Canada: Two ROFRS In Two Contracts Interpreted As Two Separate ROFRs

Last Updated: July 24 2014
Article by Karen A. Salmon and Sandi Shannon

Most Read Contributor in Canada, September 2016

The plaintiff Blaze Energy Ltd. ("Blaze") and the defendant Imperial Oil Resources ("Imperial') were parties (as successors) to two agreements.  The first was a Land Agreement entered into in 1960 with respect to oil and gas interests or oil and gas leases located in four specific parcels of land and which contained a ROFR (the "Lands ROFR").  The second agreement was a Construction Ownership and Operation agreement entered into in 1988 (the "CO&O") regarding the 6-28 West Pembina Gas Plant (the "Plant") built after 1988.  This agreement also contained a ROFR (the "CO&O ROFR").  Blaze, Imperial and three other parties were party to the CO&O.  <\u002fp>

Imperial entered into an arrangement to sell a number of assets to Whitecap Resources Inc. ("Whitecap") (the second defendant).  Whitecap then entered into an arrangement to sell certain of the purchased assets to Keyera Patnership and Keyera Corp.  Land ROFR notices were issued by Imperial and later Whitecap under the Land Agreement.  However, both Imperial and Whitecap relied upon the exception found in the CO&O which allowed for the disposal of an interest in the plant without restriction when the owner was disposing of an interest in the Plant in conjunction with disposing of its corresponding working interest in the lands, and as a result, neither issued CO&O ROFR notices.  Blaze did not exercise the Lands ROFR under the Imperial transaction but did exercise the Lands ROFR under the Whitecap transaction.  Blaze commenced this Action and alleged that the two agreements must be read together such that its exercise of the Land ROFR triggered the requirement for an offer under the CO&O ROFR.      <\u002fp>

The Court reviewed the two agreements and determined that each one must be interpreted independently of the other and that each ROFR must be interpreted by analysis of the contract that created it.  The Court noted that the 1988 CO&O did not incorporate by reference the 1960 Lands Agreement and included parties who were not a party to the Lands Agreement. The Court held that it would be unreasonable to extend the Lands ROFR beyond the plain wording of the Lands Agreement.  The Court held that the intention of the parties at the time of execution could not have included an interest in the Plant, which was built almost three decades later. <\u002fp>

Blaze further argued that clause 18 of the 1960 Agreement and, specifically, the words "for the offered price and upon the offered terms" created a contractual right to an interest in the Plant because otherwise, Blaze was not being offered the same terms and conditions, in a manner that complied with the exemption in the CO&O Agreement. The Court disagreed based on the fact that the 1960 Lands were only a small portion of the sale and the Land ROFR could be not be taken as extending to any other assets being sold outside the specific 1960 Lands.  The Court noted that by issuing the Lands ROFR as it was required to do (as it related to a disposition of assets) Imperial did not waive its right to the Plant ROFR exemption. There was nothing in the contract language that required the Court to consider or read into the contractual language "a functional nexus or benefit between owning the producing lands and an interest in the Plant." [para.  93] The Court noted that even if a nexus could be proven, as many landowners are not plant owners and many plant owners are not land owners, such an interpretation would be unreasonable. <\u002fp>

The Court also rejected Blaze's argument that its exercise of the Lands ROFR had the effect of nullifying the exemption under the CO&O Agreement.  The Court noted that the exemption in clause 1101 of the CO&O does not require that the "corresponding interest" in the lands be sold to the same party.  Further, nothing in the language of clause 1101 could be read such that exercise of a separate discrete ROFR under a different agreement would affect that exemption.  The court determined that the parties would have been at liberty to use different language if that was the intended interpretation but nothing in the clear and unambiguous language of the exemption clause evidenced that. [para. 146]<\u002fp>

In the result, while Blaze was entitled to a ROFR over the lands, this did not have any effect on the CO&O ROFR or the ability of the defendants to rely upon the exemption provision found within it.  <\u002fp>

As a final matter, the Court considered the question of specific performance in the event it was wrong on the interpretation of the ROFRs and determined that specific performance would be refused in any event.  The first two reasons for declining specific performance are common in such cases, that Blaze had failed to strictly comply with the Imperial ROFR notice, and that the interest being sought pursuant to the CO&O ROFR was uncertain and non-specific.   The third is more unusual. The Court invoked the clean hands doctrine and determined that because Blaze was and had been in default in payment of amounts owing under the CO&O since it acquired an interest in the Plant, it was not entitled to equitable relief in any event. 

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