Canada: Case Law Summaries - Contracts

Last Updated: March 27 2019
Article by Aidan L. Cameron, Lindsay Burgess, Alexis Hudon, Camille Marceau and Angela M. Juba

Most Read Contributor in Canada, March 2019

CANLIN RESOURCES PARTNERSHIP V. HUSKY OIL OPERATIONS LIMITED, 2018 ABQB 24

In this decision, the Alberta Court of Queen's Bench dealt with the interpretation of a right of first refusal contained in a joint venture agreement.

Canlin Resources Partnership, Husky Oil Operations Limited and Canadian Natural Resources Limited were joint venture participants in the Erith Dehydration and Flow Splitter Facility (Facility) and successor parties to the Construction, Ownership and Operation Agreement (Agreement) that governed the operations of the Facility. Between 2014 and 2016, Husky had shut down and decommissioned the dehydrator unit of the Facility and installed a "jumper" pipeline that bypassed the inlet separation and flow splitter unit. Since 2016, the gas that was previously processed at the Facility was flowed to, and processed at, a different facility instead. Although Canlin had pressed for the Facility to become operational and had expressed interest in assuming ownership and operations of the Facility, Husky firmly maintained its position that the Facility should remain in its current shut-in, non-operational status.

The joint venture agreement provided Canlin with a right of first refusal if either of the other joint venture parties wished to sell its interest in the Facility, subject to an exception: an owner may transfer all or a part of its interest in the Facility without providing a right of first refusal where the disposition made by the owner is "... of all or substantially all ... of its petroleum and natural gas rights in wells producing to the Facility ...." In September 2017, Husky gave Canlin notice of its intention to sell certain of its assets, including its interest in the Facility, to Ikkuma Resources Corp. Husky took the position that the exception applied to the Ikkuma transaction, such that Canlin was not entitled to a right of first refusal. Canlin disagreed, and sought relief in the Court of Queen's Bench.

The Court found in favour of Canlin, holding that Canlin was entitled to a right of first refusal notice and specific performance of that right. In so doing, the Court refused to read the phrase "wells producing to the Facility" as "wells associated with the Facility" as suggested by Husky on the basis of annotations to the model agreement that the Agreement at issue was based upon. Considering the ordinary and grammatical sense of the phrase, the Court held that "wells producing to the Facility" means wells that are actually being processed by the dehydrator and inlet separation and flow splitter units of the Facility. The Court found this interpretation to be consistent with the Agreement as a whole, which has as its purpose the use of the Facility for functions of flow splitting and dehydration. As the wells were not utilizing those capabilities, but rather were "producing" to another operational facility, they could not be said to be "producing to the Facility."

ILLIDGE V. SONA RESOURCES CORPORATION, 2018 BCCA 368

This is an appeal from a decision reviewed in Mining in the Courts, Vol. VIII, in which the British Columbia Supreme Court was asked to determine the time by which a party was required to obtain a bankable feasibility study in circumstances where the parties had not agreed on a specific date.

The plaintiffs granted options to purchase several properties known to contain gold to Sona Resources Corporation, a junior mining company. A condition of the agreements was that Sona obtain a bankable feasibility study before it could obtain full rights and title to the properties. No specific date was attached to this requirement. Over the next 12 years, Sona spent over C$6.4 million exploring the property, but did not obtain a bankable feasibility study. The plaintiffs sought to terminate the agreements.

The B.C. Supreme Court held that the plaintiffs could not terminate the agreements on the basis of the undelivered study. Considerable effort is required to obtain a feasibility study. The requirement to do so must be fulfilled within a "commercially reasonable period," having regard to the exploration and development activities necessary to obtain the study, as well as prevailing economic, gold and market conditions. Though 15 years had passed since the agreements were entered, this period had yet to expire. The Court decided that it would also be inappropriate to imply a "time is of the essence" term in this case, given the inherent difficulties in advancing a mineral property to the stage of a bankable feasibility study.

The Court of Appeal allowed the plaintiffs' appeal, but only to the extent of replacing a term of the underlying order with a term dealing with the issue of reasonable time for completion of the study. While the Court declined to interfere with the trial judge's conclusion that a reasonable time for completion of the bankable feasibility study had not passed, it found the trial judge had erred in holding that it was not possible to determine a reasonable time for performance. The Court granted leave to the parties to make further submissions on this term in writing. Absent persuasive submissions, the Court noted a deadline of December 31, 2020 would be viable, which would be comprised of two additional exploration seasons plus some time for writing.

LANDRY (LUNIK EXPLORER) C. FIELDEX EXPLORATION INC., 2018 QCCS 3235

This case concerned a claim for damages flowing from a breach of contract.

The defendant, Fieldex Exploration inc., was a mineral exploration and map staking company. Around 2009, the People's Republic of China announced its intention to restrict its exports of rare earth minerals, which caused a sudden craze for the minerals. Fieldex possessed mining rights in an area where rare earth minerals had been discovered. Luc Landry, doing business under the name Lunik Explorer (Landry) was engaged in exploration activities for the benefit of various mining companies. Landry approached Fieldex to acquire its mining rights, and the parties entered into a contract for 232 mining rights of six prospectors. According to Landry, it was a purchase agreement. Fieldex claimed it was a contract with an option to purchase.

Landry did not obtain the mining claims from all six prospectors and only 227 mining claims, instead of 232 claims, were ever transferred to Fieldex. In January 2011, the remaining five claims expired and reverted back to the public land sphere. In the summer of 2011, Landry was informed that Fieldex did not intend to pay the sum of C$100,000 to pursue its option on the 232 mining rights and intended to terminate the agreement if its financial terms were not amended. Fieldex proposed to Landry that all mining rights be transferred back to him. Landry refused this offer. Instead, 151 mining rights expired from February 2011 to July 2012. Landry commenced an action, and Fieldex counterclaimed for abuse of process.

The Court concluded on the facts of the case that the contract was an option agreement. The Court found that Landry knew in 2011 that his mining rights no longer had the same appeal and that it was for this reason that he refused to have Fieldex transfer the mining rights back to him. Indeed, that same year, the People's Republic of China decided to forgo its restriction on its exports of rare earths. Landry knowingly allowed 151 mining rights to expire without taking any action. The Court also granted Fieldex's counterclaim for abuse of process.

MEGA REPORTING INC. V. YUKON (GOVERNMENT OF), 2018 YKCA 10

In this decision, the Yukon Court of Appeal unanimously upheld a waiver of liability clause in the Yukon government's Request for Proposal (RFP) that was challenged by an unsuccessful bidder.

In 2013, the Yukon government issued an RFP seeking bids for a one-year contract for court transcription services. The RFP explicitly provided that the process was subject to the Yukon Contracting and Procurement Directive, which sets out various principles for public procurement, including commitments to fairness, openness, transparency, and accountability. The RFP also included a clause purporting to waive the government's liability for any costs associated with unfairness in the RFP process, except as awarded through a "Bid Challenge Process."

The tendering process had two stages: (i) a technical evaluation of the bidder's experience and performance; and (ii) for each bid that met the minimum technical criteria, an assessment of the price. The evaluation committee determined that Mega Reporting Inc. did not pass the first stage, so it did not consider its (lower) bid price and another bidder was selected. There was no evidentiary record of the evaluation, but Mega later learned that it lost points for criteria not disclosed in the RFP. Mega sued the government, alleging that it breached its duty to fairly review its proposal. The Yukon Supreme Court held that the government failed to meet its duties of fairness, accountability, and transparency, both at common law and under the Directive. In addition, applying the test from Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, the Court found that public policy reasons justified refusing to enforce the waiver of liability clause and awarded Mega damages in excess of C$300,000. The Yukon government appealed.

The Court of Appeal overturned the ruling, finding that the trial judge erred by not considering that the public policy must be "substantially incontestable" to justify not enforcing a waiver of liability clause. Even if the trial judge believed that one policy interest (avoiding unfair tendering) outweighed the other (enforcing contracts), the legal test is not a balancing act. The law sets a high bar to defeat an otherwise valid exclusion clause, and the bar was not met in this case. Although the Court found it was not substantially incontestable that the public interest in ensuring fair procurement overrides the government's ability to protect itself from liability, cases that have risen to that level involved clauses excluding liability for human rights violations or fraud. In contrast, Mega was a sophisticated business party, which chose to participate in a bidding process with an exclusion of liability clause and no public policy interest justified depriving the government of the exclusion clause that Mega had accepted. The Court further distinguished Tercon, noting that the exclusion clause clearly and unambiguously excluded liability for any costs associated with unfairness in the RFP process.

For more on this decision see McCarthy Tétrault LLP's Canadian Appeals Monitor blog post entitled "'Bid At Your Own Risk': Yukon Court of Appeal in Mega Reporting upholds waiver of liability in government procurement process." Mega Reporting has sought leave to appeal to the Supreme Court of Canada.

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