Stewart Estate v TAQA North Ltd., 2013 ABQB 691

Court of Queen’s Bench of Alberta Citation: Stewart Estate v TAQA North Ltd., 2013 ABQB 691 Date: 20131125 Docket: 0501 11695 Registry: Calgary Between: Lynda Calder in her capacity as Executrix of the Estate of Merville V. Stewart (Deceased), Lynda Calder, Morgan Stewart, Cody Stewart, Cody Stewart in her capacity as Administrator or Litigation Representative for the Estate of James D. Stewart (Deceased), and as Litigation Representative for Morgan Stewart, Jerome Development Limited, Bowen Family Properties Ltd., Ronald B. Pole, Kevin R. Pole, Danny G. Oneil in his capacity as Executor of the Estate of Mabel B.

Oneil (Deceased), Robert Copley, Karen Nell Copley, Margaret Alice Demers, Mary Jean Biggar, Goldie Alberta Danielsen, Edna Keam, Wilma Marshall and Laurel Lee McLaren, 1088924 Alberta Ltd. Plaintiffs/ Defendants by Counterclaim - and - TAQA North Ltd., Nexen Inc., ExxonMobil Canada Ltd., Esprit Exploration Ltd., Bonavista Energy Corporation, Triquest Energy Corp. and Coastal Resources Limited Defendants/ Plaintiffs by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice B.E. Romaine _______________________________________________________ I.

INTRODUCTION II. OVERVIEW A. The Parties

B. Overview of Leases and Operations C. The 7-25 Well D. Chain of Title for Original Leases and Pooling Agreement a. Jefferson SW/4 Lease b. Union NE/4 Lease c. Scurry NE/4 Lease d. Scurry SE/4 Lease e. Imperial NW/4 Lease E. Origins of the Current Dispute F. Lynda Calder and the Jerome Group a. Agreements with FSI b.Assignment of Interest to Snell Farms Ltd. G. Robert Copley and the Copley Group H. Laurel Lee McLaren and the Irwin Group I. 1088924 Alberta Ltd. III. PRELIMINARY ISSUES A. Preliminary Issue 1: Are the Jerome Group Plaintiffs proper parties to the litigation? a. Overview b. Arguments and Analysis 1.

The absence of Snell Farms and Wheatland has no bearing on the issues 2. The onus of naming Snell Farms and Wheatland as parties is on the Defendants 3. The assignments are invalid 4. The Defendants have adduced inadequate evidence with respect to Wheatland 5. The principle of indefeasibility of title settles the issue 6. The evidence is limited with respect to its admissibility 7. The Defendants have no standing to enforce the assignments 8. The issue was not properly raised by the pleadings 9. The assignments are hearsay evidence 10. Snell Farms and Wheatland have failed to file caveats c. Conclusion B.

Preliminary Issue 2: Does 108 have standing before the Court? C. Preliminary Issue 3: Are some of the claims made by the Plaintiffs barred by the Limitations Act ? a. Overview b. The Limitations Act c. Two-year Limitation Period d. Collateral Issues and the Ultimate Limitation Period D. Preliminary Issue 4: Are some claims barred, in whole or in part, by the doctrines of estoppel, laches, or acquiescence?

IV. CORE ISSUE: VALIDITY OF LEASES A. Facts - Development of

Section 25 a. Nexen Witnesses 1. Allan Seredynski 2. Ronald Watson b. ExxonMobil Witnesses 2. Randy Thomsen c. Bonavista Witnesses 1. James Morrice 2. Cory Stewart 3. Wesley Owen d. Coastal Witness 1. Rahim Lakhoo B. Expert Witnesses a. Ross A. Clark b. Fred Schorning, P. Geol. c. Paul V. Pedersen, P. Eng. d. Cameron P. Six, P. Eng. e. Wazir C. Seth, P. Eng. f. William R. Freeborn, P. Eng. g. Robert Charles Edney C. Analysis - Have the Leases in issue terminated according to their terms as a result of the lack of production from August 1995 until January 20, 2001? a. General Principles of

Interpretation b. Specific Lease Provisions c. Onus d. Lack of or an Intermittent Market e. Any Cause Whatsoever Beyond the Lessee’s Reasonable Control f. Have the Defendants Met their Onus? g. Conclusion on Lease Validity V. DAMAGES A. General Principles B. The Substitutionary Royalty Cases a. Williston Wildcatters b. Freyberg Damages Decision C. Analysis a. Criticism of the Royalty Approach

b. Are the Defendants Innocent Tortfeasers? c. Does the Involvement of FSI and 108 distinguish this case from Williston Wildcatters and Freyberg? D. Disposition E. Leave and License VI. POSITION OF THE DEFENDANT ESPRIT A.Overview B. Disposition VII. COUNTERCLAIMS A. Champerty and Maintenance B. Interference with Contractual Relations C. Set-Off VIII. CONCLUSION APPENDIX A -

Summary of Leases APPENDIX B - Diagram of

Section 25 Lands APPENDIX C - Lease Provisions I. INTRODUCTION [ 1 ] This action involves five freehold petroleum and natural gas leases covering most of a

section of land near Crossfield, Alberta. The Plaintiffs are some of the current land owners and a top-lessee, whose top-lease would become effective only if it is determined that the existing leases have terminated. The Defendants are oil and gas companies who are the current lessees. The main issue in dispute is whether the leases have terminated in accordance with their terms as a result of the cessation in operations and production from a well on the land between 1995 and 2001. Specifically, the issue is whether the Defendants (or their predecessors) were required to operate the well at a loss or nominal return in order to preserve and continue the leases. This requires an

interpretation of certain terms of the five leases. At trial, a number of factual and expert witnesses provided evidence about the decision made to shut-in the well for economic reasons. [ 2 ] In addition to the main issue, the parties raise four preliminary issues:

a) whether the registered land owners to which two of the leases apply are the proper parties to seek a declaration that those leases have terminated;

b) whether the top-lessee Plaintiff has standing before the Court;

c) whether a number of the claims are barred in whole or in part by reason of the Limitations Act , RSA 2000, c L-12; and

d) whether several of the claims are barred in whole or in part by the doctrines of estoppel, laches or acquiescence.

[ 3 ] With respect to the preliminary issues, I conclude:

a) the registered land owners to which two of the leases apply have not satisfied me that they are the proper parties to seek a declaration that those leases have terminated, as there are other interested parties who were not before the Court;

b) the top-lessee Plaintiff has standing before the Court on the issue of lease validity, but has no claim for damages;

c) the Plaintiffs’ claims for unjust enrichment, trespass and conversion are barred pursuant to the Limitations Act ; and

d) none of the claims are barred in whole or in part by the doctrines of estoppel, laches or acquiescence. [ 4 ] With respect to the main issue involving contractual

interpretation of the leases, the action is dismissed. The well was shut-in for reasons permitted under the leases, and the leases did not terminate as a result of the cessation in operations and production. In the event I am in error in dismissing the action, I also address the issue of damages. I would have awarded damages in restitution based on a royalty, or royalty plus bonus, approach, and not on the basis of disgorgement of profits. II. OVERVIEW A. The Parties [ 5 ] The Plaintiffs, other than 1088924 Alberta Ltd. (“108”) and Timothy Bowes, are members of five families and two family holding companies.

Through inheritance, they are the current registered freehold owners of most of the lands and petroleum and natural gas rights in

Section 25, Township 27, Range 1, West of the 5 th Meridian (“Section 25” or the “Section 25 Lands”) near Crossfield, Alberta, other than a small sliver of land (12 acres) originally owned by the Canadian Pacific Railway as a railway right-of-way. Their parents or grandparents entered into leases of these rights in the 1960s with predecessors in interest of the Defendant resource companies.

One of the issues in this litigation is whether two of these leases were assigned by the original lessor to parties not named as plaintiffs, and, therefore, whether all of the necessary parties have been joined in this litigation. [ 6 ] The Plaintiff 108 is a company formed by Freehold Solutions Inc. (“FSI”), a top-lessee with respect to the five leases. It was FSI’s intention that 108 would take over the leases and operate an existing well drilled on

Section 25 if the current leases are declared to be invalid. FSI assigned its agreements to 108. 108 was added to the litigation as a Plaintiff in 2009 and has registered caveats against the

Section 25 Lands. FSI and the Plaintiff Danny Oneil have been the main organizers and promoters of this litigation. The Plaintiff Timothy Bowes is President of FSI and 108. The relationship of FSI and the other Plaintiffs and how such a relationship came to develop is discussed in detail later in these Reasons for Judgment. [ 7 ] The predecessors in interest of the Defendants Nexen Inc., ExxonMobil Canada Ltd., Coastal Resources Limited and Bonavista Energy Corporation entered into the leases with the predecessor freeholder owners of the

Section 25 Lands, and these corporations are the current interest holders and lessees under the leases. The relationship of TAQA North Ltd., Esprit Exploration Ltd. and Triquest Energy Corp. to the leases will be described later. Caveats in respect of all of the leases were filed by the Defendant lessees. B. Overview of Leases and Operations [ 8 ] In September, 1968, the then-lessees pooled their interests under a Pooling Agreement, as they had the right to do. Under the Pooling Agreement, the lessees combined their interests in each of the leases such that any production or deemed production of leased substances from

Section 25 constituted a continuation of all of the leases. The then-lessors under all five leases became entitled to royalties in respect of their pro-rata shares of leased substances produced and marketed from any well drilled on the

Section 25 Lands. [ 9 ] The current percentage working interests in production under the Pooling Agreement are as follows: Nexen - 12.03%

ExxonMobil - 12.03% Coastal - 15.89% Bonavista - 60.05% [ 10 ] There are five leases in issue in respect of the

Section 25 Lands. The leases differ from one another slightly, but the provisions that are key to the issues in this litigation are substantially the same. The leases provide for a ten-year primary term, continuing so long thereafter as there is production from the lands. After the primary term, if production has ceased and the lessee commences further drilling or working operations within 90 days, the lease remains in force so long as operations continue and if they result in production.

These leases contain a so-called “Third Proviso”, to the effect that “if . . . any well . . . is shut-in, capped, suspended or otherwise not produced as the result of a lack of or an intermittent market, or any cause whatsoever beyond the Lessee’s reasonable control, the time of such interruption or suspension or non-production shall not be counted against the Lessee . . .”, or a slight variation on this wording. C. The 7-25 Well [ 11 ] On September 17, 1968, a well was drilled at 7-25-27-1W5M on the

Section 25 Lands (the “7-25 Well”). This well and its history is the focus of the litigation. The well was shut-in, wherein production was suspended, from August 1, 1995 through to January 13, 2001, approximately five-and-a-half years. The Plaintiffs submit that it was shut-in because it no longer met the operator’s internal profitability hurdles and not as a result of a lack of or an intermittent market, and that thus the Defendants cannot rely on the Third Proviso to continue the term of the leases.

The Defendants submit that the 7-25 Well was shut-in because it was uneconomical, that this was a prudent decision by the lessees, and that the leases never terminated. [ 12 ] The 7-25 Well was drilled by Jefferson Lake Petrochemicals of Canada Ltd., one of the original lessees, in September 1968, within the 10 year primary term of the SE/4

Section 25 lease. It was drill stem tested in the Basel Quartz (“BQ”) geological formation on October 30, 1968, and perforated on August 20, 1970. [ 13 ] Two potentially producing formations were discovered: the BQ and the Crossfield (sometimes referred to as “Wabamun”) formations. The Crossfield formation is a deeper formation than the BQ formation, and produces sour gas.

The initial target formation for the well had been the Crossfield formation, but for various reasons relating to transportation and processing, Jefferson Lake decided to produce gas initially from the BQ formation. [ 14 ] Production from the 7-25 Well in the BQ formation commenced in March 1971 and continued, subject to certain cessations in production, until June 1980 when the well was shut-in. Production from the BQ formation was subsequently suspended in September 1980 and the perforations into that formation were cemented.

From 1978 to 2004, Nexen (or its predecessor in interest, Canadian Occidental Petroleum Ltd.) was the designated operator of the 7-25 Well under the Pooling Agreement and the operations agreement amongst the working interest owners under the original leases, except for a brief period in 2011, as later described. [ 15 ] The 7-25 Well was completed in the Crossfield formation on May 16, 1978.

Production commenced in March 1981 and continued, subject to certain cessations in production, until July 1995. [ 16 ] In July 1995, the 7-25 Well was suspended in the Crossfield formation and gas was not produced from the well from the end of July 1995 through January 2001. This period is of primary significance in the litigation, although the Plaintiffs have put in issue for limited purposes the Defendants’ decisions and actions with respect to the leases during previous periods of time.

However, the Plaintiffs do not allege that prior periods of cessation in production led to a termination of the leases. [ 17 ] During the period from August 1995 through January 2001, shut-in royalty payments (also referred to as annual rentals or delay rentals under the leases) were paid by the then-lessees to the then-lessors. It is important to note that shut-in royalty payments were paid during this time period by Coastal and Bonavista (or its predecessor in interest) to Wheatland Farming Co. Ltd. with respect to two of the leases. These shut-in royalty payments were received by all of the payees.

Although there was some evidence of late payments, the Plaintiffs do not raise this as an issue with respect to the continued validity of the leases in this litigation, except in a limited sense that will be described later. [ 18 ] In November 2000, Triquest, a working interest holder at the time, examined the possibility of bringing the 7-25 Well back into production and circulated an Independent Operations Notice to other working interest holders with respect to its intention to re-enter and

recomplete the 7-25 Well in the BQ formation to begin producing gas from that formation. [ 19 ] As part of the recompletion, Triquest perforated the BQ formation in the 7-25 Well on January 19, 2001, and fracture-stimulated the well on January 21, 2001. The 7-25 Well was put back on production in the BQ formation in February 2001. [ 20 ] Triquest became the operator of the 7-25 Well during well recompletion, but Nexen resumed that role when the independent operation was complete.

Bonavista assumed the role of designated operator on September 1, 2004 and has operated the 7-25 Well since that date. [ 21 ] On or about January 13, 2011, the 7-25 Well was shut-in by court order pursuant to an interim injunction issued in separate litigation in this Court, at the behest of the owner of an adjoining gas storage facility, CrossAlta Gas Storage & Services Ltd. No production or operations to obtain production have occurred on the

Section 25 Lands since January 13, 2011. In that separate litigation, CrossAlta alleges that the working interest owner defendants were producing CrossAlta’s storage gas from the 7-25 Well, which is adjacent to CrossAlta’s gas storage reservoir. D. Chain of Title for Original Leases and Pooling Agreement [ 22 ] All original leases reserved a 12.5% royalty to the lessor in respect of the substances produced and marketed from the leased lands. [ 23 ] The five leases in issue in this action in respect of the

Section 25 Lands, discussed below, are as follows: a. Jefferson SW/4 Lease; b. Union NE/4 Lease; c. Scurry NE/4 Lease; d. Scurry SE/4 Lease; and, e. Imperial NW/4 Lease. [ 24 ] A table setting out the current registered mineral owners and current lessees of the

Section 25 Lands is attached as Appendix A to this decision. The table does not reference the issue of whether the Stewart family members are in fact the current lessors with respect to the Scurry NE/4 Lease and the Scurry SE/4 Lease, which issue is described in detail later in this decision. A diagram of the

Section 25 Lands, indicating the location of the various leases, is attached as Appendix B to this decision. Selected lease provisions are included in Appendix C to this decision. a. Jefferson SW/4 Lease [ 25 ] On January 8, 1968, Jefferson Lake entered into a lease with Nellie B. Pole, the grandmother of the Plaintiff Danny G. Oneil, covering the SW/4 of

Section 25 (the “Jefferson SW/4 Lease”). The Plaintiffs Bowen Family Properties Ltd., Ronald B. Pole and Kevin R. Pole as joint tenants, and Mr. Oneil as executor of the estate of his mother, Mabel B. Oneil, are the current registered owners of Ms. Pole’s interest in the mines and minerals, other than coal, in the SW/4 of

Section 25, each holding a one-third interest. [ 26 ] The successor in interest to Jefferson Lake by an amalgamation effective July 12, 1971 was Canadian Occidental Petroleum Ltd., which in turn became Nexen Canada Ltd. and, ultimately, Nexen. Currently, Nexen and ExxonMobil are each 50% working interest owners under the Jefferson SW/4 Lease. [ 27 ] The Pooling Agreement includes the lands under the Jefferson SW/4 Lease. Nexen is the successor in interest to Jefferson Lake as a named party to the Pooling Agreement, and ExxonMobil is the successor in interest to Mobil Oil Canada Ltd. as a named party to the

Pooling Agreement. [ 28 ] The relevant wording of the Third Proviso of the Jefferson SW/4 Lease is as follows: . . . provided that if . . . any well on the said lands or the pooled lands . . . is shut-in, capped, suspended or otherwise not produced as the result of a lack of or an intermittent market, or any cause whatsoever beyond the Lessee’s reasonable control, the time of such interruption or suspension or non-production shall not be counted against the Lessee, anything hereinbefore contained or implied to the contrary notwithstanding. b.

Union NE/4 Lease [ 29 ] Jean Ella Irwin, as lessor, and the Union Oil Company of California, as lessee, entered into the original gas lease on May 9, 1961 for a portion of the NE/4 of

Section 25 (the “Union NE/4 Lease”). Edna Keam, Wilma Marshall and Laurel Lee McLaren as executrix for Betty Blanche Cardiff are the current registered owners of Ms. Irwin’s interest in the mines and minerals, other than coal, in the NE/4 of

Section 25, each as to a one-third interest. [ 30 ] Coastal is the successor in interest to Union under the Union NE/4 Lease, having acquired its interest from Unocal Canada Limited effective April 1, 1993. [ 31 ] Coastal is also the successor in interest to Union as a named party to the Pooling Agreement, having acquired its interest under the Pooling Agreement from Unocal Canada effective April 1, 1993. The Pooling Agreement includes the lands under the Union NE/4 Lease. [ 32 ] The relevant wording of the Third Proviso of the Union NE/4 Lease is as follows: . . .

PROVIDED THAT if drilling, working or production operations are interrupted or suspended as the result of any cause whatsoever beyond the Lessee’s reasonable control including, in the case of production operations, lack of or an intermittent market, the time of such interruption or suspension shall not be counted against the Lessee, anything hereinbefore contained or implied to the contrary notwithstanding. c. Scurry NE/4 Lease [ 33 ] Merville V. Stewart, as lessor, and Scurry Rainbow Oil Limited, as lessee, entered into the original lease on November 30, 1967 for the remainder of the NE/4 of

Section 25 (the “Scurry NE/4 Lease”). The registered owners of Mr. Stewart’s interests in the mines and minerals, other than coal, until December 2012, just before the trial commenced, were: (

a) Jerome Development Limited, as to a one-half interest; (

b) as to the other one-half interest: (

i) Lynda Calder as to a 2/12 interest; (ii) James D. Stewart as 2/12 interest; (iii) Cody Stewart as to a 1/12 interest; and (iv) Morgan Stewart as to a 1/12 interest.

Pursuant to certain transactions described later in paragraphs 86 and 87 of this decision, Jerome Development is the current registered owner of Merville Stewart’s interests in the Scurry NE/4 Lease in their entirety. [ 34 ] Scurry Rainbow held 50% of its interest under the Scurry NE/4 Lease in trust for Union. As such, Union held a 50% interest as original lessee under the Scurry NE/4 Lease. [ 35 ] The successor in interest to Scurry Rainbow by amalgamation was Home Oil Company Limited, which in turn assigned its 50% interest in the Scurry NE/4 Lease to Amoco Canada Resources Ltd. as of March 23, 1994. Thereafter: (

a) on October 16, 1996, Amoco assigned its 50% interest in the lease to TAQA North; however, Canadian 88 exercised a right of first refusal in respect of the natural gas in the BQ, Wabamun and Elkton formations under this lease and entered into a sale agreement with Amoco dated January 16, 1997 with respect to Amoco’s interest in the natural gas in those formations; (

b) following the two Amoco transactions, TAQA North had acquired all of Amoco’s 50% legal interest in the lease; however TAQA North held Canadian 88’s beneficial interest in the natural gas in the BQ, Wabamun and Elkton formations in trust for Canadian 88; (

c) on June 1, 2000, Canadian 88 sold its beneficial interest in natural gas in the BQ, Wabamun and Elkton formations under the lease to Triquest and, following that transaction, TAQA North assigned legal title to its interest in the lease to Triquest by way of a freehold lease assignment dated November 16, 2000; however, Triquest held TAQA North’s beneficial interest in trust for TAQA North pursuant to a declaration of trust dated November 30, 2000; (

d) following these transactions, Triquest had acquired all of TAQA North’s 50% legal interest in the lease and was the legal and beneficial owner of the interest in the natural gas in the BQ, Wabamun and Elkton formations; however, Triquest held TAQA North’s beneficial interest in the lease in trust for TAQA North; and (

e) by virtue of an agreement made as of January 29, 2004, Triquest’s legal and beneficial interests in the lease were transferred to Bonavista. [ 36 ] Coastal is also the successor to Union’s 50% working interest under the Scurry NE/4 Lease, having acquired its interest from Unocal Canada effective April 1, 1993. Coastal is the successor in interest to Union as a named party to the Pooling Agreement under the same agreement.

The Pooling Agreement includes the lands under the Scurry NE/4 Lease. [ 37 ] Bonavista is the successor in interest to Scurry-Rainbow, Imperial Oil Limited and Canadian Pacific Oil and Gas Limited as named parties to the Pooling Agreement. [ 38 ] Bonavista and Coastal are currently the working interest owners, each as to a 50% interest in the natural gas in the BQ, Wabamun and Elkton formations under the Scurry NE/4 Lease, while Coastal and TAQA North are each currently the working interest owners as to a 50% interest in all petroleum and natural gas (excluding natural gas in BQ, Wabamun and Elkton formations) under the Scurry NE/4 Lease. [ 39 ] The relevant wording of the Third Proviso of the Scurry NE/4 Lease is nearly identical to that of the Jefferson SW/4 Lease. d.

Scurry SE/4 Lease [ 40 ] Merville Stewart, as lessor, and Scurry Rainbow, as lessee, entered into the original lease for the SE/4 of

Section 25 (the “Scurry SE/4 Lease”) on January 7, 1964. The current registered owner of Mr. Stewart’s interest in the mines and minerals, other than coal, in the SE/4 of

Section 25, is Jerome Development.

[ 41 ] The successor in interest by amalgamation to Scurry Rainbow was Home Oil, which in turn assigned its interest in the Scurry SE/4 Lease to Amoco as of March 23, 1994.

Thereafter, by transactions that mirrored the transactions described with respect to the Scurry NE/4 Lease, Bonavista became the current working interest owner as to a 100% interest in the natural gas in the BQ, Wabamun and Elkton formations under the Scurry SE/4 Lease, while TAQA North became the current working interest owner as to a 100% interest in the natural gas (excluding natural gas in the BQ, Wabamun and Elkton formations) under the Scurry SE/4 Lease. [ 42 ] Bonavista is also the successor in interest to Scurry Rainbow, Imperial and Canadian Pacific as named parties to the Pooling Agreement.

The Pooling Agreement includes the lands under the Scurry SE/4 Lease. [ 43 ] The relevant wording of the Third Proviso of the Scurry SE/4 Lease is nearly identical to that of the Jefferson SW/4 Lease. e. Imperial NW/4 Lease [ 44 ] William Murdoch Copley, as lessor, and Imperial Oil Limited, as lessee, entered into the original lease for the NW/4 of

Section 25 (the “Imperial NE/4 Lease”) on December 13, 1961. Robert Copley, Karen Nell Copley, Margaret Alice Demers, Mary Jean Biggar and Goldie Alberta Danielsen are the current registered owners of Mr. Copley’s interest in the mines and minerals, other than coal, in the NW/4 of

Section 25. [ 45 ] Imperial assigned its interest in the Imperial NW/4 Lease and transferred its interest in the related caveat to Canadian 88, which subsequently became the Defendant Esprit and, ultimately, Pengrowth. Bonavista is the current working interest owner under the Scurry NW/4 Lease. [ 46 ] The relevant wording of the Third Proviso of the Imperial NW/4 Lease is nearly identical to that of the Jefferson SW/4 Lease. E. Origins of the Current Dispute [ 47 ] In 2001, Mr. Oneil’s elderly mother, who was then a registered interest holder under the Jefferson SW/4 Lease, gave Mr.

Oneil power of attorney over her affairs. Prior to this, Mr. Oneil knew very little about the production or non-production of the 7-25 Well, other than a general family knowledge that the lease existed. [ 48 ] In March 2003, while reviewing his mother’s affairs, Mr. Oneil noticed that Nexen had not issued a royalty cheque for the month of March 2002. Upon further examination, Mr. Oneil noticed that Nexen had been deducting the Alberta Freehold Mineral Tax and that ExxonMobil had not appeared to pay any royalties for October, November and December 2002. [ 49 ] Mr.

Oneil contacted both Nexen and ExxonMobil by email to address his concerns about royalty payments. Nexen informed Mr. Oneil that a cheque for March 2002 had been issued but not cashed, and agreed to stop payment on the first cheque and issue a new one. Nexen also clarified Mr. Oneil’s concerns regarding the deductions of the Alberta Freehold Mineral Tax. ExxonMobil agreed to mail a royalty cheque for the months of October 2002 through February 2003. [ 50 ] When he received the royalty cheque from ExxonMobil for $3,849.03, Mr.

Oneil noticed that the amount was for much less than the royalty cheque from Nexen for the same period, which was approximately $14,000. Given that the companies held the same percentage interest in the lands, Mr. Oneil became concerned that ExxonMobil was underpaying its royalties and contacted the company requesting clarification. [ 51 ] After several months of discussions with ExxonMobil in early 2003, Mr. Oneil received an email from Nexen notifying him that Nexen had overpaid royalties in the amount of $72,000. In discussions with Nexen, Mr.

Oneil indicated that his mother was willing to repay any amount that had been overpaid, but requested assistance in dealing with the tax implications of this error and the adverse effect on his mother’s senior subsidy benefits.

[ 52 ] In July 2003, ExxonMobil notified Mr. Oneil that it also had overpaid royalties and that it would be withholding future royalty payments until such time as it recovered the overpayment. Mr. Oneil also requested assistance from ExxonMobil in dealing with the tax and benefits implications of this error for his mother. Mr. Oneil testified that ExxonMobil demanded several times that Mr. Oneil make an offer of payment terms. Mr. Oneil became concerned that ExxonMobil was preparing to sue for the overpayment of royalties. [ 53 ] In August 2003, Mr.

Oneil notified the other holders of leasehold interests in the Jefferson SW/4 Lease about his concerns. He decided to seek legal advice. Subsequently, counsel for Mr. Oneil and the other leasehold interest holders contacted ExxonMobil and Nexen in late 2003, indicating that his clients had concerns about the validity of the leases. In separate discussions, both ExxonMobil and Nexen gave their opinions that the leases continued to be valid. [ 54 ] Mr. Oneil’s counsel also told him of the existence of FSI, indicating that it may be interested in helping him.

FSI is a small oil and gas company that holds a number of different assets and leases. It is also in the business of acting on behalf of lessors who have limited experience in the oil and gas sector in disputes with corporate lessees. [ 55 ] FSI is owned by three parties. Tim Bowes, President of FSI, holds a one-third interest in the company with his wife through a holding company. Darryl Erickson and his wife own another one-third interest. Robyn Lore, through a holding company Willmist Holdings Ltd., owns the final one-third interest. Mr. Bowes, Mr. Erickson and Mr.

Lore are all directors of FSI, and all three have experience in the financial and management side of the oil and gas business, including experience as landmen. [ 56 ] Mr. Oneil instructed his counsel to contact FSI, and, in July 2004, Mr. Oneil and Ms. Baxter-Gilmour (on behalf of Bowen Family Properties) had their first meeting with Mr. Bowes. While Mr. Bowes agreed that there were problems with the Jefferson SW/4 Lease, Mr. Bowes advised Mr. Oneil that FSI was not prepared to do a historical title opinion unless the remaining parties with interests in the

Section 25 Lands agreed to join in litigation against the lessees. [ 57 ] At the July 2004 meeting, Mr. Bowes also explained how FSI would be prepared to undertake a “top lease” should the existing leases be found invalid. A top lease is a lease that only comes into effect if it is determined that the existing lease has terminated. The top lease would provide that FSI would pay royalties to the lessors at a rate of 18% and that FSI would agree to pay any legal costs arising from any action that had to be taken.

As part of the deal, FSI would split 50% of any damages recovered in legal proceedings with the Plaintiff lessors. Later in November 2004, FSI agreed to increase the royalty rate under the top leases from 18% to 20%. [ 58 ] Mr. Oneil has known some of the other Plaintiffs for most of his life. Bowen Family Properties is a family company owned by his cousins. Ron Pole is his uncle and Kevin Pole is his cousin. Mr. Oneil has also known Lynda Calder from the time Ms. Calder was a high school student. He was aware Jerome Development was owned by the Stewart family. While Mr.

Oneil testified to being aware of who Karen Copley was, he did not know her very well. Prior to the litigation, Mr. Oneil did not personally know any of the other Plaintiffs. [ 59 ] Mr. Oneil (on behalf of his mother), Ms. Baxter-Gilmour (on behalf of Bowen Family Properties) and Ronald Pole signed an agreement with FSI on November 1, 2004. These three Plaintiffs, together with Kevin Pole, are referred to as the “Bowen Group”.

This agreement provides that FSI would advise the Bowen Group within 120 days whether it would analyze the Jefferson SW/4 Lease, including a “historical and legal” analysis of production to determine if further money was owed and whether the lease had terminated. In either case, FSI would “take action as exclusive agent” of the lessors at its own cost and expense to obtain the money owed or obtain a determination that the lease had terminated. FSI would provide a law firm to handle the matter and pay all that law firm’s fees and disbursements.

In consideration, the lessors would pay FSI 50% of anything received from any settlement or judgment in the action. [ 60 ] The FSI agreement attaches a top lease which would become effective automatically if it is determined that the existing lease has terminated.

Executed copies of the top lease were to be held by a law firm until the lessors and FSI directed their release, but it is not clear if such top lease was actually executed. [ 61 ] According to the agreement, if the lessors do not wish to accept a settlement recommended by FSI, they have the right to proceed without FSI, although FSI would be entitled to 25% of anything ultimately received, net of lawyers’ fees. The lessors agree to co-operate with FSI in its negotiations with the other owners of

Section 25 natural gas rights. [ 62 ] Kevin Pole did not sign the agreement on November 1, 2004, but by signatures dated between June 6 and September 11, 2008, he

and the other two representatives of the Bowen Group executed a supplemental agreement with FSI, said to be effective November 1, 2004. The agreement provides a replacement top lease, also back-dated to November 1, 2004, which this time was executed by all members of the Bowen Group.

The agreement provides that by entering into the top lease, “the Lessors made an absolute disposition of their reversionary interest in the said lands such that the entire right, title, estate and interest of the Lessee [Jefferson Lake] in the lands vested in FSI pursuant to the terms of the Top Lease immediately as of the effective date thereof.” However, it also provides that “FSI’s right to possession under the Top Lease is contingent upon and deferred until there is a determination that the [Jefferson SW/4 Lease] has terminated.” [ 63 ] The supplemental agreement makes it clear that FSI is not required to make any payments, other than an unspecified “bonus consideration”, unless and until the Jefferson Lake SW/4 Lease has terminated, FSI is in possession of the lands and is producing petroleum substances.

F. Lynda Calder and the Jerome Group a. Agreements with FSI [ 64 ] Mr. Oneil called the Plaintiff Lynda Calder in 2005. Merville Stewart, Ms. Calder’s father, died in 1984 and Ms. Calder is the executor of his estate. Mr. Oneil thought that Ms. Calder’s family owned most of the east half of

Section 25. [ 65 ] Mr. Oneil described to Ms. Calder the arrangement he had entered into with FSI, and told her of FSI’s opinion that the lease had terminated. He asked her if the family still had interests in Alberta, and said that he knew that a portion of

Section 25 was registered in the name of Jerome Development. Although Ms. Calder stubbornly insisted that Jerome Development no longer held any assets in Alberta, Mr. Oneil told her that Mr. Erickson would be in touch on behalf of FSI to explain things further. [ 66 ] Mr. Erickson contacted Ms. Calder and explained FSI’s proposal. He then sent her some documentation, including a draft of an agreement with FSI and land titles certificates dated November 10, 2004, indicating that the mines and minerals under a portion of the NE/4 and the SE/4 of

Section 25 were registered in the name of Jerome Development as to 50% of the NE/4 and 100% of the SE/4. She discussed this with her family and could see no downside risk to proceeding, as FSI would agree to fund the litigation. FSI invited her and her brother, James Stewart (now deceased), to Calgary, where they met with the three FSI principals. [ 67 ] Ms. Calder and Mr. Stewart decided to sign the proposed agreement with FSI. Ms. Calder signed the agreement on March 12, 2005, both in her personal capacity and as executor and beneficiary of her father’s estate.

She also signed the undated top lease attached to the proposed agreement, although her signature was not witnessed. This top lease mis-states the legal description of the leased lands in part, referring to the SW/4, rather than the SE/4 of

Section 25. [ 68 ] James Stewart signed the agreement in his own capacity and as beneficiary of the estate of Merville Stewart. It is not clear from the document when he signed it. It does not appear that he signed the attached top lease. James Stewart’s daughter, Cody Stewart, was also added and signed the agreement in May 2005.

She testified that her father had advised her of the FSI deal, telling her that it appeared that her grandfather had an interest in land in Alberta that the family did not know about. [ 69 ] The agreement is substantially similar to that signed by the Bowen Group, except that the top lease is stated to be dated “within 30 days of the removal of encumbrances from the title”, rather than becoming automatically effective if it is determined that the original lease has terminated. No fully executed copy of the top lease has been discovered or put into evidence.

The agreement also compels the lessors to transfer the petroleum and natural gas rights in the portion of the NE/4 and the SE/4 of

Section 25 (which the agreement reflects were then registered in the name of Merville Stewart as to 50% of the NE/4, and Jerome Development as to 50% of the NE/4 and 100% of the SE/4) to the beneficiaries of the estate and the shareholders of Jerome Development, which, the agreement notes, may involve reviving Jerome Development as a corporation under the Alberta Business Corporations Act , RSA 2000, c B-9. [ 70 ] Jerome Development was a family holding company incorporated by Merville Stewart in 1969.

It was struck from the Alberta Corporate Registry in 1985, having failed to file annual returns for the last two years. Ms. Calder revived the corporation for the purpose of this litigation on August 8, 2005. [ 71 ] Morgan Stewart, James Stewart’s son, was also a beneficiary of the estate of his grandfather, but he was estranged from the

family at this time and no one knew where he was. He was not included among the signatories to the agreement. [ 72 ] In 2008, some of the members of the Stewart family (the “Jerome Group”) executed supplemental agreements with FSI that are substantially the same as the supplemental agreement executed by the Bowen Group. Ms.

Calder executed separate agreements for the NE/4 and the SE/4 on August 7, 2008, both in her own capacity and on behalf of Jerome Development, and also executed the top leases that were attached, which were post-dated to March 16, 2005. [ 73 ] James Stewart executed a supplemental agreement and a new top lease on September 9, 2008. Mr. Stewart also signed a supplemental agreement and lease on the same date on behalf of his son, Morgan Stewart, although Mr. Stewart had no legal authority to do so. It appears that Morgan Stewart died in early 2011.

Cody Stewart executed a supplemental agreement and a new top lease on September 15, 2008. [ 74 ] The involvement of the Jerome Group in this litigation gives rise to the issue of whether its members the Plaintiffs Lynda Calder, Morgan Stewart, Cody Stewart and Jerome Development Limited, have standing as lessors, given certain complications with respect to Merville Stewart’s entitlement to the mines and minerals in the east half of

Section 25 after 1977. These complications are described in the following

section of these Reasons for Judgment. b. Assignment of Interest to Snell Farms Ltd. [ 75 ] In October 1995, Ms. Calder received a letter from Erica Heuer at Montreal Trust Company inquiring about the status of Jerome Development for royalty payment purposes, pursuant to a royalty trust. Ms. Calder spoke with Ms. Heuer, expressing her surprise at the inquiry, as she understood that her family had no assets left in Alberta. In August 1996, Ms. Calder and Ms. Heuer had another conversation. Ms. Heuer told Ms.

Calder that Montreal Trust had made a mistake and that the royalty was payable to Snell Farms Ltd. and another company, Fairholm Development, which was associated with Robert Kolstad, a friend of Merville Stewart. Ms. Calder’s handwritten notes on these letters indicate that she understood at the time that royalty trust certificates in relation to

Section 25 were owned by Snell Farms and Mr. Kolstad. Ms. Calder asked her brother, James Stewart, about this, and his comment was that this was one of “Mr. G.’s” companies. [ 76 ] Mr. G. was Merville Stewart’s lawyer and also the lawyer for Jerome Development until it was struck off the Alberta Corporate Registry in 1985. Ms. Calder testified that her father had a poor view of Mr. G.’s ethics, but that he had continued to retain Mr. G. because, he told her, it was just too hard to switch lawyers. [ 77 ] At pre-trial questioning, Ms.

Calder was presented with assignment agreements dated March 1, 1977 that she conceded appeared to be signed by her father, transferring his mineral rights in the SE/4 and NE/4 of

Section 25 to Snell Farms. While she tried to resile from that testimony at trial, her explanation for her change of opinion was not satisfactory or credible. [ 78 ] Ms. Calder testified that she “had a problem” with these assignment agreements, as her father’s “mantra” to his children was that they should never sell mineral rights. She also found it suspicious that the assignments were signed on behalf of Snell Farms by Mr. G., with Mr. G.’s wife as witness to Ms. Calder’s father’s signature.

She testified that her brother, James Stewart, agreed that there was something “not cricket” with the documents. [ 79 ] Merville Stewart left Alberta in the early 1970s, as he began to suffer serious health concerns and could no longer run a cattle operation. Ms. Calder was aware that her father sold the “home place” in the mid 1970s, although she was not living in Canada at that time and so could not provide a precise date. Ms. Calder’s mother stayed in Alberta, living in the family home in Airdrie. Merville Stewart visited her from time to time until she died in 1983. Ms.

Calder admitted that she had infrequent contact with her father during those years, and that he had never discussed his business affairs with her. While James Stewart worked for a time with his father in his father’s auction business, they had been estranged for a number of years. [ 80 ] When Ms. Calder took over as executor of Merville Stewart’s estate, she found nothing about any interests in

Section 25 among his papers, although she found some documents relating to gross royalty trusts in other lands. [ 81 ] Ms. Calder kept the estate open until 2005, as the estate had liabilities and she wished to pay her father’s creditors. To that end, she made inquiries about possible assets. Ms. Calder testified that she had asked her brother, James Stewart, many times about the

possibility that the family still had an interest in

Section 25 and his answer was always the same: James Stewart believed that the estate owned absolutely nothing in Alberta. [ 82 ] Ms. Calder was also in touch from time to time with Mr. Kolstad, a family friend who was in the oil and gas business and was knowledgeable about Merville Stewart’s business interests. She testified that she took one of the existing gross overriding royalty trust certificates relating to other lands to Mr. Kolstad during a visit and asked him if there was anything left for the estate on

Section 25. He said that there was not. Ms. Calder agreed that Mr. Kolstad was knowledgeable about her father’s business and that, in fact, he had witnessed the Scurry SE/4 Lease when her father signed it. [ 83 ] Ms. Calder was also aware that Jerome Development had been struck from the Alberta Corporate Registry even before her father died, and she testified that she did not revive it as executor prior to this litigation, as her understanding was that there were no assets left in the name of that company. [ 84 ] Ms.

Calder has never investigated the Snell Farms assignments, and Snell Farms is not a party to this litigation. Neither is Fairholm Development. [ 85 ] From the documentation presented in evidence, it appears that when the Scurry NE/4 Lease and the Scurry SE/4 Lease were entered into, Merville Stewart was the freehold owner of the SE/4 of

Section 25 and that portion of the NE/4 of the

Section 25 that lies to the south of the lands covered by the Union NE/4 Lease, which collectively comprise nearly half of

Section 25. [ 86 ] From the documentation, it also appears that in March 1972, Mr. Stewart transferred 50% of his interest in the NE/4 of

Section 25 to his family holding company, Jerome Development, and kept the other 50% interest in mines and minerals in his name. He also transferred all of his freehold interest in the SE/4 of

Section 25 to Jerome Development. The transfer documents were witnessed by Mr. G. The transfer is dated in 1972 but appears to have been filed at the Land Titles office in 1974. Certificates of title dated May 1974 indicate that Jerome Development is the owner of the lands and all mines and minerals, other than coal, in the SE/4 and an undivided half interest in the NE/4 of

Section 25. [ 87 ] It thus appears that Jerome Development has been the registered freehold owner of the SE/4 and 50% of the NE/4 of

Section 25 from 1972 to the present. From 1974 to 2008, Mr. Stewart continued to be the registered freehold owner of the other 50% interest in mineral rights in the NE/4 of

Section 25. Although he died in 1984, this interest was only transferred to the beneficiaries of his estate in 2008. By agreement dated December 8, 2011 (about a month before trial) and a transfer of land registered on January 5, 2012, this 50% interest was transferred to Jerome Development. [ 88 ] There is no direct evidence that the two Scurry Leases were assigned to Jerome Development in 1974 or any other time, other than what the Plaintiffs submit may be implied from the wording of the 1972 transfer documentation. Nor is there any evidence that Mr. Stewart or his solicitor, Mr.

G., or Jerome Development advised the lessees under the Scurry Leases of the transfers of freehold interest to Jerome Development. [ 89 ] I am satisfied that Ms. Calder recognized the signature on the assignments as being that of her father, and only resiled from her previous testimony at trial when she understood the adverse implications of this evidence. Mr. Stewart’s signature is witnessed by A.G., Mr. G.’s wife, and the assignments include a commissioned affidavit of execution. Snell Farms executed the assignments by its agent, Mr.

G. [ 90 ] The assignments are prepared in part on pre-printed forms and are entitled “Assignment of Natural Gas Lease”. They commence with the words “This Indenture” and are dated March 1, 1977. The recitals reference the Scurry NE /4 Lease and the Scurry SE/4 Lease, the dates of the leases and the mineral interests covered by the leases. The recitals also state that Mr. Stewart has agreed to assign the leases for one dollar and other valuable consideration.

The assignments contain the following reference, added to the printed form: The within Assignment is in addition to and forms a part of an Agreement for Sale dated the 1st of March, A.D. 1977, whereby MERVILLE V. STEWART did sell, assign and transfer unto the Transferee herein certain assets and it is agreed and understood that the within Assignment is subject to the same terms and is a part of the said Agreement of 1 March, 1977. [ 91 ] As part of the printed form, Mr. Stewart as assignor covenants that the leases are good, valid and subsisting leases, that the rents

have been paid for the current year and that the assignor has the right, power and authority to assign the leases. The assignments specify that they will be binding on the heirs, executors and administrators of the assignor and assignee. [ 92 ] The assignments were sent to the appropriate lessees by Mr. G., and it appears that from 1977 to 1982, royalties under the leases were paid to Snell Farms. Mr. G. wrote to Union Oil on June 17, 1977 and again on July 25, 1977, indicating that Mr. Stewart had disposed of his interest in the royalty with respect to the leases but had lost his documentation.

He asked for copies of the leases, which were forwarded to him. [ 93 ] In June 1982, the lessees were informed by counsel for Wheatland Farming Co. Ltd. that Snell Farms had changed the royalty payee to Wheatland. From the documentation, it appears that Mr. G. also notified at least one of the lessees on June 17, 1982 that royalties should be paid to Wheatland. [ 94 ] According to representatives of Coastal and Bonavista, the ultimate lessees with respect to these two leases, neither Wheatland nor Snell raised any issues with them in relation to the royalty payments that they received.

These royalties have been substantial - over $1.7 million from February 2001 to January 2011 paid by Bonavista alone. [ 95 ] There is no evidence that James Stewart or Jerome Development ever raised any issues or concerns with respect to the fact that neither received any royalty payments under the Scurry Leases from 1977 onward. There is evidence that Mr. Stewart’s accountant in Las Vegas received Alberta Energy Tax statements in 1985 for the taxation year 1983 referring to taxes payable with respect to mineral rights, which were the responsibility of the lessees to pay under the leases.

These taxes were paid by the lessees. There is no evidence that Mr. Stewart or his accountant ever asked the lessees about these statements. [ 96 ] Neither the Plaintiffs nor the Defendants called any witnesses from Snell Farms or Wheatland with respect to these documents, even after this issue had been raised during pre-trial questioning. The Defendants point out that on November 30, 2011, they provided the Plaintiffs with a “without prejudice” brief for a judicial dispute resolution in which the issues arising from these assignments were discussed. The judicial dispute resolution was held on December 8, 2011.

On about December 9, 2011, Ms. Calder and Cody Stewart signed documentation that transferred the 50% interest held by the individual heirs of Mr. Stewart in the NE/4 of

Section 25 to Jerome Development. Cody Stewart testified that she was called by a lawyer and told that this needed to be done to get things in order and that there were several benefits to doing this, including tax benefits. The certificate of title in relation to the NE/4 of the

Section 25 Lands was amended on January 5, 2012, days before the trial commenced, reflecting Jerome Development as the interest holder, rather than Ms. Calder, Cody Stewart, James Stewart and Morgan Stewart. G. Robert Copley and the Copley Group [ 97 ] Robert Copley is the brother-in-law of Karen Nell Copley and the brother of Margaret Alice Demers, Goldie Alberta Danielsen and Mary Jane Biggar. Mr. Copley knew the grandparents and some of the parents of the other Plaintiffs but had never met them. Mr. Copley shares in an interest in the NW/4 of the

Section 25 Lands and, thus, the Imperial NW/4 Lease with his siblings, who inherited their interests from their father’s estate. [ 98 ] His interest and the interest of his siblings (the “Copley Group”) in the NW/4 lands are subject to a caveat held by Computershare, a gross royalty trust that distributes royalties from the 7-25 Well to family members holding units in the trust. [ 99 ] Mr. Copley became involved in the present litigation after speaking with Mr. Lore of FSI. Mr. Lore visited Mr.

Copley and told him that since the 7-25 Well had been out of production for more than 90 days, the original lease had expired. Mr. Copley had previously received calls from Mr. Oneil and Mr. Erickson, but had told Mr. Oneil he was not interested in the litigation. After his conversation with Mr. Lore and receiving legal advice, Mr. Copley and the other interest holders in the Imperial NW/4 Lease entered into a supplemental agreement with FSI stated to be effective May 9, 2005 that is substantially similar to the other supplemental top lease agreements.

It is not clear when the agreement was actually signed, but the affidavits of execution on the top lease are dated September 2008. It was Mr. Copley who negotiated the higher royalty rate with FSI that benefited all the other freehold lessors. H. Laurel Lee McLaren and the Irwin Group [ 100 ] Ms. McLaren holds a one-third interest in the Union NE/4 Lease of the

Section 25 Lands. Her aunts, Edna Keam and Wilma

Marshall, also each own a one-third interest. Ms. McLaren is named as a Plaintiff in this action as the executrix of the estate of her mother, Betty Blanche Carter. Ms. Carter, Ms. Keam and Ms. Marshall all obtained their interests in the NE/4 lands upon the passing of their mother, Jean Ella Irwin, signatory to the Union NE/4 Lease as executrix of the estate of William James Irwin. [ 101 ] Ms. McLaren’s interest was not actually transferred to her as executrix of her mother’s estate until June 23, 2010, long after the litigation had been commenced. [ 102 ] Ms. McLaren had very little knowledge of the

Section 25 Lands until her mother’s passing in April 2005. Shortly thereafter, Ms. McLaren was contacted by Mr. Erickson of FSI, who explained the litigation and FSI’s role in it. At this point, the Statement of Claim filed by the remaining Plaintiffs listed the Irwin family members (the “Irwin Group”) as Defendants. Ms. McLaren agreed to the top lease agreement and to join the litigation as a Plaintiff. Ms.

McLaren and her aunts, or their representatives, signed the FSI documentation in late September and early October 2007, on the understanding that FSI would assume the top lease should this litigation be successful. The statement of claim was amended on December 5, 2005 to add Ms. McLaren, Ms. Keam and Ms. Marshall to the list of Plaintiffs and remove them as Defendants. Supplemental agreements were signed in late spring, 2008. [ 103 ] Under cross-examination, Ms. McLaren stated that she did not have any concerns with Coastal’s performance under the Union NW/4 Lease in the period after her mother’s passing.

She continued to accept royalty cheques in her mother’s name, and later in her own, and did not ask Coastal about any periods of non-production until her discussion with Mr. Erickson in the summer, 2005. [ 104 ] Ms. McLaren also acknowledged that she had not received independent legal advice before signing the FSI top lease and litigation agreements. At the time she entered into the agreements, she understood from FSI that the lease held by Coastal was invalid and the new lease with FSI now governed natural gas production on the NE/4 lands. Ms.

McLaren never contacted Coastal after entering into the FSI agreements.

She ceased cashing royalty cheques from Coastal until an agreement among counsel was reached on March 19, 2007 to the effect that the payment of royalties by Coastal to the Irwin Group following the date of service of the statement of claim did not constitute any form of acceptance, acquiescence, condonation or waiver by the royalty payees or prejudice or affect Coastal’s allegation that the payment and acceptance of royalties prior to service of the statement of claim did constitute acceptance, condonation and waiver such that the royalty payees were estopped from challenging the lease.

I. 1088924 Alberta Ltd. [ 105 ] The original top lease agreements entered into in 2004 with the various lessor families are with FSI. In 2004 and 2005, 108 filed caveats alleging a contingent interest in

Section 25, although it was not a party to the top lease agreements. After May 24, 2007, when a decision with respect to damages in Freyberg v Fletcher Challenge Oil & Gas Inc , 2007 ABQB 353 , 428 AR 102 was released by the Alberta Court of Queen’s Bench (“ Freyberg Damages Decision”), the top lease agreements were amended, but, as has been noted previously, the supplemental agreements were back-dated to 2004 and 2005. 108 was not a party to these supplemental agreements, but filed further caveats to register its alleged contingent interest.

On January 28, 2009, 108 was added as a Plaintiff to this action with the consent of the Defendants, subject to the proviso that any defences based on limitations periods were expressly preserved. III. PRELIMINARY ISSUES [ 106 ] The Defendants raise a number of preliminary issues that they submit result in the Plaintiffs’ action being fatally flawed. It is useful to resolve these issues before the core issue of the validity of the leases, as their resolution has an impact on the parties before the Court and the evidence that informs the lease validity issue. [ 107 ] The Defendants submit that:

a) the Jerome Group plaintiffs are not the proper parties to seek a declaration that the Scurry Leases have terminated; b) 108 has no standing before the Court;

c) a number of the claims are barred in whole or in part by reason of the Limitations Act ; and

d) several of the claims are barred in whole or in part by the doctrines of estoppel, laches or acquiescence. [ 108 ] The Defendants also submit that the top lease Plaintiffs have engaged in wrongful conduct, and champerty and maintenance. They have counterclaimed, alleging set-off, champerty and maintenance, and interference with contractual relations. They also submit that a great deal of trial evidence relating to the historical conduct of the lessees with respect to the 7-25 Well is irrelevant to the issue of the validity of the leases. A.

Preliminary Issue 1: Are the Jerome Group Plaintiffs proper parties to the litigation? a. Overview [ 109 ] The Defendants submit that the Jerome Group Plaintiffs have not established that they are the proper parties to seek a declaration that the Scurry NE/4 Lease and the Scurry SE/4 Lease have terminated. For the reasons set out below, I agree.

The Plaintiffs’ application for declarations that the Scurry NE/4 Lease and the Scurry SE/4 Lease have terminated must fail on the basis that Snell Farms and Wheatland, whose rights may be affected by the declarations sought, are not parties before the Court in this litigation. The Court is unable to effectively adjudicate the issue of who are the current lessees under these leases in the absence of submissions from these interested parties. Thus, the Plaintiffs are unable to establish on a balance of probabilities that the Jerome Group Plaintiffs are the proper parties entitled to seek such declarations. b.

Arguments and Analysis [ 110 ] The Plaintiffs raise the following arguments to support their position that this Court should proceed to make the declarations sought: 1. The absence of Snell Farms and Wheatland has no bearing on the issues; 2. The onus of naming Snell Farms and Wheatland as parties is on the Defendants; 3. The assignments are invalid; 4. The Defendants have adduced inadequate evidence with respect to Wheatland; 5. The principle of indefeasibility of title settles the issue; 6. The evidence is limited with respect to its admissibility; 7.

The Defendants have no standing to enforce the assignments; 8. The issue was not properly raised by the pleadings; 9. The assignments are hearsay evidence; and, 10. Snell Farms and Wheatland have failed to file caveats. [ 111 ] Each of the Plaintiffs’ arguments is addressed below. 1.

The absence of Snell Farms and Wheatland has no bearing on the issues [ 112 ] The Plaintiffs submit that the presence or absence of Snell Farms and Wheatland in this litigation would have no bearing on the outcome of the core issue of whether the leases terminated for want of continuous production, since neither company had any involvement in the decision to shut-in the 7-25 Well.

This, of course, begs the question of whether Snell Farms and/or Wheatland, as the putative holders of the leases and the beneficiaries of royalties, wish to have the leases declared invalid or, if they do, whether the Defendants may have defences to an application for declaratory orders specific to these entities. There is simply no properly admissible evidence before me on the positions of these absent parties. As the Court of Appeal noted in Alberta (Treasury Branches) v.

Ghermezian, 2000 ABCA 228 , 226 AR 170 , I cannot be “perfectly certain” that I will be able to effectively adjudicate all issues relating to the assignments and the validity of the leases without Snell Farms and Wheatland as parties to the action: paras 19-20. [ 113 ] There was a late attempt to address this issue. On April 25, 2012, the Plaintiffs brought an application to reopen their case to lead evidence with respect to what they alleged were new developments involving Snell Farms.

This was after eighteen days of trial and after the Plaintiffs had closed their case, other than for the limited purpose of calling evidence from experts whose reports had been previously disclosed to the Defendants: see Stewart Estate v TAQA North Ltd , 2012 ABQB 87 . Not surprisingly, the Defendants were opposed to this application, and advised the Court that a full hearing into this issue would be required, that cross-examination on the affidavit sworn by Mr.

Lore in support of the application would be necessary, and that it was likely questioning of certain other witnesses and possible witnesses would be required. The Defendants were harsh in their criticism of the nature of the new evidence that the Plaintiffs sought to admit, and alleged that Mr.

Lore had failed to be candid with the Court in his previous trial testimony with respect to his involvement in any attempts to adduce new evidence. [ 114 ] Counsel for Bonavista and Coastal submitted that if the application to admit new evidence was granted, it would change the whole nature of the case, and would require a lengthy delay, further examinations, amendments to pleadings and possibly a new trial. They asserted that granting the Plaintiffs’ application would result in grave prejudice to their clients.

They asked the Court either to dismiss the Plaintiffs’ application summarily, or to allow them additional time to prepare to address it. The Defendants who are not directly involved in the Scurry NE/4 Lease and the Scurry SE/4 Lease also made strong submissions about the impact of this proposed new evidence on the trial process, the prejudice to their clients of further delay, and what they submitted was the tainted and suspicious nature of the proposed new evidence.

They referred to the possibility of a mistrial and argued that admission of the evidence in the circumstances of this case would bring the administration of justice into disrepute. They asked that I dismiss the Plaintiffs’ application summarily. [ 115 ] In response, counsel for the Plaintiffs indicated that, while he was personally affronted by some of the submissions made by counsel for the Defendants, his instructions were to withdraw the application to adduce fresh evidence, as his clients were not prepared to risk further delay. [ 116 ] In short, the application was withdrawn, and I made no ruling on it.

The proposed new evidence was never admitted at trial. [ 117 ] In final argument, the Plaintiffs submit that since the Defendants objected to them calling this fresh evidence during the trial, they cannot fairly argue that the Plaintiffs’ case should not succeed for not having brought Snell Farms before the Court. However, the objections of the Defendants to the alleged fresh evidence were two-fold: the timing of the application after years of preparation for trial and the closure of the Plaintiffs’ case at trial, and the form of the proposed evidence and the circumstances under which it was obtained.

They are not by any principle of equity precluded from continuing to assert that the proper parties to the litigation are not before the Court, as they did before the application to adduce fresh evidence was brought. [ 118 ] The Defendants submit that the episode reflects on the credibility of Mr. Lore. The Plaintiffs in response suggest that, since these allegations with respect to credibility have been made, I should take into account the proposed new evidence, despite the fact that their application to adduce it was withdrawn. That would be entirely unjustified. The allegations about Mr.

Lore’s credibility relate to what the Defendants suggest is inconsistent evidence with respect to his involvement in attempting to obtain the proposed new evidence and his testimony at trial a few weeks earlier. As it happens, Mr. Lore’s credibility is not an issue in this trial. While he may be concerned about the allegations, I do not need to make any findings on this specific issue that may affect him. 2.

The onus of naming Snell Farms and Wheatland as parties is on the Defendants [ 119 ] The Plaintiffs submit that the onus was on Bonavista and Coastal to name Snell Farms and Wheatland as parties to the litigation, or to adduce evidence beyond what has been adduced by the Defendants to address the issues relating to the assignments. [ 120 ] In response to the Plaintiffs’ implied assertion that they are the proper parties to seek the declarations they seek with respect to the validity of the leases, the Defendants have adduced evidence in the form of the assignments, correspondence relating to the assignments and their conduct in paying royalties to Snell Farms and Wheatland for close to 35 years to cast doubt on that assertion with respect to the Scurry Leases.

The Defendants have the evidentiary burden of establishing on a balance of probabilities that there are parties who are interested in the issue of the validity of the Scurry Leases that are not before the Court, and they have satisfied that evidentiary onus. Once they have done so, the onus shifts back to the Plaintiffs to refute the validity of the assignments on a balance of probabilities and to satisfy their burden of demonstrating that the parties before the Court are the only interested parties. They have not done so.

[121] The same reasoning applies to the suggestion by the Plaintiffs that Coastal and Bonavista should have brought Snell andWheatland into the litigation through third party notices. It is not Coastal or Bonavista who seek a declaration that the leases haveterminated; it is the Plaintiffs. [122] It is important to note that it is not necessary, nor would it be appropriate, for this Court to decide with finality either the issue ofthe validity of the Scurry Leases or the issue of the validity of the assignments to Snell Farms and/or Wheatland in the absence of thoseparties.

In response to the Plaintiffs’ application for declaratory relief with respect to the Scurry Leases, the Defendants need onlyestablish that there are interested parties that are not before the Court. They do not need to prove the validity of the assignments. [123] The Plaintiffs submit that where the subject matter of an allegation lies particularly within the knowledge of one of the parties,that party must prove it. The Defendants Bonavista and Coastal have presented evidence from their files to establish the existence ofother parties interested in the leases by virtue of the assignments.

It is the Plaintiffs who assert that they are the proper lessors. Giventhat the assignments involved Mr. Stewart as assignor, information with respect to the validity of the assignment must lie particularlywithin the knowledge of the Jerome Group. The difficulty posed by Mr. Stewart’s death does not shift this burden to the Defendants. Infact, the evidence of Ms. Calder, other than with respect to her suspicions about the validity of the assignments, supports the validity ofthe assignments. Ms. Calder thought her father no longer had any interest in

Section 25, and from her review of her father’s affairs asexecutrix, she had no reason to believe otherwise. She heard from Montreal Trust in 1995 that royalty payments were being paid to SnellFarms and, until persuaded otherwise by Mr. Erickson, the Stewart family had no reason to believe they were still valid lease holderswith respect to the

Section 25 Lands. 3. The assignments are invalid [124] The Plaintiffs submit that since Mr. Stewart transferred all of his interest in the SE/4 of

Section 25 and half of his interest in theNE/4 of

Section 25 to Jerome Development in 1972, he could not assign any interest in the SE/4 Lease to Snell Farms in 1977 because heno longer owned such interest. [125] Coastal and Bonavista argue that this misses the point; that they have never asserted that Mr. Stewart assigned his fee simpleinterest in

Section 25 to Snell Farms. They point out that it is a basic principle of oil and gas law that leasehold interests are separate anddistinct from fee simple interests: Scurry Rainbow Oil Ltd. v Kasha (1996), 1996 ABCA 206 , 184 AR 177, 39 Alta LR (3d)153 (CA) at para 25.

The Court of Appeal in Kasha notes that, after a lease, the lessor has three kinds of legal interests in the land andminerals: the surface interest, the right to receive rents and royalties under the existing lease and a reversionary interest in the minerals inplace, contingent upon the termination of the existing lease. [126] Justice O’Leary noted that a court should follow a “two-step approach” to a determination of the nature of an interest assignedsubsequent to a lease: Kasha at para 28.

The first is to characterize the interest retained by the lessor following the lease over and abovethe fee simple interest in the reversion. In Kasha, that interest only consisted of the right to receive royalties, as there was no surfaceinterest. In this case, Mr. Stewart retained both the surface interest and the right to receive rents and royalties under the Scurry Leases.The second step is thus to examine the transfer to Jerome Development to determine what it conveyed. [127] The Plaintiffs submit that when Jerome Development acquired its interests in 1972, it also acquired Mr.

Stewart’s lessor interestsunder the two Scurry Leases. The Plaintiffs refer to the (partially) printed words of the land titles form that was used by Mr. G. on Mr.Stewart’s behalf when the transfer to Jerome Development took place, to the effect that it was a transfer of “all of my estate and interestin the said parcel of land”. The Defendants submit that there is no evidence that Mr. Stewart intended to sell his rights to receive theleasehold rents and royalties by this transfer.

Evidence that he did not advise the lessors of a change of payee to Jerome Development in1972 nor comply with the terms of the leases that require evidence of the assignment to be provided to the lessors is indicative of thecontrary, as is the fact that he appears to have formally assigned his interests in the leases to Snell Farms in 1977 by way of assignmentsthat include the representation that he had the power and authority to assign the leases. It is also noteworthy that notification of theselater assignments was given to the lessees, and that Jerome Development, through its operating mind Mr.

Stewart, never sought royaltiesfrom the lessors after the transfers of 1972. [128] However, it is not necessary or appropriate that I decide with finality whether Mr. Stewart was incapable of assigning hisleasehold interests to Snell Farms because of an earlier transfer to Jerome Development without the benefit of submissions by partieswith an interest in that issue, Snell Farms and Wheatland. This argument cannot succeed in the absence of such submissions.

4. The Defendants have adduced inadequate evidence with respect to Wheatland [ 129 ] The Plaintiffs submit that there is no evidence of any assignment of any interest in the Scurry NE/4 lease to Wheatland. [ 130 ] There is documentary evidence indicating that counsel for Wheatland wrote to the then-lessees under the Scurry Leases on January 20, 1983 to advise that future payments and correspondence should be sent to Wheatland at a specific address, and changed that address on July 25, 1983. There is also evidence of a letter from Mr.

G. on June 17, 1982 confirming a change of name respecting the royalty interests from Snell Farms to Wheatland. There is evidence that the lessees subsequently paid royalties to Wheatland without complaint from Snell Farms, Jerome Development or Mr. Stewart. This is sufficient evidence to raise an issue with respect to whether a party with an interest in the issue has been joined in this proceeding. 5.

The principle of indefeasibility of title settles the issue [ 131 ] The Plaintiffs submit that, with the registration of land transfers to Jerome Development, Jerome Development’s title became indefeasible pursuant to sections 60 and 203 of the Land Titles Act , RSA 2000, c L-4.

These sections provide, in part: 60(1) The owner of land in whose name a certificate of title has been granted shall, except in case of fraud in which the owner has participated or colluded, hold it, subject (in addition to the incidents implied by virtue of this Act) to the encumbrances, liens, estates and interests that are endorsed on the certificate of title, absolutely free from all other encumbrances, liens, estates or interests whatsoever except the estate or interest of an owner claiming the same land under a prior certificate of title granted under this Act or granted under any law heretofore in force and relating to title to real property. ... 203(2) A person contracting or dealing with or taking or proposing to take a transfer, mortgage, encumbrance, lease or other interest from an owner is not, except in the case of fraud by that person, (

a) bound or concerned, for the purpose of obtaining priority over a trust or other interest that is not registered by instrument or caveat, to inquire into or ascertain the circumstances in or the consideration for which the owner or any previous owner of the interest acquired the interest or to see to the application of the purchase money or any part of the money, or (

b) affected by any notice, direct, implied or constructive, of any trust or other interest in the land that is not registered by instrument or caveat, any rule of law or equity to the contrary notwithstanding. ... [ 132 ] The Plaintiffs rely on the following comment in Darnley v Tennant , 2006 ABQB 575 , 408 AR 261 at para 21 : It is a fundamental premise of the land titles system that the owner under a title issued by the Registrar takes the land free of any unregistered interests, except in the case of fraud...

The object of the Act was to contain within its four corners a complete system which any intelligent man could understand, and which could be carried into effect in practice without the intervention of persons skilled in law.

The cardinal principle of the statute is that the register is everything, and that, except in cases of actual fraud on the part of the person dealing with the registered proprietor, such person, upon registration of the title under which he takes from the registered proprietor, has an indefeasible title against all the world. [emphasis added] [ 133 ] It is arguable that the indefeasibility of title referred to in this comment refers merely to the interest that has been transferred. In Darnley , the interest was clearly a surface interest in land, both with respect to what was registered and what was claimed.

In this case, the extent of the interest Mr. Stewart intended to transfer to Jerome Development in 1972 is still an issue, one that should not be finally determined without giving Snell Farms and Wheatland standing to participate in the litigation. [ 134 ] The Darnley decision is also relevant with respect to both the 1972 transfer and the recent transfers of

Section 25 interests from

the Stewart heirs to Jerome Development. [135] In Darnley, Ms. Darnley and her husband had been the registered owners of a piece of land. On November 15, 2002, they agreedto sell a portion of this land to Mr. Tennant in the future if they did not require it. The letter of intent stipulated that if the Darnleys soldthe land, the letter of intent would be presented and agreed to by the new buyer. However, on November 29, 2002, prior to the letter ofintent being registered against title, the land was transferred into Ms. Darnley’s name only. [136] The Court found that Ms.

Darnley was a bona fide purchaser for value and not a volunteer, as the transfer to her was part of adivorce settlement. However, the Court found that there was “something extra” that amounted to fraud under the Land Titles Act and thatthe situation thus fell within the exception to indefeasibility under

section 60 of the Land Titles Act. First, Ms. Darnley was one of thecovenators who created the interest in the land, and second, she granted Mr. Tennant an interest in the land when she was a joint ownerof the land. The Court held that the interest was subject to the rights of Mr. Tennant, as Ms. Darnley had merely changed the quantum ofher interest, and this was “something more” than mere knowledge of the interest. [137] With respect to the 1972 transfer, Mr. Stewart, like Ms.

Darnley, created the initial interest in land through the leases, andarguably, merely changed the nature of his interest from a personal interest to a wholly-owned family company, of which he was theoperating mind. [138] With respect to the recent transfer, Jerome Development had been the holder of 50% of the NE/4 of

Section 25 since 1974, andthe eleventh-hour transfer of the other 50% interest from Mr. Stewart’s heirs to Jerome Development effective January 5, 2012 simplychanged the quantum of its interests (and, in effect, merely changed the manner in which Ms.

Calder and Cody Stewart owned theirinterests). [139] The decision of the Alberta Court of Appeal in Lanstrom Developments Ltd v Passburg Petroleums Ltd (1984), 1984 ABCA 78, 53 AR 96, 30 Alta LR (2d) 379 (CA), is also relevant to the issue of indefeasibility of title. [140] Although the facts of that case are distinguishable and the ultimate issue was different from the issue here, the Court of Appealcommented on whether a registered owner had as much right to rely upon title as a third party about to deal with the registered owner. [141] The Court of Appeal noted that it was clear that unregistered interests may exist independent of the register under the Torrenssystem: para 12.

Justice Moir referred to a Supreme Court of Canada decision where a party claiming under her father’s will was in nobetter position than her father in terms of the recognition of an unregistered interest, thus making it clear that an unregistered interestmay exist independently of the register between the immediate parties to the transaction or volunteers claiming through the immediateparties: Re Church, (SCC), [1923] SCR 642, [1923] 3 WWR 405. [142] As the individual members of the Jerome Group are volunteers, this case appears to answer the question of w

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