2195002 Ontario Inc. v. Tribute Resources Inc.

Ontario Reports

Court of Appeal for Ontario,

Doherty, Simmons and Pepall JJ.A.

September 26, 2013

117 O.R. (3d) 192 | 2013 ONCA 576

Case Summary

Contracts — Interpretation and construction — Application judge not erring in finding that previous oil and gas agreements between appellant and landowner were replaced by gas storage lease in 1998 and that termination of 1998 lease left appellant without any right to store gas on land.

Courts — Jurisdiction — Court of Appeal — Application judge resolving dispute over interpretation of oil and gas agreements and whether they conferred right to store gas under certain lands — Ontario Energy Board subsequently making order designating lands as gas storage area and authorizing appellant to store gas under lands — Jurisdiction of Court of Appeal to hear appellant's appeal from application judge's order not ousted by s. 38(3) of Ontario Energy Board Act — Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B, s. 38(3).

Both the appellant and the respondent claimed the right to inject and store gas into and under certain lands under agreements made with the landowner. The application judge found that the respondent was entitled to the disputed lands by virtue of a gas storage lease made in March 2009 (the "219 Ontario gas storage lease"). She rejected the appellant's claim to those rights under a 1977 oil and gas lease as amended by a 1984 unit operation agreement. She accepted that the 1977 oil and gas lease and the 1984 unit operation agreement conveyed certain gas storage rights that were in turn assigned to the appellant, she found that those rights were replaced by the terms of a gas storage lease entered into by the appellant and the landowner in 1998, and that the termination of the 1998 gas storage lease left the appellant without any right to store gas on the lands. The appellant appealed. The respondent raised a preliminary objection, submitting that the jurisdiction of the Court of Appeal to hear the appeal had been ousted because of an order made by the Ontario Energy Board (the "OEB") after the application judge's decision. That order designated the lands as a gas storage area and authorized the appellant to inject and store gas into and under the lands.

Held, the appeal should be dismissed.

It was not disputed that the application judge had jurisdiction to make her decision. Nothing in s. 38(3) of the Act ousted the jurisdiction of the Ontario Court of Appeal to entertain an appeal on the merits from a final order of a Superior Court judge made within its jurisdiction.

The trial judge did not err in finding that the 1998 gas storage lease replaced the gas storage rights conveyed under the 1977 oil and gas lease as amended by the 1984 unit operation agreement. The 1998 gas storage lease was, on its face, a detailed document designed specifically to address gas storage rights, whereas the 1977 oil and gas lease as amended by the 1984 unit operation agreement addressed the issue of gas storage rights somewhat peripherally. Perhaps more importantly, the payment provisions of the 1998 gas storage lease were different than, and inconsistent with, the payment provisions of the 1977 oil and gas lease as amended by the 1984 unit operation agreement. That difference made it clear that the 1998 gas storage lease [page193] was intended to replace the earlier agreements and not merely to supplement them. Equally compelling evidence that the 1998 gas storage lease was intended to replace the earlier agreements was the fact that that agreement provided that it would terminate if the issue of designation of the lands as a gas storage area had not been taken to the OEB within ten years. The 1998 gas storage lease had a term of ten years. Clause 3 of the main body of the agreement provided for automatic renewal of the agreement upon the expiry of the ten-year term unless the lessee provided written notice of its desire not to renew the agreement. Schedule B to the 1998 gas storage lease stated: "This Gas Storage Lease Agreement shall terminate on the tenth anniversary date, if and only if, the Lessee or some other person has not applied to the Ontario Energy Board to have the said lands or any part thereof designated as a Gas Storage area on or before the tenth anniversary date thereof." When read in conjunction with clause 3 of the 1998 gas storage lease providing for the automatic renewal of that agreement, the termination provision in Schedule B demonstrated that the parties intended the appellant's gas storage rights to come to an end if the issue of gas storage rights had not been taken to the OEB within the ten-year term.

Snopko v. Union Gas Ltd. (2010), 100 O.R. (3d) 161, [2010] O.J. No. 1335, 2010 ONCA 248, 317 D.L.R. (4th) 719, 261 O.A.C. 1, 100 L.C.R. 137, 187 A.C.W.S. (3d) 110, consd

Other cases referred to

Borowski v. Canada (Attorney General), 1989 123 (SCC), [1989] 1 S.C.R. 342, [1989] S.C.J. No. 14, 57 D.L.R. (4th) 231, 92 N.R. 110, [1989] 3 W.W.R. 97, J.E. 89-499, 75 Sask. R. 82, 47 C.C.C. (3d) 1, 33 C.P.C. (2d) 105, 38 C.R.R. 232, 7 W.C.B. (2d) 61; Tribute Resources Inc. v. 2195002 Ontario Inc., [2012] O.J. No. 55, 2012 ONSC 25 (S.C.J.); Tribute Resources Inc. v. McKinley Farms Ltd., [2010] O.J. No. 2293, 2010 ONCA 392, 263 O.A.C. 214

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 6 [as am.], (1)(b) [as am.]

Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B, ss. 19 [as am.], 36.1, (1)(a), 37 [as am.], 38 [as am.], (1), (2), (3)

APPEAL from the judgment of Rady J. (2012), 113 O.R. (3d) 67, [2012] O.J. No. 4900, 2012 ONSC 5412 (S.C.J.) interpreting oil and gas agreements.

Christopher A. Lewis, for appellant.

William Mitches, for respondent.

[1] BY THE COURT: -- This appeal involves a dispute over the interpretation of various oil and gas agreements and whether they confer a right to inject and store gas into and under certain lands now owned by McKinley Farms Limited (the "McKinley lands"). Both the appellant, Tribute Resources Inc. ("Tribute"), and the respondent, 2195002 Ontario Inc. ("219 Ontario"), claim the right to inject and store gas into and under the McKinley lands under agreements made with the landowner. [page194]

[2] The application judge held that 219 Ontario was entitled to the disputed rights by virtue of a gas storage lease made in March 2009 (the "219 Ontario gas storage lease"). She rejected Tribute's claim to those rights under an oil and gas lease dated October 12, 1977 (the "1977 oil and gas lease") as amended by a unit operation agreement dated November 30, 1984 (the "1984 unit operation agreement").

[3] Although the application judge accepted that the 1977 oil and gas lease and the 1984 unit operation agreement conveyed certain gas storage rights that were in turn subsequently assigned to Tribute, she found that those rights were replaced by the terms of a gas storage lease entered into by Tribute and McKinley Farms Limited on September 24, 1998 (the "1998 Tribute gas storage lease").

[4] Previous litigation that reached this court determined that the 1998 Tribute gas storage lease terminated in September 2008: see Tribute Resources Inc. v. McKinley Farms Ltd., [2010] O.J. No. 2293, 2010 ONCA 392, 263 O.A.C. 214. The application judge concluded that the termination of the 1998 Tribute gas storage lease left Tribute without any right to store gas on the McKinley lands. Any of Tribute's gas storage rights with respect to the land had been replaced by the terms of the now terminated 1998 Tribute gas storage lease. The 219 Ontario gas storage lease was, therefore, the only agreement permitting gas storage rights on the McKinley lands.

[5] On appeal, Tribute argues that the 1977 oil and gas lease and the 1984 unit operation agreement do contain gas storage rights and that those rights continue to exist despite the termination of the 1998 Tribute gas storage lease. Tribute's argument turns primarily on the interaction of the relevant provisions of these three documents and, in essence, involves an issue of contractual interpretation.

[6] 219 Ontario submits that the application judge properly interpreted the relevant documents. However, 219 Ontario also raises a preliminary argument that this court's jurisdiction to hear this appeal has been ousted because of an order made by the Ontario Energy Board (the "OEB") after the application judge's decision.

[7] For the reasons that follow, we reject 219 Ontario's preliminary argument and, in addition, we dismiss Tribute's appeal.

A. 219 Ontario's Preliminary Argument

[8] As a preliminary argument, 219 Ontario submits that although the application judge had jurisdiction to determine the contractual rights of the parties under the various agreements, [page195] this court has no jurisdiction to entertain an appeal from the application judge's decision because of an order made by the OEB four months after the application judge's decision in respect of the McKinley lands.

[9] On December 21, 2012, at the request of Tribute, the OEB made an order under s. 36.1 of Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B (the "Energy Act") designating the McKinley lands as a gas storage area and a further order under s. 38 of the Energy Act authorizing Tribute to inject, store and remove gas from those lands. In addition, the OEB stayed the pending compensation application in relation to those lands pending conclusion of "all related court proceedings . . . including any appeal of [the application judge's decision]". Presumably, 219 Ontario's contractual rights in the lands, if any, would be relevant to any compensation order made by the OEB.

[10] 219 Ontario's preliminary argument is premised on various provisions of the Energy Act that deal with the OEB's authority to regulate gas storage areas and on this court's decision in Snopko v. Union Gas Ltd. (2010), 100 O.R. (3d) 161, [2010] O.J. No. 1335, 2010 ONCA 248 interpreting those provisions.

[11] As described in Snopko, at para. 22:

Under the [Energy] Act, the [OEB] has broad jurisdiction to regulate the storage of natural gas, to designate an area as a gas storage area, to authorize the injection of gas into that area, and to order the person so authorized to pay just and equitable compensation to the owners of the property overlaying the storage area.

[12] Under s. 36.1(1)(a) of the Energy Act, the OEB may "designate an area as a gas storage area for the purposes of the Act".

[13] Section 37 prohibits the injection of gas for storage into a geological formation "unless the geological formation is within a designated gas storage area" and, in relation to gas storage areas designated after January 31, 1962, "unless . . . authorization has been obtained".

[14] Under s. 38(1) of the Energy Act, the OEB may authorize the injection, storage and removal of gas from a designated gas storage area.

[15] Subject to any agreement, s. 38(2) requires a person authorized to inject, store and remove gas from a designated gas storage area to make "just and equitable compensation" to the owners of such rights with respect to those rights and for any damage resulting from their exercise.

[16] Notably, s. 38(3) of the Energy Act gives the OEB exclusive jurisdiction to deal with compensation issues relating to authorized injection and storage rights and prohibits civil proceedings with respect to such issues: [page196]

38(3) No action or other proceeding lies in respect of compensation payable under this section and, failing agreement, the amount shall be determined by the Board.

[17] Further, s. 19 of the Energy Act gives the OEB the authority to hear and determine all questions of fact and law falling within its jurisdiction together with exclusive jurisdiction in respect of all matters in which jurisdiction is conferred on it by the Energy Act:

19(1) The Board has in all matters within its jurisdiction authority to hear and determine all questions of law and fact.

(6) The Board has exclusive jurisdiction in all cases and in respect of all matters in which jurisdiction is conferred on it by this or any other Act.

[18] In Snopko, this court upheld a decision dismissing for want of jurisdiction an action brought by land owners against a company authorized to inject and store gas on their lands where the action was commenced after a s. 38 compensation order had been made.

[19] In Snopko, the landowners' action was framed in misrepresentation, breach of contract, unjust enrichment, nuisance and negligence. This court held that in determining whether an action or proceeding falls within the prohibition contained in s. 38(3), it is the substance and not the form of the claim that governs. On the facts of that case, this court found that despite their legal labels, in substance, the landowners' claims fell within the scope of "just and equitable compensation" as described in s. 38(2) of the Energy Act.

[20] Relying on Snopko and on the various provision of the Energy Act to which we have referred, 219 Ontario contends that the orders designating the McKinley lands as a gas storage area under the Energy Act and authorizing Tribute to inject, store and remove gas into and from those lands had the effect of ousting the court's jurisdiction to further adjudicate the issues of contractual interpretation in dispute on this appeal.

[21] We do not accept 219 Ontario's submissions. The issue of jurisdiction was raised in the Superior Court. It is now undisputed that the application judge had jurisdiction to make her decision. In our view, nothing in s. 38(3) of the Energy Act ousts the jurisdiction of this court to entertain an appeal on the merits from a final order of a Superior Court judge made within its jurisdiction.

[22] Tribute brought a preliminary application in the Superior Court objecting to that court's jurisdiction to entertain the application because of its pending application to the OEB for orders [page197] under ss. 36.1 and 38 of the Act. In an endorsement dated January 6, 2012, Bryant J. dismissed Tribute's objection: see Tribute Resources Inc. v. 2195002 Ontario Inc., [2012] O.J. No. 55, 2012 ONSC 25 (S.C.J.).

[23] In his endorsement, Bryant J. concluded that this court's decision in the previous litigation between the parties, Tribute Resources Inc. v. McKinley Farms, resolved the jurisdiction issue.

[24] At the time of the appeal hearing in the previous litigation, Tribute had a prior application pending before the OEB for an order designating the McKinley lands as a gas storage area and for injection and storage rights.

[25] At paras. 18 and 19 of this court's previous decision [Tribute Resources Inc. v. McKinley Farms, supra], Juriansz J.A. held that s. 38(3) of the Energy Act did not affect the court's jurisdiction:

The parties are agreed that the recent decision of this court in Snopko et al. v. Union Gas Ltd., does not apply to this case. In Snopko, this court examined the scope of the privative clause set out in s. 38(3) of the [Energy Act][.]

Section 38(1) provides that the OEB may make a designation order authorizing a person to "inject gas into, store gas in and remove gas from a designated gas storage area, and to enter into and upon the land in the area and use the land for that purpose" and such an authorized person is required under s. 38(2) to make "just and equitable compensation" for the right to store gas or for any damage resulting from the authority to do so. The substances of the claims in this case do not fall within the language of s. 38(2) as no designation order has been made by the OEB in relation to these lands. The court's jurisdiction to determine the questions on appeal is not at issue.

(Emphasis added; citations omitted)

[26] At paras. 23 and 24 of his endorsement, Bryant J. adopted this reasoning. He held that the interpretation of the leases was not within the OEB's exclusive jurisdiction because the OEB had not yet made an order designating the proposed storage areas under the Energy Act [at paras. 23-24].

The pending application filed by 219 [Ontario], dated September 1, 2011, requests a judge of the Superior Court to interpret the Tribute Oil and Gas Lease and the 219 Ontario Gas Storage Lease. The Board has not "designated a gas storage area" or "authorized a person to inject gas into, store gas in and remove gas from a designated gas storage area and to enter into and upon the land in the area and use the land for that purpose" or made a compensation order under s. 36.1, s. 38(1), s. 38(2) or s. 38(3) of the [Energy Act] [.]

In my view, the substance of the claims made by 219 Ontario in its application to the Superior Court for the interpretation of leases does not fall within the language of s. 36.1, s. 38(1) or s. 38(2) of the [Energy Act]. I find that judges of the Superior Court regularly interpret leases and other contracts and have the jurisdiction to interpret the contacts at issue and to [page198] grant the relief sought by 219 Ontario. I further find that the interpretation of the leases is not within the exclusive jurisdiction of the Board because the Board has not made an order designating the proposed storage areas under s. 36.1 or 38 of the Act [Energy Act]. (Tribute v. McKinley, supra, at paras. 18 and 19).

(Footnotes omitted)

[27] Bryant J.'s decision was not appealed.

[28] The jurisdiction of this court to entertain this appeal derives from s. 6 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the "CJA"). Under s. 6(1)(b) of the CJA, this court has jurisdiction to entertain an appeal from the application judge's decision because it is a final order of a Superior Court judge.

[29] The parties agree that the application judge had jurisdiction to render her judgment interpreting the relevant contractual documents. Her judgment is a final order and nothing in s. 38(3) of the Energy Act ousts this court's jurisdiction to entertain an appeal under s. 6(1)(b) of the CJA. Neither the decision of the application judge, nor this decision, address compensation under the Energy Act. The order of the OEB made some four months after the decision of the application judge cannot turn what was an order interpreting contractual rights into an order for compensation under the Energy Act.

[30] The questions of what, if any, effect this court's decision will have on the OEB's determination of the compensation issues now outstanding under the Energy Act and whether this appeal may now be moot are different issues than the jurisdictional issue raised by 219 Ontario.

[31] The fact that this court has jurisdiction to entertain an appeal from the application judge's decision does not determine the question of the effect, if any, of this court's decision on the compensation issues under the Energy Act.

[32] We make no comment on that subject, which will be a matter for the OEB to determine.

[33] To the extent that 219 Ontario may be arguing that this court should not entertain this appeal because the OEB is entitled to make its own determination of the issues decided by the application judge thus making this appeal moot, we would not give effect to that argument in the circumstances of this case. Although 219 Ontario submits that this court should not hear this appeal, it also submits that the OEB is bound by the application judge's decision. We reject that position. 219 Ontario cannot have it both ways. If the OEB decides it is bound by the application judge's decision, the issues before this court are not moot.

[34] In any event, as we have said, in its December 21, 2012 decision, the OEB stayed the compensation application in relation [page199] to the McKinley lands pending the conclusion "of all related Court proceedings . . . including any appeal of Superior Court File No. 5041/2011". The terms of this order indicate that from the perspective of the OEB, the outcome of this appeal has potential relevance to the terms of any compensation order to be made by the OEB. Accordingly, even if this appeal is now technically moot because the OEB is entitled to make its own determination of the issues determined by the application judge, we would exercise our discretion to decide it: see Borowski v. Canada (Attorney General), 1989 123 (SCC), [1989] 1 S.C.R. 342, [1989] S.C.J. No. 14, at p. 353 S.C.R.

B. The Interpretation Issue

[35] The application judge gave several reasons for holding that the 1998 Tribute gas storage lease replaced the gas storage rights conveyed under the 1977 oil and gas lease as amended by the 1984 unit operation agreement. Tribute raises multiple grounds of appeal relating to those reasons. In our view, it is unnecessary that we address all of Tribute's arguments because an examination of the agreements at issue demonstrates that the application judge's conclusion is correct.

(1) The agreements at issue

[36] In her reasons, the application judge briefly reviewed the agreements at issue. In doing so, she reproduced relevant provisions of the 1977 oil and gas lease that refer to storage rights [at para. 11]:

That the Land Owner . . . does hereby grant, demise, and lease to Operator for the term of ten years and so long thereafter as oil or gas are produced in paying quantities, or storage operations are being conducted, . . . and Land Owner also leases to Operator the exclusive right to drill for, produce, store, treat, transport and remove by any method all oil and gas found in or under the said lands, to store in any gas sands on the premises and withdraw therefrom gas originally produced from other lands[.]

If, at any time prior to the termination of this lease, the Operator should decide to utilize any underlying productive gas sand as a storage reservoir for the gas originally produced from other lands, Operator agrees to notify Land Owner of such utilization, and thenceforth to pay Land Owner double the herein specified acreage rental amount as full compensation for the storage rates hearing granted and in lieu of all delay rental[.]

(Emphasis added by application judge)

[37] The application judge noted that gas was discovered on the McKinley lands by Tribute's predecessor in 1982 and 1983. Following that discovery, the 1977 oil and gas lease was amended by the 1984 unit operation agreement, which included detailed [page200] provisions relating to production royalties and which replaced the royalty provisions in the 1977 oil and gas lease. Once again, the application judge reproduced relevant portions of the 1984 unit operation agreement that refer to storage rights [at para. 13]:

AND WHEREAS it is believed that the Salina and Guelph-Lockport formation underlying those certain lands listed and described in Schedule "B" hereunto annexed and a part hereof, (and which include all or part of the said lands) contain a gas as or gas and oil reservoir or pool known as the Stanley 4-7-XI Pool as hereinafter defined;

AND WHEREAS for the purpose of protecting the Stanley 4-7-XI Pool . . . and for the protection of their correlative rights . . . the parties hereto desire to amend the said lease and to unite and combine that portion of the said lands which is included in Schedule "B" . . . with all of the other lands in the said schedule, into a single operative unit[.]

12. If, at any time prior to the termination of this Agreement, the Lessee should decide to utilize the underlying productive gas sand as a storage reservoir for gas originally produced from other lands, the Lessee agrees to notify the Lessor of such utilization, and thenceforth to pay Lessor double the herein specified acreage rental amount as full compensation for the storage rights herein granted and in lieu of all delay rental in event there is a productive well or wells on these lands at the date of said notification the Lessee shall not commence utilization of the lands as a storage reservoir without first entering into an agreement with the Lessor to settle the value of the Lessor's royalty[.]

13. Excepting as herein hereby expressly modified or amended, the said lease shall continue in all respects in full force and effect for so long as therein provided, and the same as so amended or modified is ratified and confirmed[.]

(Emphasis added by application judge)

[38] As for the 1998 Tribute gas storage lease, the application judge noted that it included, among others, the following terms [at para. 16]:

The Lessor doth hereby demise and lease unto the Lessee . . . the said lands save and except the surface rights thereto . . . to be held by the Lessee subject to the oil and gas lease, as tenant for a term of Ten (10) years from the date hereof, subject to renewal as hereinafter provided, for the purpose of injecting, storing and withdrawing gas, natural and/or artificial, . . . within or from the demised lands:

16. Subject to its rights, if any, under the oil and gas lease, the Lessee shall not inject gas into the demised lands under the provisions hereof unless . . .

17. This Agreement expresses and constitutes the entire agreement between the Parties, no implied covenant or liability of any kind is created or shall arise by reason of these present or anything herein contained.

(Emphasis added by application judge) [page201]

[39] In addition, the application judge referred to the following terms contained in Schedule B to the 1998 Tribute gas storage lease:

-- a termination provision;

the 1998 compensation rates for crop damage and the mechanism for their calculation in ensuing years; and

a term stating [at para. 17], "all provisions in this schedule shall be additional and shall be paramount with any of the terms contained in the original agreement".

(2) The application judge's reasons

[40] After reviewing the agreements at issue and the legal principles relevant to the interpretation of commercial contracts, the application judge turned to her analysis. She concluded that the 1998 Tribute gas storage lease was intended to replace gas storage rights contained in the 1977 oil and gas lease and in the 1984 unit operation agreement for several reasons.

[41] First, the 1998 Tribute gas storage lease contained an entire agreement clause. The application judge said [at para. 37], "[t]his must mean that all matters pertaining to storage are contained in that lease".

[42] Second, Sch. B to the 1998 Tribute gas storage lease stated "all provisions in this schedule shall be additional and shall be paramount with any of the terms contained in the original agreement". The application judge concluded [at para. 37] that this was a "clear expression of the parties' intention that the [1998 Tribute gas storage lease] was to prevail [over the earlier agreements], at least in respect of those matters dealt with in the schedule".

[43] Third, in the application judge's view, the 1984 unit operation agreement supported her conclusion. The 1984 unit operation agreement contemplated that a further agreement would be entered into prior to the lessee beginning to use the lands as a gas storage reservoir. Further, while the 1984 unit operation agreement specifically provided that except as modified by it, the 1977 oil and gas lease remained in full force and effect, the 1998 Tribute gas storage lease contained no such language.

[44] Fourth, the 1998 Tribute gas storage lease contained broader storage rights and more detailed provisions relating to storage rights than the earlier agreements. In the application judge's view [at para. 39]: [page202]

The parties' subsequent conduct in executing a specific storage lease support[ed] the common sense conclusion that they considered that the earlier lease dealt primarily with drilling and extraction rights and did not adequately provide for storage.

In her view, it was "disingenuous" for Tribute to assert that the 1998 Tribute gas storage lease was created to "supplement" the earlier agreements. The broader rights and privileges included in the 1998 Tribute gas storage lease were [at para. 40]:

. . . strong objective evidence that the parties intended the storage lease to provide for all of the contractual rights and obligations governing storage and that it was to replace rather than supplement the earlier agreement.

(3) Tribute's position on appeal

[45] Tribute submits that the application judge made multiple errors in her interpretation of the 1998 Tribute gas storage lease:

she failed to consider and give meaning to the four references in the 1998 Tribute gas storage lease to that agreement being "subject to the oil and gas lease";

she erred in relying on the entire agreement clause in the 1998 Tribute gas storage lease as supporting her interpretation that the 1998 Tribute gas storage lease replaces the earlier agreements;

she erred in failing to accept the uncontradicted evidence of Tribute's representative that the 1998 Tribute gas storage lease was intended to supplement the earlier agreements and to provide Tribute with a modern form of gas lease to submit to the OEB;

she erred in concluding that the words "original agreement" in Schedule B to the 1998 Tribute gas storage lease referred to the 1977 oil and gas lease as opposed to the pre-printed section of the 1998 Tribute gas storage lease; and

she erred in concluding that the language of the 1984 unit operation agreement supported her interpretation.

[46] In addition, Tribute asserts that the application judge's findings are procedurally unfair because she referred in her reasons to six decisions not relied on by 219 Ontario and because her central conclusion that the 1998 Tribute gas storage lease was intended to replace gas storage rights contained in earlier documents was not anchored in the pleadings. [page203]

(4) Discussion

[47] As we have said, in our view, an examination of the agreements at issue demonstrates that the 1998 Tribute gas storage lease was intended to replace the earlier agreements insofar as they related to gas storage rights. We note, first of all, that the 1998 Tribute gas storage lease is, on its face, a detailed document designed specifically to address gas storage rights, whereas the 1977 oil and gas lease as amended by the 1984 unit operation agreement addresses the issue of gas storage rights somewhat peripherally.

[48] Both the title and terms of the 1998 Tribute gas storage lease demonstrate that the agreement was designed specifically to address gas storage rights. The document is called, and registered on title as, a gas storage lease agreement. The demising clause states that the lands (save and except the surface rights) are leased "for the purpose of injecting, storing and withdrawing gas, natural and/or artificial . . . within or from the demised lands". The terms of the 1998 Tribute gas storage lease are detailed and make more specific provision for matters addressed in less detail in the earlier agreements.

[49] For example, Schedule B to the 1998 Tribute gas storage lease makes specific provision for the 1998 compensation rates for crop damage for individual crops and the mechanism for calculation of crop damage rates in ensuing years.

[50] By way of contrast, the 1977 oil and gas lease as amended by the 1984 unit operation agreement deals primarily with oil production and royalties issues. Although gas storage rights are provided for, they are not the main focus and are not dealt with in the same level of detail as in the 1998 Tribute gas storage lease.

[51] Perhaps more importantly, the payment provisions of the 1998 Tribute gas storage lease are different than, and inconsistent with, the payment provisions of the 1977 oil and gas lease as amended by the 1984 unit operation agreement.

[52] The latter documents provide a per acreage charge for gas storage rates and require that the parties enter into a further agreement to address residual royalties. Clause 12 of the 1984 unit operation agreement states:

12. If, at any time prior to the termination of this Agreement, the Lessee should decide to utilize the underlying productive gas sand as a storage reservoir for gas originally produced from other lands, the Lessee agrees to notify the Lessor of such utilization, and thenceforth to pay Lessor double the herein specified acreage rental amount as full compensation for the storage rights herein granted and in lieu of all delay rental in event there is a productive well or wells on these lands at the date of said notification the [page204] Lessee shall not commence utilization of the lands as a storage reservoir without first entering into an agreement with the Lessor to settle the value of the Lessor's royalty.

[53] In contrast, the 1998 Tribute gas storage lease provides that the lessee will serve a notice of what it proposes to pay for gas storage rights and that if the parties cannot agree, the issue will be determined by arbitration. Clauses 16-18 of the 1998 Tribute gas storage lease read as follows:

16. Subject to its rights, if any, under the oil and gas lease, the Lessee shall not inject gas into the demised lands under the provisions hereof until it has offered to the Lessor the additional acreage rental to be paid to the Lessor in respect of its storage operations to be conducted hereunder in the manner hereinafter provided and until it has offered to purchase from the Lessor, as hereinafter provided, the Lessor's interest in such of the gas and oil and related hydrocarbons (hereinafter called "the petroleum substances") contained in the demised lands as are liable on the withdrawal of the gas so injected to be co-mingled indistinguishably therewith as to their respective volumes, or as are liable to be rendered commercially unrecoverable by reason of such injection or the storage operations to be conducted by the Lessee hereunder. Nothing herein shall prevent the Lessee from and it is hereby given the right at any time and from time to time to purchase the Lessor's interest in any or all the other petroleum substances contained in the demised lands.

17. The purchase price of any of the petroleum substances to be purchased by the Lessee under Clause 16 hereof shall be computed as follows:

18. In the event that the Lessee desires to purchase any of the petroleum substances as provided in Clauses 16 and 17 hereof, it shall give written notice to the Lessor of the quantity thereof to be purchased, the price therefor computed as provided in Clause 17(a) and the effective date of such purchase. The Lessee shall in addition state the additional acreage rental to be paid by the Lessee in respect of its storage operations to be conducted hereunder. The Lessor shall within Thirty (30) days from the receipt of the aforesaid notice advise the Lessee that it disputes either the purchase price or the additional acreage rental or both of them and in default of such notice of dispute the Lessor shall be deemed to have agreed thereto and the same shall become final and binding upon the Lessor and the Lessee. In the event that the Lessor gives such notice of dispute, such purchase price and additional acreage rental and any other compensation payable to the Lessor in respect of the Lessee's storage rights hereunder shall be determined by a board of arbitration in the manner provided under the Energy Board Act of Ontario and the regulations thereunder or any act or regulations in amendment or substitution therefor.

[54] In our view, this difference in the payment provisions makes it clear that the 1998 Tribute gas storage lease was intended to replace the earlier agreements and not merely to supplement them. Because of the difference in the payment provisions, the two sets of documents could not coexist. [page205]

[55] Equally compelling evidence that the 1998 Tribute gas storage lease was intended to replace the earlier agreements is the fact that this agreement provides that it would terminate if the issue of designation of the lands as a gas storage area had not been taken to the OEB within ten years.

[56] The 1998 Tribute gas storage lease had a term of ten years. Clause 3 of the main body of the agreement provides for automatic renewal of the agreement upon the expiry of the ten-year term unless the lessee provided written notice of its desire not to renew the agreement.

[57] However, Schedule B to the 1998 Tribute gas storage lease states:

This Gas Storage Lease Agreement shall terminate on the tenth anniversary date, if and only if, the Lessee or some other person has not applied to the Ontario Energy Board to have the said lands or any part thereof designated as a Gas Storage area on or before the tenth anniversary date hereof.

[58] In our view, when read in conjunction with clause 3 of the 1998 Tribute gas storage lease providing for the automatic renewal of that agreement, the termination provision in Schedule B demonstrates that the parties intended Tribute's gas storage rights to come to an end if the issue of gas storage rights had not been taken to the OEB within the ten-year term. The automatic renewal provision ensured that Tribute's gas storage rights were to continue indefinitely and that they were to do so on the terms set out in the 1998 Tribute gas storage lease. However, they would only continue indefinitely if the issue of gas storage rights had been taken to the OEB during the initial term of the 1998 Tribute gas storage lease. Otherwise, gas storage rights would end.

[59] Based on our review of the relevant agreements, we are satisfied that the application judge was correct in holding that the 1998 Tribute gas storage lease was intended to replace the earlier agreements.

[60] Further, we reject Tribute's claim that it has suffered procedural unfairness. The issue before the application judge was the proper interpretation of the agreements at issue. Tribute has had a full opportunity to present and respond to arguments concerning that issue.

C. Disposition

[61] Based on the foregoing reasons, we reject 219 Ontario's preliminary argument that this court lacks jurisdiction to entertain this appeal and we dismiss Tribute's appeal. Costs of the appeal are to 219 Ontario fixed in the amount of $26,150, [page206] inclusive of disbursements and applicable taxes as agreed upon by the parties.

Appeal dismissed.

End of Document