In a recent decision of the Alberta Court of Queen’s Bench, Bard v Canadian Natural Resources​, 2016 ABQB 267, the Court considered issues respecting e-discovery in the context of a complex, multi-million dollar accounting action between sophisticated commercial entities.

Background

The Plaintiffs and the Defendants (collectively, “CNRL”) are parties to a 1968 Memorandum of Agreement (the “Agreement”) “according to which the Plaintiffs hold an undivided 5 percent working interest in Lease 18 for an oil sands project known as Horizon, while CNRL operates the project [the “Horizon Project”] as 95 percent shareholder” (para 2). The Plaintiffs’ share of the proceeds and costs were to be recorded in a Carried Account, which tracks the Plaintiffs’ financial interest, as the Plaintiffs do not get paid until and unless the proceeds exceed the costs recorded in the Carried Account (para 2).

In 2010, the Plaintiffs commenced an action against CNRL for breach of contract, breach of fiduciary duty and unjust enrichment in relation to CNRL’s accounting of credits and debits posted to the Carried Account.

In 2014, CNRL issued new statements for the Carried Account, purporting to replace all previous statements. The new statements were based on a new interpretation of the Agreement and followed a significantly different methodology of accounting.

In 2014, the Plaintiffs applied to obtain (a) permission to amend the Statement of Claim to reflect, among other things, the implications of the new methodology; and (b) an order compelling CNRL to produce seven categories of native and other records.

The Decision Regarding Production of Records

In total, the Plaintiffs sought production of seven categories of records. Three of these categories, and the Court’s decision regarding whether they should be produced, are of particular relevance to industry participants. The Plaintiffs sought production of:

  1. Native spreadsheets, including embedded formulas and metadata, to supplement the copies already produced by CNRL in a TIFF format in accordance with the Complex Case Litigation Plan (the “Litigation Plan”) agreed to by the parties;
  2. Certain of CNRL’s electronic financial database records; and
  3. Miscellaneous records requested by the Plaintiffs’ expert.

Native Spreadsheets

CNRL had provided spreadsheets to the Plaintiffs in their TIFF image files in accordance with the Litigation Plan. However, the Plaintiffs argued that the TIFFs were not “usable” and they needed the native versions of the spreadsheets to enable them to manipulate the data and test different analyses more robustly.

CNRL objected to producing the native spreadsheets primarily arguing that (a) the spreadsheets had already been produced in accordance with the Litigation Plan and were usable as produced and (b) compelling CNRL to produce the native spreadsheets would impose an undue burden on CNRL disproportionate to the records’ probative value.

In response to CNRL’s first argument, the Court held that disclosure must be meaningful and “one’s inability to search and manipulate the data from across thousands of TIFF images renders them, at the very least, less usable than their Excel counterparts” (para 112). The Court noted that it could have chosen to strictly enforce the Litigation Plan that the parties agreed to, but here, doing so would not result in meaningful disclosure.

With respect to CNRL’s proportionality argument, the Court held that proportionality is an important principle, but “what it requires will differ depending on the circumstance” (para 121). Counsel for CNRL claimed it would cost $1 million to satisfy the Plaintiffs’ production requests, in part because CNRL did not maintain a Carried Account separate and distinct from all other financial data for the Horizon Project and thus would have to run a query in CNRL’s financial system to generate the relevant data. However, the Court held that “even if it would cost $1 million, proportionality is not a major feature of discovery in a case of this scope, featuring parties of this size and sophistication, and where the magnitude of potential damages is this great” (para 122) and that “any burden on CNRL arises from its own failure to maintain a separate Carried Account” (para 104).

In conclusion, the Court held that the expense, delay, danger or difficulty in producing the records the Plaintiffs requested was not grossly disproportionate to the likely benefit and therefore ordered CNRL to produce the native spreadsheets.

Financial Database Records

CNRL uses a database system in its business to store all of the revenue and expenses and source data related to the Horizon Project (the “E1 System”). The Plaintiffs sought production of the credits and debits entered into CNRL’s E1 System with respect to the Horizon Project so the Plaintiffs could re-construct the Carried Account and apply what it believed to be the correct interpretation of the Agreement to the actual financial data. As a result, the Plaintiffs’ request sought production of the general ledger, trial balances, chart of accounts, and other records requested by the Plaintiffs’ expert.

The Court held that:

  1. whether or not a full reconstruction of the Carried Account was necessary, electronic financial database records on the Horizon Project’s revenue and costs were, at a minimum, relevant and material as to whether or not CNRL did, in fact, credit and debit the Carried Account in accordance with the Agreement (para 83);​
  2. comparing the financial database records for the Horizon project with the statements provided to the Plaintiffs would either corroborate or contradict CNRL’s position that it has at all times acted accurately and in good faith in its accounting of the Plaintiffs’ interest (para 83);
  3. producing the source data would “minimize delay if CNRL were to change its methodology again and empower this Court to reach a just outcome if the trial judge were to disagree with the interpretations offered by the parties” (para 84). CNRL unsuccessfully argued that the request was a level of detail that was not needed; and
  4. although the rules of evidence permit the introduction of summaries of voluminous source documents, it is generally still a requirement that the source documents be disclosed to the opposing side, and introduced as part of the trial record (para 84: citing Kon Construction Ltd v Terranova Developments Ltd, 2015 ABCA 249).

Records Requested by Expert

The Plaintiffs relied on an expert retained to assist in its reconstruction of the Carried Account. That expert gave evidence which asserted that certain records the Plaintiffs sought were necessary for him to conduct his analysis. CNRL argued that full reconstruction of the Carried Account was unnecessary and that the expert’s evidence should be given little weight.

The Court disagreed with CNRL and ordered CNRL to produce the records requested by the expert. The Court cited Air Canada v WestJet Airlines Ltd., [2006] OJ No 1797 (Ont SCJ) where the Court held, at para 72, that “it does not lie within the purview of Air Canada to decide what information WestJet's experts do or do not need…”. The Court noted that Plaintiffs’ counsel had disclosed “a rational strategy in which the disputed [records play] a material part” (para 74) and that “no independent witness suggests that [the expert] does need this data to do his analysis” (para 72).

Implications

This case has implications to oil and gas industry participants, some procedural, some practical, and some legal:

  1. With respect to e-discovery, this case confirms that a proactive approach to electronic record-keeping and e-discovery is important;
  2. Discovery must be “meaningful” and what constitutes “meaningful” disclosure will vary depending on each individual case. When financial records are at the heart of a case, extensive production from the accounting software where those records are stored may be ordered and any derivative spreadsheets are likely to be ordered to be produced in their native format in order to provide meaningful access to the opposing party; and
  3. Records requested by experts, asserted to be necessary to do their expert work, will generally be required to be produced, particularly where no independent witness testifies that those records are not required.

BLG acted for the successful Plaintiffs in this matter.