Executive Summary: Key Legal and Evidentiary Issues

• CNOOC Petroleum North America ULC (the Tenant) discovered asbestos-containing material in the spray-applied fire-retardant coating of a premiere 37-story Calgary office tower and terminated its lease, claiming the Landlord failed to remove all asbestos as required by law and the lease.

• The Landlord (801 Seventh Inc) contended the Tenant overreacted to trace amounts of asbestos and seized on the discovery as a pretext to exit an expensive long-term lease it could no longer fully utilize.

• Central to the dispute was the interpretation of Alberta's occupational health and safety legislation regarding asbestos in existing buildings, including whether the OHS Code mandated full removal of friable asbestos-containing material from the Building's air distribution system.

• Novel questions arose regarding the duty of good faith contractual performance when both parties anticipated imminent litigation yet remained bound by ongoing lease obligations.

• Mid-trial evidentiary challenges addressed the permissible scope of expert testimony, with the Court excluding certain opinions on building safety, condition assessments, and respirability as overreach, while allowing overlapping expert evidence given the case's magnitude and complexity.

• Post-liability trial proceedings addressed the scale and scope of recoverable legal costs under Clause 30 of the Lease, with the Court ruling that full indemnity applies to costs within that clause's scope.

The parties and the building

CNOOC Petroleum North America ULC, formerly Nexen Energy ULC, was an oil and gas exploration and production company acquired by CNOOC Limited in 2013. It occupied 33 floors of a premiere 37-story office tower in downtown Calgary under a lease with 801 Seventh Inc, the building's owner. The lease was amended and restated on December 30, 2013, extending through December 31, 2031, with escalating base rents. The building was constructed between 1979 and 1982, and its steel structure was coated with a spray-applied fire-retardant material (the "SAF") known as Monokote-5, produced by W. R. Grace & Co. using vermiculite mined near Libby, Montana — a source now generally accepted to contain trace amounts of asbestos.

The asbestos discovery and the tenant's response

In advance of planned building renovations, the Tenant commissioned a hazardous materials survey beginning mid-2017. In November 2017, the Tenant's consultant Eco Abate discovered asbestos in the SAF within the building's plenum spaces — the area above the suspended ceiling tiles that formed part of the building's air distribution system. The SAF was confirmed to be asbestos-containing material, though the parties agreed only trace amounts were present. The Tenant kept this discovery secret from the Landlord for approximately four months, from November 9, 2017, to March 14, 2018, during which time it assembled an internal team under litigation privilege, began searching for alternative office space, and formulated an ultimatum. On March 14, 2018, the Tenant presented the Landlord with a demand that all SAF be removed from the building and that the Landlord relocate the Tenant's workforce at its expense during the remediation. The Tenant believed Alberta's OHS Code prohibited friable asbestos-containing material within the building's air distribution system and mandated its complete removal.

The landlord's position and the asbestos management plan

The Landlord disagreed fundamentally with the Tenant's interpretation of the law. After conducting its own investigation through consultants, the Landlord concluded that the trace amounts of asbestos in the SAF did not pose a safety risk requiring wholesale removal. Instead, the Landlord developed an Asbestos Management Plan (the "AMP") to manage the ACM in place, consistent with what it believed was the practice within the province for existing buildings. The Landlord also initiated a Declaratory Proceeding in early March 2019, seeking judicial determination of the parties' respective lease obligations — signalling its willingness to comply with whatever the court determined was required. The Tenant, however, proceeded to commit to a second lease across town, relocated its entire workforce of over a thousand employees, and in the spring of 2019 formally terminated the lease and ceased paying rent.

The mid-trial ruling on expert evidence

During the liability trial, which commenced on October 3, 2022, and involved close to 20 experts, the Tenant challenged seven portions of the evidence given by the Landlord's experts, Drs. Lee and Sanchez, on the grounds of both overreach and overlap. The Court declined to exclude any evidence on overlap grounds, finding that in a case of this magnitude, some overlap among experts from differing disciplines was virtually unavoidable and did not constitute abuse of process. On overreach, the Court excluded certain portions — notably opinions that the building was "safe," that the fireproofing was in "good condition," observations about ceiling debris, and characterizations of particles as "non-respirable" — as falling outside the experts' qualified scope of forensic asbestos analysis. However, other challenged portions were permitted, including opinions on fibre release characterization and the experts' use of the word "clean" as a technical shorthand for "the fireproofing is not shedding asbestos."

Key lease provisions at issue

Several lease clauses were central to the dispute. Clause 17 provided an express right to terminate if the building was destroyed or damaged rendering the premises "unfit for the Tenant's occupancy" and the Landlord's Architect opined that restoration would take over one year, acting diligently. Sub-clause 16(j) required the Landlord to comply with all occupational health and safety laws; sub-clause 16(o) contained a representation that no hazardous substances were present in the building and obligated the Landlord to remove any subsequently found, to the extent required by law. Sub-clause 16(a) guaranteed quiet enjoyment, while sub-clauses 16(e) and 16(i) required the Landlord to operate and maintain the building as a first-class property. Sub-clause 15(z) stipulated that the Landlord could make further reasonable rules and regulations but only subject to the prior consultation with the Tenant and the Tenant's agreement.

The court's findings on the law

The Court ruled that Alberta's OHS Code did not require the complete removal of all asbestos-containing material from existing buildings. Rather, the legislation required that ACM be managed in place and removed only when it would be disturbed by planned renovation, alteration, or demolition activities. The Tenant's interpretation of the OHS Code — that friable ACM was prohibited from being present in any building's air distribution system and therefore mandated immediate removal — was erroneous. The Court found that the Landlord had not breached its obligations under sub-clauses 16(j) or 16(o), nor the quiet enjoyment or first-class property covenants. The premises had not been rendered unfit for occupancy under Clause 17, as the trace amounts of asbestos found did not constitute the kind of destruction or damage that clause contemplated. The Landlord did breach sub-clause 15(z) by imposing the AMP without obtaining the Tenant's agreement, though this breach did not deprive the Tenant of the whole benefit of the lease and did not justify termination. Additionally, the Court found that the Landlord's representation in sub-clause 16(o) that there were no hazardous substances in the building was incorrect, though the Landlord was not found to have knowingly misled the Tenant or acted negligently in making that representation at the time the lease was entered.

The good faith analysis

Both the Landlord and Tenant cross-claimed for breach of the duty of good faith contractual performance. The Court acknowledged the novel question of how this duty operates when parties are simultaneously performing a contract and positioning for anticipated litigation. The Court found isolated breaches by both sides. The Landlord breached its duty of honest performance by misrepresenting to the Tenant that Alberta OH&S had affirmed the findings and recommendations of the WSP report and confirmed the building was safe for occupancy, when in fact the government official, Rogerson, had only offered informal "insight" and had expressly stated he could not provide a determination on the Landlord's state of compliance. The Landlord also evaded its contractual role under Clause 17 by failing to procure the requested Architect's opinion on the second prerequisite for termination — how long restoration would take — and instead responded only to the first prerequisite, which it disputed. The Tenant breached its duty of cooperation by concealing the asbestos discovery from the Landlord for four months, misleading the Landlord into believing the matter was minor, while internally strategizing an exit from the lease under litigation privilege. The Court found, however, that the Tenant's overall conduct was not proven to have been a dishonest sham; rather, it was driven by a genuine, though erroneous, interpretation of the law coupled with sincere safety concerns rooted in prior workplace fatalities. Overall, both parties reasonably continued to perform contract duties in good faith considering the entire period, with these breaches representing unfortunate exceptions where litigation interests were placed ahead of honourable conduct.

Third party indemnity claims

CNOOC Limited, the Tenant's parent corporation, was found liable to the Landlord under the Lease Indemnity Agreement executed at the time of the lease, having not denied liability at trial if the Tenant was found in breach. The Court declined to pierce the corporate veil between the Tenant and CNOOC Limited, finding the Landlord failed to satisfy both branches of the test: evidence did not establish that the Tenant was under the complete control of CNOOC Limited, and no fraudulent or improper purpose in the separate corporate structure was proven. The Beneficial Owners of 801 Seventh Inc were found liable only to the extent of their respective interests in the building, in accordance with clause 4 of the Beneficial Owners Agreement.

Costs application and procedural rulings

Following the liability trial, the Landlord applied for recovery of its legal costs under Clause 30 of the Lease, which provided for indemnification of enforcement costs. In an endorsement dated February 27, 2026, the Court set the parameters for that costs hearing, scheduled for April 7 and 8, 2026. The scale of costs for amounts within Clause 30's scope was determined to be full indemnity — the entire amounts invoiced and paid, with no reasonableness filter applied. All costs incurred on or prior to the entry of the order following the liability trial were eligible for recovery, and the parties were directed not to waste effort delineating between liability and damages issues costs. The Court ordered reciprocal disclosure of all parties' legal invoices, subject to redaction of privileged information. Importantly, the Court held that Clause 30 did not amount to an automatic waiver of privilege, and that there should be no disclosure of privileged communications or any one-sided disclosure requirement. No restricted access order or publication ban was warranted, consistent with the open courts principle.

The ruling and overall outcome

The Court found that the Landlord, 801 Seventh Inc, was the successful party overall in the liability trial. The Tenant's termination of the lease was declared invalid, as it lacked any lawful basis — neither fundamental breach, anticipatory breach, nor the express Clause 17 termination right had been established. The Tenant's aggressive pursuit of its position, premised on an erroneous interpretation of Alberta's asbestos legislation, constituted a breach of the lease, and the Tenant will bear liability for it. While the Landlord prevailed on the vast majority of claims, the Tenant succeeded on select findings: the Landlord's breach of sub-clause 15(z) by imposing the AMP without the Tenant's agreement, and the Landlord's isolated breaches of good faith duties regarding the Rogerson/OH&S misrepresentation and the evasion of the Clause 17 Architect's opinion obligation. The trial addressed liability only and did not quantify any resulting damages, with the exact amount to be determined in a subsequent damages phase. The amounts at stake in this litigation were described as very roughly in the range of $750,000,000.