Bard v Canadian Natural Resources, 2016 ABQB 267

Court of Queen’s Bench of Alberta Citation: Bard v Canadian Natural Resources, 2016 ABQB 267 Date: 20160524 Docket: 1001 12889 Registry: Calgary Between: Ralph A. Bard III, J-I-S Corporation, Shaw, Isham Tar Sands, LLC, Shaw Isham & Company, the Bard Group L.L.C., Devon Canada and Devon Canada Corporation Plaintiffs/Applicants - and - Canadian Natural Resources and Canadian Natural Resources Limited Defendants/Respondents _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice K.D.

Nixon _______________________________________________________ Introduction [ 1 ] This is an interlocutory application. The plaintiffs (collectively “Devon”) seek the Court’s permission to amend their statement of claim and an order compelling the defendants (“CNRL”) to produce a series of documents in their native electronic format. Background

[ 2 ] Devon and CNRL are parties to a 1968 Agreement according to which Devon holds an undivided 5 percent working interest in Lease 18 for an oil sands project known as Horizon, while CNRL operates the project as 95 percent shareholder. Devon’s share of the proceeds and costs were to be recorded in a Carried Account, which tracks Devon’s financial interest in the Lease. Devon does not get paid until and unless the proceeds exceed costs recorded in the Carried Account. [ 3 ] CNRL provides Devon with periodic statements of the Carried Account.

Devon disputes CNRL’s accounting of credits and debits posted to the Account, which led to the present action being filed on September 9, 2010. Devon advances three main claims: breach of contract, breach of fiduciary duty, and unjust enrichment. [ 4 ] The pleadings have closed. In 2014, CNRL issued new statements for the Carried Account, purporting to replace all previous statements. The new statements follow a significantly different methodology of accounting for Devon’s interest in Horizon, which posits a new

interpretation of the Agreement (the “New Methodology”). Issues [ 5 ] This application raises the following issues: 1. Should the Court grant Devon’s application to amend its statement of claim in whole or in part? 2. Should the Court grant Devon’s application for production of records in whole or in part? a. Are the requested records relevant and material? b. Should records already produced in accordance with the parties’ mutually agreed upon Complex Case Litigation Plan be reproduced in native format? c. Are the records usable as produced in TIFF format? d. Would the expense, delay, danger or difficulty in producing these records be grossly disproportionate to the likely benefit?

Summary [ 6 ] The Court grants Devon leave to amend its pleading in part. Although CNRL does not consent to most of the proposed amendments, the grounds for its objections do not stand up to scrutiny. Firstly, CNRL would not suffer serious prejudice that could not be compensated with costs. Secondly, Devon’s claims regarding “Other Costs” are not statute-barred by the Limitations Act .

Thirdly, allegations regarding bad faith in administering the Carried Account would require significant proof if they were fresh claims, but when properly read in their context, they merely particularize the breach of fiduciary duty and breach of the Agreement that Devon alleged in its original pleading. Lastly, contrary to CNRL’s suggestion otherwise, the facts underpinning the new remedies that Devon seeks to plead did not all arise in the course of litigation and therefore do not bar a claim for punitive damages. With exception to paras 35(e), (

i) and (j), the amendments are not hopeless, and none are proposed in bad faith. [ 7 ] All relevant and material records that are not privileged ought to be produced, unless the expense, delay, danger, or difficulty in complying with this rule would be grossly disproportionate to the likely benefit. The six categories of records that Devon requests meet the test for legal relevance and materiality. The pragmatic reasons that CNRL advances based on its technical compliance with discovery protocol or the TIFF files’ usability do not justify non-disclosure: discovery must be meaningful in all circumstances.

Although e-discovery has limits, the principle of proportionality does not figure prominently in this case. Ordering CNRL to produce the records that Devon has requested is proportional in the circumstances. Accordingly, CNRL must produce the records. Analysis 1. Should the Court grant Devon’s application to amend its statement of claim in whole or in part? [ 8 ] The amendments proposed by Devon are allowed to the extent that CNRL consents: Alberta Rules of Court , Alta Reg 124/2010, s 3.62(1)(c).

As CNRL consents to all amendments concerning facts and breaches arising as a result of the Revised Net Carried Interest (NCI) Statements that CNRL delivered to Devon on July 7, 2014, amendments to the following paragraphs are granted in whole: 15–26, 28, 30, 32(c), 33, 37–38. CNRL consents to the amendments at paras 27 and 29 in part. [ 9 ] CNRL’s opposition to the other proposed amendments rests on four grounds: a.

Devon could have included additional allegations of breach not arising from the Revised NCI Statements after it had audited CNRL in 2009 and 2012, so Devon should not now be allowed to add those breaches to expand the scope of the proceeding [paras 27, 29, 31, 32(a)(b)(e)(f)(g)]; b. claims regarding “Other Costs” are barred by the Limitations Act , RSA 2000, c L-12, s 3(1)(a) [paras 32(d), 34, 39]; c. allegations of bad faith in administering the Carried Account require heightened proof to amend [paras 12, 14, 35–36]; and

d. new remedies should not be added because the facts on which they are based arose during the course of litigation and go to costs[paras 41, 44]. [10] Although CNRL opposed all of these amendments in its brief, it did not seriously pursue most of these objections at thehearing. Paragraphs 35, 41, and 44(

i) were the focus of its argument. [11] Courts have discretion to grant leave to amend or not: Alberta Rules of Court, Alta Reg 124/2010, s 3.65(1). Chief JusticeWittmann set out the general rule on amending pleadings in Attila Dogan Construction v AMEC Americas Ltd, 2013 ABQB 525 at para13, 565 AR 1, aff’d 2014 ABCA 74, 569 AR 308 [Attila]: Generally, any pleading may be amended, no matter how careless or late the party seeking the amendment, subject to four majorexceptions, 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. [12] If an amendment is ancillary, no evidence is necessary. Otherwise, the amount of evidence to support an amendment isgenerally low. This requirement for “modest” evidence includes amendments that allege new substantive facts; yet, even as theevidentiary threshold to amend is low, the evidence “must have some foundation in fact”: Attila, supra at paras 14–16. Amendments thatparticularize a pre-existing claim are granted more liberally than those which effectively add new causes of action.

The onus is on theapplicants to adduce a modest amount of evidence to support their proposed amendments. [13] Devon has met its evidentiary burden. There is sufficient evidence to support the amendments that Devon requests and, for thereasons that follow, I am satisfied for the most part that none of the exceptions to the general rule bar Devon from amending its pleadingsas proposed. Only paras 35(e), (

i) and (

j) are hopeless and, accordingly, the application for these amendments is denied. a. Any prejudice from allowing amendment is compensable in costs [14] The amendments proposed at paras 29 and 31 do not fall into the category of breaches that were known to Devon after the2012 audit; rather, the claims made there arise from the Revised NCI Statements and could not have been made before 2014. Thus, thesetwo paragraphs fall within the same category of amendments to which CNRL had consented on the basis that they arose from changes tothe NCI Statements, which CNRL initiated mid-litigation. Leave is therefore granted to amend these paragraphs. [15] CNRL’s objection to paras 27, 32(a)(b)(e)(

f) and (

g) on the basis that Devon could have made these claims sooner assumestwo things: first, that these amendments add new claims to expand the scope of the proceedings and, second, that CNRL has suffered orwould suffer prejudice if those amendments were now allowed. CNRL cites no authority for its position that Devon was required toinclude additional allegations of breach in its original pleading. While CNRL argues it would suffer prejudice if it were compelled toproduce thousands of additional records, it has not raised prejudice by virtue of these amendments.

Crucially, CNRL bears the burden ofdemonstrating prejudice resulting from an amendment: Castledowns Law Office Management Ltd v FastTrack Technologies Inc, 2012ABCA 219 at para 17, 533 AR 287 [Castledowns]. It is not up to the amending party to prove a negative, i.e. that no prejudice arisesfrom its proposed amendments: Hodge v Carey Industrial Services Ltd, (AB KB), 202 AR 154 at para 10, 50 AltaLR (3d) 306 (Alta QB). [16] Certainly, it is important to file a claim at the earliest opportunity.

However, the importance of filing a complete and accurateclaim, which clarifies the real issues in dispute and ensures that defendants understand the case against them, is the reason courts haveadopted a liberal approach to amending pleadings: see Ignition Energy Ltd v Direct Energy Marketing Ltd, 2011 ABQB 90 at para 10,198 ACWS (3d) 321; Kent v Postmedia Network Inc, 2012 ABQB 559 at para 14, 548 AR 73. [17] The common law on amending pleadings in this province implicitly addresses CNRL’s concern regarding delay.

Under thegeneral rule, whether the amendments alleging additional breaches of the Agreement could have been made sooner is irrelevant. Instead,delay goes to the first exception—that is, whether the amendment would cause serious prejudice to CNRL, not compensable in costs. Ifind that it would not. [18] Most prejudice will be compensable with costs: Hunter Financial Group Ltd v Maritime Life Assurance Co, 2007 ABQB263 at para 12, 428 AR 150, aff’d 2009 ABCA 199, 457 AR 271 [Hunter].

For example, an amendment that lengthens the lawsuit maycause prejudice, but this prejudice may be compensated with costs: see Dow Chemical Canada Inc v Nova Chemicals Corp, 2010ABQB 524, 495 AR 338. There is no limit on what types of prejudice are relevant to the Court’s analysis.

Prejudice in this contextincludes detriment to one’s ability to defend, e.g. as a result of evidence that has been lost due to the passage of time, after a key witnesshas died, or in other circumstances: Castledowns, supra at para 22; Hunter, supra at para 12. [19] This Court has considered several situations in which defendants have suffered serious prejudice not compensable in costs.

Forinstance, in Canada Southern Petroleum Ltd v Amoco Canada Petroleum Co (1998), (AB KB), 221 AR 364, 62Alta LR (3d) 31 (Alta QB) [Amoco], MacLeod J held that amending a statement of claim to add a new cause of action, which arose afterthe start of the original action, would seriously prejudice the defendants where: • the application was made 100 days into trial and after the plaintiffs had closed their case;

• the matter had already lasted seven years; • the amendments would delay proceedings by at least one year; • trial would need to be adjourned; and • the amendments would require production of new records, discoveries, and expert reports before returning to trial. At para 26, the Court held “a delay of that magnitude results inevitably in serious prejudice to the Defendants which cannot be compensated for by costs.” [ 20 ] In Hunter , supra at para 37 , the defendant similarly argued that it would suffer serious prejudice as a result of the delay in bringing the amendment.

Thomas J contrasted the facts in that case with the facts in Amoco .

Although no adjournment would be necessary and proceedings would not be delayed by as much as one year, the Court held that allowing the plaintiffs to amend the quantum of damages would nevertheless cause serious, non-compensable prejudice because: • the claims related to ongoing revenue streams that dated back 7 or 8 years and which could go forward indefinitely; • the plaintiffs did not have a good explanation as to why they could not have applied to amend sooner; • their financial information was no better at the time of the application than it was when the Receiver was appointed; • much of the information had been physically moved and would have been difficult to locate; • many of the personnel familiar with the matter had changed; • entire teams no longer existed; • information systems had changed after a corporate merger; and • the volume of business carried on by the plaintiff was “enormous,” so the amount of information required to answer this claim at this late stage would have been “vast, varied and overwhelming.” [ 21 ] By the same token, in 321665 Alberta Ltd v Mobil Oil Canada Ltd , 2010 ABQB 522 at para 27 , 507 AR 140, Ross J applied the factors in Hunter to the case before her, concluding: Costs would compensate for some of the expenses of legal counsel, but cannot remedy the prejudice that would result from having to answer claims related to alleged savings in operating expenses dating back 13 years.

The evidence is that some financial records have been destroyed, and whether they may have included relevant information can never be known for sure. Persons who were involved in the matter have retired or moved on and their memories will obviously be significantly affected by the length of time that has passed. I conclude that the nature of the proposed claim, together with the inordinate length of time that has passed, combine to create prejudice to the Defendants that cannot be compensated by costs.

Although the defendants could not point to specific lost evidence, Ross J accepted the probability that their ability to answer the claim would have been prejudiced by the 13-year delay. [ 22 ] In Geophysical Service Inc v EnCana Corp , 2014 ABQB 276 at para 73 , 240 ACWS (3d) 834, Park J distinguished Hunter on the basis that his case (

i) did not involve a post-litigation merger that would have made it more difficult to locate evidence, (ii) would not require the same volume of information to answer the amended part of the claim, and (iii) did not yield evidence of lost or destroyed records. The parties had not yet completed discovery. As the amendments merely particularized the breach alleged in the original statement of claim, the defendants would not have had to defend anything more than they otherwise would have under the original statement of claim: paras 71–72.

As such, there could be no prejudice to the defendants from allowing the amendments. [ 23 ] Unlike Amoco , trial in this action has not begun and the parties are not ready to proceed to trial. Discovery is not yet complete, and it is not clear that allowing these amendments would delay proceedings more than necessary.

Devon has not offered a compelling reason why it could not have applied to amend its pleadings sooner in respect of the specific breaches arising from the 2012 audit; however, it is worth noting that this application was filed over one year ago and the hearing was delayed because of the lack of available court time. Much of the delay thus far may be attributed to the parties’ dispute over records production. The matter has lasted five years. The proposed amendments relate to financial data that dates back to 1999, but this is no further back in time than the claim advanced in the original pleading.

No corporate merger or change in information systems arises on the facts. There is no evidence that records have been destroyed. CNRL has not demonstrated that it would suffer serious prejudice arising from the passage of time that significantly impairs its ability to defend against these allegations: see Horst Tyson Dahlem Professional Corp v John F Schneider Professional Corp (Canmore Legal Services) , 2013 ABQB 601 at para 10 , 233 ACWS (3d) 601 [ Horst ]. [ 24 ] Some prejudice is to be expected whenever a claim that could have been brought sooner is delayed.

However, to the extent that these amendments would prejudice CNRL, such prejudice is compensable in costs. b. Devon’s claims regarding “Other Costs” are not barred by the Limitations Act [ 25 ] Devon’s proposed amendments claim, among other things, that CNRL breached the 1968 Agreement by charging various “Other Costs” to the Carried Account that are not permitted under the terms of the contract. CNRL argues that these claims at paras 32(d), 34, and 39 are out of time.

[26] Section 3(1)(

a) of Alberta’s Limitations Act requires parties who have suffered damages to file their claims for a remedialorder within two years from the date on which the party discovered or reasonably ought to have discovered the injury, the partyunderstood that the injury was caused by the conduct of the defendant, and the injury warranted a proceeding.

However, the Actexpressly contemplates amendments to pleadings where limitations deadlines have passed: 6(1) Notwithstanding the expiration of the relevant limitation period, when a claim is added to a proceeding previously commenced,either through a new pleading or an amendment to pleadings, the defendant is not entitled to immunity from liability in respect of theadded claim if the requirements of subsection (2), (3) or (4) are satisfied.

(2) When the added claim (

a) is made by a defendant in the proceeding against a claimant in the proceeding, or (

b) does not add or substitute a claimant or a defendant, or change the capacity in which a claimant sues or a defendant is sued, the added claim must be related to the conduct, transaction or events described in the original pleading in the proceeding [emphasisadded]. [27] “Claim” in

section 6 is broader than “cause of action”: Stolk v 382779 Alberta Inc, 2005 ABQB 440 at para 21, 383 AR 203.The Alberta Court of Appeal defines “claim” in the Act as the “facts giving rise to the injury or offence for which a remedial order issought”: Stuffco v Stuffco, 2006 ABCA 317 at para 40, 397 AR 111.

However, a new claim does not arise “[w]here amendments relateto the same sequence of events and the same continuing relationship between the parties and the factual background underlying theclaim”: Hunter, supra at para 20. [28] Assuming for the sake of argument that the amendments regarding “Other Costs” raise new claims and the time to bring thoseclaims has passed, as CNRL argues it has, they are nonetheless permissible under section 6(2)(

b) of the Limitations Act. Here, Devonseeks neither to add a claimant or defendant nor to change the capacity in which it sues CNRL. Furthermore, Devon’s claims that CNRLallegedly withdrew costs from the Carried Account other than those for Hedging and Excess Benefits are the product of CNRL’sinterpretation of the Agreement and accounting of the Carried Account more generally.

Since they allege breaches of the sameAgreement and arise out of the same legal relationship, I am satisfied that these claims are at the very least “related to the conduct,transaction or events described in the original pleading,” which is not a high threshold: Stolk, supra at para 36 [emphasis added]. c. New allegations of bad faith in administering the Carried Account requireheightened proof to amend [29] The parties agree that new claims alleging bad faith generally attract a higher evidentiary threshold to amend.

They disagree,however, on whether the bad faith amendments at paras 12, 14, and 35–36 merely elaborate upon a claim contained in the originalpleading or whether they constitute distinct causes of action, attracting the higher evidentiary burden. [30] There is a general rule against allowing amendments that allege fraud, high-handedness, or malicious conduct: see EvanoffEnterprises Ltd v Pioneer Hi-Bred Ltd, 2009 ABQB 223 at para 49, 471 AR 112 [Evanoff]; Canadian Natural Resources Ltd vArcelormittal Tubular Products Roman SA, 2012 ABQB 679 at para 78, 549 AR 72.

A higher standard of evidence is required to allowthis type of amendment: “There must be good ground in a particular case to relax the general rule against amending to allege fraud….Some cases say that ‘exceptional circumstances’ are needed. And it is impossible to show ‘good ground’ without significant evidence, letalone particulars” (Mikisew Cree First Nation v Canada, 2002 ABCA 110 at para 61, 303 AR 43).

Thus, significant evidence of fraudand evidence of intent are needed to amend: Evanoff, supra at para 49. [31] In Horst, supra at para 14, Millar J observed that “courts have allowed amendments that allege fraud where the originalpleading already contained the substance of the allegation or where evidence of fraud was only found in the course of questioning”[emphasis added]. In the present case, the proposed amendments do not allege fraud, but rather “bad faith” on CNRL’s part.

CNRLargues that this Court should effectively treat allegations of fraud and bad faith as equals for the purpose of determining what level ofevidence is necessary to allow the amendment. [32] It is worth noting that “bad faith” in this sense refers to the specific claims at paras 12, 14, and 35–36 that CNRL breached aduty to act in good faith.

It is distinct from the kind of bad faith that would preclude amendment if the amendment itself were sought inbad faith: see the fourth exception in Attila, supra at para 13. [33] In Beck v Edmonton (City) (1991), (AB KB), 118 AR 107, 25 ACWS (3d) 838 (Alta QB), this Courtheard an application for an injunction to restrain the City of Edmonton from enforcing taxi regulations that the applicant felt wereenacted in bad faith.

The Court held at para 9 that “to allege ‘bad faith’ is tantamount to alleging fraud.” Similarly, in InternationalWarranty Co (Receiver of) v International Warranty Co (Trustee of), [1997] AJ No 462 (QL) at para 3 (Alta QB), Clarke J held that“[c]ourts have always taken a very serious view of the allegation of bad faith or failure to act in good faith against a party in litigation.Such claims clearly ought not to be lightly made and should be clearly supported by clear evidence that establishes that allegation.”Despite the different contexts in which each of these remarks were made, I accept that bad faith is the type of conduct that the rulerequiring significant evidence aims to address. i.

Paragraphs 12 and 14 do not attract the heightened standard ofproof and are allowed [34] Strictly speaking, the amendments proposed at paras 12 and 14 do not allege bad faith. They merely claim that CNRL (

i) must

record the full particulars of Devon’s carried interest in good faith and (ii) must perform its obligations under the Agreement in good faith. Accordingly, these claims require only modest proof to amend, of which there is plenty. For instance, clause 12(

a) of the 1968 Agreement states that “[t]he Operator [CNRL] shall not be liable to the Non-Operator [Devon] for the results of any errors in judgment or for any loss resulting from errors in exercising any authority conferred upon it by this agreement so long as the Operator exercises its discretion in good faith …” [emphasis added]. Clause 14(

a) expressly stipulates that “[t]he carrying party [CNRL] shall record in the Carried Account full particulars of the carried interest held by the carried party under this agreement.” Meanwhile, clause 9 appoints CNRL as Operator for the joint account “and is deemed conclusively to have exclusive and unfettered discretion as Operator, subject to this agreement…” [ 35 ] While the correct

interpretation of the contract is a question for the trial judge, whether CNRL has an obligation to perform these obligations in good faith is arguable in light of the evidence, which is sufficient to allow the amendment: see Balm v 351 2061 Canada Ltd , 2003 ABCA 98 at para 12 , 327 AR 149 in which Côté JA said that even a doubtful plea should be permitted if it is arguable. ii. Paragraphs 35 and 36 particularize allegations of bad faith contained in the original pleading [ 36 ] A new cause of action alleging bad faith requires significant proof. Adding particulars for an existing cause of action does not.

The Court of Appeal defined “cause of action” in Sherwood Steel Ltd v Odyssey Construction Inc , 2014 ABCA 320 at paras 23–24 , 245 ACWS (3d) 89, citing Markevich v Canada , 2003 SCC 9 at para 27 , [2003] 1 SCR 94 as “a set of facts that provides the basis for an action” [emphasis in original]. [ 37 ] Where, as here, the original pleading already contained the substance of the allegation—that CNRL breached a fiduciary duty and a contractual duty to act in good faith—courts may allow amendments that elaborate upon that claim.

This is consistent both with the rationale of pleadings, which is to give the other side notice of the case it has to meet, and with the technical requirements for pleadings in Rules 13.6(3) and 13.7, which require parties to include statements and particulars for matters that may take the other party by surprise, including fraud, malice, or ill will. [ 38 ] The original statement of claim alleges at para 25: “CNRL, as Operator, owes a fiduciary duty to the Plaintiffs. […] As a fiduciary, CNRL must act in the Plaintiffs’ best interests and must ensure that the Carried Account is managed in good faith and in accordance with the terms of the Agreement.

CNRL has breached its fiduciary duty…” The original pleading goes on to list at least two ways in which CNRL allegedly breached a fiduciary duty owed to the plaintiffs—namely, “charging the Hedging Costs and Excess Benefit Costs to the Carried Account” and “failing to credit the Carried Account with the Proceeds.” [ 39 ] The proposed amendments at paras 35–36 specifically allege bad faith in CNRL’s administration and accounting for Devon’s interest under the Agreement and provide particulars.

The key difference between these amendments and the original allegation at para 25 is that the revised pleadings list specific ways in which CNRL might have demonstrated bad faith. [ 40 ] Devon argues that these amendments should be allowed because they merely particularize the breach of fiduciary duty contained in the original pleading. Certainly, para 36 in the Amended Statement of Claim—the parallel

section to para 25 in the original pleading—alleges two additional ways in which CNRL breached its fiduciary duty: by charging the “Other Costs” to the Carried Account and by engaging in the “CNRL Misconduct” as particularized at para 35. [ 41 ] However, the amendments do more than just particularize the breach of fiduciary duty. They also particularize the breach of the Agreement.

For example, at para 24 (now para 34), Devon claimed that: CNRL has breached the Agreement by charging the Hedging Costs and Excess Benefit Costs to the Carried Account and by failing to credit the Carried Account with the Proceeds, as said actions and omissions were not undertaken by CNRL in good faith, with reasonable diligence or in accordance with generally accepted oilfield practices [emphasis added]. [ 42 ] The claim contained in this paragraph is distinct from the breach of fiduciary duty alleged at para 25 (now para 36).

It asserts that CNRL’s failure to act in good faith constituted a breach of the Agreement apart from any fiduciary duty CNRL may have also owed. The amendments proposed at para 35 therefore elaborate on CNRL’s bad faith, as it relates to CNRL’s capacity as Operator under the Agreement and as fiduciary. They describe how CNRL’s contractual and fiduciary duties were breached. Both of these causes of action were included in the original pleading. As these amendments plead particulars of bad faith, rather than launching entirely new causes of action, the Court allows all but three of them. iii. Paragraphs 35(e), (

i) and (

j) are hopeless [ 43 ] The amendments proposed at paras 35(

i) and (

j) allege bad faith by virtue of CNRL’s decision to change its method of accounting for Devon’s interest under the Agreement in 2014, four years after litigation commenced and after questioning and records production had proceeded on the basis of an entirely different

interpretation of the contract. Similarly, the only evidence offered to support the claim at para 35(

e) that CNRL has acted in bad faith by failing to provide sufficient information to enable Devon to test CNRL’s accounting is directly tied to CNRL’s failure to produce records requested in the context of this application. [ 44 ] The Ontario Superior Court of Justice very recently considered whether amendments alleging bad faith in the conduct of litigation could ground a claim for breach of fiduciary duty.

In Geographic Resources Integrated Data Solutions Ltd v Peterson , 2015 ONSC 4658 at para 34 , 257 ACWS (3d) 556, citing Canada v Stoney Band , 2005 FCA 15 , 249 DLR (4th) 274, leave to appeal to SCC refused, 30826 (15 September 2005), Beaudoin J held: Stoney Band confirms that no fiduciary duty exists between opposing parties in the conduct of litigation.

The court system is, by its very nature, adversarial and no defendant is required to act in the best interests of a plaintiff in conducting its defence… [T]his principle applies regardless of whether a fiduciary duty existed between the parties in a previous relationship outside the context of the litigation

[emphasis added]. [ 45 ] The Court does not allow the amendments at paras 35(e), (

i) and (

j) because CNRL’s conduct of the litigation cannot support a breach of a fiduciary duty or of a contractual duty to act in good faith. To that extent, they are hopeless. I will return to the proposed amendments at paras 35(e), (

i) and (

j) in discussing Devon’s added plea for punitive damages. [ 46 ] I am satisfied that there is sufficient evidence to support the rest of the amendments at paras 35–36. In particular, there is evidence on this application to demonstrate that CNRL: (

a) failed to reasonably interpret the Agreement (e.g. the Agreement makes no mention of a 20 percent Facility Fee that CNRL now asserts, and its old methodology included non-cash items in the Carried Account even as the New Methodology does not); (

b) interpreted the Agreement primarily in its own economic interest (e.g. the Affidavit of Richard Conn suggests that charging a 20 percent Facility Fee all but guarantees the Carried Account will not reach payout); (

c) failed to reasonably obtain or consider reasonable legal advice regarding the Agreement’s

interpretation (e.g. the same in-house counsel for CNRL advanced two significantly different

interpretations of the Agreement at various points in time); (

d) did not take steps to accurately record expenditures in the Carried Account (e.g. in questioning, CNRL’s corporate representative, Trevor Kratz, acknowledged errors in accounting related to the calculation of a 12 percent cap on employee benefits and admitted that CNRL could not substantiate various charges to the account); (

e) failed to recognize Devon’s interest in the Lease and Plant in its internal records or public disclosure materials (e.g. the affidavit of Kevin Deacon-Rosamond dated October 24, 2014 reviews these documents at length and suggests that CNRL repeatedly held itself out as 100 percent owner of the Horizon Oil Sands Project leases, despite Devon’s interest); (

f) changed its method of accounting without notice or explanation (e.g. CNRL amended or replaced NCI Statements even before litigation began); and (

g) was unable to explain or provide evidence to back up charges to the Carried Account (e.g. again, Kratz admitted that CNRL could not substantiate various charges to the Carried Account). d. The Court can grant any remedy, whether or not it has been expressly pleaded [ 47 ] Finally, CNRL objects to the proposed amendments at paras 41 and 44 of the Amended Statement of Claim because the remedies that they add are based on alleged facts that arose during the course of the proceeding and should be addressed by way of costs at the conclusion of the action.

Paragraph 41 asserts that CNRL’s misconduct and associated allegations, if proven, are “egregious and reprehensible, and [warrant] an award of exemplary and punitive damages.” Paragraph 44 lists the remedies that Devon seeks. The amendments request the following new remedies: (

a) a declaration of the amounts properly recorded in the Carried Account, including the “Other Costs” ; (

b) an injunction prohibiting CNRL from charging the “Other Costs” to the Carried Account; (

f) an order for the disgorgement of any benefit obtained as a result of CNRL’s misconduct and breach of fiduciary obligations; (

g) costs on a full indemnity basis; (

h) special costs incurred as a result of CNRL’s change in accounting methodology and

interpretation of the contract; and (

i) punitive/exemplary damages. [ 48 ] This Court has the authority to grant any remedy it deems fit, regardless of whether or not a particular remedy has been pleaded: Alberta Rules of Court , Alta Reg 124/2010, s 1.3(2). It is with this knowledge that the Court exercises its discretion in allowing new remedies to be pleaded, or not. [ 49 ] As paras 44(

g) and (

h) explicitly request costs, CNRL’s objection to the remedies at para 44 on the ground that they should “go to costs” provides no defence. They are allowed. [ 50 ] Amendments to 44(

a) and (

b) seek to include the “Other Costs” charged to the Carried Account within the scope of remedies that Devon had already requested in its original pleading. Since the Limitations Act does not bar Devon’s claims regarding the Other Costs, it is only appropriate that Devon should be able to amend its remedies to refer to these Other Costs too. [ 51 ] Only paras 41, 44(f), and 44(

i) present challenges. i. Paragraphs 41 and 44(i): Punitive damages [ 52 ] As a general rule, the appropriate remedy for misconduct by the parties before litigation is damages, while the remedy for misconduct in the course of litigation is costs. Awarding costs on a full indemnity basis is no substitute for punitive damages and entitlement to one does not preclude the other. Costs and punitive damages are fundamentally different; one must not conflate them: see College of Physicians & Surgeons (Alberta) v H(J) , 2009 ABQB 48 at paras 12–23 , 468 AR 101 for a

summary of the law in Alberta. At paras 14–16 and 18, Graesser J acknowledges it is possible that pre-suit misconduct—normally the domain of damages— may ground an award for solicitor-and-client costs if there is a fiduciary relationship, citing Polar Ice Express Inc v Arctic Glacier Inc , 2009 ABCA

20 at para 22 , 446 AR 295. However, courts will endeavour to distinguish between pre- and post-suit misconduct whenever possible in awarding damages and in fixing costs. [ 53 ] According to the proposed amendment at para 41, what warrants punitive damages in this case is “CNRL’s conduct…in relation to the Agreement, the accounting for the Carried Account, and the accounting or failure to account for the Plaintiff’s interest in the Lease and Plant…” This statement is broad.

Contrary to the assertion of CNRL’s counsel, the facts underpinning these allegations did not all arise in the course of litigation, nor do they necessarily relate to the conduct of the litigation . With three important exceptions, they refer to CNRL’s conduct over many years before the action began. [ 54 ] By contrast, the particulars proposed at paras 35(e), (

i) and (j), which I set aside earlier, are unique in that they describe the adverse impact of CNRL’s revised methodology on Devon’s prosecution of this case. Conduct of the litigation that may justify special costs includes taking steps to delay, deceive, and defeat justice, hindering or confusing the litigation, prolonging a trial unnecessarily, concealing material records, failing to produce records in a timely fashion, or other behaviour constituting blameworthiness in the conduct of the action: Sidorsky v CFCN Communications Ltd , 1997 ABCA 280 at para 28 , 206 AR 382. The allegations at paras 35(e), (

i) and (

j) relate to the parties’ conduct of the litigation and are properly resolved by way of costs. [ 55 ] The alleged misconduct that occurred prior to this action may still give rise to punitive damages. Punitive damages are available in exceptional cases that warrant punishment, deterrence, or denunciation in addition to the compensatory damages that are ordinarily awarded in a civil suit.

In Whiten v Pilot Insurance Co , 2002 SCC 18 , [2002] 1 SCR 595, the Supreme Court of Canada restored a jury’s award of $1 million in punitive damages against an insurer who acted in bad faith by contesting a fire insurance claim. Like Whiten , this is a breach of contract case. To receive punitive damages in a contract case requires the presence of an independent actionable wrong.

The fiduciary duty that Devon alleges CNRL owes to it and has breached is one such wrong. [ 56 ] The Supreme Court addressed the issue of pleading punitive damages at paras 84–92, holding at para 87 that “the facts said to justify punitive damages should be pleaded with some particularity” so that defendants may fairly respond. To be sure, the latter half of Devon’s proposed amendment at para 41 is unhelpful: stating that CNRL’s conduct has been “egregious and reprehensible” is conclusory rather than explanatory.

However, para 44(i), the first half of para 41, and the slew of misconduct alleged at para 35 disclose the factual basis upon which Devon’s plea for punitive damages rests. Such a plea is not hopeless, and these amendments regarding punitive damages are permitted. [ 57 ] CNRL argues that the full range of misconduct alleged at para 35 arises from the decision to revise its methodology for the Carried Account. That may be true, but it does not all arise from the conduct of litigation.

Although the decision to change methodologies mid-litigation or CNRL’s refusal to produce certain records cannot give rise to damages, the

interpretation of the contract (i.e. the content of the methodology) that it now advances may properly give rise to damages. [ 58 ] I express no opinion as to whether this is the kind of case that warrants punitive damages. It goes without saying that parties can plead any relief they want; it does not necessarily mean that they are entitled to receive the relief that they plead. ii. Paragraph 44(f): Disgorgement [ 59 ] Paragraph 44(

f) requests the disgorgement of any profits obtained as a result of a breach in CNRL’s alleged fiduciary duty. Like the plea for punitive damages, the facts underpinning the claim for disgorgement, rooted as it is in an alleged breach of fiduciary duty, did not arise in the course of litigation. On the contrary, the breach of fiduciary duty is based primarily on CNRL’s general management of the Agreement and the Carried Account. It rests on alleged facts that preceded the start of litigation and have nothing to do with the conduct of the litigation itself.

Therefore, Devon may add this plea for disgorgement, as it is reasonable and arises from the breach of fiduciary duty pleaded in the first instance. e. The amendments are not hopeless or proposed in bad faith [ 60 ] Finally, except as expressly provided above, the proposed amendments are not hopeless. They particularize CNRL’s breach of the Agreement and breach of the fiduciary duty that Devon claimed in its original pleading. CNRL joined issue on whether or not it acted in good faith when it denied any allegations of bad faith at paras 16 and 24 of the Statement of Defence.

Furthermore, the parties expressly agreed at para 4(a)(ii) of the Complex Case Litigation Plan that one of the real issues in dispute is whether “CNRL properly exercised any authority it may have as Operator in good faith…” These amendments principally serve to focus the dispute over good faith by naming alleged instances of bad faith. [ 61 ] CNRL would not suffer serious, non-compensable prejudice as a result of these amendments. None are statute-barred by the Limitations Act , and there is no evidence that Devon makes its application in bad faith. The general rule in Attila prevails.

Therefore, Devon’s application to amend its pleadings is granted, subject to the limitations set out above. All but paras 35(e), (

i) and (

j) are allowed. 2. Should the Court grant Devon’s application for production of records in whole or in part? [ 62 ] Devon seeks seven categories of records, including: 1. native (i.e. Microsoft Excel or Comma Separated Values) spreadsheets, including embedded formulas and metadata, to supplement the “unusable” copies already produced in TIFF format; 2. electronic financial database records on the Horizon project’s revenue and costs; 3. records on Oil Sands Royalty Regulation filings, which were the starting point for costs included in spreadsheet models under the

old NCI statements prior to adopting the New Methodology; 4. backup records for hedging costs charged to the Carried Account or included as part of the Facility Fee costs; 5. records on determining CNRL’s expenditures related to the bitumen upgrader; 6. records on CNRL’s New Methodology, including backup supporting records; and 7. miscellaneous records requested by Devon’s expert, Richard Conn, in a letter to CNRL’s counsel dated August 8, 2014 (the “Conn Requests”). [ 63 ] CNRL offers a series of general, alternative arguments as to why it should not have to produce (or reproduce, as the case may be) these records.

They may be summarized as follows: 1. the records are not relevant and material; 2. even assuming they are relevant and material, they have already been produced in accordance with the production protocol as agreed by the parties in the Complex Case Litigation Plan and need not be reproduced in their original format; 3. even assuming they are relevant and material, the records are usable in TIFF format as produced; 4. even assuming they are relevant, material, and unusable, the native spreadsheets that Devon requests are not “readily available” or “reasonably accessible,” so compelling CNRL to produce an additional 3,516 native spreadsheets would impose an undue burden on CNRL disproportionate to their probative value in this action; and 5. until the hearing CNRL had also argued that Devon’s goal of reconstructing the Carried Account from scratch was unnecessary and that, in any event, Devon already has the information required to accomplish that objective without further production. [ 64 ] By contrast, Devon asserts that: 1. all of the requested records are relevant and material; 2. the native files should be disclosed regardless of the protocol negotiated by the parties; 3. the records are not usable as produced; 4. the native files are readily available and producible without much burden on CNRL; and 5. reconstructing the Carried Account from first principles is necessary to this action and it needs additional production to accomplish this task. a.

Are the requested records relevant and material? [ 65 ] The parties agree on the basic law regarding relevance and materiality. The Alberta Rules of Court , Alta Reg 124/2010, s 5.5(1) compels every party to an action to serve an affidavit of records on all other parties in the form prescribed by rule 5.6. Rule 5.6(1) (

b) requires such affidavit to “disclose all records that (

i) are relevant and material to the issues in the action, and (ii) are or have been under the party’s control.” This includes confidential records. Only privileged records need not be produced. Rule 5.2 defines what records this Court will consider relevant and material for the purpose of disclosure: 5.2(1) For the purposes of this Part, a…record or information is relevant and material only if…the record or information, could reasonably be expected (

a) to significantly help determine one or more of the issues raised in the pleadings, or (

b) to ascertain evidence that could reasonably be expected to significantly help determine one or more of the issues raised in the pleadings. [ 66 ] In Hunka v Degner , 2011 ABQB 195 at para 41 , 200 ACWS (3d) 70 [ Hunka ], citing Mustard v Brache , 2006 ABCA 265 at paras 10–12 , 397 AR 361, this Court held that because records must be able to significantly help determine one or more of the issues raised in the pleadings or to ascertain evidence that could reasonably be expected to accomplish that end, the parties’ pleadings are the starting point for assessing the relevance of records.

Accordingly, it is appropriate to assess relevance on this application based on the issues raised in the pleadings, as amended. [ 67 ] To say that a document is relevant means that it is of primary relevance (i.e. it furnishes evidence of the facts directly in issue) or secondary relevance (i.e. it furnishes evidence of facts from which primary facts may be directly inferred). Records of tertiary relevance that go only to facts from which secondary facts may be inferred are not relevant for the purpose of civil procedure in Alberta: Hunka , supra at para 41 .

However, in Weatherill (Estate of) v Weatherill , 2003 ABQB 69 at para 18 , 337 AR 180, Slatter J (as he then was) noted that the distinction between primary, second, and tertiary relevance is often imprecise: …as a working tool the search for “tertiary” issues is unhelpful in many cases. There is no clear dividing line between primary, secondary, and tertiary evidence. As I have indicated, some facts can only be proven by tertiary or even more remote evidence. A good example is an attempt to prove a negative .

The application of … Rule [5.2] to particular fact situations must be primarily pragmatic [emphasis added] .

[ 68 ] Meanwhile, materiality is a question of proof: see Weatherill , supra at paras 16–17 . The question is will this record significantly help determine an issue or ascertain evidence that will significantly help determine an issue in dispute? If so, the record is material. If not, the record is immaterial and need not be produced.

The purpose of the rule is to avoid abusive, excessive, and unnecessarily expensive discovery; however, it is not meant to cut off legitimate lines of inquiry: Weatherill , supra at para 16 . [ 69 ] Thus, determining whether a particular record or class of records are relevant and material to the action is a threshold question. While relevance and materiality are legal concepts with definite meaning, this Court has significant discretion to decide whether records should be produced.

The Court of Appeal will not interfere with an application judge’s decision unless it is “based on an error in principle, a misapprehension of the facts, or the decision itself is unreasonable”: Canadian Natural Resources Ltd v ShawCor Ltd , 2014 ABCA 289 at para 27 , 580 AR 265. [ 70 ] Much of the evidence supporting Devon’s present application for records production rests on the affidavit of Devon’s proposed expert, Richard Conn. Conn asserts that the records Devon seeks are necessary to carry out his analysis.

On the other hand, CNRL argues that a full reconstruction of the Carried Account is unnecessary and that Conn’s evidence should be given little weight because he has no expertise on the JD Edwards E1 accounting system that CNRL uses. As a result, CNRL does not believe Conn is in a position to suggest either that the records are relevant or that they could be readily produced without much burden. [ 71 ] I disagree. Not unlike the present action, in Hunka , supra at paras 44, 47 , the pleadings claimed breach of contract and unjust enrichment, among other things.

The plaintiffs there also similarly requested “financial statements of the corporate defendants, major contract documents and documents showing shareholder transactions.” In ordering disclosure of the defendant’s year-end financial records, Gill J noted that these were “documents which the plaintiff’s expert consider[ed] necessary ” to his analysis [emphasis added]. [ 72 ] The evidence demonstrates that Devon’s proposed expert is an accredited accounting professional with significant experience analyzing complex accounts.

If he swears that these additional records are necessary to the preparation of his report, then this Court is inclined to agree. No independent witness suggests that Conn does not need this data to do his analysis. In Christian Jew Foundation v Christian Jew Outreach , [2006] OJ No 5418 at para 17, 155 ACWS (3d) 539 an Ontario Master was likewise prepared to accept a proposed expert’s evidence that he needed certain records to conduct his analysis, finding that he reasonably formed his opinion based on what had already been produced and the gaps that remained.

Having reviewed Conn’s affidavits, I find that the same is true in this case.

See also Air Canada v WestJet Airlines Ltd , [2006] OJ No 1797 at para 17, 149 ACWS (3d) 574 , where the Court held that “it does not lie within the purview of Air Canada to decide what information WestJet’s experts do or do not need. […] Air Canada will have its opportunity in the fullness of time to challenge the findings of WestJet’s experts.” [ 73 ] More importantly, Weatherill , supra at para 16 instructs this Court not to scrutinize counsel’s proposed line of argument too closely in assessing the materiality of requested records: In deciding whether a particular document is material, one must take a very pragmatic view, viewing the situation from the perspective of the party who must prove the fact in question.

At an interlocutory stage of proceedings, the Court should not measure counsels’ proposed line of argument too finely; if counsel can disclose a rational strategy in which the disputed document plays a material part, that should be sufficient [emphasis added]. [ 74 ] Based on the evidence, I am satisfied that Devon’s counsel has disclosed “a rational strategy in which the disputed [records play] a material part.” The proper accounting of credits and debits to the Carried Account is a key issue in this action.

It is a misnomer to describe Devon’s strategy as “reconstructing” the Carried Account when no distinct Carried Account exists in the first place. Devon’s application for production stems from a legitimate need to test the propriety of CNRL’s accounting and to run its own scenarios against the raw data that goes into the accounting. This case is not a simple matter of contractual

interpretation as CNRL suggests. Devon’s claim questions not only whether the subject matter of certain debits or credits are permitted by the terms of the Agreement, but also the accuracy and authenticity of those debits and credits. This is consistent with Devon’s allegation that CNRL breached a duty to act in good faith as Operator. [ 75 ] Relevance and materiality are evident in each of the following categories. i.

Native spreadsheets, including embedded formulas and metadata, to supplement the “unusable” copies already produced in TIFF format, including Conn Request #8 [ 76 ] This category of records refers to spreadsheets that CNRL has already produced in this action. Devon wants CNRL to reproduce the spreadsheets in their native file format because it argues that they are impractical and difficult to manipulate or to run scenarios on without the original Excel files. CNRL agrees that if the TIFF versions of these spreadsheets were relevant and material, then their native counterparts are also relevant and material.

However, CNRL argues that the embedded formulas and metadata that attaches to various cells in the native spreadsheets are (

i) privileged or (ii) irrelevant. [ 77 ] Prior to the hearing, CNRL had produced 34 spreadsheets in Excel format. Each file had its links to other spreadsheets broken, it’s irrelevant and commercially sensitive information redacted, and its dynamic formulas replaced with hardcoded totals. [ 78 ] There is no doubt that metadata qualifies as a record subject to disclosure: see Spar Aerospace Ltd v Aerowerks Engineering Inc , 2007 ABQB 543 at para 75 , 428 AR 84, aff’d 2008 ABCA 47 , 85 Alta LR (4th) 14.

In Spar , the Court held that litigants need not disclose metadata in most situations because it often contains only irrelevant information. However, metadata is relevant and material “where the pleadings disclose that the identity of the author of electronic records, the timing of the treatment of those records—including if and when they were modified, the dates and tracking routes of e-mail, are all potentially at the very core of the issues that are raised in the litigation”: Spar , supra at para 76.

That case involved an action for breach of contract and breach of fiduciary duty against Spar’s former employees who allegedly advertised software they had developed in the course of their employment. Thus, the authorship and timing of the records was highly relevant to proof of the ex-employer’s claim. [ 79 ] Here, Devon’s request for native files with their metadata is aimed at two ends: (

i) discovering how certain numbers in each

spreadsheet are calculated and interrelate, and (ii) learning the source of certain data. One of the claims in the pleadings is whether CNRL breached the Agreement by charging Hedging Costs, Excess Benefit Costs, and Other Costs to the Carried Account as part of the Facility Fee, or whether CNRL miscalculated the Other Costs: see paras 32(c)–(d).

Perhaps a well-trained eye could guess how the Facility Fee was calculated based on the records produced and the questioning of witnesses, but providing native files with their mathematical formulas intact is the only way to be certain as to how certain cells were calculated. These formulas would help to significantly prove facts directly in issue, e.g. that certain costs were or were not indirectly charged to the Carried Account and/or that those costs were miscalculated.

Put simply, where the calculation of amounts charged to the Account are in issue, the formulas used to calculate those amounts are relevant and material. [ 80 ] CNRL has failed to demonstrate that this metadata is privileged. [ 81 ] At the hearing of this application CNRL agreed to provide, and since the hearing has provided, 500 spreadsheets identified by Devon as a priority. To the extent these spreadsheets obviate the need for further production in this category, Devon will not require the additional spreadsheets. ii.

Electronic financial database records on the Horizon project’s revenue and costs, including Conn Requests #5–7, 14–16, 18–20 [ 82 ] Devon seeks production of the credits and debits entered into the E1 accounting system with respect to Horizon so Devon can apply what it believes is the correct

interpretation of the contract to the actual financial data for the project. Devon does not seek the invoices or contracts to support all of these items in the account. Implicit in this request is an assumption that CNRL’s accounting cannot be trusted and that the account must be reconstructed from scratch to understand the full scope of damages.

As a result, this request seeks production of the general ledger, trial balance, chart of accounts, and other records requested by Devon’s proposed expert. [ 83 ] The Amended Statement of Claim alleges that CNRL failed to credit the Carried Account with Devon’s full share of the proceeds relating to the operations of its Lease and the Horizon Plant: see para 32(a). Devon also claims that CNRL failed to charge the Carried Account with the full costs associated with the construction and operation of the Plant: see para 32(b).

Notwithstanding whether or not a full “reconstruction” of the Carried Account is necessary, electronic financial database records on the Horizon project’s revenue and costs are, at a minimum, relevant and material to whether or not CNRL did, in fact, credit and debit the Carried Account in accordance with the Agreement.

For instance, comparing the financial database records for the Horizon project with the Revised NCI Statements provided to Devon would either corroborate or contradict CNRL’s assertion that it has at all times acted accurately and in good faith in its accounting of Devon’s interest. [ 84 ] Furthermore, producing this source data would minimize delay if CNRL were to change its methodology again and empower this Court to reach a just outcome if the trial judge were to disagree with the

interpretations offered by the parties.

Although the “rules of evidence permit the introduction of summaries of voluminous source documents,” it is generally still “a requirement that the source documents be disclosed to the opposing side, and introduced as part of the trial record”: Kon Construction Ltd v Terranova Developments Ltd , 2015 ABCA 249 at para 46 , 602 AR 327. [ 85 ] Viewing the situation from the perspective of Devon as Weatherill , supra , directs the Court to do, it cannot be said that seeking Horizon’s financial database records to reconstruct the Carried Account is an irrational strategy to prove its claims. iii.

Records on Oil Sands Royalty Regulation filings [ 86 ] CNRL argues that the End of Period Statements from CNRL’s royalty filings are no longer the basis for the revised NCI Statements of costs and expenses and therefore are not relevant to the action. In other words, CNRL submits that, as it has adopted a new

interpretation of the Agreement, only those records relating to the new

interpretation are relevant. [ 87 ] Devon argues that the Oil Sands Royalty Regulation filings are relevant and material because these records contain detailed, audited records of costs associated with the Horizon project that are relevant to the issue of whether CNRL has properly included all of Devon’s share in the Carried Account, notwithstanding any relevance they had to CNRL’s old methodology. [ 88 ] I agree with Devon. These filings with the Crown are relevant to whether CNRL properly accounted for Devon’s carried interest.

CNRL submits that it has already produced all relevant royalty records, but the evidence suggests otherwise. CNRL asserts that it has searched its database for numerous keywords, including “OSR,” “Department of Energy,” “End of Period,” “EOPS,” “PNCB,” and “Oil Sands Royalties” to retrieve relevant records. Exhibit N to the Affidavit of Trevor Kratz dated November 7, 2014 confirms that CNRL executed a variety of searches to recover OSR-related records; however, “Oil Sands Royalties” was not actually one of them.

Thus, the Court is not persuaded that CNRL has produced all relevant and material records relating to oil sands royalty regulation filings. iv. Backup records for hedging costs charged to the Carried Account or included as part of the Facility Fee costs [ 89 ] One of the issues raised by the pleadings is whether or not CNRL breached the Agreement by charging the Hedging Costs to the Carried Account: see para 32(c). To date, CNRL has produced only summaries of hedging losses in the accounting records.

Devon argues that whether CNRL attempts to justify the Hedging Costs on the basis that they were “reasonably necessary for operations” under clause 319 of the Agreement, or that they are capital costs chargeable as part of the Facility Fee, these backup records (including contracts for each type of hedges that CNRL entered into) are relevant to proving whether or not the costs actually “relate to the Horizon oil sands project, were incurred for the joint account, were reasonably necessary for operations” and, by extension, whether they are permitted under the Agreement. [ 90 ] Backup supporting records that disclose the terms of various hedging contracts are relevant and material to establishing whether there was a breach of the Agreement by charging approximately $600 million in Hedging Costs to the Carried Account each

year. For example, at para 34 of the Amended Statement of Claim, Devon alleges that CNRL did not charge the Hedging Costs in good faith. If Devon can demonstrate that all or part of the Hedging Costs were unrelated to Horizon or the joint account, then such evidence might bolster its claim of bad faith on CNRL’s part. The hedging contracts are thus relevant and material. v.

Records on determining CNRL’s expenditures related to the bitumen upgrader [ 91 ] CNRL argues that the Revised NCI Statements issued in 2014 already include detailed cost information at the business unit, account, and sub-account level regarding the synthetic crude upgrading portion of Horizon. CNRL’s New Methodology for the Carried Account includes Synthetic Crude Oil (SCO) revenues and capital/operating costs associated with the upgrader used to produce SCO. As a result, Devon argues that records to substantiate the upgrader expenditures are required to reconstruct the Carried Account and test CNRL’s

interpretation of the Agreement. To date, CNRL has produced only

summary-level information regarding SCO revenues and upgrader expenditures. [ 92 ] CNRL argues that such production represents a level of information beyond what is strictly necessary to prove Devon’s claims. Devon, however, is entitled to test CNRL’s accounting, particularly given the lack of a segregated Carried Account. It seeks production so it may do its own math. In this case, the claims for breach of fiduciary duty and bad faith justify the production of this supporting documentation. vi.

Records on CNRL’s New Methodology including backup supporting records [ 93 ] These records specifically refer to impairment tests and asset retirement obligation re-measurement. Devon argues that these records relate to CNRL’s expected rate of return on the capital invested in Horizon, which is relevant to testing the reasonableness of charging a 20% annual Facility Fee to the Carried Account. This is a plausible line of argument and I find that these records are relevant and material to proving whether charging the Facility Fee as calculated breaches the Agreement. vii.

Miscellaneous records requested by Devon’s expert, including Conn Requests #1, 4, 11–13, 17 [ 94 ] Although these records do not strictly fall within the categories listed above, they are relevant and material in their own right. Requests #1, 11–13, and 17 seek production of forward-looking records, financial forecasts, cash flow statements, and risk assessments that are relevant to assessing the reasonableness of the 20% Facility Fee and CNRL’s Hedging Costs, including whether it was reasonable for CNRL to incur these costs in light of what CNRL understood to be its risk and financial projections at the time.

CNRL put these forward-looking records directly in issue when its corporate representative admitted on cross-examination that CNRL’s New Methodology “better accommodates [its own] development plans,” despite its fiduciary obligation to Devon. [ 95 ] Lastly, request #4 seeks models CNRL created to calculate the monthly accrual required for Horizon Stock Option expenses, which I find are relevant and material to proving Devon’s allegations regarding Excess Benefit Costs. b.

Should records already produced in accordance with the parties’ mutually agreed upon Complex Case Litigation Plan be reproduced in native format? [ 96 ] Devon cites 2038724 Ontario Ltd v Quizno’s Canada Restaurant Corp , 2012 ONSC 6549 at paras 128–131 , 223 ACWS (3d) 49 [ Quizno’s ] for the proposition that CNRL ought to produce the original electronic spreadsheets it has already produced in TIFF image format, notwithstanding the parties’ agreed disclosure protocol, because it would enable the plaintiffs to manipulate the data and test different analyses more robustly.

In that case, the Ontario Superior Court found that Quiznos’ refusal to acquiesce to this request was “largely a technicality” because the defendant had conceded that reproducing the records in their original format would not be difficult and would not result in hardship. Like CNRL in this application, Quiznos relied on the fact that it complied with the parties’ discovery plan agreement and thus argued it had no obligation to produce them in any other format.

Perell J’s comments at paras 130–131 are especially salient: While I agree that discovery plans are important and that generally speaking a court should not allow the significant effort to establish a plan becoming a waste of time and effort by not holding parties to their agreement, discovery plans are just that, they are a plan and there is an old maxim that it is a bad plan that admits of no modification. I am not impressed with Quiznos’ purely technical…argument.

For the already produced documents, if there is a readily available copy in Excel format , then the document should be produced again in Excel format [emphasis added]. I agree. The parties’ disclosure protocol in their litigation plan does not bar the Court from ordering CNRL to reproduce its spreadsheets in native format. [ 97 ] Devon additionally cites Adroit Resources Inc v Tres-Or Resources Ltd , 2008 BCSC 1211 , 172 ACWS (3d) 351 [ Adroit ] and Gamble v MGI Securities , 2011 ONSC 2705 , 201 ACWS (3d) 53 [ Gamble ].

In Adroit , supra , an action between two mining companies that shared an interest in mineral deposits, the British Columbia Supreme Court agreed at paras 74–81 that the defendant ought to reproduce spreadsheets in their native electronic format, even though its production up to that point had complied with the Chief Justice’s Practice Direction on electronic evidence. The Justice in Chambers reasoned that native files “may contain useful information about how the documents were created” and therefore should be produced. [ 98 ] In Gamble , supra at paras 20–22 , an Ontario Master ruled that:

…the production of [non-native] documents by DVD or in paper format is not meaningful and does not permit the plaintiff to take full advantage of technology now available to manage document intensive litigation. […] [T]he defendant’s original documents…are in their original format, electronic or electronically created and stored and consequently, the plaintiff is entitled to the documents in that format.

The fact that the defendants had stored the documents in their native format was relevant to the Master’s decision, as producing them in their native format was an “efficient” result. [ 99 ] Based on these authorities, the issue is twofold: (1) has CNRL substantiated its claims that it would suffer significant prejudice as a result of having to reproduce documents in Excel format, and (2) does needing to re-run a query in CNRL’s E1 accounting system to regenerate the already-produced records (as CNRL claims it must) mean the records are not readily available or, using the Court’s language in Spar , supra at para 57, reasonably accessible?

If the answer to either of these questions is “Yes,” then CNRL should not have to reproduce those records in native format. CNRL argues (1) that it would suffer hardship and experience difficulty in having to reproduce its records, and (2) that, unlike the situation in Quizno’s , the native files it has already produced in TIFF format are not readily available. [ 100 ] The evidence on each of these points is lacking. Devon claims the native spreadsheets are at the offices of CNRL and its counsel.

That conclusion was supported by CNRL’s corporate representative, Trevor Kratz, in the cross-examination on his affidavit. CNRL’s counsel now argues Kratz was mistaken. [ 101 ] Whether or not CNRL has saved native files of the records it produced in TIFF format, it is clear that CNRL has ready access to the information on which those records are based in the form of its E1 system.

CNRL asserts that its hardship arises from having to: • manually redact certain parts of spreadsheets, • break references to external spreadsheets, • spend up to 1,000 hours to assure the quality and integrity of the data, and • spend significant time and money on this process. [ 102 ] CNRL emphasizes that the burden in reproducing these documents lies not in having to run a query in the E1 system to generate the relevant data, but in the subsequent process of quality assurance.

Based on CNRL’s own estimate of 1,000 hours and the claim that Devon’s request would result in the production of an additional 3,516 electronic spreadsheets, it would take approximately 17 minutes to produce each record. In total, CNRL would spend 125 eight-hour workdays or 25 forty-hour work weeks to produce native files in this action. One employee could fulfill Devon’s request in less than half a year.

This is consistent with the evidence of Julie Watkins, the CNRL Director responsible for the E1 system, who quoted six months or a cost of approximately $50,000. [ 103 ] To be fair, this calculation does not include the extra cost CNRL claims it would incur as a result of enlisting the services of a third-party consultant to export revenue and expenditure data held in legacy databases for years prior to 2004; however, the only evidence of this cost is that it would be “significant.” There is no estimate of this cost in evidence. [ 104 ] Aside from the amount of time it would take to re-create the spreadsheets already produced in this action, CNRL asserts that the records are not “readily available” by virtue of the fact that there is no Carried Account separate and distinct from all other financial data for the Horizon project.

CNRL says all Horizon financial data is maintained in its E1 accounting system and would need to be re- exported to satisfy Devon’s production request. However, unless the data was directly exported in TIFF format, CNRL presumably kept original copies of the spreadsheets it delivered to Devon in this action to date. Regardless, any burden on CNRL arises from its own failure to maintain a separate Carried Account. [ 105 ] Finally, CNRL claims that reproducing the spreadsheets in their native format amounts to oppression, citing this Court’s decision in SW v TK , 2005 ABQB 298 at paras 38–41 , 379 AR 320.

That case is distinguishable from the present situation. In SW , the plaintiffs were held in contempt of court for failing to follow deadlines imposed by Court Order and deliberately delaying proceedings by refusing to comply with undertakings to answer questions. By contrast, the delay in this action cannot be meaningfully described as Devon’s “fault,” particularly given the bona fide merits of the application. [ 106 ] In Demb v Valhalla Group Ltd , 2014 ABQB 554 at paras 90–93 , 596 AR 309, Jones J considered an application for the production of electronic records.

He referred to Civil Practice Note #4 dated March 1, 2011, which provides guidelines for the discovery of electronic records. Among other things, the Practice Note expects that parties will discuss and agree upon a mutually acceptable format for the electronic production of records.

It provides a sample affidavit of records, the default rules that the Court will impute to the parties unless they agree otherwise, and various other best practices. [ 107 ] The webpage on which the Practice Note is posted acknowledges that receiving parties “are required to manipulate data before being able to use it,” and suggests that the Practice Note’s purpose is to encourage parties to consider these technical issues early in the litigation process to avoid duplication of effort later.

On this basis, the Court may choose to strictly enforce the production protocol that the parties agreed to, which was to produce all printable electronic records as TIFF images. However, based on the authorities cited above and the Court’s recognition that parties need to be able to manipulate electronic data, the Court must take a pragmatic approach based on what constitutes meaningful disclosure in an individual case. c. Are the records usable as produced in TIFF format? [ 108 ] CNRL argues it should not have to reproduce relevant spreadsheets because they are already usable in their TIFF format.

This is not a legal argument so much as it is a pragmatic one. Alberta courts have endorsed the principle that disclosure must be meaningful. For

instance, in Spar , supra at paras 71–73, Veit J held: …it is obvious that the defendants should produce their electronic records electronically: not only is hard copy production considerably more expensive, but it is also less searchable and is inferior because it does not retain potentially critical meta-data such as when and by whom a record was created or amended…. In order to access the electronic disclosure, it is obvious that a receiving party requires from the producing party whatever passwords and other systems necessary in order to constitute real disclosure.

d) Must unprocessed records be produced? The defendants must produce their electronic records in a meaningful way. Here the electronic records provided have not been processed for export into an electronic document database program. The principles of meaningful disclosure are the same, whether disclosure is made by electronic or paper means… [emphasis in original]. [ 109 ] According to CNRL, the TIFF spreadsheets are workable and usable by virtue of the fact that Devon’s proposed expert was able to discern key differences between CNRL’s old and new methodologies used to account for Devon’s carried interest.

Be that as it may, in Kaddoura v Hanson , 2015 ABCA 154 at para 16 , 600 AR 184 the Court of Appeal held that “[i]t is no objection that the questioning litigant may already ‘know’ the answer to a question, because the objective of the question is to get the other side to admit the fact.” So too is it with records production: “it is no answer to legitimate discovery inquiries that information in the hands of a litigant might also be available through other methods” (see para 18). [ 110 ] Moreover, if the spreadsheets were usable as produced, then this does not explain why CNRL’s own representative Kratz would prefer to consult the native files.

During cross-examination on his affidavit, Kratz implicitly cast doubt on the TIFF records’ usability: Q. But you’re not suggesting that this document that we’re looking at…goes to the level of invoices or journal entries; correct? A. I don’t know if it is – it may be journal entry level. I don’t know without – I’d have to go back and relook at the document. Q. You’d have to flip through the over thousand pages of this TIFF image to do it. A. In theory, yes. Q. But that’s not what you would do. You would go to the native spreadsheet, wouldn’t you? A.

Correct. [ 111 ] Earlier in the cross-examination, Kratz put it even more bluntly: Q. And unless it has employee names on it, there would be no reason to have any redaction issues associated with this document; correct? A. From an employee perspective, no. Without seeing what all the other columns are, there may be some sensitivity if there’s some suppliers’ names or confidential issues around that, but I know there’s other ways that it’s handled in a lawsuit, fair enough. Q. Okay. But in order to see the other columns, we have to go to the other pages of the [over 1000-page-long] TIFF image; correct? A. Yes. Q.

So…can you start scrolling through. Just keep clicking the little arrow. You’re on page 2. Is there any way you know, Mr. Kratz, for us to quickly get to where we know where the end of the spreadsheet is so we can see the rest of the columns? A. No. Q. So we have to sit here and click through the number of pages – A. It’s not useable. I understand that. Q. So you acknowledge that TIFF images of spreadsheets of this size like this are not useable? A.

For very large TIFF images, correct, yes. [ 112 ] So, while the TIFF spreadsheets may be used in an abstract, inefficient way, to compel Devon to do so when a more convenient alternative is available arguably gives CNRL an unfair advantage in this litigation. One’s inability to search and manipulate the data from across thousands of TIFF images renders them, at the very least, less usable than their Excel counterparts.

To that extent, their production in a format other than the one in which they were originally created does not give Devon meaningful access to what are otherwise relevant, material records. [ 113 ] To be clear, the concern about usability is not merely a complaint as to the inconvenience or incomprehensibility of TIFF images. The plaintiff’s proposed expert associates the records’ usability with the metadata and formulas that are included in the native files.

Merely lining up columns and rows, in his view, would make the spreadsheets more “readable” but no more “usable” because it would still be practically difficult to test the assumptions used to arrive at the data as presented. I accept his evidence on this point. [ 114 ] Lastly, CNRL asserts that if it is ordered to reproduce the spreadsheets in native format, “#REF” errors would inevitably arise where the spreadsheet pulls data from other source files beyond the scope of production. As a result, CNRL says the “native” file would be more akin to an “electronic picture,” rather than a fully functional document.

An Excel document with #REF errors may not be fully

functional, but its cells would still be manipulable, searchable, and capable of testing in a manner that static TIFF images are not. [ 115 ] Usability is as much a concern for a litigant as it is for the Court. Producing records in an unusable format undermines procedural fairness and just results. It does not help to narrow the issues in dispute, and not only impairs the plaintiff’s ability to prove its case, but also threatens the Court’s ability to understand the evidence put before it.

Thus, there is value in producing the spreadsheets in native format whether or not they contain #REF errors when Devon opens them on its own computer network. d. Would the expense, delay, danger or difficulty in producing these records be grossly disproportionate to the likely benefit? [ 116 ] Rule 5.3(1) empowers the Court to alter the normal obligation to disclose all relevant and material records: 5.3(1) The Court may modify or waive any right or power under a rule in this Part or make any order warranted in the circumstances if […] (

b) the expense, delay, danger or difficulty in complying with a rule would be grossly disproportionate to the likely benefit. [ 117 ] The parties disagree about the extent to which the principle of proportionality should determine the scope of electronic discovery. CNRL cites Chief Justice Wittmann’s recent comments in Dow Chemical Canada Inc v Nova Chemicals Corp , 2015 ABQB 2 , 605 AR 85 for the proposition that proportionality is an important principle in electronic disclosure.

Certainly, Wittmann CJQB goes so far as to state at para 48 that “ [t]he principle of timely and affordable access to civil justice, including proportionality, is now embodied in Canadian Law and in Alberta.” [ 118 ] CN

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