Hawkeye Power Corporation v. Sigma Engineering Ltd.

2012 BCCA 414 Hawkeye Power Corporation v. Sigma Engineering Ltd. COURT OF APPEAL FOR BRITISH COLUMBIA Citation: Hawkeye Power Corporation v. Sigma Engineering Ltd., 2012 BCCA 414 Date: 20121018 Docket: CA039561 Between: Hawkeye Power Corporation Appellant/ Respondent on Cross Appeal (Plaintiff) And Sigma Engineering Ltd. Respondent/ Appellant on Cross Appeal (Defendant) Before: The Honourable Mr. Justice Groberman The Honourable Madam Justice Bennett The Honourable Madam Justice A. MacKenzie On appeal from: Supreme Court of British Columbia, November 21, 2011 (Hawkeye Power Corporation v. Sigma Engineering Ltd., 2011 BCSC 1578) Counsel for the Appellant: G. J. Allen Counsel for the Respondent: S. M. Hirji and J. R. Schmidt Place and Date of Hearing: Vancouver, British Columbia September 4, 2012 Place and Date of Judgment: Vancouver, British Columbia October 18, 2012 Written Reasons by: The Honourable Madam Justice MacKenzie Concurred in by: The Honourable Mr. Justice Groberman The Honourable Madam Justice Bennett Reasons for Judgment of the Honourable Madam Justice MacKenzie: Introduction [1] In 2006, two brothers, Greg and Robert Neeld, incorporated two related companies to carry out hydroelectric energy projects: Hawkeye Power Corporation ("Power") and Hawkeye Energy Corporation ("Energy"). Power and Energy entered into an asset purchase agreement (the "APA") which governs the ownership of 36 water licence and land tenure applications (the "River Applications"). Under the APA, Power agreed to transfer beneficial and legal ownership of the River Applications to Energy in exchange for shares in Energy and certain payments and reimbursements. The APA contained an expiry clause which allowed Power to regain ownership of the River Applications if Energy did not fulfill certain obligations. [2] The dispute is between Power and Energy's creditor, Sigma Engineering Ltd. ("Sigma"). Energy was placed into receivership on September 1, 2009, and the receiver attempted to sell the River Applications to Sigma. Power opposed the sale on the grounds that it was the legal and beneficial owner of the River Applications by operation of the expiry clause in the APA. On May 31, 2010, the Supreme Court approved the sale of the River Applications by Energy's receiver to Sigma, subject to Power's claim of ownership interest in the River Applications (2010 BCSC 1977). Power's ownership claim was tried in the Supreme Court in July 2011. [3] In careful and thorough reasons indexed as 2011 BCSC 1578, the trial judge held Power and Energy had, by their conduct, modified the terms of the APA. As a result of this modification, the judge interpreted the APA's expiry clause to impose an additional obligation on Power in order to give effect to the expiry clause and regain ownership of the River Applications. As Power did not fulfill this additional obligation when the APA expired, the expiry clause failed to operate so as to transfer the River Applications to Power. Notably, the question of contract modification and this interpretation of the expiry clause were neither pleaded nor argued by the parties at trial. [4] The judge concluded Energy is the legal and beneficial owner of the River Applications and dismissed Power's claim for a declaration of ownership in the River Applications. She also dismissed Sigma's counterclaim that the APA was a fraudulent conveyance or fraudulent preference. [5] Power appeals from the order on the basis the trial judge erred in finding Power and Energy had modified the APA so as to impose an extra obligation on Power under the expiry clause and the trial judge erred in finding the modification of the APA binding on Power and Energy, despite a lack of consideration. [6] Alternatively, Power submits the trial judge erred in basing her decision on an analysis that was neither pleaded nor argued by the parties. Power submits the outcome was therefore unfair. [7] Sigma cross appeals on the ground that if Power's appeal is allowed, this Court must consider Sigma's cross appeal that the conveyance was fraudulent. [8] For the reasons that follow, I conclude the trial judge made a procedural error in resolving this case based on an interpretation of the expiry clause that was neither pleaded nor argued by the parties. Neither party had the opportunity, in its pleadings or in submissions, to address the basis for the judge's decision. This resulted in prejudice to Power and constitutes reversible error. In light of this conclusion, it is unnecessary to address the other two grounds of appeal. It is also unnecessary to address Sigma's cross appeal that the APA was a fraudulent conveyance or preference. [9] Accordingly, I would allow the appeal, set aside the order of the trial judge and order a new trial. Background [10] The facts are set out comprehensively in the reasons of the trial judge so I will only summarize them here. [11] Two brothers, Greg and Robert Neeld, had a history of working together in the mining industry. In an effort to venture into the development of hydroelectric power claims, the brothers incorporated two companies: the appellant Power, and its associated company, Energy. The principal and directing mind of both companies is Greg Neeld, assisted by Robert Neeld. [12] Using the business framework from their mining experience, the brothers decided to use Power as the "prospect generator" to obtain the River Applications. Energy would act as the "operating company" and raise five million dollars in financing to develop the claims, obtain ownership of the River Applications upon making certain payments to Power, and eventually become a public company. To this end, Power and Energy entered into the APA, which governs the ownership of the River Applications. [13] Power and Energy retained Sigma for advice and engineering services. Sigma investigated and filed a total of 36 River Applications for the Neeld brothers, all of which were filed in Energy's name. The Asset Purchase Agreement [14] Power and Energy entered into the APA in July 2007 as Vendor and Purchaser respectively in order to transfer the beneficial ownership of the River Applications from Power to Energy. [15] At that time, the River Applications were registered under Energy's name in order to maintain the highest priority position in the River Applications. Although Energy was always the legal owner of the River Applications, the trial judge found that Power retained beneficial ownership of the River Applications and both Power and Energy expected the future ownership of the River Applications to be governed by the terms of the APA. [16] The APA contemplated two sets of purchases and three potential closing dates. On the First Closing Date, July 25, 2007, the beneficial ownership of three of the River Applications was to be conveyed from Power to Energy in exchange for 7,900,000 of Energy's shares. The Second Closing Date was to be the 60th day after Power notified Energy of Power's ability to convey the remaining River Applications to Energy. If by that date Energy had financed at least $5 million, it would pay Power $895,000 plus an amount equal to the Integrated Land Management Bureau ("ILMB") costs incurred by Power, in exchange for beneficial and legal title to the remaining River Applications. If Energy had not obtained an investment of at least $5 million by this date, it would issue two promissory notes, one in the amount of $895,000 and a separate one in an amount equal to the ILMB Costs incurred by Power, in exchange for beneficial and legal title of the remaining River Applications. These promissory notes were to be payable on or before the Third Closing Date, being the 15th business day after the day on which Energy completed the $5 million minimum financing. [17] Clause 4.6 (the "Termination Clause") provided that if Energy did not pay $895,000 plus the ILMB Costs within twelve months after the Second Closing, Power, upon notice to Energy, would have the right to terminate the APA, with the option of returning Energy's shares and promissory notes in exchange for the original three River Applications. [18] Clause 4.7 (the "Expiry Clause") specified that if the Third Closing did not occur by the Expiry Date of July 1, 2009, then Energy would be deemed to have quitclaimed all the River Applications to Power in exchange for the surrender of the 7,900,000 Energy shares and the promissory notes. [19] The Termination Clause and the Expiry Clause are as follows: 4.6 Failure of Purchaser to Pay Additional Projects Purchase Price If the Purchaser [Energy] does not pay the Additional Projects Purchase Price payable for the Additional Projects and related Assets within 12 months next following the Second Closing, the Vendor [Power] will thereafter (until the earlier of the Expiry Date and that date, if any, on which the Purchaser gives written notice to the Vendor to the effect that the Purchaser has received the Minimum Financing and has deposited into trust with its solicitors an amount sufficient to pay the Additional Projects Purchase Price together with irrevocable instructions to pay the Additional Projects Purchase Price to the Vendor in satisfaction of the Purchaser's Third Closing obligations) have, in addition to all other rights and remedies available to it at law and in equity: (a) the exclusive right and option, exercisable by notice in writing to the Purchaser, to terminate this Agreement in respect of the Additional Projects and related Assets, in which event neither party will have any further obligation to the other in respect of the Additional Projects and related Assets; and (b) the additional exclusive right and option, in addition to and separate from the option provided for in clause 4.6(a), and exercisable by notice in writing to the Purchaser, to transfer and surrender the Vendor's 7,900,000 Purchaser Shares to the Purchaser in exchange for the Original Projects and related Assets; and upon the exercise of such option, beneficial title (and legal title, if applicable) to the Original Projects and related Assets will be and be deemed for all purposes to be transferred to the Vendor without the need for any further action or documentation, and neither party will have any further obligation to the other hereunder except an obligation on the part of the Purchaser to transfer registered title to the Original Projects and related Assets to the Vendor, if required to vest good and marketable title in the Vendor. 4.7 Expiry Date Notwithstanding any other provision of this Agreement, if the Third Closing does not occur before the Expiry Date, then in the absence of a written agreement to extend the time for performance of this Agreement executed and delivered by both parties hereto, the Purchaser will be and be deemed for all purposes to have quitclaimed and surrendered the Original Projects and the Additional Projects and all related Assets to the Vendor in exchange for the transfer and surrender by the Vendor of its 7,900,000 Purchaser Shares and the promissory notes described in section 4.2 of this Agreement to the Purchaser, without the need for any further action, and neither party will have any further obligation to the other hereunder. The Conduct of the Parties to the APA [20] On July 25, 2007, Power and Energy completed the First Closing under the APA. Energy issued 7,900,000 shares to Power and Power conveyed beneficial and legal ownership of the first three River Applications to Energy. [21] Energy also made payments to Power for the ILMB Costs, totalling approximately $705,000, despite the fact the repayment of the ILMB Costs was not due until the Second Closing under the APA. [22] In July 2008, Power gave notice to Energy of its ability to convey the remaining River Applications to Energy. Under the APA, the Second Closing was to occur 60 days after this notice. Energy did not raise the minimum financing required by the Second Closing Date and did not provide any promissory notes to Power. Despite this omission, the trial judge found that the Second Closing had occurred, as the parties' conduct indicated they considered the Second Closing to be completed. As a result of the Second Closing, Energy obtained both beneficial and legal title to the remaining River Applications. Thus, by September 2008, Energy was the beneficial and legal owner of all the River Applications and Power no longer had any property interest in the River Applications. However, Power maintained a contractual right to regain ownership of the River Applications if certain requirements were fulfilled. [23] The Third Closing was to occur on the 15th business day after Energy raised the $5 million minimum financing. It required Energy to pay Power $895,000 and the amount of the ILMB Costs before the automatic expiry of the APA on July 1, 2009. Although Energy paid the ILMB Costs before the Second Closing Date, it never raised the minimum financing required for the Third Closing, nor did it pay $895,000 to Power before July 1, 2009. Thus, the Third Closing did not occur. [24] Under the APA's Termination Clause, Power had the right to terminate the APA before the Expiry Date and regain ownership of the first three River Applications if Energy did not pay $895,000 plus the ILMB Costs within 12 months of the Second Closing. Pursuant to this clause, Power sent Energy a notice of termination dated August 21, 2009, and delivered August 25, 2009. However, the trial judge found the notice of termination ineffective, as Power sent it after the APA Expiry Date of July 1, 2009. [25] Pursuant to the APA's Expiry Clause, Power had the right to regain ownership of all the River Applications after July 1, 2009, in exchange for the transfer of the 7,900,000 shares and the promissory notes to Energy. Power returned the Energy shares with the notice of termination on August 25, 2009. As they had not been issued, Power did not return any promissory notes, nor did Power return any other payments made by Energy. The Dispute Between Power and Sigma [26] In 2008 and 2009, Power and Energy fell behind in paying for Sigma's engineering services. Sigma settled its debt claim against Power, but Energy's financial problems led Sigma to give notice to Energy in April 2009 of its intention to have Energy placed into receivership. [27] Energy went into receivership in September 2009. The Receiver offered the River Applications for sale and Sigma made the favoured bid. The Receiver applied for court approval of the sale of the River Applications and Power opposed the application on the ground that by operation of the APA it was the legal and beneficial owner of the River Applications. The British Columbia Supreme Court approved the sale, subject to Power's claim to an ownership interest in the River Applications. [28] Power's claim for a declaration that the River Applications are the legal and beneficial property of Power and for an order that the Receiver, Energy and Sigma transfer the River Applications to Power, was tried and dismissed in the Supreme Court. The Parties' Positions at Trial [29] At trial, Power's position was the APA is a valid and enforceable contract that governs the ownership of the River Applications. Power maintained that the written terms continued to apply, despite some conduct of Power and Energy that was inconsistent with its terms. Power argued that, pursuant to the original, written terms of the APA, Power is the legal and beneficial owner of the River Applications as the Second Closing did not occur and any River Applications that were transferred to Energy returned to Power upon expiry or, alternatively, termination of the APA. [30] Sigma's position was the APA does not govern the ownership of the River Applications, as it is not a valid and binding agreement. Sigma argued the APA was essentially a sham, there was no consideration for the agreement, and the conduct of the parties was inconsistent with the terms of the APA. Sigma also advanced an alternative counterclaim that asserted the APA was formed in furtherance of a fraudulent conveyance or fraudulent preference and is therefore null and void under the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, or the Fraudulent Preference Act, R.S.B.C. 1996, c. 164. Thus, Energy owns the River Applications. The Trial Judgment [31] The trial judge rejected the arguments of both parties. First, she held the APA between Energy and Power was valid and binding, contrary to Sigma's position that it was an invalid sham. The judge found that although Energy and Power did not strictly adhere to the provisions of the APA, this did not invalidate the agreement. Rather, the inconsistencies between the parties' conduct and the terms of the APA amounted to a modification of the APA. [32] In particular, the trial judge found the parties' conduct modified clause 4.2(b) of the APA, which required Energy to reimburse Power for all ILMB Costs by cash or promissory note at the time of the Second Closing. However, Energy made payments to Power for the ILMB Costs before the Second Closing. The judge held this inconsistent conduct modified clause 4.2(b) of the APA to allow Energy to pay the ILMB Costs as Power incurred those costs, instead of reimbursing Power for all ILMB Costs at the time of the Second Closing. To this effect, the judge said: [175] The effect of the Neeld brothers' evidence was that while repayment of the ILMB Costs was not due until the Second Closing, because both companies intended and treated the Second Closing as occurring, Energy simply paid Power along the way instead of waiting for the Second Closing. [176] The implication of the Neeld brothers' evidence, therefore, was that by their conduct and intentions, Energy and Power had simply modified the APA in respect of the timing of Energy's payment to Power for ILMB Costs. The Neeld brothers clearly did not consider this to be a material variation of the APA. If this was so, then by necessary implication all other material terms of the APA must have been intended to continue to apply. [33] Contrary to the positions of both Sigma and Power, the trial judge went on to hold the Second Closing under the APA had occurred, even though Energy did not provide a promissory note to Power for $895,000. As a result of this finding, the judge concluded legal and beneficial title to the River Applications had been transferred to Energy: [200] My finding that the Second Closing occurred under the APA has significant implications for Power's position in this proceeding. Under the APA, the effect of the Second Closing was to transfer all beneficial title to the River Applications subject to that closing, from Power to Energy, as well as any legal title not already transferred. Legal title was already in Energy's name. [201] Thus, as of September 2008, Energy had both beneficial and legal title to all of the River Applications subject to this proceeding. The remaining question is whether ownership subsequently changed, either based on Power's right to terminate the APA under clause 4.6, or the expiry of the APA under clause 4.7, both of which I will address shortly. [34] The judge then went on to consider whether the Termination Clause or the Expiry Clause operated to transfer beneficial ownership of the River Applications back to Power. [35] The judge held Power did not regain ownership of the River Applications through the operation of the Termination Clause, as the notice of termination was sent by Power after the APA had expired on July 1, 2009. [36] The judge also held Power did not regain ownership of the River Applications through the operation of the Expiry Clause. The relevant portion of the Expiry Clause states: ... if the Third Closing does not occur before the Expiry Date [July 1, 2009] ... the Purchaser [Energy] will be and be deemed for all purposes to have quitclaimed and surrendered the Original Projects and the Additional Projects and all related Assets to the Vendor [Power] in exchange for the transfer and surrender by the Vendor of its 7,900,000 Purchaser Shares and the promissory notes ... without the need for any further action, and neither party will have any further obligation to the other hereunder. [37] The judge found the Third Closing had not occurred, and therefore the Expiry Clause applied as of July 1, 2009, giving Power the right to regain ownership of the River Applications from Energy in exchange for the shares in Energy and the promissory notes for $895,000 and for the ILMB Costs. Power returned the Energy shares on August 25, 2009, and as Energy had failed to give Power any promissory notes, the trial judge held, at para. 229, "Power cannot be faulted for not returning a non-existent note." The judge then questioned what Power should do about the pre-paid ILMB Costs. [38] The judge went on to reason that although the written terms of the APA did not specifically require Power to repay any pre-paid ILMB Costs under the Expiry Clause, the parties' modification to the APA to provide for the pre-payment of the ILMB Costs by Energy required an interpretation of the Expiry Clause to include such a requirement. Thus, in order to give effect to the Expiry Clause and regain ownership of the River Applications, Power was required to return the shares in Energy and repay the pre-paid ILMB Costs of approximately $705,000. The judge held this interpretation of the Expiry Clause was necessary to make the Expiry Clause consistent with the parties' earlier modification of the APA and with the structure of the APA as a whole. [39] Based on this interpretation of the Expiry Clause, the judge concluded Power did not regain ownership of the River Applications upon the expiry of the APA, as Power did not repay the pre-Second Closing ILMB Costs. Accordingly, the judge found Energy owned the River Applications and dismissed Power's claim for a declaration of ownership of the River Applications. [40] The judge also dismissed Sigma's counterclaim that the APA was a fraudulent conveyance or fraudulent preference. The Issues on Appeal [41] Power and Sigma do not dispute the trial judge's finding that the Second Closing under the APA occurred and, in turn, that Energy had both beneficial and legal ownership of the River Applications at the time the APA expired on July 1, 2009. [42] The dispute is over the trial judge's finding that Power and Energy, by their conduct, modified the terms of the APA to allow Energy to reimburse Power for the ILMB Costs as incurred, rather than by cash or promissory note at the Second Closing, and the effect of that modification on the APA's Expiry Clause. [43] Power advances three grounds of appeal, alleging the trial judge erred: 1. In finding Power and Energy modified the APA as to the timing of the payment of the ILMB Costs and, in turn, interpreting the Expiry Clause to require Power to repay the ILMB Costs to Energy as a condition precedent to Power's contractual right to regain title to the River Applications, when there was no evidence to support this finding; 2. In finding the aforementioned modification of the APA was binding on Power and Energy, despite a lack of consideration; and 3. In the alternative, in basing her decision on an interpretation of the APA that neither party had pleaded or raised in submissions, denying the parties the opportunity to lead evidence or make submissions on the point. [44] Sigma cross appeals on the ground that, if Power's appeal of the main action is allowed and Power is found to be the beneficial and legal owner of the River Applications, this Court should assess Sigma's counterclaim that the APA was a fraudulent conveyance or fraudulent preference on its merits or, in the alternative, remit this matter to the trial judge. Analysis [45] I will address Power's third ground of appeal first. Did the trial judge make a procedural error in basing her decision on an interpretation of the APA that was neither pleaded nor argued by the parties at trial? [46] As discussed above, the trial judge found Energy and Power had modified the APA to allow Energy to pay the ILMB Costs in advance. The trial judge also found the intent of the APA was that Energy and Power would be returned to their original positions if the APA expired and Power sought to regain the River Applications. Thus, the trial judge interpreted the Expiry Clause to require Power to repay the pre-paid ILMB Costs to Energy as a condition precedent to Power's contractual right to regain title to the River Applications upon expiry of the APA. This requirement was not specifically included in the original, written Expiry Clause, but the trial judge found it was "the only sensible commercial interpretation" of the Expiry Clause. [47] The trial judge interpreted the Expiry Clause as follows: [234] The expiry clause was only to come into play if a Third Closing was necessary because Energy had not raised the Minimum Financing by the time of the Second Closing. The structure of the APA assumed that until the Minimum Financing was raised, Energy would not pay the pre-Second Closing ILMB Costs. The expiry clause envisioned that if Energy had not raised the Minimum Financing by the Expiry Date that the earlier transactions between Power and Energy could be reversed: Energy would get back from Power the shares it had issued and the promissory notes for the $895,000 and the pre-Second Closing ILMB Costs, and Power would get back the ownership of the River Applications. [235] Given that the thrust of the Neeld brothers' evidence was that they continued to follow the intentions of the APA throughout, their modification to the APA that allowed Energy to pay the pre-Second Closing ILMB Costs upfront must have been on the same basis as the intended provision of the promissory notes: that these payments would have to be returned by Power if Power ever sought to rely on the expiry clause. Any other interpretation would be inconsistent with the structure of the APA. [236] I find that if the parties by their conduct modified the APA to allow Energy to pay the ILMB Costs before the Second Closing, they must have intended that if Power sought to exercise its rights under clause 4.7 Power would be required to reimburse Energy for the pre-Second Closing ILMB Costs as a condition of Power receiving back the full ownership in the Original Projects and the Additional Projects. This is the only sensible commercial interpretation, and it is in keeping with the original structure of the APA. [237] I find that by well before the expiry date of July 1, 2009, Energy held both beneficial and legal title to the River Applications at issue in this proceeding. The APA expired on July 1, 2009 as Energy was unable to meet its obligations for the Third Closing. However, Power did not meet the conditions for exercising its contractual rights to obtain a surrendering of the River Applications pursuant to clause 4.7 of the APA, as Power did not repay Energy all of the pre-Second Closing ILMB Costs that Energy had paid Power. [238] Thus, Energy remains both the beneficial and legal owner of the River Applications registered in its name. [48] Power argues the trial judge's finding of contract modification and her resulting interpretation of the APA's Expiry Clause were neither pleaded nor argued at trial. Instead, the judge developed this interpretation on her own; it appeared for the first time in her reasons for judgment. [49] While agreeing at trial that some of its conduct was inconsistent with some of the terms of the APA, Power did not plead or argue the APA had been modified, either in the manner found by the trial judge, or at all. Similarly, Sigma did not plead or argue the APA was valid, but had been modified by the conduct of Energy and Power. [50] At the hearing of this appeal, Sigma initially contended, on a strained examination of its pleadings, that its defence at trial could be viewed as including an argument based on modification of the contract. To its credit, Sigma abandoned that argument and fairly conceded the trial judge's finding of a modification of the APA and her interpretation of the Expiry Clause were never pleaded, did not arise in submissions and were not raised by the court at trial. [51] Power says the parties were thus denied the opportunity to lead evidence or make submissions on the question of modification of the APA and, in particular, the specific modification to the APA found by the trial judge and the resulting effect on the Expiry Clause. Power argues the modification issue was clearly pivotal, as the trial judge's interpretation of the Expiry Clause and ultimate conclusion about the ownership of the River Applications hinged on her finding that the APA had been modified. Neither party was given a meaningful opportunity to address this important point and fully make their cases at trial. [52] Sigma submits that even if the judge erred in deciding the case on an issue neither pleaded nor argued at trial, Power was not prejudiced. Sigma says it was open to the trial judge to find the APA had been modified by the conduct of Power and Energy, as Power was aware of, and did not challenge, the evidence that Power and Energy's conduct was inconsistent with the written terms of the APA. [53] Sigma says in its factum that Power's approach to its inconsistent conduct was to try to "explain it away", while still maintaining that the written terms of the APA governed ownership of the River Applications. In doing so, Sigma contends Power raised the prospect that either the inconsistent conduct was a modification of one or more terms of the APA, as the trial judge found, or there was no effective agreement in the first place or, if there was, it was an entirely different and unknown agreement. Sigma contends that Power's position on this appeal is actually premised on an acceptance of the trial judge's finding that the APA was valid and binding, but modified by the parties' conduct. Thus, it cannot be said that Power has suffered any fundamental unfairness in the way the trial judge approached Energy's advance payments of the ILMB Costs. [54] Sigma further argues Power was not prejudiced because the evidence at trial would not have been different, nor had any different effect, had either party explicitly raised the issue of contract modification. [55] I agree with Power that conduct inconsistent with the written terms of the APA can give rise to a number of legal conclusions, including waiver, modification, or a finding that the APA is not binding on the parties. Sigma only argued the latter possibility at trial, and Power successfully addressed this argument. [56] It is also correct, in my opinion, that had the issue of contract modification and the effect on the Expiry Clause been identified in the pleadings, different documentary and testamentary evidence may have been adduced, or at a minimum, the evidence may have been subject to different emphasis or argument. The parties' submissions might have affected the judge's view of the case, her findings of credibility or her disposition of the case. [57] Natural justice requires that parties have notice of the case they are required to meet and the opportunity to adduce evidence and make submissions on that case. Power cannot be taken to have abandoned these rights. [58] In Lore Krill Housing Co-operative v. Ramirez, 2012 BCCA 223, Madam Justice Neilson, for the Court, said at para. 17: Fairness requires that judges should not on their own initiative determine a matter on a pivotal point not raised by the parties without drawing their attention to it, and giving them an opportunity to address it: R. v. Whincup, 2011 BCCA 520 at para. 11, 314 B.C.A.C. 75; Canada Trustco Mortgage Co. v. Renard, 2008 BCCA 343 at para. 42, 298 D.L.R. (4th) 216. [59] Madam Justice Neilson went on to say that while this Court may be in a position in some cases to address a question of law that was not addressed in the court below, that was not so in the case before her. The chambers judge determined the case on the basis of waiver, despite the fact that waiver was not pleaded or argued at the hearing. The appellant wished to lead evidence on the issue of waiver, and the trial court was the only venue that would give the appellant an opportunity to fully address the issue on both a factual and legal basis. [60] In Canada Trustco Mortgage Co. v. Renard, 2008 BCCA 343, 83 B.C.L.R. (4th) 267, Mr. Justice Frankel, for the Court, said: [38] Fairness requires that a trial judge not bring issues into litigation without giving the parties an opportunity to address them. This is also reflected in Walker v. Blades, 2007 BCCA 436, 70 B.C.L.R. (4th) 226 at para. 16, and Rodaro v. Royal Bank of Canada (2002), 59 O.R. (3d) 74 (C.A.) at paras. 60 - 62. In Walker, the trial judge erred in dismissing an action on the basis that the plaintiff had repudiated the contract in issue, when repudiation had not been pleaded or argued. In Rodaro, the trial judge's error was in granting judgment in favour of the plaintiff on a theory of liability that had not been pleaded or argued. [61] Mr. Justice Frankel noted, at para. 39, the common thread in the authorities is that a party is entitled to know and respond to the case against it, whether by the calling of evidence, or through submissions. [62] In Rodaro v. Royal Bank of Canada (2002), 59 O.R. (3d) 74 (C.A.), Mr. Justice Doherty, for the Court, described the fairness and reliability concerns associated with deciding a case on an issue neither pleaded nor argued: [61] By stepping outside of the pleadings and the case as developed by the parties to find liability, Spence J. denied RBC and Barbican the right to know the case they had to meet and the right to a fair opportunity to meet that case. The injection of a novel theory of liability into the case via the reasons for judgment was fundamentally unfair to RBC and Barbican. [62] In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how Spence J.'s lost opportunity theory would have held up had it been subject to the rigours of the adversarial process. We do know, however, that all arguments that were in fact advanced by Mr. Rodaro and were therefore subject to the adversarial process were found wanting by Spence J. [63] I agree with Power that it was prejudiced by the analytical route taken by the trial judge. The judge found the APA had been modified by the conduct of Power and Energy to allow Energy to pay the ILMB Costs in advance, despite the fact that neither party pleaded or argued the issue of contract modification at trial. This finding led the trial judge to conclude, at para. 236, that an interpretation of the Expiry Clause requiring Power to reimburse Energy for the pre-paid ILMB Costs was "the only sensible commercial interpretation". Neither party at trial made submissions on this interpretation. [64] If the judge had raised the issue of contract modification at trial, Power could have made arguments about whether Power and Energy, by their conduct, modified the APA with respect to the timing of Energy's payment of the ILMB Costs. [65] I am also not persuaded that the judge's interpretation of the Expiry Clause was "the only sensible commercial interpretation". Notice of the trial judge's analysis of the Expiry Clause would have allowed Power to make submissions on how the Expiry Clause should be interpreted in light of a finding that the APA was modified and perhaps raise other sensible interpretations. For example, even if the APA was modified with respect to the timing of the ILMB payments, another arguably reasonable interpretation of the Expiry Clause might be that upon expiry, Power had incurred a debt to Energy for the pre-paid ILMB Costs. This debt could be interpreted as an obligation that arose on expiry, rather than a "further obligation" under the Expiry Clause. [66] In my view, the procedural error of failing to provide the parties an opportunity to address the question of whether Power and Energy modified the APA and whether Power was required, under the Expiry Clause, to repay Energy the approximately $705,000 in ILMB Costs, breached Power's right to know and respond to the case against it: Canada Trustco, supra, citing A.(L.L.) v. B.(A.), [1995] 4 S.C.R. 536 at para. 27. [67] Both parties in their factums submit this Court is well positioned to determine these issues by considering the evidentiary record from the trial, the primary facts found by the trial judge, the wording of the APA itself and the arguments before this Court on appeal. [68] Power says the evidentiary record from the trial, together with the wording of the APA itself, do not reveal a sufficient evidentiary basis for the trial judge's finding that the APA was modified to allow Energy to pay the ILMB Costs in advance, the determination that the modification was supported by good and valuable consideration, or her interpretation of the Expiry Clause. [69] However, at the hearing of this appeal, counsel for Power said it is unclear what other evidence his client may have wished to adduce had these issues been raised at trial. Document discovery was based on the pleadings, and as these issues were not in the pleadings, some relevant documents may not have been disclosed or may have been subject to different emphasis. [70] Sigma, on the other hand, says if the judge erred in her finding that Power and Energy modified the APA with respect to the ILMB payments and in her resulting interpretation of the Expiry Clause, the necessary result is not a judgment in favour of Power. Instead, it submits that given the nature and extent of the parties' inconsistent conduct, the only other conclusion that can be drawn from the primary facts found by the judge is the APA did not become effective. Alternatively, if it did, the parties, by their conduct, disclaimed or rescinded the APA shortly after July 1, 2007, before it affected any rights to the River Applications. Sigma argues that if the APA never became effective or ceased to be effective, the evidence supports the conclusion that Energy owns the River Applications. [71] I cannot agree that this Court is well positioned to determine the result had the parties pleaded or at least made submissions on the trial judge's reasoning. If the question of contract modification and the judge's interpretation of the Expiry Clause had been raised at trial, the evidentiary record might have been different. The trial strategy of the parties may have also been different. They may have pointed to, or emphasized, quite different evidence. In turn, the trial judge may have been persuaded by those submissions to reach different conclusions. [72] As in Rodaro at para. 63, the judge based her finding on an interpretation "never pleaded and with respect to which battle was never joined at trial". Instead, as Doherty J.A. wrote in Rodaro at para. 62, the trial judge's interpretation of the APA must be tested in the "crucible of the adversarial process" and "subject to the rigours of the adversarial process". Otherwise, the trial judge's interpretation of the APA, even if compelling, is unreliable. If the Court were to undertake such an analysis at this point, it would fail to remedy any prejudice. The trial court is the proper forum for the parties to test the analysis. Conclusion [73] For the above reasons, I conclude the trial judge made a procedural error by deciding this case based on a finding that the APA was modified with respect to the timing of ILMB payments and an interpretation of the Expiry Clause that required Power to repay the pre-paid ILMB Costs when these issues were not pleaded or argued by the parties at trial. The trial judge's interpretation of the APA is careful and well reasoned, but she came to conclusions not advocated by either party. [74] Accordingly, I would allow the appeal, set aside the order of the trial judge and order a new trial. If the parties wish to amend their pleadings, the appropriate forum in which to do so is the trial court. [75] In order to preserve the River Applications, I would also order that the Receiver shall not deliver to Sigma the River Applications until further order of the Supreme Court or until Power provides its agreement in writing to the Receiver. [76] This result makes it unnecessary to consider the two remaining grounds of appeal. It is also unnecessary to address Sigma's cross appeal. "The Honourable Madam Justice MacKenzie" I agree: "The Honourable Mr. Justice Groberman" I agree: "The Honourable Madam Justice Bennett"