 15 ] It is arguable as to whether NOV’s claims regarding credit notes and inventory are Indemnified Losses [ 16 ] One must also consider whether the relief NOV seeks for these claims is properly characterized as a reduction in the Purchase Price, or whether the claim can qualify as an Indemnified Loss as that term has been expressly defined in the PSA. Based on the evidence, it is arguable as to whether or not the amendments proposed at paras 39(f), (g), (h), (i), (j), (k), 42(a), and 43(

d) qualify as Indemnified Losses and, to that extent, they cannot be fairly described as hopeless. [ 17 ] Accurately interpreting the intentions of the parties to a contract requires courts to adopt the meaning of words that the parties have expressly given to them: Hall, supra at 227–228.

Article 1.1 of the PSA broadly defines Indemnified Losses: “Indemnified Losses” means all losses, costs, damages, expenses, charges, fines, penalties, solicitor client legal fees and disbursements and other Liabilities whatsoever ; [emphasis added] [ 18 ] The definition given to Liabilities is similarly broad: “Liability” means, with respect to any Person, any liability or obligation of such Person of any kind , character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise, and whether or not the same is required to be accrued on the financial statements of such Person; [emphasis added] [ 19 ] Moreover,

article 18.1 expressly contemplates: ...Indemnified Losses which...any of the Purchasers may sustain, pay or incur, as a result of any act, omission, circumstance or other matter arising out of, resulting from, attributable to or connected with...(

a) any breach of any representation or warranty made by the Shareholders or Enerflow Canada in...this Agreement... [ 20 ] Enerflow Canada argues that Indemnified Losses are limited to NOV’s out-of-pocket expenses. The evidence does not support that proposition. The PSA does not mention out-of-pocket expenses as such or purport to limit the scope of Indemnified Losses to out-of-pocket expenses. Although the parties’

definitions may stretch the conventional understanding of indemnified losses, their deliberate decision to capitalize and define that term is strong evidence that they intended the buyer would have significant recourse against the seller subject to the terms set out in

article 18.1(

a) to (e). As sophisticated commercial entities, if the parties had intended to limit the right of indemnification to out-of-pocket expenses, they could have and probably would have done so explicitly. [ 21 ] Importantly, Enerflow Canada does not dispute that this Court has jurisdiction to adjudicate claims for breaches of representations and warranties. Its concern is rooted in the remedy NOV seeks, which it says can be properly understood only as a reduction in the Purchase Price. I do not agree.

Properly understood, the claim is for damages for losses incurred as a result of Enerflow Canada breaching its representations and warranties in the PSA. How those damages should be quantified is for the trial judge to determine. But they can only be meaningfully described as damages. That the damages may be construed as effectively reducing the Purchase Price is a function of

interpretation. [ 22 ] For example, in Gauntlet Energy Corp (Re) , 2005 ABQB 605 , 374 AR 364, aff’d 2005 ABCA 357 , 376 AR 95, the buyer argued that it would not have closed the acquisition of all shares in Gauntlet if it had been aware of the seller’s breach of warranty beforehand. The subscription agreement provided for post-closing working capital adjustments to the purchase price based, in part, on an allocation of Gas Cost Allowance credits. Gauntlet’s failure to disclose a regulatory filing that altered accounting principles and practice

constituted a breach of the agreement. At para 81, LoVecchio J. doubted that the buyer would have backed away from the deal, characterizing the buyer’s loss as “a right to negotiate what would most likely have been a reduction in the purchase price” if it had known of the breach sooner. Important for our purposes is the fact that this Court used the purchase price as a yardstick for quantifying the loss: see para 87. This is less an indictment of NOV’s attempt to adjust the Purchase Price indirectly than it is an affirmation that money is often an inexact, even poor measure for quantifying loss.

In any event, the remedy NOV seeks is not the only remedy that this Court can order, and, furthermore, the remedy is properly characterized as damages for breach of warranty. [ 23 ] The Defendants cited Telecommunications Workers Union Local 202 v MacMillan , 2008 ABPC 38 , 438 AR 280 for the proposition that when a party seeks a remedy that is clearly unavailable under a contract, the claim on which the remedy is based is hopeless. This case is distinguishable on a number of grounds.

In particular, Judge LeGrandeur held at para 55 that “To permit the TWU to prosecute the claim outside the terms of its own constitution is to allow unilateral amendment to the constitutional contract.” For reasons already discussed, it is not outside the terms of the PSA to adjudicate Indemnified Losses in this Court, and since it is arguable as to whether the loss asserted by NOV is an Indemnified Loss, the amendments are not hopeless.

Therefore, this Court has jurisdiction to hear the claims regarding credit notes and inventory. (ii) Even if the Court has jurisdiction, have the claims now advanced already been adjusted for? [ 24 ] It is unclear whether the breaches complained of have been accounted for as part of

Article 7’s adjustments [ 25 ] Even if one assumes that the claims advanced by NOV qualify as Indemnified Losses under the PSA, they are nevertheless hopeless to the extent that the damages claimed have already been accounted for in the post-closing adjustment process. On this point,

article 18.7 is clear: Limitation on Remedies After the Closing Time, and subject to Sections 3.3, 7.1, 7.2, 7.3, 11.2(e), 13.9, 13.10, 13,11(

d) and 21.11 this,

Article 18 sets forth the sole remedies of each Party against any other Party in connection with (

i) the transactions contemplated herein for, and (ii) any act, omission, circumstance or other matter arising out of, resulting from, attributable to or connected with any misrepresentation or breach of any representation or warranty, obligation, covenant or agreement contained in this Agreement, and the Parties shall have no further right or remedy (whether legal, equitable, fiduciary or in tort) whatsoever, against the other Parties, or their Affiliates or their respective shareholders or Representatives; provided however that these limitations shall not apply in the event of fraud.

For greater certainty, the Parties agree that notwithstanding any other provision of this Agreement there shall be no right to indemnity under

Article 18 to the extent of any item taken into account in the determination of any adjustment to the Purchase Price [sic] is adjusted in accordance with

Article 7. [emphasis added] [ 26 ] The question, then, is whether, as a matter of fact, the parties or the Independent Accountants already adjusted for the credit note and inventory deficiencies about which NOV complains. If they did, then NOV cannot claim damages for them now as Indemnified Losses. [ 27 ] The evidence filed on this application indicates that credit notes and inventory were raised during the post-Closing adjustments process.

Exhibit H-9 attached to the transcript of Hewitt’s cross examination also shows that prior to closing NOV was aware of at least some of the “excess” inventory about which it now complains. However, the mere fact that it was disclosed does not guarantee that it was included in the adjustments process. The parties agreed “...there shall be no right to indemnity under

Article 18 to the extent of any item taken into account in the determination of any adjustment to the Purchase Price...” [emphasis added]. It is unclear whether “any item” refers to credit notes and inventory generally or each individual credit note or piece of inventory. [ 28 ] Enerflow Canada’s Notice of Objection dated November 26, 2012 (see Exhibit H-24) provides some evidence to suggest that allowances were made for obsolete inventory as part of the post-closing adjustments process.

However, it is not at all clear that the parties intended such amounts would preclude a right of indemnification for breaches of representations or warranties with respect to those credit notes or pieces of inventory for which the Purchase Price was not specifically adjusted. Since the claim here is that Enerflow Canada has breached its representations and warranties as to the financial condition of the company, it extends only to those items for which the Purchase Price was not reduced under

article 7. As such, the argument that NOV’s proposed amendments are hopeless because some or all of the items complained of have already been accounted for really goes to the quantum of damages that may be proven, if any. [ 29 ] During oral argument, Enerflow Canada suggested that NOV was aware of the problems with inventory before closing and should have asked for a greater price reduction as part of the adjustments process if it had a problem.

Certainly, NOV ought to have known that this was a possibility when the PwC representative that it had retained to conduct due diligence said, “I hope this [information] is helpful in negotiating the inventory adjustment”: see Exhibit H-9. It might have been prudent to negotiate a reduction at that time, but it does not diminish NOV’s claim for breach of representation or warranty, if it can be proven at trial. [ 30 ] There is a qualitative difference between disclosing the existence of excess inventory and disclosing that such inventory is also obsolete, unsaleable, or unusable. In

summary, it is arguable on the evidence as to (

i) whether the latter allegations are true, (ii) if so, whether they were disclosed, and (iii) whether they were included in the adjustments. As a result, leave to amend paras 39(f), (g), (h), (i), (j), (k), 42(a), and 43(

d) is granted, subject to this Court’s determination on the expiry of the relevant representations and warranties underpinning these claims. iii) Is there sufficient evidence to support the allegation that the purchase commitments were made outside the ordinary course of business and without

disclosure? [31] Whether the purchase commitments were made outside the ordinary course of business is a question of fact. [32] Whether something is or is not done in the ordinary course of business is a contextual, fact-specific determination to be madeon a case-by-case basis in light of all circumstances known to the parties at the time: 369413 Alberta Ltd v Pocklington, 2000 ABCA307 at paras 21–22, 271 AR 280, citing Pacific Mobile Corp., Re, (SCC), [1985] 1 SCR 290 at para 3, 16 DLR (4th)319 (SCC). See Pocklington, supra at para 22 for a list of relevant factors that courts may consider.

Precisely because it is a fact-specificdetermination and not one that calls on this Court to interpret law, one could argue that this is a decision best left to the trial judge;however, this Court must also be mindful of the general trend towards adjudicating matters such as this at this preliminary stage if adetermination can be made fairly and reasonably on the record.

Also recall that Attila (CA), supra at para 29, entitles this Court toengage in a limited assessment of the evidence to determine whether the evidentiary threshold to amend has been met, and Bouvry, supraat para 11, emphasizes that the hopelessness of a claim is properly determined before trial. [33] The purchase commitment amendments are contained at paras 39(

l) and 43(e).

The first amendment particularizes EnerflowCanada’s misrepresentation of the financial condition of the business by alleging that the company made risky purchase commitmentsthat were “out of the ordinary course of business, without any disclosure or allowance in the financial statements for the risk of obsolete,surplus, unsaleable or unuseable [sic] inventory...” The second amendment particularizes the loss that NOV argues it has incurred.Specifically, it asserts that NOV has incurred a loss “as a result of purchase commitments for components for which the PurchasedBusiness had no need, but [which] were ordered out of the ordinary course of business for speculative or other extraordinary purposes.” [34] NOV relies on the following evidence to support these amendments: 1.

Exhibit 17 to the Hewitt affidavit dated August 11, 2015 reveals purchase commitments for 19 Quintuplex pumps totalling$7,129,772 and 15 Twin Disc transmissions totalling $9,179,567. 2. Kevin Pitzel’s inventory analysis revealed a sharp increase in inventory in late 2011 and early 2012. This is confirmed by ExhibitH-9 attached to the transcript of Hewitt’s cross examination, in which Kyle West, a representative of PricewaterhouseCoopers LLP inHouston, Texas, discloses to NOV excess inventory that it discovered over this same time period as part of NOV’s due diligence (“thePwC Letter”).

West explains that that “the rationale given for having the excess inventory on hand was that equipment orders were madefor anticipated growth but the ramp up of the Houston location is behind schedule.” 3. Enerflow Canada undertook efforts to reduce its inventory of the pumps and transmissions by selling them before closing. Hewittswears that these sales activities “appear[...] to have been out of the ordinary course of operation of the Enerflow Entities’ business priorto that time.” 4.

The pump and transmission purchase commitments were not disclosed in the Enerflow Disclosure Letter dated March 4, 2012, or inthe update dated May 8, 2012. 5. Hewitt swears there was no disclosure of these commitments to NOV’s leadership prior to closing. [35] While NOV has adduced evidence as to the existence of such purchase commitments and the evidence shows that theinventory increased significantly during the time period covered by Mr.

Pitzel’s analysis, there is little evidence that these commitmentsor Enerflow’s efforts to reduce its inventory were outside the ordinary course of business in violation of its representation at

article 8.15of the PSA. [36] NOV relies principally on the absence of these items from the Enerflow Disclosure Letters and on the “sharp increase” ininventory in late 2011 and early 2012 to suggest that these activities were outside the ordinary course of business. One could argue thatthis does not meet even the modest evidentiary threshold required to amend NOV’s pleadings. For example, that Enerflow Canada failedto disclose the purchase commitments as being outside the ordinary course of business does not make them so.

The fact that they werenot listed in the Enerflow Disclosure Letters is just as consistent with them being in the ordinary course (and therefore not required to bedisclosed) as it is with establishing a breach of

article 8.15.

Article 8.15 did not require Enerflow Canada to disclose purchasecommitments so long as they were in the ordinary course of business: Business Carried on in the Ordinary Course Since May 31, 2011, the Enerflow Entities have, except to the extent described in Enerflow Disclosure Letter

Section 8.15 with respectto the Houston Expansion, carried on the Purchased Business in the ordinary course thereof and, in particular and without limitation, theEnerflow Entities have not: [...]

d) incurred or assumed any Liability relating to the Purchased Business other than in the ordinary course of the PurchasedBusiness; [...]

(

l) entered into or become bound by any Contract or arrangement, or made or authorized any capital expenditure relating to the Purchased Business, other than in the ordinary course thereof, involving or which by its terms would result in the payment of money by the Enerflow Entities of an amount in excess of $250,000 with respect to any one transaction or an amount in excess of $250,000 with respect to all transactions; [...] [ 37 ]

Article 8.15 required only that Enerflow Canada disclose purchase commitments that were not in the ordinary course of business. [ 38 ] Furthermore, the evidence NOV has offered on this point contradicts the existing record. Contrary to the assertion that no disclosure was made as to the risk of obsolete inventory, Exhibit H-8 attached to the transcript of Hewitt’s cross examination makes clear that at least some purchase commitments and increases in inventory were disclosed as part of NOV’s due diligence process by February 6, 2012.

The PwC Letter expressly refers to “open commitments to receive 5 transmissions and torque converters per month for the next 4-5 months.” Although this letter does not cover all of the purchase commitments in issue, it demonstrates that NOV’s proposed amendment at para 39(

l) is overstated. [ 39 ] NOV does not point to any other evidence that the purchase commitments were entered outside the ordinary course of business beyond Hewitt’s sworn opinion that they “appear” to be so at para 32 of his affidavit on this application. One can infer from all of the evidence that NOV implicitly relies upon at least two additional facts: (

a) the fact that these purchase commitments were made at all and (

b) the fact that Enerflow Canada appears to have had limited success in selling the subject of the commitments, Twin Disc transmissions and Quintuplex pumps. [ 40 ] Although the evidence to support these amendments is clearly weak at this stage, it cannot be described as hopeless. I find that Hewitt’s assertion, the absence of the purchase commitments in the Enerflow Disclosure Letter

Section 8.15, and the difficulty Enerflow Canada had in selling the same equipment are collectively sufficient to meet the low evidentiary threshold required to amend. I would ordinarily allow the amendments proposed at paras 39(

l) and 43(e); however, as the following analysis makes evident, this outcome is trumped by the Court’s findings on the expiration of representations and warranties in the PSA. (iv) Have the representations and warranties that NOV alleges to have been breached expired? [ 41 ] Representations and warranties in articles 8.11, 8.12, 8.15, and 8.24 expire two years from the Closing Date unless a claim for indemnification is made sooner [ 42 ] NOV argues that the amendments merely elaborate upon and particularize what was already a broad, general claim set out in the original pleadings.

For example, paragraph 17 of the Amended Statement of Claim states: Lindholm, Williamson and Enerflow Canada et al. have breached the provisions of the PSA, and the representations, warranties and guarantees therein, including covenants and conditions of fitness and merchantability, including but not limited to , breaches of sections 3.1, 8.10, 8.13, 8.38, 11.2, 11.6, 13.9, 18.1, 18.3, 18.4, 18.5, and 18.7 of the PSA. [emphasis added] [ 43 ] Similarly, paragraph 39 reads: NOV Enerflow, Grant Prideco and Dreco Holding state that the Purchased Assets, Purchased Business and Purchased Shares (as defined in the PSA) that they received from Lindholm, Williamson, Enerflow Canada et al. were not as warranted, represented , covenanted or promised, nor of the quality, reputation, value or reliability of the Purchased Assets, Purchased Business and Purchased Shares defined in the PSA. [ 44 ] Importantly, Enerflow Canada does not dispute that adding breaches of articles 8.11, 8.12, 8.15, and 8.24 particularize the original claim; instead, they oppose the addition of these breaches on the basis that the warranties that they contain have expired and are therefore plainly and obviously hopeless.

NOV delivered a Claim for Indemnification dated January 31, 2014 to Enerflow Canada. The action began March 3, 2014, well within two years of the Closing Date on May 11, 2012. The question is whether the broad claim pleaded at paragraphs 17 and 39 of the original pleading provides sufficient notice or otherwise complies with the procedural requirements contained in

article 18.4 of the PSA, such that all of the representations and warranties contained in

article 8 survive, or whether only those representations and warranties expressly pleaded in the first instance survive. [ 45 ] Although the parties addressed this argument last, it is a preliminary question that affects the final determination on the other groups of amendments. This is because Enerflow Canada argues that the amendments at paras 17, 39, 42, and 43 are based on alleged breaches of representations and warranties that have expired by virtue of PSA

article 10.1. Specifically, paras 17 and 39 allege breaches of PSA articles 8.11 (Books and Records), 8.12 (Financial Statements), 8.15 (Business Carried on in Ordinary Course), and 8.24 (Inventory), while paras 42 and 43 seek remedies for those breaches. [ 46 ]

Article 10.1 addresses the survival and expiry of various representations and warranties under

article 8: 10.1 Survival of Representations and Warranties of Enerflow Canada and the Shareholders The representations and warranties of Enerflow Canada and the Shareholders contained in this Agreement...shall survive the Closing and shall continue in full force and effect for the benefit of the Purchasers provided, however, that Enerflow Canada and any Shareholder shall not have any liability hereunder in respect of any representation and warranty unless a claim in respect thereof is made within the following time periods : [...]

(

c) in the case of a claim in respect of a representation or warranty other than Sections 8.2, 8.3, 8.4, 8.17, 8.32, 8.35, 8.36 and 8.46, within a period of two (2) years from the Closing Date; provided, however that no claim in respect thereof after the Closing shall be valid unless made in accordance with the provisions set forth in

Article 18 ( for greater clarity, the Parties acknowledge and agree that any claim made in accordance with the provisions set forth in

Article 18 prior to the applicable expiration date of such representation or warranty shall survive such expiration date until such claim is finally resolved and all payments have been made with respect thereto ). [emphasis added] [ 47 ] This

section is clearly intended to limit the seller’s liability by establishing dates after which Enerflow Canada’s representations and warranties could no longer be relied upon. This type of provision is not uncommon in commercial contracts. In effect,

article 10.1(

c) gave NOV until May 11, 2014 to advance any claim for breaches of articles 8.11, 8.12, 8.15, and 8.24. Only if (

i) NOV brought the claim before that date and (ii) brought it in accordance with

article 18’s procedural requirements can it be said that the breaches and representations survive today. That is not to say NOV could not still bring a claim for breach of representation or warranty after May 11, 2014; however, such claims would be hopeless if the representations and warranties on which they were based had expired. [ 48 ]

Article 18.4 states in part: 18.4 Procedure Except as otherwise provided in

Section 13.10(a)(ix) [which deals with tax audits], all claims for indemnification under this

Article 18 shall be asserted and resolved as follows: (

a) A Person entitled to indemnification under

Section 18.1 or 18.2 (an “Indemnitee”), promptly after it becomes aware of facts giving rise to a right of indemnification under this Agreement, shall give written notice thereof to the Person obligated to indemnify under such

Section (an “Indemnitor”), stating the amount of the Indemnified Losses, if known, and method of computation thereof, all with reasonable particularity, and stating with particularity the nature of the matter and basis of the claim for indemnity under this Agreement. [...] Failure to provide the notice shall not affect the right of the Indemnitee to indemnification except to the extent the Indemnitor is materially prejudiced by the Indemnitee’s failure to give such notice. (

b) If an Indemnitee should have Indemnified Losses against any Indemnitor hereunder that does not involve a Third Party Claim, the Indemnitee shall provide the Indemnitor a written notice with respect to the Indemnified Losses. If the Indemnitor does not notify the Indemnitee within 30 calendar days from its receipt of the written notice of Indemnified Losses that the Indemnitor disputes the Indemnified Losses, the Indemnified Losses specified by the Indemnitee in the claim notice shall be deemed a liability of the Indemnitor hereunder.

If the Indemnitor has timely disputed the Indemnified Losses as provided above, such dispute shall be resolved subject to the provisions of this Agreement. [...] [ 49 ] This provision required NOV to provide written notice to Enerflow Canada of any claims for Indemnified Losses and to state “ with particularity the nature of the matter and basis of the claim for indemnity under this Agreement” [emphasis added]. Enerflow Canada then had 30 days to dispute the claim, failing which the claim crystalized into a deemed liability.

One could argue that written notice was not strictly required unless Enerflow Canada would have been “materially prejudiced by [NOV’s] failure to give such notice”, but without any notice whatsoever it would be practically difficult to assess whether any of the relevant representations and warranties survived the two-year expiration date and, if so, which ones. In other words, if Enerflow Canada’s representations and warranties could survive without notice of the specific breaches alleged, Enerflow Canada could never rely on the expiration dates set out in

article 10.1(c). This, in turn, could materially prejudice Enerflow Canada. [ 50 ] A claim “including but not limited to” certain breaches is insufficient to enable all representations and warranties to survive [ 51 ] NOV’s Claim for Indemnification constitutes written notice in accordance with

article 18.4: see Exhibit H-21. That exhibit makes no reference to articles 8.11, 8.12, 8.15, or 8.24. These representations and warranties are also absent from the original Statement of Claim filed March 3, 2014 and the Amended Statement of Claim filed May 29, 2014 (see above). On May 2, 2014—again, within the two year expiration date from Closing—counsel for NOV replied to Enerflow Canada’s Request for Particulars.

In that reply, attached as Exhibit 7 to Hewitt’s affidavit dated August 11, 2015, NOV states: “Additional sections of the PSA breached by the Defendants include, but are not limited to, sections 3.3, 8.11, 8.24, 8.26(d), 13.1 and 13.5 of the PSA” [emphasis added]. This means that Enerflow Canada had notice of a claim for breach of representation or warranty under articles 8.11 and 8.24 within two years of the Closing Date.

Article 8.15(

d) and (

f) are referred to in defining “Proceeding” and “Liability” as those terms are used in the PSA and the pleadings, but no specific breaches of that

article are alleged.

Article 8.12 is nowhere mentioned. [ 52 ] On one hand, NOV argues that the claim was always a general one, as evinced by the “including but not limited to” language in the Amended Statement of Claim and the Reply to Request for Particulars. It suggests that the claim was broad enough such that all of the representations and warranties under

article 8 survive today. On the other hand, Enerflow Canada contends that the parties did not intend that giving notice of one claim for indemnification on the basis of one misrepresentation could mean that all representations and warranties not expressly pleaded could also survive. According to Enerflow Canada, such an

interpretation would defeat the purpose of

article 10.1(c). [ 53 ] This Court recently considered whether “including but not limited to” is a deficient response to a demand for particulars in 1021018 Alberta Ltd v Bazinet , 2015 ABQB 151 at paras 37–44 , 253 ACWS (3d) 365. That case involved an action in defamation by one company against a group of defendants. Citing Stoney Tribal Council v R , 2005 ABCA 204 at para 5 , 54 Alta LR (4th) 184, Schutz J. noted that this language presents an obstacle to natural justice, specifically the requirement that the defendant receive notice of the claim it must meet.

Schutz J. then held at para 39 that the phrase “including but not limited to” shall not form part of the Plaintiff’s pleadings: I agree that in the face of an allegation “including but not limited to”, questioning cannot and shall not be a substitute for particulars, and

I am not able to find that Mr. Bazinet is at present in possession of sufficient particulars to enable him to sufficiently plead his defence or prepare evidence for questioning, or trial. [ 54 ] Without expressing any opinion as to whether this phrase should be struck from the pleadings, surely the parties did not intend that all representations and warranties under the agreement could survive by virtue of a single blanket allegation that Enerflow Canada breached the representations and warranties under the agreement “including but not limited to” the provisions expressly listed.

If that were the case, then NOV would be incentivized to launch a claim within two years from the Closing Date in order to postpone expiry of the PSA’s representations and warranties, whether or not it had a real basis for indemnification. In addition, this Court must bear in mind the commercial context in which the parties operate. They are sophisticated entities capable of understanding the legal consequences of placing expiration dates on representations and warranties in the PSA. If the parties intended that notice of a general breach would enable all to survive, they probably would have said so explicitly.

In fact, it would be surprising to see such a provision in a commercial agreement of this nature when the provision is itself designed to limit liability under the Agreement. See e.g.

article 10.1: “Enerflow Canada... shall not have any liability hereunder in respect of any representation and warranty unless a claim in respect thereof is made...” [ 55 ] Moreover,

article 18.4(a)’s requirement that claims for indemnification be made with particularity is not only essential to ensuring that Enerflow Canada can meet the case against it; it is also key to adjudicating and enforcing the strict expiration dates placed on

article 8’s representations and warranties and agreed to by the parties. Without particulars, all representations and warranties would survive or none of them would survive.

There is no evidence on the record that the parties intended such a result. [ 56 ] Enforcing expiry dates on representations and warranties does not offend the Limitations Act [ 57 ] Section 7(2) of the Limitations Act , supra, states: “An agreement that purports to provide for the reduction of a limitation period provided by this Act is not valid.” The parties disagree as to whether a two-year expiry date on certain representations and warranties violates the Limitations Act.

In Edmonton (City) v TransAlta Energy Marketing Corp , 2008 ABQB 426 , 441 AR 228 [TransAlta], this Court held that imposing expiry dates on representations and warranties in a contract does not violate the Limitations Act, supra, s 7(2) so long as the expiry date applies to specific representations and warranties, and not to any or all claims that may arise.

Goss J. distinguished TransAlta in Wood Buffalo Housing & Development Corporation v Flett , 2014 ABQB 537 , 245 ACWS (3d) 686 because, unlike that case, here the contract purported to limit the time to bring any action. [ 58 ] Enerflow Canada argues Wood Buffalo can be distinguished from the present action because the PSA does not purport to limit all claims under the Agreement. I agree. The time periods contemplated by

article 10.1(

c) apply only to representations and warranties. They do not restrict NOV’s right to bring an action against Enerflow Canada at any time; however, to the extent that it extinguishes certain representations and warranties, claims brought in respect of those representations and warranties have no reasonable chance of success and are therefore hopeless. [ 59 ] In Shaver v Co-operators General Insurance Co , 2011 ABCA 367 at para 36 , 515 AR 345 [Shaver], Côté J.A. held section 7(2) ought to be interpreted by asking the following questions: “What is the last day that the Act allows the plaintiff to sue?

Does the contract choose a date earlier or later than that? If earlier, that contract is invalid; if later, that is valid.” This Court does not take issue with Côté J.A.’s general formulation in Shaver; however, Shaver was a tort claim involving a motor vehicle accident. By contrast, the present case involves a contractual right of indemnification under a purchase and sale agreement between sophisticated commercial parties like those in TransAlta.

Accordingly, this Court takes a position similar to the one advanced in TransAlta and recently affirmed by the Ontario Court of Appeal in NFC Acquisition LP v Centennial 2000 Inc , 2011 ONCA 43 , 198 ACWS (3d) 619 [NFC]. While the Limitations Act in that province differs somewhat from section 7(2) ’s blanket prohibition on lowering limitation periods (see e.g.

Limitations Act , SO 2002, c 24, Sched B , s 22), the rationale underlying the Court’s reasons in that case at para 4 are relevant here: We do not agree that the notice requirement imposed by s. 3.5 [of the contract] was of no force and effect by virtue of the Limitations Act, 2002 , s. 22. S.O. 2002, c. 24, Sch. B that provided that a limitation period prescribed by the act “applies despite any agreement to vary or exclude it”. (

Section 22 was amended, S.O. 2006, c. 21 , Sch. D, s. 2 with respect to permit the variation of statutory limitation periods in business agreements but this case is governed by the earlier provision.) The notice provision at issue did not vary or exclude the limitation period prescribed by the Limitations Act . The right of indemnity was purely contractual in nature in a commercial agreement between sophisticated parties. The various indemnity rights granted were, by agreement, time limited. The timely notice requirement was a mutually agreed contractual condition precedent for triggering a right of indemnity.

Once a timely notice is given, the cause of action accrued and at that point, the statutory limitation period begins to run. Notice provisions of this kind are acceptable in the context of commercial agreements between sophisticated parties. [ 60 ] Thus, the Limitations Act poses no obstacle to the expiry of certain representations and warranties in the PSA. [ 61 ] During oral argument, counsel for NOV argued that if a valid claim is made within the relevant limitation period, then adding claims to that action should be governed by

section 6 of the Limitations Act , rather than any contractual terms (e.g. the expiration dates set out in

article 10.1 of the PSA). NOV also argues one should look to the effect, rather than the form of the so-called “expiration dates” placed on representations and warranties in the PSA. The effect, NOV argues, is to reduce the limitation period of two years from the date of discoverability provided by the Limitations Act , even if the contract describes it as an expiration date on warranties and not a “limitation period.” Certainly, the practical result is to defeat one’s ability to succeed in an action where the representation or warranty on which it is based has expired.

However, enforcing mutually agreed upon expiration dates on contractual representations and warranties under a contractual right of indemnification does not frustrate the operation of

section 6. NOV may still add claims to this action so long as they are “related to the conduct, transaction or events described in the original pleading in the proceeding”: see Limitations Act , supra, s 6(2)(b). That the added claims in respect of articles 8.12 and 8.15 would be related to the conduct, transaction or events described in the original pleading is not challenged. The relevant point here is that, even if the proposed amendments added new claims so as to be governed by

section 6, they would still be hopeless because the representations and warranties on which they are based have expired under the PSA’s clear terms. [ 62 ] Counsel for NOV further added that the TransAlta and NFC cases are distinguishable because those cases, unlike the present one, dealt with actions where the original claim was brought after certain representations and warranties had already expired. NOV

emphasizes here that at least some of the representations or warranties breached had not yet expired when the claim was originally filed and that, therefore, the others either

a) also survive by virtue of the parties’ intentions articulated in

article 10.1, or

b) ought to be governed by

section 6 of the Limitations Act . [ 63 ] For the reasons already mentioned, the Court rejects both of these arguments. [ 64 ] Enerflow Canada’s representations and warranties at articles 8.11 and 8.24 survive; articles 8.12 and 8.15 have expired [ 65 ] As Enerflow Canada had written notice of claims under articles 8.11 (Books and Records) and 8.24 (Inventory) in the Reply to Request for Particulars, the proposed amendments should be allowed to the extent that they touch on 8.11 and 8.24.

The proposed amendments that allege breaches of articles 8.12 (Financial Statements) and 8.15 (Business Carried on in Ordinary Course) should not be granted because the representations and warranties on which they are based have expired. To that extent, they are hopeless. Practically speaking, this also means some of the amendments discussed above regarding credit notes, financial statements, and purchase commitments are also hopeless on this ground.

In the result, the Court grants leave to amend all paragraphs as proposed, except to the extent that the proposed amendments refer to or are premised on breaches of articles 8.12 or 8.15 of the PSA. Heard on the 22 nd day of October, 2015. Dated at the City of Calgary, Alberta this 30 th day of November, 2015. J.T. McCarthy J.C.Q.B.A. Appearances: Kevin Feehan/Gary J. Draper for the Plaintiffs Michael Theroux/Olivia Dixon for the Defendants