SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL COURT

DATE: 20130121

RE: Stetson Oil & Gas Ltd., Plaintiff

AND:

Thomas Weisel Partners Canada Inc, Defendant

BEFORE: Newbould J.

COUNSEL:
William J. Burden, Arthur Hamilton and Lara Jackson, for the Plaintiff

Joseph Groia and Kellie Seaman, for the Defendant

HEARD: January 18, 2013

TRIAL RULING

[1] The defendant has moved to amend its statement of defence and counterclaim after the first week of trial. The issues first arose during Mr. Groia's opening and continued further during the evidence of Mr. Bharti. The plaintiff opposes the amendments for the most part. It does not oppose the deletion of paragraphs 15 and 16 but reserves its right to raise those paragraphs when the issue of costs of the trial is dealt with.

[2] The pleading of material facts sought to be added in the defence which are opposed by the defendant relate to events that occurred following the refusal by the defendant to complete the purchase of the shares of the plaintiff. The plaintiff contends that the changes do not raise any tenable defence. An amendment that does not raise a tenable claim or defence should not be permitted. See Zurich Indemnity Co, of Canada v. Matthews (2005), 2005 14130 (ON CA), 13 CPC (6th) 221 (Ont. C.A.), at para. 14. The plaintiff does not raise prejudice as a ground to oppose the amendments and does not want an adjournment of the trial.

[3] Paragraphs 18 and 19 of the proposed amended defence plead the Canaccord agreement dated August 28, 2008 and the issuance of preference shares by the plaintiff pursuant to that agreement. I do not see these paragraphs as being an issue. They plead facts that where led in evidence by the plaintiff, and those paragraphs are allowed.

[4] Paragraph 25 of the proposed amended defence pleads that the plaintiff is not entitled to specific performance for four reasons, being (i) Stetson’s claim is not for a unique or non-monetary benefit (ii) such relief would not be equitable (iii) the rules of mutuality and (iv) Stetson has made specific performance impossible. Although the statement of claim claims an order for specific performance of the agreement between the plaintiff and the defendant and further or in the alternative damages for breach of contract, the plaintiff now takes the position that it is not entitled to specific performance, and in fact never was. In light of the position now being taken by the plaintiff, I see no basis for not permitting paragraph 25 of the proposed amended defence, and I did not understand the plaintiff to be opposing its addition.

[5] Paragraph 23 of the amended defence pleads that Stetson acquired another corporation named Rhea Resources Inc. in December 2008 in which one common share of Rhea Resources was exchanged for 0.7 of a share of Stetson. Paragraph 24 pleads that on February 27, 2012 Stetson consolidated its shares by exchanging one new common share for every eleven outstanding shares and that on the date of the announcement the shares were trading at $0.33 per share. One of the reasons raised in paragraph 25 of the proposed defence that the plaintiff is not entitled to specific performance is that the plaintiff has made specific performance impossible. While particulars of that allegation are not provided in paragraph 25, Mr. Groia in argument said that the facts pleaded in paragraphs 23 and 24 are relied upon to support that pleading. In light of paragraph 25 being permitted to be added to the defence, I see no reason not to permit paragraphs 23 and 24 to be added as well.

[6] The gravamen of what the plaintiff complains of in the proposed amendments relates to a pleading dealing with a transaction entered into by the plaintiff with Red Willow Great Plains LLC ("Red Willow") and what occurred under that transaction. The proposed amendments in issue are:

20. In October 2008, Stetson partnered in the Bakken project with Red Willow Great Plains, LLC ("Red Willow") by assigning 50% of its oil and gas mineral rights in the Allotment Lands and 60% of its rights in the Tribal Lands to Red Willow. In exchange, Red Willow agreed to pay for Stetson's first $3,500,000 of drilling costs and also to pay for its share of all land, drilling and exploration costs, to provide its considerable technical expertise and to act as the operator of the programme.

21. In 2009, Stetson, following a thorough exploration programme, advised its shareholders that there are no economic reserves in the Bakken project. Stetson allowed its oil and gas mineral leases in the Lands to lapse in 2012. There were, in fact, no economic reserves in Stetson's Bakken project.

22. As described in Stetson's quarterly filings, sometime in 2011, as announced in 2012, Stetson wrote off the value of its oil and gas leases and turned the focus of its business to other areas and developments.

23. 21. Further, TWP states that if Stetson suffered any damages or losses, which is denied, Stetson has failed to adequately mitigate completely mitigated its damages. The date for assessment of any damages is the date of trial as Stetson has never accepted the Defendant’s alleged repudiation of the July 11 Letter.

[7] Mr. Groia relies on the principle that when a party to a contract repudiates the contract by failing to perform, the innocent party may accept the repudiation and treat the agreement as being at an end or decline to accept the repudiation and continue to insist on performance. He contends that as the plaintiff has claimed specific performance in its statement of claim and has never withdrawn it, it has kept the agreement alive and thus has postponed the date of the breach to the date of the trial. The defendant relies upon the statements of Sopinka J. in Semelhago v. Paramadevan, 1996 209 (SCC), [1996] 2 S.C.R. 415 at para. 15, including a passage adopted from MacGregor on Damages that states:

Where a party to a contract repudiates it, the other party has an option to accept or not to accept the repudiation. If he does not accept it there is still no breach of contract, and the contract subsists for the benefit of both parties and no need to mitigate arises. On the other hand, if the repudiation is accepted this results in an anticipatory breach of contract in respect of which suit can be brought at once for damages.

Thus, the claim for specific performance can be seen as reviving the contract to the extent that the defendant who has failed to perform can avoid a breach if, at any time up to the date of judgment, performance is tendered. In this way, a claim for specific performance has the effect of postponing the date of breach.

[8] Mr. Groia's contention is that in this case the plaintiff did not abandon its claim for specific performance before the trial and therefore if there was a breach of the agreement by the defendant, the date of the assessment of damages arising from the breach must be taken to be the date of trial. He relies upon a case of Inmet Mining Corp. v. Homestake Canada Inc. (2002) 2002 BCSC 61, 99 B.C.L.R. 93d) 93 in which Satanove J. assessed damages for breach of an agreement to purchase a gold mine as at the date of trial.

[9] The statement of defence originally pleaded that if the plaintiff suffered any damages, it failed to adequately mitigate them. It now seeks in paragraph 27 to claim that the plaintiff completely mitigated its damages. While particulars of that allegation are not provided in the new pleading, Mr. Groia said that the defendant relies upon (i) the Canaccord agreement, (ii) the Red Willow agreement under which Red Willow is alleged to have provided more money than claimed in this case and provided technical support and expertise far greater than the plaintiff would have had if it performed the work by itself and (iii) an allegation that the property had no commercial oil (no "prospectivity").

[10] Mr. Groia said that if the new paragraphs are allowed to be pleaded, the defendant will lead geological evidence that there was no commercial prospect that the property under lease would have been profitable. Thus the defendant will seek to establish that even if it had paid the purchase price to the plaintiff for shares of the plaintiff, the plaintiff would have spent the money and ended up with nothing and therefore suffered no damages. It will also claim that the plaintiff mitigated its damages partly by obtaining the covenants from Red Willow to operate the property and spend money in an amount greater than the amount claimed by the plaintiff.

[11] Mr. Burden contends that the principles relied upon by Mr. Groia and the Inmet case are not applicable as they arise only if a claim for specific performance is available on the facts of the case but for some particular reason is not granted. In Inmet, the plaintiff vendor of the mine claimed specific performance and alternatively damages. The trial judge held the mine to be a unique property, thus enabling the plaintiff to be entitled to specific performance or actual damages instead. The trial judge held that as it was not practical or sensible to force the parties to complete the transaction, equitable damages should be awarded and that because the plaintiff had kept its specific performance claim alive until trial, damages should be assessed as of the date of trial.

[12] Mr. Burden contends that there is nothing unique about the shares of the plaintiff that were to be sold to the defendant that could not be compensated in damages and thus specific performance is not available. The defendant can hardly quarrel with that position of the plaintiff, even though it may be late in coming, in light of paragraph 25 of the amended defence which pleads that specific performance is not available, one of the reasons being that the claim of the plaintiff is not for a unique or non-monetary benefit.

[13] Equitable damages may be awarded if a claim is available for specific performance but for some reason is not granted, such as in Inmet. As the parties are in agreement that specific performance is not available to the plaintiff, any claim for damages by the plaintiff would not be for equitable damages in lieu of specific performance but rather would be for common law damages. While Mr. Groia made an assertion that it was not clear from the statement of claim that common law damages were being claimed for breach of contract, in my view the statement of claim can fairly be read to include such a claim. See paragraphs 1 (b), 12 and 13.

[14] Losses recoverable for breach of contract are limited to those that will put the injured party in the same position as he or she would have been in had the wrongdoer performed the contract. See Baud Corp., N.V. v. Brook, 1978 16 (SCC), [1979] 1 S.C.R. 633 at para. 18. What are the damages that a seller of an asset may be entitled to on a breach by the purchaser? The authorities make clear that the seller is entitled to the difference between the contract price and the market price subject to the obligation of the seller to take reasonable steps to mitigate the loss by selling on the market. See S.M. Waddams, The Law of Damages, Looseleaf, (Canada Law Book, November 2012) at para. 13.110. See also Jamal v. Moola Dawood, Sons & Co., [1916] 1 A.C. 175 (P.C.).

[15] Thus what the plaintiff may have done with its money had the defendant paid the purchase price, or what the plaintiff may have done with money obtained from selling the shares in the marketplace in mitigation of its damages, is not relevant. Whether the plaintiff would hit a gusher on the property or drilled only barren wells with the money it received is irrelevant. What is relevant is the market price of the shares at the date of the breach. On that basis, what occurred under the Red Willow agreement is not relevant.

[16] Even if equitable damages were permitted in this case, which in my view they are not, the principles for measuring them would be the same as for common law damages. See Ryan v. Kaukab (2011), 6 C. L.R. (4th) 247 at paras. 206 and 207 and Semelhago at para. 16.

[17] The normal rule is that the damages for breach of a contract are assessed as of the date of the breach. See Jamal v. Moola Dawood, Sons & Co at page 179. See also Treaty Group Inc. v. Drake International Inc. (2007), 86 O.R. (3d) (C.A.) at paras. 22 and 23.

[18] However this rule is not inflexible. In Johnson v. Agnew, [1980] A.C. 367, adopted in Semelhago, supra, Lord Wilberforce stated:

(2) The general principle for the assessment of damages is compensatory, i.e., that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach -- a principle recognised and embodied in section 51 of the Sale of Goods Act 1893. But this is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances.

[19] In Red Back Mining Inc. v. Geyser Ltd. 2006 BCSC 1652, [2007] 1 W.W.R. 568, a claim for damages was made as a result of the failure of the defendant to purchase all of the shares of a mining company owned by the plaintiff. No claim for specific performance was made. The shares of the mining company declined drastically after the defendant’s failure to purchase them. The defendant argued that the normal rule that damages were to be assessed as of the day the breach should be applied. The trial judge did not accept that position but rather assessed the damages as of the date of trial in order that the innocent plaintiff would be properly compensated.

[20] I do not see damages being assessed as of the date of trial in this case as being of any assistance to the defendant. The plaintiff's case is that it is entitled to the difference between the 55 cents per share agreed to be paid by the defendant on the underwriting and 20 cents per share paid by Canaccord on its underwriting relatively shortly thereafter. The evidence in this case adduced by the defendant is that at the date of trial, shares of the plaintiff, after being consolidated 11 to 1 in 2012, were trading at somewhere around 12 cents, which would amount to 1.09 cents per share before consolidation. The preference shares issued in connection with the Canaccord underwriting under which the benefits of the litigation will flow to the common shareholders holding the preference shares are trading at four cents per share. Together, these amounts are far less than the 20 cents per share paid by Canaccord. Thus if the damages are assessed at the date of trial, the plaintiff's damages will be greater than if assessed at the time of the Canaccord underwriting. Mr. Burden stated that the plaintiff recognizes that, and for that reason would be happy to have damages assessed at the date of trial, but also recognizes that there is no legitimate claim for it to have the damages assessed as of the date of trial.

[21] Thus even if the defendant is right that the maintenance of the claim for specific performance up to the trial establishes the date of breach as the date of trial, which appears problematical in that the defendant claims in paragraph 25 of the amended defence that the plaintiff has made specific performance impossible, and according to Mr. Groia relies for that in part on the issuance by the plaintiff of preference shares in 2008, assessing the damages as of the date of trial would assist the plaintiff rather than the defendant. This is not a case in which the plaintiff is pursuing a claim for lost profits.

[22] While Mr. Groia stated in argument that the Red Willow transaction and its results were support for the proposed paragraph 27 that the plaintiff had completely mitigated its damages, I do not see how that could be considered to be mitigation. Mr. Groia stated that the Canaccord transaction was one of the grounds for the allegation that the plaintiff had mitigated its damages, a position also taken by the plaintiff. Moreover, the Red Willow transaction did not involve any sale of shares to Red Willow, but rather was a participation agreement for the development of the leases in question. However, even if the Red Willow transaction and its consequences could be considered steps taken in mitigation, I do not see how that assists the defendant. Those steps resulted in no financial recovery to the plaintiff and thus there would be nothing to deduct from the damages otherwise to be paid to the plaintiff.

[23] In the circumstances, I do not think that paragraphs 20 to 22 and 27 of the proposed amended statement defence raise tenable defences and the motion to add them to the defence is dismissed.

Newbould J.

DATE: January 21, 2013