The recent surge in commodity prices has resulted in an acquisition rush on projects at various stages of development. It should therefore come as no surprise that disputes over ownership of desirable mining projects are finding their way into courts. This article addresses:
- the two typical remedies available in such disputes – an award of possession of the property or damages for the value of the property;
- the factors driving courts to order one remedy over the other; and
- relevant considerations for parties to maximize the likelihood of obtaining the desired remedy.
The Supreme Court of Canada's (SCC) decision in Lac Minerals Ltd. v. International Corona Resources Ltd. (Lac Minerals) established that where a dispute arises regarding entitlement to a mining asset, the successful plaintiff may be awarded possession of the mine (a proprietary award), instead of simply a monetary award of damages as compensation. Indeed, in the 20 years since Lac Minerals was decided, courts have demonstrated a general preference for proprietary awards where possible, often citing the difficulties in adequately valuing a mining property for the purposes of awarding monetary damages. That said, a proprietary award is never guaranteed and should not be expected as a matter of course. Rather, Canadian courts have repeatedly noted their willingness to undertake the exercise of quantifying an appropriate monetary award, difficult though that task may be.1 Parties to litigation are well advised to give careful consideration to the evidence they choose to lead on the question of the value of the property because the choices they make may inadvertently drive the court to a remedy that the party is seeking to avoid.
In most cases, both parties to litigation will be advocating for an end result that finds them in possession of the asset. The plaintiff often approaches litigation from a "have not" position and will be asking the court for a proprietary award that provides it with ownership of the asset.
Conversely, the defendant often enters litigation in possession of the asset and will want that status quo of ownership maintained. Thus, even in the event that it is found liable to the plaintiff, the defendant will want the court to award monetary damages in lieu of a proprietary award. The parties must always have regard to their desired outcome in assessing the focus of their evidence.
Considerations for a Plaintiff
Counterintuitive though it may be, the fact that a plaintiff ultimately desires a proprietary award does not relieve it of leading evidence directed at establishing the monetary value of the target asset. This is because one of the key factors that will lead a court to award a proprietary remedy is a conclusion that a monetary award would be so uncertain that there is a real risk of under-compensating the plaintiff. Accordingly, a court will be more likely to award a proprietary remedy if there is conflicting evidence so as to produce material uncertainty as to quantification. One can be sure that the defendant (who will be advocating that monetary damages are appropriate) will lead evidence to show that damages are quantifiable with an appropriate degree of certainty. In the absence of countervailing evidence from the plaintiff establishing a wildly different valuation, the court may be inclined to accept the defendant's argument that damages are quantifiable and therefore the appropriate remedy.
Bearing in mind that the end goal is often getting a proprietary award, the plaintiff must give careful consideration to the type of evidence that it will lead as to the quantification of damages. Examination of this point requires a brief digression as to the method by which the court quantifies the value of mining assets.
Although there are numerous accepted approaches to the valuation of mining properties,2 courts have tended to favour a valuation based on the net present value of the anticipated earnings over the life of the project. The determination of a project's net present value will be dependent on a number of interrelated variables, including among others: long term metals pricing, capital costs, operating costs, mineral reserves, timeline to production, taxation regimes, future economic considerations (e.g., inflationary trends, future demand for commodity, etc.) and political risk.
The plaintiff is often best served by leading evidence that takes an aggressive but reasonably defensible position in respect of as many variables as possible. For example, it may be desirable to advance a valuation based on highest metals pricing, lowest possible capital and operating expenditures, quickest timetable to production, most favourable tax structure, etc.
This approach serves two important functions. First, it produces a large valuation of the asset, positioning the plaintiff most favourably in the event that the court ultimately prefers a monetary award. Second, and more importantly, it will compel the defendant to lead contradictory evidence as to valuation, ideally (from the plaintiff's perspective) attempting to drive down the quantum by attacking as many of the variables as possible. The plaintiff's real goal is to show that an attempt at valuation will be so uncertain as to likely result in compensation that is unjust to one of the parties. This goal is achieved by having contradictory evidence on a number of variables, such that a multitude of outcomes is possible and no particular outcome can be said to be reasonably certain.
Considerations for a Defendant
Assuming that the plaintiff will be successful at establishing liability, the defendant faces the prospect of either losing its asset or paying out monetary damages. Presuming the latter to be the lesser evil, the defendant must walk a precarious line to ensure that it pays as little money as necessary, all the while protecting its ownership of the asset. Protesting the plaintiff's damages evidence too vigorously may prompt the court to throw up its hands on quantification, favouring instead a proprietary award. However, failure to dispute the plaintiff's evidence may result in a cripplingly large damages award. As with all line walking, the defendant will have to find the right balance for its particular situation.
A defendant would be well advised to compare the plaintiff's damages assessment against its own internal estimate of the net present value. If the two positions are largely congruous, there is a strong strategic advantage to accepting the plaintiff's figures. Doing so will severely hamper the plaintiff's argument for a proprietary remedy, as the parties will have agreed to a damages value that appropriately compensates the plaintiff.
Where the comparison reveals that the plaintiff's assessment is grossly overstated, the defendant may nonetheless want to pick its battles carefully. As set out above, a scorched earth attack on all or even many of the variables advanced by the plaintiff may simply play into the plaintiff's hand: the more uncertainty produced through conflicting evidence on quantification, the greater the chance of the court finding that a proprietary remed is necessary. Rather, the defendant might determine which single variable will produce the greatest swing in total price and focus its evidence on that element of the plaintiff's valuation.
Another approach for a defendant to consider, depending on the stage of development of the project, is to attack the appropriateness of the methodology chosen by the plaintiff and to present a coherent alternate valuation approach or seek to arrive at a valuation through the assessment of a combination of approaches.3 An issue a defendant will almost always face in this scenario is that its valuation will almost inevitably result in the defendant presenting a range of values, and it will then be incumbent on the defendant to convince the court that such a range represents an acceptable level of valuation precision for properties in the mining sector.
Although courts in recent years have shown a tendency towards awarding proprietary awards in disputes over mining properties, this result is by no means a foregone conclusion in any particular piece of litigation. Rather, the determination of appropriate remedy will always be a function of the evidence adduced by the parties. A strategic and thoughtful approach to such evidence is therefore crucial to any party seeking to tip the remedial balance in its favour.
1. Even in the seminal case of Lac Minerals, two of the SCC's justices indicated that they would have ordered a monetary, rather than proprietary, award.
2. See, for example, CIMVAL Standards and Guidelines for Valuation of Mineral Properties.
3. Alternate approaches could include a cost approach, a comparable transaction approach or a comparable trading multiple approach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.