Northrock Resources, a Partnership Appellant (Plaintiff) v. ExxonMobil Canada Energy, 3120272, 2017 SKCA 60

Court of Appeal for Saskatchewan Docket: CACV2915 Citation: Northrock Resources v ExxonMobil Canada Energy , 2017 SKCA 60 Date: 2017-08-02 Between: Northrock Resources, a Partnership Appellant (Plaintiff) And ExxonMobil Canada Energy, 3120272 Nova Scotia Company, 3120273 Nova Scotia Company, and Crescent Point General Partner Corp. Respondents (Defendants) Before: Caldwell, Herauf and Whitmore JJ.A. Disposition: Appeal dismissed Written reasons by: The Honourable Mr. Justice Caldwell In concurrence: The Honourable Mr. Justice Herauf The Honourable Mr.

Justice Whitmore On Appeal From: 2016 SKQB 188 , Saskatoon Appeal Heard: March 24, 2017 Counsel: Glenn Solomon, Q.C., and Laura Warner for the Appellant Howard Gorman Q.C., and Gunnar Benediktsson for the Respondent, ExxonMobil Canada Energy Sean S. Smyth, Q.C., and Kelli McAllister for the Respondents, Crescent Point Partner Corp., 3120272 Nova Scotia Company and 3120273 Nova Scotia Company Caldwell J.A. I.

Introduction [ 1 ] Northrock Resources appeals from a judgment after trial dismissing its claims against ExxonMobil Canada Energy, 3120272 Nova Scotia Company, 3120273 Nova Scotia Company and Crescent Point General Partner Corp. I would dismiss the appeal. There is no basis upon which to interfere with the decision of the trial judge. II. background [ 2 ] Northrock’s claims arose out of a transaction under which ExxonMobil disposed of certain of its Saskatchewan oil and gas interests [Interests], 10% of which Interests [ROFR-tied Interests] were subject to rights of first refusal [ROFRs] granted to Northrock.

The relationship between these two contracting parties was such that each benefitted from rights of first refusal over certain of the other’s Saskatchewan oil and gas interests. In this case, ExxonMobil offered its Interests for sale at large under either a straight-up asset sale or what is known as a busted-butterfly -structured transaction. The busted-butterfly-structured sale involved ExxonMobil first assigning its Interests to affiliates— i.e. , 3120272 and 3120273—and then selling the outstanding shares in the capital stock of its affiliates to the successful bidder.

Throughout, ExxonMobil understood it could achieve a favourable tax result if it sold its Interests through a busted- butterfly structure. Importantly, ExxonMobil also understood it would not trigger the ROFRs by using a busted-butterfly structure because the ROFRs permitted transfers of ROFR-tied Interests to affiliates but did not address the subsequent sale of the shares in those affiliates to a third party. For tax reasons, most bidders placed a lower value on the Interests if sold through a busted-butterfly structure.

Crescent Point, because of the way it is itself organised, would realise no tax advantage or disadvantage under either structure and so it valued the Interests at the same price under each structure. Northrock, Crescent Point and others bid, but Crescent Point was successful. [ 3 ] When ExxonMobil announced that Crescent Point had been successful, Northrock took the position that, regardless of how it was to occur, the purpose and effect of the sale transaction was the disposition of ROFR-tied Interests to a third party.

In Northrock’s view, this was precisely the nature of transaction the ROFRs were meant to capture. It therefore asserted that its first-refusal rights with respect to ROFR-tied Interests had been triggered by the proposed sale to Crescent Point, even though that transaction was to be structured as a busted-butterfly sale. ExxonMobil disagreed and sold its shares in 3120272 and 3120273 to Crescent Point without first offering the ROFR-tied Interests to Northrock.

The within action resulted wherein Northrock claimed breach of contract as against ExxonMobil, breach of a duty of good faith as against all respondents, inducing breach of contract as against Crescent Point, and conspiracy as against all respondents. [ 4 ] At trial, the parties entered the bulk of their evidence through the affidavits of 17 witnesses, transcriptions of cross- examinations on the affidavit evidence, an agreed statement of facts, an exhibit book and examination for discovery read-ins. In addition, seven witnesses gave testimony in person.

The parties submitted written opening statements and lengthy written closing arguments on the law and the evidence. The trial record is voluminous. [ 5 ] In his judgment in Northrock Resources v Exxonmobil Canada Energy , 2016 SKQB 188 , [2017] 2 WWR 559 [ Trial

Decision ], the trial judge dismissed all of Northrock’s claims. He interpreted the ROFRs and found ExxonMobil had not breached them. He found as fact that ExxonMobil had neither lied nor misled and had not structured the transaction to avoid triggering the ROFRs. On this basis, the trial judge concluded ExxonMobil had not breached its duty of good faith to Northrock. As a consequence of these findings, he concluded Northrock’s claims against Crescent Point, 3120272 and 3120273 were meritless.

The trial judge therefore rendered judgment dismissing Northrock’s entire action. [ 6 ] Northrock now appeals on the grounds the trial judge committed reversible errors by applying incorrect principles of contract

interpretation, ignoring material evidence and misapprehending the plain wording of the ROFRs, and that he thereby reached an unreasonable

interpretation of the ROFRs. Northrock further alleges the trial judge erred by improperly focusing on the stated motives for utilising a busted-butterfly structure instead of its design and effect. At the core of Northrock’s grounds is its assertion that the respondents have breached their duty of good faith because they designed a transaction they understood would nullify Northrock’s rights under the ROFRs and, therefore, defeat the purpose of the ROFRs. III. analysis A.

Standards of review [ 7 ] The Supreme Court of Canada decision in Sattva Capital Corp v Creston Moly Corp. , 2014 SCC 53 , [2014] 2 SCR 633 [ Sattva ], is central to this appeal. In it, a unanimous Supreme Court held that a trial court’s

interpretation of a contract is a question of mixed fact and law that is entitled to appellate deference except in rare cases. Justice Rothstein, for the Court, wrote: [47] 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 : 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. ( Reardon Smith Line , at p. 574, per Lord Wilberforce) … [49] As to the second development, the historical approach to contractual

interpretation does not fit well with the definition of a pure question of law identified in Housen and Southam . Questions of law “are questions about what the correct legal test is” ( Southam , at para. 35). Yet in contractual

interpretation, the goal of the exercise is to ascertain the objective intent of the parties – a fact-specific goal – through the application of legal principles of

interpretation. This appears closer to a question of mixed fact and law, defined in Housen as “applying a legal standard to a set of facts” (para. 26; see also Southam , at para. 35). However, some courts have questioned whether this definition, which was developed in the context of a negligence action, can be readily applied to questions of contractual

interpretation, and suggest that contractual

interpretation is primarily a legal affair (see for example Bell Canada , at para. 25). [50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual

interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual

interpretation are applied to the words of the written contract, considered in light of the factual matrix. … [53] Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law ( Housen , at paras. 31 and 34-35). Legal errors made in the course of contractual

interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” ( King , at para. 21) . Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on. [54] However, courts should be cautious in identifying extricable questions of law in disputes over contractual

interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to s. 31(2) of the AA , the applicant for leave and its counsel will seek to frame any alleged errors as questions of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized.

The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here: Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”.

Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact”.…[para. 36] [55] Although that caution was expressed in the context of a negligence case, it applies, in my opinion, to contractual

interpretation as well. As mentioned above, the goal of contractual

interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual

interpretation and the construction

ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the

interpretationprocess will be rare. … [Emphasis added] As Rothstein J. suggests, given the rigour of the palpable and overriding error standard of appellate review that applies to questions offact and of mixed fact and law, an appellant in a case that involves contractual

interpretation is now all but forced to frame its objectionsto a trial decision as “readily extricable” questions of law, which are subject to the non-deferential standard of correctness (see also themajority reasons in Teal Cedar Products Ltd. v British Columbia, 2017 SCC 32). [8] In this case, Northrock has objected to the trial judge’s decision alleging he focused improperly on the mechanics of thebusted-butterfly-structured sale rather than its purpose and effect, assessed the evidence inconsistently, misinterpreted the ROFRs, andarrived at a commercially unreasonable result.

But, at core, these allegations of error are chiefly expressions of disagreement with howthe trial judge evaluated and weighed the evidence before him, i.e., how he applied the principles of contractual

interpretation to thewords of the ROFRs considered in the light of the factual matrix. These circumstances invoke inherent questions of fact or mixed factand law. Nevertheless, there are “readily extricable” questions of law that deal with whether the trial judge identified or applied anincorrect principle of law, failed to consider a required element of a legal test, or failed to consider a relevant factor. The standard ofreview of those questions is correctness. The standard of review for all other questions in this case is palpable and overriding error. B. Claims against ExxonMobil 1.

Failure to consider evidence [9] Given the nature of this appeal, I will first address Northrock’s broader allegation that the trial judge erred in his fact-findingby overlooking evidence.

As noted, the trial record is voluminous and it is true the trial judge did not make reference to all of it.However, Northrock alleges the trial judge’s findings of fact reveal he ignored evidence that establishes the busted-butterfly-structuredtransaction was a single transaction in substance—one that resulted in ExxonMobil disposing of ROFR-tied Interests to Crescent Point. [10] As a starting point, a judge is not required to revisit each and every piece of evidence adduced at trial in his or her reasons;and, correspondingly, an appellate court must presume the judge has reviewed all of the evidence unless an omission gives rise to a“reasoned belief” the judge has forgotten, ignored or misconceived the evidence in a way that affected the judge’s conclusion (Van dePerre v Edwards, 2001 SCC 60 at para 15, [2001] 2 SCR 1014; Housen v Nikolaisen, 2002 SCC 33 at para 72, [2002] 2 SCR 235).

It isopen to a judge to prefer the evidence of certain witnesses over others and to place more weight on some parts of the evidence thanothers (Toneguzzo-Norvell (Guardian ad litem of) v Burnaby Hospital, (SCC), [1994] 1 SCR 114 at 122–123; Housenv Nikolaisen at para 72). Moreover, the mere fact a judge has not discussed certain evidence in depth is not sufficient grounds forappellate interference (Van de Perre v Edwards at para 15; Housen v Nikolaisen at para 72). [11] In my assessment, the record here fails to establish any basis for forming a reasoned belief that the trial judge overlookedmaterial evidence.

The fact a sale to Crescent Point was the purpose and effect of the transaction does not seem to have been in dispute.The agreed statement of facts makes it clear that the busted-butterfly-structured transaction had the overall purpose and effect oftransferring the Interests, which include ROFR-tied Interests, to Crescent Point. Moreover, it is abundantly clear the trial judgeunderstood this to be the fact (Trial Decision at paras 5, 14, 19 and 28–32). [12] In short, the basic shape of the facts in question had been agreed upon by the parties at the outset.

It was only their fine detailthat remained to be determined by the trial judge. While the trial judge did not reference each or every piece of relevant evidence tosupport his findings in that regard, nothing suggests he overlooked relevant evidence or otherwise erred in his treatment of the evidenceor in the factual conclusions he drew from it.

This assessment is reinforced by the trial judge’s remarks at the opening of trial where headvised: THE COURT: … In the week that I spent reading for this trial, I did of course read all the materials that counsel had identified and thatwas very helpful, so, in effect, I’ve had a week of evidence already by virtue of doing that, and to do that I actually pulled out the papercopies just because I generally find it easier to read on paper than to read on the screen if I’m doing a lot of reading.

And without muchdifficulty I was able to locate all of those affidavits and all of those transcripts and the exhibits as necessary, so I’m not exactly surewhich boxes they’re in just now, but if it does come to it I will take you up on the offer [to sort through the boxes of evidence and findthem]. [13] There is no merit to this allegation of error. 2. Misinterpretation of the ROFRs [14] At the root of Northrock’s submission that the trial judge misinterpreted the ROFRs is its contention that the ROFRs coveredall dispositions of the ROFR-tied Interests to a third party, no matter how structured.

Northrock submits the trial judge’s

interpretation isflawed because it ignores the general purpose of a right of first refusal, which Northrock says is to enforce the parties’ right to controltheir business partners and accrete ownership interests. The trial judge interpreted the ROFRs in this way: [51] Here, the parties are sophisticated actors in the oil industry, in the sense that they are large, experienced and equipped withlawyers, accountants and whatever other advisors they may want.

Further, I note that in contract negotiation such parties make choices.In the end, on signing an agreement, they accept the deal that they have been able to negotiate. [52] In this case, Northrock (and its predecessor interest-holders) did not bargain to include a provision that would trigger a ROFR in acircumstance such as this. Such a provision could have been bargained for among the ROFR provisions. It was not. I see no reason toread such a term into the agreements.

[53] The same reasoning applies where Northrock is a successor in interest to an original party to one of the agreements. In deciding to become a successor, Northrock accepted the terms of the agreements as they had been negotiated and agreed. [54] In addition, an examination of the ROFR provisions reveals that the parties to the agreements did not intend that every circumstance of a party divesting itself of an interest would trigger a ROFR.

In negotiating the ROFR provisions they chose which divestitures would be singled out for a restriction on the right of a party to deal with its own property. [55] The parties have used clear language in the agreements. They said what they intended to say in the agreements, having chosen and identified what they were prepared to agree to. Since the meaning of the parties’ words is clear, this is not a case of that meaning constituting an

interpretation that defeats the intentions of the parties. Rather, those clear words communicate the intentions of the parties. [Emphasis added] [ 15 ] In its factum (at para 93), Northrock alleges the trial judge “seems to have concluded that if any specific manner of disposing of an interest is not listed in the ROFRs, that type of transaction is not caught.” In support, Northrock observes that neither of the ROFRs limits the types of dispositions that are caught by its terms, subject to specifically enumerated exceptions.

As I read them, Northrock’s submissions suggest that the phrase right of first refusal is tantamount to a legal term of art (as, for example, was the case with the term working interests in the contract interpreted in IFP Technologies (Canada) Inc. v EnCana Midstream and Marketing , 2017 ABCA 157 ) that everyone knows and understands to be a blanket prohibition on all dealings with its subject matter except in accordance with the right.

Even if right of first refusal were a legal term of art (which I consider here only for the sake of analysis), ExxonMobil and Northrock had clearly modified the term or otherwise deviated from its meaning by negotiating and writing in (or acceding to) exceptions to the otherwise omnibus rule now posited by Northrock. That is, the ROFRs in question do not fit within the meaning of the legal term of art as espoused by Northrock. [ 16 ] The ROFRs in this case cannot be read as a blanket prohibition on dealings with ROFR-tied Interests without compliance with the right.

While I have respect for its ingenuity, Northrock’s submission to the contrary turns logic and contractual

interpretation on their respective heads. The submission fails to recognise that the first-level rights in circumstances such as these are those of the property- owner. It is the prospective right-of-first-refusal holder who negotiates to restrict the property-owner’s ownership rights for a price. That is, assuming general equality in bargaining power, [1] the parties to an arrangement of this nature do not start with the property-owner being forced to grant an omnibus right of first refusal only to negotiate carve-outs for a lower price.

Rather, and logically, the property- owner starts with an unrestricted freedom to deal with its own property as it chooses. The prospective right-holder then bargains with the property-owner to restrict that freedom at a price satisfactory to the property-owner as commensurate with the level of restriction bargained for. If the property-owner does not wish to restrict its ownership rights in a particular way or in any way, or at a particular price or at any price, it need not do anything by way of contract; it may simply remain silent.

Conversely, the prospective right-holder has no rights over the property unless and until they are bargained for and, presumably, reduced to written contract. [ 17 ] In terms of contractual

interpretation then, Northrock’s submission would have the effect of requiring a court to find a contractual term existed where there is an absence of words to that effect in a written contract. This is very clearly contrary to the principles of contractual

interpretation, which call for a court to “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” (emphasis added, Sattva at para 47 ).

Generally speaking, the principle finds expression in other ways: a court will not make a bargain that the parties did not intend; an implied term cannot be used to rewrite the express terms of a contract; an implied term may not improve the bargain for one party to the detriment of another. [ 18 ] Northrock’s submission also runs contrary to the way in which it has itself interpreted the ROFRs. By their terms, the ROFRs apply only to the disposition of interests , not to change-of-control transactions.

That is, a party to the ROFRs might undergo a change of control, thereby effectively disposing of its interests to a third party without triggering the ROFRs. Northrock’s own evidence suggests it has itself or its predecessors have used this exception on two previous occasions to unilaterally introduce strangers to the relationship. Yet, it now seeks to have the ROFRs interpreted purposively to prevent the unilateral introduction to the relationship of a stranger: Crescent Point. [ 19 ] Moreover, as the trial judge found, the ROFRs admit of no ambiguity in their terms. On the principles of contractual

interpretation and on the basis of the underlying factual matrix, there is simply no reason to impute into the ROFRs any additional restrictions on ExxonMobil’s ownership rights and, therefore, it was not an error for the trial judge to decline to do so. That is, the trial judge did not commit a palpable and overriding error in his

interpretation of the ROFRs. 3. Commercially unreasonable result [ 20 ] Northrock puts this ground of appeal in strong terms. It says the trial judge’s decision is an “impermissible commercial absurdity.” In its view, it is commercially absurd for an ROFR to apply to a sale transaction when structured one way ( i.e. , a straight-up asset sale) but not another ( i.e. , a busted-butterfly sale), each having the same purpose and effect ( i.e. , the sale of ROFR-tied Interests to Crescent Point).

On its face, there is cogency to Northrock’s submission; however, upon closer examination, the argument fails to persuade. [ 21 ] The argument fails to persuade because there is simply nothing commercially unreasonable about a right of first refusal addressing the disposition of interests while at the same time excepting change-of-control transactions. If that is what the parties bargained for, then there is equally nothing commercially unreasonable about holding parties to the clear terms of the bargain.

All other things being equal, the courts do not exist to save a contracting party from a bargain that proves improvident with hindsight. By their terms, the ROFRs in this case are straightforward. The plain fact is the parties bargained for or acceded to ROFRs that were triggered by some dispositions and not by others. In these circumstances, it would in fact be commercially unreasonable—indeed, even absurd—to throw the ongoing contractual relationship into flux by interpreting the ROFRs as prohibiting something they do not prohibit.

In that commerce and commercial relationships require certainty, the courts can best help achieve that end by enforcing the bargains struck by

the parties to them, provided they have acted in good faith. [22] This is decidedly not the circumstance discussed in Guarantee Co. of North America v Gordon Capital Corp., (SCC), [1999] 3 SCR 423, where, if “a given construction of the contract would lead to an absurd result, the assumption is that thisresult could not have been intended by rational commercial actors in making their bargain, absent some explanation to the contrary” (atpara 61). As the trial judge found, it is not necessary in this case to search for alternative constructions of the ROFRs to avoid acommercially unreasonable construction of them.

The parties here used clear language. They said what they intended to say in theROFRs, having reached a bargain they were prepared to accept.

I am simply not persuaded the trial judge erred when he concluded theparties had not bargained “to include a provision that would trigger a ROFR in a circumstance such as this.” While Northrock nowconsiders the bargain improvident or disadvantageous, that does not make it unreasonable or absurd and it does not mean the courts mustnow step in to save Northrock from its acceptance of the bargain as struck, one that it has lived with and taken advantage of for manyyears. [23] There is no merit to this allegation of error. 4.

The duty of good faith [24] In respect of the duty of good faith, Northrock alleges the trial judge’s conclusions disclose an error in the application of thelaw to the facts. It says the trial judge was solely focused on ExxonMobil’s motivation for the transaction.

Northrock submits thisapproach is flawed because it ignores the purpose of a right of first refusal, which, as noted, Northrock says is to enforce the parties’right to control their business partners and accrete ownership interests. [25] In support of this ground of appeal, Northrock cites Gardner v Coutts & Company, [1967] 3 All ER 1064 (Ch Div) [Gardner];Mesa Operating Limited Partnership v Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 AR 187 (CA); andLandymore v Hardy (1991), 110 NSR (2d) 2 (SC (TD)) [Landymore]; for the proposition that the courts will not allow a party to conveya property in a way that might appear to comply with the express language of a right of first refusal but that has the effect of frustratingits purpose.

Northrock also finds support for this proposition in Chase Manhattan Bank of Canada v Sunoma Energy Corp., 2002 ABCA286, 317 AR 308 [Chase Manhattan], and GATX Corporation v Hawker Siddeley Canada Inc. (1996), (ON SC), 1OTC 322 (Ont Ct J (Gen Div)) [GATX Corp.].

Furthermore, it notes that in Bhasin v Hrynew, 2014 SCC 71, [2014] 3 SCR 494 [Bhasin],Cromwell J. wrote, “the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contractingparties” (at para 70). [26] On the basis of this jurisprudence, Northrock submits the trial judge erred by pinning the success of its claims on persuasiveproof that ExxonMobil had been motivated to nullify the ROFRs rather than whether ExxonMobil had acted in a manner that, in fact,nullified Northrock’s rights and violated Northrock’s reasonable expectations under the ROFRs.

Northrock puts the issue in these termsin its factum: 121. Properly understood, the mischief addressed by the duty of good faith is an unintended loophole – one which might appearavailable on the letter of the terms of the agreement but which would have the effect of undermining its purpose.

Preventing thatmischief does not depend on the defendant’s intentions; it depends on the defendant’s actions in designing the impugned transaction. [27] Put in appellate terms, this ground of appeal is framed as a question of law that asks whether the trial judge failed to considera required element of a legal test or failed to consider a relevant factor. That is, it asks whether the trial judge erred in law by overlookingthe purpose and effect of the transaction.

In addition, Northrock asserts the trial judge’s two key findings of fact on the issue of goodfaith (see within at paragraph 35) are irrelevant—and owed no appellate deference—because he did not make findings about the designand effect of the transaction. In this way, Northrock alleges the trial judge erred in law by assessing the evidence based on a wrong legalprinciple: Housen v Nikolaisen at paras 33–36. [28] What then are the applicable legal principles? The general organising principle of good faith contractual performance was setout and described in detail by Cromwell J. in Bhasin.

In simple terms, the common law duty of good faith applies to all contracts andrequires contracting parties to “act honestly in the performance of contractual obligations” (at para 33) or to “perform their contractualduties honestly and reasonably and not capriciously or arbitrarily” (at para 63) and to “not seek to undermine [the] interests [of anotherparty] in bad faith” (at para 65).

From his reasons, it is clear the trial judge understood and accepted this as the basic framework of theorganising principle of the duty of good faith contractual performance. [29] However, as a general organising principle, the duty of good faith must be adapted to the factual circumstances of eachparticular case.

In Bhasin (at para 66), Cromwell J. directed the courts to interpret the requirements of the general organising principlewithin the existing legal doctrines that are applicable to the types of situations and relationships in which the law requires honest, candid,forthright or reasonable contractual performance. Justice Cromwell observed this calls for a “highly context-specific understanding ofwhat honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of bothcontracting parties” (at para 69).

Moreover, Cromwell J. recognised the principle of good faith “must be applied in a manner that isconsistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom ofcontracting parties to pursue their individual self-interest” (at para 70). Importantly, Cromwell J. observed: [71] Tying the organizing principle to the existing law mitigates the concern that any general notion of good faith in contract law willundermine certainty in commercial contracts.

In my view, this approach strikes the correct balance between predictability and flexibility. [30] For this reason, the trial judge properly looked for and found guidance in the existing jurisprudence regarding the duty ofgood faith in the context of a right of first refusal. He adopted the approach set forth in GATX Corp. and followed in Glimmer ResourcesInc. v Exall Resources Ltd. (1997), 39 OTC 215 at para 16 (Ont Ct J (Gen Div)) [Glimmer Resources]. He also had regard for the factthe Court in Chase Manhattan had approached the issue similarly.

On the basis of these cases and Bhasin, the trial judge drew thefollowing conclusions on the duty of good faith in the context of a right of first refusal:

(

a) a breach of a duty of good faith may be established where a party is shown to have lied or misled, thereby breaching the duty of honest performance ( Bhasin ), for example, where a party is shown to have structured a transaction for the purpose of avoiding a right of first refusal ( GATX Corp. and Glimmer Resources ); and (

b) if a structure has been chosen for reasons other than to avoid a right of first refusal, then the choice of that structure does not constitute a breach of a duty of good faith ( Chase Manhattan ).

While the trial judge identified a third possibility, namely, where the avoidance of the ROFRs was not the reason but was a factor contributing to the choice of structure, he found no need to address that possibility in the case at hand because, on the evidence, he concluded ExxonMobil had not been motivated by a desire to avoid triggering the ROFRs ( Trial Decision at para 89). [ 31 ] Having reviewed the jurisprudence, I find no error in the trial judge’s identification of the applicable legal principles or the approach to be taken.

The following expressions of the legal principles that underpin the duty of good faith in the context of a right of first refusal may be drawn from the case law here considered: (a) “the grantor of a right of first refusal must act reasonably and in good faith in relation to that right” ( GATX Corp. at para 71 ); (

b) the grantor “must not act in a fashion designed to eviscerate the very right which has been given” ( GATX Corp. at para 71 ); (c) “the grantor of a ROFR has a duty to exercise its rights in such a manner to ensure that the other party’s rights are not rendered meaningless” ( Chase Manhattan at para 25 , citing GATX Corp. at para 71 et seq. ); (d) “[t]he duty [of reasonableness and good faith] is not discharged if the essential purpose of the sale to the third party is to frustrate the right of first refusal” ( GATX Corp. at para 71 , citing Landymore at 193–194, citing Victor Di Castri, The Law of Vendor and Purchaser , loose-leaf, 3d ed, vol 1 (Toronto: Carswell, 1988) at 6–8); (e) “unless … the whole transaction is structured to do indirectly that which triggers the right of first refusal, the right of first refusal does not apply” ( Glimmer Resources at para 18 (WL)); and (

f) the grantor “is not entitled to frustrate [a right of first refusal] by conveying the property in such a way as to avoid having to give the right in the first place” ( Landymore at para 97 (WL), citing Gardner ). [ 32 ] When assessing these statements of principle and their application to the facts at hand, it is important to understand that the right of first refusal in GATX Corp. “encompass[ed] all means and methods by which either of them might choose to terminate their interest …” (at para 68).

That is, the GATX Corp. right of first refusal was an omnibus right that covered any disposition of the grantor’s interest. That is not the case here; the trial judge found the ROFRs did not address a busted-butterfly-structured transaction. Comparably, the court in Glimmer Resources distinguished GATX Corp. on the basis that, like here, there was no evidence that “the structuring of the transaction in a fashion that would not attract the application of the right of first refusal was a primary force behind the way in which the agreement was contrived” (at para 12).

On this basis, it is clear that the trial judge’s approach was correct. The trial judge had to examine the language of the ROFRs before he addressed what had motivated ExxonMobil to structure the sale as a busted-butterfly transaction. [ 33 ] In that respect, the trial judge assessed the evidence, and particularly that of Philip Graham (ExxonMobil’s operating mind in the transaction), through the legal lens he had articulated and made two critical findings of fact about ExxonMobil’s decision to structure the sale as a busted-butterfly transaction: (

a) in negative terms, he found ExxonMobil had not been motivated by a desire to avoid triggering the ROFRs; the trial judge said they were “a detail that did not affect the decision” ( Trial Decision at para 80) and “ExxonMobil was not motivated by considerations of ROFRs” (at para 89); and (

b) in positive terms, he found ExxonMobil had preferred a busted-butterfly structure because “it was motivated by tax considerations” (at para 89). Importantly, the trial judge grounded these findings of fact squarely on Mr. Graham’s credibility and the reliability of his testimony, saying: “I believe him when he says that he made the choice of the busted butterfly structure for tax reasons, and I believe him when he says that considerations relating to ROFRs played no

part in the decision” (at para 88). Although not referenced by the trial judge, I note there was other evidence adduced at trial that corroborated Mr. Graham’s evidence or otherwise supported the trial judge’s factual conclusions in this regard. [ 34 ] In the result, the trial judge found ExxonMobil had not breached its duty of good faith because it had neither lied nor misled Northrock and it had not used a busted-butterfly structure for the purpose of avoiding the ROFRs ( Trial Decision at para 104).

In that the trial judge identified and applied the correct legal principles, I find no error in his conclusions. 5. Improper focus [ 35 ] In its factum, Northrock summarises this ground in this way: 35. When faced with a multi-step transaction, the court must focus on the overall scheme and final result, not on mechanics. In other words, the Court must analyze substance, not form. Contrary to that principle, the trial judge defined “the transaction” not as Exxon’s transfer of the Interests to Crescent Point but as the separate conveyancing mechanics used to bring that about.

That analysis was an extricable legal error. [ 36 ] Framed as it is, the ground of appeal is based on Northrock’s now-familiar premise that the ROFRs apply to any disposition of ROFR-tied Interests to a third party . However, the premise does not recognise the exceptions set out in the ROFRs as being exceptions to that rule; rather, Northrock’s argument requires the Court to interpret the exceptions narrowly, as permitting an internal

restructuring or reorganisation by a party to the ROFRs that does not affect the true ownership of ROFR-tied Interests. The argument, in simple terms, is this: Northrock has a right of first refusal over every disposition of ROFR-tied Interests to a third party but, by relying on a misinterpretation of the exceptions to that rule, the trial judge failed to see this was a disposition of ROFR-tied Interests to a third party. [ 37 ] The structure of Northrock’s argument is well-known: “the exception proves the rule” ( exceptio probat regulam ).

The full aphorism is: “the exception proves the rule in the cases not excepted” ( exceptio probat regulam in casibus non exceptis ). But, in this case, Northrock’s argument is flawed because, as already noted, the breadth of the ROFR rule espoused by Northrock is not readily evident on the plain terms of the ROFRs themselves. Put another way, I am not persuaded the trial judge did not look at the transaction holistically.

Rather, it seems he did look at the overall scheme; he simply concluded it was an exception to the rule. [ 38 ] Although the ROFRs at issue differ slightly in their wording, they each permit, generally speaking, the assignment of ROFR- tied Interests to an affiliate of the assignor (or, more broadly in one ROFR, “to a corporation in return for shares in that corporation”).

In that ROFR, the language is broader because it is not limited to assignments to affiliates (a word defined in corporate statute law and in the ROFRs) but, nonetheless, the assignor is required to take a shareholder position in the assignee, effectively rendering the assignee an affiliate . And, generally speaking, this supports Northrock’s argument because that kind of disposition in and of itself does not necessarily affect the overall relationship between the parties to the ROFRs or with respect to ROFR-tied Interests.

However, cracks in the argument start to form when one looks at the language of the ROFRs themselves. The trial judge set out the relevant language as follows: [33] The ROFR provisions appear in the BVU2 Unit Agreement and in the NWPA. The pertinent parts of Articles 101, 1201 and 1202 of the BVU2 Unit Agreement provide:

ARTICLE I

DEFINITIONS 101.

Definitions In this agreement: (a) “Affiliate” means, with respect to any person, any other person which is affiliated with such person, and for the purposes hereof: (

i) two persons will be considered to be affiliated with one another if one of them controls the other, or if both of them are controlled by a common third person; and (ii) one person will be considered to control another person if it has the power to direct or cause the direction of the management and policies of the other person, whether directly or indirectly, through one or more intermediaries or otherwise, and whether by virtue of the ownership of shares or other equity interests, the holding of voting rights or contractual rights, or otherwise; …

ARTICLE XII TRANSFER OF INTEREST 1201. Disposition Except as provided in this

Article XII, no Owner shall sell, transfer, assign, mortgage or otherwise dispose of all or part of its interest in the Unit. An Owner who intends to dispose of all or a part of its interest in the Unit (in this

Article called “the Disposing Owner”) shall comply with the provisions set out below: (

a) The Disposing Owner shall, by notice, advise each other Owner (in this

Article called an “Offeree”) of its intention to make the disposition .... … 1202. Unrestricted Disposals Notwithstanding anything contained in this

Article XII, an Owner may transfer all or a portion of its interest in the Unit without providing prior notice or the option to acquire such interest to the other Owners in the following instances, namely: (

a) a disposition to an Affiliate of the Owner, or in consequence of a merger or amalgamation of the Owner with another corporation or pursuant to an assignment, sale or disposition made by an Owner of its entire Unit Participation to a corporation in return for shares in that corporation or to a registered partnership in return for an interest in that partnership; ... [34] The pertinent parts of Articles 101 and 2701 of the NWPA provide:

ARTICLE I

Definitions, Headings, References and Exhibits 101.

Definitions In this Agreement including the recitals and this

Article I, the following words and phrases shall have the following respective meanings, namely: ... (b) “Affiliate” shall mean with respect to the relationship between corporations, that one of them is controlled by the other or both of them are controlled by the same person or corporation; and for this purpose a corporation shall be deemed controlled by those persons or corporations who hold or control sufficient voting shares of the corporation to elect the majority of its Board of Directors. …

ARTICLE XXVII Disposition of Interest 2701.

First Right of Refusal Except in the case of an assignment made by way of security for the assignor’s indebtedness, or to an affiliate of the assignor, or in consequence of a merger or amalgamation of the assignor with another company, or as part of the sale by the assignor of all or substantially all, or of an undivided interest in all or substantially all, its petroleum and natural gas rights in the province, a party hereto shall not assign or dispose of any interest in the Joint Lands (other than as elsewhere provided herein including without limitation assignment made with respect to abandonment of wells, surrender of lands or forfeiture of interest) without first complying with the provisions below.

The party (in this paragraph called the “selling party”) wishing to make the assignment or disposition shall first give the other parties the first right and opportunity to purchase the interest (in this paragraph called the “subject interest”) which the selling party wishes to assign or of which it intends to dispose. If the selling party has received an offer for the subject interest which it wishes to accept (or in any other circumstances which would result in a disposition of the subject interest), the selling party shall give notice to the other parties ....

Importantly, neither ROFR contains language that addresses the subsequent disposition of the shares of an affiliate (or other corporation) to whom an assignor has transferred its ROFR-tied Interests. The ROFRs are silent in that regard. I have addressed the implications of this earlier in these reasons. [ 39 ] On the other hand, the ROFRs specifically exclude from their scope certain change-of-control transactions, like mergers and amalgamations, as well as the sale by an assignor of “all or substantially all” of its petroleum and natural gas rights in Saskatchewan.

The latter exception is important because it proves that the ROFR rule is not that which Northrock posits. In this limited way, it is unimportant whether ExxonMobil was selling all or substantially all of its interests in Saskatchewan to a third party. What is important is that it could do so without triggering the ROFRs. That is, the ROFRs do not apply to all dispositions of ROFR-tied interests to a third party. [ 40 ] What this means is that Northrock’s argument is based on a false premise because Northrock did not enjoy a right of first refusal over every disposition of ROFR-tied Interests to a third party.

As I observed earlier, the trial judge very clearly understood the overall scheme of this transaction was a disposition to a third party. He simply found it was a disposition that did not trigger the ROFRs. As noted, the trial judge’s

interpretation in this regard is due deference absent a palpable and overriding error. [ 41 ] Viewed from a purely legal angle, acceptance of Northrock’s argument would imprudently broaden the duty of good faith in commercial relations.

In Northrock’s submission, that duty “prohibits a ROFR grantor from undertaking a transaction which appears to comply with the strict letter of the ROFR if its overall effect is to defeat the ROFR’s purpose” (factum at para 129), regardless of the grantor’s motivation or intent. [ 42 ] In simple terms, Northrock’s submission on the law is that the duty of good faith will trigger a right of first refusal whenever it is not otherwise triggered . Again, this is premised on Northrock’s narrow

interpretation of the contractual terms of the ROFRs in question. But, what it speaks to—in legal terms—is a duty of fidelity , not of good faith, because it mandates that one party to a contract put the other party’s interests ahead of its own interests. This is, of course, entirely inconsistent with the scope of the duty recognised in Bhasin .

There, Cromwell J. firmly rejected the general idea that contracting parties owed fiduciary duties to each other (at para 60) and specifically rejected the idea that a contracting party has a duty “to put the interests of the other contracting party first,” remarking there were “strong conceptual differences” between a fiduciary duty and the duty of good faith (at para 65).

Later, in concrete terms, Cromwell J. wrote: [70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd. , 2014 SCC 12 , [2014] 1 S.C.R. 177, at para. 31 .

Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co. , 2002 SCC 43 , [2002] 2 S.C.R. 601, at para. 31 . The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice.

In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. [ 43 ] Moreover, although they predate Bhasin , the principles set out in GATX Corp. and Glimmer Resources confirm the approach taken by the trial judge as the proper approach. On these authorities, the law requires contracting parties to act in good faith and

reasonably with respect to rights of first refusal. That is, a party must not set out to avoid a right of first refusal or enter into a transaction whose entire purpose is to defeat another party’s rights of first refusal. But, subject to that restriction, contracting parties are at liberty to pursue their legitimate business interests within the limits prescribed by commercial, arm’s-length rights of first refusal. In Clifford D. Johnson and David J.

Stanford, “Rights of First Refusal in Oil and Gas Transactions: A Progressive Analysis” (1999) 37 Alta L Rev 316 at 327, the authors put it in these terms: … the courts will not accept transactions which are contrived by the parties to do indirectly what they cannot do directly, but they will allow transactions to proceed which have legitimate business purposes and which are not simply structured so as to avoid another party’s pre-emptive rights.

Such purposes may well include tax planning and the structuring of transactions to avoid potentially adverse tax consequences. … In short, the express language of a right of first refusal governs unless the grantor has taken steps to structure a transaction so as to deliberately avoid triggering the right. [ 44 ] I do not read the reasons in Hanen v Cartwright , 2007 ABQB 184 , [2007] 6 WWR 481 [ Hanen ] (aff’d on other grounds 2007 ABCA 388 , [2009] 3 WWR 304), or Apex Corporation v Ceco Developments Ltd. , 2008 ABCA 125 , [2008] 6 WWR 393 (aff’g 2005 ABQB 656 , 387 AR 211) [ Apex ], which Northrock has cited in support of its argument, as deviating from this approach.

In Hanen , the trial court found the grantor had taken steps to deliberately avoid triggering the rights of first refusal in question. Similarly, the courts in Apex found the grantor had been motivated to avoid triggering a right of first refusal. Because that right (like the one in GATX Corp. ) contained no exceptions for transfers to an affiliate—the trial court found “no such exception [had been] bargained for”—both courts declined to read one into the right.

That is, the courts’ decisions turned first on the express language of the right of first refusal. [ 45 ] Here, the trial judge found the ROFRs, on a plain reading in their grammatical and ordinary sense, did not apply to the busted- butterfly-structured sale by ExxonMobil to Crescent Point. He then looked to see if ExxonMobil had been motivated, when structuring the transaction in that way, to do indirectly that which would have directly triggered the ROFRs. He found no improper motivation on ExxonMobil’s part.

In this regard, the trial judge’s approach properly recognised that parties to a contract are free to arrange their affairs within the limits of the express words of the contract but may not take action to deliberately thwart or avoid another party’s contractual rights. [ 46 ] In sum, the trial judge’s approach to this matter was consistent with Bhasin and the existing legal doctrines that are applicable to rights of first refusal. [ 47 ] For these reasons, I find no legal error in the trial judge’s decision to examine the transaction, first, from the perspective of whether it had triggered the ROFRs and, second, from the perspective of whether ExxonMobil had breached its duty of good faith by structuring the transaction to purposefully avoid triggering the ROFRs.

As Cromwell J. cautioned in Bhasin , the duty of good faith must not be used to circumvent the plain language of a contract because that would result in ad hoc judicial moralism and undermine the principle of certainty in contract. 6.

Summary [ 48 ] As noted, the trial judge correctly held that a breach of the duty of good faith in the context of a right of first refusal may arise where a party has lied or misled another party or is found to have structured a transaction for the purpose of avoiding the right of first refusal.

In his conclusion, the trial judge found ExxonMobil had not breached its duty of good faith because it “did not lie,” “did not mislead” and “did not use the busted butterfly structure for the purpose of avoiding the ROFRs” (at para 104). [ 49 ] In that the relevant findings of fact (set out at para 35) were grounded squarely on the trial judge’s assessment of witness credibility and resulted from his assessment of what he accepted was cogent evidence through the lens of the applicable law, his findings attract a good measure of deference.

Absent a palpable and overriding error, this Court is not entitled to interfere with them. [ 50 ] I have found that the trial judge applied the correct legal principles and, on that basis, made factual findings that are supported by the evidence that was before him. While Northrock disagrees with the trial judge’s findings, the trial judge’s assessment of the evidence discloses no reversible error and, therefore, there is no basis upon which to disturb his findings. The appeal in respect of Northrock’s claims against ExxonMobil is dismissed. C.

Claims against Crescent Point and the affiliates [ 51 ] A final aspect of Northrock’s appeal requires comment. In its claims, Northrock alleged that Crescent Point, 3120272 and 3120273, even though not parties to the ROFRs, had breached a duty of good faith owed to Northrock. The trial judge declined to address these claims because he found no breach of the duty of good faith on the part of ExxonMobil, the party to the ROFRs.

As I would sustain the trial judge’s conclusion in that regard, I find no need to address this aspect of Northrock’s appeal. [ 52 ] I would also uphold the trial judge’s dismissal of Northrock’s claims as against Crescent Point for inducing ExxonMobil to breach the ROFRs and as against Crescent Point, 3120272 and 3120273 for conspiracy. Northrock’s appeal with respect to the trial judge’s decision on these claims must fall because I would sustain the trial judge’s conclusion that ExxonMobil had not breached the ROFRs. IV.

DISPOSITION [ 53 ] Northrock’s appeal is dismissed as against all respondents, with one set of costs to ExxonMobil and one set of costs to Crescent Point, 3120272 and 3120273.

“Caldwell J.A.” Caldwell J.A. I concur. “Herauf J.A.” Herauf J.A. I concur. “Whitmore J.A.” Whitmore J.A.