Canada: UPDATE: Stewart Estate v Taqa North Ltd

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 the Alberta Court of Appeal decision in STEWART ESTATE v TAQA NORTH LTD: Three Alberta Court of Appeal Justices Weigh in on Critical Oil and Gas Lease Issues. Since our previous commentary there have been further decisions and developments respecting this action.

Application for Leave to Appeal to the Supreme Court of Canada

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 for leave to appeal, 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.

The Supreme Court of Canada decision on the leave application is expected shortly.

Court of Appeal Judgment Roll Decision

Clarification of GORR Holder Liability

On May 6, 2016, the Alberta Court of Appeal issued its decision in Stewart Estate v TAQA North Ltd, 2016 ABCA 143, respecting the form of the Judgment Roll. The draft Judgment Roll totaled $22,192,303.77 in damages, excluding interest and the decision addressed the following specific issues.

As discussed in our initial commentary of Stewart Estate v TAQA North Ltd, 2015 ABCA 357, the majority of the Court of Appeal (O'Ferrall J.A. and McDonald J.A.) concluded that a GORR carved out of the lessee's working interest and entitling the holder to receive a portion of the lessee's production revenue, is limited in duration to the life of the lease from which it is carved. The GORR expires once the lease expires. A GORR holder is not a working interest owner and is not jointly and severally liable for the value of natural gas wrongfully converted under an expired lease, but the GORR holder may have to account to the lessor for royalty payments received once the lease terminates.(para 465-467) In this case, the GORR holder (Esprit/Pengrowth) received benefits of production after the leases terminated. The majority of the Court of Appeal held that this benefit was something that had to be accounted for back to the lessor, either by the lessee (Bonavista) or the GORR holder (Esprit/Pengrowth).

In its more recent decision, the Court of Appeal clarified that the lessee (Bonavista) and the GORR holder (Esprit/Pengrowth) were jointly and severally liable to the lessors for the value of the royalty volumes in the aggregate amount of $1,357,703. The Court offered no further clarification on the cause of action giving rise to the GORR holders' liability but explained the liability to account to the lessor for the GORR payments as follows:

[12] Bonavista, as lessee, is liable for the tortious conversion of the lessors' natural gas and Esprit/Pengrowth, as the recipient of the value of a portion of the wrongfully converted property of the lessors are also liable to account. Bonavista and Esprit/Pengrowth are jointly and severally liable to their lessors, the persons suffering the loss. Esprit/Pengrowth must account for the value of that production; but if Esprit/Pengrowth defaults in accounting to the lessors for that value, Bonavista would be liable to account for those volumes. As between themselves, Bonavista and Esprit/Pengrowth may have a contract which provides for contribution and/or indemnity; but any such arrangement will not affect their joint and several liability to their lessors for the value of the royalty volumes.

[13] So, to answer Esprit/Pengrowth's question, the appellant-lessors do have a judgment against Esprit/Pengrowth for the royalty volumes and, in default, a judgment against Bonavista for those same volumes. Any disputes between Bonavista and Esprit/Pengrowth arising out of their contractual arrangements may be settled by the Court of Queen's Bench. But their liability for the royalty volumes to the appellant-lessors is joint and several.

[14] The gross overriding royalty payable to Esprit/Pengrowth was nothing more than a right to receive a portion of a lessee's production revenue (or a portion of the natural gas produced by the lessee). If Bonavista, as lessee, was not entitled to produce the natural gas, then the overriding royalty holder, Esprit/Pengrowth, was not entitled to receive a portion of it. The bottom line is that all of the wrongful production must be accounted for, including the royalty volumes. Hence the finding of joint and several liability for the overriding royalty volumes.

The Court further held that the GORR holder must account for the GORR proceeds for the same time period as the lessee is required to account for production as, "it would be illogical and unfair to require Bonavista to account for the production it received while not requiring the overriding royalty recipient (Esprit/Pengrowth) to account for the value of the production Bonavista paid to it during that same period." (para 19)

Clarification of Leave and License

The Court noted a corrigendum correcting paragraph 1 (e) of the Executive Summary of the initial decision, which clarified that the majority had agreed that the Irwin Group did not give leave and license from December 2005 to January 2007, and although superfluous to the issue before the Court, concluded that any leave and license was terminated when Coastal's predecessor was served with the Statement of Claim and Notice to Vacate.

[26] ... Coastal's predecessor, Unocal, from whom it acquired its interest, was served with the Statement of Claim in the Fall of 2005. Unocal was served because Coastal failed to register its interest on title. There is simply no basis on which to suggest that the Irwin Group consented to Coastal's continued receipt of the natural gas revenues attributable to the north 43 acres of the NE 1/4 of Section 25 after Unocal was served with the Statement of Claim and Notice to Vacate. That Unocal was served in the Fall of 2005 ends the matter; but the fact that Coastal was advised by Chevron (on behalf of Unocal) of the litigation by letter dated December 19, 2005 makes the argument completely untenable ...

Court of Appeal Costs Decision

On May 6, 2016, the Alberta Court of Appeal also issued the costs decision in Stewart Estate v TAQA North Ltd, 2016 ABCA 144 and confirmed that complex litigation may give rise to a multiplier under Schedule C: Tariff of Recoverable Fees. The Court further confirmed that in Alberta, an informal offer, if sincere, may give rise to double costs. The appellants and the cross-respondent, J. Timothy Bowes ("Bowes"), claimed trial and appeal costs and disbursements totaling $2,261,358.08. The appellants supported their claim by arguing:

[2] ... their unqualified success on appeal and cross-appeal; they were compelled to sue because of the respondents' tortious conduct and the litigation is ten years and counting; the suit was complex and they were pursuing five respondents each with a different approach to defending the claims against them at trial and on the appeal; the respondents' proposed bill of costs for the trial alone was 50% more than the appellants' claim for trial and appeal; the appellants bested a formal offer of $18 million made before trial; and there were three informal offers, two before the appeal, all of which were bested. The appellants request that we determine trial costs.

The respondents, TAQA North Ltd. ("TAQA"), Esprit, Bonavista, Triquest Energy Corp. ("Triquest"), Coastal, Nexen and Exxon argued that each party should be responsible for their own appeal costs given what they characterized as novel issues and submitted that the matter should be remitted back to the trial judge for determination. The respondents contended that the Court should exercise its discretion and award no costs on appeal because the lawsuit is a "leading case in oil and gas law" as it addressed important industry-wide issues for the benefit of oil industry participants and freeholder interest holders. Alternatively, they argued for significantly reduced costs. Their arguments were summarized as follows:

[3]... the lessors would be over-indemnified because they were never responsible for costs as a result of an agreement with a non-party (the top lessee) and a retainer agreement with their counsel. The respondents contend that trial costs are on reserve by the trial judge and should be decided by her (not by this court). They say the appellants pursued unmeritorious collateral issues at trial and used objectionable expert witness tactics.

Coastal and Bonavista argued that they were both in a unique position because of the time when they were added as parties and the fact that their legal relationship was arguably with a non-party (Snell Farms Ltd./Wheatland Farming Company Ltd.) Esprit also distinguished itself from the other respondents as its liability as a GORR holder was for disgorgement of GORR payments and arguably of a different nature.

The Court determined that it would be more expeditious and less costly for it to determine both the appeal costs and trial costs. In rejecting the respondents' contention that the parties should bear their own costs, the Court held that the appellants were successful in their appeal and that there were no mitigating factors in either the trial or the appeal. As a result, the only issue was whether the Court should award enhanced costs.

Costs Multiplier

The appellants argued that as a result of the complexity of the matter (which required them to respond to five counsels' submissions) and the fact that they were successful on virtually all grounds of appeal, they should be entitled to a four times multiplier of the tariff amount in column 5. The respondents argued that there should be no multiplier.

The Court held that application of a multiplier was not unprecedented and found that there was nothing in the case law to suggest that the analysis for a multiplier is altered in an oil and gas context. The Court confirmed that Alberta Courts have typically awarded a multiplier of the tariffs in column 5 in three circumstances (para 25): when the complexity of the action warranted it, when the amount in dispute significantly exceeded the $1.5 million threshold for column 5 or when the conduct of one of the parties warranted a multiplier. In addition, the Court will also rely on the considerations set out in Rule 10.33 in determining whether a multiplier should be applied.

Ultimately the Court awarded a two times multiplier. The Court based its decision largely on the complexity of the trial and appeals, more specifically, the volume of documents, multiple days of questioning, number of agreed exhibits, lay and expert witnesses, the volume of written argument as well as the number of respondents, the complexity and variety of issues and the length of the appeal hearing.

Counterclaim Costs claimed by Bowes (trial only)

Bowes sought costs in the Counterclaim. He was instrumental in the lessors signing the top leases but was not a party to the proceedings until he was made a party by the counterclaim of Nexen and Exxon. The counterclaim focused on a champerty and maintenance claim and was rejected by both levels of Court. Nexen and Exxon argued that Bowes' costs claim was unjustified as he was represented by the same counsel as the appellants and that there were few trial submissions and no witnesses, evidence or documents specific to the counterclaim. The Court awarded Bowes costs against Nexen and Exxon only, and in a reduced amount.

Esprit/Pengrowth

The Court concluded that Esprit/Pengrowth was not jointly and severally liable with the working interest owners for the value of the natural gas wrongfully produced and was not liable for costs on a pro rata basis. However, Esprit/Pengrowth was liable for the GORR payments received and therefore had unsuccessfully resisted the claim of disgorgement. The Court determined that Esprit/Pengrowth's liability "lay in the law of personal property (a person cannot acquire better title to a chattel than that of the person from whom it received the chattel), not the law of torts." The Court did factor in that Esprit/Pengrowth was successful in arguing that it was not jointly and severally liable for the wrongful production by the working interest owners.

Formal Offers to Settle

With respect to the formal offers to settle, made by the appellants prior to trial and which had been bested, Bonavista and Coastal argued that despite the offers they were compelled to continue producing because they owed a duty to their lessor. The Court disagreed, finding that in a pooled production spacing unit, the lessees had no right to produce as soon as any one of the lessors withdrew their consent to continued production. Accordingly, the Court held that there was no reason to deny the appellants, including Bowes, the cost consequences of besting their offer; the trial costs that followed their formal offer were therefore doubled.

With respect to the offers to settle made prior to the appeal being heard, the Court held that, although the informal offers were conditional, there was every indication that if the respondents accepted that would have led to the approval of all of the appellants. The Court held that the offers were a sincere attempt to settle the dispute without a lengthy appeal hearing, and again ordered a doubling of costs.

Implications

  1. Subject to clarification by the Supreme Court of Canada, GORR holders should remain cautious where GORR payments are received after a well has been shut-in and then placed back on production. In such circumstances, the GORR holder and the lessee of the lease from which the GORR is carved may be jointly and severally liable to the lessor, for any GORR payments received after the lease terminates. The GORR holder may be best advised to hold the payments in trust pending a title opinion or a re-granted lease.
  2. Acceptance of royalty payments or other encouragement to continue production may constitute leave and licence to continue production after lease termination and preclude a trespass claim, up until such time as the lessor provides a clear Notice to Vacate the property or commences and serves an action. Having taken such steps, a subsequent lessee, even one who has no direct knowledge of the Notice to Vacate and the commencement and serving of the action, may be precluded from alleging consent or leave and licence and may be liable for trespass.
  3. Read together with other recent Alberta decisions, the costs decision in this case confirms an ongoing trend of Alberta courts towards significant cost awards and costs awards which promote settlement. This case is a reminder that Alberta Courts will look favourably on sincere attempts to settle disputes before trial, and that even an informal offer may lead to double costs or elevated costs.

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