Limitation periods restrict how far back in time a plaintiff can
recover damages for a past wrong. Petroleum and natural gas
royalty holders are required to bring a lawsuit within two years of
when they first knew, or ought to have known, that they have not
been paid the proper royalties, that the defendant was responsible
for the error, and that their loss is large enough to warrant
bringing a lawsuit. There is also a ten-year "drop
dead" provision, so that, generally speaking, no lawsuit can
be brought for a royalty that was due more than ten years
ago. Finally, each missed or incorrect payment is considered
a new claim even if the same mistake keeps being made. As a
result, in most royalty disputes, the question is whether the
royalty holder can claim for two years or ten years of royalties,
measured from the date when the lawsuit was filed. See
Limitations Act, RSA 2000, c L-12, s 3 and Meek
(Trustee of) v San Juan Resources Inc, 2005 ABCA 448.
Often when a royalty mistake has occurred, it is because no
royalty was paid or there has been a calculation error that has
been repeated for years. In such cases, it is usually
straightforward to determine when the royalty holder first
discovered the mistake, who made the mistake, and whether the
amounts involved are large enough to warrant bringing a
lawsuit. The controversy is usually over when the royalty
holder first "ought to have known" about the mistake.
The courts have previously taken two different approaches to
determining when a royalty holder ought to have known of the
mistake. The first is that the royalty holder has the
responsibility to monitor its own contracts and put in place
mechanisms to discover errors, and so should discover an error
sooner rather than later: Luscar v Pembina Resources
Ltd, 1994 ABCA 356 (CanLII). The second is that the
royalty holder is entitled to expect that the royalty payor will
honour its obligations and absent "clear information to show
an improper payment" the royalty holder is not expected to
take positive steps to ensure the correct payment is being
made: Meek, supra. The
Luscar approach usually results in a two-year limitation
period being applied; the Meek approach usually results in
a ten-year period. Some lawyers have speculated that the
Luscar test applies if the royalty holder is a relatively
sophisticated corporation and the Meek test applies if the
royalty holder is a "little guy".
This case largely overrules the Meek test. It
clarifies that in all cases, royalty holders are expected to
exercise reasonable diligence. Even where the royalty holder
does not have "clear information to show improper
payment", the royalty holder may still have sufficient
knowledge to give rise to an obligation to make reasonable
inquires. In this case, the plaintiff was the holding company
of an experienced land man. He knew he held equivalent
royalty rights over lands in close proximity to the lands in
question, and that he was receiving royalties from those
lands. He had not taken any steps to monitor whether he was
receiving the correct royalty payments from the lands in
question. On those facts, the Court of Appeal held that he
had sufficient notice to make the necessary inquiries years ago,
and so ought to have known of the error sooner. He was
limited to a two-year recovery period from when the lawsuit was
started. The trial judge had given him ten.
The "clear information to show an improper payment"
test is now much restricted, if not dead. All royalty holders
must make reasonable inquiries. Whether such inquires are
reasonable in any particular case will depend on the facts.
In some cases more inquiries will be expected than in others.
Knowledgeable counsel can significantly limit or increase the
damages in a lawsuit by being conversant in the law of limitations,
a notoriously complex speciality.
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.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
In Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363, the Alberta Court of Queen's Bench enforced the "immediate replacement" provision in the Canadian Association of Petroleum Landmen 2007 Operating Procedure...
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