Canadian Superior Oil v. Hambly, [1970] SCR 932

Supreme Court of Canada

Canadian Superior Oil v. Hambly, [1970] S.C.R. 932

Date: 1970-05-25

Canadian Superior Oil Ltd. and Kerr-McGee Corporation (formerly Kerr-McGee Oil Industries Inc.) (Plaintiffs) Appellants;

and

The Paddon-Hughes Development Co. Ltd. and Ralph Hambly (Defendants) Respondents.

1970: February 20, 23; 1970: May 25.

Present: Martland, Judson, Ritchie, Hall and Spence JJ.

ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION

Mines and minerals—Petroleum and natural gas lease—Termination of lease—Whether lessor estopped by subsequent conduct from taking posi­tion lease terminated—No estoppel proved in any event.

The appellants sought a declaration that a certain petroleum and natural gas lease was a good, valid and subsisting lease. The action was dismissed at trial, and an appeal from the trial judgment was dismissed by unanimous decision of the Appellate Division of the Supreme Court of Alberta.

Under the lease, the commencement of the drill­ing of a well, shortly before the expiration of the primary term, extended the term until drilling was completed (August 6, 1958). At that time, the term of the lease could only continue as a result of pro­duction, actual or constructive, and there was none. Accordingly, the lease terminated on that date.

On appeal to this Court, the appellants contended that the respondent Hambly was estopped from taking the position that the lease had terminated on August 6, 1958, and, in support of this submis­sion, reliance was placed upon his conduct, on different occasions, as constituting a representation by him to the appellant Superior that the lease was still in effect. All of these occasions occurred after the lease had terminated on August 6, 1958.

Held: The appeal should be dismissed.

The lease could not be revived after its termina­tion except by agreement, for consideration, between the parties. To say that subsequent representations by Hambly could recreate the legal relations between the parties would be to say that such representations could create a new cause of action for Superior. But, subject to the equitable rule as to acquiescence, a cause of action could not be founded upon

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estoppel. The principle of promissory estoppel as­sumed the existence of a legal relationship between the parties when the representation was made, but, in the present case, the contractual relationship between the parties had come to an end before any alleged representation had been made.

In any event, as found by the Courts below, no estoppel was proved.

Low v. Bouverie, [1891] 3 Ch. 82; Combe v. Combe, [1951] 2 K. B. 215, applied; Central London Property Trust Ltd. v. High Trees House Ltd., [1947] K. B. 130; Conwest Exploration Co. v. Letain, [1964] S.C.R. 20; Hughes v. Metropolitan Railway Co. (1877), 2 App. Cas. 439; Willmott v. Barber (1880), 15 Ch. D.96, referred to.

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

J. D. Arnup, Q.C., and D. O. Sabey, for the plaintiffs, appellants.

W. B. Gill, Q.C., and J. B. Ballem, Q.C., for the defendants, respondents.

The judgment of the Court was delivered by

MARTLAND J.—The appellants in this case seek a declaration that a petroleum and natural gas lease, dated June 17, 1948, between the respondent Ralph Hambly, hereinafter referred to as "Hambly", as lessor, and the appellant Canadian Superior Oil Ltd., hereinafter referred to as "Superior", formerly known as Rio Bravo Oil Company Limited, as lessee, is a good, valid and subsisting lease; In these proceedings the legal position of the other appellant is the same as that of Superior and the legal position of the other respondent is the same as that of Hambly. We are concerned, in this appeal, with the legal relations of Hambly and Superior in respect of that lease.

The appellants' action was dismissed at trial, and their appeal from the trial judgment was dismissed by unanimous decision of the Appellate Division of the Supreme Court of Alberta.[1]

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The lease was for a primary term of 10 years and related to all of Section 17, Township 38, Range 2, West of the 5th Meridian in the Province of Alberta.

The provisions of the lease which were material to this action provide as follows:

Subject to the other provisions herein con­tained, this lease shall be for a term of ten (10) years from this date (called "primary term") and as long thereafter as oil, gas or other mineral is produced from said land hereunder, or as long thereafter as Lessee shall conduct drilling, mining or reworking operations thereon as hereinafter pro­vided and during the production of oil, gas or other mineral resulting therefrom.

3. The royalties reserved by Lessor are:

* * *

(b) On gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale; where gas from a well producing gas only is not sold or used, Lessee may pay as royalty $100.00 per well per year, and if such payment is made it will be considered that gas is being produced within the meaning of Paragraph 2 hereof;

* * *

12. If Lessee shall commence to drill a well within the term of this Lease or any extension thereof, Lessee shall have the right to drill such well to completion with reasonable diligence and dispatch, and if oil or gas be found in paying quantities, this lease shall continue and be in force with like effect as if such well had been completed within the term of years herein first mentioned.

The lease provided that Superior should com­mence drilling operations on the leased land on or before one year from its date, but provided for annual postponements of the drilling commitment, during the primary term of the lease, by payment by Superior to Hambly of a delay rental of $640. There were no drilling operations com­menced until June 10, 1958. The learned trial judge found that drilling operations ceased on

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August 6, 1958, and this finding was not attacked in this Court. Prior to that date, on July 23, 25 and 26, tests had disclosed gas flows in three formations, and had established that gas "in paying quantities" could be produced from the well. There was at that time no available market for it, and Superior was aware that the well would not be put into production. This situation had been provided for in para. 3(b) under which Superior had the option, but was under no duty, to pay a royalty of $100 per year in respect of that well. If it made such payment, it would be considered that gas was being produced, within the meaning of para. 2.

Under the lease, a gross royalty of 12½ per cent was reserved to Hambly. On May 25, 1951, Hambly executed four royalty trust agreements, each relating to one quarter-section of the leased land, whereby he assigned to Prudential Trust Company Limited, as trustee, the royalties pay-able to him under the provisions of the lease, in trust, to be disbursed among the holders of royalty units purchased by them.

On August 13, 1958, a week after drilling operations had ceased, a cheque for $100 was sent to the trust company, as a payment in lieu of production, which cheque was received the following day. The accompanying letter referred to No. 2 Gross Royalty Trust Agreement, this being the agreement relating to the quarter-section on which the drilling had occurred. This payment was distributed among the holders of royalty units under that agreement. Hambly did not have any interest in any unit under that agreement.

The lease in question here is in the same form as that which was under consideration in this Court in Canadian Superior Oil of California, Ltd. v. Kanstrup et al.[2], and, in the light of that decision, the conclusion reached by the Courts below, that the lease terminated on August 6, 1958, is correct. The only material factual dif­ference between the Kanstrup case and the present

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one is that, in the present case, the drilling of a well had commenced just prior to the end of the primary term, and para. 12 came into operation.

Under that paragraph, Superior had the right to drill the well to completion (which it did), and if oil or gas was found in paying quantities (and it was) the lease would continue with like effect as if the well had been completed during the primary term. If the well had been completed during the primary term, and produced oil or gas in paying quantities, that term would be extended, under para. 2, beyond the primary term "as long thereafter as oil, gas or other mineral is produced." The latter part of para. 2, after providing for an extension of the primary term for as long as Superior conducted drilling, mining or reworking operations, goes on to provide for the continuance of the extension "during the production of oil, gas or other mineral resulting therefrom."

The result is that, under para. 2, extension of the term of the lease depends upon there being production either at the time the primary term ends, or, if para. 12 becomes applicable, on the completion of the drilling of a well commenced before the primary term ends. In either case, failure to produce results in the termination of the lease.

In the present case, the commencement of the drilling of the well, shortly before the expiration of the primary term, extended the term until drill­ing was completed (August 6, 1958). At that time, the term of the lease could only continue as a result of production, actual or constructive, and there was none. Accordingly the lease terminated on that date.

This conclusion was not seriously challenged in argument before this Court. The contention of the appellants was that Hambly was estopped from taking the position that the lease had terminated on August 6, 1958, and, in support of this submission, reliance was placed upon his conduct, on different occasions, as constituting a representation by him to Superior that the

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lease was still in effect. All of these occasions occurred after the lease had terminated on August 6, 1958.

Without attempting finally to determine the matter, I have serious doubt as to whether the issue of estoppel can properly be raised in the circumstances of this case. The appellants, as plaintiffs, seek a declaration that the lease is a good, valid and subsisting lease. For the reasons already given, it appears that the lease in ques­tion had terminated. It could not be revived thereafter except by agreement, for consideration, between the parties. To say that subsequent representations by Hambly could recreate the legal relations between the parties would be to say that such representations could create a new cause of action for Superior. But, subject to the equitable rule as to acquiescence, which has sometimes been described as estoppel by acquiescence, and to which I will refer later, a cause of action cannot be founded upon estoppel: Low v. Bouverie[3]; Combe v. Combe[4]; Spencer Bower & Turner on Estoppel by Representation, 2nd ed., p. 279, para. 289.

The doctrine of promissory estoppel, enunci­ated by Lord Denning in Central London Property Trust Ltd. v. High Trees House Ltd.[5], was con­sidered by this Court in Conwest Exploration Co. Ltd. et al. v. Letain°. Mr. Justice Judson, speaking for the majority, at p. 28, expressed the view that Lord Denning's statement did not do anything more than to restate the principle propounded by Lord Cairns in Hughes v. Metro­politan Railway Co.[6]., at p. 448:

... it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results—certain penalties or legal forfeiture—after­wards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have

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enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.

This principle assumes the existence of a legal relationship between the parties when the repre­sentation is made. It applies where a party to a contract represents to the other party that the former will not enforce his strict legal rights under it. In the present case, however, the contractual relationship between the parties had come to an end before any representation is alleged to have been made. There is no allegation that Hambly, While the lease still subsisted, had ever represented that its provisions would not be enforced strictly.

We do not have here evidence to support an allegation of fraud, of the kind which was defined by Fry J., when dealing with the equitable defence of acquiescence, in his well-known statement in Willmott v. Barbers[7], at p. 105:

It has been said that the acquiescence which will deprive a man of his legal rights must amount to fraud, and in my view that is an abbreviated statement of a very true proposition. A man is not to be deprived of his legal rights unless he has acted in such a way as would make it fraudulent for him to set up those rights. What, then, are the elements or requisites necessary to constitute fraud of that description? In the first place the plaintiff must have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant's land) on the faith of his mistaken belief. Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff, and the doctrine of acquies­cence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plain-tiff's mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining

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from asserting his legal right. Where all these ele­ments exist, there is fraud of such a nature as will entitle the Court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do.

Part of the above passage was cited by Johnson LA., who delivered the reasons of the Appellate Division. He went on to say this:

There can be no doubt that the respondent Hambly did not know that he had the right to treat the petroleum and natural gas lease as termi­nated. It was only after two parties had tried to obtain copies of his lease that he began to suspect that something might be wrong. It is significant that even after he granted a new petroleum and natural gas lease to the respondent The Paddon-Hughes Development Co. Ltd., he expressed his opinion to a representative of Kerr-McGee that the new lessees were wasting their money in paying him the con­sideration for signing the lease. The relationship created by the document relied upon by the appel­lants is not one which imports a duty in Hambly to disclose to the appellants that their lease had been terminated. (B.A. Oil Co. Ltd. v. Kos, [1964] S.C.R. 167 at 176.)

The appellants, from their knowledge of the drill­ing records which Hambly did not possess, were, at all times, in a better position to know the facts upon which their right to continue the lease depended.

I do not propose to consider this aspect of the case any further, because, in any event, I am in agreement with the concurrent findings of the Courts below that no estoppel was proved. The appellants adopted, in argument, the legal princi­ples stated in Greenwood v. Martins Bank[8], at p. 57:

The essential factors giving rise to an estoppel are I think:

(1) A representation or conduct amounting to a representation intended to induce a course of con-duct on the part of the person to whom the repre­sentation is made.

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(2) An act or omission resulting from the repre­sentation, whether actual or by conduct, by the per-son to whom the representation is made.

(3) Detriment to such person as a consequence of the act or omission.

The learned trial judge reviewed the evidence respecting the appellants' allegations as to repre­sentations made by Hambly to Superior and reached the following conclusion:

In the case at bar there is no basis for estoppel. The plaintiffs were aware at all times as to the pos­sible invalidity of the lease. No detriment has been proved.

Johnson J.A., after reviewing the evidence, expressed the following opinion:

In my opinion, there was no representation by word or conduct by the respondent Hambly on which a defence of estoppel could be founded. That being so, it is unnecessary to consider whether the appellants suffered prejudice, which is another ele­ment that must be considered when estoppel is pleaded.

As I am in agreement with their conclusion that the evidence in this case did not support a plea of estoppel, I do not think that it would serve any useful purpose for me to review that evidence.

In my opinion the appeal should be dismissed with costs.

Appeal dismissed with costs.

Solicitors for the plaintiffs, appellants: Saucier, Jones, Peacock, Black, Gain, Stratton & Laycraft, Calgary.

Solicitors for the defendants, respondents: Gill, Conrad & Robinson, Calgary.

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