Erehwon Exploration Ltd. v. Northstar Energy Corp., (1993) 147 A.R. 1 (QB)

• Judge: Hunt, J.
• Court: Court of Queen's Bench of Alberta (Canada)
• Case Date: November 24, 1993
• Citations: (1993), 147 A.R. 1 (QB)

Erehwon Exploration v. Northstar Energy (1993), 147 A.R. 1 (QB)

MLB headnote and full text

Erehwon Exploration Limited (plaintiff) v. Northstar Energy Corporation (defendant)

(Action Nos. 8901 12048; 9001 18726)

Indexed As: Erehwon Exploration Ltd. v. Northstar Energy Corp.

Alberta Court of Queen's Bench

Judicial District of Calgary

Hunt, J.

November 24, 1993.

Summary:

The plaintiff (non-operator) and defendant (operator) were involved in joint gas activ­ities but differences arose. The plaintiff sued the defendant for damages, alleging, inter alia, breaches of fiduciary duties and im­proper accounting by the defendant. The case also involved a gas marketing dispute.

The Alberta Court of Queen's Bench allowed the plaintiff's action and awarded damages.

Contracts - Topic 7430

Interpretation - Ambiguity - Admission of extrinsic evidence - The plaintiff and defendant were involved in joint gas activ­ities - The contract between them incor­porated the Operating Procedure of the Canadian Association of Petroleum Land­men (CAPL) - Clause 602 of the CAPL gave operators authority to sell a joint-operator's share of production where the joint-operator refused to take in kind and separately dispose of its proportionate share of production - The Alberta Court of Queen's Bench held that there was an ambiguity on the face of clause 602, therefore, the court admitted evidence of conduct of the parties subsequent to their contract - Further, the court opined, if there was no patent ambiguity, there was at least a latent ambiguity justifying ad­mission of the extrinsic evidence - See paragraphs 100 to 108.

Damages - Topic 1305

Exemplary or punitive damages - Breach of contract - The plaintiff (non-operator) and defendant (operator) were involved in joint gas activities - In a suit against the defendant, the plaintiff successfully estab­lished a breach of fiduciary duty by the defendant, inappropriate accounting by the defendant and a breach of a duty of good faith by the defendant to notify the plain­tiff of a change in the defendant's gas purchasing policy (when the plaintiff declined to take its share of production in kind) - The plaintiff claimed punitive damages - The Alberta Court of Queen's Bench rejected the punitive dam­ages claim, where, inter alia, the actions by the defen­dant were not deliberate and there was no evidence of dishonesty or fraud - See paragraphs 159 to 165.

Equity - Topic 3650

Fiduciary or confidential relationships - Breach of fiduciary relationship - Joint ventures - Oil and gas - The Alberta Court of Queen's Bench discussed gen­erally the fiduciary duties of an operator involved in joint oil and gas activities - See paragraphs 7 to 16.

Equity - Topic 3650

Fiduciary or confidential relationships - Breach of fiduciary relationship - Joint ventures - Oil and gas - The plaintiff (non-operator) and defendant (operator) were involved in joint gas activities - The plaintiff claimed that the defendant breached its fiduciary obligation to the plaintiff by acquiring, without notice, interests in two sections of land that were subject to the "area of mutual interest" (AMI) obligations between the parties - The Alberta Court of Queen's Bench held that the defendant breached its fiduciary duty respecting the AMI lands - The court declared a constructive trust in the lands pending a decision by the plaintiff on whether to participate in the venture - The defendant was ordered to disclose infor­mation to the plaintiff to enable it to make its decision on participation - See para­graphs 17 to 56.

Equity - Topic 3650

Fiduciary or confidential relationships - Breach of fiduciary relationship - Joint ventures - Oil and gas - The plaintiff (non-operator) and defendant (operator) were involved in joint gas activities - Their contract incorporated the Operating Procedure of the Canadian Association of Petroleum Land­men (CAPL) - Clause 602 of the CAPL gave operators authority to sell a joint-operator's share of produc­tion where the joint-operator ref­used to take in kind and separately dispose of its propor­tionate share of production - The Alberta Court of Queen's Bench inter­preted clause 602, holding that it author­ized the defend­ant (operator) to purchase the gas for its own account without limita­tions on what it could do with the gas - The court rejected the argument that the defendant (operator) had a fiduciary duty to sell the non-opera­tor's gas at the same price it received for its own gas - See paragraphs 96 to 147.

Mines and Minerals - Topic 8004

Oil and gas - Operating Procedure of the Canadian Association of Petroleum Land­men (CAPL) - Interpretation - Article IV of the CAPL dealt with ownership and disposition of petroleum production - Clause 602 gave operators authority to sell a joint-operator's share of production where the joint-operator refused to take in kind and separately dispose of its propor­tionate share of production - The Alberta Court of Queen's Bench interpreted clause 602 - The court discussed the rights of the operator and joint-operator (or a non-operator) respecting marketing of the joint-operator's gas, when the joint-oper­ator does not take in kind - See para­graphs 96 to 147.

Mines and Minerals - Topic 8004

Oil and gas - Operating Procedure of the Canadian Association of Petroleum Land­men (CAPL) - Interpretation - [See Con­tracts - Topic 7430 ].

Mines and Minerals - Topic 8225

Oil and gas - Operation and production agreements - Area of mutual interest clause - [See second Equity - Topic 3650 ].

Mines and Minerals - Topic 8231

Oil and gas - Operation and production agreements - Obligations of operator - Fiduciary - [See all three Equity - Topic 3650 ].

Mines and Minerals - Topic 8232

Oil and gas - Operation and production agreements - Obligations of operator - Accounting matters - The plaintiff and defendant companies were involved in joint gas activities - The plaintiff alleged that the defendant acted inappropriately as operator or levied inappropriate charges - The defendant argued that an operator will never be responsible to the non-operators for accounting matters unless it failed to follow the "good oilfield practice" standard set out in clause 304 of the Operating Procedure of the Canadian Association of Petroleum Landmen (CAPL) - Alterna­tively, the defendant argued that the oper­ators would never have liability to the non-operators for the types of claims in this case unless acting with gross negli­gence - The Alberta Court of Queen's Bench rejected both arguments - See paragraphs 57 to 67.

Mines and Minerals - Topic 8232

Oil and gas - Operation and production agreements - Obligations of operator - Accounting matters - The plaintiff and defendant companies were involved in joint gas activities - The plaintiff alleged that the defendant breached fiduciary duties and acted inappropriately as oper­ator or levied inappropriate charges - The Alberta Court of Queen's Bench allowed the plaintiff's action - The court examined well operating fees, well drilling costs, costs relating to the installation and removal of coiled tubing in a well and royalty payments and determined where there were overcharges or overpayments by the defendant - See paragraphs 67 to 95.

Mines and Minerals - Topic 8233

Oil and gas - Operation and production agreements - Obligations of operator - Where joint-operator refuses to take in kind - The plaintiff (non-operator) and defendant (operator) were involved in joint gas activities - Their contract incorporated the Operating Procedure of the Canadian Association of Petroleum Landmen (CAPL) - Clause 602 of the CAPL gave operators authority to sell a joint-opera­tor's share of production where the joint-operator ref­used to take in kind and sepa­rately dispose of its proportionate share of production - The Alberta Court of Queen's Bench dis­cussed the duty of good faith imposed on an operator when acting under clause 602 - This duty included an obli­gation to notify the plaintiff of a change in gas purchasing policy by the defendant - See paragraphs 148 to 158.

Mines and Minerals - Topic 8233

Oil and gas - Operation and production agreements - Obligations of operator - Where joint-operator refuses to take in kind - [See Contracts - Topic 7430 , third Equity - Topic 3650 and first Mines and Minerals 8004 ].

Cases Noticed:

Frame v. Smith and Smith, [1987] 2 S.C.R. 99; 78 N.R. 40; 23 O.A.C. 84; 42 D.L.R.(4th) 81, appld. [para. 8].

International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574; 101 N.R. 239; 36 O.A.C. 57; 61 D.L.R.(4th) 14; 69 O.R.(2d) 287; 35 E.T.R. 1, appld. [para. 8].

Hodgkinson v. Simms, [1992] 2 W.W.R. 330; 11 B.C.A.C. 248; 22 W.A.C. 248; 6 C.P.C.(3d) 141 (C.A.), refd to. [para. 9].

Bank of Nova Scotia v. Société Général (Canada) et al. (1988), 87 A.R. 133 (C.A.), refd to. [para. 10].

Midcon Oil & Gas Ltd. v. New British Dominion Oil Co. (1956), 19 W.W.R.(N.S.) 317 (Alta. T.D.), affd. (1957), 21 W.W.R.(N.S.) 228 (C.A.), affd. (1958), 12 D.L.R.(2d) 705 (S.C.C.), refd to. [paras. 12, 16].

Pine Pass Oil & Gas Ltd. v. Pacific Petroleums Ltd. et al. (1968), 70 D.L.R.(3d) 196 (B.C.S.C.), refd to. [para. 12].

Act Oils Ltd. v. Pacific Petroleums Ltd. (1975), 60 D.L.R.(3d) 658 (Alta. C.A.), refd to. [para. 12].

Trilogy Resource Corp. v. Dome Petro­leum Ltd., [1990] 6 W.W.R. 726; 108 A.R. 383; 76 Alta. L.R.(2d) 140 (Q.B.), refd to. [para. 12].

Luscar Ltd. and Norcen Energy Resources Ltd. v. Pembina Resources Ltd. (1991), 122 A.R. 83 (Q.B.), refd to. [para. 42].

Rawluk v. Rawluk, [1990] 1 S.C.R. 70; 103 N.R. 321; 38 O.A.C. 81; 23 R.F.L.(3d) 337; 65 D.L.R.(4th) 161; 36 E.T.R. 1; 71 O.R.(2d) 480, refd to. [para. 52].

McDonald v. McDonald (1988), 11 R.F.L.(3d) 321 (Ont. H.C.), refd to. [para. 52].

United Canso Oil & Gas Ltd. v. Washoe Northern Inc. et al. (1991), 121 A.R. 1 (Q.B.), dist. [para. 63].

Stine (R.N.) et al. v. Marathon Oil Co. et al., Husky Oil Co. et al. (1992), 976 F.2d 254 (U.S.C.A. 5th Cir.), dist. [para. 63].

Mobil Oil Canada Ltd. v. Beta Well Ser­vice Ltd. (1974), 43 D.L.R.(3d) 745 (Alta. C.A.), affd. 13 N.R. 127; 2 A.R. 183; 50 D.L.R.(3d) 158 (S.C.C.), refd to. [para. 64].

Renaissance Resources Ltd. v. Metalore Resources Ltd. (1984), 53 A.R. 289 (Alta. Q.B.), affd. 38 Alta. L.R.(2d) 133 (C.A.), refd to. [para. 82].

Passburg Petroleums Ltd. v. San Antonio Explorations Ltd. et al. (1987), 57 Alta. L.R.(2d) 57 (Q.B.), refd to. [para. 82].

Scurry-Rainbow Oil Ltd. et al. v. Galloway Estate, [1993] 4 W.W.R. 454; 138 A.R. 321 (Q.B.), refd to. [para. 101].

Canadian National Railways v. Canadian Pacific Ltd. (1978), 95 D.L.R.(3d) 242 (B.C.C.A.), refd to. [para. 101].

Northwestern Mechanical Installations Ltd. v. Yukon Construction Co., [1982] 5 W.W.R. 40; 37 A.R. 132 (C.A.), refd to. [para. 102].

Leitch Gold Mines Ltd. et al. v. Texas Gulf Sulphur Co. (Inc.) et al. (1968), 3 D.L.R.(3d) 151 (Ont. H.C.), refd to. [para. 104].

Transcanada Pipeline Ltd. v. Northern and Central Gas Corp. Ltd. (1983), 41 O.R.(2d) 447 (C.A.), refd to. [para. 105].

Gateway Realty Ltd. v. Arton Holdings Ltd. et al. (No. 3) (1991), 106 N.S.R.(2d) 180; 288 A.P.R. 180 (T.D.), affd. 112 N.S.R.(2d) 180; 307 A.P.R. 180 (C.A.), refd. to. [para. 149].

Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1992), 129 A.R. 177 (Q.B.), refd to. [para. 150].

Sturrock et al. v. Ancona Petroleums Ltd. (1990), 111 A.R. 86; 75 Alta. L.R.(2d) 216 (Q.B.), refd to. [para. 161].

Vorvis v. Insurance Corporation of British Columbia, [1989] 1 S.C.R. 1085; 94 N.R. 321; 58 D.L.R.(4th) 193; [1989] 4 W.W.R. 218; 36 B.C.L.R.(2d) 273; 90 C.L.L.C. 14,035; 25 C.C.E.L. 81, refd to. [para. 161].

Authors and Works Noticed:

Canadian Encyclopedic Digest (Western)(3rd Ed.), vol. 2, s. 16 [para. 160].

MacLean, J.A., The 1990 CAPL Operating Procedure: An Overview of the Revi­sions (1991), 30 Alta. Law Rev. 133, generally [paras. 63, 96].

Park, Marketing Production from Joint Property: The Past, The Present and the Future (1990), 28 Alta. Law Rev. 34, p. 40 [para. 108].

Counsel:

D. Youngren and R. Mack, for the plain­tiff;

B. Nemetz, for the defendant.

This case was heard before Hunt, J., of the Alberta Court of Queen's Bench, who deliv­ered the following decision on Novem­ber 24, 1993.