IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
DaKow Ventures Ltd. v. Daski Contracting Ltd., |
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2018 BCSC 2016 |
Date: 20181023
Docket: S183272
Registry: Vancouver
Between:
DaKow Ventures Ltd. and David John Kowalski
Plaintiffs
And
Daski
Contracting Ltd. and
New Wave Energy Services Group Ltd.
Defendants
And
Blu-Water LP Ltd.
Defendant by way of Counterclaim
Before: The Honourable Mr. Justice Myers
Oral Reasons for Judgment
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Counsel for the Plaintiffs and Defendant by Counterclaim: |
James Goulden Louse D. Hamill |
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Counsel for Defendants: |
Peter R. Senkpiel Emily L. Hansen |
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Place and Dates of Hearing: |
Vancouver, B.C. October 15 and 19, 2018 |
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Place and Date of Judgment: |
Vancouver, B.C. October 23, 2018 |
[1] In August 2014, New Wave purchased the shares of Daski from Mr. Kowalski for $7 million. The share purchase agreement contained a five-year non-solicitation and non-competition clause. The scope of the clause was "the frac water management business as conducted by [Daski] before and after the closing date in the oil and gas industry." The geographic scope of the clause was British Columbia and Alberta. New Wave says that the respondents to this motion – Mr. Kowlaski, DaKow and Blu-Water – are in breach of the covenant and seek an interlocutory injunction.
[2] The respondents argue that the clause's duration and geographic scope is unreasonable; the clause is ambiguous and therefore unenforceable; the defendants will not suffer irreparable harm; and the balance of convenience does not favour granting the injunction. However, their main substantive argument is that they are not breaching the clause because the business conducted by them is not "frac water management" and therefore not within the scope of the covenant.
[3] Prior to the purchase, New Wave and Daski were involved in providing frac water management services to the oil and gas industry. I will explain that later. New Wave also provided a wider range of water management services to various industries; however, its main focus and 95% of its revenue has been frac water management.
[4] Daski also provided general water management and frac water management to the oil and gas industry. It was based in Fort St. John and serviced what is known as the Montney oil and gas resource area. At the time of the acquisition, 90% of Daski's revenue was from frac water management. Its major client for water management and frac water management was Progress Energy Canada Ltd., one of the biggest oil and gas producers in the region. Liam Balfour, a founder of New Wave and its CEO, deposed that New Wave acquired Daski to, amongst other things, break into the Montney region.
[5] Mr. Kowalski owns DaKow Ventures Ltd. It is in the business of equipment rentals and has provided equipment to Daski for water management and frac water management projects. This lawsuit was initiated by DaKow to collect rental fees owing. Daski counterclaimed for breach of the covenant.
[6] The relevant clauses of the share purchase agreement are:
2.01 Non-Competition
(1) The Vendor must not in any manner whatsoever, without the prior written consent of the Purchaser, at any time during the Non-Competition Period, directly or indirectly:
(a) own, manage, carry on, be hired or mandated by, engage in or be concerned with or interested in; or
(b) provide assistance, lend money to, guarantee the debts or obligations of or permit its name or any part thereof to be used or employed by any person engaged in or concerned with or interested in, any business that is the same as, substantially similar to or competitive with the Business within the Territory.
(2) The Vendor confirms that all restrictions in Article 2.01(1) are reasonable, valid and necessary for the protection of the Company and the Business and waives all defences to the strict enforcement thereof.
2.02 Non-Solicitation
(1) The Vendor must not in any manner whatsoever, without the prior consent of the Purchaser, at any time during the Non-Competition Period, directly or indirectly:
(a) induce or endeavour to induce any employee or consultant of the Company to leave his or her employment;
(b) employ or attempt to employ or assist any person to employ any employee or consultant of the Company (each an "Employee"), provided that the Vendor will not be precluded from hiring or employing an Employee who (i) initiates discussions regarding their employment with the Vendor or its Affiliates without any direct solicitation by the Vendor or its Affiliates; (ii) responds to any public advertisement or other form of general solicitation placed by the Vendor or its Affiliates; or (iii) has been terminated by the Purchaser prior to commencement of employment discussions between such Employee and the Vendor or its Affiliates; or
(c) solicit, endeavour to solicit or gain the customer or business partner of, canvass or interfere or attempt to do so with the relationships of the Company with any person that:
(i) is a customer or business partner of the Company as of the Effective Date; or
(ii) has been pursued as a prospective customer by or on behalf of the Company at any time within 24 months prior to the Effective Date, and in respect of whom the Company has not determined to cease such pursuit.
(2) The Vendor hereby acknowledges and confirms that all restrictions in Article 2.02(1) are reasonable, valid and necessary for the protection of the Company and the Business and waives all defences to the strict enforcement thereof.
...
2.04 Vendor Undertaking Regarding Affiliates
(1) The Vendor acknowledges and agrees that all of its obligations and undertakings under this Deed apply, mutatis mutandis, to each and all of its Affiliates and that:
(a) it will cause the strict compliance of each and all of its Affiliates with the terms, conditions and prohibitions of this Deed; and
(b) it will indemnify the Purchaser in accordance with the provisions of Article 2. 05(3) in respect of any and all breaches by an Affiliate of the Vendor of the terms, conditions or prohibitions of this Deed.
(2) For certainty, the Vendor acknowledges and agrees that a violation by any of its Affiliates of a term, condition or prohibition of this Deed shall be deemed to be a violation by the Vendor of such term, condition or prohibition.
[7] The definition section defines business as:
The frac water management business as conducted by the Company [Daski] before and after the closing date in the oil and gas industry.
[8] In March 2019, Mr. Kowalski and two others incorporated Blu-Water. He deposed that it "specialises in water transfers and management, but not frac water management".
[9] In most instances, a party must establish three elements in order to obtain an interlocutory injunction:
· there is a serious question to be tried
· the applicant will suffer irreparable harm if the injunction is not granted
· the balance of convenience favors the granting of an injunction.
(RJR‑MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 at para. 43.)
[10] However, the court in RJR-MacDonald allowed for the possibility that in some cases a serious question to be tried is not a high enough standard and that the appropriate test is a strong prima facie case. This is so where the injunction will, in effect, be a final determination of the matter:
56 Two exceptions apply to the general rule that a judge should not engage in an extensive review of the merits. The first arises when the result of the interlocutory motion will in effect amount to a final determination of the action. This will be the case either when the right which the applicant seeks to protect can only be exercised immediately or not at all, or when the result of the application will impose such hardship on one party as to remove any potential benefit from proceeding to trial. Indeed Lord Diplock modified the American Cyanamid principle in such a situation in N.W.L. Ltd. v. Woods, [1979] 1 W.L.R. 1294 , at p. 1307:
Where, however, the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that the plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other.
Cases in which the applicant seeks to restrain picketing may well fall within the scope of this exception. Several cases indicate that this exception is already applied to some extent in Canada.
[11] In Belron Canada Inc. v. ICG International Inc., 2009 BCSC 596 at para. 47, aff'd 2009 BCCA 577, Ballance J. held that the higher standard should be applied to injunctions seeking the enforcement of a restrictive covenant in contracts for the sale of business. In doing so, she adopted the following passage from Justice Robert Sharpe in Injunctions and Specific Performance, looseleaf (Aurora, Ont.: Canada Law Book, 2008):
In many, if not most, cases involving covenants and restraint of trade, the final decision, for practical purposes, is the one made on the interlocutory application. It is surely wrong to say that the application should turn solely upon the balance of convenience, and that the result should be the same where the covenant is probably good as where it is probably bad. Indeed, reasonable as to the duration of the life of the covenant is one of the tests of its validity. Accordingly, to be at all valid, the life of the covenant may often have to be shorter than the time it will take to get the case tried. Even if the life of the covenant exceeds the time it takes to complete pre-trial proceedings and work through the queue for trial, the crucial period for both parties will usually be the first year or so. [footnotes omitted]
The same resoning was adopted in 853947 B.C. Ltd. v. Source Office Furniture & Systems Ltd., 2016 BCSC 2233 at paras. 75–77.
[12] Here, there are only 10 months remaining on the five-year covenant. It is therefore an interesting question as to whether an injunction can be said to finally dispose of the matter. It is certainly not a case as noted at the end of the quote from Sharpe J. of the crucial first-year period following the contract. However, I will approach the matter on the basis that the test to be applied is that of a strong prima facie case.
[13] Restrictive covenants are unenforceable unless it is reasonable as between the parties and the public interest: IRIS The Visual Group Western Canada Inc. v. Park, 2017 BCCA 301 at para. 16, citing Elsley v. J.G. Collins Insurance Agencies, [1978] 2 S.C.R. 916 at 923–924. The party seeking to enforce the clause bears the burden of showing that it is reasonable.
[14] In employment contracts, the courts have applied a very high standard of scrutiny in determining the scope of restrictive covenants and their reasonableness. However, that is not the case with respect to covenants contained in contracts for the sale of a business: IRIS at paras. 16–25. The clause here is contained in a share purchase agreement and therefore the lower standard of scrutiny is to be applied.
[15] As Hunter J.A. said in IRIS at para. 25, once the level of scrutiny has been determined, there are three questions that need to be addressed: whether the claimant has a proprietary interest worthy of protection; whether the interest can be protected by less restrictive measures than a non-competition covenant; and whether the geographic scope and duration of the clause are reasonable.
[16] I do not think there is any dispute that Daski had a legitimate interest to protect, given it bought the shares of DaKow for $7 million. I think it is plain that something less than a non-competition covenant would not have been appropriate. In employment contracts, it may be the case that a non-solicitation clause would suffice, that is not the case for the sale of a business, which merits a higher level of protection, including the inability to do business with customers of the vendor company even if they make the initial approach to the former business owner.
[17] Turning to the five-year duration of the clause, in Payette v. Guay inc., 2013 SCC 45––a business sale case––the court stated:
[63] A non-competition clause in a commercial contract must of course be limited as to time, or it will be found to be contrary to public order and a court will refuse to give effect to it. See, for example, Yvon Beaulieu Well Drilling Ltée c. Marcel Beaulieu Puits artésiens Ltée, [1992] R.J.Q. 2608 (C.S. Que.); see also Allard v. Cloutier (1919), 29 Que. K.B. 565 (Que. K.B.), at p. 567. Whether the term of a clause is reasonable must be assessed on the basis of the specific circumstances of the case before the court, including the nature of the activities to which the clause applies. For example, in the case of a sale of assets between well-informed persons who are represented by competent counsel, it is likely, although there may be exceptions, that the clause so negotiated is reasonable. In assessing these factors, the Quebec courts have found non-competition clauses in commercial contracts that applied for as long as 10 years to be valid: Trans-Canada Thermographing (Ontario) Ltd. v. Trans-Canada Thermographing Ltd. (1992), SOQUIJ AZ-92021644; Papeterie l'Écriteau inc. c. Barbier, [1998] J.Q. No. 5090 (C.S. Que.).
[64] In the instant case, there is no evidence that the stipulated period of five years from the date on which the appellant Payette ceased to be employed by the respondent, Guay inc., is unreasonable. The courts regularly find clauses with similar terms valid. Everything depends on the nature of the business, and each case must be assessed in light of its own circumstances. Here, the highly specialized nature of the business's activities weighs in favour of finding a longer period of up to five years to be valid. Indeed, this was not in issue at trial, as the parties recognized the specialized nature of the business's activities.
All of these factors are applicable to the case at bar. I find the five-year period to be reasonable.
[18] In terms of the geographic scope, at paras. 65 to 67 of Payette, the court noted that it is reasonable to restrict the seller of a business from competing in the same territory in which the company did business. Although that was a case under the civil law of Québec, it appears to me the same principle is applicable in the common law. I therefore find the geographic scope of Alberta and British Columbia to be reasonable. This does leave Blu-Water and Mr. Kowalski able to do business in Saskatchewan, a province in which fracking is used.
[19] Mr. Kowalski and Blu-Water rely on IRIS at para. 63, in which Hunter J.A. found the phrases "in conjunction with" and "concerned with" ambiguous and therefore unreasonable:
What is the nature of the connection required to compete "in conjunction with" another person? How is one to determine whether an individual is "concerned with" a business that competes with IRIS?
[20] Once again, IRIS involved an employment contract, and therefore attracted a far higher standard of scrutiny than the case at bar. Moreover, in the context of the sale of a business, where the legitimate concern is preventing the seller working in, investing in or backing a competitor, the phrase has a more certain meaning, and its wider scope is appropriate. As Mr. Justice Dickson (as he then was) stated in Elsley at p. 6:
It is important, I think, to resist the inclination to lift a restrictive covenant out of an employment agreement and examine it in a disembodied manner, as if it were some strange scientific specimen under microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can be determined only upon an overall assessment, of the clause, the agreement within which it is found, and all of the surrounding circumstances.
Elsey was an employment case, and these words have even greater force with respect to a covenant in a share purchase agreement. In the context of this agreement and on the wording of the specific clause, I do not find the phrases to be uncertain or ambiguous.
[21] Finally, if I were wrong on that, I find that there is a strong prima facie case and that at trial the court will strike or "blue-pencil" the offending phrases. The courts have drawn a distinction between notional severance or reading down an offending phrase in a contract versus striking the provision. In Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, Rothstein J. stated:
[29] Where severance is permitted, there appears to be two types: "blue-pencil" severance and "notional" severance. Both types of severance have been applied in limited circumstances to remove illegal features of a contract so as to render the contract in conformity with the law. Blue-pencil severance was described in Attwood v. Lamont, [1920] 3 K.B. 571 (C.A.), by Lord Sterndale as "effected when the part severed can be removed by running a blue pencil through it" (p. 578). In Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 S.C.R. 249, Bastarache J., in dissent, described this form of severance at para. 57:
Under the blue-pencil test, severance is only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining.
[22] In KRG, Rothstein J. referred at length to the distinction between employment contracts and contracts for the sale of a business. At para. 42 he concluded that notional severance was not applicable in employment contracts. He allowed for the possibility for blue-pencilling in limited circumstances, quoting, at para. 34, from Lord Moulton in Mason v. Provident Clothing and Supply Co., [1913] A.C. 724 (H.L.) at 745:
My Lords, I do not doubt that the Court may, and in some cases will, enforce a part of a covenant in restraint of trade, even though taken as a whole the covenant exceeds what is reasonable. But, in my opinion, that ought only to be done in cases where the part so enforceable is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause. …
[23] Lord Moulton's comments were made with respect to employment contracts as, of course, were Rothstein J.'s. The policy rationale for the strict approach in employment contracts was noted in the following passage from Mason, quoted at para. 33 of Shafron:
It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the Courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master.
[24] Rothstein J. also stated:
[19] In Nordenfelt, Lord Macnaghten pointed out that there is greater freedom to contract between [page167] buyer and seller than between employer and employee. At p. 566, he wrote:
To a certain extent, different considerations must apply in cases of apprenticeship and cases of that sort, on the one hand, and cases of the sale of a business or dissolution of partnership on the other. A man is bound an apprentice because he wishes to learn a trade and to practise it. A man may sell because he is getting too old for the strain and worry of business, or because he wishes for some other reason to retire from business altogether. Then there is obviously more freedom of contract between buyer and seller than between master and servant or between an employer and a person seeking employment. [Emphasis in Shafron.]
[25] It is apparent from this that a less restrictive view can be taken with respect to business sale contracts. In my view, therefore, severance is appropriate here. It is to be noted that the alternative of refusing to enforce the clause in its entirety would result in Daski having paid $7 million for a business against which Mr. Kowalski, with all his knowledge and contacts, could compete with impunity. In a commercial contract situation, that should not result from an easily severable phrase inserted by what may perhaps have been an overzealous solicitor.
[26] The respondents also say that the definition of "business" is uncertain because it incorporates the business conducted by Daski after the closing and at the time of the contract it could not be known what business Daski might be conducting in the future. There is some force to that but, again, I think there is a strong prima facie case that at trial, the court would blue-pencil the offending phrase.
[27] The plaintiffs acknowledge that they are providing water management services to the oil and gas industry. The issue between the parties is whether that work amounts to frac water management. In other words, what is in dispute is not the work being done by Blu-Water, but the interpretation of the contract.
[28] The interpretation of a contract is to be determined objectively construed with reference to the factual matrix including the commercial objective of the contract. Mr. Balfour and Mr. Kowalski both swore affidavits setting out their understanding of the frac water management business. I will refer to this evidence not for the purpose of their subjective understanding of the contractual term, but rather for the factual matrix, which includes industry practice.
[29] In his affidavit, Mr. Balfour describes the business of frac water management:
(a) The provision of water management for a fracking operation includes sourcing, transferring, storing, treating, and disposing of the water used in the fracking process. Frac water management may also include the design of a water management system or plan.
(b) Frac water management deals with both fresh and frac (also referred to as "produced") water. In Canada, fresh water is often sourced from lakes, ponds, rivers, creeks, ground run-off, and water wells, especially during spring run-off when water is plentiful. It is usually pumped closer to a site through hoses or pipelines, and then stored in lined and unlined earthen pits or dams, which may be interconnected, or in tanks. Because of the excess run-off, water may be sourced and stored in spring for operations in summer, fall, and winter. Regulatory compliance requires maintaining pits and dams at specific levels, which frequently requires that pits or dams be "dewatered". (LB1, paras. 9, 24-25, 32; 2nd Affidavit of Liam Balfour made 11 October 2018 [LB2], paras. 3-5)
(c) The process of filling and refilling lined and unlined earthen pits is referred to as "pit fill". Pit fill operations take place before fracking operations in order to build water supply for the frac, including during spring break up… Pit fill operations also take place during live fracking operations in order to provide additional water to the site as the water supply is depleted during the frac. Approximately 95%-99% of the water in a fresh water pit will be used for actual fracking, while a small portion will be used for purposes ancillary to the fracking operation, including dust control for construction work and for the camp water supply. (LB1, para. 9)
(d) Over 95% of water in fresh water pits and dams is used for fracking. The remainder is used for ancillary functions, such as dust control for construction work and for the camp water supply. (LB1, para. 9(vi))
(e) In Western Canada, fracking operations in the oil and gas industry are limited to specific parts of Alberta, Northeastern British Columbia, and Saskatchewan and water management services for fracking operations are limited to these areas as well. (LB1, paras. 10-11, Ex. D)
[30] Mr. Kowalski describes frac water management as:
10. From my understanding and experience in the industry, frac water management means moving frac water from pit to pit, site to site or pit to site. In other words, it involves water that is being moved directly for frac operations at the time of frac operations, or moving water that was previously used in frac operations. Frac water management does not include dewatering … water transfers of fresh water … or fresh water pit fills. Rather this is generally known in the industry as just water management.
[31] In terms of the work he acknowledges DaKow is doing, Mr. Kowalski says:
15. In the spring of 2018, Blu-Water was retained by Progress to conduct water transfer work. However, Blu-Water did not provide frac water management for Progress, nor to my knowledge did Progress have a frac water management plan at the time. … The reason that Blu-Water was retained was because the water levels in Progress's fresh water ponds were too high, so Blu-Water pumped off excess water into the surrounding bush. In other words, Blu-Water was retained to dewater fresh water ponds. This is not frac water management. […]
[32] There is no dispute that the fresh water ponds referred to here were used primarily for fracking operations. However, the water ponds may be used for other purposes, such as fire fighting. As Mr. Kowalski said––and I do not think this is disputed––95% of the water in the pits is used for fracking.
[33] The respondents' argument focuses on the timing of the work being done by Blu-Water. If the pits are being filled, maintained or loaded when no fracking work is actually being done––in other words, when no water is being injected into the rock veins––then that is not frac water management work under the share purchase agreement. If fracking work is actually being done then that same work would be frac water management.
[34] I do not agree. It is not disputed that the water pits are filled in advance of the fracking. As stated by Balfour in the above quote, water may be sourced and stored in the spring for operations in summer, fall and winter. An American industry publication notes:
Water is delivered in tanker trucks or via dedicated waterlines. The water may arrive over a period of days or weeks and may be stored on site in tanks or lined pits.[1]
It therefore cannot be that "frac water management" takes place only when water happens to be delivered at the same time as fracking operations take place.
[35] Dewatering of the pit because of excess water can occur at any time. Once again, it makes no sense that it is considered to be frac water management only if fracking operations happen to be taking place at the time.
[36] As I said, 95% of the water in the pits is used for fracking operations. It is obviously not possible to apply a first-in/first-out analysis to determine whose water was delivered for what purpose.
[37] In my view, therefore, the work being done by Blu-Water for Progressive is frac water management and prohibited by the restrictive covenant.
[38] Mr. Kowalski admits that Blu-Water is doing similar work for Black Swan Energy, another oil and gas company. This work consists of diverting creek water to a fresh water pond, again used primarily for fracking, at two locations. Once again, I conclude that this is frac water management.
[39] Irreparable harm is determined by the nature of the harm suffered, rather than its magnitude. Courts generally treat harm suffered from breach of a non-competition clause as irreparable, because of the possible loss of reputation to the plaintiff and the difficulty in calculating damages: Edward Jones v. Voldeng, 2012 BCCA 295 at para. 37; 853947 B.C. Ltd.
[40] I considered whether Daski can demonstrate irreparable harm if the injunction is not granted, given that there is less than a year to run on the five-year covenant and that Blu-Water has already established the relationship and begun to do business with Daski's principal client, Progress. In other words, has most of the harm already been done and the balance of the harm calculable? However, if Blu-Water is allowed to continue its current work for Progress––and Black Swan for that matter––it will be impossible to determine whether any further work it obtains from these clients is the result of having gotten a "leg-up" by, in effect, unilaterally shortening the length of the non-competition clause. Mr. Balfour notes that it is likely there will be an increase in fracking and the need for frac water management services because of the planned LNG plant in Kitimat. I therefore conclude that the prospect of irreparable harm has been demonstrated.
[41] In determining the balance of convenience, the court weighs the harm that the applicant will suffer if the injunction is denied and the applicant is successful at trial against the harm that the respondent will suffer if the injunction is granted and ultimately vacated at trial.
[42] One relevant factor is who has altered the status quo: Canadian Broadcasting Corp. (CBC) v. CKPG Television Ltd., 64 B.C.L.R. (2d) 96 (C.A.). In the case at bar, it is clearly Blu-Water and Mr. Kowalski.
[43] The strength of the applicants' case is another factor that may be considered. Having applied the strong prima facie case standard, it weighs in favour of Daski.
[44] If the injunction is granted, Blu-Water and Mr. Kowalski are not out of business. Rather, they can continue to do other water management work, such as construction of culverts, dust control for construction and camp water supply.
[45] The interests of third parties may be considered. Here there is no evidence or argument that Progressive or Black Swan will be harmed by the injunction being granted. Moreover, Mr. Kowalski said that he informed Progressive of the clause before he obtained the work from them.
[46] In my view, the balance of convenience favours granting the injunction.
[47] The injunction restraining the further breach of the non-competition clause––as blue-pencilled––is granted against the plaintiffs/respondents. I note that the applicants have provided the respondents with an undertaking as to damages.
[48] The non-solicitation clause was mentioned by the defendants as an after-thought at the conclusion of the hearing. I will therefore not deal with it.
"E.M. MYERS, J."