In American Creek, Teuton Resources Corp., a mineral
"prospect generator" company, entered into an option
agreement with American Creek Resources, whereby American Creek
would earn a 51-percent undivided interest in a mineral claim upon
making "exploration expenditures" of $5,000,000. American
Creek incurred over $5,000,000 in expenditures from 2007-2009 and
included these amounts in assessment reports accepted by the B.C.
Mineral Titles Branch. When American Creek sought to trigger its
51-percent interest, Teuton refused, asserting that some of the
expenditures were unreasonable because, in part, of an alleged
"lack of expertise and general incompetence" of American
Creek. American Creek sued for specific performance, and succeeded
On appeal, the Court of Appeal noted the deferential standard of
review owed to findings of mixed fact and law as recently set out
by the Supreme Court of Canada in Sattva Capital Corp
v Creston Moly Corp, 2014 SCC 53, and concluded after a
thorough review of the trial judge's findings that no error,
much less a palpable and overriding error, was demonstrated. While
Teuton maintained that the "exploration expenditures"
incurred to earn-in had to be reasonably incurred whether because
of the meaning of the phrase or because such a requirement must be
an implied term of the agreement, the trial judge rejected this
position. The trial judge noted that: 1) there was no expert
evidence led to establish any industry standard with respect to
"exploration expenditures"; 2) some of Teuton's past
option agreements had included qualifying terms such as
"reasonable" while this one did not; and 3) interpreting
a "reasonableness" requirement could create uncertainty,
raising questions such as from whose perspective should
reasonableness be judged and at what point in time?
While it was reasonable to presume that the contract must have
contemplated some limit or control on "exploration
expenditures", it would be commercially unreasonable to expect
American Creek to undertake expense "without knowing its
rights until... a retrospective forensic investigation" of the
expenses was conducted. Instead, the judge found that the control
on expenditures could be met by understanding "exploration
expenditures" to be those expenditures made in good faith in
relation to "exploration and development work" within the
meaning of the relevant regulation and accepted by the Mineral
American Creek is an important reminder of imposing explicit
control mechanisms on cost or other expenditures in a contract if
they are desired. It further highlights the importance of defining
key terms to avoid unnecessary and expensive judicial intervention,
and the risk of a court-imposed definition at odds with the
parties' intentions. A short, self-drafted letter agreement can
be a risky endeavor.
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