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REMEDIES - Damages - Amount - Consequences of breach - Interest

Thursday, October 22, 2020 @ 6:17 AM  

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Appeal by the defendant from trial judgment awarding the respondent over $1.4 billion in damages for breach of contract. The appellant owned an ethane cracker, E3, as a joint venture with Union Carbide. The respondent took over the position of Union Carbide because of a corporate merger in 2001. After 2004, the parties each owned an equal interest in E3. Under their Plant Co-Owners Agreement, each owner owned its proportionate share of the ethylene and other byproducts produced by E3. Each month, both parties were required to nominate how much ethylene each wanted in the next month. The appellant was the Operator of E3 under an Operating and Services Agreement requiring it to aggregate the purchases of ethane for the site in an Ethane Pool. By 2000, ethane shortfalls became a risk. In 2001, the appellant decided to manage ethane supply by ethane allocation. The Ethane Pool would notionally be allocated to the three ethane crackers in proportion to Feedstock Fractions, which were tied back to their notional nameplate capacity, not actual ethane consumption or actual ethylene capacity. The respondent alleged the appellant was contractually responsible for ethane supply and E3 should be run at full capacity. In 2006, the respondent sent a Notice of Default to the appellant and commenced an action, alleging the appellant converted to its own use part of the ethylene produced at E3 that was contractually owned by the respondent and failed to run E3 to its productive capacity as required by the Joint Venture agreements. The appellant counterclaimed alleging the respondent breached the Operating and Services Agreement because it acquired ethane in the Pool Area, that it failed to perform the agreement honestly and in good faith and that the merger was a breach of contract. The trial judge found the appellant breached the Operating and Services Agreement as the respondent was entitled to 50 per cent of the actual production of ethylene from E3, not just 50 per cent of a notional amount resulting from ethane allocation. He held the appellant was required to supply sufficient ethane to allow E3 to operate at full capacity and was not allowed to allocate ethane between the three crackers, because it had covenanted to operate E3 at full capacity. The trial judge concluded the respondent’s right to recover damages was not constrained by any limitation of liability clause. The counterclaim was dismissed on the basis that some of the Notices of Default were ineffective. The trial judge also concluded that the ethane acquisition covenants were unenforceable because they were unreasonable restrictions on competition and that the scope of the restrictive covenant was overly broad, and therefore unenforceable at common law.

HELD: Appeal allowed in part. The judge made no reviewable errors in finding the appellant was required to operate E3 at full capacity and that it breached that obligation. There was no contractual cap on production. The trial judge erred, however, in the interpretation of the exclusion clause respecting damages by applying a strict interpretation to the clause and in interpreting it to exclude only damages that were not recoverable in any event. When interpreted considering its purpose and in its commercial context, the downstream polyethylene profits fell within indirect or consequential damages, including without limitation loss of profits and damages arising from loss of production, and were thus excluded damages under the contract. The appeal with respect to the computation of damages was allowed in part, and the calculation of direct damages resulting from the ethylene shortages was referred back to the trial court. The allocation damages should be converted to Canadian dollars as of the date of breach, with the exchange rate to vary periodically. Interest should be calculated on the last day of each calendar month, applying the Prime Rate plus two percentage points on that date to all the damages that accrued during that month. The appeal from the dismissal of the counterclaim was dismissed, except that the remedial effect of the illegality of the performance of Ethane Pooling covenant was referred to the trial court.

Dow Chemical Canada ULC v. NOVA Chemicals Corp., [2020] A.J. No. 964, Alberta Court of Appeal, F.F. Slatter, R. Khullar and J. Antonio JJ.A., September 16, 2020. Digest No. TLD-October192020008