CITATION: Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONSC 692

COURT FILE NO.: CV-10665-00CL

DATE: 20150226

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Energy Fundamentals Group Inc.

Applicant

– and –

Veresen Inc.

Respondent

Orestes Pasparakis, Rahool P. Agarwal and Andrea Campbell for the Applicant

Jeffrey S. Leon and Derek J. Bell for the Respondent

HEARD: January 23, 2015

penny j.

Overview

[1] This is an application for a declaration that EFG’s option right to acquire an interest in an energy infrastructure project in Jordan Cove, Oregon, has not been terminated. EFG also seeks an order that Veresen provide, as an incident to the option right, sufficient financial information about the project to enable EFG to decide:

(a) what the option is worth; and

(b) to confirm Veresen’s calculation of the exercise price.

The Issues

[2] There are two issues:

(1) whether the option is no longer valid because the project was terminated; and

(2) if the option remains valid, whether, and under what conditions, Veresen is required to provide financial information about the project to EFG as an incident to the exercise of EFG’s rights under the option.

[3] For the reasons that follow, I declare that the option has not been terminated and order Veresen to provide sufficient information:

(a) to enable EFG to determine what the option is worth; and

(b) to confirm Veresen’s calculation of the exercise price of the option.

Background

[4] The applicant, Energy Fundamentals Group Inc. (EFG), is an Ontario corporation founded in 2004 by three business executives. There were two aspects to its business:

(1) acting as a financial advisor, providing investment banking services in the utility and energy infrastructure sectors; and

(2) acting as a principal, acquiring and/or operating energy infrastructure assets.

[5] Veresen is a public company incorporated in Alberta whose shares are listed on the Toronto Stock Exchange. Prior to January 1, 2011, Veresen operated as a limited partnership under the name Fort Chicago Energy Partners LP. Veresen is engaged in three principal businesses:

(1) a pipeline transportation business;

(2) a midstream business; and

(3) a power business.

In addition, Veresen is engaged in developing a number of infrastructure projects, including the Jordan Cove liquid natural gas (LNG) terminal which is the subject matter of this application.

[6] In 2005, EFG was approached by a U.S. energy asset developer, Energy Projects Development LLC (the Developer). Jordan Cove, which is a port on the south coast of Oregon, was being developed as an LNG import facility, which would receive LNG from overseas markets, convert it into a gaseous state and distribute it through natural gas pipelines to markets within North America. Market conditions at that time supported this plan: natural gas prices were relatively high and long-term North American natural gas supply was considered to be insufficient to meet domestic demand.

[7] Mr. Karry, the president and CEO of EFG, had a long-standing relationship with the Developer. The Developer approached Mr. Karry seeking EFG’s assistance in locating a suitable development partner to invest in the proposed LNG terminal to be constructed at Jordan Cove.

[8] EFG’s principals had worked on a number of advisory roles for Veresen dating back to 2000 and were aware of Veresen’s desire to acquire and operate energy infrastructure assets, including LNG assets. EFG also knew that Veresen had been unable to acquire fully developed energy infrastructure assets and that Veresen was, in 2005, beginning to shift its focus to early-stage development projects. EFG thought the proposed LNG terminal would be an interesting investment opportunity for Veresen. In February 2005, EFG introduced Veresen to the Jordan Cove development. Veresen decided to pursue the investment opportunity.

The Formation of the Contract

[9] On April 1, 2005, in a non-binding letter agreement, Veresen engaged EFG to work on the project through to commissioning. The letter acknowledged that, due to the early stage of this project, there would be significant uncertainty about how the investment would ultimately unfold. The letter said:

While this stage of development of the project is much earlier than others we have explored together, the fundamental due diligence questions remain the same, including permitting, supply, market demand, construction costs and investment economics. Because of the early stage nature of this investment, we do not expect that definitive answers will be available in all of these areas…

[10] The letter contemplated that EFG would provide:

opportunity origination and initial screening

commercial assistance in due diligence review

commercial assistance in developing and negotiating equity funding, and

other assistance as requested by Veresen.

[11] In consideration for its services, it was contemplated in the letter that EFG would be provided with an opportunity to realize value over time related to successful development of the project through the investment of capital into the project with Veresen. This would include:

a success fee of US $1 million payable upon project commissioning, and

the right to acquire up to 20% of Veresen’s equity interest in the development, to be exercised at EFG’s election.

[12] Between April and July of 2005, EFG assisted Veresen in acquiring the Jordan Cove infrastructure assets.

[13] EFG helped Veresen finalize a letter of intent with the Developer which served as a basis for their discussions. Thereafter, EFG worked with Veresen to negotiate the terms of its commercial arrangements with the Developer. During this period of time, the scope of the development grew significantly. The terminal’s capacity was quadrupled and the project’s reach was expanded to include the Pacific Northwest and California.

[14] The discussions between Veresen and the Developer culminated on July 12, 2005 with the execution of a limited partnership agreement (LPA) and the formation of the Jordan Cove Energy Project LP (the Partnership).

[15] Through the LPA, Veresen acquired a controlling preferential ownership position in the Partnership, which in turn owned the Jordan Cove LNG assets.

[16] Under the terms of the LPA, the Partnership is constituted as a special purpose vehicle whose business is restricted to the pursuit of the Jordan Cove Energy Project. The Jordan Cove Energy Project (or Project) is defined to mean:

that project to be undertaken by the Partnership including the development, design, construction, ownership and or leasing (or combination thereof) and operation of a liquid natural gas terminal, liquid natural gas storage tanks, a regassification [sic] facility, and integrated power facility, gas pipelines and related facilities near North Bend Oregon.

[17] The LPA also specifically anticipated EFG’s right to exercise an option to acquire an equity position in the Project. Section 2.3 of Schedule G to the LPA expressly provides for the transfer of up to 20% of Veresen’s equity interest in the Partnership to EFG.

[18] Concurrent with Veresen’s successful acquisition of a controlling interest in the Partnership (and, therefore, the Jordan Cove LNG terminal project), EFG and Veresen finalized their arrangements by signing a binding Letter Agreement dated July 27, 2005.

[19] Under the Letter Agreement, EFG agreed to provide customary investment banking-type services to Veresen in the latter’s capacity as an owner and investor in the Project through to Project commissioning. Such services included:

opportunity origination and initial screening

commercial assistance in due diligence review

commercial assistance in developing and negotiating equity funding providing such other assistance as Veresen may need, and

at Veresen’s request, attendance at Veresen’s board meetings or other meetings in respect of the Project.

[20] In consideration for these services, EFG was provided an opportunity to realize value over time related to the successful development of the Project through the investment of capital into the Project. Specifically, EFG's rights entitled it to:

a success fee of US $1 million, and

at EFG’s option, to be exercised prior to or within five days of Project commissioning, the right to invest up to 20% of the development and construction capital contributed or to be contributed by Veresen into the Project (the Option).

[21] The Letter Agreement specifies that development and construction capital means “all of the development equity contributed by [Veresen] to the date of EFG’s election, together with an amount equal to the development equity return [Veresen] is entitled to receive on such development equity from Jordan Cove Energy Project LP as set forth in the limited partnership agreement.”

[22] The Letter Agreement also provides that if Veresen elected not to proceed with the Project, EFG would earn no success fee or Option rights but would have the right to pursue a position in the Project on terms to be negotiated with Veresen.

Developments After The Contract was Formed

[23] In its July 28, 2005 press release, Veresen announced that it had taken a controlling preferential ownership position in Jordan Cove Energy Project LP which planned to develop an LNG import terminal and storage facility in Oregon. The press release also stated that EFG acted as an advisor to Veresen in this transaction and “holds the deferred right to become an equity participant” in the Project.

[24] Veresen also disclosed the fact that EFG had been granted the Option in its 2005 annual information form (AIF) and continue to disclose the EFG Option in its annual AIF for the next seven years.

[25] In September 2007 the Partnership applied to the Federal Energy Regulatory Commission (FERC) for authorization to construct and operate the proposed LNG import terminal. The FERC granted that authorization in December 2009.

[26] However, during the same period, the U.S. natural gas market began to shift as “fracking” and horizontal drilling technology developed to a point that made it economically feasible to withdraw shale gas from U.S. production properties. Domestic production in shale gas increased significantly in the U.S. with the result that:

(a) U.S. production could meet domestic consumption needs, i.e., there was no longer a need to import LNG from overseas markets; and

(b) North American natural gas prices dropped significantly.

[27] As a result of this market shift, it became apparent by 2011 that the importation of LNG would no longer be profitable. Accordingly, the Partnership reassessed its development options to determine how, if at all, it could develop the Project infrastructure to respond to market conditions.

[28] By the spring of 2011, the Partnership began to consider modifying the Project to export LNG. This was disclosed in a Veresen May 12, 2011 press release, which stated:

Given current market conditions, Veresen is exploring alternative uses for the proposed Jordan Cove Energy Project and Pacific connector gas pipeline. A number of natural gas producers have expressed strong interest in converting Jordan Cove from an import facility into a liquefaction and LNG export facility.

[29] In September 2011, the Partnership applied to the U.S. Department of Energy (DOE) for authorization to export LNG to free trade agreement countries. In that application, the Partnership stated that it had developed modified plans for the terminal to also be an export facility. This was followed by a Veresen press release of October 27, 2011 in which it was announced that the DOE application was part of initial activities required to support a dual use LNG export/import facility and affirmed that market factors and contractual commitments would ultimately drive the direction of the Project.

[30] By February 2012, the Partnership decided to proceed with the export facility but to delay the construction of an import facility pending future market developments.

[31] The Partnership made application to the FERC seeking a pre-filing review of the proposed export facility. That application states:

The Partnership does not intend to construct the facilities specific to the importation of LNG at this time, but would add the equipment necessary for import of LNG should the natural gas market conditions change in the future.

[32] Upon receipt of the 2012 pre-filing application, the FERC unilaterally vacated its previous order authorizing the construction of an import facility. The FERC was of the view that the original authorization was no longer current, stating:

Given that the Partnership no longer intends to implement the December 17 order’s authorization to construct and operate an import terminal, we will vacate that authorization.

[33] By May 2013, the Partnership had submitted to the FERC an application for authorization to construct and operate an LNG export facility. That application affirmed that the Partnership would retain the capacity within the LNG terminal design to add import and regasification facilities at a later date.

[34] In September 2013 Veresen applied to the National Energy Board in Canada, seeking authorization to export natural gas from Canada to the U.S. for ultimate export through the Jordan Cove terminal.

[35] In March 2014, the Partnership’s application to the DOE for authorization to export LNG was granted.

[36] Mr. Karry sat as EFG’s representative on the Board of Management of the Partnership from 2005 until 2014, when he was removed without notice. It was admitted, in cross-examination of Mr. Wadey, Veresen’s deponent, that Mr. Karry was removed after EFG started “to make noise about their rights.”

[37] There is little evidence of communications between EFG and Veresen from 2005 to 2011. Although EFG performed few if any additional services after Veresen’s initial agreement to acquire a controlling interest in the Project closed, is also admitted by Veresen that EFG was never asked to provide any additional services. There is no evidence or allegation that EFG failed to perform any of its obligations under the Letter Agreement.

[38] In November 2011, Mr. Wadey had communications with another principal of EFG, Mr. Walker, about the Option. Those communications took place after EFG sent a letter to Veresen seeking confirmation of its continuing rights under the Option. Mr. Wadey did not dispute that the Option could be exercised with respect to the proposed export facility but argued that the Option was “out of the money” given the cost increases. Mr. Wadey asked for guidance from Mr. Walker on what it would take to “eliminate” the Option. Mr. Walker replied that EFG would be open to a buyout proposal, but no such proposal was ever received. Even after that discussion, Veresen’s AIF for the year ended December 31, 2011 continued to note the existence of the Option.

[39] It was not until August 11, 2014, after EFG had raised the prospect of litigation, that Veresen took the position that EFG’s rights under the Option “no longer exist” because “the current LNG export terminal project is a brand-new project.”

1. Was the Project Terminated?

Principles of Contract Interpretation

[40] A commercial contract is to be interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense and that avoids a commercial absurdity.

Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254 at para. 24.

[41] The Supreme Court of Canada also considered the principles of contract interpretation in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. The overriding concern is to determine the intent of the parties. To do so the 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 (para. 47).

[42] While the surrounding circumstances will be considered in interpreting the terms of the contract, they must never be allowed to overwhelm the words of the agreement. The goal of examining such evidence is to deepen the decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. Interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (para. 57).

[43] While the nature of the evidence to be considered as surrounding circumstances varies from case to case, it should consist only of objective evidence of the background facts at the time of the execution of the contract. This involves knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting (para. 58).

[44] The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing. The rule precludes, among other things, evidence of the subjective intentions of the parties. The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack or vary the terms of a written contract (para. 59).

[45] Both parties relied extensively on post-contractual conduct and events. At my request, the parties submitted a joint memorandum of law addressing the admissibility and relevance of post-contractual conduct in contract interpretation.

[46] The gist of that memorandum is that in cases of ambiguity (that is, where there are two or more reasonable interpretations of the contract) evidence of parties’ subsequent conduct can assist the court by providing insight into how the parties viewed the contract at the time it was signed.

[47] As the Court of Appeal explained in Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 CanLII 438 (ON CA), 24 O.R. (3d) 97, [1995] O.J. No. 1609 at para. 21:

Subsequent conduct may be used to interpret a written agreement because “it may be helpful in showing what meaning the parties attached to the document after its execution, and this in turn may suggest that they took the same view at an earlier date”: [S.M. Waddams, The Law of Contracts, 3rd ed. (1993), at para. 323.] Often, as Thompson J. wrote in Bank of Montreal v. University of Saskatchewan…: “there is no better way of determining what the parties intended than to look to what they did under it.”

See also Canadian National Railways v. Canadian Pacific Ltd. (1979), 1978 CanLII 1975 (BC CA), 95 D.L.R. (3d) 242 (B.C.C.A.) at p. 262 and Chippewas of Mnjikaning First Nation v. Ontario (Minister of Native Affairs), 2010 ONCA 47 at para. 162.

Argument and Analysis

[48] Veresen argues that the Option is tied to the Jordan Cove Energy Project as it existed in 2005. The Letter Agreement does not define the Jordan Cove Energy Project but the contemporaneous LPA does. Under the LPA, the Jordan Cove Energy Project means a project that includes a regasification facility.

[49] Veresen argues that, by defining the Project as including a “regasification facility,” it is clear that the Project was a LNG import facility. This is so because only in the import scenario is it necessary to turn LNG into natural gas capable of flowing through a natural gas pipeline. Veresen argues that, as of April 16, 2012, when the FERC vacated its previous order authorizing the construction of an import facility, the Project became an LNG export facility and was, therefore, a brand-new project not covered by the Option. There was, and is no longer, any intention to construct a regasification facility. Rather, the intention is to construct a liquefaction facility (that is, a facility to turn natural gas into LNG for export).

[50] Under the Letter Agreement, EFG’s Option must be exercised prior to or within five days of Project commissioning. Project commissioning is defined as “closing of the financing for the construction” of the Jordan Cove LNG terminal.

[51] Veresen argues that Project commissioning for the import project will never occur because that Project has ceased to exist. Further, EFG’s Option is the right to invest up to 20% of the development and construction capital contributed or to be contributed by Veresen into “the Project.” As “the Project” has ceased to exist, there are no development and construction capital costs for “the Project” to which EFG could contribute.

[52] In support of this position, Veresen points to eight main differences between the import project as conceived in 2005 and the current project as of 2014:

(1) The liquefaction of natural gas for export as LNG requires larger facilities and a great deal more electrical power. As a result, more land (an additional 200 acres) was acquired to accommodate the necessary liquefaction and power plant facilities for an export terminal.

(2) The import project required a power plant sufficient to generate 37MW. The export liquefaction plant requires a power plant capable of generating 420MW.

(3) Liquefaction, not regasification, facilities must be constructed.

(4) The 2014 export terminal is estimated to require capital investment in excess of $5 billion, as opposed to the 2005 import facility which was anticipated to require capital investment slightly in excess of $1 billion. The components of the liquefaction facility represent by far the largest portion of this increase.

(5) Regulatory approvals are different as between the import of LNG and the export of natural gas. The import approval obtained from the FERC was canceled and a new application must be brought for the construction of an export terminal.

(6) The import facility would have involved finding sellers of LNG, bringing LNG to Jordan Cove, finding purchasers of natural gas in domestic markets and finding distributors of the re-gasified natural gas to move the gas to the purchasers. The export facility will require finding sellers of natural gas in the U.S. or Canada, distributors to move the gas from point-of-purchase to Jordan Cove and finding purchasers of LNG in foreign markets.

(7) The export facility will require extensive supplies of natural gas coming to the facility whereas the import facility contemplated movement of re-gasified LNG away from the terminal.

(8) Construction and operation of an export terminal involves different operational and supervisory requirements.

The “Project”

[53] I do not find Veresen’s argument based on the definition of Jordan Cove Energy Project in the LPA persuasive. This argument rests solely on the inclusion of the words “regasification facility” in that definition. The remaining elements set out in the definition, however, remain part of the Project:

(a) a liquid natural gas terminal;

(b) liquid natural gas storage tanks;

(c) an integrated power facility;

(d) gas pipelines; and

(e) related facilities near North Bend, Oregon.

There is no doubt the Project has changed. The differences pointed out by Veresen (which, although enumerated as eight, really boil down to the liquefaction facility) are not immaterial but the similarities are not immaterial either. In my view, in its “pith and substance,” the Project was and is still an LNG ship terminal. It will still be connected by pipeline to the Pacific Northwest. It will still store LNG in tanks. It will still have a power facility.

[54] The export facility is not a “brand new” or a “completely different” project. The Project continues to be carried on by the same corporate entity, at the same location, under the same legal structure, governed by the same limited partnership agreement, with the same project manager, with the same project website, using the same office and with the same lawyers. The additional land was acquired under an option that existed in 2005. The Project is still an LNG terminal which will handle LNG. The Project is also using the same financial model. In addition, at Veresen’s request, EFG’s representative occupied a position on the Board of Managers of the general partner until the eve of this litigation.

[55] The LPA itself also stipulates that while the business of the Partnership consists of activities relating directly or indirectly to the Project, the Partnership “may also engage in such other necessary or related activities as the General Partner deems advisable in order to carry on the business of the Partnership as aforesaid.”

[56] If Veresen’s argument based on the limited definition of the Project were correct, such that the business of the Partnership is restricted to an import facility only, then the Partnership could not lawfully pursue an export facility. The Partnership is, however, pursuing an export facility. Moreover, it has made express representations to its regulatory authorities to the effect that the proposed export facility is within the authorized powers of the Partnership. The Partnership’s counsel’s legal opinion to the FERC states:

the construction and operation of the Proposed Terminal for the export of natural gas is within the authorized powers of [the Partnership].

[57] It must be remembered that EFG was not paid for the introduction it made to the Developer and for bringing Veresen to this opportunity. Instead, EFG was granted the right to buy an interest in the venture that it helped Veresen to acquire, namely, the Jordan Cove LNG terminal assets and opportunity. The Letter Agreement expressly states that EFG’s compensation was structured to provide it with “an opportunity to realize value over time related to successful development of the project.” In 2005, the Project was at an early stage of development. Financially, the size of the project quadrupled over the period of time leading up to the finalization of the LPA and the Letter Agreement. I find that the parties understood that the Project would change in response to prevailing economic and market conditions. Veresen itself concedes that the Project “evolved” over time.

[58] The financial structure of the Option is reflective of this as well. The Option is not for a fixed price. The Option makes EFG’s exercise price proportionate to Veresen’s actual, fully loaded costs (including a markup to reflect Veresen’s cost of capital). As EFG stated in its factum, “the greater the cost to Veresen and the greater the time to complete the development, the greater EFG’s exercise price.”

[59] Veresen’s argument that this is a brand-new project because the capital cost has grown to over $5 billion is answered by this same provision of the Letter Agreement. EFG is not getting, nor can it get, a free ride. To exercise its right to acquire up to 20% of Veresen’s interest, EFG must pay the fully loaded cost to Veresen of that interest. Once it has acquired up to 20% of Veresen’s interest, EFG will become subject to any ongoing obligations under the LPA to contribute its proportionate share of the ongoing development costs by way of additional capital contributions.

Post-contract Conduct

[60] Veresen’s post-contract conduct is, in my view, overwhelmingly supportive of the continued existence of the Option notwithstanding the significant evolution of the Project from a $1 billion import facility to a $5 billion export facility.

[61] The Letter Agreement deals with project termination. It says that if the Project does not proceed, “EFG will be entitled to pursue such other opportunities in relation to the Project as it sees fit.” The Letter Agreement also provides that if Veresen elects not to proceed with the Project, EFG “would have the right to pursue a position in the Project on terms to be negotiated” with Veresen.

[62] Prior to August 2014, no notice of termination was ever provided to EFG. EFG has never been provided with the chance “to pursue other opportunities” with respect to the Jordan Cove LNG terminal nor to exercise “the right to pursue a position in” the Jordan Cove LNG terminal on terms to be negotiated. If, as Veresen says, the Project was terminated in 2012 by the FERC order vacating the 2009 approval for the import facility, the Letter Agreement would have required Veresen to advise EFG of this fact and to permit EFG the opportunity to pursue a new position involving the assets acquired in 2005. The fact that Veresen did not do so is further evidence that Veresen understood the export facility was not a “new” project but merely an evolution of the energy infrastructure development opportunity that EFG brought to Veresen in 2005.

[63] In addition, since the Letter Agreement was signed in July 2005, Veresen has repeatedly acknowledged the existence of EFG’s rights under the Option. Veresen is a public company. Its AIFs stated, from 2005 to year end 2011, that “Energy Fundamentals Group Inc. acted as an advisor to the Partnership in this acquisition and was granted a deferred right to become an equity participant in the Jordan Cove Energy Project.”

[64] Veresen’s argument that the export facility is brand-new or completely different is also inconsistent with many of its own public statements. In numerous public disclosure documents published between 2011 and 2014, Veresen described the development of the export terminal as an “alternative use.” In Veresen’s 2013 AIF, for example, Veresen stated:

Due to changes in North America’s natural gas supply capability, resulting from the discovery and production of shale gas, the facilities were not constructed and we began exploring alternative uses for the planned Jordan Cove terminal and the Pacific Connector.

[65] In the Partnership’s 2011 application to the U.S. Department of Energy, it represented to the DOE that it had developed “modified plans for the terminal to also be an export facility.” In its 2013 application to the National Energy Board of Canada for a natural gas export license, the Project was described as having been “under development since 2005, initially as an import facility and subsequently as an export facility.”

[66] In a 2012 pre-filing letter to the FERC, the Partnership stated that:

Given current natural gas market conditions, JCEP [Jordan Cove Energy Project] is seeking authorization to site, construct, and operate the Liquefaction Project on this site using the facilities authorized in the [2009] FERC Order, as well as some additional facilities as described in the following section. JCEP has retained the capability within the LNG terminal design to add the equipment necessary for import of LNG. JCEP does not intend to construct the facilities specific to importation of LNG at this time, but would add the equipment necessary for import of LNG should the natural gas market conditions change in the future. [emphasis added]

Similar language was used in the Partnership’s 2013 application to the FERC.

[67] In a 2012 Q & A for Veresen shareholders and analysts, Mr. White, the former CEO of Veresen, was asked to provide a bit more “colour” about the Jordan Cove LNG terminal. He replied by saying that they were “continuing to discuss that project with a number of international gas players… for an export terminal” and that they had “commenced the FERC approval process.” He said:

That means we have to go back and redo a lot of the permit work that we did previously about 3 or 4 years ago. But large parts of the project remain the same, so it shouldn’t be much of a problem. But the port facilities, the tankage and that sort of thing remains exactly as we designed and permitted them for an import terminal. So we’ve got a lot of work to do. But we see most probably about late next year, before we come out the back end of the permitting process.

[68] Finally, the Partnership’s U.S. regulatory counsel publicly describe the Jordan Cove LNG project as a single project that was originally conceived as an LNG import terminal. Their website says that “Dickstein Shapiro is now representing Jordan Cove before FERC and the U.S. Department of Energy in connection with Jordan Cove’s proposed modification of the project to permit the export as opposed to the import of LNG.”

[69] Veresen also seeks to differentiate the project as conceived in 2005 from what it is today on the basis that EFG did not assist with or participate in a number of recent steps taken to pursue the Project. These steps included the regulatory applications to export LNG, locating natural gas supply for export and the redesign of responsibilities for changed operational and supervisory requirements.

[70] In my view, Veresen’s non-participation in these activities is not relevant. This is because it was never contemplated that EFG would assist with any of these activities. EFG’s role was to source the initial investment opportunity, assist with the acquisition and provide investment banking services when requested. It is common ground that no services have ever been requested of EFG since 2005. Responsibility for the development of the Project was that of the Partnership, not EFG. This is confirmed by the language of the Letter Agreement itself, which stipulates that the Project may seek additional services from EFG but these would be subject to a separate agreement, to be negotiated, delineating the scope of the services and the remuneration.

[71] For all these reasons, I grant the declaration sought by EFG that the Option has not terminated and that it applies to the current Jordan Cove LNG terminal Project.

2. Disclosure of Confidential Financial Information

[72] Assuming EFG has a valid Option, EFG also seeks disclosure of information needed:

(a) to determine whether to exercise the Option; and

(b) to satisfy itself that the Option exercise price has been calculated correctly.

[73] EFG concedes that the Letter Agreement does not specifically address EFG’s right to disclosure of financial information necessary to answer these questions. EFG argues, however, that disclosure of the information sought is necessary to give business efficacy to the agreement and should, therefore, be implied.

[74] Simply put, EFG wants to analyze for itself whether the “value” of the Option (i.e., the value of the equity stake EFG would be acquiring) is sufficient to warrant the cost of exercising the Option (i.e., the proportionate contribution EFG would have to make toward Veresen’s sunk costs to date and the future development costs of the Project).

[75] Veresen conceded in its factum that it will provide the information necessary to verify Veresen’s calculation of the Option price as a matter of “good faith” under the Letter Agreement.

[76] On the larger question of whether it must disclose information sufficient to determine whether the Option is “in the money,” however, Veresen takes the position that this would involve the disclosure of highly sensitive, confidential commercial information and that EFG has no right to this information because it never bargained for access to it in the Letter Agreement.

[77] Veresen argues therefore that it is neither reasonable nor necessary to imply into the Letter Agreement any obligation to disclose Veresen’s confidential information.

[78] Veresen says it is a public company. It is subject to regulatory obligations beyond its control which prohibit it from disclosing information on a preferential basis. This concern can be (and is routinely, in transactions of this kind) met through the provisions of a confidentiality agreement. But, Veresen asks, what is the scope of disclosure required? How is the information to be disclosed? To whom? What is the scope of the confidentiality required? Will there be a restricted use clause? For how long? Will there be a standstill agreement? These are all terms that are typically negotiated in an arm’s length transaction where material non-public information is being disclosed to a potential investor, sometimes through hard bargaining indeed.

[79] In addition, Veresen argues that the scope of the disclosure sought by EFG exceeds what any public company would ever share with any arm’s length third party investor in any project under development.

[80] Veresen also argues that, given the expanded financial scope of the Project, EFG should be required to establish credit-worthiness for the amount of the financial commitment it would likely be required to make if it became an equity owner in the Project.

[81] Finally, Veresen argues that EFG has a financial partner – a hedge fund called West Face. Veresen is concerned that EFG may have purported to assign its Option rights to West Face. Veresen takes the position that any purported assignment of Option rights under the Letter Agreement is unlawful.

[82] The parties have agreed that the issue of whether the Option right can be assigned is not being resolved on this motion. The existence of West Face as a possible financial partner with EFG raises, however, additional problems and concerns around if, and in what circumstances, EFG would be permitted to disclose confidential financial information received from Veresen to West Face.

Analysis

[83] Contractual terms may be implied based on the presumed intentions of the parties when it is necessary to give business efficacy to an agreement or as otherwise meeting the “officious bystander” test as a term which the parties would say, if questioned at the time, that they had obviously assumed, M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619 at para. 27.

[84] The focus is on the intentions of the actual parties. The court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of “reasonable parties.” This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis. Attention must be paid to the express terms of the contract to see whether the suggested implication is necessary and fits within what has clearly been agreed upon and the precise nature of what, if anything, should be implied: Ibid at paras. 28-29.

[85] If Veresen was looking for a 20% equity partner in the Project, it is clear beyond peradventure that it would have to provide access to confidential financial information about the Project. No one would ever invest several hundred million dollars in this Project without performing detailed due diligence on the value of the stake in the Project being acquired.

[86] Whether the Option is “in the money” goes to the heart of the Letter Agreement and the rights provided by the Option. The centrality of this question was conceded in November 2011 when, in discussions with Mr. Walker, Mr. Wadey sought to prevail upon EFG to walk away from the Option on the basis that it was not “in the money.”

[87] Without information about the economics of the Project, EFG will be unable to exercise its rights under the Letter Agreement. In fact, without disclosure, EFG’s Option right would be rendered illusory because EFG would be entirely in the dark about the value of the stake it has the contractual right to acquire in this venture.

[88] It must be remembered as well that, in 2005 when the Letter Agreement was signed, EFG was Veresen’s financial advisor and had a confidentiality agreement with Veresen which made it privy to confidential financial information about the Project. In addition, EFG continued to have access to confidential information about the Project by virtue of Mr. Karry’s role on the Board of the general partner. The Developer also had a confidentiality agreement with Veresen which covered the parties’ obligations while they were in pre-contractual discussions with respect to the Jordan Cove LNG terminal.

[89] In addition to the implication of terms, the Supreme Court of Canada has recently found that good faith performance of contracts is a general organizing principle of the common law of contract. There is a common law duty to act honestly in the performance of contractual obligations. Parties are generally required to perform contractual duties honestly and reasonably and not capriciously or arbitrarily. In the performance of a contract, a party must have appropriate regard to the legitimate contractual interests of the other contracting party. This notion of “appropriate regard” for the other party’s interests requires that a party not seek to undermine those interests in bad faith, Bhasin v. Hrynew, 2014 SCC 71.

[90] The Court specifically considered this animating principle of the common law of contract in the context of implied terms. At para. 44, the Court said, “The implication of terms plays a functionally similar role in common law contract law to the doctrine of good faith in civil law jurisdictions by filling in gaps in the written agreement of the parties: Chitty on Contracts, at para. 1-051” [emphasis added].

[91] In para. 49, the Court went on to say:

The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., 1978 CanLII 215 (SCC), [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase-sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale.”

[92] In my opinion, business efficacy and good faith require the importation of an obligation upon Veresen to provide sufficient financial information for EFG:

(a) to make a reasonable determination of what an equity stake of up to 20% in the Project is worth; and

(b) to confirm Veresen’s calculation of the Option exercise price.

This obligation is, in my view, a necessary incident to the existence of the Option right itself as, without it, the Option right is really no right at all. Thus, the importation of the obligation to provide financial disclosure about the Project is necessary to give effect to the contract.

[93] The scope of the required financial information should be the scope that would ordinarily apply in transactions of similar scope, size and nature. Similarly, there must be obligations of confidentiality placed upon EFG and any financial backer with which it seeks to share the information. The scope of the confidentiality obligations shall include restrictions on the use to which the information may be put and a standstill agreement. The scope and detail of these obligations shall, again, be those which ordinarily apply in transactions of similar scope, size and nature.

[94] It is the expectation of the court that the parties will negotiate the terms and conditions of an appropriate confidentiality agreement which addresses access to information going to the two issues set out above. If the parties are unable to agree on such terms and conditions, they may return to court, with the benefit of expert opinion evidence on these matters, for direction on terms and conditions which meet the criteria set out above.

[95] I do not think there is any basis upon which to impose on EFG a “credit-worthiness” disclosure obligation. The Letter Agreement provides the mechanism for determining what EFG has to pay to exercise the Option. The LPA deals with additional capital contributions. It is the unchallenged evidence of Mr. Walker that it was always contemplated that EFG would need to access capital from a third party in order to raise the amount necessary to exercise its Option rights. In the circumstances, any attempt to impute a credit-worthiness obligation into the Letter Agreement runs contrary to the express terms agreed to by the parties and does not, in my opinion, fall within the scope of necessity for business efficacy.

[96] In its factum, Veresen sought relief in connection with the production of an unredacted copy of EFG’s Co-venture Agreement with West Face. This issue was not seriously pursued in oral argument. In addition, there was, in my view, insufficient evidence before the court to resolve the issue. If the issue persists in the context of the additional directions provided in these Reasons, and if the parties are unable to resolve this issue, the matter may come back before the court on further material.

Conclusion

[97] In conclusion:

(a) a declaration is granted that the Option was not terminated and that it continues to apply to the Jordan Cove LNG terminal Project; and

(b) it is an implied term of the Letter Agreement, and necessary under the good-faith requirement, that Veresen provide sufficient information to enable EFG:

(i) to make a reasonable determination of what an equity stake of up to 20% in the Project is currently worth; and

(ii) to confirm Veresen’s calculation of the Option exercise price.

Costs

[98] I encourage the parties to reach an accommodation on costs. Absent agreement, EFG may seek costs by filing a brief written submission (not to exceed three typed double-spaced pages) together with a Bill of Costs within two weeks following the release of these Reasons. Veresen may respond to any such request by filing a brief written submission (subject to the same page limit) within a further 10 days.

Penny J.

Released: February 26, 2015

CITATION: Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONSC 692

COURT FILE NO.: CV-10665-00CL

DATE: 20150226

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Energy Fundamentals Group Inc.

Applicant

– and –

Veresen Inc.

Respondent

REASONS FOR JUDGMENT

Penny J.

Released: February 26, 2015