Harvest Operations Corp v Obsidian Energy Ltd, 2022 ABKB 848

Court of King’s Bench of Alberta Citation: Harvest Operations Corp v Obsidian Energy Ltd, 2022 ABKB 848 Date: 20221215 Docket: 1901 08891 Registry: Calgary Between: Harvest Operations Corp. Plaintiff /Defendant by Counterclaim - and - Obsidian Energy Ltd. Defendant/Plaintiff by Counterclaim _______________________________________________________ Decision of the Honourable Justice B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] This is an appeal of a decision of Applications Judge Prowse dated September 28, 2021 by the defendant/plaintiff by counterclaim Obsidian Energy Ltd. [ 2 ] In a

summary judgement, the Applications Judge found that none of the amounts claimed in an action by Harvest Operations Corp against Obsidian were statute- barred as alleged by Obsidian, and that if he was wrong in that regard, Harvest was contractually

entitled to set-off time- barred claims against Obsidian’s counterclaims. [ 3 ] The main issues are whether all or portions of Harvest’s claim are barred under the Limitations Act , RSA 2000, C L-12 , and if so, whether there is admissible evidence of an acknowledgement of debt that prevents the limitation period from expiring. Also in issue whether Harvest can set- off a limitation- barred claim against Obsidian’s counterclaim. II. Facts [ 4 ] Harvest, as operator of four petroleum facilities, filed a claim against its joint venture partner Obsidian in the amount of approximately $2.9 million.

Obsidian defended on the basis that the claim is out of time. It also says it is owed approximately $750, 000 by Harvest as the operator of several other unrelated joint ventures. [ 5 ] Harvest does not deny this counterclaim but says that it is entitled to set-off the counterclaim against its $2.9 million claim, reducing Harvest’s claim to approximately $2,150,000. [ 6 ] Both the claim and the counterclaim were brought before the Applications Judge, each party seeking

summary judgement. [ 7 ] Applications Judge Prowse found

summary judgment to be appropriate, and that: i. Obsidian had no limitations defence to any of Harvest’s claims; but ii. If he was wrong, and some or all of Harvest’s claims are statute-barred, Harvest could still use those statute- barred claims as a defence by way of set-off to the Obsidian counterclaim. [ 8 ] The following facts are uncontested: a. Harvest filed its Statement of Claim on June 26, 2019. The parties agree that the agreements with respect to the four facilities agreements at issue extended the limitation period to four years. b.

Obsidian concedes that claims discoverable after June 27, 2015 are therefore not statute- barred. As the Applications Judge indicated, the only claims that might be limitation- barred are claims that arose in calendar years 2012 and 2013. c. Three of the facilities agreements provide that the operator “shall within [180] days of the end of the proceeding year adjust the distribution of the costs, fee income and Surplus Capacity usage charges made [in monthly invoices]”.

One agreement provides that the operator shall “make reasonable efforts to adjust within... [180] Days of the end of the proceeding year, the distribution of the costs, fee income and Surplus Capacity usage charges made” [ in monthly invoices]” These year- end adjustments are called equalization invoices, the 13 th month adjustments, or the EQs. d. Harvest completed and issued the 2012 equalization invoice on December 6, 2016. Obsidian advised on March 2, 2017 that it was reviewing the 2012 invoices. Correspondence and meetings ensued. On August 3, 2017.

Harvest advised Obsidian by letter that the 2012 equalization invoice had been adjusted through the verification process and that equalization invoices for 2012 through 2016 had been completed based on the “Methodology as approved by the [joint venture owners] for 2011 thirteenth month adjustments,” totalling $2,903,891 plus GST. e. On August 30, 2017, Mr. Lee of Obsidian emailed Ms.

Watt of Harvest as follows: Regarding the subject EQs [Obsidian] has been waiting for a response to our position stated in the meeting, specifically: The excess capacity fee applied to the wells significantly changes the well economics well after the fact. That it took Harvest so long to get the EQs to [Obsidian] eliminated our ability to make informed business decisions contemporaneously. As mentioned previously this is, in the least, a less than ideal method of operating and as such [Obsidian’s] position is that this should be a factored into the equation and has yet to be.

We have been and are willing to pay the Opex portion of the EQs in short order and without delay but do not see the excess capacity fees in the same manner. Let me know your thoughts and of course we can sit down again anytime. (emphasis added) [ 9 ] Ms. Watt responded on the same day: It was Harvest’s understanding following the meeting that [Obsidian] was going to make a settlement offer once they received the equalization packages. Sorry for this misunderstanding.

Harvest’s position is that [Obsidian] had sufficient information to manage its business in the Hayter area from 2012 to 2016 when it sold to Cleo. [Obsidian] was aware from past adjustments that the agreements were subject to 13 th month adjustments and that the 01-34-040- 01W4 Facility had substantial throughput adjustments and excess capacity fees due to [Obsidian] excess production. The agreements and subsequent approval mail ballots were in place to charge the fees.

As well, the 2010 equalization was booked in August 2012 and the 2011 equalization was booked in August 2013 and so in 2012 [Obsidian] knew that the 01-34-040-01WA Battery through put adjustments and excess capacity fees were just under $1 million dollars per year. [Obsidian] could have accrued these costs on a go forward basis against their properties. Production did not change substantially so [Obsidian] would have been aware that they were in excess in the subsequent years. [Obsidian’s] management of their business through this period was not the responsibility of Harvest.

Harvest is in compliance with the various agreements terms with regards to the Owner Excess fees and as such does not agree that there are any further concessions that need to be factored into the calculations. Thank you for your accepting the Opex portion of the EQs and agreeing to submit payment without delay. Harvest will book these adjustments as soon as possible. (emphasis added) [ 10 ] Mr.

Lee responded later that day as follows: For clarity • [Obsidian’s] acceptance of the Opex portion of the EQ is contingent on an agreement on the excess capacity value. • The previous EQs that were paid were part of a larger settlement and do not constitute acceptance therefore should not prejudice any other EQs. • Harvest is not in compliance with the agreement o Appendix III- that required adjustments be done within 180 days of the previous year • I understand this is not the norm but nor is the delay in this case o Appendix IV- requires that if the sum of all volumes for a month is greater than the deemed capacity then the issues shall be sent to the Op Committee.

OBE believes there can be a resolution once the unique/sub-optimal operating conditions are acknowledged and the litigation principal is applied to these adjustments. Let me know if this is something we can get close enough on that we should meet. f. On September 6, 2017, Harvest invoiced the OPEX portion of the EQs, payable 30 days after issuance. g. On November 5, 2017, Harvest billed and invoiced the remaining portion of the EQs, being the excess capacity fee portion. h. On January 23, 2018 Harvest issued a default notice and demand for payment. i.

For the five calendar years 2012-2016 that were originally at issue under the Statement of Claim, the 13 th month adjustments were always in Harvest’s favour. Harvest has issued five EQs claiming in total approximately $2.9 million. The largest amount of the claim is made up of “surplus capacity fees.” In three of the facilities agreements, surplus capacity fees are not billed monthly, but only annually. j. After the Applications Judge’s reasons were issued, Obsidian was granted an Order allowing it to amend the counterclaim to increase its damages to $1,208,270.71.

On April 29, 2021 Obsidian filed an application to permit an inspection or compel production of all the books and records maintained by Harvest in connection with the 13 th month adjustments for 2012 to 2016. Harvest signalled its intention to bring an application to quantify its judgment. The compel application was adjourned and the damages assessment was stood down. Both matters will proceed pending the outcome of this appeal. [ 11 ] It is not necessary for the purpose of this appeal to describe the agreements in detail. Relevant parts of the agreements will be referred to in the course of this decision. III.

Analysis A. Standard of Review [ 12 ] As noted in Bhachelli v Yorkton Securities Inc. , 2012 ABCA 168 at para 30 , an Application Judge decision on appeal is reviewed for its correctness on all issues.

An appeal of a master’s decision under Rule 6.14 is heard de novo and the standard of review is correctness: an Application Judge’s Stoney First Nation v Imperial Oil Resources Limited , 2014 ABQB 408 at para 31 : Shallow Gas Drilling Corp. v Legacy Oil & Gas Inc , 2015 ABQB 606 at para 31 . [ 13 ] Although I refer to the Applications Judge’s decision from time to time, I have heard this appeal on the basis that it is a de novo application. B.

Summary Judgement [ 14 ] Both parties and the Applications Judge agree that

summary judgement is appropriate in this case and I accept that it is.

Summary judgement is appropriate when a fair and just determination can be made on the existing record. The only controversy between the parties is whether there is admissible evidence of an acknowledgement of debt that extends the limitation period, which can be resolved by the correspondence between the parties. I find that, having regard to the state of the record, it is possible to fairly resolve this dispute on a

summary basis, and there is no issue requiring a trial: Weir- Jones Technical Services Incorporated v Purolator Courier Ltd , 2019 ABCA 49 at para 47 . [ 15 ] As noted in Hannam v Medicine Hat School District No.76 , this Court may make findings of facts from contested evidence, as long as the record allows it and it is procedurally fair to do so: ABCA 343 at para 141-161; leave to appeal to SCC refused, [2020] BCCA No. 421

C. Harvest’s Claims for 2012 and 2013 Equalization Invoices [ 16 ] With respect to the appropriate limitation period, the Applications Judge noted as follows at para 19 of his decision: ... it is clear from the contracts between the parties that the earliest the limitation period could begin to run was 30 days (for payment) following 180 days after calendar year end.

As the parties had contractually agreed to extend the limitation period from 2 years to 4 years, the final column of the following chart shows the earliest date upon which a limitation period could have expired: Calendar year Amount of EQ invoice Ideal (180 day) invoice date Date by which invoice should have been paid 4 year limitation date to commence proceedings 2012 $766,000 June 28, 2013 July 28, 2013 July 28, 2017 2013 $746,000 June 28, 2014 July 28, 2014 July 28, 2018 2014 $632,000 June 28, 2015 July 28, 2015 July 28, 2019 2015 $603,000 June 29, 2016 July 29, 2016 July 29, 2020 2016 $157,000 June 28, 2017 July 28, 2017 June 28, 2021 [ 17 ] Obsidian submits that the Applications Judge was correct with respect to the dates by which an equalization invoice should have been paid for 2012 and 2013, if the limitations date was calculated on the assumption that the EQs should have been issued with 180 days of year- end. [ 18 ] As Obsidian’s Statement of Claim was issued on June 26, 2019, the parties both agree that it would cover claims made after June 26, 2015.

It appears that Obsidian no longer asserts that claims made for the EQs in 2014-2016 are statute-barred. [ 19 ] Harvest concedes that it took more than 180 days to complete the EQs, but submits that it issued its invoices within a reasonable time. [ 20 ] The EQs for the period 2012-2016 were issued by Harvest on August 3, 2017.

Slightly earlier EQs were issued but were subsequently revised. [ 21 ] The Applications Judge dealt with the issue of whether a reasonable time for invoicing the 13 month adjustments was later than 180 days after calendar year end, and agreed with Harvest that, on this basis, none of Harvest’s claims were statute-barred. [ 22 ] The Applications Judge noted that, under the facilities agreements, there is an inherent protocol of discussions in order to finalize accounting issues. Thus, these agreements are dissimilar to other contracts for the provisions of goods and services.

In para 34, he noted that ... whole context of this type of oil and gas contract is a process which involves the sharing of information, the issuance of challenges and the resolution if possible, often by one side conceding some points and the other side conceding others. [ 23 ] The Applications Judge referred to Bellatrix Exploration Ltd. v Penn West Petroleum Ltd. , 2013 ABCA 10 at para 40 , where the Court observed in obiter: [w]here one party has a duty to provide an accounting to another, and detailed set-off calculations are required, it may not be possible to discover a cause of action until the accounting is done, or there is a clear refusal to perform or pay. [ 24 ] As noted previously, a final EQ for the years 2012 and 2013 was not issued by Harvest until August 13, 2017.

If the 180 day contractual provision had been followed, the appropriate dates for the EQs for these years would have been July 28, 2013 and July 28, 2014.. [ 25 ] Harvest points out, and provides uncontroverted evidence, that Obsidian has paid late EQs in the past, and issued late EQs itself when acting as operator, although none of these examples appear to be as late as four to five years, as appears to be the case with the 2012 and 2013 EQs. [ 26 ] Harvest’s expert witness, in uncontested evidence, states that in his experience, “EQs are typically issued and paid well after the adjustment period deadline prescribed in the applicable agreements.” [ 27 ] I accept the evidence that, for the reason expressed in Bellatrix , the contractual 180 day provision is rarely complied with in the oil and gas industry and between the parties, and the question becomes when the delay in accounting becomes unreasonable.

Obsidian submits that Harvest had all the information it required to issue the EQs within 180 days after year end, and that Harvest’s lack of diligence in issuing the EQs should not be a burden on Obsidian.

It notes that Section 3(1) of the Limitations Act calls for “reasonable diligence” on the part of a plaintiff. [ 28 ] Harvest submits in response that Obsidian had all the information necessary to “discover” its claim, and that it “ought to have known” of its cause of action months prior to the dates the EQs were issued. [ 29 ] I cannot agree that Obsidian had all the information it required to assess its liability for a 13 th month adjustment invoice within the period provided for in the facilities agreement. [ 30 ] With respect to whether Obsidian should have known that it had a cause of action, as noted by Harvest’s own expert, these adjustments are complex exercises involving large amount of data.

As noted in Boyd v Cook , 2013 ABCA 27 at paras 20 and 28 , while the test whether a party “ought to have known” of the injury for which the claimant seeks a remedial order ( Section 3(1) (

a) of the

Limitations Act ) is largely objective, it refers to a reasonable person in the same circumstances. There is evidence of “the same circumstances” as between Obsidian and Harvest with respect to their overall business relationships. [ 31 ] In 698828 Alberta Ltd. v Elite Homes (1998) as follows at para 89: The test for “discoverability” is primarily objective, but it does permit some consideration of the claimant’s “own circumstances and interests” in deciding at what point the claimant should reasonably have brought an action.

This is described as the “restrictive subjective/objective approach”: Gayton v Lacasse , 2010 ABCA 123 at para. 20 , 26 Alta LR (5th) 182 , 482 AR 179 . The trial judge found that both the appellant and the respondent took a relaxed approach to their business arrangement and did not insist on strict compliance with the terms of the joint venture: trial reasons at paras. 19, 32, 47. Even the preparation and drafting of the joint venture agreement was marked by informality: trial reasons at para. 15.

The Management Committee contemplated by the joint venture agreement was never established, and the financial reporting requirements in the agreement were neither followed by the respondents nor insisted upon by the appellant. While such a casual approach to the business arrangement cannot indefinitely suspend the limitation period, it does explain in part why the appellant did not pursue the matter more aggressively in April 2008.

In the context of the overall business arrangement , the claim against the respondent Friesen was not reasonably discoverable more than two years before the statement of claim was issued. (emphasis added) [ 32 ] Therefore, while I acknowledge that this approach gives rise to uncertainty with respect to the question of how long a period of time taken to issue an EQ is “unreasonable”, in the factual context of this case, I cannot say that the time taken by Harvest to issue the 2012 and 2013 EQs was unreasonable as between the parties, I agree with Applications Judge Prowse that the four year time limitation for all calendar years in question began in 2016 at the earliest and that Harvest is not statue-barred from pursuing any of its claims.

D. Evidence of an Acknowledgment or Acceptance of the Debt [ 33 ] In the event that I am wrong, and that the 2012 and/or 2013 EQs are statute- barred, Harvest submits that Obsidian acknowledged the debt. [ 34 ]

Section 8 of the Limitations Act provides that, subject to provisions that do not apply in this case and to

Section 9 , if a person liable in respect of a claim: ... acknowledges the claim , or makes a payment in respect of the claim , before the expiration of the limitation period applicable to the claim, the operation of the limitation period begins again at the time of the acknowledgment or part payment. [emphasis added] [ 35 ] Obsidian submits that evidence of an email communication between Ms. Watt of Harvest and Mr.

Lee of Obsidian on August 30, 2017, which may be relevant to the issue of whether there was an acknowledgement of debt, is not admissible on the basis that it is covered by settlement privilege. [ 36 ] Section 9(1) requires that an acknowledgment must be in writing and signed by the person (or agent of the person) adversely affected. [ 37 ] As noted previously, the email at issue was sent by Mr. Lee to Ms. Watt on August 30, 2017.

Referring to the equalization invoices for the years 2012 through 2016, it includes the following statement: We have been and are willing to pay the OPEX portion of the [ equalization invoices] in short order and without delay but do not see the excess capacity fees in the same manner... [ 38 ] Ms. Watt responded the same day, thanking Mr. Lee for accepting the OPEX position of the equalization invoices. Mr.

Lee responded that payment of the OPEX portion was “contingent on an agreement on the excess capacity value”. [ 39 ] I agree with the Applications Judge that settlement privilege is established when following elements are in place:

a) the existence, or contemplation, of a litigious dispute;

b) an express or implied intention that the communication would not be disclosed to the court in the event negotiations failed; and

c) the purpose of the communication must be to attempt to effect a settlement: Bellatrix at para 15 and 26. [ 40 ] The Applications Judge accepted that (

a) and (

c) existed in this case but noted that the issue was whether there was an express or implied intention that the communication would not be disclosed to the court in the event negotiations failed. I agree that the communication was made in contemplation of a litigation dispute. [ 41 ] Obsidian submits that even if there was an acknowledgment on August 30, 2017, the limitation period applicable to the 2012 equalization invoices had already expired and that the acknowledgment could not revive the expired period.

This assumes that the four year limitation date to commence proceedings commenced 180 days after the equalization invoice date.

As I have found that the 180 days provision was not reasonable or in accordance with industry practice and the business relationship between the parties, I do not address this submission. [ 42 ] Obsidian also submits that it is not possible to ascertain with certainty the precise quantum of the claim that is alleged to have been acknowledged, but it is clear the parties knew what portions of the EQs they were referring to, and Harvest quantified the OPEX portion of the equalization invoices for the years 2012 to 2016 by way of invoice on September 6, 2017, payable 30 days after issuance. [ 43 ] With respect to requirements

b) and c), none of the communications in evidence between Ms. Watt and Mr. Lee are marked, “without prejudice”, but, as noted in Bellatrix at para 25, this is not conclusive either way. Nevertheless, there is no express intention that the communication will not be disclosed to the Court in any of them.

[44] The public policy rationale underlying settlement privilege is based on the objective that the parties should be able to “put alltheir cards on the table” without worrying about whether they may be prejudiced should negotiations fail to resolve the dispute: Bellatrixat para 23.

However, as the privilege operates to preclude evidence that might otherwise be relevant, it competes with the Court’s truth-seeking function, and for this reason, the tripartite requirements must clearly be satisfied before the privilege is applied: Bellatrixindicated that the privilege must be given wide scope and attach not only communications involving offers of settlement but alsocommunications that are “reasonably connected to the parties’ negotiations.

The Court also noted that “communications ... during theperiod of time that the parties are involved in settlement discussions [do] not necessarily bring every communication within theprotection of the settlement privilege”.

Bellatrix at para 26 and 28. [45] The key appears to be whether the communication includes “at least a hint of potential compromise or negotiation... anunconditional assertion of rights without any connection to the possibility of settlement or negotiation do not fall within the scope of therule.” [46] Harvest’s August 3, 2017 letter setting out the EQs for the years 2012 -2016 fits into the category of an unconditionalassertion of rights and is not protected by settlement privilege. While Obsidian’s response hints at negotiations, Mr.

Lee’s statement withrespect to the operating expenses portions of the EQs is an acknowledgment of this portion of the debt and extends the limitation periodfor this category of the debt. Mr. Lee’s statement was not merely an admission against interest. [47] The fact that Mr.

Lee later sought to make the acceptance “contingent” does not affect the nature of the earlier statement as anacknowledge of debt, and the language itself does not support the requirement of settlement privilege that there was any intention thatthe communication would not be disclosed to the Court. [48] I therefore find this evidence admissible for the purpose of establishing an acknowledgement of the operating expensesportion of the debt.

It is also admissible under one of the generally accepted exceptions to privilege, to prove that a settlement wasreached: Bellatrix at para 29, citing Comvie v Comvie, 2001 AKCA 33. As noted, by the Court at para 30, this is not inconsistent withthe policy behind the privilege, and while “it may be that even if part of a communication is covered by the privilege, anotherpart...might not be.” E. Part Payment by Obsidian [49] Harvest does not raise this as an issue in this appeal, referring to Applications Judge Prowse’s comments on the issue in hisdecision. F.

Can limitation- barred portions of the Harvest claim be set -off against theamounts owing? [50] Three of the facilities agreements at issue provide that the operator may set-off against an amount unpaid by a defaulting jointventure partner any sums due or owing to such partner from operating pursuant to, not only the agreement in question, but from any otheragreement between the operator and the joint venture partner.

One of the agreements is non- specific in that regard. [51] As noted, Obsidian, as operator of facilities other than the four at issue, counter-claimed in the amount of approximately$750,000, and bought an application for

summary judgement in that amount. Harvest does not deny that claim but says that it is entitledto set-off the claim against its claim against Obsidian. [52] Obsidian submits that a claim involving contractual set-off must be brought within the time period applicable to thecontracted claim, meaning within four years of when Harvest knew or ought to have known of a claim attributable to Obsidian thatwarranted bringing a proceeding. It submits to that hold otherwise would be contrary to the discoverability principles that are part of theLimitations Act. Obsidian takes no other issue with respect to the claim.

Harvest’s claim of set-off is set out in its defence tocounterclaim.

It characterizes this defence as being on the basis of “legal or equitable set-off and the self-help remedy of withholding,among other remedies.” [53] Applications Judge Prowse found that the contractual provisions provided Harvest with a defence to Obsidian’s claim, and notsimply a cross-claim. [54] He found that it would make no difference that the claims that Harvest intends to use for its defence are statute-barredbecause, by using its contractual set-off rights, Harvest is not seeking relief from Court, and the immunity from claims under theLimitation Act is only immunity from court action. [55] I agree with the Applications Judge’s analysis.

As he noted: Perhaps the clearest enunciation of this principle is by Denning L.J. in Henriksens Rederi A/S v. Rolimpex, [1973] 3 All E.R. 589 (Eng.C.A.) [cited with approval by the Ontario Court of Appeal in Pierce v. Canada Trustco Mortgage Co., (ON CA),2005 CarswellOnt 1876, 197 O.A.C. 369, 254 D.L.R. (4th) 79, 5 B.L.R. (4th) 178] as follows: In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of adefence and one which is in the nature of a cross-claim.

When a defendant is sued, he can raise any matter which is properly in the natureof a defence, without fear of being met by a period of limitation. No defence, properly so-called, is subject to a time-bar. [56] I also agree that it is unnecessary to focus on the difference between equitable set-off and legal set-off to answer the questionin this case. However, if I am incorrect in this, I note that in Spyglass Resources Corp. v Bonavista Energy Corporation, 2017 ABQB504, Jones, J, in strikingly similar circumstances, found that the operator was entitled to both legal and an equitable set-off.

[ 57 ] Therefore, Harvest may set-off any time-barred claims against Obsidian’s counter-claim. IV. Conclusion [ 58 ] In

summary, I find that:

a) Obsidian has no limitation defence to any of Harvest’s claims;

b) If I am wrong in this Obsidian acknowledged the operating expenses portion of the debt, thus extending the limitation period for that portion of the debt; and

c) Harvest may set-off any time-barred claims against Obsidian’s counter-claim [ 59 ] If the parties are unable to agree on costs, they may make brief written submissions on the issue. Dated at the City of Calgary, Alberta this 15 th day of December, 2022. B.E. Romaine J.C.Q.B.A. Appearances: Eugene J. Bodnar/Lukas Frey Scott Venturo Rudakoff LLP for the Harvest Craig O. Alcock Burnet, Duckworth & Palmer for the Obsidian