Werklund Ventures Ltd v NRG Divestitures Inc, 2022 ABKB 671

Court of King’s Bench of Alberta Citation: Werklund Ventures Ltd v NRG Divestitures Inc, 2022 ABKB 671 Date: 20221011 Docket: 2001 01656 Registry: Calgary Between: Werklund Ventures Ltd. Applicant - and - NRG Divestitures Inc. Respondent _______________________________________________________ Reasons for Judgment of the Honourable Justice M.H. Bourque _______________________________________________________ I.

Introduction and Background [ 1 ] Werklund Ventures Ltd. (“Werklund”), as lender, entered into a Demand Loan Agreement dated June 15, 2018 (the “Demand Loan Agreement”) with the Respondent, NRG Divestitures Inc. (“NRG”), as borrower, and with certain third parties (whose identity is not relevant to this application) as guarantors, pursuant to which Werklund extended a demand facility loan to NRG (the “Demand Loan”).

The Demand Loan was extended to finance NRG’s purchase of certain surplus equipment (the “Project Assets”) from ConocoPhillips Surmont Partnership and ATCO Structures & Logistics Ltd. and to fund the disassembly and transport of the Project Assets. [ 2 ] Werklund advanced funds under the Demand Loan in NRG’s favour whenever NRG submitted invoices or other supplier or vendor documentation in connection with the Project Assets. Rather than paying the funds to NRG, Werklund made the payments directly to the suppliers, including any amounts of goods and services tax (“GST”) owing on the purchases.

In its GST returns to the Canada Revenue Agency (“CRA”), NRG, as purchaser of the supplies, claimed input tax credits (“ITCs”) equal to the amount of GST paid to its suppliers, as would any business entitled to ITCs. The Demand Loan Agreement did not require NRG to assign the ITCs to Werklund or otherwise to pay down the Demand Loan by the amount of any ITCs.

The amount of NRG’s indebtedness increased by the amounts paid for the Project Assets, including GST paid in respect of those purchases. [ 3 ] By January 31, 2019, Werklund had advanced funds under the Demand Loan totalling $16,480,151.05 (including GST) and, as of that date, the amount owing under the Demand Loan by NRG to Werklund, including interest, was $16,622,242.36. [ 4 ] On January 31, 2019, Werklund demanded repayment of the outstanding principal by electing to require NRG to assign all of its interest in the Project Assets to Werklund in accordance with clause 2.5(a)(iii) of the Demand Loan Agreement (the “Loan Repayment Assignment Clause”).

To effect the assignment of the Project Assets, Werklund presented a Conveyance Agreement that used words normally associated with a purchase and sale agreement rather than an assignment. Characterizing the transaction as a

purchase and sale of the Project Assets rather than an assignment obliged NRG to collect and remit GST on the notional purchase price of the Project Assets. This was advantageous to Werklund because it could then claim ITCs in its own GST returns. The result of this plan was that Werklund would acquire the Project Assets and would indirectly receive a cash payment of $791,535.35 from NRG.

I pause to point out that refunding the ITCs to Werklund would not cause a loss to the CRA unless NRG failed to remit the GST. [ 5 ] Werklund’s evidence was that it received advice that the assignment of the Project Assets was subject to GST on the notional purchase price and it drafted the Conveyance Agreement accordingly. As discussed below, this advice (which was not put before the Court) was erroneous. Ultimately, the CRA deemed the assignment of the Project Assets to be a supply made for no consideration under

section 183 of the Excise Tax Act. Therefore, no GST was payable and Werklund’s claim for ITCs of $791,535.35 was denied. Werklund seeks to recover that amount from NRG. II. Issues [ 6 ] Werklund argues that the fundamental issue in this application is the proper

interpretation of the contractual provisions, particularly sections 2 and 3 of the Conveyance Agreement. Werklund’s position is that the Conveyance Agreement did not achieve its objective because the purchase price of the Project Assets was intended to satisfy the total indebtedness. It asserts that the evidence of meetings leading up to the execution of the Conveyance Agreement on January 31, 2019 demonstrates objectively that the parties’ intention was that GST would be included in the purchase price. Werklund says that the proposed alternative

interpretation – that the GST was not included in the purchase price – is absurd because it would have the effect of not fully satisfying the indebtedness. Accordingly, Werklund argues that the issue is whether NRG is in default of its obligations under the “Loan Documents” and owes the amount of the GST, being $791,535.35, to Werklund. [ 7 ] Some comments about language are important at this point. In its brief, Werklund uses the term “Loan Documents” to refer collectively to the Demand Loan Agreement, the Conveyance Agreement and a Release (as defined below).

The Demand Loan Agreement is dated June 15, 2018 and was amended several times between that date and January 31, 2019 to reflect additional advances made and additional Project Assets acquired. No changes were made to the Loan Repayment Assignment Clause. The Demand Loan Agreement includes schedules attaching a guarantee agreement, a pledge agreement and a security agreement. However, it does not include a form of conveyance agreement or release to be used if Werklund elected under the Loan Repayment Assignment Clause.

The evidence shows that the Conveyance Agreement and the Release were drafted much closer to January 31, 2019 and were received by NRG’s principal the evening of January 31, 2019. In my view, using the defined term “Loan Documents” is problematic in these circumstances because these agreements were drafted at different times in the parties’ commercial relationship when their relative bargaining powers may have been different.

In addition, the parties’ intentions at the time they executed the Conveyance Agreement and Release may well have been different from what they were at the time they executed the Demand Loan Agreement. As explained below, the Court’s task is to ascertain the parties’ intentions and the surrounding circumstances at the time of contract formation. Using a defined term that conflates various agreements renders that exercise more difficult because the surrounding circumstances may be different and the parties’ intentions may have changed.

Therefore, I have refrained from adopting the term “Loan Documents” to describe the Demand Loan Agreement, Conveyance Agreement and Release. [ 8 ] For its part, NRG argues that the Conveyance Agreement amounts to a modification of the Demand Loan Agreement that, without additional consideration, is unenforceable. NRG further argues that the Conveyance Agreement is unenforceable because the CRA rejected Werklund’s characterization of it as a purchase and sale agreement as “unlawful”.

In any event, NRG says that it fully performed its obligation under the Conveyance Agreement by remitting the GST to the CRA and that Werklund’s inability to claim ITCs is not a valid basis for a claim against NRG. Finally, NRG argues that if the various agreements are ambiguous, the contra proferentum rule should apply against Werklund as drafter thereof. [ 9 ] Werklund counters that NRG’s lack of counsel and refusal adequately to review the “Loan Documents”, including sections 2 and 3 of the Conveyance Agreement, is not material to the determination of this application.

Werklund asserts that NRG is a sophisticated commercial party and should not be granted relief for its commercial errors of judgment to Werklund’s detriment when Werklund fairly negotiated the agreements in good faith. Rather, it ought to be held accountable for the obligations it agreed to under the “Loan Documents”. [ 10 ] For the reasons that follow, I find that by electing under the Loan Repayment Assignment Clause, Werklund received exactly what it was entitled to receive, namely, assignment of the Project Assets in full and final settlement of the amounts owing under the Demand Loan Agreement.

Therefore, NRG owes nothing further to Werklund. III. Analysis A. The Law [ 11 ] In Sattva Capital v Creston Moly , 2014 SCC 53 , Justice Rothstein, writing for the Court, discussed at para 47 the modern approach to contractual

interpretation: Regarding the first development, the

interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” ( Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada , 2006 SCC 21 , [2006] 1 S.C.R. 744, at para. 27 , per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) , 2010 SCC 4 , [2010] 1 S.C.R. 69, at paras. 64-65 , per Cromwell J.).

To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning...

[ 12 ] More recently, Justice Paperny, writing for the Court of Appeal in Trico Developments Corporation v El Condor Developments Ltd , 2020 ABCA 132 , explained at paras 28-32 : There is only one objective in interpreting the terms of a contract - to determine the objective intent of the parties at the time the contract was made: IFP at para 79, citing Sattva at para 49.

In undertaking that exercise, the court must read the contract in its entirety and give the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time the contract was formed: Sattva at para 47.

As the Supreme Court noted in Sattva , quoting Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen , [1976] 3 All ER 570 at 574 : No contracts are made in a vacuum: there is always a setting in which they have to be placed … In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. Similarly, in IFP , this court cautioned that courts ought not to sanction contractual

interpretations disconnected from economic reality. “[C]ommercial contracts should be interpreted in accordance with sound commercial principles and good business sense… In the absence of evidence of a bad bargain courts should not interpret a contract in a way that yields an unrealistic or absurd result”: IFP at para 88, citing John D McCamus, The Law of Contracts , 2d ed (Toronto: Irwin Law, 2012) at 763-766. As stated by Professor Hall in his book, Canadian Contractual

Interpretation Law : The purpose of the commercial efficacy principle is not to protect business people from absurd results of their own contracts. Instead, the commercial efficacy principle relates to the overall goal of contractual

interpretation, which is to give an accurate meaning to the parties’ intentions (Geoff R Hall, Canadian Contractual

Interpretation Law , 3rd ed (Toronto: LexisNexis, 2016) at 57 [ Canadian Contractual

Interpretation ]). In this regard, I find myself in agreement with the following statement of Lord Reid in Wickman Tools v Schuler AG , [1974] AC 235 at 251 : The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.

The intention of the parties is to be determined objectively, with consideration of the surrounding circumstances that “would have affected the way in which the language of the document would have been understood by a reasonable man”.

The relevant surrounding circumstances include the genesis of the contract, its purpose, the nature of the relationship created by the contract, and the nature or custom of the market or industry in which the contract was made: IFP at para 83. [ 13 ] As the Court of Appeal instructs, I commence my analysis by reading the Demand Loan Agreement in its entirety and giving the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time the contract was formed. B.

The Agreements [ 14 ] There is nothing particularly unusual about the Demand Loan Agreement. It states that Werklund is willing to lend monies to NRG to acquire the Project Assets. It also identifies third parties as guarantors of NRG’s obligations. As is typical,

section 2 contains the key ingredients of the commercial agreement between the parties. In this case,

section 2.1 broadly provides that Werklund agrees to loan the principal amount to NRG, that the advance will be made as one advance [1] , and that the Demand Loan, including accrued interest, shall be repaid on the Demand Date or the Maturity Date, as defined.

Section 2.2 provides that the proceeds of the Demand Loan may be used only to acquire the Project Assets.

Section 2.3 is a typical provision dealing with tax matters and indemnities that may arise in respect of taxation. Importantly, neither party suggested that

section 2.3 had any relevance to the resolution of this application.

Section 2.4 deals with the computation and accrual of interest. [ 15 ] The key provision in this application is the Loan Repayment Assignment Clause found in

section 2.5 of the Demand Loan Agreement. It provides as follows: 2.5 Payments and Prepayments (

a) Mandatory Repayments. The Borrower shall repay to the Lender in full the Outstanding Principal, accrued and unpaid interest on the earliest to occur of: (

i) the date the Lender declares the Outstanding Principal and Interest due and payable whether as a result of an Event of Default or otherwise (the “ Demand Date ”); (ii) the Maturity Date; and (iii) the election by the Lender, upon written notice to the Borrower, to require the satisfaction in full of all of the Outstanding Principal and all accrued and unpaid Interest on the Loan at any time by causing the Borrower to assign up to, or to the direction of, the Lender all of its right, title and interest in and to the Surmont Facilities and the ATCO Kitchen; provided that the Surmont Facilities and the ATCO Kitchen shall be free and clear of all Liens (other than in respect of the Loan) and the Borrower shall pay to the Lender. [2] [ 16 ] Thus, the Demand Loan Agreement provided Werklund with three options to demand repayment.

Subclause (

i) allowed it simply to demand repayment of the Outstanding Principal (defined as including accrued interest on the amounts advanced) upon an

Event of Default (as defined in

section 7.1) or otherwise. Subclause (ii) allowed Werklund to demand repayment of the Outstanding Principal on the Maturity Date (defined as June 15, 2019). Finally, subclause (iii), the Loan Repayment Assignment Clause, allowed Werklund to elect to require NRG to repay the Outstanding Principal by assigning all its interest in the Project Assets.

In effect, the Loan Repayment Assignment Clause, when exercised, results in the transfer of the Project Assets from borrower to lender in consideration for the extinguishment of the borrower’s obligation to repay the outstanding principal to the lender. [ 17 ] The balance of the Demand Loan Agreement contains typical provisions and neither party suggested that any of them was relevant in the determination of the issues in this application.

Before moving on, I simply note, as I did above, that the Demand Loan Agreement includes schedules attaching execution copies of limited recourse guarantees and security agreements but does not include a form of conveyance agreement to be used if Werklund elected repayment under the Loan Repayment Assignment Clause. [ 18 ] The evidence before me indicates that the parties always expected Werklund to elect to acquire the Project Assets pursuant to the Loan Repayment Assignment Clause once NRG had located, moved and re-assembled them.

Werklund’s Chief Financial Officer confirmed this intention in cross-examination on his affidavit (at page 19, lines 10-20). Recitals C and D of the Services Agreement dated June 15, 2018 also strongly hint to Werklund’s intention: WHEREAS: A. Pursuant to a surplus equipment sales agreement (the “ Equipment Purchase Agreement ”) entered into on April 26, 2018, [NRG] has purchased temporary worksite accommodation units (the “ Worksite Units ”) from ConocoPhillips Surmont Partnership;. B.

In order to finance the purchase price for the Worksite Units, the Contractor entered into a Demand Loan Agreement with Werklund dated June 15, 2018, pursuant to which Werklund advanced to the Contractor the principal amount of $8,886,15000 (the “ Loan ”); C. Pursuant to the Demand Loan Agreement, Werklund may elect to have the Loan satisfied by causing the Contractor to assign (the “ Assignment ”) to, or to the direction of, Werklund all of its right, title and interest in and to the Worksite Units; and D.

In anticipation of the potential Assignment, the Parties desire to enter into this Agreement to provide for certain services to be provided by the Contractor in connection with the Worksite Units, on behalf of and for the benefit of Werklund, as more particularly described herein. [ 19 ] To effect its election, Werklund issued to NRG a Notice of Demand and Election dated January 31, 2019 that clearly references and incorporates the language of the Loan Repayment Assignment Clause: Reference is made to the [Demand Loan], as amended by amending agreements dated [...] (the “ Loan Agreement ”).

Unless otherwise defined, all capitalized terms used herein shall have the meanings specified in the Loan Agreement. As of the date hereof, the Outstanding Principal is $16,622,242.36, being an aggregate outstanding Principal Amount of $16,480,151.05 plus accrued and unpaid Interest of $142,091.31. Pursuant to [the Loan Repayment Assignment Clause], the Lender hereby: (

i) demands repayment of all of the Outstanding Principal, including all accrued and unpaid Interest on the Loan, and (ii) provides this written notice to the Borrower of its election to require the satisfaction in full of all of the Outstanding Principal and all accrued and unpaid Interest on the Loan by assignment by the Borrower to the Lender of all of the Borrower’s right, title and interest in and to the Surmont Facilities and the ATCO Kitchen, free and clear of all Liens (other than in respect of the Loan). [ 20 ] To document the transfer of the Project Assets, Werklund’s counsel drafted a General Conveyance Agreement dated January 31, 2019, the recitals of which also clearly reference and incorporate the language of the Loan Repayment Assignment Clause: RECITALS: ...

D. Pursuant to [the Loan Repayment Assignment Clause], the Lender has elected to require satisfaction in full of all of the outstanding principal and all accrued and unpaid interest under the Loan Agreement by the assignment to the Lender of all of the Borrower’s right, title and interest in and to the Items, free and clear of all Liens (other than in respect of the Loan Agreement). E.

The Borrower wishes to deliver a general conveyance dated the date hereof assigning and conveying all of its right, title and interest in and to the Items to the Lender, free and clear of all Liens (other than in respect of the Loan Agreement). ... [ 21 ] However, as noted above, sections 2 and 3 of the Conveyance Agreement use language more appropriate to an asset purchase and sale agreement, providing for payment of a purchase price for the Project Assets that, when GST is added, equals the amount of the outstanding principal under the Demand Loan. That purchase price, according to

section 3 of the Conveyance Agreement, is to be set off against the outstanding principal. The provisions read as follows: 2. Conveyance Subject to

Section 5 of this Agreement, the Borrower hereby conveys to the Lender, its successors and assigns, as at the date hereof, all of its right in and to the items free and clear of all Liens (other than in respect of the Loan Agreement), and the Lender accepts that conveyance, for a purchase price equal to $15,830,707.01 plus GST of $791,535.35 (the “ Purchase Price ”).

The Borrower shall remit the GST amount set forth above to the applicable Governmental Agency. The Borrower’s GST number is [...]. 3.

Payment of Purchase Price The Purchase Price will be paid in full by the Lender by way of set off of the Outstanding Principal, including all accrued and unpaid Interest on the Loan, in the aggregate amount of $16,622.242.36. [ 22 ] Upon execution of or in connection with the Conveyance Agreement, Werklund delivered to NRG, the guarantors, and counsel a Receipt, Acknowledgement and Release (the “Release”) also dated January 31, 2019, the relevant portions of which again clearly reference and incorporate the language of the Loan Repayment Assignment Clause, as follows: ...

AND WHEREAS pursuant to [the Loan Repayment Assignment Clause], the Lender has elected to require satisfaction in full of all of the Outstanding Principal and all accrued and unpaid Interest on the Loan by the assignment to the Lender all of the Borrower’s right, title and interest in and to the Surmont Facilities and the ATCO Kitchen; provided that the Surmont Facilities and the ATCO Kitchen shall be free and clear of all Liens (other than in respect of the Loan).

AND WHEREAS the Borrower has executed and delivered a general conveyance dated the date hereof assigning and conveying all of its right, title and interest in and to the Surmont Facilities and the ATCO Kitchen to the Lender and representing and warranting to the Lender that the Surmont Facilities an the ATCO Kitchen are free and clear of all Liens (other than in respect of the Loan) (the “Conveyancing Agreement”).

NOW THEREFORE in consideration of foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledge by the Lender, the Lender hereby confirms, acknowledges and agrees as follows. ... 2. The Borrower has repaid in full all of the Outstanding Principal and all accrued and unpaid Interest on the Loan by the execution and delivery of the Conveyance Agreement. ... C.

The GST [ 23 ] It is not disputed that NRG remitted an amount of $791,535.35 on account of GST to the CRA or that, on February 28, 2019, Werklund filed a GST/HST return claiming total ITCs and adjustments in the amount of $873,864.69. The CRA denied Werklund’s ITC claim in a proposal letter dated May 31, 2019: Decrease to Input Tax Credits (ITCs) Reference: subsections 169(1), 169(4) and 183(1) of the Excise Tax Act Input Tax Credits are proposed to be denied in the amount of $791,535.35 per subsection 169(1) of the Excise Tax Act as the amount is not due or payable.

The amount is claimed in regards to the agreement with NRG Divestitures Inc. Subsection 183(1) of the Excise Tax Act provides that where property is seized or repossessed from a person to satisfy a debt or obligation (in whole or in part) owed to a creditor under a right or power exercisable by the creditor, a supply of property by way of sale will be deemed to have been made by the person and to have been received by the creditor and the supply will be deemed to have been made for no consideration.

Consequently, no GST will apply to the seizure or repossession and therefore an ITC is not claimable. [ 24 ] On July 2, 2019, Werklund’s Chief Financial Officer wrote to NRG as follows: Basically, GST should not have been charged since the camp assets were assigned to [Werklund] in satisfaction of the outstanding debt and accrued interest based on a right exercisable by [Werklund] under the [Demand Loan Agreement]. As such, we recommend that you correct your previously filed GST return to reduce the GST reported by $791,535.35 in order to have the CRA refund this amount.

Given that the GST of $791,535.35 formed part of the purchase price which we have not been able to recover from the CRA through the ITC claimed, the GST recovered by [NRG] should be paid to [Werklund] in order to fully satisfy the outstanding principal and interest. We notified the CRA GST examiner, [...], that we would recommend that you correct your GST return.

She indicated that she would make a note in your file referencing our review and the denial of the ITC claimed which should support your refiling position. ... [ 25 ] On July 18, 2019, an agent for NRG wrote to the CRA, enclosing an Amended GST/HST return, presumably to reflect that no GST was collectible on the exercise of the Loan Repayment Assignment Clause. In due course, the CRA refunded to NRG the GST it had remitted. D.

Disposition [ 26 ] The thrust of Werklund’s position in this application is that the Court should focus only on the words of sections 2 and 3 of the Conveyance Agreement in, notwithstanding the clear language of the Loan Repayment Assignment Clause that is incorporated into the election, the Release and the Conveyance Agreement itself. [ 27 ] Albeit on a different point, Werklund cited Blackmore Management Inc v Carmanah Management Corporation , 2022 BCCA 117 , in which the Court at para 31 characterized a shotgun provision of a shareholders’ agreement:

I am not persuaded that the invocation of a shotgun clause is either an exercise of a contractual option or an offer to form a new contract. Rather, to invoke a shotgun clause is to rely on a term of an existing contract by which the parties have agreed to a compulsory buyout procedure. As a result, whether the respondents were entitled to revoke the shotgun offer depends on the proper

interpretation of the shareholders’ agreement as a whole. [ 28 ] In my view, the reasoning in Blackmore is applicable to the present circumstances. When Werklund invoked the Loan Repayment Assignment Clause, NRG was required to convey its entire interest in the Project Assets to Werklund in exchange for extinguishment of its outstanding debt under the Demand Loan Agreement. I reject Werklund’s submission that the Conveyance Agreement constitutes a new contractual arrangement between the parties or that it overrides or supersedes the Loan Repayment Assignment Clause.

In my view, the Conveyance Agreement is merely the instrument by which the Project Assets are transferred from NRG to Werklund in compliance with the Loan Repayment Assignment Clause. [ 29 ] For these reasons, I find that NRG, by transferring its entire interest in the Project Assets, fully complied with its obligations under the Demand Loan Agreement and in response to Werklund’s invocation of the Loan Repayment Assignment Clause. That Werklund’s preferred characterization of the transaction for GST purposes was unsuccessful does not change that. Heard on the 24 th day of June, 2022.

Dated at the City of Calgary, Alberta this 11 th day of October, 2022 . M.H. Bourque J.C.K.B.A. Appearances: Daniel Dickey for the Applicants Victor C. Olson for the Respondent