Canada: Focus On Energy - May 2009

Last Updated: May 30 2009

Article by Mike Hurst, Miles Pittman, George Antonopoulos and Jenelle Matsalla

Extension of Oil & Gas Operators' Trust Obligations

Where an operator commingles the monies of a joint-operator with its own funds and the account is depleted, a constructive trust may be imposed on the assets (and sale proceeds thereof) of the operator for the benefit of the joint-operator.

Under clause 507 of the 1990 CAPL Operating Procedure, an operator is expressly authorized to commingle its own funds with those of a joint-operator, but it is provided that the joint operator's funds are considered trust monies. In Brookfield Bridge Lending Fund Inc. v. Vanquish Oil & Gas Corporation and King Energy Inc., 2008 ABQB 444, the Alberta Court of Queen's Bench held that, where an operator empties its bank account to pay creditors, a constructive trust may be extended over the other assets of the operator, and the joint-operator will be granted priority over all of the operator's creditors.

Karl Oil and Gas Ltd. ("Karl") and Choice Resources Corporation ("Choice") were 55% and 45% working interest owners, respectively, of a well referred to as the "Simonette property". Karl was originally the operator until it sold its interest to Vanquish Oil & Gas Corporation ("Vanquish"), and Vanquish assumed the role of operator. The well came into production when Vanquish was operator.

The Simonette property was operated subject to the terms of the 1990 CAPL Operating Procedure. Clause 507 specifically allowed the operator to commingle the monies received from or on account of a joint-operator with its own funds, and these monies were deemed trust monies held by the operator as the joint-operator's trustee.

A related dispute not addressed in this specific action was whether Karl or Choice was the owner of the 45% working interest in the Simonette property, which was not previously owned by Vanquish. For the purposes of this case, it was clear that whomever was the owner of that 45% interest was entitled to have been paid by the operator a percentage of the net production revenues. Vanquish, as operator, kept a main operating account where all expenses were paid from and all production revenues were deposited. However, Vanquish did not pay the pro rata net production revenues, estimated to be in the amount of $320,539.00, to the owner of this remaining 45% interest.

Three years after Vanquish became operator, a receiver was appointed on application by Brookfield Bridge Lending Fund Inc. ("Brookfield"), a secured lender of Vanquish. The receiver applied for the sale of Vanquish's assets. From the proceeds of the assets sale, Karl and Choice advanced a claim to obtain the $320,539.00 which should have been remitted to the 45% interest owner for net production revenues.

The issue to be determined then was whether the joint-operator working interest owner in the property had a claim in trust, to the extent of the unpaid net production revenues, on the other assets or sale proceeds of the assets of the operator (ie. those not in the bank account).

Counsel for Brookfield argued that at the date of the receivership, approximately $58,000.00 remained on deposit in the main operating account, and accordingly, that was the maximum amount the joint-operator could claim in the proceedings.

The Court, however, determined that a constructive trust should be imposed on the assets of Vanquish, and not just on the money in the main operating account, on the bases that: 1) clause 507 of the 1990 CAPL Operating Procedure clearly established a valid trust; 2) there was a high probability that the net asset base of Vanquish was unjustly enriched by its breach of trust; 3) the 45% interest owner had a legitimate reason for seeking a remedy against Vanquish's property, rather than simply the money in the account, to ensure that parties like Vanquish would comply with clause 507 of the 1990 CAPL Operating Procedure; and 4) while the imposition of a constructive trust would adversely affect the rights of Vanquish's secured lender, Brookfield, it was not unjust because Brookfield was in a far better position to ensure that Vanquish conducted its business in a manner which complied with the 1990 CAPL Operating Procedure.


We are advised that this case has been appealed. This is an interesting decision, as the Court extended a constructive trust to a situation where the trust property, or proceeds of its disposition, may not be able to be directly traced. The effect is that joint-operators, whose revenues were held in trust by the operator, may have a successful claim against the assets of the operator, irrespective of tracing.

The outcome of this case is not favourable from the perspective of the secured creditors of operators, as they will have to ensure that a borrower-operator strictly complies with its CAPL obligations, and be mindful that the claim of the joint-operator is superior to their own claim. Prior to lending, creditors will now face the challenge of determining the extent of a operators' trust obligations, given the impact these obligations will have on potential claim priorities in the future.

We Learn Even More From the Enron Decade

If an express provision in an agreement contains plain language, one party cannot allege that steps contrary to this provision were required to be taken by the other party by virtue of industry practice.

On January 23, 2009, the Alberta Court of Appeal affirmed the Queen's Bench decision that Marathon Canada had lawfully terminated an agreement with Enron Canada. The fact that the termination provision in the agreement was found to have been triggered was fortuitous for Marathon Canada, as it was "out of the money" on the contract.

The dispute in Marathon Canada Ltd. v. Enron Canada Ltd., 2008 ABQB 408; affirmed by 2009 ABCA 31, arose out of a natural gas purchase agreement (the "Agreement"), whereby Marathon Canada Limited ("Marathon") was the seller and Enron Canada Corp. ("Enron Canada") was the buyer (both parties being successors to the original parties to the Agreement).

When the U.S. company Enron Corp., Enron Canada's indirect parent corporation, ran into financial trouble in the fall of 2001, its credit rating was downgraded to a B-, or "junk bond status". Within one hour of learning of this downrating, Marathon faxed a letter to Enron Canada alleging a Triggering Event of a Material Adverse Change, as set out in the Agreement, and terminated the Agreement.

A portion of the definition of Material Adverse Change in the Agreement included, with respect to Enron Canada and Enron Corp., long term debt unsupported by third part credit enhancement rated by Standard and Poors below BBB-. A Triggering Event was defined in the agreement as being the occurrence of a Material Adverse Change, unless the affected party was to establish and maintain a Letter of Credit for the other party (the "notifying party"). While Enron Canada responded to Marathon's letter by insisting that it was solvent and that no Triggering Event had occurred, it did not provide or maintain a Letter of Credit. The Agreement further provided that where a Triggering Event occurred, the notifying party could terminate the Agreement.

The trial judge determined that it was reasonable for Marathon to conclude that a Triggering Event of a Material Adverse Change had occurred in respect of Enron Corp., as set out in the Agreement, which entitled Marathon to terminate the Agreement. Enron Canada argued that it was the industry custom and practice for the notifying party to provide notice requesting the affected party provide performance assurance and allow reasonable time to comply before a right to termination arose. However, the Court concluded that the evidence did not establish such a well-known industry practice that there could be a presumed intent to be bound by it, particularly where the alleged practice was contrary to the plain language in the Agreement, to which the law clearly states that effect must be given.

Furthermore, because Marathon had supplied natural gas under the Agreement in November which Enron Canada had not paid for, the trial judge awarded Marathon damages plus interest for this amount owing. The trial judge also dismissed Enron Canada's counterclaim, concluding that the Agreement contemplated a "one way" arrangement which allowed Marathon, upon lawfully terminating the Agreement, to walk away without having to compensate Enron Canada for incurring the loss of the favourable price for the gas granted under the Agreement. While Enron Canada argued that the one way clause amounted to a penalty such that Enron Canada should be able to seek relief from forfeiture, the trial judge held that this was not a case where the parties had an unequal bargaining power such that it would be fair or equitable to deny enforcement of the one way provision in the Agreement.

Enron Canada appealed this decision. The Court of Appeal held that the trial judge's findings of fact, that a Triggering Event and Material Adverse Change had occurred under the terms of the agreement, and that there was no industry practice or commercial context which demanded that Marathon should have held back on its contractual rights, were reasonable. The Court further held that the trial judge did not misdirect himself on the law when interpreting the Agreement. Because Marathon was within its rights afforded by the Agreement when it terminated the contract, the Court concluded that the trial judge had not erred in finding that Enron had not made out its counterclaim. Thus, the entire appeal was dismissed.


This case demonstrates the inclination of courts to determine disputes based on plain language in the contract, as opposed to industry standard, particularly where sophisticated parties are involved and the party seeking to implicitly impose the industry standard on the contract was the drafting party.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Oct 2018, Webinar, Toronto, Canada

Dentons and SheEO are coming together for an evening of #radicalgenerosity on October 17, 2018. Meet Vicki Saunders, Founder of SheEO, and learn about how SheEO is changing the landscape for female entrepreneurs.

17 Oct 2018, Webinar, Toronto, Canada

With the continued focus on Bill 148’s significant changes to the Employment Standards Act, Dentons’ Toronto Employment and Labour group is pleased to launch a new webinar series focusing on Bill 148.

17 Oct 2018, Seminar, Québec, Canada

Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions