Harco Enterprises Ltd. v Knelsen Sand and Gravel Ltd., 2021 ABQB 263

Court of Queen’s Bench of Alberta Citation: Harco Enterprises Ltd. v Knelsen Sand and Gravel Ltd., 2021 ABQB 263 Date: 20210407 Docket: 1203 07693 Registry: Edmonton Between: Harco Enterprises Ltd., also known as Harco Oilfield Services Ltd. Plaintiff (Defendant by counterclaim) - and - Knelsen Sand and Gravel Ltd. Defendant (Plaintiff by counterclaim) _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice Tamara L.

Friesen _______________________________________________________ Introduction: [ 1 ] In 2009, Harco Enterprises Ltd. (Harco) and Knelsen Sand and Gravel Ltd. (Knelsen) entered into a mutually beneficial business agreement. The agreement allowed Knelsen to set up gravel crushing operations in two gravel pits located near the Alberta/Saskatchewan border for which Harco held quarry leases from the Government of Saskatchewan (“GOS”): the Border Pit and the Rawlakes Pit (the “Gravel Pits”).

For a period of 5 years, Knelsen would access, process and acquire gravel and sand products from the Gravel Pits, and pay royalties to Harco in return. [ 2 ] The business relationship soured in the summer of 2011 when Knelsen discovered that Harco had accessed and sold processed gravel products to a third party from a stockpile in one of the Gravel Pits, without notifying Knelsen. This discovery set off a chain of events leading to the dramatic demise of the relationship between the parties, and ultimately, to this trial.

[ 3 ] Offended by Harco’s actions, and suspicious that additional products had been removed from the Gravel Pits without their consent, Knelsen stopped paying royalties to Harco; however, they continued to access and acquire gravel products from the Gravel Pits for the next three to four months. Knelsen did not advise Harco of the reason for withholding payment until January 3, 2012.

Harco responded on February 9, 2012 by terminating the contract and eventually evicting Knelsen from the Gravel Pits and other Harco properties. [ 4 ] On May 22, 2012, Harco filed a Statement of Claim against Knelsen for unpaid royalty debts, and additional claims that were resolved prior to trial.

Knelsen filed its Statement of Defence on June 28, 2012, and on August 8, 2012 counterclaimed for breach of contract and associated damages incurred as a result of alleged improper eviction from the properties. [ 5 ] The contract in issue consisted of a combination of both written and oral terms, as well as at least one collateral oral agreement. Many important terms were left uncertain. Other important terms were ignored, or unanticipated by the parties. Some agreed upon terms apparently shifted or evolved over time.

The parties did not establish an appropriate method for dispute resolution to deal with disagreements or breaches. They put no thought or effort into determining what should happen to stockpiled materials if the contract was not renewed, or if it was terminated due to default by one of the parties. [ 6 ] A good contract makes for a good business relationship.

As a result of the major deficiencies in this contract, what started out as a mutually beneficial and lucrative business relationship ended in distrust, blame, anger, hurt feelings, family discord, and a very expensive and extensive litigation process. [ 7 ] For the reasons that follow, I find that Harco’s claim for unpaid invoices succeeds, and Knelsen’s counterclaim fails.

The parties’ positions [ 8 ] In its Statement of Claim, Harco asserted that Knelsen breached the agreement by failing or refusing to pay amounts owed to Harco for gravel products removed from the Gravel Pits between September and December, 2011. Harco claimed that pursuant to the unwritten terms of the agreement, established through course of conduct, Knelsen was required to prepare and pay Harco’s invoices within a reasonable time frame (30 days) and had failed to do so.

In addition to other remedies, Harco sought payment of the invoices in the amount of $391,164.74 . [ 9 ] Knelsen did not take significant issue with the amounts claimed in the invoices, which were prepared based on records provided to Harco by Knelsen; rather, Knelsen argued it was not required to pay the invoices because Harco breached the agreement first by removing gravel from the Gravel Pits without Knelsen’s consent, and without payment.

Further, Knelsen disagreed with the assertion that any particular timeframe for payment of the invoices was agreed upon, and argued that the termination of contract was unjustified as Knelsen had delayed rather than refused payment of the invoices. [ 10 ] In its Counterclaim, Knelsen argued that the terms of the written agreement gave them “exclusive right” to access and acquire gravel and sand products from the Gravel Pits, and ownership of (or rights in equity to) stockpiled processed gravel products.

An implied term of the agreement was that Harco would not remove, sell or otherwise make use of the processed gravel products in the Gravel Pits without Knelsen’s prior approval or agreement. [ 11 ] Because Harco breached that term, Knelsen was entitled to respond by withholding payment for the invoices until the matter of improperly removed gravel products could be determined.

Knelsen submitted it was a further breach of the contract for Harco to terminate the agreement and evict them prior to the agreed upon expiration date of May, 2014. [ 12 ] Knelsen sought compensation for: aggregate products improperly removed by Harco; crushing fees for the processed gravel product remaining in Harco’s possession; costs incurred to relocate their asphalt plant; costs incurred to acquire additional processed gravel products for Knelsen’s ongoing projects; and costs for the remobilization of their crushing plant.

Knelsen sought damages to a total of: $1,124,615.15 . [ 13 ] In its Statement of Defence to the Counterclaim, Harco submitted that they could not have breached the terms of the written agreement because it was not binding: it contained no consideration and was missing essential terms.

At trial, Harco submitted they were entitled to take aggregate products from the stockpile because until royalties were paid, the processed gravel products stored in the Gravel Pits were still owned by them. [ 14 ] Harco further defended on the basis that they considered Knelsen’s refusal to pay the invoices to be a breach of an essential term which constituted a repudiation of the business agreement.

As a result, Harco was entitled to revoke permission for Knelsen to operate its gravel extraction, crushing and removal operations in the Gravel Pits. [ 15 ] Knelsen filed its Affidavit of Records on February 2, 2013. After reviewing those records, Harco made a further demand for payment of four additional invoices totalling $15,065.15 .

Harco filed an Amended Statement of Claim on March 20, 2014 which included the additional invoices. [ 16 ] In February of 2015, Harco demanded further payment of additional outstanding invoice amounts which had been calculated in relation to what the parties referred to as the “2011 Hotmix Totals” in the amount of $174,498.70 ; however, they did not amend their Statement of Claim to specifically include those totals. [ 17 ] At trial, Harco sought compensation for the unpaid invoices identified in their Statement of Claim, as well as for additional gravel products extracted, processed and removed by Knelsen which they became aware of following termination of the contract; specifically, the 2011 and 2012 Hotmix, Hotmix inventory and concrete sand (“Hotmix Totals”).

Their final claim for unpaid invoices was $406,229.89 for regular aggregate products, and $374,194.84 for Hotmix Totals, bringing their total claim to $780,424.73. [ 18 ] Knelsen argued at trial that Harco’s claim with respect to the Hotmix Totals was never properly pleaded, and was therefore

barred by the Limitations Act, RSA 2000 c L-12 and also as a matter of trial fairness, by application of the audi alteram partem rule. Preliminary issue: laws from another jurisdiction [ 19 ] Given that the Gravel Pits are located in Saskatchewan and Harco is a Saskatchewan company, Harco might have filed its claim in Saskatchewan. It chose to file in the Court of Queen’s Bench of Alberta. This was a reasonable decision given that Harco’s center of operations is in Cold Lake, Alberta; Knelsen is an Alberta company; and the agreement in issue was entered into and took place primarily in Alberta.

The dispute clearly has a “real and substantial connection” to Alberta: see Rule 11.25(3) of the Alberta Rules of Court , Alta Reg 124/2010 and Bansal v Ferrara Pan Candy Co Inc , 2014 ABQB 384 at para 29 . [ 20 ] Further, Knelsen implicitly consented to the jurisdiction of the Alberta Court of Queen’s Bench by defending and counterclaiming in the same action, and by proceeding with the trial in this Court: see Norex Petroleum Limited v Chubb Insurance Company of Canada , 2008 ABQB 442 at para 54 [ Norex ]. [ 21 ] In closing argument, Harco argued that

Part III.1 of the Provincial Lands Regulations , Sask Regs 145/68 (the “Gravel Regs”), specifically s 25, prevented it from legally bargain away its ownership interest in the processed aggregate to Knelsen even if that is what the parties may have intended (an assertion Harco denies). [1]

Section 25 indicates that “No sand and gravel disposition may be assigned or transferred except with the prior written consent of the Minister.” No such consent was sought or given in this case. [ 22 ] This argument was made for the first time in closing argument, taking Knelsen by surprise. As a result, the Court allowed the parties to provide additional written submissions.

In its submissions, Knelsen asserted that this Court, having properly taken jurisdiction over the dispute, should not rely on Saskatchewan statutes dealing with regulation of Crown resources, and gravel in particular, in determining the issues at trial, as to do so would amount to improper reliance on the laws of a foreign jurisdiction. [ 23 ]

Section 12 of the Judicature Act, RSA 2000, c J-2 provides a complete answer to this argument: When in a proceeding in the Court the law of any province or territory is in question, evidence of that law may be given, but in the absence of or in addition to that evidence the Court may take judicial cognizance of that law in the same manner as of any law of Alberta. [ 24 ] In taking judicial cognizance of Saskatchewan legislation, Alberta rules of construction apply.

In Turner v Bell Mobility Inc , 2014 ABQB 36 at para 38 Lee J adopted the following observation from Norex : “this Court is routinely called upon to apply foreign laws and does so with the aid of experts as needed”.

He concluded: “Alberta courts are capable of applying Saskatchewan laws as they relate to contractual rights and obligations existing between [the parties]” and found that in that case, there would be no disadvantage to the parties for the Court to do so (para 39). [ 25 ] There is an ample body of jurisprudence and statutory authority dealing with disputes over, and regulation of, Gravel Pits and quarries in Alberta and Saskatchewan, as well as in many other Canadian jurisdictions.

Further, Alberta’s legislation includes laws very similar to the Saskatchewan legislation relied on by Harco; in particular, the Metallic and Industrial Minerals Exploration Regulation , Alta Reg 213/1998 which is enabled by the Mines and Minerals Act , RSA 2000, c M-17 and the Public Lands Act , RSA 2000, c P-40 . [ 26 ] Therefore, insofar as legislation and authorities from other provincial jurisdictions, and Saskatchewan in particular, may assist this Court in determining the issues, this Court will rely on them. I do not require the assistance of an expert in order to do so.

Issues: [ 27 ] The issues before the Court were as follows: 1. What were the terms of the contract between the parties? 2. Did Harco breach a term of the agreement by taking processed aggregate product without permission? 3. If so, what action was Knelsen entitled to take as a result of the breach? 4. Did Knelsen breach a term of the agreement by withholding payment of invoices? 5. If so, what action was Harco entitled to take as a result of the breach? 6. What damages, if any, should flow to Harco? 7. Does Knelsen have a valid counterclaim against Harco based in contract or equity? 8.

What damages, if any, should flow to Knelsen? Facts: The evidence [ 28 ] At trial, Harco called two witnesses: Mr. Zane Harrison in his personal capacity and as corporate representative of Harco, and

Harco’s accountant, Mr. Keith Puetz. Knelsen called four witnesses: Mr. Darryl Quist in his personal capacity and as Knelsen’s corporate representative; Mr. Terry Harrison, brother of Mr. Zane Harrison and former General Manager of Harco; Mr. Jake Wiebe, a key Knelsen employee directly involved with the issue at trial; and Mr.

Ryan Becker, a Knelsen employee in relation to Knelsen accounting and corporate matters. [ 29 ] In addition to oral evidence, the evidence at trial included a significant quantity of business and other records entered as exhibits, most by agreement, as well as lengthy portions of transcripts from the questioning of Mr. Quist and Mr. Wiebe which were read into the record. [ 30 ] I found each of the witnesses who testified before me to be credible and reliable on certain points, and not on others. It was clear to me that Mr. Zane Harrison, Mr. Quist, and Mr.

Wiebe, in particular, were deeply entrenched in their view of events, and committed to delivering to the Court whatever information best supported their party’s particular interests, depending on how they interpreted the questions being put to them. This was not surprising given that the litigation process was well into its eighth year when the matter came before me. [ 31 ] Fortunately, there were few areas of significant factual disagreement.

In general, where there was a contradiction between testimony a witness gave at questioning, and their testimony at trial, I preferred the evidence given at questioning, as it was much closer in time to the events in issue. Where I was able to understand and rely on documentary evidence to support a factual finding without resorting to relying on a particular witness’s subjective

interpretation, I did so. [ 32 ] Many of the facts as set out below were taken from the parties’ closing oral and written submissions. Where the parties disagreed, the fact set out below should be considered my finding based on full consideration of the evidence at trial. The parties: Harco Enterprises Ltd. [ 33 ] The Plaintiff, Harco Enterprises Ltd., operating in Alberta as Harco Oilfield Services Ltd. (Harco), is a Saskatchewan corporation, extra-provincially registered in Alberta. It started as a construction company run by members of the extended Harrison family in 1978. It was purchased by Mr.

George Harrison and his four sons – Terry, Craig, Darryl and Zane – in the 1990s. Currently, it is in the business of selling concrete and aggregate, in addition to other pursuits in leasing. For efficiency and clarity, I will refer to the Harrisons by their first names throughout the remainder of this judgment. No disrespect is intended. [ 34 ] George is the largest shareholder of Harco. Initially, Zane and his three brothers were also shareholders. The family members held various positions within the company over the years.

Over time, the other three brothers left the company. [ 35 ] At the time the agreement at issue in the case was formed, Terry was acting as general manager, a position he had taken over from George in 2007. Terry and George had a falling out in 2010 which ended in Terry being removed as general manager and director, and eventually, ceasing to be a shareholder. At that time, George returned to his position as general manager and Zane stepped in to act as assistant manager. [ 36 ] Harco’s offices are in Cold Lake, Alberta.

Harco’s shop is in Pierceland Yard which consists of 29 acres of undeveloped residential land.

The Yard contains a cement plant, an area where various aggregate products and byproducts are stored in stockpiles, and storage for various pieces of equipment and machinery. [ 37 ] Harco also owns other parcels of land near Cold Lake, including an 11.9 acre lot at the corner of Highway 55 and Highway 28 (the “Alberta Property”). [ 38 ] Harco leases two parcels of land near Cold Lake from the Government of Saskatchewan: the Rawlakes Pit located in Saskatchewan, and the Border Pit which runs along the Saskatchewan/Alberta Border.

The leases are renewed every 5 years and Harco has held them continually since the mid 1980s. [ 39 ] During the applicable time period, Harco’s rights and obligations pursuant to the leases included, but were not limited to: possession of the land; exclusive right to exploration, recovery and disposition of sand and gravel located on the land; land stripping; provision of annual production returns; royalty payment to the GOS; record keeping for royalty payment purposes; reclamation/remediation; and removal authorization. [ 40 ] Harco is required to pay royalties to the GOS at the end of the year based on preparation of an annual production return and to pay disturbed acreage charges and royalties “in accordance with the Regulations .” At the applicable time, the rate was 20 cents per cubic meter.

Harco’s business model [ 41 ] As explained by Zane, the process for gravel extraction, and Harco’s business model with respect to the gravel quarry leases they hold is as follows: - Harco applies to the GOS for “removal acres”. - Harco moves in machines and removes whatever is above the soil. Harco then removes the layers of top soil until aggregate level is reached. - Harco hires a crushing company, generally determined based on an agreed upon price for the product.

- The crushing company brings in crushing equipment and sets it up. The crushing company then removes the aggregate and loads it into its crushing machine. - The crushing machine processes aggregate into various sizes of “crush” or “base rock” which is placed into stockpiles depending on what is required. Some examples of aggregate product include: ¾ inch straight rock, roll gravel, base, ½ inch straight rock, 2 inch, 1.5 inch etc.

Different types of aggregate have different uses, and therefore different values. - As the machine crushes the rock into the required aggregate product, it rejects or separates out byproducts such as natural fines, asphalt sand or natural sand. These materials, considered to be commodities, are also stored in piles. Sometimes they are combined with other aggregate products to produce asphalt mix – also known as Hotmix. - The amount of aggregate product produced and placed into stockpiles is measured using a platform scale in the pit.

A hauling truck drives onto the scales, the weight of the truck is subtracted, and other necessary adjustments made in order to determine the tonnage. Then the product is dumped into a stockpile or removed. - When product is removed from the stockpiles, the amount removed is measured in the same way. That amount is recorded on a haul ticket which is then reported to Harco. - Harco prepares and issues an invoice back to the crushing company with respect to royalties payable to Harco for the removed product.

Royalties are (usually) only payable on amounts once they are removed. - Harco then reports back to the GOS at the end of each year by providing an annual production return.

Harco pays royalties to the GOS according to that return. - The crushing company moves out of the pit at the end of contract. - When the pit is no longer producing, Harco is responsible to the GOS for reclamation of the area. [ 42 ] This business model, which enables Harco to sever raw aggregate from property belonging to the GOS, crush it, and dispose of it for a profit, is legally described as a profit à prendre : “the right of taking.” Knelsen Sand and Gravel Ltd. [ 43 ] The Defendant, Knelsen Sand and Gravel Ltd. (Knelsen) is an Alberta corporation, carrying on business as a sand and gravel supplier.

Knelsen started as a small aggregate supply company based in La Crete. It has since grown into a large general contracting company. In 2004, Knelsen started bidding on major highway construction projects, and has expanded and grown in size as it established itself in the commercial paving business. [ 44 ] Mr. Darryl Quist, a professional engineer, was hired by Knelsen in 1998 to help expand the company’s business from supply into general contracting. He has held various roles in the company, and was acting as the Construction Manager for Knelsen in 2008 when Knelsen became involved with Harco. [ 45 ] Mr.

Jake Wiebe has worked for Knelsen for over 26 years. He has also held various roles in the company. In 2007, he took the position of “Aggregate Manager” which he continued to hold as of the date of trial. [ 46 ] Knelsen owns and operates most of the equipment it requires to fulfill its contractual duties to its customers, including trucks, a mobile aggregate crusher, and asphalt plant. While its center of operations is located in La Crete, Knelsen also operates a concrete plant in Cold Lake, referred to as the Cold Lake Yard. The Agreement [ 47 ] In 2008, Mr.

Quist purchased some gravel from Harco for a paving job Knelsen was doing on Highway 55 south of Cold Lake. He was interested in securing a supply of aggregates for projects in North-eastern Alberta and began discussing with Terry the possibility of entering into a long-term agreement. They continued their discussions over the winter of 2008/2009. Knelsen was considering bidding on various projects in the area, including a Government of Alberta contract to take on the Cold Lake Highway Twinning Project. [ 48 ] Mr.

Quist assessed the two Harco Gravel Pits and determined that the Border Pit would be conducive to processing gravel with a lot of sand in it, or what is known as “base gravel” – or ¾ inch road crush while the Rawlakes Pit would be a good source for other aggregate products. [ 49 ] The Border Pit has a large footprint and Mr. Quist and Terry discussed the possibility of storing inventory in the Border Pit for project bids.

They agreed Knelsen would produce and process a 50 thousand tonne stockpile of ¾ inch aggregate for that purpose, which Knelsen did in the summer of 2008 (although this may have occurred as late as the spring of 2009). [ 50 ] Around the same time, Terry asked Knelsen to crush a pile for Harco’s use. Another stockpile was created at the Border Pit that was around 20 thousand tonnes (although at different points in the litigation and at trial, this was also described as a 5000 tonne pile).

Harco paid Knelsen a crushing fee of $7 per tonne for the gravel in that pile. [ 51 ] In order to further secure their gravel supply, and to keep competitors out of the Harco Gravel Pits, Knelsen sought a more formal arrangement with Harco. There is no question that Terry and Mr. Quist had the necessary authority to enter into binding business agreements on behalf of their respective companies during the relevant time period.

[ 52 ] Urlacher Construction (Urlacher) was also operating in the Border Pit at that time. The parties agreed that as Urlacher only dealt with sand products, they were not in competition with Knelsen and could remain. [ 53 ] George often stopped by the Gravel Pits and took

part in at least some of the discussions leading up to formalization of the agreement. Zane was not in a management position at that time and was not involved in any of these preliminary conversations or negotiations. [ 54 ] On May 25, 2009, Mr. Quist and Terry agreed to terms, and signed a one-page Aggregate Agreement (the “Agreement”) on behalf of their respective companies. [ 55 ] Mr. Quist drafted the document, which he described as a “foundational, farmer to farmer” type agreement, without the assistance of legal counsel. It contained the following provisions: i.

The term of the agreement was for 5 years from May 15, 2009 to May 15, 2014. ii. During the term of the agreement, Knelsen had “exclusive right to access and acquire gravel and sand products” from the two leased Gravel Pit sites. iii. Pricing for the processed gravel products would be established on a project-by-project basis. iv. No other entity would be entitled to access and process materials at the Gravel Pit sites unless they had the permission of both Knelsen and Harco to do so. v. Knelsen was permitted to set up an asphalt processing plant on Harco’s Alberta Property. vi.

The Agreement could be extended for another 5 years if both parties agreed to do so. vii. The Agreement could not be cancelled by Harco unless Knelsen defaulted on it. [ 56 ] Mr. Quist testified that Harco “threw in... for gratis ” the offer to allow Knelsen to set up its asphalt plant operations on the Alberta Property for the duration of the Agreement.

Terry testified that “if we didn’t throw in the property it wouldn’t have happened.” Regardless: the Agreement did not require Knelsen to pay any rent to Harco in relation to any of the properties. [ 57 ] Knelsen won the Twinning Project contract about a month after signing the Agreement. Approximately 2 months after signing the Agreement, the parties agreed on a written Royalty

Schedule (the “Schedule”) that specified amounts payable for the gravel products. Mr. Quist testified that the

Schedule reflected pricing that the parties had been using already “for some time.” The price for ¾ inch crush “general use” was $7.00 per tonne. [ 58 ] Mr. Quist indicated that in order to “bid with confidence” on the Twinning Project, he had approached George and Terry and asked them for “an aggressive price.” He used a price of $3.50 per tonne for ¾ inch crush (20 mm crush) in the bid.

He further testified that materials for the Twinning Project were billed differently than other projects and that billing was based on the project the materials were used for, not which stockpile the products came from. [ 59 ] Mr. Quist’s claim that the special, aggressive price of $3.50 was to be used for all Twinning Project materials regardless of what stockpile the materials were drawn from was contradicted by documentary and other evidence at trial, most obviously the

Schedule itself. The

Schedule clearly lists $3.50 per tonne as the price for “20 mm crushed gravel – Cold Lake Twinning (separately stockpiled)” and $7.00 per tonne as the price for “20mm crushed gravel – (separately stockpiled).” [ 60 ] The parties further agreed – verbally, or through established course of conduct – on the following additional contractual terms: • Urlacher could continue to operate in the Border Pit. • Harco could continue to sell materials from the Gravel Pits to customers with whom they had an established customer base. • Knelsen controlled the quantities and types of raw aggregate it processed at the Gravel Pits. • Knelsen purchased the processed aggregate from Harco upon hauling quantities of processed aggregates away from the Gravel Pits or at the “point of sale”. • Knelsen had no obligation to pay Harco royalties on the materials in the stockpiles prior to selling or using them. • Knelsen kept records of the quantities and types of processed aggregate materials it extracted and processed (the “Crushing Records”) as well as the materials it hauled away from the Gravel Pits (the “Haul Cards”).

At the end of each month, Knelsen prepared a

summary based on the Haul Cards which stated the quantity and type of processed aggregate hauled from the Gravel Pits (the “Summaries”). • Harco invoiced Knelsen for the purchased product by preparing monthly invoices based on the Summaries Knelsen provided to Harco. • Once they were prepared and received, Knelsen paid the invoices within a reasonable amount of time by mailing a cheque to Harco for the outstanding amounts. • The prices paid by Knelsen to Harco for the various types of processed aggregate were contained in the Schedule.

[ 61 ] In addition to the terms of the main contract, the parties also agreed that from time to time, if Harco required aggregate product for itself or for one of its existing customers, it could remove it from Knelsen’s stockpiles, or request Knelsen to process it into a separate stockpile designated for Harco’s use. Knelsen would do so, prepare an invoice, and Harco would remit an agreed upon crushing fee to Knelsen. [ 62 ] As indicated earlier, some important terms were ambiguous, undefined, or not addressed or included in any of the written, oral or collateral agreements, specifically: 1.

What did the term “exclusive right to access” mean in the Aggregate Agreement? 2. Who owned the unused aggregate materials stockpiled in the Gravel Pits? 3. What constituted a “reasonable time” for Knelsen to pay Harco’s invoices? 4. Were “Hotmix” materials supposed to be billed monthly or annually? 5. Who was considered an existing Harco customer, or a Knelsen competitor and how would that be determined? 6. What crushing fee would Harco pay to Knelsen for crushing services? 7. What constituted a “default” by Knelsen warranting termination of the agreement by Harco? 8.

What actions were the parties entitled to take against one another for non-terminable breaches occurring during the course of the agreement? 9. What rights or obligations did the parties have on termination of the agreement, whether due to one party’s default, or as of the anticipated expiration date? 10. What specific rights or obligations did the parties have with respect to processed aggregate materials that had not been purchased by Knelsen prior to the termination of the agreement (i.e. stockpiles left behind)? [ 63 ] The issue of Hotmix billing was not particularly controversial. Mr.

Quist initially indicated that the Hotmix Totals were calculated on an annual basis, although in cross-examination he said “... it was the way it ended up happening... nothing prevented us from doing it monthly.” In questioning he indicated that in 2010, the year-end calculation of Hotmix Totals was an “oversight” and there was no agreement that the Hotmix materials were to be billed differently than other aggregate materials. I accept his evidence from questioning. [ 64 ] The bulk of the ambiguous, or missing terms listed above were contested by the parties.

The following facts are relevant to the Court’s determination of issues related to those terms, which will be dealt with in the context of the “Decision”

section below. [ 65 ] Mr. Quist testified that the parties did not specifically discuss whether Harco could access stockpiles in the Gravel Pits other than piles created specifically for their use. Zane testified that he would not take material from stockpiles designated for Knelsen’s use unless he notified someone from Knelsen he was doing so, and afterwards, provided a record of how much was taken. Terry said the agreement was: “Knelsen’s stockpiles are Knelsen’s and Harco’s are Harco’s.” [ 66 ] The parties did not discuss whether Harco would have been able to bring its own crusher to the Gravel Pits. Mr.

Quist asserted the Agreement would not have allowed that to happen. [ 67 ] Mr. Quist admitted Knelsen did not actually have “exclusive right of access” to the Gravel Pits because Harco maintained operational management and was entitled to access the Gravel Pits and to sell product to its customers. Additionally, Urlacher continued to operate in and out of the Border Pit. [ 68 ] Upon entering into the agreement, Knelsen did not undertake to purchase a minimum quantity of aggregate.

Nothing in the Agreement required Knelsen to keep buying aggregate and other materials from Harco if its circumstances changed, for example, if its future contracts in the area fell through and it had no need for local aggregate products. [ 69 ] Mr. Quist testified that the parties “did not spend a lot of time” discussing the issue of termination of the agreement, or what might constitute a breach of the agreement. The only term relating to default is contained in the Aggregate Agreement. Mr.

Quist offered his subjective opinion that a deliberate breach of a term would likely invite termination by the other party. [ 70 ] Mr. Quist indicated that the idea of set-off or withholding payment was not brought up with Terry, nor was the issue of payment at the end of the relationship. [ 71 ] With respect to invoicing, Terry testified that “the deal was, when it was trucked out they had 30 days to pay for it”; however, the invoices did not indicate that there were to be paid in 30 days.

Terry further testified that “every 30 days they sent haul tickets or weigh tickets, and I sent [the invoice] to La Crete and they sent me a cheque.” Once the invoices were sent “7 days later, [we would] get paid every time.” [ 72 ] Knelsen reviewed its invoices prior to May 2009, and noted they were paid within a few days of the 25 th of each month.

Most of the invoices entered as exhibits were paid within 30 days. [ 73 ] Prior to signing the Agreement, the only circumstance contemplated that would permit Knelsen to delay payment of invoices to Harco “within a reasonable time” was a construction delay where Knelsen was waiting for payment from a customer. [ 74 ] Knelsen had a side agreement with Urlacher for the purchase of concrete sand. Urlacher would invoice Knelsen and pay

royalties to Harco accordingly. Carrying out the Agreement [ 75 ] After the Agreement was signed, Knelsen’s operations and relationship with Harco, primarily via Terry, ran smoothly. In 2010, work in the Gravel Pits increased, and large quantities of gravel product were produced and removed, mostly in relation to the Twinning Project. [ 76 ] From 2008 to September 2011, Harco received numerous Summaries and Haul Cards which purported to accurately record quantities and types of processed aggregate Knelsen hauled from the Gravel Pits. Harco provided invoices to Knelsen accordingly, which Knelsen paid. [ 77 ] Mr.

Wiebe testified that Knelsen mobilized in the Border Pit twice in 2009. In the spring of 2009 they produced the 50 thousand tonne pile of ¾ inch road crush, as well as the 5000 tonne pile for Harco (although this may have occurred as early as the summer of 2008). In the late summer of 2009, they produced a larger pile of 140 – 150 thousand tonnes of ¾ inch road crush dedicated to the Twinning Project. [ 78 ] Mr. Wiebe further testified that Knelsen mobilized in the Rawlakes Pit three times. In the summer of 2009, they produced a 12,000 tonne pile of ¾ inch crush (asphalt material). In the fall of 2009, Mr.

Wiebe estimated they produced 63 thousand tonnes of asphalt material for the Twinning Project. In late fall 2010, Knelsen processes 24,000 tonnes of ¾ and ½ inch rock. [ 79 ] Knelsen left a loader at the Border Pit for the duration of the relationship. They did not leave a loader at the Rawlakes Pit. [ 80 ] After the material was crushed at the various yards, some of it was taken and stored at the Alberta Property, and some at Harco’s Pierceland Yard. Knelsen was responsible for hauling materials from the Border Pit.

A scale was set up in the pit to measure the amount of material after it was removed from the stockpiles. [ 81 ] Harco hauled all of the concrete out of the Rawlakes Pit into Pierceland Yard. Knelsen picked it up at Pierceland Yard and hauled it to their concrete plant at the Cold Lake Yard. Knelsen hauled the asphalt materials out of the Rawlakes Pit. Some material hauled from the Pierceland Yard and the Rawlakes Pit would be measured using a scale at the Alberta Property. Some material would be measured upon arrival at the Cold Lake Yard. The reprocessing incident [ 82 ] According to both Zane and Mr.

Wiebe, in December 2010, Knelsen re-processed a portion of the ¾ inch material in the 12,000 tonne stockpile into 2000 tonnes of ½ inch material. [ 83 ] When already processed aggregate material is “reprocessed,” wastage and loss occur. Mr. Wiebe in his questioning indicated that the loss might be up to 1/3 rd to 50% of the rock put in. If that is the case, then 2000 of ¾ inch product might result in the creation of as little as 1000 tonnes of ½ inch.

Similarly, in order to create 2000 tonnes of ½ inch, 3000 – 4000 tonnes of ¾ inch rock would need to be removed from the pile. [ 84 ] At trial, when asked how it was possible to create 2000 tonnes of ½ inch from 2000 tonnes of ¾ inch, Mr. Wiebe recalled that they had removed 2000 tonnes of ¾ inch from the existing stockpile, and added “pit run” materials to account for the wastage, thus enabling them to produce almost exactly 2000 tonnes of ½ inch material from almost exactly 2000 tonnes of ¾ inch material. [ 85 ] I do not accept this explanation.

It is not believable that Knelsen would reprocess more valuable ¾ aggregate into less valuable ½ inch aggregate by combining it with “pit run” materials. It would have made much more sense to leave the more valuable product as it was, and produce new ½ inch material from “pit run” materials.

It is therefore far more likely that 3000 – 4000 tonnes of ¾ inch material was removed from the pile in order to create 2000 tonnes of ½ inch rock. [ 86 ] Zane, when asked about the re-crushing incident, testified that he thought Knelsen had re-crushed the ¾ inch rock to “make us look like we stole it.” I also do not accept that explanation.

Knelsen’s decision to re-process ¾ inch rock into ½ inch rock was a baffling and inefficient use of resources even to a gravel neophyte, but I have no evidence to indicate it was done deliberately in an effort to “disguise” or “hide” gravel for nefarious purposes. [ 87 ] Knelsen mobilized the crusher and moved it out of the Rawlakes Pit at the end of 2010, following the “reprocessing” incident. Mr. Quist testified that he anticipated Knelsen would need to remobilize the crusher to bring it back to the Gravel Pits prior to the expiration of the 5-year contract with Harco.

The relationship falters [ 88 ] It became obvious through the course of the trial that Zane and George were unhappy with the terms Terry had agreed to. In particular, they believed Harco was entitled to more beneficial royalty payments than were set out in the Royalty Schedule. [ 89 ] In the fall of 2010, they removed Terry as General Manager of Harco, and together, took over management of Harco. This caused tension and unhappiness within the Harrison family, and from my

interpretation of the events that followed, this tension and unhappiness spilled over into the relationship between Harco and Knelsen. [ 90 ] Following his removal, Terry remained friends with some of the Knelsen staff and management, in particular, with Mr. Wiebe. It is also clear to me that their continued friendship contributed to George and Zane’s feeling that Knelsen was or had been

somehow taking advantage of them, and that they were not getting the best out of the bargain Terry had entered into on Harco’s behalf. [ 91 ] I found Zane’s testimony with respect to the timing and content of various meetings and incidents occurring in 2010 and 2011 somewhat confusing. [ 92 ] At some point after Terry left, he and George met with Mr. Quist and Mr. Wiebe to discuss royalty prices. He recalled telling them they would need to negotiate with Harco on a project by project basis moving forward. That did not occur, and the

Schedule pricing was not amended. The subject of rent for the Alberta Property was also raised, to no avail. Zane recalled that at this meeting, Mr. Quist and Mr. Wiebe indicated they were experiencing difficulty selling off the 50 tonne pile because of the higher royalty price of $7 per tonne. Harco offered to sell it for them, again to no avail. [ 93 ] In 2009, when Terry was still in charge, Knelsen had crushed gravel for Harco’s use, and the use of Harco customers, on several occasions, charging a crushing fee which allowed for some profit but which was between 4 and 6 dollars per tonne.

At some point in 2010, Zane Harrison asked for additional materials to be crushed for Harco’s use. Knelsen invoices from 2010 indicates that some crushing was done for Harco that year, after Zane took over. [ 94 ] Zane testified at some length about another incident during the same time period in which he asked Mr. Wiebe to create piles of crush for Harco, and was refused. Apparently, this occurred just prior to the “recrushing” incident. Zane watched as Knelsen re- crushed already crushed aggregate materials, and then moved out the crusher without performing the crushing requested by Harco. [ 95 ] Mr.

Wiebe recalled meeting with the Harrisons at Humpty’s at some point in 2011. Harco was seeking additional aggregate products to sell to third party. On that occasion, Mr. Wiebe refused the request as in his opinion, the third party in that case was a competitor and not an “existing customer” in his opinion. [ 96 ] Clearly, in Zane Harrison’s view, Knelsen did not deal with his requests for crushing promptly or respectfully, and should not have refused to crush for him in 2010 and 2011. [ 97 ] Mr. Quist did not remember participating in any of these conversations.

August 2011 removal incident and September meetings [ 98 ] Mr. Quist testified that the start of 2011 was “business as usual.” Things changed abruptly in August 2011 when he was notified gravel was being removed from the 50 thousand tonne stockpile in the Border Pit. The product was not being removed with the Knelsen loader or loaded onto Knelsen trucks. No one from Knelsen knew about it and Knelsen was not hauling out of the Border Pit at that time. [ 99 ] The source of that information was Terry, who testified as follows: “I don’t know if it was me or not – if it was me so what?

If you saw someone getting hurt you would call it in too. I saw my friend getting hurt.” [ 100 ] The material was being removed by Carillion Canada (Carillion) and loaded into their trucks. Mr. Quist said he called a supervisor at Carillion and told him the gravel was designated for Knelsen’s use. He was informed by Les Kwiatkowski of Carillion that 2383 tonnes had been removed under Harco’s authorization. [ 101 ] Zane testified through reference to an invoice that he sold 2117 tonnes of ¾ inch gravel crush to Carillion at that time. Zane further testified that Carillion was one of Harco’s existing customers. Mr.

Quist did not disagree. He said the issue was not that Harco was prohibited from selling gravel product to Carillion; rather, that Harco was not entitled to remove product from “that specific pile” which was the 50 thousand tonne general use pile. [ 102 ] George and Zane met with Mr. Wiebe and Mr. Quist in a conference room at the Ramada in Cold Lake on September 7, 2011 to try to resolve the issue. Mr. Quist insisted that the pile was designated for Knelsen projects and the material had been taken from it without authorization. He said he wanted to “figure out a path forward.” [ 103 ] As confirmed by Mr.

Quist, the Harrisons took the position that they owned the gravel in the Gravel Pits, and it was theirs to sell however they chose to do so, as long as they paid the crushing fee, regardless of what stockpile it came from. If Knelsen refused to crush for Harco, then Harco was entitled to take what it needed. Mr. Quist indicated this was the first time he had heard anyone from Harco taking that position. He admitted to being “excitable” at the meeting and that he had raised his voice. The Harrisons admitted to allowing Carillion to remove product from the 50 tonne stockpile at the Border Pit.

George said no other product had been removed. The meeting did not end well. [ 104 ] Prior to the meeting on September 7, 2011, Mr. Wiebe had visited the Rawlakes Gravel Pits. The inventory he expected to see there was almost gone. He said he had a suspicion rock had been taken by Harco because he saw a “different truck leaving and the machine was warm.” He did not elaborate on these observations. Mr. Wiebe then “walked off the pile,” in order to measure it, and estimated 5000 tonnes to be missing. [ 105 ] Mr.

Wiebe testified in questioning that he would go back “every couple of months” to check on the various stockpiles in the Gravel Pits. Knelsen’s site manager would also go out to the Gravel Pits to check on them. Mr. Wiebe could not say when he or the site manager had last checked on the status of the stockpiles prior to September 7, 2011. [ 106 ] The parties agreed to meet at the Rawlakes Pit on September 8, 2011. Mr. Quist and Mr. Wiebe arrived first. Mr. Quist said he was “astounded” to see that the material in the pile was “half gone” although he also could not say when he had last checked on the stockpiles.

He said he and Mr. Wiebe have become very good at estimating the size of stockpiles over the years, and he also estimated 5000 tonnes was missing from the pile. Mr. Quist indicated 5000 tonnes would equate to approximately 180 truckloads.

[ 107 ] Zane arrived to the Rawlakes meeting alone. When asked about the missing gravel he admitted to removing some of it. At that time, he estimated it was about 1100 tonnes. In his testimony, based on his billing records, he indicated it was 685 tonnes. Mr. Quist and Mr. Wiebe insisted that it was 5000 tonnes – a position they maintained at trial. [ 108 ] Zane testified that he offered to bring in a crusher to crush new gravel to replenish the pile. Mr. Quist did not deny this offer “could have” been made. If it had been made, his response would have been “no” because “we crush our own rock.” Mr.

Wiebe testified that at some point, Zane offered to return the rock that had been removed, but he did not know if it was at that time. His offer was not accepted. The meeting ended quickly, and the parties drove away. [ 109 ] Zane explained that he had not told Knelsen about the additional amounts he had removed during the meeting the day before because things had become so heated, and essentially, he was too flustered and upset to do so. [ 110 ] Following the meeting, Knelsen did no further investigation into the issue.

They did not get GPS measurements of the Rawlakes stockpile, or the aggregate stored in various places, nor did they perform an accounting of the amount they had actually crushed versus the amount they had actually hauled and billed. The crushing records they could have relied on to prove the various amounts were eventually lost when Mr.

Wiebe’s computer crashed sometime in 2013. [ 111 ] As a result, following the September meetings, Knelsen had only a general idea of how much aggregate product they suspected had been removed by Harco or Harco customers without Knelsen’s permission: 7000 tonnes (5,000 tonne estimate from the Rawlakes Pit, plus the approximately 2,000 tonnes removed by Carillion from Border Pit). Invoicing issue [ 112 ] Mr. Quist testified that following the September meetings he did not know how to resolve the issue. He indicated to Mr.

Wiebe that “the relationship was probably over”; however, he explained that Knelsen continued to operate in the Gravel Pits into 2012 because “they had huge commitments to the City of Cold Lake” and had to continue to use the material they had processed and committed to that job. [ 113 ] Knelsen continued to remove quantities of processed aggregates, and continued to send invoices to Harco for the materials removed, with the exception of “Hotmix Totals” which had been, through “oversight”, billed on a yearly basis, rather than a monthly basis in 2010 and 2011.

Harco continued to issue monthly invoices back to Knelsen accordingly. [ 114 ] On October 28, 2011, Harco issued Invoice No. 4739 in the amount of $112,074.38. On November 30, 2011 Harco issued Invoice No. 4742 in the amount of $241,605.95 . On December 10, 2011 Harco issued Invoice No. 4744 in the amount of $25,176.69 . On December 31, 2011 Harco issued Invoice No. 4746 in the amount of $12,307.72. [ 115 ] The Outstanding Invoices totalling $391,164.74 accurately reflected the quantities of aggregate hauled by Knelsen from the Gravel Pits, as detailed in the Summaries and/or Haul Cards provided by Knelsen.

The Outstanding Invoices also accurately reflected the prices outlined in the Royalty

Schedule (although one calculation was challenged by Knelsen). The four invoices were prepared and sent to Knelsen in the established manner. They were received by Knelsen, but they were not paid. [ 116 ] The “Hotmix Totals” for 2011 were apparently prepared as a batch in November 2011 but were not forwarded to Harco at that time. Harco received those totals as part of document production in these proceedings at a much later date. Retroactively determined: the total payment owed by Harco for Hotmix at the end of 2011 was $174, 498.70. [ 117 ] Knelsen had ceased operations in the Rawlakes Pit prior to September.

The 2011 construction season wound up at the end of October. By that time, Knelsen had removed most of the remaining concrete materials from the Gravel Pits, and taken it to the Asphalt Plant or into Cold Lake to the Pierceland Yard, leaving only manufactured sands. They hauled 3/4 inch gravel base out of the Border Pit until it was depleted. [ 118 ] When questioned in 2013, Mr. Quist indicated that the decision to stop paying Harco’s invoices was made shortly after the September meeting, possibly in September or early October.

In his 2015 questioning, this date changed to “close to the time the [January 2012] letter was written.” In his testimony in chief he again contradicted his earlier testimony and indicated the decision to stop paying was made “over the Christmas break.” I find that the decision was made sometime in October. [ 119 ] According to the exhibits, Knelsen continued to pay Harco for invoices received in August and September of 2011, although these payments were delayed by two to three months. The last payment to Harco was made in December of 2011. [ 120 ] Mr.

Quist further testified that he had not considered at that time, because he did not “know for sure,” what the value was of the crushing costs associated with the missing materials he suspected Harco removed without permission. [ 121 ] As already indicated, at the time the decision was made to withhold payment of invoices, Knelsen would have known that the amount alleged to be missing was just over 7,000 tonnes. If a crushing fee of $5 per tonne was owed on that amount, Harco would have owed Knelsen $35,000.00 .

Even if a much higher crushing fee of $20 per tonne was charged, Harco would have owed Knelsen $140,000.00 . Demise of the relationship Knelsen Letter [ 122 ] On January 3, 2011, Mr. Quist sent a letter to Harco on behalf of Knelsen. The letter summarized the terms of the “foundational” Aggregate Agreement and stated that it “places the relationship between Harco and Knelsen as that of landlord and tenant

with specific operational management in the responsibility of Knelsen.” [ 123 ] With respect to the Border Pit materials, the letter indicated that the stockpiles were depleted at the end of the 2011 construction season and that they would now be performing a “summary review” of the quantities removed from the stockpiles. [ 124 ] Mr.

Quist summarized the events of August and September 2011 from Knelsen’s perspective, concluding that “...Harco has, without our knowledge and without our authorization, removed products that have been allocated specifically for Knelsen’s purpose” and that “Harco has depleted inventory of material that Knelsen requires.” [ 125 ] The letter also stated that “Knelsen is holding Harco responsible for all of the missing and unaccounted for aggregate. The actions and positions that Harco has taken in the above-noted action demonstrate a contravention of the Aggregate Agreement.

We cannot proceed forward with the current method of operations.” [ 126 ] He indicated Knelsen was holding the invoices “without payment until such time as: 1. Knelsen is satisfied that adequate remedy is in place for the missing materials 2. For moving forward, there is firm understanding of procedures for administrative and operational management of the sources.” [ 127 ] Mr.

Quist indicated in his testimony that the purpose of the letter was to “wake up” the relationship to see if “something could be salvaged.” He claimed that at that time, he still wanted to continue the relationship because the Border and Rawlakes Gravel Pits were good sources of product, in a good location. He insisted the letter did not represent a refusal to pay; rather, it was “a pause, not an end.... pausing is withholding temporarily.” [ 128 ] In questioning, Mr. Quist had similarly indicated that Knelsen considered Harco’s actions to constitute a breach, but not a default of the agreement.

Harco Letter [ 129 ] Harco replied on February 8, 2012, via letter from their legal counsel, and terminated the agreement with Knelsen. [ 130 ] Harco took the position that the Agreement was not a binding contract as it did not include essential terms. In the alternative, if the Agreement was binding, then Knelsen had defaulted by failing to pay Harco for the aggregate sold and invoiced in the last three months of 2011.

Payments were due within 30 days and had not been remitted to Harco. [ 131 ] Harco gave Knelsen until March 14, 2012 (approximately one month from the date of the letter) to remove their vehicles and equipment from the Rawlakes and Border Gravel Pits. They also gave Knelsen the option of removing “any aggregate, sand or other stockpiled commodities” from the Gravel Pits after receiving written authorization from George or Zane Harrison. [ 132 ] With respect to the Alberta Property, Harco indicated that there was no tenancy agreement in place as no rent had ever been agreed upon or paid.

Knelsen was again given one month to remove their vehicles and equipment. In addition, Harco sought an accounting of the “Hotmix Totals” for 2011 so that Harco could prepare an invoice.

The information was to be provided “prior to Knelsen being allowed to remove any aggregate, sand or stockpiled commodities from the Alberta Property.” [ 133 ] With respect to the Pierceland Yard, Harco stated that “Knelsen is not to remove any aggregate, sand or other stockpiled commodities from Harco’s property in Pierceland, unless and until full payment for the outstanding amount is received.” [ 134 ] Harco went on to set out a revised

Schedule of material pricing for 2012 in which it more than doubled the amounts set out for most of the items listed in the previously agreed upon Schedule. Knelsen vacates the properties [ 135 ] While they were no longer operating in the Gravel Pits when they received this letter, Knelsen had continued to haul product from the Pierceland Yard into Cold Lake until roughly February 9, 2012. Once they received Harco’s letter, their operations ceased. No additional aggregate products were removed. [ 136 ] Mr.

Quist testified that as of January, 2012 Knelsen did not have any “extraordinary projects” on the horizon, similar to the Twinning Project. [ 137 ] Knelsen did not take Harco up on its offer to seek permission or authorization from Zane or George to access the properties to remove aggregate, sand and other commodities.

Instead, they took the position they had been “locked out.” From that point onward, Knelsen purchased any aggregate materials needed to meet their commitments from other sources. [ 138 ] On February 22, 2012, Knelsen used aerial photos and GPS data to determine quantities of aggregate product left at the Pierceland yard and the Alberta Property. No measurements were taken of the Rawlakes Pit. Mr.

Quist testified there were 2110 tonnes of ¾ inch, 4165 tonnes of ½ inch and 20,034 thousand tonnes of manufactured fines left at Pierceland Yard. 5000 tonnes of ½ inch, 3,288 tonnes of manufactured fines and 1233 tonnes of natural sand remained at the Alberta Property. [ 139 ] Zane testified that at the time Knelsen vacated the properties there was 7000 tonnes of ½ inch and 2000 tonnes of ¾ inch at Pierceland yard. The only thing left at Rawlakes Pit was a pile of manufactured fines.

He indicated some additional piles of material were left at the Alberta property but did not give an estimate. [ 140 ] Following the termination of the contract, as part of disclosure related to the lawsuit, Knelsen disclosed “Agg tracker” records

which enabled Harco to reconstruct the amount of aggregate removed by Knelsen in 2012. Invoices were issued accordingly: Invoice No.5 for $4,879.96; Invoice No. 6 for $970.09; Invoice No. 7 for $6,813.16, Invoice No. 8 for $2,401.54, for a total of: $15,065.15. Thoseinvoices were not paid. [141] Similarly, as part of its Affidavit of Records, Knelsen disclosed a document that accounted for the 2011 Hotmix Totals.Invoices were prepared by Harco and disclosed to Knelsen in their subsequent Supplemental Affidavit of Records in February of 2014.

InFebruary of 2015, counsel for Harco made a formal demand for payment of the Hotmix Totals via letter for a total amount of: $174,498.00. The Hotmix invoices were also not paid. Applicable Law: [142] To make out a claim in contract, a plaintiff – whether by claim or counterclaim – must prove: the existence of a contract, breachof contract, and damages flowing from the breach. The test is on a balance of probabilities.

Contract formation [143] A contract is not legally enforceable unless there is clear agreement that the parties intend to be bound by the essential termsoffered and accepted: see Jin v Ren, 2015 ABQB 115 at para 59 [Jin]; and Ron Ghitter Property Consultants Ltd v Beaver LumberCompany Limited, 2003 ABCA 221 at para 9. [144] The question of whether the parties have agreed to be bound is assessed objectively using the “reasonable bystander” standard:Berthin v Berthin, 2016 BCCA 104 at para 46.

The Court may therefore rely on the parties’ statements, oral agreements, and actions indetermining an intention to be bound: Jin at para 61; R & B Plumbing & Heating Ltd v Gilmour, 2018 BCSC 1295 at para 38 [R & BPlumbing]. The parties’ subjective intentions are irrelevant.

The same principles apply whether the contract in question is oral, written ora combination of the two: R & B Plumbing at para 39. [145] Consideration forms the heart of every enforceable contract: each party must receive something of value from the other:Balfour v Tarasenko, 2016 BCCA 438 at paras 44–45 [Balfour]. [146] Enforceable contracts may be in the form of written agreements, oral agreements or agreements comprised of both written andoral components: John D McCamus, The Law of Contracts, 3rd ed (Toronto: Irwin Law, 2020) [McCamus]; and Balfour at para 46. [147] Generally speaking, most written contracts represent the exclusive record of the parties’ agreement: written contracts are meantto speak for themselves.

When interpreting the terms of a written contract, the “parol evidence” rule precludes consideration of extrinsicevidence “... that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing”: Sattva CapitalCorp v Creston Moly Corp, 2014 SCC 53 at para 59 [Sattva], citing King v Operating Engineers Training Institute of Manitoba Inc,2011 MBCA 80 at para 35 [King]. [148] The court’s ultimate goal has always been “... to determine the intent of the parties at the time of the execution of the contract”:King at para 60, citing Manulife Bank of Canada v Conlin, (SCC), [1996] 3 SCR 415, 139 DLR (4th) 426 at para 79;Consolidated-Bathurst v Mutual Boiler, (SCC), [1980] 1 SCR 888, 112 DLR (3d) 49 at para 26 [Consolidated-Bathurst]. [149] In keeping with this approach, the Court may consider “...extrinsic evidence to determine if the written agreement was intendedto be the whole agreement or whether a collateral contract exists”: McRoberts v Whissell, 2006 ABCA 388 at para 19 [McRoberts]; andsee King at paras 38–41; see also Sambrook v Altamira Management Ltd, [2001] OJ No 2769, 106 ACWS (3d) 653 (ONSC), aff’d (ON CA), [2002] 19 CCEL (3d) 184, 117 ACWS (3d) 92 (ONCA). [150] If the Court determines that a contract is partly oral and partly written, “the oral and written parts of the contract must then beconsidered together and interpreted as one inclusive contract” (King at para 39).

This is sometimes referred to as a “whole agreement”exception to the parol evidence rule: AGP, Inc v Chinook Grain Co, 1999 ABQB 857 at paras 75–78 [AGP]. [151] Collateral oral contracts are rare and must be proven strictly: Balfour at para 46; Gainers Inc v Pocklington Holdings Inc,2000 ABCA 151 at para 19 [Gainers].

In order for a Court to recognize the existence of a collateral oral agreement, the evidence mustdemonstrate the parties clearly intended to enter into a separate and legally binding agreement that “stands alone as a distinct contract”:Carman Construction Ltd v Canadian Pacific Railway Co, (SCC), [1982] 1 SCR 958 at paras 19–20, SCJ No 49;Gainers at para 19; AGP at paras 69–71. Further, the terms of the collateral agreement cannot contradict the terms of the master (usuallywritten) agreement: Balfour at para 46; AGP at para 73. Contractual

interpretation [152] The primary goal of contractual

interpretation is to determine “the intent of the parties and the scope of their understanding”:Sattva at paras 47.

In order to do so, courts are encouraged to be practical, and to consider context beyond the four corners of the writtencontract: Sattva at paras 47 - 49; IFP Technologies (Canada) Inc v EnCana Midstream and Marketing, 2017 ABCA 157 [IFP] at para79. [153] Words are to be given meaning based on their “ordinary and grammatical meaning, consistent with the surroundingcircumstances known to the parties at the time of formation of the contract”: Sattva at para 47; Alberta Union of Provincial Employeesv Alberta Health Services, 2020 ABCA 4 [AUPE] at para 23.

Surrounding circumstances are background facts which would likely be uncontroversial to the parties, be known to both parties at the

relevant time, and be capable of affecting how a reasonable person would understand the language of the document. In other words,objective background facts relevant to the interpretive exercise (AUPE at para 25 [emphasis in original]). [154] Objective evidence must be contextual, and should not be used “to overwhelm the contractual language”: Sattva paras 57, 59;AUPE at paras 28–29; IFP at para 81.

Furthermore, evidence of “the parties’ subjective intentions about the meaning of contractuallanguage” is irrelevant and always inadmissible: AUPE at paras 27, 29; IFP at paras 58, 79–87. [155] In IFP Alberta Court of Appeal gave several examples of relevant background facts including: ... (1) the genesis, aim or purpose of the contract; (2) the nature of the relationship created by the contract; and (3) the nature or customof the market or industry in which the contract was executed: Sattva ... at paras 47-48 [citations omitted].

Ultimately, the surroundingcircumstances can include "absolutely anything which would have affected the way in which the language of the document would havebeen understood by a reasonable man": Sattva ... at para 58 [citations omitted] (para 83). [156] To this end, evidence of pre-contractual negotiations may be relevant “insofar as that evidence shows the factual matrix, forexample by helping to explain the genesis and aim of the contract [citations omitted]”: IFP at para 85 [emphasis in original]. [157] Furthermore, “[i]t is a cardinal rule of the construction of contracts that the various parts of the contract are to be interpreted inthe context of the intentions of the parties as evident from the contract as a whole”: BG Checo International Ltd v British ColumbiaHydro &Power Authority, (SCC), [1993] 1 SCR 12 at para 9, 99 DLR (4th) 577; see also IFP at para 79.

Each term inthe contract must be interpreted in an appropriate way, harmonious with other terms in the agreement: McCamus at 820. [158] Commercial contracts “... should be interpreted in accordance with sound commercial principles and good business sense”:McCamus at 763–766. As stated by the Supreme Court in Consolidated-Bathurst at para 26: “Where words may bear two constructions,the more reasonable one, that which produces a fair result, must certainly be taken as the

interpretation which would promote theintention of the parties.” [159] Furthermore, “in the absence of evidence of a bad bargain, courts should not interpret a contract in a way that yields anunrealistic or absurd result”: IFP at para 88; In the Matter of a Plan of Compromise or Arrangement of Unique Broadband Systems,Inc, 2014 ONCA 538 at para 88 [Unique]. Similarly, whenever possible, courts should avoid an

interpretation that renders an agreementinvalid or unlawful: see McCamus at 831, citing Detomac Mines Ltd v Reliance Fluorspar Mining Syndicate Ltd, (ONSC), [1952] OR 423 (Ont Sup Ct) at 430, aff’d (ON CA), [1952] OR 783 (CA); see also Unique at para 87. [160] As aptly summarized by the Court of Appeal: In the end, contractual

interpretation is not an exercise in second guessing what could have been included in a contract while discountingor dismissing relevant terms of a contract and uncontradicted contextual information. It is instead an exercise in determining what theparties objectively intended having regard to the entire written text, relevant contextual background and commercial context (IFP at para89). [161] In my view, this interpretive approach should be taken irrespective of whether the contract in question is written, oral or, as isthe case here, a combination of the two.

Implied terms [162] It is common practice for courts to imply contractual terms when there are gaps or omissions because the parties agreed only tothe essential terms of the agreement or because the parties did not foresee and provide for a conflict or contingency that arises in theircontractual relationship: McCamus at 832–833; Bhasin v Hrynew, 2014 SCC 71 at para 44 [Bhasin]. [163] The ability to imply terms is not an invitation for the Courts to construct or “rewrite” a new agreement for the parties after thefact.

The legal presumption is against implication of terms, and courts ought to imply terms sparingly and cautiously: McCamus at 833;Benfield Corporate Risk Canada Ltd v Beaufort International Insurance Inc, 2013 ABCA 200 at paras 108, 110–112 [Benfield]. [164] Implied terms must be reasonable, and capable of clear expression: McCamus at 842, citing Marinangeli v Marinangeli, (ON CA), [2003] 228 DLR (4th) 376 at para 65, 66 OR (3d) 40 (CA)[Marinangeli]. They must not contradict any expressprovisions of the written contract: Marinangeli at para 65; Benfield at para 115; Gainers at para 18.

Furthermore, they must be lawfuland not contrary to public policy: McCamus at 842; Pacific National Investments Ltd v Victoria (City), 2000 SCC 64 at paras 30–32. [165] Terms may be implied based on “custom in a certain trade or industry,” if the Court has been provided with a proper evidentiarybasis on which to base its implication: Benfield at para 105; Canadian Pacific Hotels Ltd v Bank of Montreal, (SCC),[1987] 1 SCR 711 at para 51, 40 DLR (4th) 385 [CP Hotels]. [166] Terms may be implied in fact “where the term suggested is so obvious that it is not worth mentioning expressly” (an “officiousbystander” would obviously assume the parties’ intended the term) or “where it is needed to give “business efficacy” to the intendedcontract (it is necessary because without it, the contract would fail): McCamus at 833, 842; Benfield at paras 106–107; and CP Hotels atpara 54. [167] Terms may be implied in law if such terms are necessary “to ensure that the agreement between the parties is, in the court’sview, a fair and reasonable one” (McCamus at 834, 850; Machtinger v HOJ Industries Ltd, (SCC), [1992] 1 SCR 986,91 DLR (4th) 491 at paras 50 – 54 [Machtinger]; CP Hotels at para 53.

Terms implied in law are not based on the presumed intentionsof the parties and therefore, may not necessarily be consistent with those intentions (McCamus at 834). For example, they may beimplied for reasons of public policy, in the context of a particular type of contract: London Drugs Ltd v Kuehne & Nagel InternationalLtd, (SCC), [1992] 3 SCR 299, 97 DLR (4th) 26 at 282.

Breach of contract [168] The usual remedy for breach of contract is damages.

Following discovery of the breach, the contract continues with the“obligations of both parties yet unperformed” pursuant to the terms of the contract remaining in place: Hunter Engineering Co vSyncrude Canada Ltd, (SCC), [1989] 1 SCR 426 at para 148, 57 DLR (4th) 321 [Hunter Engineering]. [169] The “exceptional remedy” of terminating the contract is only available where the breach amounts to a failure of performance byone party which deprives the other party of “substantially the whole benefit” of the contract: Hunter Engineering at para 148;Guarantee Co of North America v Gordon Capital Corp, (SCC), [1999] 3 SCR 423 at paras 40–44, 178 DLR (4th) 1[Guarantee]; Booster Juice Inc v West Edmonton Mall Property Inc, 2019 ABCA 58 at para 13 [Booster Juice].

The breaching partyhas, through their actions, repudiated the contract. [170] It then falls to the innocent party to determine whether to accept the repudiation and terminate the agreement, or continue thecontract and deal with the breach in some other way: Van Camp v Laurentian Bank of Canada, 2015 ABCA 83 at para 32 [VanCamp]; Brown v Belleville (City), 2013 ONCA 148 at para 45 [Brown]; Booster Juice at para 19. The innocent party must clearly andunequivocally communicate their decision to disaffirm the contract to the party within a reasonable time.

Communication of the choice todisaffirm may be done “...directly by either oral or written words, or may be inferred from the conduct of the innocent party in theparticular circumstances of the case”: Brown at para 45; Van Camp at para 32. [171] The term “fundamental breach” is often used to describe this calibre of breach, albeit in the context of exclusionary clauses inthe employment context: Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10 at para 35 [Potter]; see Graesser J’sdiscussion in Gaw v Yellowhead (County), 2018 ABQB 271 at paras 68–79.

Whether categorized as a substantial, fundamental, materialor serious breach, the “standard nevertheless remains unchanged”: to constitute repudiation, the conduct in question must “evince anintention to no longer be bound by the contract”: Potter at para 35. [172] Professor Waddams has suggested there is really only a need to identify two classes of breaches: “breaches that justifytermination, and breaches that do not.”: S M Waddams, The Law of Contracts, 7th ed (Toronto: Thomson Reuters, 2017) at para 597[Waddams].

I agree. [173] The right to terminate a contract for a breach exists independently from the contract itself.

If a party fundamentally orsubstantially breaches a contract, the conditions or requirements for termination as stipulated in the contract no longer apply: JohnBarlot Architect v 413481 Alberta Ltd, 2013 ABQB 388 at para 42, citing Norwood Construction Ltd v Post 83 Co-operative HousingAssociation, [1988] 30 CLR 231 at paras 19, 26 – 27, CLD 1649 (BC CA) [Norwood]. [174] The choice to terminate the agreement is not rescission in the true legal sense of the word, being void ab initio by a vitiatingelement; rather, the parties are discharged from future obligations, but remain bound by rights and obligations that have accrued throughpartial performance: Guarantee at paras 40–41, see also Ascent One Properties Ltd v Liao, 2020 BCCA 247 at paras 88–89. [175] In other words: the contract has ended, but it remains binding in terms of past acts and defaults: Chomedy Aluminum Co vBelcourt Construction (Ottawa) Ltd, (ON CA), [1979] 24 OR (2d) 1, at para 15, 97 DLR (3d) 170 (CA).

Lawfultermination of a contract does not deprive the breaching party of accrued contractual rights: Norwood at para 36.

Breach of a payment term [176] The requirement to “pay within a reasonable time” is a commonly implied term, but it is not often considered a fundamental oressential term, breach of which justifies termination of the contract: see Hughes v Moncton (City), 2006 NBCA 83 at para 6 [Hughes],and Muller v O’Flynn, 2019 BCSC 1674 at para 46 [Muller]. [177] What constitutes a “reasonable time” is based on the expectations of the parties at the time they made their agreement, and thecircumstances of the case: Muller at para 58.

It can also depend on a number of other factors, such as: (1) “the course of dealing betweenthe parties leading up to the formation of the contract”; (2) the nature of the obligations under the contract; (3) the financial position ofthe relevant party; (4) the value of what is at issue; and (5) the state of the market: Muller at paras 46,58; Illidge v Sona ResourcesCorporation, 2017 BCSC 1326 at para 171 [Illidge]. [178] Without an express contractual term to the contrary, time is not presumed to be “of the essence”: Illidge at para 172.

When aparty does not fulfill of term of the contract within a reasonable time, the other party to the contract may issue a notice to comply. At thispoint, time may become “of the essence”, and if the party fails to comply upon receiving reasonable notice, “the party seekingperformance can choose to treat the contract as having been repudiated”: Muller at para 60. [179] In a.k.a Cartoon v Natterjack Animation, 2002 BCSC 1763 [Natterjack] the parties entered into an agreement under whichNatterjack would provide animation services to a.k.a.

Part way through production, a.k.a. stopped paying Natterjack, and in response,Natterjack stopped working on the project. The issue before the Court was whether non-payment by a.k.a. was a fundamental breach ofthe contract constituting repudiation (Natterjack at para 2). Natterjack treated it as such, accepted the repudiation, and terminated thecontract (para 13). [180] The Court found that a.k.a.’s suspension of payments caused Natterjack to be deprived of the substantial benefit that itcontracted for under the agreement (para 50).

Natterjack did not know when it would be paid, the suspended payments were substantialand the suspension of payments was indefinite (para 50). The Court found that in some circumstances, when payment is not received,“the default may amount to a fundamental breach even where no damages have yet been suffered” (Natterjack at para 52). [181] In R & B Plumbing & Heating Ltd. v. Gilmour, 2018 BCSC 1295 the Court found that breach of the terms of an agreed uponpayment method, established through course of conduct, was a fundamental breach warranting termination (at paras 44 – 47).

Set-off and self-help [182] Self-help remedies taken in response to breaches or perceived breaches of contract are subject to the same analysis as any otherimplied term would be.

Courts cannot rewrite agreements by inserting terms into them after the fact unless those terms are firmlygrounded on the presumed intentions of the parties – nor can the parties. [183] A claim to “set-off” is one type of remedy that is commonly resorted to in contractual disputes between parties who havecorresponding duties of payment. [184] In Compton Petroleum Corp v Alberta Power Ltd, 1999 ABQB 42 [Compton] Paperny J (as she then was) held that Alberta’sunequivocal refusal to pay an invoice that was due and payable represented a clear repudiation of the agreement entitling Compton to“consider its obligations at an end” (paras 46–47). [185] The Compton case was, at its core, a case about self-help and set-off.

Alberta had claimed a right to set-off its debt to Comptonagainst money Compton’s affiliate Nesi owed to Alberta’s affiliate Atco, as a justification for withholding payment to Compton. [186] Paperny J explained that there are three possible ways to assert a set-off (at para 24): 1. Set-off by agreement: This occurs where the parties agree to set-off debts or obligations (para 25). 2.

Set-off by law: A party may be entitled to legal set-off where the claims between the two parties are for liquidated debts (specifiedcash amounts) and the cross-claims are mutual (between the same parties and in the same right) (paras 27–28). 3. Set-off in equity: Where the strict requirements of legal set-off would create an injustice, the party may rely on the law of equity onproof of five elements (para 31, citing Royal Bank v Wilton, (AB CA), [1995] 28 Alta LR (3d) 1 at 13, 123 DLR(4th) 266 (CA): i.

The party relying on the set-off must show some equitable ground for being protected against hisadversary's demands... ii. The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed... iii. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjustto allow the plaintiff to enforce payment without taking into consideration the cross-claim... iv. The plaintiff's claim and the cross-claim need not arise out of the same contract... v.

Unliquidated claims are on the same footing as liquidated claims... [187] In Compton, none of the justifications for set-off were found to have been established. Unjust enrichment [188] Unjust enrichment is an independent cause of action: Jin at para 52.

As such, in theory it may be possible for even a repudiatingor breaching party to seek a remedy based on unjust enrichment following termination of a contract. [189] Of course, the ability to bring an unjust enrichment claim in a breach of contract case would depend on the absence of a term inthe agreement requiring forfeiture in the event of a breach: McCamus at 1143; John D McCamus & Peter D Maddaugh, The Law ofRestitution, 2nd ed (Aurora: Canada Law Book Inc, 2004) at 600. [190] A claim of unjust enrichment depends on proof of the following three elements: 1. An enrichment of the defendant; 2.

A corresponding deprivation of the plaintiff; and, 3. An absence of juristic reason for the enrichment. Garland v Consumers' Gas Co, 2004 SCC 25 at para 30 [Garland]; citing Pettkus v Becker, (SCC), [1980] 2 SCR 834at p. 848 [191] What constitutes an “enrichment” or “corresponding deprivation” is seldom controversial, especially where money and goodsare involved.

The question is generally a straight-forward economic assessment as to whether a “tangible benefit” (positive or negative)has been conferred on the defendant: Garland at para. 31. [192] Determining whether there is a “juristic reason” justifying the enrichment is more complicated.

In Garland, the Court describeda two-step analysis summarized as follows: First: the plaintiff must show that there is “no juristic reason from an established category” which could be relied upon to deny recover.Those categories include: contract, disposition of law, donative intent or “any other valid common law, equitable or statutory obligation.” Second: if no such reason from an established category exists, then the defendant may attempt to prove another reason to deny recovery,

“having regard to two factors: the reasonable expectations of the parties, and public policy considerations.” (at paras 44 – 46; Jin at para 58 ). [ 193 ] In Natterjack , the Court posited that restitution for the defaulting

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