Executive Summary: Key Legal and Evidentiary Issues

• Alberta's Court of King's Bench, in the Liability Trial (2025 ABKB 145), found that CNOOC Petroleum North America ULC unlawfully terminated its commercial lease over asbestos-containing spray-applied fireproofing despite testing showing only trace, non-hazardous concentrations.
   
• Both parties alleged breaches of the implied duty of good faith performance, with the Court finding only narrow, one-off breaches by each side rather than pervasive bad faith.
   
• Subsequent case-management decisions addressed the scale and disclosure of legal costs owed to the successful Landlord following the bifurcated Liability Trial.
   
• A separate 2026 ruling determined whether CNOOC could amend its pleadings as of right or required leave of the Court under Alberta's Rules.
   
• An earlier mid-trial ruling addressed the permissible scope of two Landlord experts' opinion evidence on asbestos characterization.
   
• A 2026 discovery ruling denied CNOOC's application for further and better affidavits of records, finding its requests speculative and fishing in nature.
   

Facts of the case

CNOOC Petroleum North America ULC ("CNOOC" or the "Tenant"), formerly known as Nexen Energy ULC, leased approximately 600,000 square feet across floors 4 through 36 of a 37-storey Calgary office tower known as the Nexen Building, owned by 801 Seventh Inc. and several beneficial owners (collectively the "Landlord"). In November 2017, CNOOC's environmental consultant, Eco Abate, detected asbestos-containing spray-applied fireproofing ("SAF") in the building's ceiling plenum spaces. CNOOC did not share this information with the Landlord in any substantive way for over four months. At a March 14, 2018 meeting, CNOOC presented its findings and delivered an "Ultimatum": the Landlord had to remove all SAF, and CNOOC would not remain in the building while that occurred. CNOOC then began relocating its workforce and, on May 3, 2019, formally terminated the lease, citing fundamental and/or anticipatory breach and, alternatively, its express termination right under Clause 17 of the lease. The Landlord had earlier filed a Declaratory Proceeding in March 2019 asking the Court to determine the parties' rights and obligations regarding the asbestos, and counterclaimed for CNOOC's wrongful termination and unpaid rent.

The Court's extensive factual findings, following a trial confined to liability only, found that the SAF contained asbestos at extraordinarily low concentrations — generally between 0.0002% and 0.038% by weight — and that undisturbed SAF released no asbestos fibres at all. Only nine airborne asbestos fibres were detected across more than four years of testing and thousands of samples, with concentrations found to be at or near background levels. The Court concluded the building was safe to occupy throughout, both before and after termination.

Policy and legislative provisions at issue

The dispute turned substantially on the interpretation of Part 4 of Alberta's Occupational Health and Safety Code, particularly section 31 (deeming a building in an "unsafe condition" if asbestos fibres "may be released") and section 33 (prohibiting asbestos in air distribution systems). CNOOC argued these provisions required full removal of the SAF regardless of concentration; the Landlord argued a risk-based management approach, consistent with government guidance in the Alberta Asbestos Abatement Manual, was sufficient. The Court found the legislative and guidance materials genuinely ambiguous on several points, which informed its conclusion that neither party's differing legal interpretation reflected bad faith.

Reasoning and analysis

Clause 16(o) of the lease represented that the building contained no hazardous substances and required the Landlord to remove any hazardous substances "to the extent required by law." Clause 16(j) required the Landlord to comply with occupational health and safety laws. The Court found the Landlord had not breached either provision given the minimal and non-releasing nature of the undisturbed SAF. CNOOC also invoked its express termination right under Clause 17, but the Court found that pre-condition was never triggered because the premises had not been rendered unfit for occupancy.

CNOOC additionally alleged breaches of quiet enjoyment (Clause 16(a)), the covenant to maintain the building as a first-class property (Clauses 16(e) and (i)), and improper imposition of rules through the Landlord's Asbestos Management Plan (Clause 15(z)). The Court rejected most of these claims but found the Landlord had breached Clause 15(z) by imposing the Asbestos Management Plan without CNOOC's prior agreement, and had breached its duty of honest performance by misrepresenting that an Alberta OH&S official had endorsed its management approach. The Court also found the Landlord failed to timely obtain its architect's opinion as required under Clause 17, though this breach had no practical consequence.

On the cross-claims of bad faith, the Court applied the Supreme Court of Canada's organizing principle of good faith contractual performance and found that neither party's conduct amounted to a breach of that duty overall, aside from narrow exceptions: the Landlord's misrepresentation regarding OH&S's position, and CNOOC's four-month period of non-cooperation and misleading representations following its discovery of the asbestos. The Court rejected the Landlord's theory that CNOOC's ultimatum was a pretext to escape an unwanted lease, finding CNOOC's stated safety concerns genuine even though its legal interpretation of the asbestos regulations was ultimately incorrect. The Court further found that the Landlord's active Declaratory Proceeding, seeking judicial clarification of its obligations, defeated any claim of anticipatory or fundamental breach, since the Landlord had not evinced an intention to refuse performance of the lease. CNOOC's misrepresentation claim concerning pre-lease environmental disclosures also failed, as the Court found the Landlord genuinely believed its representation that the building was free of hazardous substances at the time it was made.

Ruling and overall outcome

The Landlord was the substantially successful party. The Court held that CNOOC failed to prove the Landlord breached the lease in a manner justifying termination, and that CNOOC's termination was therefore unlawful, along with its subsequent cessation of rent payments. The Landlord succeeded on its counterclaim for wrongful termination, though this liability-only decision did not quantify damages, which were left to a second, separate damages trial. The Court found only narrow, one-off breaches by the Landlord (failure to obtain consent for its Asbestos Management Plan and a misrepresentation regarding OH&S's position), whose damages consequences, if any, were also left to the second phase. No specific monetary amount was ordered, granted, or awarded in this decision — the Court expressly deferred quantification of damages to the subsequent damages trial.