|Date Announced:||June 19, 2018|
|Date Closed:||June 19, 2018|
|Deal Value:||$1.3 billion|
|Client Name:||Dow Canada|
On June 20, 2018, Justice Barbara Romaine of the Court of Queen's Bench of Alberta awarded $1.06 billion USD to Dow Chemical Canada ULC and an affiliate ("Dow") in an action for breach of contract against NOVA Chemicals Corporation ("NOVA"). The dispute arose from the operation of an ethylene plant at Joffre, Alberta, jointly owned by Dow and NOVA.
History of the Alberta Ethylene Industry
Ethane, a natural gas liquid, is the primary feedstock in the production of ethylene. After extraction from a natural gas stream and separation from other natural gas liquids, it is transported by pipeline to an ethylene plant where, through a process of thermal cracking, ethane molecules are broken down and ethylene is produced. The ethylene may then be used to produce various petrochemical products.
The Alberta ethane-based petrochemical industry began in the 1970s. Dow and Dome Petroleum Limited proposed to construct and operate an ethylene plant, but the Alberta government decided instead to have a Crown corporation (now NOVA) construct the plant. That ethylene plant, known as E1, commenced operations at Joffre, Alberta in 1978. In 1984, NOVA opened a second plant, E2, at Joffre and, in 1994, Dow constructed its own ethylene plant at Fort Saskatchewan.
Dow and NOVA's Joint Venture
In 1997, NOVA and Union Carbide Canada Inc. ("UCC") entered into a joint venture to build a third ethylene plant, E3, at Joffre. Twelve project agreements set out the rights and obligations of the parties regarding the ownership, management, operation and use of E3, including the appointment of NOVA as Operator.
In August 1999, a merger between Dow and UCC was announced. Concerned about the merger's impact on the co-ownership of E3, NOVA's senior management formed a small working group to consider options. The group produced a "wish list" that included "minimize ethylene to Dow" and "back Dow out of E3".
In early 2001, E3 commenced commercial operations.
Dow's Claims against NOVA
In 2006, Dow sued NOVA, alleging that NOVA had failed to run E3 at full rates and had taken for itself, by a non-contractual scheme that NOVA called "ethane allocation", part of Dow's share of E3's ethylene production. NOVA counterclaimed, arguing that by the terms of one of the parties' agreements UCC (and therefore Dow) was prohibited from acquiring ethane in Western Canada for its own plant.
Justice Romaine's Decision
Following a trial that took place over much of a year, Justice Romaine awarded Dow $1.06 billion USD in damages. NOVA's counterclaim was dismissed.
In assessing Dow's claims, Justice Romaine found no justification in the parties' agreements for NOVA's ethane allocation scheme, by which NOVA had claimed a shortage of ethane, purported to ration ethane among E3 and its own two plants, and then allocated the total ethylene production among the three plants. Noting that several witnesses had conceded that NOVA had always had enough ethane to run E3 at full capacity, she found that NOVA's conduct amounted to conversion, and ruled that NOVA had failed to "act honestly and in good faith and in accordance with the provisions of the" agreements.
On Dow's complaint that NOVA had failed to run the plant at full rates, which Justice Romaine confirmed it had been required to do, she found that NOVA "ran E3, not to optimize production of Product, but to optimize NOVA's profit and to optimize the entire Joffre Site". Although NOVA argued at trial that various mechanical difficulties had limited production, Justice Romaine accepted the opinions of Dow's experts as to the real productive capability of E3, which she found had not been limited by any "uncommon mechanical constraints".
Relying on an exclusion of liability clause, NOVA argued that it had not acted with "Gross Negligence" or "Wilful Misconduct". Justice Romaine rejected the argument, ruling that NOVA's failure to run E3 to capacity and its conversion of Dow's E3 ethylene had been deliberate, or at best had shown an "utter disregard for harmful, foreseeable and avoidable consequences".
Other Noteworthy Aspects of the Decision
Since NOVA's conduct was continuing even at the time of trial, the parties agreed to conclude the initial damages period at the end of 2012. As part of her award, Justice Romaine accordingly directed a "top-up" of damages to cover the further period from January 2013 to the date of judgment, estimated to be several further hundreds of millions of dollars.
As the Court noted, an unusual aspect of the case was the extent of confidential information put into evidence – either business information of one party that, for competitive reasons, the other side should not be permitted to see, or information about E3 that should not be published to the industry at large. Portions of the trial evidence were accordingly treated as confidential and, prior to releasing her Reasons for Judgment, Justice Romaine allowed the parties to review a draft version and to propose redactions. The published Reasons contain a number of such redactions.
Bennett Jones LLP acted as lead trial counsel for Dow, with a team that included Blair Yorke-Slader Q.C., April Grosse, Russell Kruger, Desislava Docheva and Ciara Mackey, with assistance from Barry Crump and Scott Tallman of Burnet Duckworth & Palmer LLP and Randall Hofley, Kevin MacDonald and Micah Wood of Blakes LLP.
NOVA was represented by William Kenny Q.C., Sean Kelly and Fraser Schappert of Miller Thomson LLP, Colin Feasby and Tamara Prince of Osler, Hoskin & Harcourt LLP and Mary Comeau and Bryan Walker of Norton Rose Canada LLP.