Canada: Saskatchewan Court Of Appeal Upholds Decision Respecting ROFR Obligations In Light Of Duty Of Honest Performance Of Contracts

On August 2, 2017, the Saskatchewan Court of Appeal (SKCA) released its decision in Northrock Resources v ExxonMobil Canada Energy, 2017 SKCA 60, an appeal from a Saskatchewan Court of Queen's Bench decision regarding rights of first refusal (ROFRs). As BLG discussed in our previous blog post regarding the Queen's Bench decision, the Northrock case raises important questions respecting how ROFR obligations will be interpreted and enforced in light of the principle of good faith and honest contractual performance set out by the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71. In dismissing the Northrock appeal and upholding every aspect of the Queen's Bench decision, the SKCA provided additional insight into the interaction between ROFRs and the duty of good faith, and emphasized the importance of the deal struck by the parties. As a result, the case provides some welcome certainty for energy industry participants who are contemplating transactions in which ROFR obligations may be triggered, and also provides a roadmap of how parties can potentially avoid ROFR-related transaction obstacles.


The central issue in this case is whether ExxonMobil Canada Energy (ExxonMobil) breached ROFR obligations it owed to Northrock Resources (Northrock) as part of a sale process. Rather than sell certain assets, ExxonMobil instead transferred them to wholly-owned subsidiaries, and then sold the shares of the subsidiaries to a third party, Crescent Point General Partner Corp. (Crescent Point).

This type of transaction is referred to as a "busted butterfly", and structuring the transaction this way provided ExxonMobil with more than $20MM in tax efficiencies. The busted butterfly structure also had the effect of preventing Northrock from exercising its ROFR, as the governing ROFR provisions specifically provided that transfers to ExxonMobil affiliates would not trigger a ROFR. The ROFR provisions were silent about whether the shares in such subsidiaries could subsequently be sold on to third parties.

Northrock sued ExxonMobil, Crescent Point, and the subsidiaries, alleging that the transaction breached the well-established rule set out in GATX Corp. v Hawker Siddeley Canada Inc. (1996), 27 BLR (2d) 251 (Ont. Ct J.), which holds that sellers act in bad faith if they structure transactions for the purpose of avoiding ROFR obligations. The Court of Queen's Bench rejected this argument, holding that ExxonMobil had negotiated an unqualified contractual right to transfer the Assets to subsidiaries, and in choosing to exercise this right, had been motivated by tax considerations rather than a desire to avoid ROFR obligations.

Northrock appealed the Court of Queen's Bench decision, largely on the basis that the trial judge committed reversible errors by misinterpreting the ROFR provisions and misapplying the legal test for good faith contractual performance.

The Decision

Regarding the interpretation of the ROFR provisions, the trial judge had held that the plain language of the ROFR provisions was unambiguous in permitting unqualified dispositions of assets to subsidiaries – the parties could have negotiated ROFR provisions which were triggered by a subsequent share sales of subsidiaries to third parties, but had not done so. Northrock alleged that this interpretation of the ROFR provisions was flawed because it defeated the "general purpose" of ROFR provisions, which was "to enforce the parties' right to control their business partners and accrete ownership interests".1 To accord with this general purpose, Northrock argued that the ROFR provisions' silence as to busted butterfly type transactions should be interpreted as preventing such transactions in the absence of a ROFR notice.

The SKCA rejected Northrock's claim that ROFRs have a "general purpose" and instead characterized them as restrictions on a property-owner's right to sell that only exist because they are specifically bargained for. The restrictiveness of a ROFR will depend in each case on the bargain that is struck by the parties and memorialized in a written contract. As such, determining the extent of a party's ROFR obligations is simply a matter of contractual interpretation, without reference to any "general purpose". The SKCA noted that the ROFR provisions in this case were not ambiguous – dispositions to subsidiaries were permitted without any qualifications or restrictions. Under the principles of contractual interpretation, implying a term that would place additional restrictions on ExxonMobil would unfairly alter the parties' written bargain.

Northrock also argued that the trial judge's interpretation of the ROFR provisions was unreasonable because it would lead to a commercially absurd result. Northrock alleged that it would be absurd for a ROFR to be triggered when a transaction is structured as a straight-up asset sale and not triggered by a busted butterfly transaction, because the ultimate purpose and effect of both transaction types would be to transfer the Assets to a third party. The SKCA held that there is nothing absurd about holding parties to the clear terms of their bargain. In fact, the SKCA noted that it would be "commercially unreasonable—indeed, even absurd—to throw the ongoing contractual relationship into flux by interpreting the ROFRs as prohibiting something they do not prohibit".2

Having found that the ROFR provisions clearly permitted busted butterfly transactions, the SKCA went on to consider whether ExxonMobil had chosen a busted butterfly in bad faith. Northrock argued that the trial judge had misapplied the test for bad faith by focusing on whether ExxonMobil had been motivated by a desire to avoid its ROFR obligations. In Northrock's view, ExxonMobil's motivation was irrelevant to bad faith – the correct test was whether ExxonMobil had conveyed the Assets in way that appeared to comply with the express language of the ROFR provisions, but had the effect of frustrating their purpose.3 Northrock claimed that the ROFR provsions' silence as to busted butterfly transactions was an "unintended loophole", and argued that the duty of good faith prevented ExxonMobil from knowingly designing a transaction that exploited this loophole.4

In rejecting Northrock's argument, the SKCA first noted that the principle of good faith identified in Bhasin calls for a "highly context-specific understanding of what honesty and reasonableness in performance require".5 Recognizing the context-specific nature of good faith, the SKCA found that the trial judge properly focused on the ROFR-specific approach to good faith set forth in GATX and related jurisprudence.6 Relying on these cases, the SKCA identified the following principles as underpinning the duty of good faith in the ROFR context:7

  1. "the grantor of a right of first refusal must act reasonably and in good faith in relation to that right";8
  2. the grantor "must not act in a fashion designed to eviscerate the very right which has been given";9
  3. "the grantor of a ROFR has a duty to exercise its rights in such a manner to ensure that the other party's rights are not rendered meaningless";10
  4. "[t]he duty [of reasonableness and good faith] is not discharged if the essential purpose of the sale to the third party is to frustrate the right of first refusal";11
  5. "unless ... the whole transaction is structured to do indirectly that which triggers the right of first refusal, the right of first refusal does not apply"; 12 and
  6. the grantor "is not entitled to frustrate [a right of first refusal] by conveying the property in such a way as to avoid having to give the right in the first place".13

In applying these principle to the facts, the SKCA emphasized that in GATX, the ROFR provisions had been interpreted broadly as capturing any and all dispositions to third parties. Because of this broad language, any transaction which had the effect of disposing of the assets to a third party would seemingly trigger the ROFR, regardless of the seller's motivation. In these circumstances, whenever a seller entered into a transaction knowing that it would result in a disposition to a third party without triggering a ROFR, it would be acting in bad faith.

In contrast, the ROFR provisions Northrock was relying on contained an unqualified exception permitting dispositions to subsidiaries. ExxonMobil clearly had a contractual right to use this exception, and the inevitable effect of doing so would be to avoid the ROFR. As a result, knowing avoidance of the ROFR could not be a reliable indicator of bad faith.  Instead, the key question was why ExxonMobil knowingly chose a transaction structure which would avoid the ROFR. The SKCA deferred to the trial judge's findings of fact in this regard, and confirmed that ExxonMobil had chosen a busted butterfly for tax purposes rather than to avoid Northrock's ROFR.

In support of its conclusion on the good faith issue, the SKCA noted that "acceptance of Northrock's argument would imprudently broaden the duty of good faith in commercial relations".14 Here, the SKCA emphasized that Bhasin recognized that the duty of good faith must be applied in a manner that is consistent with the common law of contract, "which generally places great weight on the freedom of contracting parties to pursue their individual self-interest.15 Specifically, the obligation to perform a contract honestly and in good faith "must not be used to circumvent the plain language of a contract because that would result in ad hoc judicial moralism and undermine the principle of certainty in contract".16


This case provides some needed certainty for transaction parties navigating the sometimes murky waters of ROFR obligations. Where a ROFR is drafted in broad, all-encompassing terms, a seller risks breaching the duty of good faith if the effect of a transaction is to avoid the ROFR, regardless of their motivation. However, where the language of the ROFR clearly exempts certain transaction types, Northrock stands for the proposition that sellers are free to creatively utilize such transactions types, provided they are not doing so for the purpose of avoiding the ROFR.

As discussed in our previous blog post regarding the Queen's Bench decision, maintaining a careful record of the reasoning behind transaction choices can help parties to demonstrate their good faith. The SKCA was able to point to specific evidence led by ExxonMobil showing that the transaction was tax-driven and not avoidance driven. We encourage parties in these situations to maintain scrupulous notes and meeting minutes, as the parties' intent at the time the ROFR was being considered and complied with will be highly relevant.

Northrock is of particular relevance to the oil and gas industry, as the language in ROFR provisions at issue in Northrock is broadly similar to the ROFR provisions found in CAPL Operating Procedures. The case will likely have high precedential value in future cases which revolve around CAPL ROFR provisions. One immediate implication of Northrock is that it should give transaction parties a degree of confidence that busted butterfly transactions are a viable option for assets governed CAPL Operating Procedures.

The Northrock decision is also relevant more broadly to cases involving good faith, because it is a reminder that Bhasin does not supplant or modify much of the common law of contract. For example, while the Northrock decision references Bhasin, the principles upon which the case turned were derived from ROFR-specific cases which significantly predated Bhasin. In addition, much of the commentary in Northrock re-emphasises that the general principle of good faith does circumvent the written words of a contract or alter how they are to be interpreted.

Finally, although Northrock provides some clarity, good faith performance of ROFR obligations can still be difficult for transaction parties to handle. Most notably, the case does not address the scenario in which a seller chooses a transaction type partly in order to avoid ROFR obligations, and partly to pursue other business drivers. Given its emphasis on strictly granting ROFR holders only that which they have bargained for, Northrock would seem to work against the ROFR holder in such a scenario. Further, the decision contains commentary – likely in obiter – which supports the notion that the duty of good faith only prevents transactions whose "entire purpose" is to defeat a ROFR.17 Despite these signals, sellers should remain cautions. Providing any indication that a transaction has been motivated, even partially, by a desire to avoid ROFR obligations continues to create a risk that a seller will be found to have acted in bad faith.


1 At para 14.
2 At para 21.
3 At para 25.
4 At para 26.
5 At para 29, citing Bhasin at para 69.
6 .GATX; Glimmer Resources Inc. v Exall Resources Ltd. (1997), 39 OTC 215 (Ont Ct J (Gen Div)); and Chase Manhattan Bank of Canada v Sunoma Energy Corp., 2002 ABCA 286; Landymore v Hardy (1991), 110 NSR (2d) 2 (SC (TD)).
7 At para 31.
8 GATX at para 71
9 GATX at para 71
10 Chase Manhattan at para 25, citing GATX at para 71
11 GATX at para 71
12 Glimmer Resources at para 18.
13 Landymore at para 97.
14 At para 41.
15 At para 29, citing Bhasin at para 70.
16 At para 47.
17 At para 43.

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