Spyglass Resources Corp v Bonavista Energy Corporation, 2017 ABQB 504

Court of Queen’s Bench of Alberta Citation: Spyglass Resources Corp v Bonavista Energy Corporation, 2017 ABQB 504 Date: 20170816 Docket: 1501 13786 Registry: Calgary Between: Ernst & Young Inc., in its capacity as Court-appointed Receiver of Spyglass Resources Corp. Applicant - and - Bonavista Energy Corporation Respondent _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice C.M. Jones _______________________________________________________ I. Introduction [ 1 ] In an Originating Application filed October 3, 2016, Ernst & Young Inc. (the “Receiver”) sought (

a) a declaration that Bonavista Energy Corporation (“Bonavista”) was not entitled to claim a right of set-off and withhold funds otherwise due to Spyglass Resource Corp. (“Spyglass”) in the amount of $826,855.00 and (

b) judgment for payment of withheld funds. The Receiver also seeks interest and costs on a full indemnity basis. [ 2 ] As will become evident, the central issue in this case is whether Bonavista, as the Operator under certain agreements, may set off certain credits it receives for the benefit of the parties against what Bonavista alleges is Spyglass’ share of certain expenses allegedly incurred on behalf of both parties. II. Facts [ 3 ] The facts of this matter are both convoluted and critical. To their credit, the parties filed an Agreed Statement of Facts.

Given its importance, I will reproduce that Agreed Statement below almost in its entirety. 1. Spyglass was a public oil and gas exploration company based in Calgary, Alberta that operated oil and natural gas properties in Alberta and British Columbia. On November 26, 2015, this Court granted an order appointing the Receiver as receiver of Spyglass. 2. Bonavista is a Canadian oil and natural gas producer headquartered in Calgary, Alberta.

3. Spyglass and Bonavista jointly own and operate a sour gas plant, compressors and a series of pipelines and wells in the West Liege (Fort Mackay) region of Alberta. 4. The relationship between Spyglass and Bonavista is contractual and is governed by a number of agreements, accounting procedures and operating procedures (as discussed below). 5. Spyglass and Bonavista are successors in interest to three Joint Operating Agreements (“JOAs”) whereby they, as the holders of certain petroleum and natural gas rights, provide for the conduct of related operations.

Bonavista and Spyglass have all of the rights and obligations of their respective predecessors in interest under the JOAs. 6. Pursuant to a May 29, 1986 JOA, Bonavista and Spyglass own, inter alia , a 7% and 77% working interest respectively in a number of gas wells. The JOA incorporates, inter alia , the 1981 Canadian Association of Petroleum Landmen (“CAPL”) Operating Procedure and the 1983 Petroleum Accountants Society of Western Canada (“PASWC”) Accounting Procedure (collectively, the “1986 JOA”). 7.

Pursuant to the April 1, 1987 JOA, Bonavista and Spyglass own, inter alia , a 7% and 77% working interest respectively in a number of gas wells. The JOA incorporates, inter alia , the 1981 CAPL Operating Procedure and the 1983 PASWC Accounting Procedure (collectively, the “1987 JOA”). 8. Pursuant to the September 15, 1997 JOA, Bonavista and Spyglass own, inter alia , a 53% and 47% working interest in a number of gas wells. The JOA incorporates, inter alia , the 1990 CAPL Operating Procedure and the 1988 PASWC Accounting Procedure (collectively, the “1997 JOA”). 9. Bonavista is the Operator under the JOAs. 10.

At all material times, and subject to the JOAs, Spyglass and Bonavista were working interest owners (in varying proportion) of 57 gas wells (the “Wells”). Currently, the Wells include 23 non-producing Wells and 34 abandoned Wells. 11. The parties are also joint owners of a series of pipelines (the “Pipelines”). The Pipelines are governed by the terms of the JOAs and applicable laws, guidelines, orders and regulations of the Province of Alberta. 12.

Spyglass and Bonavista are successors in interest to the agreement for the construction, ownership and operation of the Liege facility, dated January 1, 1998 (the “CO&O”) pursuant to which Spyglass and Bonavista own a 47% and 53% working interest (respectively) in the West Liege sour gas plant located at 14-21-089-21 W4M (the “Plant”).

Pursuant to the CO&O, Spyglass and Bonavista also each own a 47% and 53% working interest (respectively) in two functional units: one located at 06-13-89-22 W4M (including, inter alia , an inlet separator, water disposal pump, 1-400 Bbl tank and 1-750 Bbl tank) (the “First Functional Unit”); and one located at 14-21-089-21 W4M (including, inter alia , a booster compressor, dehy [sic], sales compressor and amine unit) (the “Second Functional Unit”). 13.

The applicable operating and accounting procedures governing the Plant, the First Functional Unit and the Second Functional Unit are the 1996 PJVA Model Operating Agreement and the 1996 PASC Accounting Procedure which are incorporated by and form part of the CO&O, as amended by the CO&O. 14. Bonavista is the Operator under the CO&O. 15. Bonavista and Spyglass have all of the rights and obligations of their respective predecessors in interest under the CO&O. 16.

The Plant, the First Functional Unit, the Second Functional Unit, the Wells, and the Pipelines comprise the joint operations of the parties (the “Joint Operations”) and are governed by the CO&O, JOAs, CAPL Operating Procedures, PASWC Accounting Procedures, PASC Accounting Procedure and PJVA Model Operating Agreement (collectively, the “Agreements”) and the Regulations. 17.

Effective on or about January 1999, Alberta Environment and Sustainable Development (“Alberta Environment”) issued Approval No. 10960-01-00 approving the operation and reclamation of the Plant and the Second Functional Unit subject to certain terms, conditions, and requirements (as amended from time to time, the “First Approval”). 18.

The First Approval was cancelled following its expiry on November 30, 2008 and Approval No. 10960-02-00 (as amended) was issued by Alberta Environment on or about October 13, 2009 approving the operation of the Plant and the Second Functional Unit subject to defined terms and conditions including, but not limited to, reclamation requirements (the “Approval”). 19. Pursuant to the Natural Gas Royalty Regulation, 2009 , the owners of natural gas wells that are ordered shut-in due to the close proximity of the wells to bitumen reservoirs are entitled to gas-over-bitumen royalty credits (“GOB Credits”). 20.

On May 10, 2011, the Alberta Energy Regulator (“AER”) issued an interim decision directing the shut-in of a number of wells in areas where the extraction of gas would compromise production from underlying bitumen reservoirs (the “Interim Order”). The Interim Order was approved by the AER on December 13, 2011 as a permanent shut-in order (the “Shut-in Order”). 21. The Wells were subject to the Interim Order and the Shut-in Order. Accordingly, immediately following issuance of the Interim Order, Bonavista undertook the shut-in of the Wells which was completed on or about the end of May 2011. 22.

On February 29, 2012, the Plant, as a result of the Shut-in Order, ceased all production and notified Alberta Environment of such cessation. 23. It was a requirement of the Approval that, inter alia , Bonavista prepare and implement a Decommissioning and Land Reclamation Plan (“Decommission Plan”) in the event that Plant production ceased. Alberta Environment extended the deadline twice for Bonavista to prepare and implement a Decommission Plan.

24. The Decommission Plan was submitted to the AER on February 18, 2014. 25. On or about January 16, 2015, the AER approved the Decommission Plan. 26. Since the shutting in of the Wells in late May 2011, Bonavista, as the Operator under the JOAs, has been receiving GOB Credits. The GOB Credits are provided by way of monthly reductions in the gas crown royalty otherwise payable by operators of shut-in wells. The GOB Credits are based on a deemed production volume at the shut-in date, declining at 10% per year, and are to be provided for a period of up to 10 years from the shut-in date.

The GOB Credits are paid to operators through a credit against their crown royalty invoice (not paid in cash). 27. Accordingly, the GOB Credits are not received by Bonavista qua Bonavista, but by Bonavista as Operator under the JOAs. The Operator has the right to receive the GOB Credits for the Joint Account. 28. In order to recover the full amount of GOB Credits available to an operator, the total gas Crown royalties payable by that operator must meet a defined threshold.

At all times since the shut-in of the Wells, Bonavista as a corporation has met the threshold in the royalties otherwise payable to the Crown for receipt of the full amount of the GOB Credits, and has been positioned to draw the GOB Credits on behalf of the Joint Account. Since the Shut-in Order, none of the Joint Operations had or have generated any royalties payable to the Crown. 29. Pursuant to the terms of the Agreements, the GOB Credits are applied by Bonavista to the Joint Account each month.

Accordingly, each working interest participant in the Joint Operations receives the benefit of the GOB Credits as a credit to the Joint Account proportionate to its interest. 30. Each month, Bonavista has issued Spyglass a joint interest bill (“JIB”) detailing each charge paid and credit received in the Joint Account as a result of the Joint Operations. Such JIBs have detailed all GOB Credits received. 31. Each month, and in accordance with the Agreements, Spyglass reviewed the JIB on a line-by-line basis and either accepted or disputed each individual charge. 32.

Bonavista administers one Joint Account for all Joint Operations. 33. On December 23, 2013, Bonavista sent to Spyglass Mail Ballot 2013-01 (the “Mail Ballot”). The Mail Ballot contained two motions. 34. At the same time, Bonavista sent to Spyglass two Authorizations for Expenditures (“AFEs”) (AFEs 2144022 and 2144025). 35. The Mail Ballot had a due date of January 10, 2014. Spyglass did not sign the Mail Ballot. 36. On January 13, 2014, Bonavista wrote to Spyglass that both motions in the Mail Ballot had been approved. 37.

On January 15, 2014, Bonavista sent to Spyglass 35 AFEs in relation to Bonavista’s abandonment of the Pipelines. 38. On January 29, 2014, Bonavista sent to Spyglass Mail Ballot 2014-01 (the “Second Mail Ballot”). The Second Mail Ballot was accompanied by an AFE (AFE 1144036). 39. The Second Mail Ballot had a due date of February 14, 2014. Spyglass did not sign the Second Mail Ballot. 40. On February 26, 2014, Bonavista wrote to Spyglass that the motion in the Second Mail Ballot had been approved. 41.

Bonavista decommissioned the Plant, decommissioned and reclaimed the First Functional Unit and abandoned the Pipelines. The Plant, First Functional Unit and Pipelines were only accessible for the completion of the required decommissioning, reclamation and abandonment work (as applicable) during the winter months. 42. Between February and June 2014, Bonavista and Spyglass had numerous discussions regarding the Abandonment Costs. [ infra ] 43. On June 19, 2014, Bonavista sent to Spyglass Supplemental AFEs 2144022 and 2144025. 44.

On October 16, 2014, Bonavista sent to Spyglass Mail Ballot 2014-02 (the “Third Mail Ballot”) which contained a motion to include Phase II ESA and development of a remediation plan to comply with the regulatory required Decommission Plan. The Third Mail Ballot was accompanied by an AFE (AFE 2124400 Supplement/Scope Revision). 45. Bonavista took the position that the activities detailed in the Third Mail Ballot were required to comply with the Approval, and accordingly, that Spyglass approval was not required and moved forward with the work shortly thereafter. 46.

Between January 2104 and November 2015, Bonavista issued JIBs to Spyglass that included the costs incurred for the decommissioning of the Plant, the decommissioning and reclamation of the First Functional Unit and the abandonment of the Pipelines totalling $1,342,309.07 (the “Abandonment Costs”). Spyglass disputed the Abandonment Costs and did not pay them. 47. On February 3, 2015, Bonavista sent a letter to Spyglass requesting payment of the Abandonment Costs. 48. On February 9, 2015, Spyglass responded to Bonavista. 49.

On June 3, 2015, Bonavista served Spyglass with a Notice of Default with respect to, among other things, the Abandonment Costs. 50. Spyglass did not pay the Abandonment Costs.

51. In the monthly JIB, Bonavista netted amounts received by the Joint Account, including the GOB Credits, against costs incurred by the Joint Account, including the Abandonment Costs. 52. On September 11 and 16, 2015, Bonavista filed applications with the AER pursuant to

section 30 of the Oil and Gas Conservation Act , requesting that the AER determine the Abandonment Costs and allocate to Spyglass its proportionate share of such costs (the “Applications”). 53. On November 3, 2015, Bonavista amended the Applications to correct the total amount of Abandonment Costs claimed. 54. On November 4, 2015, the AER issued two Notices to Pay Abandonment Costs to Spyglass (the “Notices”).

The Notices stated that the AER had determined that Spyglass was responsible for costs pertaining to the abandonment of the Plant in the amount of $755,006.50, and costs pertaining to the abandonment of the First Functional Unit in the amount of $168,266.77. 55. On November 25, 2015, Spyglass submitted to the AER two Statements of Concern regarding the Notices. 56. On November 26, 2015, a Receiver was appointed over all of the assets and undertakings of Spyglass pursuant to the Receivership Order granted by Justice Hawco (the “Receivership Order”).

The Receivership Order was subsequently amended by Justice Macleod on February 1, 2016. 57. Between November 2013 and the date of the Receivership Order, Bonavista netted a total of $826,855 of GOB Credits received by the Joint Account against amounts owing to the Joint Account by Spyglass, including the Abandonment Costs. 58.

On January 29, 2016, counsel for the Receiver sent a letter to Bonavista demanding payment of the portion of GOB Credits received by Bonavista as Operator for the Joint Account which the Receiver alleged were attributable to Spyglass’ share of the Joint Operations (the “January Letter”). 59. On February 9, 2016, counsel for Bonavista responded to the January Letter. 60. On March 29, 2016, counsel for the Receiver sent a further letter to counsel for Bonavista. 61. On April 8, 2016, counsel for Bonavista responded to the Receiver’s counsel’s letter. 62. On June 3, 2016, the AER issued Abandonment Costs Order No.

ACO 2016-01 (the “Abandonment Costs Order”), ordering Spyglass to pay abandonment costs incurred by Bonavista for the abandonment of the Plant and First Functional Unit in the amount of $755,006.50 and a penalty in the amount of $188,751.63. 63. On the same date, the AER provided a letter to counsel for Spyglass advising of its considerations in issuing the Abandonment Costs Order. 64. On June 13, 2016, the Receiver submitted a Request for Regulatory Appeal of the Abandonment Costs Order. 65. On June 16, 2016, counsel for the Receiver sent a further letter to counsel for Bonavista.

Counsel for Bonavista responded to the Receiver’s letter on June 29, 2016. 66. On June 20, 2016, counsel for Bonavista sent a letter to the AER submitting: (

a) that the Receiver’s Request for Regulatory Appeal should be denied; and (

b) that the AER had incorrectly calculated the Abandonment Costs in the Abandonment Costs Order. 67. On June 29, 2016, the AER advised the Receiver and Bonavista that the Abandonment Costs Order erroneously excluded certain abandonment costs and associated penalty and that the Abandonment Costs Order was reissued in order to correct this calculation error (the “Re-Issued Order”). The Re-Issued Order found Spyglass responsible for paying abandonment costs in the amount of $923,273.27 and assessed a penalty against Spyglass in the amount of $230,818.31. 68.

By further correspondence dated June 29, 2016, the AER denied the Receiver’s Request for Regulatory Appeal. 69. On June 30, 2016, the Receiver submitted a Request for Regulatory Appeal appealing the penalty in the Re-Issued Order. 70. On July 14, 2016, the AER wrote to counsel for the Receiver, counsel for Bonavista, and the AER Closure & Liability Group.

The letter notified Bonavista and the Closure & Liability Group of their respective opportunities to provide the AER with submissions prior to the AER making a decision on whether a regulatory appeal hearing would be held in respect of the penalty imposed in the Re-Issued Order. 71. On July 26, 2016, Bonavista wrote to the AER, informing the AER that Bonavista took no position on whether the AER should hold a regulatory appeal hearing in respect of the penalty imposed in the Re-Issued Order. 72.

On July 28, 2016, the Closure & Liability Group wrote to the AER, informing the AER that the Closure & Liability Group did not intend to provide a submission regarding whether the AER should hold a regulatory appeal hearing in respect of the penalty imposed in the Re-Issued Order. 73. On August 5, 2016, the AER wrote to counsel for the Receiver requesting additional information prior to making a decision on whether it would hold a regulatory appeal hearing regarding the penalty it had imposed. 74. Counsel for the Receiver responded to the AER on August 9, 2016. 75.

Bonavista has not entered the Re-Issued Order as a judgment in this Court.

III. Issues [ 4 ] The fundamental issue before me is whether Bonavista is entitled to net the Abandonment Costs against the GOB Credits. The Receiver disputes this entitlement on several grounds. 1. Spyglass is not liable for the Abandonment Costs, either because Bonavista failed to get Spyglass’ approval for incurring them or because Bonavista was not required by law to incur them. 2. Bonavista, having elected to obtain the Abandonment Costs Order, is limited to pursuing that remedy and is precluded from netting the Abandonment Costs. 3.

Bonavista is not entitled to withhold the GOB Credits as a matter of contractual set-off. 4. Bonavista is not entitled to legal set-off. 5. Bonavista is not entitled to equitable set-off. [ 5 ] Bonavista disputes all of these arguments. In addition, Bonavista argues that the Receiver’s arguments are limitation-barred. IV. Arguments and Analysis A. Spyglass is not liable for the Abandonment Costs 1.

Bonavista Failed to Obtain Spyglass’ Approval [ 6 ] The Receiver asserts that various provisions of the JOAs and the CO&O required Bonavista to obtain approval from Spyglass in respect of the Abandonment Costs. [ 7 ] First, the Receiver points to clauses 201 and 203 of the CO&O, which provide that owners must form an Operating Committee that “…shall, in accordance with the terms of this Agreement, exercise overall supervision and control of and shall determine all matters of importance relating to Joint Operations.” However, no evidence was put before me to suggest that Spyglass sought to have an Operating Committee formed and was denied that right by Bonavista. [ 8 ] Next, Bonavista relies on clause 204(

e) of the CO&O, which provides that “an Owner who does not vote or abstains from voting on any matter shall be conclusively deemed to have voted in the affirmative on the matter”. It suggests that this is also contemplated by clause 110 of the 1996 PASC, which states: …in the absence of provisions in the Agreement, approval shall be obtained by the Operator in writing from 2 or more Owners having interests in the Joint Property totaling (75%) or more.

Each Owner shall, by notice, cast its vote with the Operator fifteen (15) days from receipt of request for approval and an Owner who does not vote on any matter shall be deemed conclusively to have voted affirmatively. [ 9 ] However, the Receiver points to clause 208 of the CO&O, which provides that: …if and for so long as there are only two Owners for voting purposes, Clause 204 shall not have any effect, and all matters coming before the Operating Committee shall be determined by unanimous approval of representatives of the Owners. [ 10 ] The Receiver draws the Court’s attention to the words “in the absence of provisions in the Agreement…” in clause 110 of the 1996 PASC and argues that it is inoperative because it conflicts with Clause 208 of the CO&O requiring unanimity if there are only two owners.

These provisions, it argues, must be read in conjunction with the words in clause 104 of the CO&O, which states that: If any provision contained in an Appendix conflicts with a provision contained in the Operating Procedure the provision in the Operating Procedure shall prevail. [ 11 ] The Receiver further asserts that the JOAs require written approval from Spyglass before Bonavista was permitted to incur expenses over $25,000.

Clause 301 of the 1990 CAPL Operating Procedure provides, inter alia , that: … the Operator shall not make or commit to an expenditure for the joint account for any single operation , the total estimated cost of which is in excess of twenty-five thousand ($25,000) dollars, without an approved Authority for Expenditure from the Joint Owners, unless the expenditure is reasonably considered by the Operator to be necessary by reason of an event endangering life or property or is required by the Regulations and failure to make such expenditure could result in prosecution of the Operator thereunder.

If the Operator is required to make such an expenditure, it shall promptly advise the Joint Operators of the nature of such event or requirement and the expenditure anticipated to be associated therewith. [Emphasis added.] [ 12 ] As noted above, 35 AFEs, all but one for less than $25,000, were sent to Spyglass in connection with the abandonment of the Pipelines.

The Receiver argues that Bonavista was required to obtain approval from Spyglass before proceeding with these expenditures and points to the Explanatory Notes to the 1990 CAPL Operating Procedure respecting the $25,000 threshold: The $25,000 discretionary authority is included in order to enable an operator to make those minor capital expenditures which, in the course of normal day-to-day operations, are required to maintain production, such as the replacement of a minor piece of wellsite equipment.

It is not intended to provide the operator with the authority to conduct exploration operations or geological studies.

[13] The Receiver argues that these AFEs, aggregating more than $300,000, are not “minor” or reflective of “day-to-day”operational costs necessary to maintain production. Rather, taken together, they represent a significant expenditure well above thediscretionary spending limit provided for in the JOAs for which approval was required. [14] Further, the Receiver asserts that Bonavista failed to consult with Spyglass regarding the abandonment program.

Clause 301of the JOAs requires that Bonavista “shall consult with the Joint-Operators from time to time with respect to decisions to be made for theexploration, development and operation of the joint lands.” While the Receiver acknowledges that the JOAs do not provide for a formalconsultation process through a management committee, it again resorts to the Explanatory Notes to the 1990 CAPL Operating Procedure,which state that the review mechanism available to a non-operator concerned about an operator’s discretionary spending is to convene ameeting. [15] The Receiver claims that Spyglass requested a meeting with Bonavista to discuss the abandonment program.

The agreedexhibits in this matter include an email chain ensuing from the Second Mail Ballot and reflecting Spyglass’ desire to meet to discuss theabandonment program. In these emails, Spyglass clearly questions the abandonment of the Pipelines and repeatedly asks for a meetingwith Bonavista to discuss it. By the time of the last email on June 6, 2014, the work in question had been done. [16] The Receiver claims that Bonavista was contractually obligated to meet with Spyglass to discuss and obtain approval for theAFEs prior to proceeding with abandonment of the Pipelines. It cites clauses 205(

a) and (

b) of the CO&O, which provide that an Ownerwith a working interest of 5% or more has the right to request that the Operator call a meeting to deal with specific stated items and thatany Owner has the right to require the Operator to place a motion on the agenda for the meeting. Noting that Spyglass had a 47%working interest in the Plant and Functional Units, the Receiver asserts that: …therefore, Bonavista was required to hold a meeting to address Spyglass’ concern regarding the Abandonment Program.

Moreover,pursuant to Clause 208 (of the CO&O Agreement Operating Procedure), Bonavista was required to obtain Spyglass’ approval beforeproceeding with the Abandonment Program. [17] The Receiver’s representation of events leads it to the following conclusion: Because Bonavista failed to obtain the required authorization of Spyglass, it conducted the Abandonment Program for its own account,with no right to pass on to Spyglass any of the Abandonment Costs. [18] Subject to clause 205(

a) of the CO&O, my review of the Agreements does not convince me that consultation with Spyglasshad to take place in a meeting, as opposed to written communication initiated by Mail Ballot. It is clear, however, that Bonavista ignoredSpyglass’ requests for a meeting to discuss the expenditure plans. It is also clear from the email chain that Spyglass, while notcompleting a Mail Ballot, questioned the proposal to abandon, though it is equally clear that Spyglass was seeking an “explanation”rather than outright objecting to the proposal.

Thus, the evidence satisfies me that Bonavista acted in contravention of this expressrequirement which Spyglass attempted to invoke. The consequences of that contravention are, however, less clear. [19] For its part, Bonavista argues that Spyglass is liable for the Abandonment Costs, both contractually and at common law. Itargues that abandonment of the Plant, First Functional Unit and Pipelines were regulatory requirements and that the Abandonment Costswere part of the Joint Operations. It quotes

section 1004 of the CO&O: The proceeds and costs of salvaging or disposing of any portion of the Facility, incurred pursuant to Clause 1003, shall be shared andborne by the Owners of the Functional Unit to which salvage or disposal relates, based on each Owner’s respective Functional UnitParticipation in such Functional Unit. [20] Contrary to the Receiver’s assertions, Bonavista argues that, as Operator, it did not require the approval of co-owners to incurexpenses for the Joint Account relating to regulatory requirements. Expenses must either be authorized pursuant to

section 208 of theCO&O or incurred for work required by regulation. Bonavista asserts that it is mandated to complete all clean up and restoration of thePlant when required to do so by the regulations, independent of any approval by Spyglass. It quotes

section 1003 of the CO&O: If required by the Regulations or directed by the Operating Committee to salvage the Facility or any Functional Unit or a portion thereofas the case may be, Operator shall, for the Joint Account: … (

b) clean up and restore the site of the Facility, Functional Unit or portion thereof, as the case may be, in accordance with theRegulations and to the satisfaction of any governmental body having jurisdiction with regard thereto and to the reasonable satisfactionof the owner or occupier of the land upon which the Facility is located. [Emphasis added.] [21] Bonavista cites Renaissance Resources Ltd. v Metalore Resources Ltd (1984), (AB KB), 53 AR 289(QB) at para 42: …once a person decides to become a joint-operator of a drilling project in Alberta, that person has agreed to pay the costs incurred inabandoning the well.

Unlike completion, which is a separate undertaking requiring election by the joint-operators to participate…abandonment is part and parcel with the drilling of the well with procedures prescribed by law. [22] Bonavista asserts that, through the AFEs, it sought Spyglass’ approval.

When it did not receive that approval, it wasnevertheless required to proceed with the decommissioning, reclamation and abandonment of the assets as a regulatory obligation.Spyglass’ refusal to approve negated neither the regulatory requirement for the work nor Bonavista’s contractual authorization to incurthe necessary expenses. [23] It appears to me from the email exchange referred to above that Bonavista largely ignored Spyglass’ repeated requests for ameeting to discuss the abandonment program.

While Bonavista’s lack of responsiveness is unfortunate, I find that it does not make whatwas otherwise a proper expense for the Joint Account Bonavista’s sole responsibility.

[ 24 ] Further, I do not interpret the email chain to reveal an intention on Spyglass’ part never to pay the Abandonment Costs. I am satisfied that Spyglass simply was not prepared to pay its share unless and until it received an explanation from Bonavista regarding the decision to abandon. Ultimately, it received that explanation, though it may not have been happy with it and certainly might have received it earlier. [ 25 ] I find that the need to effect regulatory compliance trumps clause 208 of the CO&O requiring unanimous approval if there are only two owners.

Clause 104 of the CO&O provides, inter alia , that: If there is a conflict between any provision in this Agreement and the Regulations, the Regulations shall govern. [ 26 ] Accordingly, Spyglass’ approval was not required. 2. Bonavista Was Not Required by Law to Incur the Abandonment Costs [ 27 ] Contrary to Bonavista’s above arguments, the Receiver takes the position that Bonavista was not required by law to incur the Abandonment Costs.

The Receiver acknowledges that Bonavista was required to conduct the Joint Operations in accordance with all applicable laws, regulations and government orders and could incur expenditures it deemed necessary to remedy a violation of an environmental regulation or law without the approval of the Owners. Nevertheless, it makes three arguments in support of its position that the Abandonment Costs were not required by law. a. The Decommission Plan [ 28 ] The Receiver acknowledges that Bonavista was required to conduct the Joint Operations within the terms of the Approval.

It asserts, however, that the Decommission Plan had not been finally authorized by Alberta Environment on the dates Bonavista sent the First, Second, and Third Mail Ballots and the 35 AFEs.

Therefore, it argues that Bonavista was not required to incur the Abandonment Costs as of those dates because the Approval authorizing the Decommission Plan had not yet been issued. [ 29 ] The Receiver advances the argument that since Spyglass had a contractual right to meet with Bonavista to address the abandonment program, Bonavista should have requested an extension to the deadline for filing the Decommission Plan to accommodate a meeting and dialogue with Spyglass.

The Receiver points out that that Alberta Environment previously had extended the deadline to submit the Decommission Plan on “similar grounds”, namely to permit Bonavista to evaluate potential future opportunities to re-activate the Plant and the Pipelines. The Receiver asserts that, five days after Spyglass requested a meeting, Bonavista submitted the Decommission Plan to Alberta Environment without Spyglass’ knowledge or approval.

Accordingly, the Receiver argues that Bonavista should not be allowed to rely on the terms of the Decommission Plan when it could have delayed its implementation in order to respond to Spyglass’ requests for consultation. [ 30 ] Bonavista argues that it did not fail to seek a further extension from Alberta Environment to accommodate Spyglass’ request for a meeting. It asserts that Spyglass never requested that Bonavista seek such an extension.

When the Decommission Plan was submitted in February 2014, less than a month remained on previous extensions granted by Alberta Environment. [ 31 ] Bonavista argues that Alberta’s regulatory regime required it to complete the decommissioning of the Plant, the decommissioning and reclamation of the First Functional Unit and the abandonment of the Pipelines.

These obligations, it asserts, were triggered by the Shut-in Order, under which the Wells were shut in, ceasing all production at the Plant. [ 32 ] Bonavista submits that the Approval required it to implement the Decommission Plan in accordance with its terms, which prescribed commencement of the process in January 2014, notwithstanding it was not approved by the AER until January 16, 2015. Bonavista argues that any delay in executing the work would have contravened the Decommission Plan and the Approval. b.

Plant and First Functional Unit [ 33 ] The Receiver takes the position that Bonavista was not required by the terms of the Approval or the Decommission Plan to decommission and reclaim the Booster Compressor in the First Functional Unit or to abandon all of the Pipelines. [ 34 ] The Approval obligated Bonavista to reclaim the “plant”, defined in the Approval as: …all buildings….located on the 14 of

Section 21, Township 89, Range 21, West of the 4 th Meridian… [ 35 ] The Receiver states that the Booster Compressor in the First Functional Unit was located on a different parcel, 06-89-22- W4M, and was therefore not part of the “plant” governed by the Approval. Thus, the Receiver asserts that Bonavista was not required to decommission and reclaim the Booster Compressor and incurred the $198,054.08 cost of doing so for its own account.

The Receiver takes the further position that since 32 of the 35 AFEs were for pipelines not located at 14-21-89-21- W4M, they were not part of the “plant” governed by the Approval and Bonavista was not required to abandon them. The Receiver argues that costs of $292,375.81 also were incurred by Bonavista for its own account. [ 36 ] The Receiver asserts that Bonavista breached its obligations by incurring Abandonment Costs despite Spyglass’ expressed concerns.

Bonavista argues that Spyglass never expressed any concerns in relation to either the Decommission Plan or the Operator’s end of life obligations regarding the Plant. All such correspondence offered by the Receiver is in relation solely to the Pipelines. The Decommission Plan related only to the Plant, not to the Pipelines. [ 37 ] Bonavista concedes that there was no regulatory prescribed deadline for completion of the decommissioning and reclamation of the First Functional Unit. Decommissioning and reclamation was, however, a regulatory requirement. The timing may have been discretionary but the work was not.

Bonavista elected to complete the decommissioning and reclamation of the First Functional Unit at

the same time the Plant, the Plant Site and the Pipelines were decommissioned. The parties agree that all assets were only accessibleduring the winter months. [38] Bonavista advised Spyglass that it was attending to the First Functional Unit at the same time as the regulatory requireddecommissioning of the Plant in order to save costs. In doing so, Bonavista argues, it was completing the regulatory required work in themost efficient and cost effective way for the benefit of the co-owners. c.

Pipelines [39] While it is common ground that the Shut-in Order necessitated some steps in respect of the Pipelines, the parties disagree onwhat was required to be done. Section 82(1) of the Pipeline Rules states: Unless otherwise authorized by the Regulator, a licensee shall discontinue, abandon or return to active flowing service a pipeline that hasnot seen active flowing service within the last 12 months. [40] This language, the Receiver argues, allows an operator to either abandon or discontinue a pipeline in circumstances where it isno longer used. Para 82(9)(

g) of the Pipeline Rules requires abandonment of a pipeline associated with a well or facility that has beenabandoned. The Receiver argues that Bonavista has not provided any evidence that the Pipelines were associated exclusively with thePlant, the First Functional Unit, or the Wells. It also points out that the Wells were ordered shut-in and not abandoned and that 23 of the57 Wells were inactive, not abandoned. [41] As it asserts that Bonavista was not required to abandon the Pipelines, the Receiver states that Bonavista had no right to incurthe Abandonment Costs without Spyglass’ consent.

It did so for its own account, leaving no amount against which Spyglass’ GOBCredits could be set off. [42] Bonavista responds that discontinuing the Pipelines, rather than abandoning them, was not an option. It also argues that it wasentitled to choose the regulatory option deemed appropriate. [43] Bonavista cites section 82(3) of the Pipeline Rules: When a pipeline or part of a pipeline is discontinued, the licensee shall ensure that the pipeline or the part of the pipeline that isdiscontinued is…(

d) protected by suitable internal and external corrosion control measures. [44] Bonavista quotes clause 9 of AER Directive 77, which requires that any buried pipeline have an external corrosion barriercoating and cathodic protection. Bonavista asserts that the Pipelines had neither and therefore were required to be abandoned. [45] Further, Bonavista argues that it had the right under

section 301 of the 1990 CAPL Operating Procedure to determine howbest to satisfy its regulatory obligations. That

section provides, inter alia, that Bonavista, as Operator, is “delegated the management ofthe exploration, development and operation of the joint lands and the construction, installation and operation of any production facilityfor the joint account on behalf of the Joint-Operators.” Bonavista claims that abandoning the Pipelines was the only reasonable optionand that it was entitled to make that decision on behalf of the Joint Operations. [46] I am satisfied that, as Operator, Bonavista was entitled, within reason, to decide how best to achieve regulatory compliance.Here, I believe Bonavista acted reasonably.

I accept its explanation for proceeding with the abandonment plan. [47] In particular, I conclude that Bonavista was justified in pursuing abandonment of the Pipelines rather than discontinuing them.The Receiver did not challenge Bonavista’s assertions that the Pipelines did not have appropriate corrosion or cathodic protection. [48] Further, the AER approved of Bonavista’s abandonment plan. I conclude that abandonment, as opposed to discontinuance,was considered by the AER to be an acceptable resolution of the lack of corrosion and cathodic protection of the Pipelines. B.

Bonavista Elected to Obtain the Abandonment Costs Order [49] The Receiver makes the further argument that Bonavista is precluded from netting GOB Credits against Abandonment Costsbecause it elected the alternative course of proceedings under the OGCA.

The Receiver asserts that seeking an order under s. 30 of theOGCA is inconsistent with set-off because Bonavista cannot obtain both remedies without being overcompensated. [50] As authority for the proposition that a party must elect between alternative and inconsistent remedies, the Receiver offers the following quotation from Peirs Feltham, Daniel Hochberg and Tom Leach, eds, The Law Relating to Estoppel and Representation,4th ed.,(West Sussex: Tottel Publishing Ltd., 2004) at 359: Where A in dealing with B is faced with inconsistent courses of action which affect B’s rights or obligations and knowing that the twocourses of action are inconsistent and that he or she has the right to choose between them, A then makes an unequivocal choice betweenthem and communicates that choice to B, A is prevented from afterwards resorting to the course of action which he has deliberatelyrejected and communicated to B his intention of rejecting. [51] Citing McClenaghan v Edmonton (City), (AB KB), [1926] 1 DLR 1042 (Alta SC) at p 1049, the Receivertakes the position that the AER’s decision is equivalent to a final judgment in favour of Bonavista, precluding it from pursuing anyalternative remedies: The fact that the Legislature has not used the term “judgment” to define the judicial findings of the board, but has found other languageto describe the same thing does not make the board’s findings any less a judgment.

[52] The Receiver asserts that, pursuant to the OGCA, Bonavista’s exclusive means of enforcement of the Abandonment CostsOrder is to register the Abandonment Costs Order as a judgment of this Court. As Spyglass is in receivership, Bonavista is required tofile a creditor claim against Spyglass’ unsecured assets. [53] Bonavista takes the position that the Abandonment Costs Order does not preclude the exercise of its contractual remedies.

Itnotes that the Agreements expressly provide that any remedies exercised by the Operator are without limitation to any other rights theOperator may have under the relevant agreement, at law or in equity and therefore argues that the Agreements expressly contradict anyneed for an election between remedies. [54] Further, Bonavista disputes the Receiver’s assertion that the doctrine of election prevents Bonavista from pursuing otherremedies having obtained the Abandonment Costs Order.

It asserts that the essence of the doctrine of election is a choice betweenfundamentally inconsistent rights and requires the electing party to make a conscious and unequivocal choice which cannot be retracted:Hill v Hill, 2010 ABQB 528, 501 AR 227 at para 29. [55] Bonavista argues that the Abandonment Costs Order is in no way inconsistent with the ongoing exercise of its contractualremedies. The effect of the Abandonment Costs Order, it argues, is merely to validate the quantum of the Abandonment Costs, todetermine that they were reasonably incurred and to confirm the allocation of Spyglass’ share.

It does not preclude Bonavista fromrecovering the Abandonment Costs through its contractual rights. [56] I find that Bonavista was not precluded from pursuing its other remedies simply because it obtained the Abandonment CostsOrder. That Order merely validated and allocated the Abandonment Costs. Obtaining it did not require Bonavista to give up its otherremedies. C.

Bonavista Has No Right to Contractual Set-off [57] The Receiver asserts that the terms of the CO&O do not permit Bonavista to set off Spyglass’ GOB Credits against its shareof the Abandonment Costs. [58] The Receiver concedes that where there is a valid agreement regarding set-off, the Court need not determine whether set-offis available at common law, in equity or under legislation: Re McMurtry & Co. Limited, [1924] O.J. No. 176.

Further, the Receiverconcedes that where a right of set-off exists prior to its appointment, it will assume its responsibilities subject to that pre-existing right:Re First Investors Corp, (AB KB), 102 AR 249 (QB). [59] The Receiver points to clause 602 of the CO&O and argues that it permits Bonavista to set-off only amounts due to it fromSpyglass under the CO&O: 602 Operator’s Lien […] If an Owner fails to pay or advance any of the costs or expenses incurred for the Joint Account which are to be paid or advanced by itwithin the time period prescribed by the Accounting Procedure, Operator may, without limiting the Operator’s other rights as containedin this Agreement or otherwise held at law or in equity: […] Set-off against the amount unpaid by such defaulting Owner, any sums due or accruing to such Owner from Operator pursuant to thisAgreement. [Emphasis added.] [60] The Receiver contrasts this restriction with clause 505(b)(iii) of the 1997 JOA, which provides that if a Joint Operator defaultson payment of costs and expenses incurred for the joint account, the Operator may: Set-off against the amount unpaid by such defaulting Joint-Operator, any sums due or accruing to such Joint Operator from the Operatorpursuant to this Operating procedure or any other agreement between the Operator and such Joint-Operator, whether executed before orafter the effective date of the Agreement. [Emphasis added.] [61] The Receiver argues that Bonavista incurred the Abandonment Costs pursuant to the CO&O.

Accordingly, they could be setoff only against sums due or accruing to Spyglass from Bonavista pursuant to the CO&O. Therefore, the Receiver argues, as the GOBCredits accrued pursuant to the JOAs, they could not be set off against the Abandonment Costs. Bonavista’s “netting” of GOB Creditsagainst Abandonment Costs is not permitted under the CO&O. [62] The Receiver acknowledges that Bonavista properly may net GOB Credits against accepted charges arising from JointOperations under the JOAs. It also may set off GOB Credits against unpaid amounts due or accruing to Bonavista from Spyglass underthe JOAs.

The Receiver argues, however, that the JOAs do not authorize Bonavista to withhold the GOB Credits to offset disputedcharges Bonavista claims are owed to it under the CO&O. [63] The Receiver asserts that maintaining the Joint Account for all operations governed by the JOAs and the CO&O is merely amatter of convenience and does not obviate Bonavista’s obligation to administer that account in accordance with the distinct terms of theAgreements.

In support of that position, the Receiver points to clause 501 of the 1990 CAPL Operating Procedure: [T]he accounting and financial records maintained by the Operator with respect to the operations conducted by it hereunder shall bemaintained separately from those kept by it with respect to operations which are not conducted hereunder, in accordance with establishedindustry accounting practice.

[ 64 ] The Receiver asserts that clause 602 of the CO&O required Bonavista to determine what, if any, amounts accruing to Spyglass under the CO&O could be set off against the Abandonment Costs and then factor that amount into the overall “netting” of the Joint Account.

Bonavista, the Receiver argues, skipped the first step, circumventing clause 602 and resulting in a broader set-off than was contractually provided for. [ 65 ] I note, however, that clause 602 provides that Bonavista’s rights of set-off are “without limiting Operator’s other rights as contained in this Agreement or otherwise held at law or in equity ”. [Emphasis added.] [ 66 ] Bonavista argues, first, that netting credits received against charges incurred for the Joint Account does not constitute set-off, but merely reflects the contractual arrangements made by the parties.

It asserts that the Receiver is bound by these arrangements. [ 67 ] A court-appointed receiver must elect to either adopt or disclaim executory contracts entered into by a debtor company: Galanda Properties Inc. v Tiercon Industries Inc. (Receiver of) (2007), 38 CBR (5 th ) 142 (Ont SCJ) at para 45 . A receiver has a reasonable period of time in which to make such an election, but if the receiver does nothing, it may be found to have affirmed the contract: North Bend Ventures Ltd v Timberland Helicopters Inc , 2010 BCSC 1907 at para 23 .

If a court-appointed receiver does not disclaim a contract and elects instead to complete it, the receiver will be subject to the terms of the contract: Galanda at para 45. [ 68 ] Bonavista argues that the Receiver did not disclaim the Agreements and is now bound by their terms. It cannot take the benefit of one part of the Agreements while disclaiming parts less advantageous to it. [ 69 ] Bonavista argues that the very concept of the Joint Account involves netting revenues against costs. As Operator, Bonavista receives revenues and pays costs using the Joint Account.

If there is a net amount in the Joint Account at the end of the accounting period, that net amount is paid to co-owners. The Abandonment Costs are a cost against which credits received, including GOB Credits, are netted. Bonavista notes that Spyglass never disputed this practice. [ 70 ] Bonavista further argues that netting became necessary as a result of Spyglass’ breach of sections 103 and 107 of the Accounting Procedure in the CO&O.

Section 103 requires Spyglass to pay all bills within 30 days of receipt thereof.

Section 107 specifies that: Non-Operator shall not withhold payments of any portion of a bill presented by the Operator due to protest or questions related to such bill unless there is a significant item under dispute and the Operator agrees to the Non-Operator withholding payment. [ 71 ] That

section requires Spyglass to provide written notice of its request to withhold payment prior to Bonavista’s consideration of such request. Bonavista asserts that Spyglass never provided a written request to withhold payment and that Bonavista never agreed to such withholding. [ 72 ] In the alternative, Bonavista argues that, even if its practice of netting revenues and expenditures through the Joint Account does constitute set-off, it has a right of contractual set-off under the Agreements. [ 73 ] In response to the Receiver’s argument that Bonavista is precluded from exercising set-off rights under the JOAs because of more the limited rights under the CO&O, Bonavista states that

section 505(b)(iii) of the 1990 CAPL Operating Procedure, set out above, clearly permits Bonavista, as Operator, to set off any sums due or accruing pursuant to any agreement between it and Spyglass. It asserts that any other

interpretation is contrary to the plain and ordinary meaning of the contract. [ 74 ] Bonavista points to the decision of this Court in SemCanada Crude Company (Re), 2009 ABQB 397 , 479 AR 299.

There, Justice Romaine considered the extent to which a right of set-off existed by virtue of the following language: “At the sole option and without Notice to the Defaulting Party, the Non-Defaulting Party may net or setoff against any Net Settlement Amount owing by the Non-Defaulting Party to the Defaulting Party any amounts owing to the Non-Defaulting Party by the Defaulting Party under any other agreement between the parties.” [ 75 ] In that case, Trilogy Energy LP argued that this language permitted set-off between various agreements to which it and SemCAMS were parties.

Trilogy’s argument was rejected because SemCAMS had entered into some contracts in its personal capacity and into others as Operator.

Romaine J noted at para 26 that: For Trilogy to succeed on its argument that the set-off provision of the Inlet Purchase Agreement extends to the Gas Processing Agreements and the Trilogy CO&O Agreements, it would have to establish that the set-off language was broad enough to cover agreements in which SemsCAMS was contracting as an Operator, or, at least, that sufficient ambiguity exists in the contract to make evidence of the surrounding circumstances or the intention of the parties a relevant consideration. [ 76 ] Bonavista argues that Justice Romaine did not reject the application of the broad set-off rights granted under one agreement because of the more limited language of others.

Rather, she held that contractual set-off would be founded upon either (

a) the parties contracting in the same capacity; or (

b) proof that the contractual language was broad enough to cover set-off between parties contracting in differing capacities. Provided one of these conditions was met, the broad language in one agreement could permit set-off of obligations arising under another agreement containing limiting language. [ 77 ] Bonavista argues that, in contrast to SemCanada , Spyglass and Bonavista are parties to the Agreements in the “same right”.

In each case, Bonavista is the Operator and Spyglass is a joint interest owner. [ 78 ] A court must interpret contractual rights of set-off in a manner that gives effect to the intentions of the parties as reflected in the words of the contract: Ministre du Revenu national c.

Caisse Populaire du bon Conseil, 2009 SCC 29 at para 22 . [ 79 ] While I agree that clause 602(b)(iii) of the CO&O purports to limit set-off to amounts due to a defaulting owner from the Operator pursuant to that Agreement, I do not view that clause as prohibiting Bonavista from netting receipts and disbursements arising in connection with the Joint Operations.

[80] I believe it would be inimical to the interests of parties whose activities are governed by a number of agreements, but forwhom a single joint account is maintained, to deny the Operator the ability to net amounts coming into the joint account under some ofthose agreements against amounts payable from the joint account under other agreements.

In my view, such netting should bepermissible when various revenues and expenses, accounted for through the use of the joint account, reflect integrated operations. [81] In this case, some aspects of the Joint Operations are governed by the JOAs and others by the CO&O, but the JointOperations are directed at a common undertaking. While the unique terms of the various Agreements must be respected, I consider itappropriate to interpret the Agreements in the aggregate as permitting netting the GOB credits against the Abandonment Costs.

Such aninterpretation, in my view, gives business efficacy to the Agreements. [82] I accept Bonavista’s position based on SemCanada that it and Spyglass contracted in the same right under the Agreements. Ineach case, Bonavista acted as Operator while Spyglass was an owner. D.

Bonavista Is Not Entitled to Legal Set-off [83] The Receiver also asserts that Bonavista cannot withhold GOB Credits on the basis of either legal or equitable set-off. [84] The Receiver acknowledges that if a creditor can establish that a right of legal set-off accrued prior to the appointment of areceiver, the appointment will not interfere with the creditor’s claim for set-off.

However, it takes the position that Bonavista cannotestablish a right of legal set-off prior to the date of the Receivership Order. [85] The Receiver cites Citibank Canada v Confederation Life Insurance Co (Liquidator of) (1996), (ONSC), 42 CBR (3d) 288 at para 37: For set-off at law to occur, the following circumstances must arise: 1. The obligations existing between the two parties must be debts, and they must be debts which are for liquidated sums or moneydemands which can be ascertained with certainty; and 2.

Both debts must be mutual cross-obligations, i.e. cross-claims between the same parties and in the same right. a. The GOB Credits were impressed with a trust [86] The Receiver argues that the GOB Credits were impressed with a trust in favour of Spyglass and therefore could not be set offagainst Abandonment Costs. This trust, it argues, arose by virtue of the JOAs. In Bank of Nova Scotia v.

Societé General (Canada), (AB CA), 87 AR 133, 1988 CarswellAlta 288 (WestlawNext Canada) at para 9 the Court of Appeal held as follows: The intention that Sorrel acts for the benefit of others (in this case the non-operators) pervades the entire agreement. Specific examplesmay be seen in ss. 503, 601, 602 and 605 [of the 1981 CAPL Operating Procedure].

We agree with the learned trial judge that thecreation of a trust does not require express words to that effect and one may be inferred from the examination of the entire agreement. [87] The Receiver notes this provision of the 1990 CAPL Operating Procedure incorporated as part of the 1997 JOA: 507 Commingling of Funds – The Operator may commingle with its own funds the moneys which it receives from or for the accountof the Joint-Operators pursuant to this Operating Procedure.

Notwithstanding that moneys of a Joint-Operator have been commingledwith the Operator’s funds, the moneys of a Joint-Operator advanced or paid to the Operator, whether for the conduct of operationshereunder or as proceeds from the sale of production under this Operating Procedure, shall be deemed to be trust moneys, and shall beapplied only to their intended use and shall in no way be deemed to be funds belonging to the Operator, other than in its capacity as theJoint-Operator’s trustee. [88] The Receiver also refers to the decision in Brookfield Bridge Lending Fund Inc. v Karl Oil and Gas Ltd, 2009 ABCA 99,454 AR 162 where the Court noted at para 27 that “It is trite law that an operator is in a fiduciary position with respect to receipts andrevenues held on behalf of non-operators.” At para 11, the Court noted in reference to the 1990 CAPL Operating Procedure that“Whether commingled or not, the trustee may only expend trust funds on purposes authorized by the trust.” [89] The Receiver argues that GOB Credits have monetary value and are recorded as “Gas Production Revenue” in the monthlyJIBs.

As such, they are revenues held by the Joint-Operators and Spyglass’ proportionate share of them is impressed with a trust.

TheReceiver therefore argues that Bonavista committed a breach of trust by using GOB Credits in a manner not authorized by the JOAs. [90] The Receiver extends its trust analysis to the CO&O, clause 604 of which creates an express trust: 604 Commingling of Funds Operator may commingle with its own funds the moneys which it receives from or for the Joint Account pursuant to this Agreement.Notwithstanding that moneys of a Non-Operator have been commingled with the Operator’s funds, the moneys of a Non-Operatoradvanced or paid to Operator, whether for the conduct of Joint Operations or as proceeds from the sale of Facility Products, shall bedeemed to be trust moneys and, subject to clause 602, shall be applied to their intended use and shall in no way be deemed to be fundsbelonging to the Operator, other than in its capacity as the Non-Operator’s trustee. [91] In addition, the Receiver cites clause 107(

a) of the 1996 PASC Accounting Procedure, which provides: Notwithstanding the foregoing provisions, the Operator shall not unreasonably deny the Non-Operator’s request to withhold payment forsignificant disputed charges which require adjustment and for which written notice has been received.

[92] The Receiver points out that Spyglass provided Bonavista with written notice that it disputed Abandonment Costs exceeding$1,000,000 with reasons for challenging them.

The Receiver argues that it was entirely reasonable for Spyglass to withhold consent tothe Abandonment Costs and that, in setting-off GOB Credits against Abandonment Costs, Bonavista effectively ignored Spyglass’refusal to pay its share of these costs, treating them as if Spyglass had accepted them while negotiations were still ongoing. [93] The Receiver quotes the Explanatory Notes to the 1990 CAPL Operating Procedure: The rights in this provision are premised on the existence of a default.

A prudent operator should not resort to the remedies where theparties are disputing an accounting practice or the adequacy of invoice information. In such event, it may be attractive to deposit thedisputed amount into a trust account until resolution of the dispute: Explanatory Notes to

Schedule B (1990 CAPL Operating Procedure). [94] The Receiver suggests that Bonavista’s conduct in netting GOB Credits against Abandonment Costs was improper, fell wellbelow the standard of a prudent operator and was inconsistent with Bonavista’s fiduciary obligations to Spyglass. [95] I agree with the Receiver that Bonavista is in a fiduciary position with respect to receipts and revenues held on behalf ofSpyglass as an Owner under the CO&O, in respect of its conduct of Joint Operations and joint accounting.

However, I do not accept theReceiver’s assertion that the GOB Credits are held under a trust arrangement that prevents them from being treated in a manner similar toother forms of revenue. While clause 603 of the CO&O and clause 507 of the 1990 CAPL Operating Procedure refer to monies accruingto the Joint Account as trust monies, these descriptions do not mean that such revenues can be applied by an Operator only for the benefitof a non-operator. Rather, I find that the reference to such monies as trust monies merely operates to remove them from the Operator’sestate and potential confiscation by its creditors.

These monies must be applied in accordance with the provisions of the Agreements andthe rules of law and equity that govern the parties’ relationship. b. Abandonment Costs Not Ascertainable Prior to Receivership Order [96] The Receiver notes that for legal set-off to arise, the obligations existing between the two parties must be “debts which are forliquidated sums or money demands which can be ascertained with certainty…”; see Citibank at para 37.

It argues that any obligation onSpyglass to pay the Abandonment Costs could not be ascertained until a final determination regarding the amount and allocation thereofhad been made by the AER. Accordingly, the Abandonment Costs were not ascertainable at the date of the Receivership Order. [97] As noted earlier, section 30(2) of the OGCA provides a mechanism for referring determination of the amount and allocationof costs associated with suspension, abandonment and reclamation of wells to the AER.

Bonavista submitted cost reimbursementapplications to the AER prior to the date of the Receivership Order, but the AER did not make a final determination until it issued theAbandonment Costs Order on June 3, 2016. This was after the date of the Receivership Order. The Receiver notes that the CanadianOxford Dictionary defines to ascertain something as “to find out as a definite fact” and argues that it was not possible to ascertain as a“definite fact” any obligation on the part of Spyglass to pay Abandonment Costs until the date of the Abandonment Costs Order.

This,the Receiver argues, means that Bonavista cannot establish a right of legal set-off prior to the appointment of the Receiver and is notentitled to withhold GOB Credits. [98] Bonavista notes that to establish legal set-off, mutual debts must be debts due from either party to the other for liquidatedsums or money demands that can be ascertained with certainty at the date of receivership. It further notes that each party must have theright to enforce its claim.

If one party cannot do so, there is no right of legal set-off: FAST Industries Ltd v Sparta Engineering Inc,2016 ABQB 215 at para 23. [99] Bonavista argues that these tests are met because the Abandonment Costs were ascertainable prior to the Abandonment CostsOrder. Spyglass received a JIB each month showing: (

a) the GOB Credits received by Bonavista and attributed to Spyglass based on itsworking interest in the Wells; and (

b) the Abandonment Costs owing by Spyglass. Bonavista takes the position that both amounts wereeasily ascertainable. [100] Bonavista asserts that Spyglass was contractually required to pay Abandonment Costs pursuant to sections 103 and 107 of theAccounting Procedure incorporated into the CO&O. Spyglass’s debt for these costs “crystallized” when it did not pay within the timeperiod provided for under the Accounting Procedure.

The debt was immediately ascertainable. [101] Bonavista argues that the Receiver misses the point when it takes the position that any set-off of the GOB Credits must be onlyagainst obligations of Spyglass arising under the JOAs as no royalties have been generated by the assets under the JOAs since the GasOver Bitumen Order.

This, Bonavista argues, means that assets of the JOAs alone create no entitlement to GOB Credits and what itportrays as the Receiver’s demand that the JOAs operate as some sort of “islands unto themselves” necessarily results in the recovery ofzero GOB Credits by the Joint Account. [102] I find that Bonavista has met the test for legal set-off. Spyglass’ debt to Bonavista crystallized when Spyglass did not pay withinthe time period provided for under the accounting procedure. Amounts owing were ascertainable at that time. E.

Bonavista Is Not Entitled to Equitable Set-off [103] The Receiver points out that the appointment of a receiver operates as an assignment that destroys the mutuality of obligationsrequired for legal set-off from and after the time of the receivership.

The Receiver concedes, however, that creditors unable to establish aright of legal set-off prior to the receivership order may be entitled to equitable set-off in limited circumstances. [104] According to Frank Bennett, Bennett on Receiverships, 3d ed (Toronto: Thomson Reuters Canada Limited, 2011) at 443, if thecross-claim arises after the receiver’s appointment, equitable set-off is generally disallowed if the debt does not arise out of the samecontract or from one intimately connected with the other. [105] I note the decision in Canadian Imperial Bank of Commerce v Tuckerr Industries Inc. (1982), (BC SC), 38

BCLR 244 (SC) at para 2: …If the two parts of the set-off [a debt owed by a claimant against a credit owed to the claimant by the grantor] under suchcircumstances are intimately connected the one with the other, for instance where they arise from the same contract, the set-off may stillbe allowed notwithstanding that the debenture has crystalized [appointing the receiver] in the meantime. [106] Equitable set-off will be available to a defendant only for “cross-claims which go directly to impeach the plaintiff’s demands,that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking intoaccount the cross claim”; see Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. [1978] QB 927 at 975. [107] A close connection justifying equitable set-off was considered in The Government of Newfoundland v.

The NewfoundlandRailway Co. (1887) 13 App Cas 199. There, the Court considered such an intimate connection to arise when one might be seen as acondition precedent to the other. [108] The Receiver argues that the GOB Credits arose pursuant to the JOAs and underlying mineral leases, the Shut-in Order and theapplicable Regulations. On the other hand, Bonavista’s claim for the Abandonment Costs is based on a regulatory order regarding thedecommissioning of specific facilities, issued after the date of the Receivership Order.

Alternatively, the Receiver argues, Bonavista’sclaim for the Abandonment Costs arises pursuant to the CO&O, a separate contract governing lands and facilities different from thoseunder the JOAs. [109] The Receiver asserts that the connection between the two claims is not close. Spyglass’ entitlement to GOB Credits was in noway conditional on its paying the Abandonment Costs and Bonavista’s claim for Abandonment Costs does not directly impeachSpyglass’ claim to GOB Credits. [110] The Receiver questions why it would be “manifestly unjust” to deny Bonavista set-off in the circumstances.

Its position is thatBonavista had no right of set-off prior to the Receivership Order and should not now be allowed to gain an advantage over othercreditors. The Receiver urges that it would be perverse to allow Bonavista to advance its claims above those of Spyglass’ other creditorssimply because it is also a Spyglass debtor. [111] Bonavista cites the Supreme Court of Canada’s decision in Holt v Telford, (SCC), [1987] 2 SCR 193 at para 35as establishing the test for equitable set off: (

a) The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands; (

b) The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed; (

c) A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiffto enforce payment without taking into consideration the cross-claim; (

d) The plaintiff’s claim and the cross-claim need not arise out of the same contract; and (

e) Unliquidated claims are on the same footing as liquidated claims. [112] Bonavista takes the position that Spyglass owes it over $1.3 million in Abandonment Costs and that it has “recovered”$826,855 of those costs through netting of the Joint Account. Its position is that the claim and cross-claim are intimately connected. TheAbandonment Costs are a direct result of the Gas Over Bitumen Order that required the Wells be shut-in. Shutting-in the Wells led to theGOB Credits.

Thus, the same order gave rise to both the requirement to decommission, reclaim and abandon and the GOB Credits. [113] From the perspective of equity, Bonavista points out that its operations unconnected with Joint Operations are what positionedBonavista to draw GOB Credits on behalf of the Joint Account. Bonavista points out that none of the Joint Operations has generated anyroyalties payable to the Crown.

Thus, the Joint Operations themselves have not entitled Bonavista and Spyglass to draw GOB Credits. [114] This, Bonavista argues, would make it wholly inequitable to permit Spyglass to take the benefit of GOB Credits that flow solelyas a result of Bonavista’s actions and activities while simultaneously leaving Bonavista with sole responsibility for the AbandonmentCosts. [115] I agree that the claim and cross-claim are intimately connected and that Bonavista has satisfied the test for equitable set-off asarticulated in Holt. F.

Limitations [116] Bonavista argues that Spyglass is barred from challenging the netting or set-off of GOB Credits against Abandonment Costsreflected in JIBs prior to October 3, 2014. Section 3(1) of the Limitations Act (Alberta) provides that a defendant is entitled to immunityfrom liability in respect of a claim if the claimant does not seek a remedial order within 2 years after the date on which the claimant firstknew, or in the circumstances ought to have known, that: (

a) the injury for which the claimant seeks a remedial order had occurred; (

b) the injury was attributable to conduct of the defendant; and (

c) the injury, assuming liability on the part of the defendant, warrants bringing a proceeding. [117] Bonavista argues that any injury Spyglass may have suffered is economic, as contemplated in

section 1(iii) of the LimitationsAct. If it occurred, it occurred each month when Bonavista issued Spyglass a JIB detailing each charge paid and credit received in the

Joint Account as a result of the Joint Operations. Spyglass, Bonavista argues, reviewed the JIB on a line by line basis every month andeither accepted or disputed individual charges. Thus, Spyglass was aware of the netting and was at liberty to commence proceedings torecover any disputed moneys. Accordingly, claims in respect of periods before October 3, 2014 are barred. [118] In light of my findings above, I consider it unnecessary to address Bonavista’s limitations argument. V.

Conclusion [119] In view of the foregoing analysis, the Receiver’s application is dismissed. [120] Bonavista argues that the Receiver should be liable for costs.

It cites Sigurdson v Fidelity Insurance Company of Canada(1980), (BC CA), 20 BCLR 345 at para 35: …If trustees of a settlement, or executors, or administrators of a deceased person, or a receiver, or a liquidator, raise a contest withanother person and bring him into Court to defend himself in respect of some claim which is set up against him, and the claim fails, thetrustees, or executors, or receiver, or official liquidator, are personally liable to pay the costs.

It is immaterial that in making the claimthey acted bona fide in the belief that they were doing that which was for the benefit of the estate which they represented. They arepersonally liable as between them and the defendant; they are entitled to an indemnity out of the estate which they are representingunless they have been guilty of misconduct. [121] Here, Bonavista argues, the Receiver was acting as a “real litigator”.

Spyglass had not commenced a claim prior to thereceivership and did not challenge netting or set-off of the Joint Account. [122] In my view, the Receiver has acted as a real litigator on this application and is liable to pay costs. Heard on the 24th day of November, 2016. Dated at the City of Calgary, Alberta this 16th day of August, 2017. C.M. Jones J.C.Q.B.A. Appearances: Steven Leitl and Sarah Ivany for the Applicant Melanie Gaston and Emily Paplawski for the Respondent