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.

In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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