Shell Oil Company v. Gibbard, [1961] SCR 725

Supreme Court of Canada

Shell Oil Company v. Gibbard, [1961] S.C.R. 725

Date: 1961-10-03

Shell Oil Company, Shell Oil Company of Canada Ltd., Devon-Palmer Oils Ltd. and Texas Gulf Sulphur Company (Defendants) Appellants;

and

William Charles Gibbard (Plaintiff) Respondent.

1961: May 2, 3; 1961: October 3.

Present: Locke, Cartwright, Abbott, Judson and Ritchie JJ.

ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION.

Real property—Petroleum and natural gas lease—Continuation clause— Necessity for pooling or combining leased lands to conform with regulations not shown—True construction of lease.

The plaintiff granted a petroleum and natural gas lease for a term of ten years on a quarter section to G, whose interests subsequently became vested in the defendant companies in varying proportions. The plaintiff brought an action for a declaration that the lease terminated at the expiry of the said period, i.e. September 16, 1959. The lease contained a clause giving the lessee the right and power at any time to pool or combine the leased lands with other adjoining lands (any one such, pool or unit not to exceed one drilling unit) when such pooling or combining was necessary to conform with any government regulations or orders. Drilling operations on, or production of leased substances from, any land included in such unit were to have the same effect in continuing the lease as if such operations or production were upon the leased land.

The defendant S acquired leases of the oil and gas rights on the three other quarters of the same section, on one of which a gas well was completed in 1952. As there was no market for the gas at that time the well was shut in and so remained until July 1959. In May 1959 a market was available and, as it was necessary under the regulations to obtain a permit to produce the well and to establish a spacing unit, an application was made to the Petroleum and Natural Gas Conservation Board for an order to establish a special spacing unit, to consist of the north half and the southwest quarter of the section. Such an order was made to come into force on July 1, 1959. The defendants contended that the lease was in full force and effect at all times, that a pooling notice given to the plaintiff in 1955 was necessary in order to conform with government regulations and, in the alternative, pleaded that if the pooling notice of 1955 was ineffective then the pooling was accomplished when the special spacing unit was prescribed in 1959.

The trial judge held that the lease terminated on September 16, 1959. An appeal from that judgment was dismissed by the Appellate Division and the defendants then appealed to this Court.

Held: The appeal should be dismissed.

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There were no regulations in existence which affirmatively required the pooling of the plaintiff's land with the adjoining lands, and it was inconceivable that the Board would, of its own motion or on the application of either party, direct such pooling when the parties had themselves agreed upon the terms upon which such pooling should be brought about. The language of the pooling clause of the lease was to be construed literally in accordance with the plain meaning of the language employed and, as the defendants had not shown that in the circumstances pooling was necessary to conform to the regulations, the appeal consequently failed.

APPEAL from a judgment of the Supreme Court of Alberta, Appellate Division1, dismissing an appeal from a judgment of Primrose J. Appeal dismissed.

J. H. Laycraft, for the defendants, appellants.

J. M. Robertson, Q.C., for the plaintiff, respondent.

The judgment of Locke, Abbott, Judson and Ritchie JJ. was delivered by

Locke J.:—This is an appeal from a judgment of the Appellate Division of the Supreme Court of Alberta2 dismissing the appeal of the present appellants, the defendants in the action, from the judgment at the trial delivered by Primrose J.

By a lease in writing dated September 16, 1949, the respondent leased to Wilbur L. Griffith all the petroleum and natural gas and related hydrocarbons, except coal and valuable stone, within, upon or under the southwest quarter of section thirteen in township 21, range 29, west of the 4th meridian in Alberta, for a term of ten years from the date of the instrument. The lessee's interest subsequently, by assignments, became vested in the appellant companies in varying proportions.

The action was brought for a declaration that the lease terminated at the expiry of the said period. The appellants contend that it was continued in full force and effect by reason of the matters to be now stated.

By the terms of the lease the lessee was entitled to enter upon the said lands for the purpose, inter alia, of drilling for oil and gas and it was provided that, if operations for the drilling of a well were not commenced within one year from the date of the lease, it should terminate unless the lessee should have paid to the lessor $160 as annual acreage

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rental, such payment to confer the privilege of deferring the commencement of drilling operations for a period of one year, and in like manner and upon like payments the commencement of drilling operations should be further deferred for like periods successively.

Paragraph 9 reads as follows:

The Lessee is hereby given the right and power at any time and from time to time to pool or combine the said lands, or any portion thereof, with other lands adjoining the said lands, but so that any one such pool or unit (herein referred to as a "unit") shall not exceed one drilling unit as hereinbefore defined, when such pooling, or combining is necessary in. order to conform with any regulations or orders of the Government of the Province of Alberta or any other authoritative body, which are now or may hereafter be in force in relation thereto. In the event of such pooling or combining, the Lessor shall, in lieu of the royalties elsewhere herein specified, receive on production of leased substances from the said unit, only "such portion of the royalties stipulated herein as the area of the said lands placed in the unit bears to the total area of lands in such unit. Drilling operations on, or production of leased substances from, any land included in such unit shall have the same effect in continuing this Lease in force and effect during the term hereby granted, or any extension thereof, as to all the said lands, as if such operation or production were upon or from the said lands, or some portion thereof.

The expression "drilling unit" was defined in para. 1 as follows:

"Drilling unit" shall mean a section, legal sub-division or other unit of land representing the minimum area in which any well may be drilled on or in the vicinity of the said lands as defined or prescribed by or under any law of the Province of Alberta now or hereafter in effect governing the spacing of petroleum and/or natural gas wells.

The payment of royalties referred to in para. 9 was provided for by para. 2. If gas or oil were produced from the leased lands the lessor was to receive in effect one eighth of its market value, such royalty to be paid monthly.

The appellant Shell Oil Company acquired leases of the oil and gas rights on the three other quarter sections in section 13 and drilled a well on the northeast quarter, which was spudded in on July 4, 1952 and completed as a gas well on November 4, 1952. Natural gas was produced from the well for test purposes in varying periods in the years 1952, 1954, 1958 and from April 20 to April 25, 1959. When, however, the well was completed there was no available market for the gas and the well was shut in.

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On August 2, 1955, the appellant Shell Oil Company, which at that time held by assignment from Griffith the entire lessee's interest, gave a written notice to the lessor in the following terms:

Take notice that Shell Oil Company as Lessee by assignment from Wilbur L. Griffith named as Lessee in a Petroleum and Natural Gas Lease, dated the 16th day of September, A.D. 1949, granted by you and covering all the petroleum and natural gas and related hydrocarbons except coal and valuable stone, within, upon or under the SW¼ of Section 13 in Township 21, Range 29, West of the 4th Meridian, in the Province of Alberta, hereby pools and combines the said SW¼ of Section 13 in Township 21, Range 29, West of the 4th Meridian with the NE¼, the NW¼ and the SE¼ of the said Section 13, so as to form a drilling unit as defined in the said lease and as prescribed by regulations of the Government of the Province of Alberta.

There was no production from the gas well on the north-east quarter at the time this notice was given. No well was drilled at any time upon the respondent's lands.

The said appellant gave a similar notice under the terms of a lease of the southeast quarter, expressed in similar terms, granted by Herbert Morris on July 19, 1950. Morris had died and the notice was given to E. M. Gunderson, the executor of his estate. That lease was for a five year term and, in an action between the Shell Oil Company and the executor decided at a time when there was no production of gas from the northeast quarter, it was held that the lease had expired by effluxion of time.

The decision at the trial of this action was sustained by the Appellate Division on appeal and that judgment was affirmed by the judgment of this Court3.

In May 1959 a market for gas was available. The well on the northeast quarter had been shut in for nearly seven years and it was necessary under the regulations to obtain a permit to produce the well and to establish a spacing unit. On May 21, 1959, Devon-Palmers Oils Ltd. applied to the Board for an order to establish a special spacing unit, to consist of the north half and the southwest quarter of section 13, and such an order was made dated June 24, 1959, to come into force on July 1,1959. It was a term of the order that in the event it was not rescinded before October 31, 1959, the Board should review it and might call a public

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hearing during the month of November 1959 for that purpose. The order was not varied in any manner material to the issues in this action and continued in effect at the time this action was commenced.

On July 27, 1959, Devon-Palmer Oils Ltd. sent to the respondent a copy of the order of the Board and informed him that a cheque for his royalty for the month of July would be forwarded to him on the 20th of August, and cheques were sent for such royalty for that month and for the month of August. The statements enclosed with these payments stated that the royalty was payable pursuant to the pooling notice dated August 2, 1955. The respondent returned the cheques and the company informed him on December 7, 1959, that it would thereafter hold the royalties to which he was entitled in trust for his account.

Under the provisions of The Oil and Gas Resources Conservation Act, R.S.A. 1942, c. 66, as amended, which was in force when the lease was made and the provisions of The Oil and Gas Resources Conservation Act, 1950, and the regulations made thereunder, which were in force when the well was drilled on the northeast quarter, a person desiring to drill a well was required to obtain a license from the Petroleum and Natural Gas Conservation Board set up under these statutes, permitting this to be done.

The expression "spacing unit", which did not appear in the earlier statute, was defined to mean the area allocated to a well for the purpose of drilling for and producing oil and gas. Section 20 provided that no person shall apply for a license to drill a well within a spacing unit unless he is entitled, or is the authorized representative of the person who is entitled, to all the drilling and producing rights for the oil and gas for the recovery of which the well is to be drilled.

The appellant Shell Oil Company, as stated, had acquired all such rights for the four quarter sections comprising section 13. No evidence was given at the trial as to the terms of the license obtained in advance of drilling the well on the northeast quarter and no spacing unit appears to have been established prior to June 24, 1959.

The extensive powers vested in the Board included the power to determine the area of the spacing unit for every well in the province, and the regulations in force at the time

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the well was drilled provided that, subject to the provisions of the regulations, the spacing unit for an oil well should be approximately 40 acres and for a gas well approximately 640 acres. The regulations provided, however, that the Board might, in a case where in its opinion it was proper to do so, prescribe a spacing unit of any size or shape or with any boundaries, and evidence was given by the witness Brant that in some gas fields such units were four sections in extent, whereas others were as little as one quarter section.

As pleaded, the respondent's case was that the pooling notice given on August 2, 1955, was ineffective since the appellant at that time had no interest in the southeast quarter by reason of the expiry of the Morris lease and, further, that when that notice was given the pooling or combining was not necessary "in order to conform with any regulations or orders of the Government of the Province of Alberta or any other authoritative body which were then in force in relation thereto." This referred to the provisions, of the first sentence of para. 9 of, the agreement.

The statement of defence alleged that the lease from the respondent was in full force and effect at all times, that the pooling notice referred to was necessary in order to conform with the regulations and; in the alternative, pleaded that if the pooling notice of 1955 was ineffective then the pooling was accomplished when the special spacing unit was prescribed by the Board, effective July 1, 1959.

The defendants also counterclaimed for a declaration that the lease was in full force and effect. The plaintiff did not file any reply to the statement of defence and simply repeated the statement of claim by way of defence to the counterclaim.

The lease in question is upon a printed form, the names of the parties, the description of the land and other formal provisions being typewritten. According to the respondent, the document in this form was handed to him by Griffith and returned by the former signed some days later. Shortly thereafter the lease was assigned by Griffith to the Shell Oil Company.

At the time the lease was made, the regulations of the Board approved by order in council under the statute of 1942, as amended on December 2, 1947, provided that,

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subject to the other provisions of the regulations, well spacing should be one well to every 40 acres, and in surveyed territory one well to every legal subdivision, provided that the Board might prescribe surface locations at which wells may be drilled and well spacing other than one well to every 40 acres. It was not until the adoption of the regulations under the Act of 1950 that the normal areas of the spacing units differed as between gas and oil wells. This fact renders obscure the meaning to be attributed to para. 1(b) defining drilling unit as meaning a section, legal subdivision or other unit of land representing the minimum area on which any well may be drilled. Had the lease been made after the 1950 regulations were passed, it might properly be inferred, in my opinion, that the reference to a unit one section in extent was intended to apply if gas were discovered, but no such inference is permissible in this situation.

The difficult question to determine is whether, in the circumstances in this case, pooling or combining was necessary in 1959 to conform with the regulations. While the statement of claim merely alleged that it was not necessary when the notice was given on August 2, 1955, the defence put in issue the question as to whether it was necessary at any time during the term of the lease and this must be determined. The lease, as stated, was proposed in its present form by Griffith and, in my opinion, if there were ambiguity in the language employed and doubt raised as to the meaning of such language, it should, if need be, be construed in accordance with the maxim verba chartarum fortius accipiuntur contra proferentem (Leake: 8th ed., p. 158).

This rule of construction is to be applied only where other rules of construction fail. In the present matter I find it difficult to understand in what circumstances it could have been contemplated that it was necessary to pool the respondent's land with the adjoining lands to conform with the regulations. There were no regulations in existence which affirmatively required any such pooling and it seems to me inconceivable that the Board would, of its own motion or on the application of either party, direct such pooling when the parties had themselves agreed upon the terms upon which such pooling should be brought about. If, as I think to be the case, what the proposed lessee intended to

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provide for was a provision for pooling when it was necessary to include the leased land with other lands in order to obtain the approval of the Board to a spacing unit and to obtain a permit, if one were required, to produce gas or oil discovered on any part of the proposed unit, unfortunately the language employed is quite insufficient for such purpose. To assign any such meaning to the clause would be to read into it words that are not to be found in the clause as drafted.

In my view, this portion of the language of para. 9 is to be construed literally in accordance with the plain meaning of the language employed and, as the appellants have not shown that in the circumstances pooling was necessary to conform to the regulations, the appeal must fail.

I would add that, with great respect, I am unable to agree with the opinion of Mr. Justice Johnson that any formal written notice of the election of the lessees to exercise the option to pool was necessary. That the lessees had elected to exercise the option was, in my opinion, sufficiently indicated by the application to the Board to fix the special spacing unit in May 1959 and the letters directed to the respondent enclosing the royalties to which he would have been entitled had the pooling been effective.

I come to the conclusion that this appeal should fail with regret as I am by no means satisfied that the result accords with the intention of the parties to the instrument. However, since it is not sought to impeach the instrument or to suggest that through mutual mistake it fails to express the real agreement, the matter must be determined upon what I consider to be the clear meaning of the language employed.

I would dismiss this appeal with costs.

Cartwright J.:—I agree with the conclusion of my brother Locke and also, subject only to one reservation, with his reasons.

I do not find it necessary to form an opinion as to whether the lessee in the lease made by the respondent, dated September 16, 1949, intended that that document should include a provision for pooling if it became necessary to include the leased land with other lands in order to obtain

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the approval of the Board to a spacing unit and to obtain a permit, if one were required, to produce gas or oil discovered on any part of the proposed unit. I agree that the lease, on its true construction, does not so provide.

I would dispose of the appeal as proposed by my brother Locke.

Appeal dismissed with costs.

Solicitors for the defendants, appellants: Chambers, Might, Saucier, Peacock, Jones, Black & Gain, Calgary.

Solicitors for the plaintiff, respondent: Fenerty, Fenerty, McGillivray, Robertson, Prowse, Brennan & Fraser, Calgary.