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Supreme Court of Canada

Estoppel—Petroleum and natural gas lease—Production obtained after expiry of primary term—Payment of royalty—Other actions taken by lessee at request of lessor—Both parties unaware lease terminated—Estoppel against lessor not proved.

As held by both the trial judge and the Court of Appeal, a petroleum and natural gas lease which the respondent had granted to the appellant Sohio terminated by its own terms because there was no production within the 10-year primary term. The drilling commitment contained in the lease was successively postponed by Sohio by payment each year of the delay rental as stipulated. Drilling operations did not commence until one week prior to the expiration of the 10-year term. The well was completed shortly after that term had expired. The well proved to be a producing well and royalty on production was paid by Sohio to the respondent. At the respondent’s request, Sohio, in accordance with the requirements of the lease, drilled an offset well and paid its share of the taxes on the leased lands.

An action brought by the respondent for a declaration that the lease had terminated and for consequential relief was dismissed at trial, but this judgment was reversed by the Court of Appeal. On appeal to this Court, the argument was directed to the issue, raised by the appellants, that the respondent, by its words and conduct, was estopped, in law and in equity, from denying the validity of the lease.

Held: The appeal should be dismissed.

The Court agreed with the judgment of the Court of Appeal that estoppel was not proved. Both parties had acted under a mistake. The actions of Sohio

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did not result from representations or conduct of the respondent. They were taken because Sohio, as well as the respondent, was unaware of the fact that the lease had come to an end before they were taken. In these circumstances, estoppel could not be established.

Canada-Cities Service Petroleum Corporation v. Kininmonth et al., [1964] S.C.R. 439, followed; Canadian Superior Oil Ltd. et al. v. Paddon-Hughes Development Co. Ltd. et al., [1970] S.C.R. 932; Willmott v. Barber (1880), 15 Ch. D. 96; Calvan Consolidated Oil & Gas Co. Ltd. v. Manning (1957), 22 W.W.R. 433; Central London Property Trust Ltd. v. High Trees House Ltd., [1947] 1 K.B. 130, applied.

APPEAL from a judgment of the Court of Appeal for Saskatchewan[1], allowing an appeal from a judgment of MacPherson J., who dismissed the respondent’s action for a declaration that a certain petroleum and natural gas lease had terminated and for consequential relief. Appeal dismissed.

D.E. Gauley, Q.C., and D.O. Sabey, for the defendants, appellants.

R.A. McLennan, B.V. Reed and J. Klebuc, for the plaintiff, respondent.

The judgment of the Court was delivered by

MARTLAND J.—The respondent in this case seeks a declaration that a petroleum and natural gas lease, dated October 28, 1949, granted by it, as lessor, in favour of the appellant Sohio Petroleum Company, as lessee, hereinafter referred to as “Sohio”, covering the petroleum, natural gas, and all related hydrocarbons, within, upon or under the North-West Quarter of Section 3, Township 6, Range 12, West of the 2nd Meridian, in the Province of Saskatchewan, had terminated, and for consequential relief. The respondent’s action was dismissed at trial, but this judgment was reversed by unanimous decision of the Court of Appeal for Saskatchewan1. The other appellants claim through Sohio.

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The habendum clause, with its provisos, reads as follows:

TO HAVE AND ENJOY the same for the term of Ten (10) years from the date hereof and so long thereafter as the leased substances or any of them are produced from the said lands, subject to the sooner termination of the said term as hereinafter provided.

PROVIDED that if operations for the drilling of a well are not commenced on the said lands within one (1) year from the date hereof, this Lease shall thereupon terminate and be at an end, unless the Lessee shall have paid or tendered to the Lessor the sum of Sixteen ($16.00) Dollars, (hereinafter called the “annual acreage rental”), which payment shall confer the privilege of deferring the commencement of drilling operation for a period of one (1) year, and that, in like manner and upon like payments or tenders, the commencement of drilling operations shall be further deferred for like periods successively;

PROVIDED FURTHER, that if at any time during the said Ten (10) year term and prior to the discovery of production on the said lands, the Lessee shall drill a dry well, or wells thereon, or if at any time during such term and after the discovery of production on the said lands such production shall cease, then this Lease shall terminate at the next ensuing anniversary date hereof unless operations for the drilling of a further well on the said lands shall have been commenced or unless the Lessee shall have paid or tendered the annual acreage rental, in which latter event the immediately preceding proviso hereof governing the payment of the annual acreage rental and effect thereof, shall be deemed to have continued in force.

AND FURTHER ALWAYS PROVIDED that if at any time after the expiration of the said Ten (10) year term the leased substances are not being produced on the said lands and the Lessee is then engaged in drilling or working operations thereon, this Lease shall remain in force so long as such operations are prosecuted and, if they result in the production of the leased substances or any of them, so long thereafter as the leased substances or any of them are produced from the said lands; provided that if drilling, working or production operations are interrupted or suspended as the result of any cause whatsoever beyond the Lessee’s control, the

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time of such interruption or suspension shall not be counted against the Lessee, anything hereinbefore contained or implied to the contrary notwithstanding.

The drilling commitment contained in the second of the above paragraphs was successively postponed by Sohio by payment each year of the small delay rental as stipulated. Drilling operations did not commence until one week prior to the expiration of the 10-year primary term. The well was completed on November 8, 1959, after that term had expired. The well proved to be a producing well and royalty on production was paid by Sohio to the respondent.

Both the trial judge and the Court of Appeal held that the lease had terminated because there had been no production within the 10-year primary term. I agree with this conclusion. The terms of the lease in question are practically identical with those under consideration by this Court in Canada-Cities Service Petroleum Corporation v. Kininmonth et al.[2] Dealing with the interpretation of the paragraph in that case equivalent to the fifth paragraph cited above, it was said, at p. 444:

The fifth paragraph commences with the words “if at any time after the expiration of the said 10 year term the said substances are not being produced on the said lands.” The habendum clause spoke of a 10-year term “and so long thereafter as the said substances or any of them are being produced.” When the two expressions “are being produced” and “are not being produced” are read together, it is my opinion that this fifth paragraph is obviously designed to deal with the situation which occurs if the primary term has been extended by production from the land and then such production ceases. Without the fifth paragraph, the lease would automatically terminate upon the cessation of production. This paragraph, however, prevents that termination occurring if, when such production ceases, the lessee is then engaged in drilling or working operations on the land, or so long as such

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operations are prosecuted. If such operations result in further production, the lease continues during such production.

I cannot construe the paragraph as meaning that, even though no production has been obtained within the 10-year primary term, the lessee may thereafter carry on drilling operations on the land which, if successful, will then serve to extend the lease for a further period during the continuance of such production.

I agree with the learned trial judge that the fact that the first paragraph, above, uses the words “are produced” and the equivalent paragraph in the Kininmonth case uses the words “are being produced” does not create any distinction in substance between the two cases.

The argument before us was directed to the issue, raised by the appellants, that the respondent, by its words and conduct, was estopped, in law and in equity, from denying the validity of the lease.

In the case of Canadian Superior Oil Ltd. and Kerr-McGee Corporation v. The Paddon‑Hughes Development Co. Ltd. and Ralph Hambly[3], recently decided in this Court, I expressed doubt as to whether a lease, which had terminated, could be subsequently enforced on the basis of representations or conduct occurring after its termination, unless, at least, they would amount to a fraud, of the kind defined by Fry J., in Willmott v. Barber[4], in the passage at p. 105, which is cited by the Court of Appeal in the present case and which reads as follows:

It has been said that the acquiescence which will deprive a man of his legal rights must amount to fraud, and in my view that is an abbreviated statement of a very true proposition. A man is not to be deprived of his legal rights unless he has acted in such a way as would make it fraudulent for him to set up those rights. What, then, are the elements or requisites necessary to constitute fraud of that description? In the first place the plaintiff must

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have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant’s land) on the faith of his mistaken belief. Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff, and the doctrine of acquiescence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plaintiff’s mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all these elements exist, there is fraud of such a nature as will entitle the Court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do.

It is not necessary to repeat what was said in the Canadian Superior case, nor is it necessary to state a final conclusion on that issue, because I agree with the judgment of the Court of Appeal that, in the present case, estoppel was not proved.

The words and conduct of the respondent relied upon by the appellants as creating an estoppel were that:

(1) The respondent had called upon Sohio to drill an offset well, in accordance with the requirements of the lease, which well was drilled.

(2) Sohio, at the request of the respondent, had paid seven-eighths of the mineral taxes imposed on the leased lands, which was a requirement of the lease.

(3) Sohio had paid and the respondent had accepted, royalties based upon the production from the leased lands.

(4) The respondent had permitted Sohio to enter a pooling unit, involving the leased lands,

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which, under the lease terms, Sohio would have had the right to do without the respondent’s consent.

The Court of Appeal dealt with the argument as to estoppel in the following portion of its reasons for judgment, in which, however, as well as in other passages quoted later, I have referred to the appellants and the respondent to accord with their present status before this Court:

In the instant case it may be that the words and conduct relied upon by the learned trial judge as the basis of the estoppel by representation are not representations of an existing fact. It is not necessary to determine whether they were because Sohio at no time acted upon them to alter its position. It is clear from the evidence that both the respondent and Sohio were of the mistaken belief that the term of the lease was extended under the provisos to the habendum clause. The respondent made no representation which affected the operation of the habendum clause. All of the facts relating to the application of the clause were fully within the knowledge of Sohio. The situation of the parties here is exactly that described by Egbert, J., in Calvan Consolidated Oil & Gas Co. v. Manning, (1957) 22 W.W.R. 433, when he said at page 453:

There was no representation made or conduct amounting to representation done by the Plaintiff with the intention of inducing any conduct on the part of the defendant. Here both parties acted under a mistake—whether a mistake of law or a mistake of fact is of no consequence—and there is no question of either party having made any representation to the other. Whatever the defendant did—and his consequent action is an essential ingredient of estoppel—he did because of his own mistake and not by reason of any representation of the plaintiff.

Sohio held the belief throughout that the lease had not terminated. Its position was adopted prior to and apart from any alleged representation on the part of the respondent and could not therefore have been induced thereby. Estoppel by representation cannot therefore be applied.

Again, when dealing with the doctrine of “promissory” estoppel, as defined by Denning L.J. in

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Central London Property Trust Ltd. v. High Trees House Ltd.[5], the Court of Appeal said this:

In the instant case, if the conduct of the respondent could be said to amount to the type of promise, assurance or course of negotiation contemplated in the passages above set out, Sohio did not rely upon it to believe that the respondent would not contend that the lease had terminated.

The acts of Sohio which were found by the learned trial judge to be alterations of its position to its detriment,—drilling of the offset well; entering into the surface lease; and payment of one-eighth of the mineral tax,—were performed because Sohio considered it was obligated to perform them under the terms of the lease. The respondent, in requesting or demanding that Sohio carry out the terms of the lease, and in allowing Sohio to proceed as it did, simply accepted the mistaken position that the lease had not terminated. Because the respondent was not aware of the true legal position, it is not now precluded from exercising its rights.

Reference was then made by the Court of Appeal to the passage from the judgment of Fry J. in Willmott v. Barber to which I have already alluded.

I agree with the reasons of the Court of Appeal. It is quite clear that the actions of Sohio did not result from representations or conduct of the respondent. They were taken because Sohio, as well as the respondent, was unaware of the fact that the lease had come to an end before they were taken. In these circumstances, estoppel could not be established, and there is no suggestion that a new lease had been created.

The respondent requested that the judgment of the Court of Appeal be varied in so far as it dealt with the date from which the appellants should be required to account to the respondent for production taken from the leased lands. The respondent contends that the date should be October 28, 1959, the date on which the lease

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terminated, subject to an allowance for expenses incurred by the appellants. This phase of the matter was dealt with in the following passage from the judgment of the Court of Appeal:

The respondent also sought an accounting of all petroleum, natural gas and related hydrocarbons removed from the land by the appellants, or damages in lieu thereof. The court has jurisdiction to grant this relief on terms which will be just and equitable to all parties involved. The appellant Sohio proceeded under a mistake as to its rights, and did not knowingly take an unfair advantage of the respondent’s lack of appreciation of its legal rights. The appellants were first aware that their position was challenged when the writ of summons was served upon them. At that time the revenue which they had received from the sale of the production exceeded the amount they had expended. Under the circumstances, it would appear just and equitable to order the appellants to account for all benefits from production received by them after the date of service of the writ of summons upon them.

I am in agreement with this conclusion.

In my opinion, the appeal should be dismissed with costs.

Appeal dismissed with costs.

Solicitors for the defendants, appellants: Francis, Gauley, Dierker and Dahlem, Saskatoon.

Solicitors for the plaintiff, respondent: MacPherson, Leslie and Tyerman, Regina.

 



[1] (1969), 69 W.W.R. 680, 7 D.L.R. (3d) 277.

[2] [1964] S.C.R. 439.

[3] [1970] S.C.R. 932.

[4] (1880), 15 Ch. D. 96.

[5] [1947] 1 K.B. 130.

 

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