on record - burnet, duckworth & palmer llp€¦ · another registration scheme pertaining to...
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Protecting Interests Through Operators’ Liens: Priority, Registration and RemediesWith New Leadership Comes a New Climate Leadership PlanThe 2016 Investment Canada and Competition Act ThresholdsPipeline Transfers: Increased Liability for Purchaser?Purchaser’s Knowledge of Inaccurate Vendor Representations & Sandbagging TacticsThe Synthetic Transportation of Natural Gas: Does Swapping Trigger a ROFR?
MARCH 2016 ENERGYon record
For additional BD&P publications please visit our web site www.bdplaw.com
ENERGY, EDITOR-IN-CHIEFAlicia K. [email protected] 403-260-0233
ENERGY, MANAGING EDITORRhonda G. [email protected] 403-260-0268
GENERAL NOTICE & DISCLAIMEROn Record is published by BD&P to provide our clients with timely information as a value-added service. The articles contained here should not be considered as legal advice due to their general nature. Please contact the authors, or other members of our Energy Team directly for more detailed information or specific professional advice.
On Record Contents:
1 Protecting Interests Through Operators’ Liens: Priority, Registration and Remedies
3 With New Leadership Comes a New Climate Leadership Plan
4 The 2016 Investment Canada and Competition Act Thresholds
5 Pipeline Transfers: Increased Liability for Purchaser?
6 Purchaser’s Knowledge of Inaccurate Vendor Representations & Sandbagging Tactics
8 The Synthetic Transportation of Natural Gas: Does Swapping Trigger a ROFR?
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Energy LawyersEnergy – TransactionalCalder, Cassandra [email protected] ...........403-260-0252Cuthbertson, q.c., John H. [email protected] ...........403-260-0305Grout, David A. [email protected] ...........403-260-0326Houston, Mark T. [email protected] ...........403-260-0375Johnson, q.c., Cal D. [email protected] ...........403-260-0203Korney, Sean [email protected] ...........403-260-0206LaBranche, Brittney [email protected] ...........403-260-0344Money, J. Stuart [email protected] ...........403-260-0312Ozirny, Jon [email protected] ...........403-260-0261Pettie, q.c., Alan T. [email protected] ...........403-260-0127Quesnel, Alicia K. [email protected] ...........403-260-0233Saffery, Hazel [email protected] ...........403-260-0173Sawatsky, Brendan [email protected] ...........403-260-0250Slaney, Randon [email protected] ...........403-260-5716Weldon, Ashley [email protected] ...........403-260-0125Wivcharuk, Jody L. [email protected] ...........403-260-0129Wright, Carolyn A. [email protected] ...........403-260-5721Energy – RegulatoryDixon, Evan W. [email protected] ...........403-260-0162Quinton-Campbell, Patricia [email protected] ...........403-260-0308Saffery, Hazel [email protected] ...........403-260-0173Energy- LitigationBeke, Paul A. [email protected] ...........403-260-0216Chiswell, Paul [email protected] ...........403-260-0201Crump, Barry R. [email protected] ...........403-260-0352Donaldson, Michael J. [email protected] ...........403-260-0228Fader, Susan [email protected] ...........403-260-0343
Haigh, q.c., David H. [email protected] ...........403-260-0135Hannan, Kelly [email protected] ...........403-260-0126Harris, Jocelyn [email protected] ............403-260-0307Hayes, Shannon [email protected] ...........403-260-0237Hennig, Jason [email protected] ............403-260-0251Martz, Robert [email protected] ............403-260-0393McDonald, q.c., Daniel J. [email protected] ...........403-260-5724McDonald, Trevor R. [email protected] ...........403-260-0378McGillivray, q.c., Douglas A. [email protected] ...........403-260-0349Mills, Douglas G. [email protected] ...........403-260-0226Murphy, James D. [email protected] ...........403-260-0152Norris, Alex [email protected] ...........403-260-0367Novinger Grant, Louise [email protected] ...........403-260-0163Nusbaum Kimberley [email protected] ...........403-260-5726Rojas, Romeo A. [email protected] ...........403-260-0293Sam, Andrea [email protected] ...........403-260-0266Scott, Alison [email protected] ...........403-260-5733Sharpe, Jeff E. [email protected] ...........403-260-0176Steele, Richard F. [email protected] ...........403-260-0051Strobl, Marika [email protected] ...........403-260-0270Sunter, Andrew [email protected] ...........403-260-0283Tallman, Scott [email protected] ...........403-260-0273Taylor, Julie J. [email protected] ...........403-806-7808Teetaert, Melanie [email protected] ...........403-260-0384Turnbull, Jocelyn [email protected] ...........403-260-0264Varzari, Jennifer K. [email protected] ...........403-260-0286Wray, Shannon L. [email protected] ...........403-260-0245
If you would like any further information on any members of the team, please feel free to contact the team member(s) directly. You may also refer to our website at: www.bdplaw.com
ENERGYPAGE 1
BackgroundAn operator’s lien is a type of contractual lien that is created by operating agreements in the oil and gas industry. Operator’s liens are available in many model form operating procedures, in the context of a joint operating agreement (“JOA”), such as those published by the Canadian Association of Petroleum Landmen (“CAPL”), the Association of International Petroleum Negotiators (“AIPN”) and the American Association of Petroleum Landmen. In Canada, the most widely used operating procedure for upstream oil and gas development is the CAPL Operating Procedure (the “Operating Procedure”).
There are various versions of the Operating Procedure but all versions since 1981 contain provisions for the creation of an operator’s lien. Clause 5.05(a) of the 1990 CAPL Operating Procedure provides an operator with,
…a lien and charge, which is first and prior to any other lien, charge, mortgage or other security interest with respect to the interest of each Joint-Operator in the joint lands, the wells and equipment thereon, the petroleum substances produced therefrom and any production facilities, to secure payment of such Joint-Operator’s proportionate share of the cost and expenses incurred by the Operator for the joint account.1
Although the CAPL 1990 Operating Procedure states that the lien will be first and prior to any other interest, this is not always the case. If an operator wishes to take full advantage of its operator’s lien, it must understand the type of asset that is the subject of the lien and register the lien under the appropriate legislation. Although operator’s liens are registerable in Alberta, few operators actually take advantage of this protection. Operators who choose to forgo registration risk losing priority to secured creditors and
to a trustee in bankruptcy in the event that their non-operator counterparts become insolvent or face bankruptcy proceedings. This is particularly significant in the current economic situation in the energy sector.
In general, to determine which party has priority, the following rules apply:• priority between two non-registered interests is determined by
the date each interest arose, with the earliest having priority;• where interests are required to be registered as between an
unregistered and a registered interest, the registered interestwill prevail; and
• in the presence of two registered interests, priority will bedetermined by the appropriate registration legislation, andthe interest with the earliest registration will prevail.
Personal PropertyThe legislation that governs the priority of interests in relation to personal property in Alberta is the Personal Property Security Act2 (“PPSA”). Personal property is valuable as it includes production of oil and gas and the sale of the proceeds of production. The PPSA gives priority to registered interests over unregistered interests. Unregistered interests of operators’ liens are prioritized on the basis of the date of attachment, which is the date the Operating Procedure is executed.
The PPSA specifies that an unperfected (unregistered) security interest is not effective against a trustee in bankruptcy if the interest is unperfected at the date of bankruptcy. Generally, an interest can be perfected either through possession and/or registration. However, the decisions in Blue Range Resource Corp (Re),3 and Direct Energy Marketing Ltd v Katla Energy Corp,4 have both
Protecting Interests Through Operators’ Liens:Priority, Registration and Remedies
By Brendan Sawatsky
PAGE 2ENERGY
rejected perfection by possession in the context of an operator’s lien. To obtain perfection by possession under the PPSA, the possession must be sufficient to indicate to third parties that a debtor has given a security interest in the collateral to a secured party. As a result of Blue Range and Direct Energy, it is critical that operators register their interests in personal property in order to maintain priority over subsequent secured creditors.
Registration not only gives an operator’s lien priority over subsequent secured interests — it also serves to provide notice to third parties of the operator’s interest. It has been argued that any creditor dealing with a company in the oil and gas industry has constructive knowledge of an operator’s interest, given the wide usage of the Operating Procedure. In some cases, constructive, as opposed to actual notice may be sufficient.5 In the context of joint lands, it is arguable that any potential security holder should have constructive notice of the operator’s interest and be aware of the operator’s lien. However, registering an operator’s lien confirms that third parties have notice, and ensures that an operator’s interest will not be ranked behind any subsequent secured interests, unsecured creditors or a trustee in bankruptcy.
Crown Land & Mineral InterestsIn relation to a non-operator’s working interest in Crown land and mineral interests, an operator’s lien may be registered with the personal property registry pursuant to the Law of Property Act,6 (“LPA”) which creates an exception for a charge on land to be registered under the PPSA. A charge on land is defined as an interest in real property given by a corporation to secure payment or performance of an obligation. While an operator’s lien seems to fit this description in cases dealing with Crown land, there have been no court decisions specifying that an operator’s lien qualifies as a charge on land as contemplated by the LPA. Like the PPSA, the LPA determines competing interests by the first interest registered. However, if no competing interest is registered, the first interest to have been executed will prevail.
Another registration scheme pertaining to Crown land is found in the Mines and Minerals Act 7(“MMA”). The MMA differs from the LPA by specifically excluding an operator’s lien in the definition of a security interest. Under the MMA, an operator’s lien will be viewed as an equitable interest. The MMA is not an all inclusive priority and registration system and does not address priority between registered and unregistered interests. While there is no jurisprudence analyzing the competing interests in this situation, it is likely that the priority rules under the LPA apply. Alternatively, using the common law approach, any subsequent registered legal security holder with constructive or actual notice of a prior equitable interest (the operator’s lien) would not have priority over the equitable interest. Registering an operator’s lien under the LPA should be sufficient to provide notice under the common law approach.
Freehold Land & Mineral InterestsIn terms of freehold land and mineral interests, the Land Titles Act,8 (“LTA”) determines the priority of interests. The LTA gives priority to the party that registers first and deals with competing unregistered interests in the same way as the LPA.9
RemediesThe decision in Novalta Resources Ltd v Ortynsky Exploration Ltd,10 upholds an operator’s right to place a lien on a non-operator’s working interest and to sell all or a portion of that interest when a non-operator fails to pay. However, there are several requirements in the Operating Procedure that the operator must fulfill before this remedy may be employed. Under the Operating Procedure, when a non-operator fails to pay its share of the costs or expenses incurred for the joint account, an operator must give written notice to a non-operator, and wait 30 days from the date notice is given before taking further action. After these requirements are fulfilled, an operator may take possession of all or part of a non-operator’s working interest in the joint lands and sell them to recover the costs it is due in accordance with the Operating Procedure.
Another remedy set out in the Operating Procedure is the right to contractual set-off by the operator of the amount a non-operator owes against the non-operator’s share of revenue (collected by the operator). The Operating Procedure extends an operator’s right to set-off to any other agreement between the operator and non-operator whether it is executed before or after the JOA. This remedy may not be utilized until the operator gives 30 days written notice to the non-operator. An additional difficulty is that the right to set-off is unavailable when the non-operator takes its share production in kind.
Concluding ThoughtsAlthough registering an operator’s lien may be perceived as an administrative burden and an additional expense, it is prudent that operators register an operator’s lien to preserve its priority of interest and take advantage of all of the remedies and benefits provided for in the Operating Procedure.
Footnotes
1 See Clause 505(a) CAPL 1990 Operating Procedure (note that the CAPL 2007 Operating Procedure has similar language; the reason the CAPL 1990 Operating Procedure is cited is due to the fact that this operating procedure is more commonly used in the oil and gas industry and has been judicially considered to a greater extent).
2 RSA 2000, c P-7. 3 [1999] AJ No 1165 (ABQB) [Blue Range]. 4 [2002] AJ No 463 (ABQB) [Direct Energy]. 5 William Corbett, “Priority Issues Affecting Operators’ and Suppliers’ Liens: The Alberta
Perspective” (Paper delivered at the Oil and Gas Sector Conference, 25 April 1996), Toronto: Insight Press, 1996, at 25.
6 RSA 2000, c L-7. 7 RSA 2000, c M-17. 8 RSA 2000, c L-4. 9 Bank v Head West Energy Inc. 2007 ABQB 188.10 [1994] AJ No 1101 (ABQB).
Registration not only gives an operator’s lien priority over subsequent secured interests — it also serves to provide notice to third parties of the operator’s interest.
The Plan focuses on five key areas:1) An economy-wide carbon price, to be
paid by both producers and consumers;2) The accelerated phase out of coal-fired
power plants;3) An absolute cap on oil sands
emissions;4) Plans to significantly reduce methane
gas emissions; and5) The development of province wide
energy efficient initiatives.
The Carbon PriceThe backbone of the Plan is the Carbon Competitiveness Regulation (“CCR”) which will put a price on carbon emissions across all industry sectors in the province. The proposed CCR will charge end-use emitters, create a price ceiling for emissions and invest carbon revenues in green technology initiatives. It is also proposed that the CCR will be used to offset the price impact felt by mid to low income households.
For large emitters, those producing over 100,000 tonnes/year, the CCR will replace the Specified Gas Emitters Regulation (“SGER”) with a new standard based on overall product performance. This is a significant change from the current system under SGER, which tasks companies with reducing emissions by 12% annually below their own baseline. For large emitters, the introduction of the CCR is meant to incentivize emissions-efficient production, is tied to inflation and will allow for periodic review by the government.
PAGE 3ENERGY
On November 22, 2015, the Alberta government released the Climate Leadership Plan (the “Plan”). The Plan is based on recommendations put forward in the Climate Leadership Report, developed by the Climate Change Advisory Panel, chaired by Andrew Leach, the academic director of energy programs at the University of Alberta’s School of Business. The Climate Leadership Report was prepared after several months of consultations with a variety of stakeholders from the public, indigenous communities, academia, think-tanks and industry on a broad range of energy-related issues.
With New Leadership Comes a New Climate Leadership PlanBy Allie Laurent, Student-at-Law
PAGE 4ENERGY
The new approach will increase the carbon price of emissions in the province to $20/tonne by 2017 and $30/tonne by 2018. This increase in the carbon price is expected to capture between 78-90% of emissions in the province and to cost the average Albertan $40/month. At this stage, the government plans to put the revenues generated by carbon pricing back into the program to offset the impact on low and middle-income households and assist displaced workers and affected communities during the transition away from coal. Revenues are also expected to help include Aboriginal peoples and vulnerable communities in new energy opportunities and to kick-start investment in green technologies.
The End of Coal-Fired PowerThe Plan proposes to phase out all coal-fired electricity production by 2030. This is really an acceleration of the federal plan to phase out coal-fired power, which contemplated the phase out 12 of 18 coal-fired power plants in Alberta by 2030. However, the Plan recommends that the government utilize a flexible approach to the shutdown of coal facilities in recognition of the fact that this will have a significant effect on many communities. This is also a wise approach with some industry proponents warning that the accelerated shutdown of coal could cost as much as $12 billion.
Currently, the Plan proposes to replace 50-75% of the lost coal-generated electricity production with production from renewable power sources, with natural gas generation replacing the remaining 25-50%. This shift will be significant and is likely to require major changes to Alberta’s energy grid. In particular, increasing renewable energy production will require substantial government support as renewable energy production continues to lag behind conventional production.
Methane Gas ReductionsCoal is not the only type of fossil fuel the Plan targets; it also proposes to reduce methane emissions to 45% of 2014 levels by 2025. These methane reduction targets will be felt by the oil and gas sector which is responsible for about 50% of Alberta’s methane emissions. Currently it is expected that reduction will primarily be achieved through regulation i.e. by the provision of market based incentives to encourage producers to upgrade facilities and the provision of emissions credits for good performance. However, the government has not yet provided tangible details as to what these regulations and market incentives will look like.
A Cap on the Oil SandsThe Plan proposes to introduce an overall cap on oil sands emissions. Currently Alberta’s oil sands generate approximately
70 megatonnes of carbon per year. The Plan proposes a legislative overall limit on oil sands emissions of 100 megatonnes. Thus, this cap actually gives oil sands producers some room to maneuver, and appears to be an olive branch to industry as a sign that the government does not want to stifle all growth.
Investment in Green Technology and Energy EfficiencyThe final element of the Plan proposes investment in the development of energy efficient and energy resilient communities, including the use of technology and innovation to accelerate emissions reductions. The Plan proposes that the government work towards becoming carbon competitive — meaning that Alberta would reduce emissions but remain cost competitive. Little information has been released by the government about whether these aspects of the Plan will be implemented, and if so, what they will look like.
Concluding ThoughtsIt remains to be seen whether Alberta can make the proposed carbon regulations work in its energy dependent economy, but if it can, Alberta’s carbon competitive approach could encourage similar climate motivated regulations elsewhere.
The 2016 Investment Canada and Competition Act ThresholdsThe Investment Canada Thresholds for 2016
• Non-SOE Threshold – $600 million in enterprise value for direct acquisitions of control of a Canadian Business by:a. WTO Investors (excluding State-Owned Enterprises (SOEs)); and b. Non-WTO Investors (excluding SOEs) if the Canadian Business is, immediately prior to the investment,
controlled by a WTO Investor.
• SOE Threshold – $375 million in asset value for direct acquisitions of control of a Canadian Business by:a. WTO Investors that are SOEs; and b. Non-WTO Investors that are SOEs, if the Canadian Business is, immediately prior to the investment,
controlled by a WTO Investor.
The Competition Act Threshold for 2016• Pre-merger notification threshold relating to transaction-size – $87 million
PAGE 5ENERGY
With the recent release by the Alberta Energy Regulator (the “AER”) of Bulletin 2015-34, the transfer of all required records will become a requirement as of April 1, 2016. On a Pipeline transfer application both parties will have to confirm that the pipeline records have been transferred as of the effective date of the licence transfer. Theoretically, the purpose of this requirement is to ensure that the purchaser receives the relevant and complete records which are required to be held pursuant to the applicable laws.
This requirement may raise some concerns for transacting parties:• The transferor must confirm that it has collected and retained
all records required under the Pipeline Rules and CSA Z66.- What if the transferor has not collected the records? - What if some of the records are missing?
• The transferee must confirm that it has received all records required to be collected and retained under the Pipeline Rules and CSA Z662. Further, the transferee is responsible for producing these records on request by the AER. Failure to do so constitutes a noncompliance of AER requirements.- What if transferee has not received all the records?- How is transferee to confirm that it has received all the records?- How can a transferee protect itself from AER non-compliance?
We understand that it will be almost impossible to ensure that the records are complete and have been transferred (one may never know what is missing). Instead, parties will want to consider ways to protect themselves or have recourse against the transferor if in the future the transferee finds itself non-compliant with the AER with respect to these particular records.
If one is a purchaser in an asset acquisition, one will want to consider the following options:• Adding a specific representation as to the completeness
of the pipeline files (possibly with a longer survival period);• Adding a covenant as to the transfer at Closing of all the
necessary pipeline files; and• Adding a separate indemnity for the completeness of the records
to ensure the purchaser is held whole in circumstance where the vendor has not maintained and/or has not transferred all of the required pipeline materials. While the ordinary indemnity as to an untrue representation would certainly include the pipeline file representation, the limitation in the ordinary indemnity is that it may not address the significant impact of a pipeline suspension or other enforcement step.
If one is a purchaser in a corporate acquisition, consider adding a representation as to the completeness of the Pipeline files and for added security, a separate indemnity with respect to the files. If one is a vendor, one will want to try to limit one’s exposure under the representation by qualifying or refusing to provide a representation or a separate indemnity.
While these new requirements are intended to limit the risk between the parties to a transaction, the practical implication is that after confirming receipt of all records, the transferee will no longer have the ability to excuse incomplete or missing records on a previous licensee. By following some of the suggestions above, parties may be in a better position to allocate this compliance risk among themselves prior to the liability arising through compliance enforcement actions by the AER.
Pipeline Transfers: Increased Liability
for Purchaser?By Hazel Saffery
It is a common understanding that when a purchaser acquires a working interest in a pipeline (whether or not it is purchased from the operator) (a “Pipeline”), the purchaser is entitled to, and usually receives the original or copies of the files related to the construction, operation and maintenance of the Pipeline. Often a vendor provides a representation as to its operation of the Pipeline in accordance with good oilfield practices and its material compliance with the applicable laws. Sometimes the vendor also provides a representation as to the maintenance of records although this representation may be quite general and may be qualified by materiality or knowledge.
An issue can arise if a purchaser becomes aware, before closing, that a material representation of the vendor is inaccurate or untrue. Upon such a discovery, a purchaser has three options. It may (i) disclose this discovery to the vendor and terminate or (ii) disclose and seek to renegotiate the agreement based on the new facts, or (iii) it may remain silent on the discovery and commence an action after closing for the misrepresentation of the vendor.
The latter option is a tactic known as sandbagging. A sandbagging purchaser attempts to ambush the vendor, catching
the vendor off guard. Parties may explicitly allow or prohibit the practice of sandbagging within the contract, or parties may remain silent on the issue altogether. How does the common law treat this practice and how should parties act to protect their interests?
The Effect of a Purchaser’s Knowledge of an Untrue Representation A party claiming misrepresentation must prove that the false representation was material and that it induced the claiming party through reliance to enter into the
contract.2 This is a question of fact, often turning on what parties knew at the time. As a result, a party’s knowledge is a critical factor in any claim for misrepresentation.
Purchasers who know that a representation of the vendor is false but proceed to close a deal in the face of it, may struggle to prove their reliance on that representation. For example, in one recent case, an experienced investor had knowledge of a company’s financial viability and chose not to investigate further prior to buying shares. When the investor attempted to rely on false representations about share valuation
PAGE 6ENERGY
Purchaser’s Knowledge of Inaccurate Vendor Representations & Sandbagging TacticsBy Randon E. Slaney
IntroductionIn virtually all transactions, parties make representations and warranties to build trust and induce contracting with each other, especially for facts not verifiable through due diligence.1 Representations are often subject to intense negotiations, and their accuracy is vital since untruths give rise to misrepresentation claims by the other party.
PAGE 7ENERGY
made by the company’s director, the Court ruled that it was not reasonable in the circumstances for the investor to rely solely on the director’s representations.3
Similarly, purchasers cannot rely on wilful ignorance when a vendor discloses information that warrants reasonable enquiries, particularly where the conveyance of assets in a transaction is on an “as is” basis.4 This was the outcome where a sophisticated purchaser had knowledge of the possibility of landfill in the area being purchased, but did not bother to read the relevant materials.
Note however, that a purchaser’s knowledge will not always excuse a vendor that fails to disclose all material facts. Where a vendor failed to disclose a reserve report showing a material and adverse change in the assets, it was unsuccessful in defending a misrepresentation claim by the purchaser, even though the purchaser had some awareness of the facts.5
Defining “Knowledge”Given uncertainty, parties may prefer to solve any ambiguities on pre-existing knowledge within the contract. In drafting a definition of knowledge, a vendor will want to negotiate to qualify its knowledge and to construe a purchaser’s knowledge broadly. Purchasers, for their part, will want to seek to broaden the vendor’s knowledge to make its representations absolute, while narrowing its own knowledge pertaining to any false representations unearthed. An effective definition of knowledge is thus a powerful tool. Common elements to defining parties’ knowledge include: • Knowledge by whom: Are all
employees, representatives or agents included, or only the executive or specific individuals?
• Actual versus implied, imputed or constructive knowledge: Are the vendor, purchaser or both obligated to review all relevant records and make all reasonable diligent enquiries, and
is the standard their actual knowledge at the time of execution or what they ought to have known as well?
• Method of proof: Is knowledge provable only by documentation, or is knowledge, however acquired or inferred, enough?
Drafting a Sandbagging ProvisionA purchaser may wish to add a clause to the contract that explicitly permits some measure of sandbagging tactics.6 A vendor must be extremely cautious with such provisions and may instead seek to prohibit the practice, or even impose disclosure obligations if the purchaser learns of any representational inaccuracies. There is little Canadian judicial guidance on the interpretation of these provisions, yet courts in the United Kingdom tend to take a dim view of sandbagging tactics, which may carry over into Canada.7
A recent study indicated that Canadian transactions use sandbagging clauses less frequently compared to their American and European counterparts, which tended to be more in favour of and against the practice, respectively.8 If a purchaser seeks to employ a sandbagging clause, it should be clear with the intention to make the vendor’s representations unqualified and absolute, with express reliance by the purchaser, and it should clearly define knowledge. Consider the elements in this sample clause:
The Vendor’s representations are not to be affected or waived by reason of any investigation by or on behalf of the Purchaser, or by reason of the fact that the Purchaser knew or ought to have known that any such representation is or might be inaccurate or untrue. The Vendor acknowledges that the Purchaser enters into this Agreement in express reliance upon the Vendor’s representations, and that the Purchaser has paid good and sufficient consideration in exchange for all such representations.
SummaryWhen a purchaser, before the closing date, becomes aware that a material representation of the vendor is false or inaccurate, it may disclose this fact to the vendor and renegotiate based on this new understanding, or even walk away from the transaction. Another option for the purchaser is to remain silent and sandbag the vendor by bringing a claim after closing.
Reliance by the purchaser on the false representation is a requirement to prove misrepresentation. Resolving these disputes often turns on what parties knew at the relevant times. Thus, a purchaser’s knowledge of the inaccuracy of a representation may prevent the purchaser from establishing reliance on the misrepresentation. With this in mind, parties should consider defining knowledge in the contract to simplify such disputes.
Purchasers can also seek to allow sandbagging under the agreement, thereby permitting claims notwithstanding any knowledge on their part or duty to investigate. Counsel for the vendor should be wary of these provisions and negotiate to weaken them or seek significant concessions in exchange. Overall, effective negotiations around these issues are vital to safeguarding best interests.
Footnotes
1 Practically speaking, corporate transactions typically employ representations and warranties simultaneously, melding the distinction at law.
2 L.K. Oil & Gas Ltd. v. Canalands Energy Corp., 1989 ABCA 153, at paras 38, 46.
3 Strand v. Emerging Equities Inc., 2008 ABCA 23, at para 7; see also 35445 Alberta Ltd. v. Transamerica Life Insurance Co. of Canada, 1998 ABCA 110, at paras 10-11.
4 Motkoski Holdings Ltd. v. Yellowhead (County), 2010 ABCA 72, at paras 78-79.
5 Eagle Resources Ltd. v. MacDonald, 2001 ABCA 264, at paras 16-18.
6 See generally, Charles K. Whitehead, “Sandbagging: Default Rules and Acquisition Agreements” (2011), 36 Delaware Journal of Corporate Law 1081.
7 See for example, Infiniteland Ltd and another v. Artisan Contracting Limited and another, [2005] EWCA Civ 758.
8 John F Clifford, Freek Jonkhart, and Jessica Pearlman, “What’s the Market for that Cross-Border Deal? The European, US and Canadian Private Target M&A Deal Points Studies” (May 2011), 12 Business Law International 2 at 147.
Purchasers can also seek to allow sandbagging under the agreement, thereby permitting claims notwithstanding any knowledge on their part or duty to investigate.
ENERGYPAGE 8
The process of shipping natural gas rarely results in the gas being delivered directly from its point of origin to its final destination; rather it typically involves a number of pipelines and transfers enroute. This type of shipping arrangement was at the heart of the dispute in Apache Canada Ltd v TransAlta Cogeneration LP.1 The dispute arose from a gas supply agreement (the “Agreement”) between Apache Canada Ltd. (“Apache”), as supplier, and TransAlta Cogeneration LP (“TransAlta”), as buyer. The Agreement had a fixed price and a 15 year term beginning in December 1996.The Agreement stipulated that TransAlta use the natural gas that it purchased from Apache for the specific purpose of fueling its cogeneration facility in Windsor, Ontario (the “Project Facility”). TransAlta was responsible for arranging the transportation of the natural gas from the delivery point to the Project Facility. The Union Gas and TransCanada pipelines were referenced in the Agreement under “Buyer’s Transporters”, however, TransAlta was not obligated to exclusively use the pipelines enumerated in the Agreement. TransAlta’s only obligation relating to the transportation of natural gas was to have “firm transportation” in place before Apache commenced delivery. At the time the Agreement was negotiated, the natural gas market in Alberta was depressed. Given the possibility that the market could recover over its term, Apache sought to protect itself from a situation in which TransAlta could buy the natural gas at the contract price and resell it at a higher market price. To deal with this concern, the Agreement gave Apache a right of first refusal (“ROFR”). The ROFR prohibited TransAlta from selling any excess volumes of natural gas (that was not required at the Project Facility) to any third party, without giving Apache the opportunity to repurchase the natural gas at the contract price. TransAlta was only free to sell the extra natural gas it purchased under the Agreement to a third party if Apache declined to repurchase.When the cost of shipping natural gas on the TransCanada pipeline significantly increased, TransAlta entered into a series of swap arrangements through eight separate purchase and
sale transactions. This involved making arrangements with other parties whereby gas was sold and other gas was acquired in its place for use at the Project Facility. In other words, the gas supplied by Apache was used as a commodity to allow TransAlta to have the required volume of gas delivered to its project facility in Windsor, without using the TCPL pipeline. Eventually Apache discovered the method that TransAlta used to facilitate the transportation of the natural gas to the Project Facility and claimed that this arrangement triggered the ROFR as the Agreement required physical transportation via the TCPL pipeline. As TransAlta did not give Apache the opportunity to repurchase the natural gas before “selling” it to a third party, Apache argued that TransAlta had violated the Agreement. Apache looked to TransAlta for its losses, estimated to be over $8 million, and advanced this claim despite conceding that the swap arrangements resulted in the delivery of the natural gas to the Project Facility where TransAlta required it.
The Court found that due to the fungible nature of natural gas, everyone in the industry acknowledges that, unlike oil shipped via pipeline which uses a batching system, the natural gas delivered is not the same natural gas that is received. The Court stated that the concept of physical transportation of natural gas is a fiction accepted within the industry.2 Furthermore, by entering into the swap arrangements, TransAlta was facilitating the transportation of the natural gas to the Project Facility rather than making a profit. The Court described the swap arrangements as “synthetic transportation.” As the volumes of natural gas that Apache delivered were ultimately required at TransAlta’s Project Facility i.e. there was no excess volumes of gas available to TransAlta to sell to third parties — the swap arrangements, or synthetic transportation, did not trigger the ROFR and TransAlta did not breach the Agreement.
Footnotes
1 2015 ABQB 650 [Apache].2 Apache, at para18.
THE SYNTHETIC TRANSPORTATION OF NATURAL GAS:
Does Swapping Trigger a ROFR?By Brendan Sawatsky
COMMON SENSE, UNCOMMON INNOVATION.BD&P is a leading Canadian law firm of over 140 lawyers skilled in virtually every aspect of business law and litigation.
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