Canada: Dow v. Nova: Interpreting an Operator's Objective to Optimize

Last Updated: August 13 2018
Article by Andrea Sam

The June 20, 2018 Court of Queen's Bench of Alberta decision in Dow Chemical Canada ULC v. NOVA Chemicals Corporation, 2018 ABQB 482, caused headlines as a result of the more than $1.3 billion damages award.  The decision should also cause some reflection to operators on their duties to facility co-owners, even where the operating agreement excludes a fiduciary duty. 

Dow Chemical Canada (Dow) claimed conversion and breaches of contract against Nova Chemicals Corporation (Nova) arising out of the parties' co-ownership of an ethylene facility located in Joffre, Alberta.  Romaine J. found that Nova had wrongfully taken products from Dow and failed to run the jointly-owned Joffre Ethylene-3 plant (E3) at its full capacity. As a result, the Court ruled that Nova breached its obligations, resulting in reduced productivity and reduced sales of Dow's downstream derivatives for more than 10 years. The Court's damage award covered the period 2001 to 2012 and the Court also made provision for a further award of damages for the period 2013 to 2018.

The relevant operating agreement negates any fiduciary duties on the part of Nova as Operator or as between the parties:  section 1.6 of the OSA stipulates that, "[e]xcept as expressly provided [in the OSA] in respect of the Operator", the OSA "shall not be considered to have created an agency relationship between any of the Parties".  It also provides that "[n]othing at law or in equity and nothing contained in this Agreement shall be construed to create or impose fiduciary obligations between the Parties or on the Operator to the Co-owners."

However, the same operating agreement (at section 4.3(b)) requires Nova as Operator to "conduct the Operations with the objective that the Plant, subject to the direction of the Management Committee, will optimize Product production and achieve first decile performance when compared to other ethylene plants in North America" [emphasis added].  Dow alleged that Nova had a duty, with the ethane that was available to it, to run E3 at full rates when the Co-owners nominated.  

Nova took the position that "optimizing" involved balancing different things to find a point that produced the maximum profit.  The Court found that since there was enough ethane to fill E3 to capacity, optimizing meant, as Dow submitted, producing as much product as possible at E3.  Nova was found to be in breach of the operating agreement because it conducted operations to optimize Nova's profit from the entire Joffre Site (which included E1 and E2 plants)—not just at E3. 

Nova tried to argue that the use of the term "objective" at section 4.3 meant a lesser duty and that an objective was not the same as an obligation.  This may have been a persuasive argument if the evidence indicated that Nova as Operator had tried but failed to comply with this duty due to circumstances beyond its control, or circumstances that would constrain production for reasons that were verifiable and reasonable.  However, the Court found that Nova, contrary to its objectives in section 4.3(b), ran E3 with the objective of satisfying its own demands and the objective of optimizing production at the Joffre Site as a whole thereby maximizing Nova's profit over that of its Co-owner.

The Court also found that Nova breached the second "objective" in section 4.3(b) because according to a Solomon Survey, E3 scored below the first quartile in capacity utilization and was thus below the first decile.  By allowing Nova to prioritize its interest over first decile performance in optimizing product performance, Nova was in breach of the operating agreement.

Since the Court found that Nova had enough ethane to run E3 at its maximum rate, unless there were other reasons to justify Nova's reduced rate of production, Nova's responsibility under the agreements was to run E3 at full rates.

The Court concluded that Nova as Operator was acting in its own interests over that of the Co-owners and failed to comply with its contractual obligations to run E3 with the objective of optimizing Plant Production and achieving first decile performance.  Even in the absence of a fiduciary duty, because of the specific obligations related to optimization, Nova was held to have a duty to pursue certain interests of the Co-owners over its own interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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