July 2012 ENERGy

Energy LawyersTransactionalAllford, R. Bruce rba@bdplaw.com ............. 403-260-0247Barretto, Jeremy jbarretto@bdplaw.com .............. 403-260-0207Campbell, q.c., Harry S. hsc@bdplaw.com .............. 403-260-0281Cuthbertson, q.c., John H. jhc@bdplaw.com .............. 403-260-0305Houston, Mark T. mth@bdplaw.com .............. 403-260-0375Inch, Julie J. jinch@bdplaw.com .............. 403-806-7808Johnson, q.c., Cal D. cdj@bdplaw.com .............. 403-260-0203Jones, Candice J. cjj@bdplaw.com .............. 403-260-0109Money, J. Stuart jsm@bdplaw.com .............. 403-260-0312Pettie, q.c., Alan T. atp@bdplaw.com .............. 403-260-0127Quesnel, Alicia K. akq@bdplaw.com .............. 403-260-0233Saffery, Hazel hsaffery@bdplaw.com .............. 403-260-0173Twa, q.c., Allan R. art@bdplaw.com .............. 403-260-0221Weldon, Ashley aweldon@bdplaw.com .............. 403-260-0125Wivcharuk, Jody l. jlw@bdplaw.com .............. 403-260-0129Wright, Carolyn A. caw@bdplaw.com .............. 403-260-5721

RegulatoryBarretto, Jeremy jbarretto@bdplaw.com .............. 403-260-0207Miller, Keith F. kfm@bdplaw.com .............. 403-260-0153Quinton-Campbell, Patricia pqc@bdplaw.com .............. 403-260-0308Saffery, Hazel hsaffery@bdplaw.com .............. 403-260-0173Wright, Carolyn A. caw@bdplaw.com .............. 403-260-5721

LitigationBatty, Trevor A. tbatty@bdplaw.com .............. 403-260-0263Beke, Paul A. pbeke@bdplaw.com .............. 403-260-0216Burron, Kevin S. kburron@bdplaw.com .............. 403-260-0189Chernichen, q.c., Donald J. djc@bdplaw.com .............. 403-260-0101

Crump, Barry R. brc@bdplaw.com .............. 403-260-0352Donaldson, Michael J. mjd@bdplaw.com .............. 403-260-0228Haigh, q.c., David H. drh@bdplaw.com .............. 403-260-0135Hannan, Kelly khannan@bdplaw.com .............. 403-260-0126Hayes, Shannon shayes@bdplaw.com .............. 403-260-0237Hyatt, Sheila shyatt@bdplaw.com .............. 403-260-0249Inch, Julie J. jinch@bdplaw.com .............. 403-806-7808McDonald, q.c., Daniel J. djm@bdplaw.com .............. 403-260-5724McDonald, Trevor R. trm@bdplaw.com .............. 403-260-0378McGillivray, q.c., Douglas A. dam@bdplaw.com .............. 403-260-0349Mills, Douglas G. dgm@bdplaw.com .............. 403-260-0226Murphy, James D. jdm@bdplaw.com .............. 403-260-0152Nishimura, Doug S. dsn@bdplaw.com .............. 403-260-0269Novinger Grant, louise lng@bdplaw.com .............. 403-260-0163Rojas, Romeo A. rrojas@bdplaw.com .............. 403-260-0293Sharpe, Jeff E. jes@bdplaw.com .............. 403-260-0176Steele, Richard F. rfs@bdplaw.com .............. 403-260-0051Strand, David H. dhs@bdplaw.com .............. 403-260-0259Strobl, Marika mstrobl@bdplaw.com .............. 403-260-0270Tallman, Scott stallman@bdplaw.com .............. 403-260-0273Teetaert, Melanie mteetaert@bdplaw.com .............. 403-260-0384Varzari, Jennifer K. jkv@bdplaw.com .............. 403-260-0286Wray, Shannon l. slw@bdplaw.com .............. 403-260-0245

Climate Change & Emmisions TradingGrout, David A. dag@bdplaw.com .............. 403-260-0326Houston, Mark T. mth@bdplaw.com .............. 403-260-0375Jones, Candice J. cjj@bdplaw.com .............. 403-260-0109Pettie, q.c., Alan T. atp@bdplaw.com .............. 403-260-0127

Energy and other issues of On Record are available on our web site www.bdplaw.com

Energy, Editors-in-ChiefJohn H. Cuthbertson, q.c.jhc@bdplaw.com403-260-0305

Alicia K. Quesnelakq@bdplaw.com403-260-0233

Energy, Managing EditorRhonda G. Wishartrwishart@bdplaw.com403-260-0268

Contributing Writers and Researchers:Cal Johnson, Q.C., Richard Smith, Jody Wivcharuk, Bryan Morin, Elizabeth Coyle, Sylvie Welsh and Daniella Murynka

ContactFor additional copies, address changes, or to suggest articles for future consideration, please contact the Managing Editor.

General NoticeOn Record is published by BD&P to provide our clients with timely information as a value-added service. The articles contained here should not be considered as legal advice due to their general nature. Please contact the authors, or other members of our Energy team directly for more detailed information or specific professional advice.

If you would like any further information on any members of our team, such as a more detailed resume, please feel free to contact the team member or the Managing Editor. you may also refer to our website at www.bdplaw.com.

On Record Contents:

Foreign Corrupt Practices: Avoiding The Pitfalls

Page 1

Fracking: The ERCB Grapples with Public Interest and Private Rights

Page 5

What Did you Mean to Say: the Power of the Courts to Imply Terms in Ambiguous Agreements

Page 6

Are Oil and Gas lessees the Biggest Fans of the Perpetuities Act (Alberta)? If Not, Maybe They Should Be

Page 8

2400, 525-8th Avenue SW, Calgary, Alberta T2P 1G1Phone: 403-260-0100 Fax: 403-260-0332

www.bdplaw.com

1

Foreign Corrupt Practices

Avoiding The Pitfalls By Richard B. Smith and Daniella Murynka, Summer Research Student

The cultural clash between Guanxi and Anti-Corruption LegislationThere is no question that a number of Pacific Rim countries are economic superpowers and will continue in these roles for some time to come. In turn, we can expect ever-increasing investment, sales and transfer of technology between the East and the West. China’s desire to be a world player on many fronts and its huge appetite for energy puts Canadian companies—and, more particularly, Alberta interests—squarely in the Asian country’s cross hairs. Canadian resource and service companies not only wish to attract and benefit from Asian investment and purchasing power, but also frequently wish to invest directly in foreign markets and companies. This process requires shrewd strategy, significant skill and constant vigilance in terms of the manner by which the business is sought, won and administered.

Canadian organizations have quickly come to recognize the traditional ways by which the Chinese conduct business. Common in Chinese business culture is the phenomenon of Guanxi—a term that describes relationships built on the granting of favours, provision of gratuitous services and creation of personal connections. Because guanxi is so central to Chinese culture, members of a Chinese organization or team may need to be rewarded before a Canadian organization can gain access to introductions, connections or appropriate service. “Facilitation payments” are also often required in order to ensure that the business is secured or that secured business can be conducted in the manner intended. A recent authority on the subject put guanxi succinctly: “if you cannot do anything for me, I will not do anything for you.”1

Canadian and American organizations will want to exercise caution when transacting with Chinese businesses. Certain activities deemed appropriate within the guanxi culture could potentially be construed by Canadian or American authorities as a “bribe”—a benefit delivered in order to obtain or retain an advantage in the course of business. Canadian or American organizations (along with their directors, officers, employees or agents) suspected of this kind of activity could be collectively investigated and charged under the provisions of anti-corruption legislation. Recent trends clearly suggest that the law enforcement and regulatory bodies involved are serious in their efforts to identify and prosecute organizations who appear to have run afoul of the rules.

How easy is it to have something like that happen? The answer may be—”dead easy”. Authorities have suggested that it could be as simple as providing a job or the promise of a job to children of foreign officials.2 Alternatively, it could take the form of a well disguised or hidden direct or indirect bribe. It could even involve the budgeting of an unmarked or undesignated line item (in a corporation’s financials) set aside to deal with unknown and unnamed “facilitation” payments or “grease money”.

“Bribery vehicles” can therefore range from the easily identifiable to the much less obvious. The list would include obvious kick-backs (e.g., red envelopes, gift cards and coupons), direct gifts, the delivery of food or other consumable items such as cigarettes, third party arrangements, rebates, “consulting” fees, finder fees, job placements or other favours.

The Convention on Combating Bribery In 1999, the Organization for Economic Cooperation and Development (“the OECD”) anti-bribery protocol came into force. This protocol was titled the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (“the Convention”). The Convention was essentially

motivated by the view that bribery hinders economic and political progress, discourages fair competitive practices and impedes economic development. Since the Convention, various G7 countries have passed anti-corruption legislation, including Canada, Germany, the United Kingdom and the U.S.

The American FCPA In the U.S., corruption of foreign officials is prosecuted pursuant to the Foreign Corrupt Practices Act (“FCPA”).3 The FCPA is broad and far-reaching legislation that prohibits bribery and requires a stringent maintenance of accounting books and records to both disclose and prevent potential bribery (or corrupt practices). In the last decade, the American Department of Justice (“the DOJ”) has used its significant influence and power to accelerate the investigation and prosecution of organizations deemed to have participated in “corrupt” activities.

The U.S. has been particularly aggressive in its prosecutions and has made it clear that it will continue to pursue cases against both small and much larger (high profile) companies. Notable prosecutions under the FCPA include Siemens A.G.4 in 2008 and Baker Hughes Services International Inc.5 in 2007. Both companies pled guilty to charges under the FCPA. Baker Hughes paid a total of $44 million in fines and more astonishingly, Siemens A.G. paid fines totaling $1.6 billion.

It is important to note that charges under the FCPA can be laid against both corporations and individuals. The FCPA is far-reaching and purports to apply to:

1. Any “issuer” (any company whose securities are registered in the U.S. or that is required to file periodic reports with the SEC);

2. Any “domestic concern” (any person who is a US citizen, national or resident, or any corporation/organization which has its principle place of the business in the U.S. or is organized under U.S. law);

3. Any foreign national or business, subject to the qualifications of the FPCA.6

When enacted in 1977, the FCPA did not apply to foreign nationals who were not “issuers”—however, 1998 amendments added the 78dd-3 provisions, which expanded the scope of the FCPA to include any person or entity that commences an act in furtherance of a bribe while in the United States.

The Canadian ResponseCanada has been regarded as a nation that was hesitant, reluctant or slow to enforce its own legislation, the Corruption of Foreign Public Officials Act 7

(“the CFPOA”) enacted in 1992. Thanks no doubt to significant political pressure from the U.S., Canada has recently become much more active on the anti-corruption stage. The anti-bribery provisions of the CFPOA read:

3(1) Every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official

(a) as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or

(b) to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

2 ENERGY

3

The CFPOA therefore prohibits not only any improper payment, but also making any offer to pay—even if no actual payment occurs.

However, the CFPOA does not prohibit “facilitation payments”. A facilitation payment is a payment made to “expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official’s duties or function”, and could include payments made to:

• Obtain permits or licenses;

• Process visas or permits; and

• Obtain services such as mail pick-up and delivery, power and water supply, or police protection.8

In addition to challenges with identifying what constitutes a “bribe”, identifying a “Foreign Public Official” is not always easy. “Foreign Public Official” is a broadly defined and all-encompassing term. Under the CFPOA, the definition includes:

1. any person holding a legislative, administrative or judicial position, or

2. any person who performs public duties or functions for the foreign state.9

This definition is particularly problematic in the Chinese business context. In China, many of the companies with which Canadians are doing business are state-owned enterprises, referred to as “SOE’s”.

Estimates vary, but it is commonly believed that SOE’s form in excess of 150,000 companies or enterprises, with the State having control over more than half of the assets in the Chinese economy. As such, there would appear to be a very good likelihood that a payment or favour to a person involved in a business transaction could easily be seen as a bribe to a foreign official and result in enforcement under the CFPOA.

There are some significant differences between American and Canadian anti-corruption laws, and both sets of legislation need to be considered when dealing with Chinese businesses at home or abroad. For example, the CFPOA does not impose any books/records maintenance obligations or requirements for internal accounting controls, unlike its U.S. and U.K. counterparts.

Under the FCPA, the DOJ (or other administrative body) can enforce the legislation through either civil or criminal sanctions. In Canada, we have elected to enforce the CFPOA through criminal prosecution, which can be initiated by either the Federal or the Provincial authorities. There is no statute of limitations in Canada for charging, and the conviction is an indictable offence with imprisonment for up to five years and no limit on the applicable fines. In addition, the Criminal Code of Canada prohibits the retention of the proceeds of crime, not just the bribe or the benefit derived from the bribe.

4 ENERGY

In an attempt to create a Canadian footprint in the world of anti-corruption, Canadian officials established two prosecutorial task forces in Ottawa and Calgary. In addition, Canadian authorities recently pursued charges against Niko Resources Ltd.(“Niko”).10 Niko pled guilty under s. 3(1)(b) of the FCPOA, with charges relating to allegations of bribing a public official in Bangladesh (even though it was admitted that the Crown was unable to prove the amount of any direct benefit to Niko). The total penalty was just under $10 million, and included three years of probation requiring:

• A broad obligation of self-disclosure and self-reporting;

• Detailed compliance, record-keeping and monitoring; and

• Retention of an independent auditor and regular reporting to the RCMP.

Niko’s “transgression” was summarized by the Court:

Between the dates of the indictment Niko Canada provided improper benefits as follows: the use of a vehicle valued at one hundred and ninety thousand Canadian dollars, nine hundred and eighty four dollars ($190,984.00) to a foreign official and approximately $5000.00 related to the non-business related portion of the travel and expenses of a foreign public official.11

Needless to say, the more profound and significant consequences to Niko relate to the public relations, marketplace and corporate governance penalties. The long-term consequences of the negative public opinion in relation to a charge, plea bargain or guilty verdict could easily outweigh the monetary penalty or the ongoing scrutiny of the authorities.

PushbackIn light of the new and increasingly aggressive positions taken by both the Canadian and American Departments of Justice, it is inevitable that a variety of groups will have concerns about the “long arm of the law”. In particular, the U.S. has been challenged as to whether it should have the ability to exercise what would appear to be extra-territorial jurisdiction—such jurisdiction may be beyond the legislated mandate, or, more interestingly, beyond what a sovereign nation is entitled to do as against foreign companies or individuals in other jurisdictions.12 The implications are significant and involve political, legal and economic concerns. There are commentators, for example, who believe the existence of anti-corruption legislation in certain countries creates a significant economic advantage for countries that do not abide by the protocol or do not have similar legislation.13

As a result, there are many more chapters to be written as these challenges and concerns work their way through the international political and economic landscape as well as the courts.

Proactive Practices and StrategiesIn short, when involved in a transaction with a foreign entity, Canadian companies would be well advised to take significant proactive steps to monitor the accounts and activities of their employees, directors, agents, consultants, partners and other intermediaries.

Before an acquisition of or investment in a foreign business, it would be wise to conduct due diligence on current practices and business models. Anti-corruption and anti-bribery policies should be confirmed and reviewed. In circumstances where the investment may involve a red-flagged country such as China, the organization should audit and identify areas of potential concern. Current and ongoing representations and warranties should be crafted and form part of the arrangement documentation.

On and after the acquisition or investment, the Canadian organization should take significant steps to create, support and ratify internal controls. This would include creating or ratifying accurate and ongoing record keeping designed to both reveal and prevent bribery.

Organizations need to become knowledgeable about who is and who is not a Foreign Public Official, and, in particular, determine if the partner, customer or investor is a Chinese SOE. Ongoing and constant due diligence needs to be conducted throughout the organization and ongoing and regular audits and reporting are critical to the support of a defence in any circumstance where a bribery or corruption allegation is suggested or prosecuted.

Footnotes

1 Y. Lun So and A. Walker, Explaining Guanxi: The Chinese business network (New York: Routledge 2006) at 6.

2 E. Zemenides et al., LPIB Roundtable on Global Corruption, (1999) 31 Law & Pol’y Int’l Bus 195 at 197 (comments of Pat Head).

3 15 USC §§ 78dd-1 (1977) [FCPA]. 4 United States v Siemens Aktiengesellschaft, No 08-367 (DDC Dec 12, 2008) (Information). 5 United States v Baker Hughes Services International, Inc No 07-129 (DDC Apr, 2007)

(Information). 6 FCPA, supra note 3 at § 78dd-1. 7 SC 1998, c 34 [CFPOA]. 8 CFPOA, supra note 7 at 3(4). 9 CFPOA, supra note 7 at 2(a) and (b). 10 R v Niko Resources Ltd., 2011 CarswellAlta 2521 (Alta QB) [Niko]. 11 Niko, supra note 10 at 55.12 For further commentary, see M. Bixby, “The Lion Awakens: The Foreign Corrupt Practices

Act – 1977 to 2010” (2010) 12 San Diego Int’l 89 at 101. 13 For further commentary, see C. La Roche and M. Flanigan “International Initiatives to

Eliminate Corruption: Has Bribery Declined?” (2004) 3 Int’l Bus and Econ Research 1; see also BulletproofBlog “Jeremy Zucker on the Foreign Corrupt Practices Act” (2010) Video online: http://www.youtube.com/watch?v=2wg4FPSSS5k.

The long-term consequences of the negative public opinion in relation to a charge, plea bargain or guilty verdict could easily outweigh the monetary penalty or the ongoing scrutiny of the authorities.

In mid January of this year, you may recall the dust-up between local energy companies near Innisfail, AB when one of them used hydraulic fracturing (“fracking “) in completing a well (at a depth of 1400 meters). The fracking allegedly caused the blow up of a pump jack on a nearby well (about one kilometer away) of another producer, resulting in an oil spill. The big question at the time was whether the fracking had resulted in “communication” between the two wells — meaning that the resulting fracture caused some form of connection between the two wells.

For some time now, there have been serious concerns raised in the US with respect to the possible links between fracking and contamination of ground water. This recent Alberta incident and the controversy surrounding the now widespread use of this new technology have raised some questions. Perhaps the most significant question is whether the regulatory framework in Alberta is able to respond to and contain any potential risks to public health and safety, as well as to nearby resource and property owners.

Alberta’s Energy Resources Conservation Board (“ERCB”) is the regulatory agency in Alberta charged with examining this method of resource extraction and determining compatibility with the existing rights of surface rights holders and mineral rights owners. The ERCB also strives to ensure that these operations are consistent with interests of Alberta’s public in health, safety, environmental protection and resource conservation.

In Kallisto Energy Corp. Application for a Well Licence Crossfield East Field1, the ERCB was considering an application for a well license where fracking operations were contemplated. While the ERCB allowed the continued use of fracking in Alberta, it sent some clear signals with respect to the potentially conflicting interests of the public and individual rights holders.

Kallisto Energy Corp. (“Kallisto”) applied to the ERCB for a license to drill a vertical well. The stated purpose of the well was to obtain crude oil production, but it was acknowledged that, until the well was drilled, the ultimate production from the well was unknown. The mineral rights in the quarter section below the proposed well were owned by individual freehold owners (i.e. not the Crown) and leased to Kallisto. Obviously these freehold mineral owners were solidly in favour of Kallisto’s application, so that they could realize a return on their investment in those mineral rights. Opposition to the licence came from CrossAlta Gas Storage & Services Ltd. (“CrossAlta”) and others who owned and operated a nearby gas storage operation in a depleted gas field. The concern of CrossAlta was that the drilling of the well would lead to “indirect communication” with the gas reservoir used in their operation and that the subsequent fracking which would result in direct communication with the reservoir, causing damage to the gas storage reservoir and its contents.

The ERCB found that, contrary to CrossAlta’s submissions, the risk of communication between the well and the gas reservoir was low, and held that, even if there was subsequent fracking, it was unlikely that any communication would occur. However, the ERCB did note that the granting of a well licence does not give the holder any right to breach a storage reservoir, or indeed even to produce from the well — Kallisto still had to look to other mineral owners for cooperation to form a drilling spacing unit. The ERCB was also mindful of the concerns of mineral holders that their legitimate rights in the lands not be unnecessarily sterilized. In effect, the ERCB held that the private interest served by protecting natural gas storage in this case did not override the public interest in promoting resource development, so long as the risks could be “appropriately and responsibly managed”. The ERCB them imposed some risk management and mitigation obligations on Kallisto including submitting stabilized initial

pressure data on a confidential basis to the ERCB, not using fracture stimulation that exceeded 40 tonnes without ERCB consent and submitting both pre and post-frac pressure data to both the ERCB and CrossAlta.

The ERCB’s approach to risk demonstrates its confidence that risk arising at the early stages of oil and gas operations can be effectively managed through a combination of existing regulation and administrative remedies. Further, the ERCB’s decision seems to constitute a strong statement that, in the ERCB’s view, the public interest in resource exploitation is predominant, with competing interests being managed through risk mitigation strategies that work alongside, and in conjunction with, resource development.

It will be interesting to monitor both the ongoing debate as to the safety and advisability of fracking operations and how the public interest in other valuable resources, such as ground water, can be maintained and protected.

Footnotes

1 2012 AERCB 005

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Fracking:The ERCB Grapples with Public Interest and Private RightsBy Cal Johnson and Elizabeth Coyle, Student-at-law

6 ENERGY

IntroductionThe recent case of Keephills Aggregate Co. v. Riverview Properties Inc.1, shows the importance of drafting agreements that clearly set out all the intentions and obligations of each party.

FactsThe parties entered into a two-year gravel lease pursuant to which Keephills Aggregate Co. (“Keephills”) had the right to excavate, crush, stockpile and remove gravel from a specified deposit area on a parcel of land owned by Riverview Properties Inc. (“Riverview”) near Devon, Alberta. Keephills was an experienced operator in the business of gravel removal.

Both parties genuinely believed that there would be in excess of 200,000 tonnes of gravel available for removal.

The companies agreed to pay a royalty in accordance with Schedule “B” attached to the lease. Schedule “B” provided that Keephills’ “Payment Amount” was $1.75 per tonne of gravel removed from the deposit area with minimum monthly payments of $14,583.33 on the first of each month.

Clause D.7 of the lease provided that in the event the “deposit area” should be found to contain less than 200,000 tonnes of gravel, then the “Lessee shall grant to the Lessor access to the gravel reserves around the perimeter of the existing gravel pit area […] to obtain sufficient gravel to make up the shortfall from the 200,000 tonnes.” Beyond that term, the lease was silent in regards to what was to happen if ultimately there was a shortfall in gravel in all the available area.

What Did you Mean to Say: the Power of the Courts to Imply Terms in Ambiguous Agreementsby Bryan P. Morin

7

After commencing the mining work, Keephills determined there would be less than 200,000 tonnes of gravel available in the deposit area. Some discussion of alternative sites ensued but eventually, the parties reached an impasse on the gravel payment issue and Keephills stopped making payments.

Riverview argued that the contract obligated Keephills to pay Riverview the minimum monthly payment for the term of the lease regardless of the presence of gravel. Keephills argued that the minimum payment provision was merely an attempt to make cash flow predictable and any excess over or deficiency under 200,000 tonnes of gravel was to be dealt with by way of an accounting.

Trial DecisionThe Alberta Court of Queen’s Bench (“the Queen’s Bench”) sided with Riverview and determined that the payment provisions in the lease were clear and unambiguous and provided for the payment of $350,000 in minimum monthly payments of $14,583.33/month over the two-year term of the lease. Having found no ambiguity in the payment provisions of the lease, the trial judge declined to imply any other terms in the document and awarded Riverview $350,000 less the payments received from Keephills. Keephills appealed to the Alberta Court of Appeal (“Court of Appeal”).

Court Of Appeal Decision

The LawThe Court of Appeal summarized the “well settled law” of contractual interpretation and held the general rule is that it is not the function of the court to rewrite a contract for the parties. Nor is it the role of the court to relieve one of the parties against the consequences of an improvident contract.2 However, courts ought to prefer interpretations that are consistent with the reasonable expectations of the parties, including compelling notions of business efficacy in such a context, so long as such interpretation can be supported by the text.3

Further, courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the agreement was concluded.4 The law does not license a judicial exploration of the negotiations of the parties in pursuit of the agreement that the court assumes would best balance the parties’ respective interests.5 Nevertheless, every word in a contract is presumed to make sense and to have a specific role to play in advancing the contractual purpose. To the extent that it is possible to do so, courts should avoid adopting interpretations that render any portion of a contract meaningless or redundant.6

The Contractual TermsThe Court of Appeal rejected the trial judge’s interpretation that Keephills was obligated to pay the minimum monthly amount for 24 months regardless of how much gravel was actually removed. The Court of Appeal stated that such an interpretation gave dominant effect solely to one term in the contract—that being “minimum monthly payments of $14,583.33”—and gave no effect to several other terms.

The Court of Appeal was of the view that meaning had to be given to the words that Keephills was obligated to pay “a royalty…for all the Gravel it…remove[s] in accordance with…Schedule “B”, at a rate of “$1.75/tonne of Gravel removed”. Likewise, meaning had to be given to Clause D.7, which required Riverview to grant Keephills access to other areas on the subject property so as “to obtain sufficient gravel to make up the shortfall from the 200,000 tonnes.”

The Court of Appeal stated:

It may be asked why the parties would speak of making up the “shortfall” unless it was an essential part of the agreement between the parties (and not merely a factual assumption by the parties about the profitability of the agreement) that there would be at least 200,000 tonnes of gravel to be excavated.7

and held that:

The inescapable conclusion is that the parties intended to enter into a bargain not merely predicated on a factual belief […] that there would be 200,000 tonnes of gravel available to be removed, but that in reality Riverview was leasing that land for two years for the purpose of Keephills’ removing at least that much gravel, and that Keephills would pay by the tonne accordingly.8

The DeterminationIn contrast to the Queen’s Bench, the Court of Appeal found the agreement, on its face, failed to determine the intention of the parties:

Because of the incomplete and somewhat ambiguous wording of the agreement, the court is forced to imply certain terms driven by business efficacy.9

The Court of Appeal subsequently characterized this as a:

failure of the parties to express in clear language the full extent of their respective obligations under this contract.10

Accordingly, the Court of Appeal held that Riverview would not be required to pay for gravel that Keephills could not reasonably extract from the land.

Concluding Comments1. Ambiguous drafting can lead to commercial inefficiency and

unwanted legal fees associated with litigation.

2. Courts will look to business common sense and efficacy when interpreting ambiguous agreements; however, courts will be reticent to add clauses into an agreement that protect a party’s interests. The obligation to bargain for such clauses falls upon the parties to the agreement.

3. The actions of parties to a contractual dispute, at even the earliest stages of the dispute, may be looked at by a Court where a Court finds an ambiguous agreement. Proper management of these actions by people who understand the potential possible legal ramifications is very important.

Footnotes

1 2011 ABCA 101 (“Keephills”)2 Jedfro Investments (U.S.A.) Limited v. Jacyk, 2007 SCC 55; Pacific National Investments Ltd. v. Victoria (City), 2004 SCC 75, at para 31.

3 Marathon Canada Ltd. v. Enron Canada Corporation, 2009 ABCA 31 at paras. 6 to 13, leave denied, [2009] S.C.C.A. No. 93; Apex Corporation v. Ceco Developments Ltd., 2008 ABCA 125 at para. 31, leave denied, [2008] S.C.C.A. No. 2

4 Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33 at para 23

5 Chartbrook Limited v. Persimmon Homes Limited, [2009] All E.R. 677 (H.L.) at paras. 29 to 33.6 Keephills, para. 13.7 Keephills,para. 14.8 ibid at para. 15.9 Keephills, para 11.10 Keephills, para. 20.

If you are the lessee of an oil and gas lease that was granted after July 1, 1973, which is still in force, you may soon have cause to celebrate, all thanks to section 19 of the Perpetuities Act (Alberta)1 (“the Act”).

On July 1, 2013, the Act (including its predecessor legislation) will have been in force for 40 years. After this date, to the surprise of lessors (and possibly the Alberta legislature), any lessee holding an oil and gas lease that was granted after July 1, 1973, may become, for all intents and purposes, the owner of the underlying oil and gas estate, as of and from the date the oil and gas lease celebrates its fortieth birthday.

Nigel Bankes, a professor of law at the University of Calgary, recently identified this issue for us on the University of Calgary, Faculty of Law Blog on Developments in Alberta Law.

In Nigel Bankes’ words:

[After July 1, 2013], as each and every oil and gas lease reaches it fortieth birthday, the lessor’s possibility of reverter

for terminating the lease for want of production comes to an end; thenceforward the lease can only be terminated for cause (as described in the default clause of the leases) such as the non payment of royalties, which causes can typically be cured without losing the lease. Lessees will become the effective owners of the oil and gas estate.

Oil and Gas Lease – a Vested InterestWhen an oil and gas lease is granted, title to the leased substances remains with the lessor, subject to the lessee’s right to take the leased substances from the land.

The Supreme Court of Canada (“SCC”) in Berkheiser v. Berkheiser2, described an oil and gas lease as being not a true lease but a profit à prendre. Moreover, the SCC determined that an oil and gas lease is most analogous to that of a fee simple determinable interest because the lessor is granting something less than the entire estate. A fee simple determinable interest allows the lessor to retain a

Are the Oil and Gas Lessees Biggest Fans of the Perpetuities Act (Alberta)?If Not, Maybe They Should Be by Jody L. Wivcharuk and Sylvie Welsh

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possibility of reverter. The possibility of reverter on a determinable fee is treated as a vested interest. This means that when the lessee’s interest in the lease comes to an end, for want of production for example, the grant of the leased substances will revert back to the lessor.

The Act in More DetailAt common law vested interests (unlike contingent interests) are not normally subject to the rule against perpetuities (“RAP”). This rule is notoriously difficult to both comprehend and properly apply. A simplistic description of RAP is that it forbids the creation of some future interests that may not vest within the time permitted.

Section 19 of the Act changes the common law rule by effectively bringing fee simple determinable interests within the realm of RAP by making possibilities of reverter subject to RAP and establishing a shorter perpetuity period of 40 years.

Section 19 provides that:

19(1) In the case of

(a) a possibility of reverter on the determination of a determinable fee simple,

[…]

the rule against perpetuities as modified by this Act applies in relation to the provision causing the interest to be determinable as it would apply if that provision were expressed in the form of a condition subsequent giving rise on its breach to a right of re-entry […] and, if the event that determines the determinable interest does not occur within the perpetuity period, the provision shall be treated as void for remoteness and the determinable interest becomes an absolute interest.

(2) The perpetuity period for the purpose of a possibility of reverter […] is 40 years.

The Alberta Law Reform Institute (the “Institute”) report that led to the adoption of this section outlined reasons for its adoption. First, jurisdictions such as England and Ontario had brought determinable interests within the RAP. Second, the purpose of the RAP is to prevent tying up of property and the Institute believed that determinable interests went against the RAP because such interests create a cloud on title.

Section 19 and Oil and Gas LeasesSo what does Section 19 of the Act mean in the context of an oil and gas lease?

An argument can be made as follows: if the event that determines the determinable interest does not occur (i.e., want of production) within the perpetuity period (i.e., 40 years), then the provision shall be treated as void for remoteness and the determinable interest becomes an absolute interest.

The practical result of this happening, as pointed out by Nigel Bankes, is if the lessor’s possibility of reverter for terminating the lease for want of production comes to an end. Then afterwards the lease can only be terminated for cause, such as the non payment of royalties, which causes can typically be cured without losing the lease. Lessees will become the effective owners of the oil and gas estate.

If this argument is successful, this would be an unexpected windfall for lessees and so it is possible that we may hear something from the Alberta legislature on this matter before the July 1, 2013 date comes to pass.

Footnotes

1 SA 2000, c.P-52 [1957] S.C.R. 387

Are the Oil and Gas Lessees Biggest Fans of the Perpetuities Act (Alberta)?If Not, Maybe They Should Be by Jody L. Wivcharuk and Sylvie Welsh

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