Canada: Update: Stewart Estate v TAQA North Ltd, The Finale

In November 2015, the Alberta Court of Appeal issued its decision in Stewart Estate v TAQA North Ltd, 2015 ABCA 357, which addressed a number of issues significant to the oil and gas industry. We previously commented on this decision. In January 2016, ExxonMobil Canada Ltd. ("Exxon"), Nexen Inc. ("Nexen"), Bonavista Energy Corporation ("Bonavista"), Coastal Resources Limited ("Coastal") and Pengrowth Energy Corporation, as successor to Esprit Exploration Ltd. ("Esprit/Pengrowth"), filed applications with the Supreme Court of Canada (docket number 36810), for leave to appeal the decision in Stewart Estate v TAQA North Ltd, 2015 ABCA 357, citing the need for clarification of:

  1. the proper measure of damages in mineral trespass cases;
  2. the standard of review applicable to interpretation of oil and natural gas leases and clarification of Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53; and
  3. whether a gross overriding royalty (GORR) holder has a duty to account for GORR payments to the lessor under the lease from which the GORR is carved.

On June 30, 2016, the Supreme Court of Canada denied leave to appeal with costs. No reasons were given.

The decision of the Alberta Court of Appeal in Stewart Estate v TAQA North Ltd, 2015 ABCA 357 remains the current law with the following industry implications from a legal and practical perspective (reproduced from our initial commentary):

  1. The wording in historic oil and gas leases, especially where original lessees and lessors are unavailable, will be interpreted, "as they might have been objectively understood by an informed person reading them when they were executed, not how they would be read today." And the Court of Appeal may very well be the effective decision-maker as it appears it will apply a correctness standard to its review.
  2. In interpreting the applicability of the shut-in provision in a lease, the Courts may first focus on the actual subjective analysis by the lessee to determine the reasons for the shut-in at the time, and will not focus on, or will give much less weight to, expert evidence analyzing the economic performance of the well after the fact. Lessees should be very careful in documenting the reasons for shut-in should they later wish to take the position that the shut-in was due to market circumstances or other circumstances out of the lessee's control.
  3. Lessees should operate under the assumption that under standard oil and gas leases, once a lessee concludes that a well is not capable of economic production, the lessee has the specified number of days within which to stimulate the existing formation or complete the well in another formation. The fourth proviso may not apply to a well that is no longer capable of producing leased substances in commercial quantities.
  4. Lessees who intend to recomplete a well in a different zone where the well has been properly shut-in under the terms of the lease, but where the shut-in is beyond the specified number of days allowed under the terms of the lease, should immediately approach the lessor for a re-grant on the same terms. If there is a top lease already in place, the lessee should consider dealing with the top lease before any capital costs are spent on recompleting the well in a different zone.
  5. Lessees who know or ought to know that their lease has expired but who continue to produce hydrocarbons under the lease will likely be liable for subsurface trespass and conversion and will likely be required to disgorge the net revenue from production to the lessors (mild rule). However, in any particular case the Courts will apply what is "just and equitable" and, for egregious behaviour, the lessees may still be required to disgorge gross revenue from production to the lessors (harsh rule). Conduct justifying the harsh rule of damages remains unclear.
  6. Lessors and underground storage operators should take comfort in the Court of Appeal recognition of subsurface trespass to mines and minerals and the remedies for subsurface trespass and wrongful conversion.
  7. Limitations and the concepts of leave and licence, or estoppel or waiver, will continue to be issues in lease termination cases. Lessors are expected to take reasonable steps and exercise due diligence in discovering their injury, and the limitations clock may start running shortly after production ceases and long before lessors obtain a legal opinion that their lease has terminated. Further, acceptance of royalty payments or other encouragement to continue production may preclude a trespass claim until the lessor provides a clear notice to vacate the property or commences and serves an action.
  8. GORR owners beware. Where the GORR is carved out of a lessee's working interest, the GORR expires once the lease from which it is carved expires. GORR owners should be cautious where payments are received after a well has been shut-in and then placed back on production. In such circumstances, the GORR owner may be best advised to hold the payments in trust pending a title opinion or a re-granted lease. Lessors will be entitled to an accounting for the amounts paid to the GORR owner following lease termination. The GORR owner may be accountable to the lessor, or possibly to the lessee who has to account to the lessor, for any GORR payments received after the lease terminates.
  9. The practice of top-leasing and litigation maintenance and funding by top-lessees does not constitute champerty or maintenance. While top-lessees do not have a direct claim against lessees for trespass where their interest is contingent upon a "determination" that existing leases have terminated, a differently structured top-lease may possibly give rise to a direct claim.
  10. While it may be possible to obtain in rem declarations as to the validity of leases even where not all parties who arguably have an interest in the leases are before the court, the prudent practice to avoid complex issues at trial is to have all affected persons as parties to the action.

The Alberta Court of Appeal has also issued decisions respecting the judgment roll in, Stewart Estate v TAQA North Ltd, 2016 ABCA 143 and costs in, Stewart Estate v TAQA North Ltd, 2016 ABCA 144. We previously commented on these decisions.

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