Court rules NOVA took Dow product and failed to run jointly owned Joffre ethylene plant at full capacity
The Alberta Court of Appeal has upheld a lower court ruling that awards Dow Chemical Canada more than $1 billion in damages in its lawsuit against rival NOVA Chemicals over a dispute on production at an ethylene plant they jointly own in Joffre, Alberta.
The mid-September decision also sets the legal parameters for how the two unlikely partners in the facility should work together in a relationship that contractually binds them together for the next 65 years.
“Since the parties will want to work together in the future to their mutual advantage, a consensual resolution of the outstanding issues . . . would be preferable to one imposed by the Court,” Justice Frans Slatter and Justice Ritu Khullar said in the majority appeal court ruling. In upholding the lower court decision, the appeal court settled issues related to calculating damages.
Blair Yorke-Slader of Bennett Jones LLP in Calgary, who was lead trial counsel for Dow, says that “it’s been a long, expensive and bitter battle between commercial rivals, but they have 65 years left together.
“They are going to have to get along, based what the appeal court has ruled, and the judges ae giving them encouragement to do so.”
In the ruling, the appeal court agreed with the Court of Queen’s Bench judge who ruled on the case in June 2018, following a lengthy trial (with 21 lawyers from six law firms over 82 days of trial) stemming out of a lawsuit that was launched in 2006. At the time, the award was estimated at $1.3 billion but was to be topped up later to include a period not included in the lawsuit.
Justice Barbara Romaine ruled in Dow Chemical Canada ULC v. Nova Chemicals Corporation that Alberta-based NOVA Chemicals had wrongfully taken products from Dow and failed to run the jointly-owned, state of the art, Joffre Ethylene-3 plant at its full capacity.
Nova was contractually required to run the co-owned ethylene facility at full productive capacity and provide Dow its 50 per cent share of ethylene and co-product production, Justice Romaine said. But she found there was “wilful misconduct and gross negligence” — a deliberate course of conduct to run the plant to suit Nova. That meant running it only as hard as was necessary to meet Nova’s needs, and it also involved a feature where they developed an arrangement to take some of Dow’s 50 per cent. These actions resulted in reduced productivity and reduced sales of Dow’s downstream derivatives years.
NOVA appealed that decision on several grounds. These included: disputing the trial judge’s finding that under the contract the two parties agreed to NOVA was obligated to maximize ethylene production at the plant; disputing the finding that the exclusion of liability clauses did not limit Dow’s damages in whole or in part; disputing the failure to convert Dow’s damages to Canadian dollars using a monthly exchange rate; and, disputing the award of prejudgement interest.
NOVA also appealed the trial judge’s dismissal of its counterclaim against Dow, based Dow’s alleged breach of the ethane restrictions in the operating and services agreement.
However, the appeal court agreed with the trial judge that Nova had committed willful misconduct in its operation of the plant. It ruled “NOVA has failed to identify any reviewable error in the trial judge’s finding that it was under an obligation to try to operate E3 at full capacity, and that it was in breach of that obligation,” the court ruled.
As for the currency and interest issues, the appeal court said damages should be converted to Canadian dollars as of the date of the breach, with the exchange rate to vary periodically, and that interest should be calculated on the last day of each month, applying the Prime rate plus two percent.
The court also upheld the trial court’s dismissal of Nova’s counterclaim.
On NOVA’s final ground of appeal - the provisions for how damages Dow sustained because of NOVA’s misconduct should be calculated - Yorke-Slader said the two sides had a “long and esoteric” argument about the difference between direct and “indirect and consequential” damages.
At trial, the issue of the interpretation of the exclusion clause centred on the definition of excluded damages as “indirect or consequential damages.” That would decide whether losses of profit would be excluded damages or whether some loss of profit might be direct, and others might be indirect or consequential, with only the latter as excluded damages.
Dow claimed the proper measure of its damages is the profit on polyethylene that it could not produce because of the ethylene shortage. At trial, NOVA argued all profits, direct and indirect, arising from ethylene or polyethylene sales, should be excluded from the calculation of damages.
However, on appeal, NOVA countered with an argument, not brought up at trial, that Dow is only entitled to the profit on the shorted ethylene. Any incremental profit that could have been made from converting ethylene into polyethylene should be considered excluded damages because such “downstream profits” are “indirect and consequential damages.”
The Court of Appeal majority ruled that NOVA’s new argument must be allowed, in part, and referred the calculation of direct damages back to the trial court. However, the third judge on the panel Justice Jolaine Antonio, said this is a reversal of position by NOVA and “this court should not entertain the new issue.”
In her dissenting opinion, the general rule is that where a ground of appeal was not raised in the pleadings or considered by the trial judge, it cannot be a ground of appeal. An exception to the general rule may be made, however, if three requisites are met.
“First and foremost, there must be ‘no doubt’ that further evidence would not have been adduced had the new ground been raised below. Second, to permit the new argument must not cause “procedural prejudice” to the opposing party. And third, a refusal to permit the new argument to be raised must not result in an injustice.” She said all of these conditions were not met.
Yorke-Slader says that much of the bad blood between the two companies is somewhat understandable since each is the other’s main competitor, and the two had never planned on working together in the first place.
In 1997, Nova and Union Carbide Canada entered into a joint venture to build and operate an ethylene plant — considered among the most advanced single-train ethane crackers in the world. Ethylene is an essential element in many plastic and petrochemical products.
In 1999, Dow Chemical announced it was acquiring Union Carbide. As a result, the two companies came to own one of the largest ethylene production facilities of its kind. It commenced production in 2000.
The conduct at the heart of Dow’s lawsuit began in 2001, the suit was launched in 2006, and it went to trial in 2015. The behaviour under question didn’t stop after 2012, but for the trial’s purposes, the cut-off calculation of damages was to the end of 2012, with damages topped up for the period 2013 to 2018.
Yorke-Slader says the trial judge must now go back and make those calculations, which could mean a reduction in damages compared to the trial award. But it will also mean millions more in top-up damages for the period atter 2013.
At this point, there is no indication that either side will ask for leave to appeal the Alberta Court of Appeal’s decision to the Supreme Court of Canada.