Xerex Exploration Ltd. v. Petro-Can.,

• Judge: Conrad, Picard and Wittmann, JJ.A.
• Neutral Citation: 2005 ABCA 224
• Date: 30 June 2005
• Court: Court of Appeal (Alberta)

Xerex Exploration Ltd. v. Petro-Can. (2005), 367 A.R. 201 (CA);

    346 W.A.C. 201

MLB headnote and full text

Temp. Cite: [2005] A.R. TBEd. JL.004

Xerex Exploration Ltd. (respondent/appellant by cross-appeal/plaintiff) v. Progress Energy Ltd. and Highland Energy Inc. (respondents/respondents by cross-appeal/defendants) and Petro-Canada and Petro-Canada Oil and Gas (appellants/respondents by cross-appeal/defendants)

(0301-0297-AC; 2005 ABCA 224)

Indexed As: Xerex Exploration Ltd. v. Petro-Canada et al.

Alberta Court of Appeal

Conrad, Picard and Wittmann, JJ.A.

June 30, 2005.

Summary:

Xerex agreed to transfer its petroleum and natural gas license covering an area referred to as the "Deep Rights" to Petro-Canada in exchange for a 3% gross overriding royalty. Xerex sued Petro-Canada and a related company for trespass and conversion, misrepresentation by false statement and misrepresentation by non-disclosure.

The Alberta Court of Queen's Bench, in a decision reported at 343 A.R. 347, allowed the action in part and awarded Xerex damages of $8,133,000. Petro-Canada appealed. Xerex cross-appealed on the issue of damages.

The Alberta Court of Appeal dismissed the appeal and cross-appeal.

Contracts - Topic 1541

Formation of contract - Duty to disclose - General - [See Fraud and Misrepresentation - Topic 2707 ].

Damage Awards - Topic 766

Torts - Fraud and misrepresentation - Negligent misrepresentation - Xerex agreed to transfer a petroleum and natural gas license to Petro-Canada in exchange for a 3% gross overriding royalty - Xerex sued Petro-Canada et al. for misrepresentation - It alleged that Petro-Canada had an obligation to completely disclose to Xerex during the negotiations the full extent of Petro-Canada's drilling activity in the area and the information Petro-Canada had obtained - The trial judge held that Petro-Canada's disclosure was incomplete and constituted a misrepresentation - He found that, with disclosure, Xerex would have negotiated a more lucrative deal (a "farmout" with a 50/50 participation rate) -The trial judge voided the royalty agreement and assessed damages at $8,133,000 -Petro-Canada appealed, arguing that damages should have been assessed as of the date of breach (1996) and quantified on the basis of the market value of a 50 % interest - The Alberta Court of Appeal held that the trial judge did not err in calculating damages for misrepresentation - What Xerex lost, by the Petro-Canada's malfeasance, was more than the opportunity to sell its 50% interest at market value in 1996 - Instead, it lost the opportunity to participate in the future exploitation and profit from the well - See paragraphs 93 to 105.

Damages - Topic 3630

Deceit and misrepresentation - Negligent misrepresentation - [See Damage Awards - Topic 766 ].

Equity - Topic 3714

Fiduciary or confidential relationships - Commercial relationships - Duty of disclosure - Xerex agreed to transfer a petroleum and natural gas license to Petro-Canada in exchange for a 3% gross overriding royalty - Xerex sued Petro-Canada et al. for misrepresentation - It alleged that Petro-Canada had an obligation to completely disclose to Xerex during the negotiations respecting the royalty the full extent of Petro-Canada's drilling activity in the area (15 metre over allowance and then a further seven metres) and the information Petro-Canada had obtained - The Alberta Court of Appeal held that a special relationship arose between Xerex and Petro-Canada when Petro-Canada drilled the 15 metre over-hole allowance - In conducting the negotiation, Petro-Canada owed Xerex a fiduciary duty - Petro-Canada was required to tell Xerex that it had already entered the area when it went to negotiate and to answer any questions Xerex might have had about what might have been seen or discovered - The lack of disclosure placed Xerex in an extremely vulnerable position - To allow Petro-Canada to negotiate with Xerex, without first telling Xerex what it had done, or what it had found, would encourage the practice in the industry of ignoring licences and legal boundaries in pursuit of self-interest - See paragraphs 70 to 81.

Fraud and Misrepresentation - Topic 2516

Misrepresentation - Contracts - [See Fraud and Misrepresentation - Topic 2707 ].

Fraud and Misrepresentation - Topic 2703

Misrepresentation - What constitutes - Falsity - General - Xerex agreed to transfer a petroleum and natural gas license to Petro-Canada in exchange for a 3% gross overriding royalty - Xerex sued Petro-Canada et al. for misrepresentation - It alleged that Petro-Canada had an obligation to completely disclose to Xerex during the negotiations the full extent of Petro-Canada's drilling activity in the area and the information Petro-Canada had obtained - Xerex alleged that it has specifically asked if Petro-Canada had drilled into "this" (i.e. the area in dispute) and that Petro-Canada's representative replied "no" - The Alberta Court of Appeal held that the answer "no" was a misrepresentation by false statement - See paragraphs 47 to 53.

Fraud and Misrepresentation - Topic 2707

Misrepresentation - What constitutes - Falsity by silence - Xerex agreed to transfer a petroleum and natural gas license to Petro-Canada in exchange for a 3% gross overriding royalty - Xerex sued Petro-Canada et al. for misrepresentation by silence or incomplete disclosure - It alleged that Petro-Canada had an obligation to completely disclose to Xerex during the negotiations the full extent of Petro-Canada's drilling activity in the area and the information Petro-Canada had obtained - Petro-Canada argued, inter alia, that under the Alberta "tight hole" rules and industry practice, Xerex would only be entitled to information derived from Petro-Canada's drilling activities when a well came off of its "tight hole" or confidential status - The trial judge rejected Petro-Canada's argument - Petro-Canada's disclosure was incomplete and constituted a misrepresentation - The Alberta Court of Appeal found that there had been an actual misrepresentation - Alternatively, there was no reason to disturb the trial judge's finding that there was an actionable misrepresentation by silence or incomplete disclosure - See paragraphs 54 to 69.

Fraud and Misrepresentation - Topic 2821

Misrepresentation - Defences - General - [See Fraud and Misrepresentation - Topic 2707 ].

Torts - Topic 3002

Trespass - Trespass to land - What constitutes - Xerex held a petroleum and natural gas license covering an area referred to as the "Deep Rights" which granted it "the exclusive right to drill for, win, work and recover the License Substances within and under the location, together with the right to remove from the Location any License Substances won, worked or recovered" - Petro-Canada had the rights to drill a well above the Deep Rights - Their drill license permitted it to penetrate the Deep Rights to the extent of 15 metres - Petro-Canada deepened the well beyond 15 metres and took additional core samples from the sands encountered - Xerex argued that Petro-Canada committed trespass of its property - The trial judge held that Xerex's interests under the licence amounted to a profit à prendre - Petro-Canada argued that one could not trespass on a such an interest because trespass could only occur in relation to the possession of land - The Alberta Court of Appeal held that it was possible to trespass on a profit à prendre - See paragraphs 85 and 86.

Torts - Topic 3032

Trespass - Trespass to land - Sufficiency of possession of plaintiff - [See Torts - Topic 3002 ].

Cases Noticed:

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, refd to. [para. 46].

Opron Construction Co. v. Alberta (1994), 151 A.R. 241 (Q.B.), refd to. [para. 56].

L.K. Oil & Gas Ltd. et al. v. Canalands Energy Corp. (1989), 98 A.R. 161 (C.A.), refd to. [para. 64].

Banque de Montréal et autre v. Hydro-Québec et autres, [1992] 2 S.C.R. 554; 138 N.R. 185; 48 Q.A.C. 241, refd to. [para. 75].

Bank of Montreal v. Bail Ltée - see Banque de Montréal et autre v. Hydro-Québec et autres.

Hodgkinson v. Simms et al., [1994] 3 S.C.R. 377; 171 N.R. 245; 49 B.C.A.C. 1; 80 W.A.C. 1, refd to. [para. 77].

Fitzgerald et al. v. Firbank, [1895-99] All E.R. Rep. 445 (C.A.), refd to. [para. 85].

MacMillan Bloedel Ltd. v. Greenpeace Canada et al. (1993), 106 D.L.R.(4th) 556 (B.C.S.C.), affd. (1994), 50 B.C.A.C. 100; 82 W.A.C. 100; 118 D.L.R.(4th) 1 (C.A.), refd to. [para. 86].

MacMillan Bloedel Ltd. v. Simpson - see MacMillan Bloedel Ltd. v. Greenpeace Canada et al.

Falkoski v. Osoyoos (Town), [1995] B.C.J. No. 857 (S.C.), refd to. [para. 86].

Rainbow Industrial Caterers Ltd. et al. v. Canadian National Railway Co. et al., [1991] 3 S.C.R. 3; 126 N.R. 354; 3 B.C.A.C. 1; 7 W.A.C. 1, refd to. [para. 96].

Athey v. Leonati et al., [1996] 3 S.C.R. 458; 203 N.R. 36; 81 B.C.A.C. 243; 132 W.A.C. 243, refd to. [para. 97].

Blair v. Merrill Lynch Canada Inc. et al. (1990), 106 A.R. 25 (C.A.), refd to. [para. 101].

Hadley v. Baxendale (1854), 156 E.R. 145 (Ex. Ct.), refd to. [para. 101].

Reform Party of Canada et al. v. Canada (Attorney General) (1995), 165 A.R. 161; 89 W.A.C. 161; 27 Alta. L.R.(3d) 153 (C.A.), refd to. [para. 116].

Gorrie v. Nielsen (No. 1) (1988), 92 A.R. 164 (C.A.), refd to. [para. 117].

Public School Boards Association (Alta.) et al. v. Alberta (Attorney General) et al. (1998), 216 A.R. 201; 175 W.A.C. 201; 60 Alta. L.R.(3d) 62 (C.A.), refd to. [para. 117].

Authors and Works Noticed:

Waddams, Stephen M., The Law of Contracts (4th Ed. 1999), para. 438 [para. 57].

Waddams, Stephen M., The Law of Damages (4th Ed. 2004) (Looseleaf Ed.), para. 5.460 [para. 95].

Counsel:

W.C. Hunter and J.C. Whitaker, for the respondent, Xerex Exploration;

D.G. Mills and M.L. Teetaert, for the respondent, Progress Energy Ltd. and Highland Energy;

G.F. Scott, Q.C., and G.J. McCue, for the appellants, Petro-Canada and Petro-Canada Oil and Gas.

This appeal and cross-appeal were heard on September 16 and 17, 2004, by Conrad, Picard and Wittmann, JJ.A., of the Alberta Court of Appeal. The following reasons for judgment reserved were delivered by the court on June 30, 2005.