Executive Summary: Key Legal and Evidentiary Issues

• Justice Kuntz reviewed an arbitrator's decision on the standard of palpable and overriding error for questions of mixed fact and law, and correctness for extricable questions of law.
   
• Contractual notice requirements under Article 6 of the Ethylene Sales Agreement (ESA) were central to whether NOVA's audit claims for 2012-2015 and 2017 were time-barred.
   
• Evidentiary disputes arose over whether INEOS's sales of linear alpha olefins (LAO) to its European and Asian affiliates qualified as third-party sales or affiliate sales for own use.
   
• Allegations that INEOS concealed marketing expenses through a job description discrepancy engaged the rule in Browne v Dunn.
   
• Findings that NOVA had misrepresented Dow Chemical's position to INEOS underpinned the rejection of NOVA's good-faith and estoppel arguments on nameplate capacity.
   
• The appeal ultimately turned on whether the Arbitrator's interpretation of the ESA's audit, pricing, expense-allocation, and capacity-testing provisions contained any reviewable error.
   

Facts of the case

Nova Chemicals Corporation (NOVA) and INEOS Canada Partnership (INEOS), along with INEOS Oligomers USA LLC, operate two related manufacturing plants in Joffre, Alberta. NOVA co-owns the E3 Plant, which produces ethylene, while INEOS owns the LAO Plant, which uses that ethylene to manufacture linear alpha olefins. The parties' relationship is governed by an Amended and Restated Ethylene Sales Agreement dated January 1, 2006 (the ESA), which required INEOS to pay NOVA a share of its LAO sales margin and a share of NOVA's ethylene production costs.

A dispute arose after NOVA alleged that INEOS made accounting errors between 2012 and 2018 that understated revenues and overstated expenses, reducing amounts owed to NOVA. INEOS counterclaimed that NOVA had overstated ethylene production costs for 2017-2020 by understating the E3 Plant's nameplate capacity. The dispute went to arbitration, and the Arbitrator dismissed several of NOVA's claims as time-barred while allowing INEOS's nameplate capacity counterclaim. NOVA appealed on four grounds: limitations, affiliate pricing, marketing expenses, and nameplate capacity.

Policy and legislative provisions at issue

The appeal centred on several ESA provisions. Section 6.7(e) required notice of any error in a statement of account within thirty months following the end of the relevant contract year, while section 6.8 similarly required errors to be identified in writing within that period, after which accounts would be deemed true and correct. Section 13.3 provided that no modification to the ESA was valid unless made in writing and executed by both parties, which affected whether a 2014 Letter Agreement extending the audit timing for 2012-2014 also extended the notice period.

On affiliate pricing, Schedule B to the ESA distinguished between sales to Third Parties, priced at the "actual amount invoiced," and sales to Affiliates for their "own use," priced at "Market Prices." The Point-of-Sale and Affiliate Sale provisions in Schedule B further defined when revenue was recognized. On marketing expenses, the ESA permitted allocation of costs to INEOS's Global Marketing Pool where they could be "reasonably allocated to LAO for support of ongoing sales." On nameplate capacity, Schedule E set out the methodology for testing the E3 Plant's maximum ethylene output, on which the calculation of ethylene costs to INEOS depended. The appeal also engaged the standard of review under the Arbitration Act, RSA 2000, c A-43, and the good faith principle recognized in Bhasin v Hrynew.

Reasoning and analysis

Justice Kuntz found no palpable and overriding error in the Arbitrator's treatment of the 30-month notice period, holding that it operated as an enforceable contractual notice requirement rather than a limitation period, and that the 2014 Letter Agreement, which only varied the timing of the 2012-2014 audits, did not extend that notice period absent a written amendment under section 13.3. On affiliate pricing, the Court agreed that the Arbitrator properly considered the factual matrix, including the closure of INEOS's Pasadena facility, to conclude that sales to European and Asian affiliates were sales for "own use" rather than Third Party sales, since INEOS did not know at the time of sale whether the product would ultimately reach a third party.

Regarding marketing expenses, the Court held the Arbitrator had not applied a "trust us" standard but had properly assessed reasonableness and found NOVA's evidence, including its expert report, insufficient to establish that allocations to the Global Marketing Pool were unreasonable. The Court also found no error in how the Arbitrator handled the Browne v Dunn issue concerning a 2014 job description, since the discrepancy was not treated as determinative and INEOS's witness had been entitled to respond to the credibility challenge against him. On nameplate capacity, the Court upheld the Arbitrator's finding that Schedule E imposed an ongoing testing obligation on NOVA, and that NOVA could not rely on an alleged mutual understanding to maintain the historical 2.81 BPY figure because NOVA had misled INEOS about Dow Chemical's position, breaching its duty of honest contractual performance. The Court further rejected NOVA's estoppel by convention argument, both because it had not been raised at arbitration and because the required shared understanding and detriment were absent.

Ruling and overall outcome

Justice Kuntz dismissed NOVA's appeal in its entirety, finding no palpable and overriding error or error of law in the Arbitrator's decisions on limitations, affiliate pricing, marketing expenses, or nameplate capacity. INEOS was the successful party on all four grounds of appeal. The decision does not specify a monetary amount awarded to INEOS as part of this ruling; the $32 million nameplate capacity award and the $6.3 million in claims NOVA sought to recover were amounts arising from the underlying arbitration award being upheld, rather than new amounts ordered by the Court itself. The parties were directed to make written submissions on costs, limited to five pages plus a Bill of Costs, within 90 days if they could not agree.