Eon Energy Ltd v Ferrybank Resources Ltd, 2016 ABQB 585

Court of Queen’s Bench of Alberta Citation: Eon Energy Ltd v Ferrybank Resources Ltd, 2016 ABQB 585 Date: 20161019 Docket: 1001 18533 Registry: Calgary Between: Eon Energy Ltd. Plaintiff - and - Ferrybank Resources Ltd. Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice K. D. Nixon Table of Contents Introduction . 4 Background . 4 Issues . 10 Analysis . 11 1. What interest does Ferrybank have in the disputed wells? . 11 Overview .. 11 Conclusion . 12 Detailed Analysis . 13 Ownership . 13 Oral Amendment 15 Estoppel, Waiver and Limitation Period . 23 2. Is Ferrybank entitled to operator fees? . 26 Overview .. 26

Conclusion . 26 Detailed Analysis . 26 Provision for fees in the JOA .. 26 Oral Amendment 28 Waiver, Estoppel and Limitation Period . 29 3. Does either party owe the other for revenues or expenses? . 30 4. Is either party entitled to an audit? . 31 5. Is Ferrybank entitled to a portion of the Gross Overriding Royalty negotiated by Eon on the sale of Eon’s interest in the wells to Enterra? . 32 6. Is Ferrybank entitled to damages for loss of production from the 6-25 well? . 33 7. Should Eon be removed as “agent” or Ferrybank be removed as “operator”? . 35 Overview .. 35 Removal of Eon as “agent” . 38 1.

GORR with Enterra . 39 2. Breach of Court Orders . 39 3. Breach of duty of good faith . 39 Removal of Ferrybank as Operator 40 1. Breach of fiduciary obligations . 40 2. Clause 202 of the Operating Procedure . 42

a) Insolvency . 43

b) Assignment of its general powers and responsibilities of supervision and management of operator 44

c) Failure to rectify default in its duty as operator. 44 3. Challenge of Operator Notice . 46

a) High risk enforcement action against Ferrybank by the regulator 47

b) Improper work-over in the 4-07 well 47

c) Shut-down of 6-25 well 48

d) Failure to agree to repair of the 6-25 pump . 48

e) Passing itself off as lessee of the 6-07 well 48

f) Failure to pay royalties . 49

g) Safety issue with 2-01 well 49

h) Failure to comply with regulatory requirements . 50

i) Instructing third party contractors not to release information to Ferrybank . 50 8. Is Eon entitled to take its share of production in-kind? . 50 Read-ins From Questioning . 51 Conclusion . 52

Introduction [ 1 ] Ferrybank Resources Ltd. (“Ferrybank”) and Eon Energy Ltd. (“Eon”) are the joint owners of five wells in Alberta. Four are conventional stripper wells producing a modest number of barrels of crude oil a day. Two of the oil wells also produce a small amount of solution gas. The fifth well is a shut in gas well. [ 2 ] Mr. Bodard and his wife are the principals of Ferrybank. Mr. Laviolette is a director of Eon, a company owned by his wife. The parties acquired their joint interests in the wells from Crossroads Energy Ltd. (“Crossroads”). Laviolette was a principal of Crossroads.

Bodard and Laviolette were the only individuals associated with Ferrybank and Eon who were called as witnesses. Bodard spoke for Ferrybank and Laviolette spoke for Eon. [ 3 ] In October 2000, Ferrybank acquired a 100% interest in six wells from Crossroads pursuant to a Purchase and Sale Agreement dated October 1, 2000 (the “October 2000 Agreement”).

That agreement provided that, in the event Ferrybank could not come up with the purchase price, its 100% interest would revert to a 10% interest with the remaining 90% interest owned by Eon and the wells would be governed by a joint operating agreement. [ 4 ] When Ferrybank was unable to pay the purchase price, the default clause was invoked and on February 1, 2001 the parties entered into a Confirmation of Interests and Joint Operating Agreement (the “JOA”) resulting in Ferrybank’s interest reverting to 10%.

The parties acquired a joint interest in four additional wells in October 2001 in the same percentages, 10% for Ferrybank and 90% for Eon. There is no executed written agreement with respect to these four additional wells (the “October 2001 Agreement”). [ 5 ] Five of the ten wells have since been sold. Of the five remaining, three are from the initial group of six wells and two are from the second group of four wells. [ 6 ] The parties disagree on a number of points.

First, about their respective ownership interests in the oil; second, whether either owes the other any revenues from sale of the oil and the gas; third, whether Eon owes Ferrybank for expenses it incurred on behalf of Eon; fourth, which entity is entitled to operate the wells; fifth, which entity is responsible for the preparation of the joint account, and, sixth, whether they are permitted to take their share of production in-kind.

Background [ 7 ] Around the time the parties entered into their joint venture with the initial six wells, the predecessor of the Alberta Energy Regulator (the “Regulator”) was in the process of instituting changes to the Licensee Liability Rating Program (the “LLR Program”). The purpose of the LLR Program is to minimize the risk of unfunded well abandonment and reclamation liabilities and to support the Orphan Well Fund.

Herein, Regulator means the Alberta Energy Regulator or its predecessors in existence at the relevant time. [ 8 ] Under the LLR Program, each well is assessed a monthly Licensee Liability Ratio (“LLR”). The LLR is the ratio of the deemed asset value to the deemed liability for each well. If the aggregate LLR for all wells held by a licensee is a ratio less than 1, the licensee is required to pay a deposit to the Regulator. [ 9 ] The LLR Program posed a particular problem for Ferrybank because of the poor quality of its wells.

As a result, Ferrybank anticipated it would be required to pay a deposit to the Regulator. To avoid this, Ferrybank wanted to acquire some good quality wells to offset the poor quality of its own wells. [ 10 ] Around the same time, Laviolette wanted to reduce the number of wells owned by Crossroads because he was moving to British Columbia to start another business venture. This posed a problem for Crossroads because Laviolette’s move disqualified it from being operator of the wells. Laviolette also wanted to remove the wells from Crossroads to preserve their value in the face of the LLR Program.

Crossroads was also at risk of paying an LLR deposit, but Laviolette was not as concerned about this risk as Bodard was for Ferrybank’s potential liability for a deposit. [ 11 ] To address the two regulatory issues facing the parties, they entered into the unusual and unique (or, as one of the expert witnesses described it, “strange”) arrangement set out in the JOA. [ 12 ] In a typical arrangement among joint well owners, one party is appointed the operator to manage the wells on behalf of the co-owners (joint-operators). The operator is usually the co-owner with the largest interest.

The management of the wells is usually under the Canadian Association of Petroleum Landmen (“CAPL”) Operating Procedure. The operator manages the well operations in accordance with the operating procedure, receives the revenues, and pays the costs and expenses, including royalties.

The operator then distributes the net revenues amongst the co-owners. [ 13 ] In contrast, Ferrybank, the minority interest holder with a 10% working interest in the petroleum substances, became the well- licensee and was appointed “Operator” while Eon, the 90% working interest holder, was appointed Ferrybank’s “agent” with full discretion to manage the wells in any manner it sought fit.

All revenue was to be directed by Ferrybank to Eon by way of directions to pay. [ 14 ] The JOA goes on to say that the directions to pay shall remain in effect “subject only to the performance of Eon as agent, specifically provided that Eon pays in a timely manor [sic] all expenses incurred in the operations of the Assets and is wholly responsible for all and every aspect of the operations of the Assets in full accord with good oilfield practice and the Regulations.” As named Operator, Ferrybank was to be responsible for regulatory filings as well as maintaining leases, licenses and marketing contracts.

It was also the party to which the Regulator looked for compliance with the regulations. [ 15 ] Although Ferrybank was registered as the Operator with the Regulator and held the marketing contracts with third parties,

Eon was managing the wells and was the de facto operator. [ 16 ] The parties’ unique arrangement was designed to allow Ferrybank to use the LLRs of the joint wells to offset the LLRs of its bad wells, thereby avoiding a deposit, and to allow Laviolette, through Eon, to continue to control the wells as majority owner despite Eon’s ineligibility to do so because of Laviolette’s move to British Columbia.

As Laviolette described it, the effect of the arrangement was to allow Ferrybank to use “his” wells to uphold its LLR. [ 17 ] Prior to the parties entering into their arrangement with respect to the initial six wells, and while the wells were owned by Crossroads, Ferrybank acquired a 10% interest in the solution gas in the 4-07 well (one of the initial six wells), in conjunction with arranging to capture the solution gas which was no longer permitted to be flared.

In return for handling the administration of capturing the gas, the parties agreed Ferrybank would handle and receive gas sales revenues and hold 90% of those revenues in trust for Crossroads. Ferrybank’s 10% interest in the solution gas in the 4-07 well was acknowledged in the October 1, 2000 Agreement, when the initial six wells were jointly-acquired by Eon and Ferrybank from Crossroads. [ 18 ] Both the JOA and the October 2001 Agreement gave Ferrybank a 10% working interest in the petroleum substances in the wells.

This interest entitled it to 10% of both the oil and the gas revenues and obligated it to pay 10% of all the costs and expenses. However, the conduct of the parties did not track the written agreements. With the exception of the 6-25 well (one of the wells acquired in the second set of wells in the October 2001 Agreement), for the first ten years, Ferrybank neither received, nor requested, any oil revenues. Eon incurred 100% of all oil-related costs and expenses, including all oil-related expenses that Ferrybank incurred on Eon’s behalf.

Ferrybank received only its 10% of the solution gas revenues and contributed only its 10% share of solution-gas-specific expenses such as gas processing, transportation and marketing in respect of the two wells that produced solution gas. [ 19 ] Several years into their venture, the parties agreed that the solution gas revenues from the 6-07 well would also be paid to Ferrybank. Further, Ferrybank would be responsible for paying the gas-specific expenses for this well.

As with the solution gas from the 4-07 well, Ferrybank became responsible for distributing to Eon its 90% of the solution gas revenues (net of 90% of the expenses) from the 6-07 well. [ 20 ] The parties agree that in 2004 they amended their respective interests in the 6-25 well. This well had not been producing when the parties acquired their joint interest in the October 2001 Agreement because the pump was broken. In 2004, the parties agreed each would have a 50% working interest.

They further agreed that Ferrybank would collect the revenues and, at its own risk and expense, repair the pump to bring the well into production. [ 21 ] The first disagreement about the terms of their arrangement arose in 2008 when an opportunity to sell one of the wells arose. That year, the parties sold the 6-14 well, one of the oil-producing wells from the initial six wells. The parties referred to this as the “Founder’s Ranch Deal”. [ 22 ] This sale was unusual because the purchasers wished to use the land for other purposes.

As a result, the deal required abandonment of the well and reclamation of the land at substantial cost. Ferrybank claimed it was entitled to 10% of the gross sale proceeds from the Founder’s Ranch Deal but denied that it was obliged to pay any of the abandonment and reclamation costs.

Eon disputed Ferrybank’s entitlement to any of the sale proceeds and accused Ferrybank of extortion because Ferrybank refused to sign the well-license transfer unless it received 10% of the gross sale proceeds. [ 23 ] Ultimately, Eon paid Ferrybank 10% of the gross sales proceeds with the result that Ferrybank received more than 10% of the value of the well. Laviolette testified that Eon paid Ferrybank, not because Ferrybank had an interest in the well, but as “blood money” to secure the well-license transfer.

Oddly, he also referred to the “blood money” as including “something” for Ferrybank’s entitlement to 10% of the solution gas, but later stated there had never been any solution gas in this well. [ 24 ] Two years later, in 2010, the parties again disagreed whether Ferrybank was entitled to any of the sales proceeds when additional wells were sold to Enterra Energy Corp (the “Enterra Sale”). Ferrybank again asserted it was entitled to 10% of the gross sale proceeds while Eon again denied Ferrybank was entitled to any of the proceeds.

At the time of the Enterra sale, Eon sought clarification from its legal counsel about the ownership of the wells. It received a legal opinion that it could represent only that it had a 90% interest in the wells. [ 25 ] Eon and Ferrybank initially attempted a joint sale of their interests to Enterra. At that time, Enterra offered the parties a 10% Gross Overriding Royalty (“GORR”). Unable to agree on a joint sale to Enterra, Eon and Ferrybank each negotiated its own respective sale agreement with Enterra: Eon for a 90% interest and Ferrybank for a 10% interest.

The agreement between Eon and Enterra included 90% of the GORR offered by Enterra. The agreement between Ferrybank and Enterra did not include any GORR. [ 26 ] Ferrybank alleges Eon breached a fiduciary duty to it in securing the GORR solely for itself. Ferrybank claims 10% of the GORR negotiated by Eon. In this action, Eon also seeks a declaration that Ferrybank is entitled to 10% of the net, rather than the gross, purchase price in the event of a sale of any asset in which it owns a 10% interest. [ 27 ] In 2010, two issues lead to the current litigation.

First, Ferrybank’s chronic delinquency in reporting and accounting to Eon with respect to the production and expenses for the solution gas in the 4-07 and the 6-07 wells and with respect to the production and expenses in the 6-25 well. Second, the parties had a major falling-out concerning the 6-25 well when the pump failed for the second time. [ 28 ] With the 6-25 well out of production, Ferrybank’s LLR was adversely affected. This exposed it to an LLR liability resulting in an obligation to pay a $300,000 deposit to the Regulator.

This was very concerning to Bodard, who testified that Ferrybank would be bankrupt if it had to pay the deposit. Ferrybank had been having financial issues for years. Indeed, avoidance of an LLR deposit was the motivation for Ferrybank to enter into the arrangement with Eon in the first place. From the time of the October 2000 Agreement, Ferrybank had been focused on the status of the LLR ratings. [ 29 ] Focusing on its LLR, Ferrybank insisted the pump be repaired in order to re-establish production. Ferrybank anticipated that

the resulting production would remove the requirement to pay a deposit. Focusing on the economics of the well, Eon wanted to increase production by moving to a different production zone. Eon was of the view that the current producing zone was uneconomic because production from the well had taken six years to cover the 2004 cost to repair the pump. [ 30 ] Unable to agree how to address the seized pump, each party served the other with a Notice of Independent Operations, proposing its preferred solution.

The parties were enjoined by court order from proceeding with any operations until several years later when Ferrybank was permitted by court order to repair the pump to avoid the LLR deposit. [ 31 ] Ferrybank seeks damages from Eon for lost oil production from the 6-25 well for the three years it was out of production. [ 32 ] The parties’ dispute about the 6-25 well illuminated the reality for Ferrybank of this unusual arrangement. Their deal served Ferrybank’s purposes only so long as the LLRs of the jointly-held wells off-set the negative LLRs of Ferrybank’s own “bad” wells.

With the 6-25 out of production, the arrangement no longer provided the off-set Ferrybank needed to avoid a deposit. [ 33 ] Bodard described Ferrybank’s situation as being “at the mercy” of Eon. In particular, Ferrybank asserted that, because Eon was manager of the wells through its status as agent, Eon’s decisions affected the production from the wells. These decisions affect Ferrybank’s LLR and its potential liability to the Regulator. [ 34 ] Ferrybank agreed in the JOA that Eon would manage the wells.

It was content to have Eon do so, as long as the benefit of the LLR of the jointly-held wells off-set the negative LLR of its “bad” wells.

Once the joint wells were not upholding Ferrybank’s LLR, Ferrybank sought to remove Eon from the operation of the wells so it could manage them in a manner that would avoid an LLR deposit, regardless of the economic implications for Eon. [ 35 ] At the heart of the dispute between the parties is Ferrybank’s desire to take over management of the wells from Eon as Ferrybank believes it can manage the operations in a manner that will avoid an LLR deposit. [ 36 ] In support of its application to remove Eon as agent, Ferrybank asserts two contradictory positions. 1.

By virtue of Eon’s appointment as Ferrybank’s agent, Eon is the de facto operator. As such, Eon, not Ferrybank, is responsible for, and failed to comply with, the duties of an operator under the Operating Procedure, including the obligation to maintain the joint account. 2. As named Operator, Ferrybank, not Eon, is entitled to operate the wells despite agreeing that Eon would do so. [ 37 ] Eon submits that, in order to protect its LLR, Ferrybank is seeking to be relieved from the bargain it made to allow Eon to manage the wells.

It submits that Ferrybank seeks to manage the wells regardless what the economic implications are for Eon. [ 38 ] Both parties now seek to enforce the JOA and the 1981 CAPL Operating Procedure, (the “Operating Procedure”) appended to the JOA, neither of which they followed for 10 years. This lead to the parties asserting incongruous, inconsistent and, at times, incomprehensible positions. Each attempted to put the proverbial square peg in a round hole.

Despite being entitled to manage the wells, Eon denied it is the de facto operator and denied it has any of the obligations of an operator yet insisted it is entitled to control the wells.

Despite asserting that Eon is the de facto operator, Ferrybank sought to enforce entitlements and remedies of an operator under the Operating Procedure while at the same time denying it had obligations as an operator under the same Operating Procedure. [ 39 ] In addition, despite making no claim to fees or to oil revenues and no contribution toward costs or expenses other than the solution gas-specific expenses for the 10 years since the wells were jointly acquired, Ferrybank for the first time asserted in the litigation that it is entitled to both oil revenues and operator fees provided for in the JOA. [ 40 ] Neither party kept the formal joint account with respect to any of the revenues, costs and expenses for the jointly-owned 10 wells.

Neither asked the other to do so. Neither party complained that the other had failed to do so until the litigation.

Instead, while delinquent in doing so, Ferrybank provided Eon with reports outlining the solution gas revenues and expenses, the oil revenues it received and expenses incurred with respect to the 6-25, and the oil-related expenses it incurred on behalf of Eon for other wells (for which Ferrybank sought 100% reimbursement). [ 41 ] The parties now accuse each other of having breached fiduciary duties to the other with respect to maintaining the joint account and with respect to accounting for revenues.

Eon asserts that Ferrybank was responsible for maintaining the joint account, despite Eon never having asked Ferrybank to do so and never having provided the necessary information with respect to oil production, costs and expenses to allow Ferrybank to do so. Eon makes that assertion because Ferrybank was the named Operator. In opposition, Ferrybank asserts it was Eon’s obligation to maintain the joint account as Ferrybank’s agent and as the party conducting the actual operations. Ferrybank gave Eon all the accounting information it had.

It could not prepare any further accounts because the information to do so was in the possession as Eon. [ 42 ] The parties disagree whether Ferrybank accurately accounted to Eon for its share of solution gas revenues from the 4-07 and 6-07 wells and oil revenues from the 6-25 well. They also disagree whether Eon reimbursed Ferrybank for all the oil-related expenses that Ferrybank incurred on behalf of Eon. [ 43 ] Over the years, Ferrybank’s statements and accounting with respect to the gas revenues for the 4-07 and 6-07 wells and the oil revenues for the 6-25 well became less frequent.

Eon accommodated Ferrybank by agreeing that a report every month was not required. However, Ferrybank became increasingly delinquent, up to 17 months late. [ 44 ] The late reporting posed difficulties for Eon with respect to its tax filings. The continued delinquency in Ferrybank’s reporting and accounting to Eon for its share of revenues sparked the litigation in 2010. In response, Ferrybank, for the first time, asserted a claim to oil revenues and operator fees it had not previously claimed.

[ 45 ] The conduct of the parties suggests they never intended that Ferrybank be entitled to oil revenues despite the JOA, which gives it a 10% working interest in all petroleum substances in the wells. Indeed, Laviolette testified at questioning that Ferrybank never had an interest in the oil from the beginning.

That position was consistent with the fact Ferrybank received no oil revenues until the parties agreed in 2004 that Ferrybank, at its own cost, could repair the pump in the 6-25 well to bring it into production in exchange for a 50% working interest in that well. [ 46 ] In the litigation, however, Eon does not disagree that Ferrybank initially acquired a 10% working interest but argues that Ferrybank is not entitled to any oil revenues (except from the 6-25 well) because they entered into an oral amendment after the wells were jointly-acquired pursuant to which Ferrybank relinquished its working interest in exchange for a release of its obligation to pay its 10% of oil-related costs and expenses.

Eon asserts that, as a result of the amendment, Ferrybank’s entitlement with respect to revenues in the disputed wells is limited to 10% of the net solution gas revenues in the 4-07 and 6-07 wells, an interest Eon describes as a “net operating interest”. [ 47 ] Despite vigorously opposing Ferrybank’s entitlement to any of the sale proceeds from the Founder’s Ranch Deal or the Enterra Sale at the time of those sales occurred, Eon acknowledged at trial that Ferrybank had a 10% equity interest in all 10 of the wells.

Eon seeks a declaration, however, that Ferrybank’s equity interest entitles it to 10% of the net proceeds in the event a well is sold, not to 10% of the gross sale proceeds claimed by Ferrybank. [ 48 ] Since the litigation commenced, and despite asserting Eon is the de facto operator, Ferrybank has inserted itself into the day- to-day management of the wells, a role it had agreed would be performed by Eon.

For example, Ferrybank interfered with Eon’s ability to access the website of the oil marketer, denied Eon access to the well sites, and directed third-party providers retained by Eon to perform well operations to send invoices to Ferrybank instead of to Eon. This created uncertainty as to whether third-party service providers were paid twice, or not paid at all. [ 49 ] In the course of the litigation, the parties entered into a consent order in 2013 whereby Ferrybank would receive and distribute the well revenues.

Not only did Ferrybank fail to comply with the court order to account to Eon for oil revenues within the time stipulated in the order, Ferrybank failed to account to Eon for its share of the gas liquid revenues. Further, despite receiving all of the revenues plus the GST, Ferrybank neither paid Eon its portion of the GST on the gross revenues nor provided records to confirm it has remitted the GST to the Canada Revenue Agency.

This exposed Eon to liability for the GST on its 90% of the revenues, and precluded Eon from claiming input tax credits. [ 50 ] In addition, Ferrybank withheld from Eon’s share of revenues amounts to pay royalties and to create a contingency fund against the possibility that Ferrybank may be required to pay an LLR deposit to the Regulator.

Since the order in 2013, there has also been confusion whether royalties have been paid twice or not paid at all. [ 51 ] In an effort to avoid the uncertainty about payment of royalties and GST, Eon served notice on Ferrybank that it wished to take its share of production in-kind. Ferrybank responded that Eon has no right to take-in-kind. [ 52 ] Not only is the arrangement between the parties unusual, the parties’ positions on the issues were a moving target.

Neither Laviolette nor Bodard was able to articulate at trial a clear or consistent story about their venture. [ 53 ] Each asserted contradictory positions in their multiple pleadings and in their trial arguments. Each sought to rely on the JOA and the Operating Procedure, which had not been followed in many respects by either party. Each asserted oral amendments to the JOA despite the Entire Agreement Clause in the JOA which precludes such agreements.

Ferrybank relied on certain oral amendments while at the same time denied other oral amendments were effective because of the Entire Agreement Clause in the JOA. [ 54 ] The heart of the dispute is Ferrybank’s desire to avoid the loss of support to its LLR, which was provided by the jointly- owned wells. In an effort to avoid the consequences of the deal it made, Ferrybank seeks to remove Eon from the well operations so it can operate the wells in its own interest to avoid an LLR deposit.

In response, Eon, despite already being the de facto operator, seeks to remove Ferrybank as named Operator in order to preclude Ferrybank from operation of the wells. Issues [ 55 ] The dispute between the parties gives rise to the following questions: 1. What interest does Ferrybank have in the disputed wells? 2. Is Ferrybank entitled to operator fees? 3. Does either party owe the other for revenues or expenses? 4. Is either party entitled to an audit? 5. Is Ferrybank entitled to a portion of the Gross Overriding Royalty that Eon negotiated on the sale of its interest in the wells to Enterra? 6.

Is Ferrybank entitled to damages for the loss of production from the 6-25 well? 7. Should Eon be removed as “agent” or Ferrybank be removed as “Operator”? 8. Is Eon entitled to take its share of production in-kind?

Analysis 1. What interest does Ferrybank have in the disputed wells? Overview [ 56 ] The parties acquired a joint interest in ten wells: six wells pursuant to the JOA, and four wells pursuant to the October 2001 Agreement. The parties signed written agreements for the initial six wells, but not for the additional four wells. [ 57 ] Five of the ten wells have been sold. Of the remaining five, three (the 2-01, 4-07 and 6-07 wells) are from the initial group of six wells, and two (the 6-25 and 12-17 wells) are from the second group of four. [ 58 ] The 12-17 is a shut-in deep gas well. The other wells produce oil.

In addition, two wells (the 4-07 and 6-07 wells) produce a small amount of solution gas and its after-processing sales components (sales gas and natural gas liquids) as a function of the oil production. [ 59 ] The parties agree that Ferrybank is entitled to 10% of the net revenues from the solution gas from the 4-07 and 6-07 wells. They also agree Ferrybank has a 50% working interest in the 6-25 well.

The parties dispute whether Ferrybank has a working interest in the three remaining oil wells and whether Ferrybank had a working interest in the wells that were sold. [ 60 ] Ferrybank asserts it has a 39.7% working interest in the oil in the 2-01 well and a 10% working interest in the 4-07 and 6-07 wells. It asserts that, as a working interest owner, it is entitled to both oil and gas revenues. Eon denies Ferrybank has any entitlement to oil revenues in any of these wells.

It asserts Ferrybank’s interest is a “net operating interest” or a “net profit interest”, entitling it only to 10% of the net solution gas revenues until the sale of a well. Upon sale, Ferrybank would receive its 10% equity interest in the well entitling it to 10% of the net proceeds of sale. [ 61 ] Although Ferrybank received no oil revenues from the beginning, Eon does not dispute that Ferrybank initially acquired a 10% working interest in all petroleum substances in the wells.

It asserts, however, that by oral agreement the parties amended the JOA and the October 1, 2001 Agreement whereby Ferrybank relinquished its working interest in exchange for a release of its liability to pay 10% of costs and expenses related to oil. In the alternative, Eon asserts Ferrybank waived its entitlement to oil revenues, or is estopped, or barred by the limitation period, from claiming oil revenues.

Conclusion [ 62 ] Ferrybank acquired a 10% working interest in all ten wells entitling it to 10% of the proceeds from the sale of all petroleum substances produced, both oil and gas, and obligating it to pay 10% of the costs and expenses. As a working interest owner, Ferrybank also acquired an equity interest entitling it to 10% of the net proceeds on sale. [ 63 ] Ferrybank acquired its 10% working interest in the initial group of six wells pursuant to the JOA. The JOA is clear and unequivocal.

It provides that “... all costs and expenses incurred in the exploration, development or operating of the Joint Lands and all petroleum substances produced, or revenues received, as a result of operations on the Joint Lands and all wells drilled thereon ... shall be shared, allocated and owned ...” 90% by Eon and 10% by Ferrybank. [ 64 ] Ferrybank acquired its 10% working interest in the second group of four wells by an oral agreement. The terms of this agreement are reflected in a letter dated October 1, 2001, the October 2001 Agreement. Pursuant to this agreement, Ferrybank also acquired a 10% working interest.

This entitled it to 10% of all petroleum substances produced, both oil and gas, from these four wells, along with responsibility for its 10% share of costs and expenses. As with the initial six wells, Ferrybank was entitled to 10% of the net proceeds on sale of the well. [ 65 ] The parties agree that they subsequently amended their agreement with respect to the 6-25 well (one of the wells in the second group of four) to 50% working interests in 2004.

With this amendment, each party held a 50% equity interest in the 6-25 well, entitling each to 50% of the net proceeds on sale. [ 66 ] I find that Ferrybank did not relinquish its 10% working interest by oral agreement. I find, however, that the parties did have an oral agreement amending the JOA and the October 2001 Agreement.

They agreed that Ferrybank’s entitlement as a working interest owner to 10% of the oil revenues and its obligation to pay 10% of the oil-related costs and expenses would be suspended unless and until Ferrybank contributed to, or agreed it would contribute to, its 10% share of oil-related costs and expenses in accordance with its obligation as a working interest owner.

Although oral amendments are not enforceable agreements with respect to the wells from the initial group of six because the Entire Agreement Clause in the JOA precludes them, Ferrybank is estopped from claiming revenues until it served its Counterclaim on Eon in which it acknowledged its obligation to pay 10% of the oil-related costs and expenses. [ 67 ] Ferrybank, therefore, is entitled to 10% of the oil revenues and, as a working interest owner, required to pay 10% of oil-related costs and expenses from the time it served its Counterclaim on Eon. [ 68 ] Even if there were no agreement to suspend its entitlement to oil revenues, Ferrybank’s claim for oil revenues owing more than two years prior to the commencement of its Counterclaim would nevertheless be barred by the passage of the limitation period, pursuant to the Limitations Act, RSA 2000 c L-12. [ 69 ] The oral amendment has no application to the remaining two wells from the second group of wells acquired in the October 2001 Agreement.

It does not apply to the 6-25 well because the parties agree they each acquired a 50% working interest in that well when it was brought into production in 2004. Nor does it apply to the 12-17 well because it is a gas well. Further, the amendment does

not apply to the other two wells from the second group of four wells acquired pursuant to the October 2001 Agreement because they were sold before Ferrybank paid, or acknowledged its obligation to pay, its portion of oil-related costs and expenses. Detailed Analysis Ownership [ 70 ] Ferrybank’s claim to a 39.7% working interest in the oil in the 2-01 well can be dealt with summarily. [ 71 ] This well is among the initial group of six wells acquired pursuant to the JOA. The JOA gives Ferrybank a 10% working interest in all six wells.

The JOA expressly provides it may not be amended, except by written instrument signed by both parties. Clause 14 of the JOA provides as follows: This Agreement constitutes the entire agreement among the Parties and supersedes and replaces all prior agreements. There are not and shall not be any verbal statements, representations, warranties, undertakings or agreements among the Parties apart from this Agreement, and this Agreement may not be modified or amended in any respect except by written instrument signed by all the Parties hereto. [ 72 ] No such written amendment was produced.

The “Clarification Agreement with Encana and Eon”, upon which Ferrybank bases its claim to a 39.7% working interest, was not in evidence. There is no basis, therefore, to conclude Ferrybank has a 39.7% working interest in this well.

Ferrybank’s interest in this well is the same as it is in the other disputed wells, which will now be addressed. [ 73 ] The parties first entered into an agreement regarding a joint interest in a well in June 2000 when Ferrybank acquired a 10% interest in the solution gas in the 4-07 well in exchange for arranging to capture and sell the solution gas. [ 74 ] The following month, on July 1, 2000, Ferrybank offered to purchase a 100% “working interest” from Crossroads in the initial six wells.

The offer was accepted and the purchase formalized by a written agreement, namely the October 2000 Agreement. [ 75 ] The October 2000 Agreement provides for the purchase by Ferrybank of the entire interest in the six wells. The assets being purchased are defined as “the petroleum and natural gas rights, the tangibles and the miscellaneous interests.” “Miscellaneous interests” are defined as “the entire interests of the Vendors in and to all property, assets and rights.” [ 76 ] The parties contemplated that Ferrybank may not be able to raise the necessary funds to close the sale.

As a result, the October 2000 Agreement provides that, in the event of Ferrybank’s default in paying the purchase price, its interest would revert to a 10% interest in “the whole of the Assets.” Should that occur, Ferrybank would continue as well-license holder and operator under a joint operating agreement. [ 77 ] Ferrybank’s 100% interest in the six wells was confirmed by an application to the Regulator requesting transfer of the wells to Ferrybank.

The application was signed by both Eon and Ferrybank on November 21, 2000. [ 78 ] Ferrybank notified Eon in mid-January 2001 that it was unable to raise the balance of the purchase price and invoked the default provision. As contemplated in the October 2000 Agreement, the parties, now joint owners, entered into the JOA, dated February 1, 2001. [ 79 ] The JOA supersedes and replaces all prior agreements.

In Clause 6 it defines the parties’ interests as “participating interests” stating “...all costs and expenses incurred in the exploration, development and operating of the Joint Lands and all petroleum substances produced, or revenues received, as a result of operations on the Joint Lands, and all wells drilled thereon and information obtained in connection with the Joint Lands shall be shared, allocated and owned ...” 90% by Eon and 10% by Ferrybank. [ 80 ] The interest described in the JOA is a working interest.

Schlumberger Oilfield Glossary defined a working interest as follows: A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obliged to pay a corresponding percentage of the costs of leasing, drilling, producing and operating a well or unit.

After royalties are paid, the working interest also entitles its owner to share in production revenues with other working interest owners, based on the percentage of working interest owned. [1] [ 81 ] As a wo rking interest owner, Ferrybank had an ownership (i.e., equity interest) in the assets described in the JOA and in the October 1, 2001 letter.

It also became entitled to 10% of all petroleum substances in the wells and responsible to pay its corresponding 10% of cost to lease, drill, produce and operate the wells. [ 82 ] Ferrybank’s 10% working interest in the 4-07 well was confirmed in a Notice of Assignment dated February 1, 2001, signed by both Eon and Ferrybank.

Ferrybank’s 10% working interest in the 6-21 well was confirmed in a Notice of Assignment dated September 1, 2001, also signed by both Eon and Ferrybank. [ 83 ] Subsequently, Ferrybank acquired a 10% working interest in all petroleum substances in the four additional wells in the October 2001 Agreement.

Although it was never signed by Eon, the terms of the October 2001 Agreement for these four wells were set out in a letter dated October 1, 2001. [ 84 ] The October 1, 2001 letter refers to Ferrybank’s acquisition of a 10% undivided working interest in defined assets, including the four specified wells, lands, leases, facilities and equipment. [ 85 ] While Eon did not sign the October 1, 2001 letter, Laviolette agreed in cross-examination that the four wells were transferred in accordance with the letter. Ferrybank pursued Eon to sign the letter but this never occurred.

Laviolette testified that he did not sign because the deal later changed. Eon did not assert that the letter failed to reflect the deal as initially agreed.

[ 86 ] It was not necessary for the parties to amend the JOA (which precludes oral amendments) to create a binding oral agreement that their respective interests in the four additional wells would be governed by the JOA. Agreeing to apply the terms of the JOA to the additional four wells did not require an amendment to the JOA itself. [ 87 ] The License Transfer Application for the four wells was signed by Laviolette on October 1, 2001 and approved by the Regulator on December 10, 2001.

The License Transfer Application describes the interests of Eon and Ferrybank as 90% and 10% working interests, respectively. [ 88 ] Laviolette denied he either saw or completed the sections of the well transfer forms referring to Ferrybank’s 10% working interest. It is unlikely, however, that Laviolette signed transfers when they were incomplete.

Even if that were so, the transfers clearly show Bodard thought Ferrybank still had a 10% working interest at the time he signed on behalf of Ferrybank. [ 89 ] Ferrybank and Eon also signed Notices of Assignment for two of the four additional wells acquired in October 2001: the first dated September 1, 2001 for the 15-35 well and the second dated December 1, 2001 for the 6-25 well. These Notices also refer to Eon’s 90% and Ferrybank’s 10% interests. The Notices expressly state that the interest was acquired pursuant to an agreement dated October 1, 2001.

Oral Amendment [ 90 ] Having established that Ferrybank initially acquired a 10% working interest in the wells, the next question is whether it relinquished its working interest and, in particular, its entitlement to 10% of oil revenues as a result of an oral amendment. [ 91 ] Laviolette testified that Ferrybank gave up its working interest because it did not want to be subject to a cash call by Eon.

No cash calls were ever made. [ 92 ] In support of the amendment, Eon relies on the 10 years during which Ferrybank never requested any oil revenues and never contributed to, nor offered to contribute to, any of the costs or expenses in respect of the oil production. Eon also relies on two documents it asserts contain admissions by Ferrybank that it relinquished its working interest. [ 93 ] Ferrybank counters that not only did it not relinquish its working interest but it made repeated requests of Eon for its share of oil revenues.

It also relies on the parole evidence rule and the Entire Agreement Clause in the JOA. [ 94 ] Eon did not address the parole evidence rule nor the Entire Agreement Clause in its trial argument. It offered no legal basis upon which the court could find that the parties had orally amended the JOA with respect to the original six wells in face of the Entire Agreement Clause.

Instead, Eon pointed out the inconsistency of Ferrybank vigorously asserting both that the JOA cannot be amended while at the same time relying on oral amendments to it, such as its entitlement to collect the gas revenues from the 4-07 and 6-07 wells, which the JOA expressly required be paid to Eon. [ 95 ] Although the Entire Agreement Clause, precludes oral amendments to the JOA, as discussed later in these Reasons, the parties shared the belief that oral amendments were effective.

This common belief gave rise to an estoppel precluding the parties from resiling from their oral amendment. [ 96 ] As stated earlier in these Reasons, there was no oral amendment pursuant to which Ferrybank gave up its working interest.

However, there was an oral amendment with respect to oil revenues, costs and expenses which precluded Ferrybank from claiming oil revenues until it began to pay, or acknowledged its obligation to pay, its proportionate share of the costs and expenses. [ 97 ] As the Entire Agreement Clause does not apply to the second set of four wells, the parties’ oral agreement does constitute an enforceable agreement with respect to those wells. Even if it were not an enforceable agreement, estoppel would also apply to these four wells as it does to the initial six wells.

As a practical matter, however, the oral amendment is irrelevant to the two remaining wells in the second group of four wells for two reasons: first, because the 12-17 well is a gas, not an oil, well; and, second, because the parties agree they subsequently amended their agreement to give each a 50% working interest in the 6-25 well. [ 98 ] The other two wells from the second set of four were sold when Ferrybank was not contributing to any of the costs or expenses.

It cannot claim a retro-active entitlement to oil revenues for a period during which it neither contributed, nor agreed to contribute, its share of costs and expenses. [ 99 ] I turn now to a discussion of the evidence with respect to the oral amendment. [ 100 ] The evidence of both Bodard and Laviolette about the arrangement between Eon and Ferrybank was vague, contradictory and confusing. I found the evidence of both, in large part, to be an after-the-fact attempt to support each party’s position in the litigation rather than an accurate reflection of what the parties intended at the relevant time.

The parties’ understanding about Ferrybank’s entitlement to oil revenues and its obligation with respect to costs and expenses must be drawn largely from the parties’ long-standing conduct. [ 101 ] Laviolette testified that Eon and Ferrybank reached their oral amendment between October and December 2001. His evidence about the timing of the amendment is curious. It fails to explain why Ferrybank did not receive any oil revenues from the beginning of the parties’ joint venture.

Indeed, no one explained why that was so. [ 102 ] Some of the evidence suggests that it was never contemplated that Ferrybank would receive oil revenues or be obligated to pay any oil-related costs or expenses despite the JOA. Indeed, Laviolette testified that Ferrybank was not entitled to oil revenues even before the amendment.

The unhelpful evidence Laviolette gave to explain his contradictory evidence was that Eon and Ferrybank had “lots of understandings” and Ferrybank agreed it would not receive any oil revenues. [ 103 ] Laviolette also testified that the amendment arose in the context of his discussions with Bodard leading to the parties’

agreement to increase Ferrybank’s interest in the 6-25 well from a 10% to a 50% working interest. He testified that this increase in interest was the consideration for the relinquishment of Ferrybank’s interest in the oil in the other wells. The increase in Ferrybank’s interest in the 6-25 well, however, occurred in 2004.

That was well after the October 2001 to December 2001 time-frame during which the amendment was said by Laviolette to have been reached. [ 104 ] Eon’s assertion that the parties reached an oral amendment between October and December 2001 is also contradicted by Eon’s representations as late as December 2001 to the Regulator and to third parties that Ferrybank had a working interest in the 6-25 well.

Further, at questioning, Laviolette testified that Eon and Ferrybank were still negotiating about the 10% working interest as of April 2002. [ 105 ] Bodard’s evidence was no more helpful than was Laviolette’s evidence. He testified he made repeated oral requests for Ferrybank’s share of oil revenues. I do not accept his evidence. Nor do I accept his evidence that Ferrybank made two written requests for oil revenue, the first in a January 6, 2002 letter and the second in a January 10, 2003 memo.

The alleged written requests were too superficial. [ 106 ] The January 6, 2002 letter states “[t]he jv agreement [JOA] between us has been in place since early 2001, almost a whole year. Please help us out with your payments, as agreed and promised.” This is not a request for oil revenues. What Ferrybank was concerned about, and was requesting, was reimbursement by Eon for operating expenses Ferrybank had incurred on behalf of Eon. [ 107 ] It is self-evident the January 10, 2003 memo is not a request for oil revenues either. It is not a request for anything.

In the memo, Ferrybank stated that “[t]here is presently no working interest consideration nor fees for service.” This supports the opposite conclusion – that the parties had suspended Ferrybank’s entitlement to oil revenues. [ 108 ] Had Bodard made numerous requests for oil revenues during meetings with Laviolette, there is no reason to believe Ferrybank would not have followed up in writing. There are no such written requests.

Bodard’s explanation at trial for the absence of written requests was that Ferrybank had to be cautious in raising the issue of unpaid oil revenues because it was “at the mercy” of Eon, and because Laviolette was volatile and had to be “coaxed” to pay. I do not find this to be plausible. [ 109 ] Ferrybank asserted it was “at the mercy” of Eon because Eon managed the wells but Ferrybank was exposed to regulatory liability as the well-licensee. There is no basis to conclude that Eon, which had by far the largest interest in the wells, would, or did, improperly manage the wells.

Ferrybank’s exposure to liability to the Regulator arose by virtue of its appointment as the named Operator and as well-licensee. [ 110 ] Ferrybank was not “at the mercy” of Eon. It was “at the mercy” of the performance of the wells. That is the risk it took in entering into the JOA. Ferrybank was concerned the wells would cease to produce and, therefore, no longer provide an LLR value sufficient to off-set Ferrybank’s “bad” wells. That, however, was not a function of any improper management of the wells by Eon, which had every incentive to properly manage the wells for its own economic benefit.

Further, there is no merit to the suggestion by Bodard in his evidence that Eon would improperly manage the wells if Ferrybank asserted its working interest. [ 111 ] Ferrybank was not cautious about making numerous written requests of Eon to sign and return documents or to reimburse Ferrybank for expenses it had incurred on behalf of Eon.

In his evidence, Bodard offered no explanation why Ferrybank would be cautious in requesting oil revenues but not in making other requests of Eon about amounts Ferrybank asserted were owing to it. [ 112 ] Bodard’s evidence about oral requests for oil revenues is also contradicted by his own evidence that Ferrybank did not pursue oil revenues for two reasons: first, because the revenues were small, and second, because Ferrybank did not have the funds to do so until it acquired a 50% working interest in the 6-25 well.

Ferrybank, however, acquired its 50% working interest in the 6-25 well in 2004, well before it made any claim for oil revenues. [ 113 ] Bodard’s claim that he made repeated requests for oil revenues is not supported by the demand for oil revenues made by Ferrybank’s legal counsel on December 10, 2010 in support of an operator’s lien. In support of its lien, Ferrybank described Eon’s interest as a 100% “revenues and cost interest” in the properties with the exception of 90% for gas from the 6-07 and 4-07 wells and 50% for oil in the 6-25 well.

Although neither the letter from Ferrybank’s legal counsel, nor Ferrybank’s own lien calculation, explains what precisely was meant by “revenues and cost interest”, it is clear oil revenues in the disputed wells were not included in the lien calculation. [ 114 ] Although it never asserted any entitlement to oil revenues, Ferrybank continued to refer to its interest in the wells as a working interest for years after the purported amendment.

Ferrybank repeatedly reminded Eon to execute the October 1, 2001 letter (which stated that Ferrybank had a 10% working interest in the four additional wells) in memos sent in January, March, April and June, 2002 – all after Eon asserts that Ferrybank had relinquished its 10% working interest. [ 115 ] Eon points to the accounting statements Ferrybank sent to Eon, which outline oil revenues and expenses for the 6-25 well and for solution gas revenues and expenses for the 4-07 and 6-07 wells, in support of its position that Ferrybank relinquished its working interest.

In these statements, Ferrybank referred to Eon having a “100% working interest” with respect to oil and a “90% working interest” with respect to solution gas. In his evidence, Bodard disagreed that these statements reflect Eon’s interest because they were not working interest statements. While not working interest statements, they do reflect the fact the parties were conducting themselves as though Ferrybank had no entitlement to oil revenues.

They support the suspension of Ferrybank’s entitlement to oil revenues. [ 116 ] In the context of all of the evidence, however, these accounting statements, along with other documents prepared by Ferrybank after the purported amendment wherein it made references to Ferrybank still having a working interest, show that the parties agreed to suspend Ferrybank’s entitlement to oil revenues and its obligation to pay its proportionate share of oil costs and expenses but did not agree that Ferrybank’s working interest was relinquished. [ 117 ] That Ferrybank did not relinquish its working interest is also supported by its letter to Eon on October 14, 2003 in reference to restoration by Ferrybank of production from the 6-25 well (which had been shut in since the parties acquired their joint interest in

October 2001). In that letter, Ferrybank referred to its interest as a 10% working interest. [ 118 ] In April 1, 2002 and June 6, 2002 memos to Eon, Ferrybank set out its understanding of the history of the parties’ transactions but made no mention of Ferrybank giving up its 10% working interest. [ 119 ] Eon never responded in writing to the memos disagreeing with Ferrybank’s understanding about their deal. Laviolette testified that he was too busy to put his thoughts in writing.

At questioning, Laviolette testified he was concerned Bodard had a different view regarding the transactions but thought everything “must be relatively OK” because his primary interest was that Eon receive all the revenues and be able to operate “my wells.” At trial, he gave the unhelpful evidence that, although Eon did not respond in writing to Ferrybank’s memos, he “had discussions” with Bodard. [ 120 ] In 2003, Ferrybank persisted in its efforts to have Eon sign the October 1, 2001 letter agreement. This letter refers to Ferrybank’s 10% working interest in the four additional wells.

In a memo January 10, 2003, Ferrybank again set out its understanding of the transaction history. The memo referred to Ferrybank’s 10% working interest in the initial six wells and a 10% interest in the subsequent four wells. Ferrybank expressly asked Eon to send a note to explain its understanding if it disagreed with the history of the transactions so the differences could be resolved. Eon did not do so. [ 121 ] Although Eon never responded in writing to these requests, Laviolette testified he told Bodard he disagreed with him. In his evidence Bodard denied this. I do not accept Laviolette’s evidence.

Had he told Bodard he disagreed with him, it is likely Bodard, whose habit was to put his position in writing, and who expressly asked Laviolette whether he disagreed with Bodard’s understanding, would have documented this and responded in writing. [ 122 ] Eon says its position that Ferrybank had no working interest in the disputed wells was reflected in its December 18, 2004 letter to Ferrybank. In that letter, Eon expressed its concern that Ferrybank was late in accounting for the gas revenues from the 6-07 and 4-07 wells and the oil revenues from the 6-25 well.

In the letter, Eon described Ferrybank’s entitlement as a 10% net share in the gas revenues from the 6-07 and 4-07 wells as well as a 50% interest in the revenues from the 6-25 well. The letter addresses Ferrybank’s entitlement to revenues it had been collecting, for which it was obliged to account to Eon, but it is not a clear statement that Ferrybank had given up entirely its working interest.

It does, however, support the conclusion that, other than in the 6-25 well, Ferrybank’s entitlement to oil revenues was suspended. [ 123 ] It was not until February 8, 2005 that Eon, in a letter to its accountant, made any clear written assertion that Ferrybank had no working interest. Its assertion, however, was not that the parties had amended their deal, as Eon now asserts, but rather that Ferrybank never had a working interest from the beginning. [ 124 ] Eon’s letter to its accountant is cryptic. It raised the question whether Eon had overpaid Ferrybank.

In doing so, Eon described the parties’ arrangement as “not a normal” joint-venture but “simply an arrangement whereby [Ferrybank] manages the assets of Eon.” Eon further asserted: “On the original 10 wells [Ferrybank] has no working interest.” It went on to make the following odd comment: “There is only an interest if a separate deal has been negotiated since 2001.” [ 125 ] Eon appeared to be asserting Ferrybank did not have an interest from the beginning but may have acquired one since 2002 – the opposite of what Eon is now asserting.

In the letter, Eon described Ferrybank’s interest as limited to 10% in the gas from the 4-07 well. To add further confusion, it did not acknowledge Ferrybank’s interest in the solution gas in the 6-07 well. It did not acknowledge Ferrybank’s interest in the 6-25 well. It did not acknowledge Ferrybank’s equity interest in any of the wells.

Yet, Eon now acknowledges Ferrybank has all three of these interests. [ 126 ] In its January 31, 2009 letter to Ferrybank (in reference to an agreement with third parties regarding the 6-07 well), that Eon asserted it owned 100% of the petroleum and 90% of the natural gas with the remaining 10% of the solution gas owned by Ferrybank. Eon did not set out the basis for its assertions.

In particular, it did not refer to the purported amendment or to a “net operating interest” upon which Eon now relies. [ 127 ] Laviolette’s evidence at trial that the parties’ amendment created a “net operating interest” was inconsistent and vague. The term “net operating interest” appears nowhere in the documents. In particular, Eon never referred to it in any of his responses to Ferrybank’s memos outlining the history of the parties’ transactions. The term first appeared in the report of Eon’s accounting expert, Mr. Parker.

Eon’s assertion that Ferrybank had a “net operating interest” is best characterized as an after-the-fact attempt to describe what the parties did rather than an agreement they reached at the time. [ 128 ] I accept the evidence of Mr. Heerensperger, Ferrybank’s accounting expert, that a “net operating interest” is not a term that exists in the oil and gas industry. Indeed, Parker did not say there was such an interest. Rather, he assumed the parties had amended their agreement because Eon had been receiving all the oil revenues and paying all the related costs and expenses.

He described Ferrybank’s interest as “like a net operating interest” based on what the parties did from an accounting perspective. Exactly what such an interest is, however, is unclear. [ 129 ] Parker considered a “net operating interest” to be separate from, and unrelated to, Ferrybank’s equity interest in the well. In his evidence, Laviolette, however, described the “net operating interest” as including both a 10% working interest in solution gas and an equity interest in the well.

Laviolette also described these two interests as being separate, with the “net operating interest” ending in the event of a sale, leaving only the equity interest. [ 130 ] What was most telling that the concept of a “net operating interest” is an after-the-fact characterization rather than a concept discussed or agreed between the parties at the time, was Laviolette’s evidence that he did not understand that Ferrybank had a “net operating interest” until he consulted legal counsel in 2010. [ 131 ] To add even more confusion, Eon pleaded in its Defence to Counterclaim that Ferrybank’s interest was limited to the underlying assets and denied Ferrybank had any working interest in any of the resources from the wells.

Yet, it is the working interest acquired pursuant to the JOA and October 1, 2001 agreements that gave Ferrybank its equity interest.

[ 132 ] I do not accept Eon’s assertion that Ferrybank’s agreement to a “net operating interest” can be found in a November 8, 2002 memo and financial

summary prepared by Ferrybank regarding the solution gas accounting for the 4-07 well. In the memo, Ferrybank referred to “our most recent accounting… to August 2002. NOI averages 42% of sales.” Laviolette asserted in his evidence that “NOI” means “net operating interest”. [ 133 ] I accept Bodard’s evidence that the memo refers to “net operating income”. What Ferrybank was describing is evident from the memo: the profitability of the solution gas from this well.

It was reporting that the net income from gas after costs and royalties was 42% of gas sales. [ 134 ] To further confuse matters, neither the evidence of Bodard nor Laviolette about the parties’ respective interests is consistent with the position each party took when several wells were sold. [ 135 ] In 2008, the 6-14 well (one of the wells from the original set of six wells) was sold in the Founder’s Ranch Deal. The deal required that the well be abandoned, reclaimed and shut-in because the purchaser was intending to use the property for other purposes. These costs were substantial.

According to Laviolette, these costs had reached $235,000 as at the time of trial. [ 136 ] Ferrybank asserted it was entitled to 10% of the gross sales proceeds but rejected any responsibility for 10% of the abandonment and reclamation costs. This is not consistent with Ferrybank’s current position that it has a 10% working interest. As a working interest owner, Ferrybank was entitled to 10% of the benefits subject to 10% of the burdens. It was entitled, therefore, to 10% of the net, not the gross, sales proceeds.

It is not evident why Ferrybank thought it was entitled to gross, rather than to net, proceeds of sale. [ 137 ] Eon’s position that Ferrybank has a 10% equity interest is also inconsistent with its position that Ferrybank has no working interest. Ferrybank’s equity interest arises from its working interest. [ 138 ] Contrary to Eon’s current position that Ferrybank has a 10% equity interest in the wells, entitling Ferrybank to 10% of the net proceeds on a sale, it took the position at the time of the Founder’s Ranch Deal that Ferrybank was not entitled to any proceeds of the sale.

Eon considered the wells its own. [ 139 ] Although Eon ultimately paid 10% of the gross sales proceeds to Ferrybank, Eon characterized this as a “flat fee” negotiated with Ferrybank as “blood money” to secure its cooperation in signing the well-license transfer.

Laviolette also testified that it included “some consideration for the natural gas.” The reference to consideration for natural gas is peculiar because Laviolette also testified there was no “net operating interest” in the well sold in the Founder’s Ranch Deal because it did not produce gas. [ 140 ] Eon’s current acknowledgement that Ferrybank is entitled to 10% of the equity is also inconsistent with the parties’ actions at the time of a subsequent sale of four wells in 2009-2010 in the Enterra Sale.

At the time of the Enterra Sale, Eon took the same position it did with respect to the Founder’s Ranch Deal: Ferrybank was not entitled to any of the sale proceeds. In similar fashion to the Founder’s Ranch Deal, Eon accused Ferrybank of extorting Eon for 10% of the sale proceeds. [ 141 ] Eon grudgingly acknowledged to Enterra in an email on January 26, 2010 that Ferrybank could claim a 10% interest as a result of an arrangement entered into in 2000/2001 for Ferrybank to be operator. The arrangement was described in the email as not having been “consummated”.

The evidence did not disclose what was meant by this enigmatic statement. [ 142 ] By January 2010, Eon had obtained a legal opinion to the effect it could only represent it had, and could sell, a 90% interest. That Eon sought the opinion because it “wanted clarification” casts further doubt on Laviolette’s evidence that Ferrybank gave up its working interest. [ 143 ] Not only was Eon’s position about Ferrybank’s interest at the time of the sale of the wells different from its current position, Laviolette’s evidence also changed between questioning and trial on this point.

At questioning, Laviolette took issue with Ferrybank’s claim to a 10% interest, should any of the remaining five wells be sold. In contrast, at trial, he testified that Ferrybank would be entitled to 10% of the proceeds on a future sale, and furthermore, he would be “happy to pay it”. [ 144 ] Regardless the lack of clarity in his evidence, I do accept Laviolette’s evidence that Ferrybank wanted to avoid a cash call and was prepared to forgo its oil revenues in exchange for being relieved of its obligation as a working interest owner to contribute 10% toward oil-related costs and expenses.

Ferrybank was concerned about its financial position and the possibility it would be required to pay a deposit. Its focus was the value the LLRs of the joint-wells could contribute to Ferrybank rather than the relatively small oil net revenues its 10% working interest would generate.

It is reasonable to conclude Ferrybank wanted to avoid adding to its financial woes the risk of a cash call in order to receive relatively small revenues when its primary purpose in acquiring an interest in the wells was for their LLR value. [ 145 ] The evidence falls short of establishing that the parties agreed to an oral amendment pursuant to which Ferrybank relinquished or bargained away its 10% working interest in the disputed wells.

The extent of the agreement between the parties was to suspend Ferrybank’s entitlement to oil revenues until it began to pay its proportionate share of oil-related costs and expenses or notified Eon it would begin to do so. The rest of its entitlements and obligations as a working interest owner were not affected.

It continued to be entitled to 10% of the net revenues from the solution gas and to its equity interest in the wells. [ 146 ] While neither party demonstrated whether it was necessary that Ferrybank, as well-licensee, be named as Operator as a prerequisite to the entitlement that Ferrybank be allowed to include the value of those joint wells in the calculation of its LLR, Bodard believed it was.

Given the importance of the LLR to Ferrybank, and the fact the Operating Procedure clearly requires an operator to have at least a 10% “participating interest” in the assets, it is not likely that Ferrybank, which was anxious that it be able to show it had the necessary interest to claim the LLRs of the jointly held wells, would agree to relinquish outright its working interest.

Indeed, Laviolette admitted at questioning that Bodard was “... adamant ... in order to do a deal, he had to show a 10 percent working interest to the Board [the Regulator], and his entire motivation seemed to be that he wanted everything to be proper and look good and protect Ferrybank’s interest ....”

[147] The likely explanation for the fact that Ferrybank neither received oil revenues nor contributed its share of oil-related costs andexpenses is that the parties had an agreement to suspend Ferrybank’s entitlement to oil revenues so long as it neither paid, nor agreed topay, its portion of oil-related costs and expenses. [148] Support for the conclusion that the extent of the agreement was to suspend Ferrybank’s entitlement to oil revenues is found inLaviolette’s cross-examination when he testified that Ferrybank could ask for its working interest at any time converting the “netoperating interest” to a working interest if it paid its portion of work-over and capital costs.

When asked whether Ferrybank would“instantly” receive 10% of the net oil revenues upon serving notice, Laviolette testified that “a wee bit of negotiation to compensate forthe fact that the 6-25 well was bumped from 10 to 50 in consideration of the NOI, but effectively, yes.” [149] As stated earlier in these Reasons, the agreement to amend the parties’ respective interests in the 6-25 well was negotiated in2004 well after the time period Eon says the oral amendment was reached.

I do not accept Laviolette’s evidence, therefore, that anycompensation would need to be negotiated before Ferrybank’s 10% working interest resumed. As previously stated, I also do not accepthis evidence that Ferrybank had a “net operating interest”. [150] Although Ferrybank asserted an operator’s lien for oil revenues without any acknowledgement of liability for costs andexpenses and made similar assertions in its trial argument, Ferrybank expressly acknowledged its obligation to pay its portion of the costsand expenses when it asserted its working interest in paragraph 7 of its Counterclaim. [151] In

summary, Ferrybank did not give up its working interest nor acquire a “net operating interest”. The parties did agree tosuspend Ferrybank’s entitlement to oil revenues in the wells other than the 6-25 well. The oral amendment, however, is not anenforceable contract with respect to the wells from the wells acquired pursuant to the JOA because of the Entire Agreement Clause in theJOA. As discussed below, however, Ferrybank was estopped from claiming oil revenues until it served its Counterclaim.

Therefore,Ferrybank’s entitlement to 10% of oil revenues in the three remaining oil-producing wells in dispute and its corresponding obligation topay 10% of the oil-related costs and expenses, with respect to these wells commenced when the Counterclaim was served on Eon. [152] The oral amendment was effective with respect to the four wells acquired in October 2001 but has no practical affect becausethe oral agreement has no application to the remaining two wells from this group of four, the 6-25 well because the parties agree theysubsequently amended their interests to 50% working interests does not apply and the 12-17 well because it is a gas well.

The oralamendment does not apply to the other two wells acquired in October 2001 because they were sold before Ferrybank served itsCounterclaim. Estoppel, Waiver and Limitation Period [153] Eon submits three forms of estoppel apply here: proprietary estoppel, estoppel by convention and promissory estoppel.

I findthat estoppel by convention applies. [154] While the oral amendment is not effective with respect to the three remaining disputed oil wells because of the EntireAgreement Clause in the JOA, Ferrybank’s entitlement to oil revenues was suspended by virtue of estoppel by convention, until it servedits Counterclaim on Eon. [155] Estoppel is an equitable doctrine.

It was described by Lord Denning (cited with approval by the SCC in Ryan v Moore, 2005SCC 38 at para 51) as follows: When the parties to a transaction proceed on the basis of an underlying assumption – either of fact or law – whether due tomisrepresentation or mistake makes no difference – on which they have conducted the dealings between them – neither of them will beallowed to go back on that assumption when it would be unfair or unjust to allow him to do so.

If one of them does seek to go back on it,the Courts will give the other such remedy as the equity of the case demands. [156] As noted by Major, J in Saskatchewan River Bungalows Ltd v Maritime Life Assurance Co, (SCC), [1994] 2SCR 490 (SCC) at para 18: “... the principle underlying both doctrines [waiver and promissory estoppel] is that a party should not be allowed to go back on a choice when it would be unfair to the other party to do so: S.M.

Waddams, The Law of Contracts (3rd ed. 1993),p. 418, at para. 606.” [157] The criteria for estoppel by convention were established by the Supreme Court of Canada in Ryan v Moore at para 59, asfollows:

(1) The parties’ dealings must have been based on a shared assumption of fact or law: estoppel requires manifest representationby statement or conduct creating a mutual assumption. Nevertheless, estoppel can arise out of silence (impliedly) [emphasis in original]

(2) A party must have conducted itself, i.e. acted, in reliance on such shared assumption, its actions resulting in a change of itslegal position.

(3) It must also be unjust or unfair to allow one of the parties to resile or depart from the common assumption. The partyseeking to establish estoppel therefore has to prove that detriment will be suffered if the other party is allowed to resile from theassumption since there has been a change from the presumed position. [158] Eon and Ferrybank shared the assumption that the JOA could be amended. Their ten-year history with respect to oil revenues,costs and expenses as well as the reliance by both parties in this litigation on other oral amendments to the JOA confirm their jointassumption.

For example, both parties agreed the JOA was amended orally to allow Ferrybank to receive solution gas revenues despitethe requirement in the JOA that all revenues were to be received by Eon. Both parties shared and relied on the assumption that the JOAwas amended with respect to oil revenues, costs and expenses. Eon did not pursue Ferrybank for its obligation to pay a 10% share of theoil-related costs and expenses and Ferrybank did not pursue Eon for its 10% share of oil revenues.

[159] Eon argues it would be unjust to allow Ferrybank to collect oil revenues, either retroactively or going forward. Eon advancesthis argument because it paid all the oil-related costs and expenses and took all the risk of the wells. [160] Having left Eon to pay 100% of these costs and expenses and take 100% of the risk with respect to the operations, it would beunfair to permit Ferrybank to resile from the parties’ shared assumption with respect to oil revenues. Ferrybank cannot claim oilrevenues retrospectively.

However, there is no evidence Eon took any specific risks with respect to the operation of these wells thatwould make it unjust for Ferrybank to receive oil revenues net of costs and expenses from the time it served its Counterclaim. [161] Eon also submits that waiver precludes Ferrybank from claiming oil revenues. I do not agree that waiver applies. [162] Waiver does not apply in these circumstances because a waiver is an intentional and unequivocal relinquishment of a right byone party to the contract.

Here, there was intentional and unequivocal action by both parties in accordance with their commonunderstanding that the JOA could be amended. [163] Major, J described waiver in Saskatchewan River Bungalows as follows at paras 19 – 20: Waiver occurs where one party to a contract or to proceedings takes steps which amount to foregoing reliance on some known right ordefect in the performance of the other party: Mitchell and Jewell Ltd. v. Canadian Pacific Express Co., 1974 ALTASCAD 18 ,[1974] 3 W.W.R. 259 (Alta. S.C.A.D.); Marchischuk v.

Dominion Industrial Supplies Ltd., (SCC), [1991] 2 S.C.R. 61(waiver of a limitation period). The elements of waiver were described in Federal Business Development Bank v. Steinbock DevelopmentCorp. (1983), 42 A.R. 231 (C.A.), cited by both parties to the present appeal (Laycraft J.A. for the Court, at p. 236): The essentials of waiver are thus full knowledge of the deficiency which might be relied upon and the unequivocal intention to relinquishthe right to rely on it. That intention may be expressed in a formal legal document, it may be expressed in some informal fashion or itmay be inferred from conduct.

In whatever fashion the intention to relinquish the right is communicated, however, the consciousintention to do so is what must be ascertained. Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) anunequivocal and conscious intention to abandon them. The creation of such a stringent test is justified since no consideration moves fromthe party in whose favour a waiver operates. An overly broad

interpretation of waiver would undermine the requirement of contractualconsideration. [164] Lastly, even if estoppel did not apply, Ferrybank nevertheless would be barred by the limitation period from claiming oilrevenues owing more than two years prior to filing its Counterclaim. The limitation period with respect to a series of payments wasdiscussed in James H Meek Trust v San Juan Resources Inc and Canadian Natural Resources Limited, 2013 ABCA 399. Each missedpayment creates a separate claim. A claimant must commence its claim within two years of being put on inquiry with respect to missedpayments. [165] Section 3(1)(

a) of the Limitations Act, RSA 2000 c L-12 bars a claim if a claimant does not seek a remedial order within twoyears after the date on which the claimant knew or ought to have known three things: a. the injury for which the claimant seeks a remedial order had occurred; b. the injury was attributable to conduct of the defendant; and c. the injury, assuming liability on the part of the defendant, warrants bringing a proceeding. [166] The burden of proving a remedial order was sought within the limitation period in s 3(1) (

a) is on the person seeking theremedial order. Ferrybank has not met this burden. It made no attempt to argue it had. [167] Absent estoppel, Ferrybank would have been entitled to 10% of the oil revenues net of 10% of oil-related costs and expensesfrom the time the JOA was signed with respect to the initial set of six wells on February 1, 2001 and from October 1, 2001 with respectto the second set of four wells. Ferrybank was aware of its working interest and that it was not receiving oil revenues all along.Ferrybank offered no convincing basis to conclude that bringing an action was not warranted.

Its explanations for not commencing anaction for oil revenues before January, 2011, namely the revenues were small, and it did not have funds to do so until it acquired its 50%working interest in the 6-25 well in 2004, do not justify its failure to bring a timely action. 2. Is Ferrybank entitled to operator fees? Overview [168] Despite neither billing Eon for any fees nor making any request for fees until July 1, 2010, Ferrybank claims two differentmonthly operator fees provided for in the JOA: a $200 fee for each well per month and a $225 fee for each producing well (as defined) per month.

Ferrybank claims fees for nine of the ten wells. It excludes the shut-in gas well, which is the 12-17 well. [169] Although the

interpretation of the fee provisions in the JOA is disputed, Eon acknowledged in its Statement of Claim that theapplication of the JOA applies to all five of the remaining wells. Laviolette confirmed in his evidence at trial and in questioning that theparties intended to operate the wells in accordance with the JOA. Eon, however, denies Ferrybank is entitled to fees for the followingreasons: a. the parties had an oral agreement pursuant to which Ferrybank relinquished its entitlement to fees; and b. even if there were no oral amendment, Ferrybank nevertheless waived its claim to fees, is estopped from claiming them, or

is barred by operation of the limitation period from claiming any fees more than two years prior to the commencement of its Counterclaim. Conclusion [ 170 ] The JOA entitles Ferrybank to the $200 fee but not the $225 fee. The $200 fee is payable for each well per month. It is not, as Ferrybank argued, payable for each facility at a well. [ 171 ] I find that there was no oral amendment pursuant to which Ferrybank relinquished its entitlement to fees. Ferrybank, however, is precluded from claiming fees by operation of waiver until 30 days after it first claimed fees.

If waiver did not apply, Ferrybank’s claim to fees more than two years prior to the commencement of its Counterclaim nevertheless would be barred by the application of the Limitations Act . Detailed Analysis Provision for fees in the JOA [ 172 ] The JOA refers to two fees: i. Clause 8(b), which provides for a $200 monthly fee payable to Ferrybank for each well; and ii.

Schedule B, which provides for a $225 operator fee per producing well per month for overhead, specifically for operation and maintenance. [ 173 ] Specifically, Clause 8(

b) provides as follows: (

b) Ferrybank hereby appoi

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