CNOOC Petroleum North America ULC v 801 Seventh Inc, 2021 ABQB 81

Court of Queen’s Bench of Alberta Citation: CNOOC Petroleum North America ULC v 801 Seventh Inc, 2021 ABQB 81 Date: 20210202 Docket: 1901 06261 Registry: Calgary Between: CNOOC Petroleum North America ULC Plaintiff/Defendant by Counterclaim - and - 801 Seventh Inc., OPTrust Office Inc., Centurion Holdings Ltd., Quantico Capital Corp., Westhills Development Corporation, Canadian Income Fund Group Inc., and TOKAY Capital Corp. Defendants/Plaintiffs by Counterclaim - and - CNOOC Limited Defendant by Counterclaim _______________________________________________________ Decision of the Honourable Madam Justice N.

Dilts _______________________________________________________ Introduction [ 1 ] Questioning of the Defendants/Plaintiffs by Counterclaim 801 Seventh Inc. (“801” or “Landlord”) and OPTrust Office Inc., Centurion Holdings Ltd., Quantico Capital Corp., Westhills Development Corporation, Canadian Income Fund Group Inc., and TOKAY Capital Corp. (the “Beneficial Owners”) by CNOOC Petroleum North America ULC (“CNOOC NA”) and CNOOC Limited (“CNOOC

Limited”) is underway and is being undertaken pursuant to a complex litigation plan. There is a material disagreement between the parties as to the scope of production required from 801 and the Beneficial Owners, and the scope of permitted questioning.

As a reflection of that disagreement, to late November 2020, 801 and the Beneficial Owners have refused over 150 undertakings and questions and their questioning is far from complete. [ 2 ] CNOOC NA seeks direction from the court to resolve issues as to the scope of production and permitted questioning of 801 and the Beneficial Owners. 801 and the Beneficial Owners agree that certain issues should be addressed by the court. They also argue, however, that many of the questions in issue have been asked and answered and for that reason do not warrant the court’s direction.

Production has been undertaken by all parties, but errors in disclosure and differences in philosophies have generated mistrust. I will note, however, that where a mistake has been made and a document has not initially been produced or where redactions have been too broad, the responsible party has acknowledged the mistake or error and has rectified it, or it has sought direction. [ 3 ] These reasons do not comment on specific questions or undertakings in issue. Rather, my intention is to provide guidance with respect to the broad areas of disagreement.

Should the parties need me to address specific questions, they can return to me in writing. My intention is to provide the necessary guidance to allow questioning to continue effectively. These written reasons do not address every argument raised in the parties’ briefs; however, all arguments have been fully considered. Background [ 4 ] By way of background, CNOOC NA (or its predecessor companies) has for decades been the principal tenant in an office building located in downtown Calgary (the “Property”).

The Property is owned by 801 as bare trustee, nominee and agent for the Beneficial Owners under an Amended and Restated Declaration of Agency and Trust Agreement dated January 14, 2005. 801 is a single purpose entity; its shareholders are the Beneficial Owners.

It holds any benefits arising from the Property in trust for the Beneficial Owners; conversely, the Beneficial Owners are responsible for any obligations relating to the Property in proportion to their ownership interest. [ 5 ] The Beneficial Owners are signatories to various agreements that govern the benefits and obligations they hold with respect to the Property, 801 and each other. As between them, they agree that their obligations with respect to the Property are several. They also agree that they are entitled to receive the benefits from the Property in proportion to their undivided ownership interest.

The benefits from the Property are defined as the net cash receipts from the Property, being the gross cash receipts (the rental paid and other money received in connection with the Property) less disbursements incurred in connection with the Property (including taxes, operating and maintenance costs, and property management fees). The net cash receipts are paid monthly by 801 to the Beneficial Owners according to their proportionate ownership interest.

The Beneficial Owners otherwise covenant to keep their interests in the Property separate for income and capital tax purposes and they agree that they are entitled to take depreciation with respect to the Property individually. Under the Co-Owners Agreement dated July 19, 2000 as amended (the “Co-Owners Agreement”), they agree to prepare financial annual statements for the Property. [ 6 ] CNOOC NA leased the Property from 801 under a lease dated December 30, 2013 (the “Lease”). The Lease is a long term lease expiring December 31, 2031.

Under the terms of the Lease, the Property is to be maintained to a standard consistent with a first class office building. The Lease includes provisions regarding the rights and obligations of the parties in the event there are hazardous substances on the Property. [ 7 ] In late 2017, CNOOC NA discovered asbestos in the office building. Over the next two years, both CNOOC NA and 801 conducted testing and investigations into the asbestos, reaching different conclusions.

CNOOC NA concluded that the office building is unsafe for occupancy and in 2019 vacated the premises, ceasing to pay rent under the Lease as of May 2019. In May 2019, CNOOC NA commenced this action against 801 alleging breach of contract and negligence, among other claims, relating to 801’s failure to remove or abate the asbestos. It seeks damages in excess of $70 million dollars. [ 8 ] 801 disputes that the office building is unfit for occupancy and alleges that CNOOC NA’s termination of the Lease was unlawful and was commercially motivated.

Through a series of amendments, 801 and the Beneficial Owners brought a counterclaim against CNOOC NA and CNOOC Limited. As against CNOOC NA, 801 and the Beneficial Owners allege that CNOOC NA wrongfully terminated the Lease and breached its duty of good faith contractual performance.

As against CNOOC Limited, 801 and the Beneficial Owners allege that the acts and knowledge of CNOOC NA are the acts and knowledge of CNOOC Limited or alternatively that CNOOC Limited directed the actions of CNOOC NA for an improper purpose and thereby tortiously interfered with the contractual relationship between 801 and CNOOC NA. 801 and the Beneficial Owners seek damages against CNOOC NA and CNOOC Limited in the amount of $550 million dollars. [ 9 ] 801 and the Beneficial Owners plead that “801 brings this Counterclaim on its own behalf and on behalf of the Beneficial Owners; the Beneficial Owners bring this claim on their own behalf and through their trustee and/or agent.” Together they say that they advance a single set of losses. [ 10 ] There is a mortgage registered against the Property that references a Commitment Letter dated March 7, 2014 between 801 and its lenders (the “Commitment Letter”).

The amount of the mortgage, the mortgage balance and the periodic payments have not been disclosed by 801 or the Beneficial Owners. The mortgage is an 18 year obligation. After this litigation was commenced, 801, the Beneficial Owners and the lenders entered into a Relief Agreement dated September 24, 2019 (the “Relief Agreement”). The Relief Agreement expressly provides that 801 defaulted on its obligations by failing to pay principal and interest payments as of July 1, 2019. Under the Relief Agreement, the lenders agree to forbear from exercising their rights and remedies on default for a defined period.

During the relief period, 801 is relieved from paying the principal under the Commitment Letter but remains obligated to pay interest and other expenses. [ 11 ] The only particulars of the damages claimed by 801 and the Beneficial Owners are set out in a Response to Request for Particulars filed by 801 in June 2019. The damages claim is described as follows:

The components of the damages claim include lost rental revenue to the end of the term, costs to restore portions of the Building, lost revenue from third parties, and loss of value of the Building.

The basis for them is that CNOOC’s wrongful termination caused them. [ 12 ] Within the framework of these pleadings, CNOOC NA seeks the following records: 1. the financial, tax and accounting records of each of the Beneficial Owners; 2. information regarding the mortgage on the Property; 3. internal valuations and third party appraisals of the Property, including related documents; and 4. source documents for the operating expenses incurred for the Property for the years 2013, 2014, 2015, 2016 and onward. [ 13 ] CNOOC NA argues that as the claim of 801 and the Beneficial Owners is cast in the broadest terms, discovery must correspondingly be broad.

CNOOC cautions that I should not limit the disclosure obligations of 801 and the Beneficial Owners to records that only support their theory of loss. CNOOC NA directs me to excerpts from James Cassels, Remedies: The Law of Damages , 3d ed, (Toronto: Irwin Law, 2014) to support its position that as 801 and the Beneficial Owners claim in both breach of contract and tort, the correct measure of damages in this case may be calculated in one of many ways.

It argues that the claimed losses may be calculated by reference to an expectation interest, a reliance interest, a restitution interest, or a retribution interest each of which, it says, involves different considerations. [ 14 ] 801 and the Beneficial Owners say that much of the disclosure that CNOOC NA is requesting is irrelevant. They say that they have and will continue to provide relevant records. Specifically, they says that if they or their experts intend to rely on any additional documents to prove their claim for damages, those records will be produced.

The Law [ 15 ] The parties agree on the general principles governing a litigant’s disclosure obligations. Parties to litigation are to disclose relevant and material records. Relevance is framed by the pleadings: Wesley First Nation v Alberta , 2013 ABQB 344 at para 21 . Materiality is whether the production sought can assist directly or indirectly to prove a fact in issue: Dow Chemical Canada ULC v Nova Chemicals Corporation , 2014 ABCA 244 at para 17 . [ 16 ] There are a number of cautions expressed in the case law that are to be kept in mind on applications for disclosure.

The court is not to restrict the scope of discovery where doing so might impact the trial judge’s ability to adjudicate the claim: Weatherford Canada Partnership v Addie , 2012 ABQB 215 at para 32 . This caution promotes flexibility and breadth of production, all within the framework set by the pleadings. [ 17 ] At the same time, the court is cautioned to take a pragmatic approach to production, keeping in mind the burden and cost to the parties of producing their records: Weatherill Estate v Weatherill , 2003 ABQB 69 at para 12 .

This caution promotes proportionality, cost effectiveness and practicality and allows for limits to be imposed on disclosure where necessary. As expressed by the Court in Wesley First Nation , placing limitations on questioning and discovery may be necessary to avoid abusive, excessive, and unnecessarily expensive efforts by the parties. [ 18 ] I take it from all of this that the right of discovery through disclosure and questioning is to be meaningful, but it is also to be practical, efficient, cost effective and proportionate. The starting point is relevance as set by the pleadings.

The question is whether the line of inquiry is a legitimate one. Can the requesting party demonstrate a rational strategy in which the disputed documents play a material part: Canadian Natural Resources Limited v ShawCor Ltd ., 2013 ABQB 230 at para 19 . [ 19 ] Before I turn to the categories of disclosure CNOOC NA seeks either through document production or questioning, it is helpful to anchor the questions in this application by reference to basic principles governing damages for breach of contract and damages for claims in tort.

In a breach of contract action, an award of damages is intended to put the wronged party in the position it would have been in had the contract been performed. The underlying policy objective is to encourage contracting parties to perform their obligations. The court looks at the benefits the plaintiff would had received under the contract and seeks to return to it those benefits. That same measure has been confirmed as the measure of damages for breach of the duty of good faith contractual performance: CM Callow Inc. v Zollinger , 2020 SCC 45 at para 107 .

The loss is calculable by reference to the contractual terms. [ 20 ] In contrast, damages for inducing breach of contract or unlawful interference with economic relations are intended to put a wronged party in the position it would have been in had the wrongful act not occurred. Damages may be awarded for the losses that flow from the tortious act, if not too remote: Polar Ice Express Inc. v Arctic Glacier Inc. , 2007 ABQB 717 at para 116-117 . Those losses may not be determined by precise calculation and may be “at large,” dependent on the overall harm caused by the defendant’s actions: Kotch v Casino St.

Albert Inc. , 2005 ABQB 649 at para 200 . [ 21 ] With these foundational principles, I will turn to the particulars of the disclosure sought.

Financial, Tax and Accounting Records of each of the Beneficial Owners [ 22 ] CNOOC NA contends that the financial, tax and accounting records of each Beneficial Owner are material and relevant to the assessment of damages in the context of the claims of 801 and the Beneficial Owners for lost rental revenue and loss of value of the Property. [ 23 ] CNOOC NA argues that as the Beneficial Owners take the benefit of the Lease and bear the obligations of the Property on a several basis, their losses are experienced uniquely. It says each Beneficial Owner structures its financial affairs in such a way as to

obtain tax benefits or to reduce its losses. It argues that both the claim for lost rental revenue and the question of mitigation requiresinquiry into how each Beneficial Owner accounts for the net cash receipts under the Lease; how it records any depreciation in the valueof the Property; and what, if any, benefits it obtains from its tax or accounting treatment relating to the Property. CNOOC NA argues theinformation is relevant and material

i) to determine the actual losses arising from the alleged wrongful termination of the Lease; ii) toaddress issues of mitigation; and iii) to avoid a windfall. [24] CNOOC NA has not produced any case law to support its position that these avenues of inquiry are relevant to the question ofthe recovery of lost rental revenue. [25] Jurisprudence has settled on the appropriate measure of damages for breach of contract: ...where the defendant breaches a contract, the defendant is liable to pay a sum of money that puts the plaintiff in the position she wouldhave been in had the contract been performed.

This is called the expectation interest. The law has selected this interest as one that is mostfair to the plaintiff and most likely to facilitate private ordering in a free market economy. James Cassels, Remedies: The Law of Damages, at p 4 [26] Similarly, jurisprudence has defined the measure of damages for breach of lease.

It is well settled that in the case of a breachof lease, one of the landlord’s exclusive remedies is to recover damages for losing the benefit of the lease over the unexpired term.Damages are calculated as the unpaid rent to the date of the breach (if any) plus the present value of the loss of future rent. The latter iscalculated by determining the present value of the unpaid rent for the unexpired period of the lease less the actual rental value of thepremises over that period: Highway Properties Ltd. v Kelly, Douglas & Co., (SCC), [1971] SCR 562 at p. 570.

Thosedamages are reduced by costs that the landlord avoided because of the tenant’s breach. [27] CNOOC NA has not presented any cases to support its theory that damages for breach of the Lease may be calculated byreference to the financial, tax or accounting records of the owner of the premises.

Nor have I found any cases that support that theory.Looking at Morguard Corporation v 6753060 Canada Inc., 2018 ONSC 4910 and Saramia Crescent General Partner Inc. v DelcoWire and Cable Limited, 2018 ONCA 519 and the cases cited within those decisions, the methodology for calculating loss for breach oflease is as articulated in Highway Properties and is so regardless of whether the owner of the premises is the ultimate owner or is anagent for beneficial owners. The question of how an owner accounts for its income from the leased premises or how it values its capitalasset plays no role.

The loss is calculated based on contractual terms. [28] In Morguard at paras 22-23, the Court canvassed a number of decisions regarding the measure of damages for a terminatedlease and says: The proper measure of damages for a terminated lease is the unpaid rent to the date of the breach (the arrears of rent) plus the presentvalue of the loss of the future rent, which is the present value of the unpaid rent for the unexpired period of the lease less the actualrental value of the premises for that period.

Thus, where the Landlord terminates the lease and delivers what has come to be known as a “Kelly Douglas Notice,” the proper measureof damages for the tenant’s breach is not the total of the rental payments for the balance of the lease term: A.B. Investments Ltd. v.Khan, 2011 ONSC 4491, at para. 29.

Such a measure would fail to account for the costs saved by the breach and fail to take into accountthat the landlord is free to benefit from its property by leasing to a new tenant. [29] In Saramia, the Ontario Court of Appeal turned its mind to how damages arising from the repudiation of a commercial leaseshould be calculated, following the principles in Highway Properties. The plaintiff in that case, Saramia Crescent General Partner Inc.(“Saramia”), was a single purpose entity, incorporated to purchase and hold the property. It owned the property on behalf of a limitedpartnership.

The Court identified the pathways available to a landlord to mitigate its losses, by re-leasing or by sale of the building. Itobserved that the plaintiff Saramia, a single purpose entity, had the obligation to mitigate despite not having discretion over the use of therevenue from the property. Notably, payment of the net cash receipts to the beneficial owners bore no scrutiny in calculating loss oraddressing mitigation. Nor was there any scrutiny into how the benefits or losses were recorded in the financial records of Saramia, thelegal owner, or of the beneficial owners.

The ultimate loss in the claim for lost rental revenue did not involve inquiry into portfolio gainsor loses, or financial gains or losses of the owner or the beneficial owner. [30] The Morguard and Saramia decisions are two of many decisions that address the proper calculation of loss for breach of acommercial lease. None suggest that the financial and accounting records of the owner of leased premises or the beneficial owner ofleased premises are relevant to the calculation of damages. In my view, the established case law regarding the calculation of damages forrepudiation of a commercial lease says otherwise.

If entitled to damages for repudiation of the Lease, 801 or the Beneficial Owners areentitled to be kept whole by receiving the unpaid rental under the Lease, discounted for its present value, and reduced by any avoidedcosts.

I am not satisfied that the legal owner’s or the beneficial owner’s financial, tax or accounting treatment relating to the asset or theincome from the asset is relevant to an assessment of damages for breach of lease. [31] When I consider the other possible claims advanced by 801 and the Beneficial Owners, my assessment that the informationsought is neither relevant nor material remains unchanged. At the trial level in the Saramia decision, the trial judge concluded thatSaramia was entitled to lost capital appreciation and employed a discounted cash flow analysis to quantify the losses.

The Court ofAppeal overturned her conclusion, finding that damages for lost capital appreciation did not fairly and reasonably arise from the breachof a commercial lease. I mention the trial court’s decision, however, for other reasons. At the trial level, the Court considered whether itrequired evidence as to what the partners of Saramia actually did with the return of their investment funds in order to assess thePlaintiff’s loss using a discounted cash flow analysis.

While the trial judge found that losses were incurred by Saramia, the singlepurpose entity incorporated solely for the purpose of holding the asset, there was no inquiry into either Saramia’s or the beneficialowners’ financial or accounting treatment of the asset or the income from the asset, even where there was evidence that Saramia couldnot afford the ongoing maintenance and mortgage expense of the property: Saramia Crescent General Partner Inc. v Delco Wire andCable Ltd., 2017 ONSC 961 at para 77.

[32] A party is entitled to pursue legitimate lines of inquiry through questioning: Wesley First Nation at para 18. However, thelegitimacy of a line of inquiry is to be demonstrated by evidence: Canadian Natural at para 31. It is not established by bare assertions orconjecture: 3557537 Canada Inc. v Howard, 2008 ABQB 586 at para 26. Questioning is not permitted just because some remote andunlikely line of analysis can be advanced: Dow Chemical at para 19.

CNOOC NA has not produced case law or evidence to satisfy methat how an owner or beneficial owner of commercial property records or accounts for the income from that property or for the capitalasset itself is relevant to a calculation of its loss for breach of lease. [33] With respect to the loss of value claim advanced by 801 and the Beneficial Owners, CNOOC NA argues that it is a novelclaim, based outside of the Lease.

It argues that it would be unfair and imprudent for me to deny it the disclosure sought and essentiallypre-determine what information a trial judge may require to assess damages for loss of value of the Property. [34] The law has clearly acknowledged the possibility of other claims arising from a breach of lease beyond the return of lost rentalrevenue. The language used by Laskin, J in Highway Properties makes room for a landlord to seek recovery of other damages. Certaincategories of other losses for breach of lease are detailed in the Morguard decision at paras 22-32.

Those include costs incurred to re-lease the premises, rent abatement, and costs for reconfiguring the premises to accommodate new tenants. The unique circumstances in acase may support additional losses, including those that may flow from the departure of the anchor tenant.

The Court in Morguard atpara 20 citing Canadian Medial Laboratories Ltd. v Stabile, (ONCA) stated “a landlord, having terminated the leaseand given proper notice to the tenant, may assert the full panoply of contractual remedies arising from the lease.” [35] While I acknowledge that a claim that arises outside of the Lease itself may involve different considerations, again CNOOCNA has not produced any case law to support the position that the financial, tax or accounting records of the owner or the beneficialowner is relevant to that inquiry.

In the decision Edmonton Regional Airports Authority v North West Geomatics Ltd., 2002 ABQB1041, the court provisionally assessed a loss of value claim for a building, the value of which was allegedly impacted by theconsolidation of air traffic at the Edmonton international airport. The Court acknowledged the difficulty and uncertainty of assessing thevalue of the building in part because appraisals of the property were not obtained at the date of sale of the property.

While the decisiondoes not review in detail the evidence that was available to the trial judge, the reasoning satisfies me that loss of value was determinedon an objective basis and by reference to market conditions, and without inquiry into the plaintiff’s financial, accounting or tax recordsrelating to the property. That is consistent with my expectation. [36] While my role is not to pre-judge how damages may be assessed, it is also to ensure that there is some rational basis to orderdisclosure or to require questions to be answered.

The Court of Appeal’s comments in Dow Chemical at para 21 bear repeating: It is not sufficient for a litigant to show some theoretical line of argument in order to establish “materiality”. The case management judgeis fully entitled to reject lines of pretrial discovery that are unrealistic, speculative, or without any air of reality. As R. 5.3(1)(

b) implies,the case management judge is allowed to reject questioning where the expense involved is disproportionate to the likely benefits thatwill result. At an interlocutory stage of proceedings, the court should not measure counsels' proposed line of argument toofinely: Weatherill at para. 16.

But that does not mean that a proposed line of questioning must be accepted at face value. [37] Finally, I will observe that the Beneficial Owners do not advance any claim in their capacity as shareholders of 801, nor dothey advance a claim for loss of return on an investment. [38] I cannot find any rational basis on which the evidence of the financial, tax or accounting treatment of the Property, or theincome from the Property, is relevant and material to the issues in dispute in this litigation. CNOOC NA’s application for thisinformation is denied.

Information regarding the Mortgage on the Property [39] CNOOC seeks production of details of the mortgage over the Property, including mortgage advances, mortgage status, andmortgage balance. It also requests information as to the Beneficial Owners’ equity in the Property, their obligations under any mortgageagreements, and details as to the forbearance by the lenders. It says this information is relevant at least to the loss of value claim, arguingthat the mortgage on the property impacts the fair market value assessment of the Property.

CNOOC NA argues that “[a]ny expertopinion commissioned in this Action will not be able to pretend (as OP Trust’s appraisers were apparently instructed to do) that thesignificant debt and encumbrances can be ignored in determining the value the Beneficial Owners claim they have lost.” It also arguesthat the information is relevant to the issue of mitigation. In addition, CNOOC NA says that each Beneficial Owner will have used itsshare of mortgage proceeds from, equity in and depreciation of the Property to optimize its portfolio or to structure its affairs.

CNOOCNA says an assessment of a Beneficial Owner’s actual damage requires a review of this information to prevent a windfall. [40] In support of its position, CNOOC NA points to the Co-owners Agreement in which fair market value is defined as “the pricewhich a sophisticated purchaser that is willing but not compelled to purchase would pay to a seller that is willing but not compelled tosell” understanding that the sophisticated purchaser would take into account the “nature, extent, maturity date and other terms of theliabilities of the Property, whether fixed or contingent, including the favourable or unfavourable nature of any financing to be assumedthen encumbering the Property, and the prospects that the income from the Property (having regard for the strength of tenants’covenants) would be sufficient to satisfy such liabilities when due.” On this basis, CNOOC NA argues that all mortgage or creditfacilities with respect to the Property are central to any valuation of the Property in the context of this action. [41] Under the Co-Owners Agreement, fair market value, including the terms of any financing “to be assumed” comes into playonly where the interest of a co-owner in the Property is to be transferred.

Fair market value is established to determine the list price or thethreshold sale price of the Property in the context of a forced sale under

Article 9.7, and it is used where a non-defaulting co-ownerintends to acquire a defaulting co-owner’s interest. In both scenarios, the acquirer is required to assume any obligations attached to theProperty (Article 9.10), making the amount and terms of any financing arrangements material to the valuation of the Property. That, ofcourse, is not the same question a court is asked to answer when asked to value real property. [42] Looking at the law generally, land value in real estate generally means the fair market value of the land – looking at what a

seller would sell for and a buyer would pay in an open market and arm’s length transaction: Musqueam Indian Band v Glass, 2000 SCC52 at para 37; Saramia at para 62. It is a theoretical value assuming an arms length sophisticated purchaser. It is not determined in a salecontext where the mortgage is to be assumed. Nor is it dependent on the owner’s financial strength or weakness. What equity the ownerhas in the land is irrelevant. The determination of fair market value is an objective exercise. It is not dependent on understanding thelending arrangements impacting the property.

Under CNOOC NA’s first line of argument, I am satisfied that the lender informationsought has no relevance to the loss of value claim. [43] CNOOC NA also argues that the “benefit” the Plaintiffs by Counterclaim have received by deferring their mortgageobligations under the Relief Agreement must be disclosed as that benefit will be deductible from any damage award to which they areentitled.

It says the amount of the mortgage is relevant to this question of mitigation and windfall. [44] CNOOC NA relies on the case of Hodgkinson v Simms, (SCC), [1994] 3 SCR 377 to support its suggestionthat the mortgage information must be produced to determine the value of the mortgage payment avoided. Both in Hodgkinson andSaramia, the Court is clear that a damage award must be reduced by expenses avoided as a result of another party’s breach.

In Saramiaat para 31, the Court concluded that Saramia would be required to deduct from the present value of the unpaid rent any savings itobtained as a result of no longer owning the property. Those savings included mortgage payments and management fees that no longerhad to be serviced because the building had been sold. [45] A redacted copy of the Relief Agreement has been produced.

Under that Agreement, 801 and the Beneficial Owners arerelieved from paying the principal due under the mortgage during the relief period; however, they are expected to continue to service theinterest and other costs and expenses payable. The Relief Agreement expressly provides that on the expiry of the relief period, 801 as theborrower shall immediately pay an amount equal to the missed principal payments, unless waived by the Lender. That satisfies me thatthe mortgage obligation has been deferred; it has not been avoided. The principle expressed in Hodgkinson and also in Saramia has noapplication in this case.

CNOOC NA’s argument does not create a pathway to the production sought. [46] CNOOC NA also seeks the lender information on the basis that it is relevant to its claim that 801 and the Beneficial Ownersbreached their duty of good faith contractual performance, sought to minimize the commercial impact of the asbestos, and evinced anintention not to be bound by the terms of the Lease.

It argues that evidence as to 801 and the Beneficial Owners’ financial health,including the debt to be serviced, is relevant to the question of whether 801 and the Beneficial Owners were motivated by commercialrealities to not abate or remove the asbestos. [47] CNOOC NA has not produced any evidence to anchor the allegation that the economic health of 801 or the Beneficial Ownersprior to CNOOC NA ceasing to pay rent had a role in its decisions relating to the presence, nature and extent of the asbestos and theobligation to abate or remove the asbestos.

CNOOC NA seeks answers to questions regarding the advance of mortgage funds in 2014 orlater, internal projections regarding mortgage obligations, and the amount of equity in the Property. CNOOC NA’s obligation is to satisfyme of the relevance of the information sought by reference to evidence or jurisprudence. It has done neither. [48] Nor am I satisfied that the allegation of breach of the duty of good faith contractual performance entitles CNOOC NA toinformation regarding the mortgage after CNOOC NA ceased to pay rent. 801 and the Beneficial Owners have been forthcoming as tothe Relief Agreement.

The nature of the relief is apparent on the document. I am not satisfied that 801 or the Beneficial Owners arerequired to disclose more. CNOOC NA’s assertions without support amount to a fishing expedition. As is often stated, the court must becautious not to allow a party to go on a fishing expedition to find some evidence to support the allegations it is making: Franco vHackett, 2000 ABQB 241 at 34; Tirecraft Group Inc. v High Park Holdings ULC, 2010 ABQB 653 at para 26. This category of inquiryis denied.

I am not satisfied that the production of details relating to the mortgage will assist to directly or indirectly prove a fact in issue. Internal valuations and appraisals of the Property and related records [49] 801 and the Beneficial Owners have produced non-privileged historical internal valuations that were prepared for the Propertyfrom the years 2013 to 2017 (they claim privilege over appraisals and valuations done after 2017). They say they have produced thoserecords not because they are relevant and material to the litigation, but as a courtesy and in an attempt to avoid dispute.

They have not,however, produced the instructions, assumptions or working papers underpinning those appraisals, nor have they produced any recordsas to how the Beneficial Owners used those appraisals to assign and record value for financial or accounting purposes. [50] CNOOC NA seeks the Beneficial Owners’ internal records and working papers relating to all valuations obtained regardingthe Property, including instructions to appraisers, related correspondence, and internal discussion or analysis.

It also seeks to question theBeneficial Owners on how they have used the appraisals to assign value for internal financial and accounting purposes. CNOOC NAsays how the Property has been recorded in the financial statements of the Beneficial Owners is a marker for the value of the Property atvarious points in time and is therefore relevant to the loss of value claim. [51] I agree with 801 and the Beneficial Owners that the historic appraisals are of limited value, if any, to assist in assessing a lossof value claim.

The Edmonton Regional Airports case is an example of the limited value of appraisals that do not reflect the marketconditions at the times relevant to the litigation. As already noted, the value of the Property will be determined in relation to marketconditions at the material points in time: the marketability of the property, the demand for commercial real estate, and macro economicand market influences. It will be determined by reference to expert evidence.

There is no evidence before me that any expert opinion willbe based on or influenced by historic appraisals from as many as six years prior to the date of the alleged breach.

I share the concernexpressed by 801 and the Beneficial Owners that production of valuations relating to points in time not relevant in this Action willpromote unnecessary and unhelpful inquiry. [52] Moreover, how the Beneficial Owners together or independently used appraisals from 2013 to 2017 to record the value of theProperty in their financial or accounting records has no relevance to the question of a loss in value of the Property for the time period inissue in this litigation, being the period immediately prior to the alleged breach in May 2019 and following.

CNOOC NA’s application asit relates to production and questioning into the area of historic appraisals is denied.

Historic Operating Expenses [ 53 ] The issue of operating expenses arises in two ways in this Action. First, CNOOC NA alleges that it overpaid variable operating expenses after it vacated, partially or wholly, the Property in 2019. Second, 801 and the Beneficial Owners seek to recover the monthly operating expenses payable under the Lease to the end of the term of the Lease.

Within this framework, CNOOC NA asks for detailed disclosure of the operating expenses under the Lease from 2013 onward, including the back up data showing the vendors that provided service, the charges for those services and how those charges were apportioned by the Landlord. That information relates to cleaning, repairs and maintenance, utilities, security, insurance, general and administrative expenses, property taxes and management fees relating to the Property.

It says this detailed information year by year is needed for an expert to form a factual foundation to express an opinion on future variable operating costs associated with the Property. [ 54 ] 801 and the Beneficial Owners point to the fact that under the Lease, CNOOC NA was provided the opportunity to examine the detail underlying past operating expenses. They say that opportunity was CNOOC NA’s exclusive opportunity to challenge those expenses or the allocation of those expenses.

They also say that the opportunity to challenge those expenses or allocations closed when CNOOC NA’s audit window closed. 801 and the Beneficial Owners maintain that any inquiry into the detail underlying the annual operating expenses for 2013, 2014, 2015, 2016 is now closed. Moreover, they say the pleadings do not challenge the accuracy of the operating expenses charged for those years.

As a result, they say the disclosure setting out the aggregate expenses for those years meets its disclosure obligations. [ 55 ] In my view, in seeking records and discovery related to operating expenses from 2013 -2016, CNOOC NA is not only seeking records of marginal relevance, they are making an impractical and onerous request out of proportion to any possible value from the production of the records. The source data sought would be voluminous and the effort to produce not immaterial.

Considering the comments of the Court in Weatherill Estate at para 14 and in Canadian Natural at para 25, these are relevant factors in assessing the pragmatism of disclosure and discovery requests. The rule of proportionality is a limiting one.

I am satisfied that when weighing the expense and effort of producing the records against their possible value, the scale tips squarely in favour of not requiring disclosure of the source records from 2013 to 2016. [ 56 ] 801 and the Beneficial Owners have produced the budget and audited operating expense schedules for 2017 and 2018, and the budget for 2019, and have committed to produce similar records for future years.

As CNOOC NA no longer has audit rights under the Lease on which it can rely to scrutinize the various costs and receipts, I am satisfied that those detailed records for 2017 onward must be produced. CNOOC NA is entitled to inquire into the appropriateness not only of the charges for which 801 and the Beneficial Owners seek recovery, but of the allocation of those operating expenses to CNOOC NA.

This will be an ongoing obligation through to the date of trial. [ 57 ] 801 and the Beneficial Owners are directed to produce the source documents relating to the operating expense claim and the property taxes from 2017 onward. Conclusion [ 58 ] In their submissions CNOOC NA and CNOOC Limited note that the law does not require that a request for disclosure be supported by expert evidence setting out that the information sought is needed to prepare a requested opinion.

Both parties point to the decision of Master Farrington in NEP Canada ULC v MEC Op LLC , 2016 ABQB 186 at para 26 : In addition, the defendant seeks documents such as internal financial statements and tax returns of the plaintiff on the basis that the defendant’s damages expert “needs them”. There is no evidence from the defendant’s damages expert of a first-hand nature that they are needed or why they are needed. It is simply a request that is passed on by the defendant’s counsel. The plaintiff has already produced audited financial statements upon request.

There is no specific probative argument made as to why particular documents are needed in the context of the damage calculation, either by the expert in requesting them, or by defendant’s counsel during argument. The argument essentially amounts to a request to produce them because the expert says so. In my view, in order to satisfy the relevance and materiality test it is reasonable to require that an argument be articulated as to exactly what facts the records requested would tend to prove or disprove. That is consistent with the Rules. [ 59 ] In response, I make two points.

First, where, as here, the submissions of counsel are not anchored by established legal principles but counsel says the information is needed for an expert to prepare a report, expert evidence would assist. Second, the law is clear that some evidence supporting the request for additional records is required. The relevance of a line of inquiry is to be demonstrated by the requesting party. It may do so by reference to evidence from an expert, by reference to documents produced or answers to questioning, or by reference to case law that demonstrates the legitimacy of its line of inquiry.

In any case, the request for production or disclosure must amount to more than a thesis, particularly where the information sought is invasive regarding a party’s business and financial records. [ 60 ] 801 and the Beneficial Owners are entitled to costs of this application. Heard on the 20 th day of November, 2020. Dated at Calgary, Alberta this 2nd day of February, 2021.

N. Dilts J.C.Q.B.A. Appearances: Jeffrey E. Sharpe Julia Lisztwan Mark MacAulay Burnet, Duckworth & Palmer LLP for the Plaintiff/Defendant by Counterclaim CNOOC Petroleum North America ULC Michael D. Mysak Blair C. Yorke-Slader, Q.C. David R. McKinnon Bennett Jones LLP for the Defendants/Plaintiffs by Counterclaim 801 Seventh Inc., OPTrust Office Inc., Centurion Holdings Ltd., Quantico Capital Corp., Westhills Development Corporation, Canadian Income Fund Group Inc., and TOKAY Capital Corp. Jerry Patterson, Q.C. Dentons For the Defendant by Counterclaim CNOOC Limited