COURT OF APPEAL FOR ONTARIO DATE: 20220427 DOCKET: C69430

Lauwers, Huscroft and Coroza JJ.A.

BETWEEN

Prism Resources Inc. Plaintiff (Respondent)

and

Detour Gold Corporation Defendant (Appellant)

Counsel: Zohar Levy and Harry Skinner, for the appellant David Sischy and Bethanie Pascutto, for the respondent

Heard: January 25, 2022 by video conference

On appeal from the judgment of Justice Eugenia Papageorgiou of the Superior Court of Justice, dated April 1, 2021, reported at 2021 ONSC 1693.

Lauwers J.A.:

Overview

[1] The appellant Detour Gold Corporation is the registered owner of certain mining claims and leases in Northern Ontario. It acquired its interest from Conquest Resources Inc. The respondent, Prism Resources Inc., sued Detour for a declaration that it has a valid and enforceable royalty interest in Detour’s mining claims and leases in two properties known as the Aurora Property and the Sunday Lake Property.

[2] The motion judge granted summary judgment, concluding that Prism’s royalty interest was an interest in land under the principles of law set by the Supreme Court in Bank of Montreal v. Dynex Petroleum Ltd., 2002 SCC 7, [2002] 1 S.C.R. 146, as explained by this court in Third Eye Capital Corp. v. Dianor Resources Inc., 2018 ONCA 253, 141 O.R. (3d) 192.

[3] For the reasons that follow, I would dismiss Detour’s appeal.

[4] I observe that none of the facts, the documents, or the evidence are as well-developed as they would have been had Prism’s summary judgment motion been brought after completion of the ordinary discovery process. But r. 20.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, permits such a motion. Detour criticizes Prism for its spare approach to the evidence, but the Rules provide avenues by which either party, as well-advised as they are, could have put a more robust record before the motion judge, in accordance with their obligation to put their best foot forward. The too-frequent strategy of playing the onuses and burdens in a summary judgment motion often causes remorse.

The Factual Context

[5] Prism's interest in the properties has changed over the years, through a sequence of options and joint venture agreements:

• 1999: Prism acquired the option to a 60% interest in the mining rights from Boliden Westmin Ltd. Prism also acquired the option to increase its 60% interest to 100%. These options were to be exercised and maintained by spending specific sums of money to explore the properties (the “1999 Agreement”).
• March 2002: Prism entered into a joint venture agreement with Conquest. Prism granted Conquest an exclusive option to acquire up to 60% of Prism’s interest in the Properties. Prism agreed to pay the necessary expenditures to secure its 60%, in accordance with the 1999 Agreement. Prism also agreed that if it failed to do so, Conquest could make the payments and increase its option to 90% of Prism’s interest. The agreement also provided that if either party’s interest was reduced to less than 10%, or it failed to make payments under the 1999 Agreement, the defaulting party’s interest would be transferred to the non-defaulting party. The defaulting party would then receive a Net Smelter Returns Royalty of 0.5%.
• March 2004: Prism’s interest was reduced to 10% or less.
• June 2004: By letter agreement, Prism transferred its remaining interest to Conquest in exchange for a 7.5% “carried interest in the project[’s]” net profits (the “2004 Letter Agreement”).
• 2010: Conquest, which then owned 60% of the properties, bought the remaining 40% from Boliden’s successor, NVI Mining Ltd.
• 2010-2014: Conquest sold its entire interest in a series of agreements so that by November 21, 2014, Detour owned both properties, subject to Prism’s interest.

[6] The precise nature of Prism’s interest is in issue. Prism asserts that it has an interest in land enforceable against Detour. Detour takes the position that Prism had only a contractual relationship with Conquest. Upon the transfer of Conquest’s interest to Detour, Prism’s contractual interest fell away because it was not an interest in land. Detour first took this position in 2017.

The Issues

[7] The outcome depends on the interpretation of the 2004 Letter Agreement between Prism and Conquest. The appellant argues that the motion judge erred:

i. In making palpable and overriding factual errors; ii. In her approach to the governing law in Dynex; iii. In her approach to contractual interpretation; iv. In taking into account the post-transaction conduct of the parties.

I address each issue in turn.

Analysis

[8] I begin with the governing principles, next review the motion judge’s reasons, and then apply the governing principles.

The Governing Principles

[9] There are three interlocking sets of governing principles, the first concerning Dynex, the second concerning contractual interpretation, and the third concerning the permissible use of post-event conduct in contractual interpretation.

The Governing Principles set out in Dynex

[10] It is common ground that Dynex changed property law in Canada, and that Prism and Conquest were both aware of that change when they negotiated the 2004 Letter Agreement.

[11] At para. 22 of Dynex, Major J. noted that Canadian common law should recognize that a “royalty interest” or an “overriding royalty interest” can be an interest in land under two conditions: first, if “the language used in describing the interest is sufficiently precise to show that the parties intended the royalty to be a grant of an interest in land, rather than a contractual right to a portion of the oil and gas substances recovered from the land”; and, second, if “the interest, out of which the royalty is carved, is itself an interest in land”.

[12] The motion judge was well-aware of the reasoning in Dynex, noting, at para. 18: “The ruling in Dynex specifically changed the law to bring it in line with industry practice, to permit a royalty that consists of a right to payment of profits to be an interest in land”. After specifying the two-part test in Dynex, the motion judge said, at para. 19: “There is no issue in this case that the second part of the test set out in Dynex is satisfied in that the property interest claimed by Prism has been carved out of Conquest’s property interest”. This finding was not appealed, and is incontestable in any event because Prism’s interest in the lands owned by Boliden was registrable although never registered. The 1999 Agreement provided that: “A party will be entitled to register this Agreement or notice thereof against the Property, subject in the case of the Leases to the consent of the Ministry, and each party will cooperate in effecting the registration of any such notice and execute any documentation required in connection therewith”.

[13] Writing for this court in Third Eye, in glossing Dynex, I made several statements that are pertinent to this appeal. I noted that the Supreme Court had upheld the approach of the Court of Appeal of Alberta in Dynex, which was that “[t]he parties’ intent could be inferred”: at para. 46. About the application of Dynex, I noted, at paras. 54-55:

Several points in the decision are of continuing importance. Justice Major noted, at para. 6: “For substantially the same reasons as the Court of Appeal, I conclude that overriding royalty interests can be interests in land.” He added, at para. 19, that he much preferred that court’s “compelling insight into the evolution of the law”. In my view, this language gives continuing relevance to the approach and the ruling of the Court of Appeal of Alberta, especially its statement, at para. 73, that a court must “examine the parties’ intentions from the agreement as a whole, along with the surrounding circumstances, as opposed to searching for some magic words.”

I also note that Major J. approved the holding of Laskin J. in dissent in Saskatchewan Minerals. He noted, at para. 11, that: “[t]he effect of Laskin J.’s reasons was to render inapplicable, at least insofar as overriding royalties, the common law rule against creating interests in land out of incorporeal interests.” He described Laskin J.’s holding, at para. 12: “[T]he intentions of the parties judged by the language creating the royalty would determine whether the parties intended to create an interest in land or to create contractual rights only.” This was the Supreme Court’s ultimate holding in Dynex.

[14] This analysis led me to conclude, at para. 65 of Third Eye, that “contractual terms are not necessarily determinative of whether an interest in land was intended; the language does not require magic words to demonstrate the parties’ intention”. The New Brunswick courts took a similar approach in Blue Note Mining Inc. v. Fern Trust (Trustee of), 2008 NBQB 310, 337 N.B.R. (2d) 116, aff’d 2009 NBCA 17, 342 N.B.R. (2d) 151.

The Governing Principles of Contractual Interpretation

[15] The parties agree that the Supreme Court’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, sets out the governing principles of contractual interpretation. The relevant principles are also addressed in this court’s decisions in Weyerhauser Co. v. Ontario (Attorney General), 2017 ONCA 1007, 77 B.L.R. (5th) 175, at para. 65, per Brown J.A., rev’d on other grounds, Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, 444 D.L.R. (4th) 77; Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corp., 2021 ONCA 592, at para. 46, per Jamal J.A.; Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24, per Blair J.A.; and Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 52-56.

[16] These principles were conveniently summarized by Brown J.A. in Weyerhauser, at para. 65. A judge interpreting a contract should:

i) determine the intention of the parties in accordance with the language they have used in the written document, based upon the “cardinal presumption” that they have intended what they have said; ii) read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective; iii) read the contract in the context of the surrounding circumstances known to the parties at the time of the formation of the contract. The surrounding circumstances, or factual matrix, include facts that were known or reasonably capable of being known by the parties when they entered into the written agreement, such as facts concerning the genesis of the agreement, its purpose, and the commercial context in which the agreement was made. However, the factual matrix cannot include evidence about the subjective intention of the parties; and iv) read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed.

[17] Brown J.A. added several observations about the proper consideration of the “factual matrix” by a judge interpreting a contract, at paras. 66-68, to the effect that it comprises, as stated in Sattva at para. 58, only “objective evidence of the background facts at the time of the execution of the contract... that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”. The “surrounding circumstances”, Sattva noted, at para. 57, “must never be allowed to overwhelm the words of that agreement” and cannot be used “to deviate from the text such that the court effectively creates a new agreement”.

The Governing Principles on the Use of Post-Event Conduct in Contractual Interpretation

[18] Strathy C.J.O. thoroughly canvassed the authorities governing the use of subsequent conduct evidence in contractual interpretation in Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912, 404 D.L.R. (4th) 512. In considering Sattva, he noted that “subsequent conduct, or evidence of the behaviour of the parties after the execution of the contract, is not part of the factual matrix”: at para. 41. Unlike the factual matrix, which “relates solely to events at the time of contract formation,” evidence of which is “admissible in every case,” evidence of the parties’ subsequent conduct is only admissible in certain circumstances: Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis, 2020), at p. 112. If, after considering the text and the factual matrix, the contract remains ambiguous, then subsequent conduct evidence may be admitted to help resolve that ambiguity: Shewchuk, at para. 46. As Lambert J.A. put it in Re Canadian National Railways and Canadian Pacific Ltd. (1978), 95 D.L.R. (3d) 242, (B.C.C.A.), aff’d, , [1979] 2 S.C.R. 668, at para. 82:

In Canada the rule with respect to subsequent conduct is that if, after considering the agreement itself, including the particular words used in their immediate context and in the context of the agreement as a whole, there remain two reasonable alternative interpretations, then certain additional evidence may be both admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable alternative interpretations is the correct one. [Emphasis added.]

[19] Subsequent conduct evidence may be probative because it can shed light on “the meaning the parties gave to the words of their contract after its execution”, which “may support an inference concerning their intentions at the time they made their agreement” (emphasis in original): Shewchuk, at para. 48. However, relying on evidence of subsequent conduct poses certain risks, and can “be an unreliable guide to parties’ intent at the time they entered into an agreement”: Thunder Bay (City) v. Canadian National Railway Co., 2018 ONCA 517, 424 D.L.R. (4th) 588, at para. 63. Parties’ conduct may change over time, the evidence itself may be ambiguous, and parties may deliberately conduct themselves in a manner consistent with their preferred interpretation of the contract: Shewchuk, at paras. 43-45.

[20] In light of the dangers subsequent conduct evidence poses, once it has been admitted, the court should carefully consider what weight to assign to it. Such evidence “will be more reliable if the acts it considers are the acts of both parties, are intentional, are consistent over time, and are acts of individuals rather than agents of corporations”: Shewchuk, at para. 53. This evidence may also be given greater weight if it is “unequivocal in the sense of being consistent with only one of the two alternative interpretations of the contract” and if it is closer in time to the contract’s execution: Shewchuk, at paras. 54-55.

The Decision Under Appeal

[21] This appeal turns on the motion judge’s determination of the first Dynex requirement for finding an interest in land: Did the parties to the 2004 Letter Agreement use sufficiently clear language to show their intention to create an interest in land, rather than just a contractual right to a portion of the substances recovered? The motion judge answered in the affirmative.

[22] As noted, the motion judge instructed herself on Dynex and Third Eye. This is the critical passage from the text of the 2004 Letter Agreement between Prism and Conquest:

Prism would relinquish its current participating interest (10% less current dilution for non-payment of outstanding contributions and cash calls) and right to any net smelter royalty in return for a carried interest in the project equal to seven and one-half percent (7.5%) of Conquest's net profit from the Aurora property after deduction of interest charges, income and other applicable taxes, depreciation and amortization determined in accordance with generally accepted accounting principles applied in Canada. [Emphasis added.]

Even though the letter agreement referred only to the Aurora property, it is common ground that it applied to both the Aurora property and the Sunday Lake property.

[23] The motion judge rejected Detour’s argument that the intention of the parties to create an interest in land was not clear because the term “property interest” was not used in the 2004 Letter Agreement. She observed that the Agreement was short and informal. It appeared to have been drafted by Conquest’s President and then signed by one of Prism’s directors.

[24] The motion judge inferred that the parties, as people in the mining industry, knew that Dynex had changed the law and that royalty interests could be property interests. She also found that it would not be commercially reasonable for Prism to give up its property rights, in exchange for a mere contractual right that could evaporate as soon as Conquest sold its interest.

[25] The motion judge found there to be “some ambiguity as to whether the carried interest may refer to the joint venture as opposed to the Properties”. She then considered Conquest’s subsequent conduct and noted that Conquest repeatedly referred to the 2004 Letter Agreement as a “permitted encumbrance” in its agreements with Detour. She concluded that the royalty interest was an interest in land and not just a contractual interest.

The Principles Applied

[26] First, the appellant asserts that the motion judge clearly erred when she said, at para. 27: “Prism ultimately acquired a 100% interest in the Properties”. Detour argues that this error is so serious that it overrides the rest of the decision. I would reject this overly dramatic submission because it does not fit with other statements in the reasons that show the motion judge’s complete and accurate grasp of the true situation. The appellant also argues that the motion judge made a similar error at para. 63, when she said that at the time of the 2004 Letter Agreement “Conquest was the owner”. I would reject this argument. Paragraphs 26 and 28 show that the motion judge knew throughout that the issue was about an interest in an interest. This comes out most clearly in para. 30: “Conquest could make such payments on its behalf, whereupon Conquest's interest in Prism's interest in the Property would increase…” (emphasis added). I address the alleged valuation error below.

[27] Second, the appellant makes a textual argument. The language in the 2004 Letter Agreement provides that Prism is to continue with “a carried interest in the project”. The appellant argues that “[t]he 2004 agreement does not state that Prism’s interest was ‘in the land’ or contain any other language conveying an intention to create a right that would bind future owners of the Properties”. But this argument is what brings Dynex into play.

[28] The appellant concedes that the contracting parties were aware of Dynex’s change in the law but argues that the gloss put on Dynex in Third Eye was not part of their knowledge. Dynex, they say, required more specificity in contractual language. As a result, after finding that the 2004 Letter Agreement was ambiguous, the motion judge should have dismissed Prism’s claim, since ambiguous language cannot meet the “sufficiently precise” requirement set out in Dynex. I would reject this argument because it is inconsistent with the text of Dynex, as explained in Third Eye, which focused on the parties’ intention, not the language they used: Dynex, at para. 14. There is no doubt that the motion judge was fully conversant with the principles in Dynex, which she laid out in her reasons.

[29] Third, the appellant argues that the motion judge made improper use of the evidence of the “surrounding circumstances”, which she permitted to “overwhelm” the text of the 2004 Letter Agreement, contrary to the Supreme Court’s instructions in Sattva, at para. 57. I would reject this argument. The motion judge was careful in instructing herself on the proper use of the evidence of the surrounding circumstances according to Sattva. Relatedly, the appellant argues that the motion judge failed to consider the possibility that there had been material amendments to the 2002 joint venture agreement, since the 2004 Letter Agreement referred to those changes. The onus, says the appellant, was on Prism to make full disclosure, which might have affected the motion judge’s understanding of the surrounding circumstances. This underplays the appellant’s own responsibility to put forward its best foot through whatever means the Rules of Civil Procedure provide. The surrounding circumstances the motion judge considered were set out in the evidence the parties filed and over which they argued. She did not err in making the reasonable assumption that any amendments to the joint venture agreement were not material to the issues before her.

[30] The motion judge made reference to the interpretative principle of commercial reasonableness in her contractual analysis The appellant argues that this was a “breach of natural justice” because there was no argument or evidence addressed to her on the subject of commercial reasonableness, as it related to Prism’s interests in the Properties at the time of entering the 2004 Letter Agreement. There is no merit to this argument. While Sattva does not use the expression “commercially reasonable”, it is implicit in the Supreme Court’s logic in that case. Moreover, it is basic to the interpretation of commercial contracts, as this court pointed out in Weyerhauser.

[31] The appellant adds that, as part of her assessment of commercial reasonableness, the motion judge incorrectly referred to the value of Prism’s interest at “$1 million”. The appellant argues in its factum that: “Prism never adduced evidence or argued that as June 28, 2004, it had an interest in land with $1 million or that it would have been commercially unreasonable to convert that interest to a contractual right”.

[32] The passages in which the motion judge refers to the value are found in paras. 43 and 45 of her decision:

It would not have been commercially reasonable for Prism to agree to give up its property rights and its protected Net Smelter Returns Royalty which appears to be valued at $1 million at that time, in exchange for a mere contractual right against Conquest which could evaporate instantly if Conquest sold the Property. In my view, this would only make sense because the parties knew that Dynex had changed the law and they could create a property interest in a royalty stream.

Again, it makes no commercial sense for Prism to give up its property rights, its Net Smelter Returns Royalties which apparently were valued at $1 million in exchange for being relieved of required payments when it could have simply not paid these costs and still maintained a Royalty Interest which Conquest would have to protect if it ever sold its interest or which Conquest would have to purchase for $1 million. [Emphasis added.]

[33] I observe that the $1 million figure appears to have come from the joint venture agreement between Prism and Conquest, which the appellant summarized in its factum, explaining: “Further, the Remaining Participant also has the right to purchase the Diluted Participant’s Net Smelter Returns Royalty for $1.0 million “ at any time ” emphasis in original).

[34] The critical element of commercial reasonableness, as I interpret these paragraphs of the motion judge’s reasons, is in the obvious point that it would make no commercial sense for Prism to give up a property right in exchange for an ephemeral contractual right. The fact that the property itself was valuable also seems obvious from the evidence on the record including this action itself. The precise value is immaterial to the motion judge’s reasoning.

[35] Fourth, the appellant argues that the motion judge made improper use of “subsequent conduct evidence without first making a finding that even after looking at surrounding circumstances, the 2004 Agreement was ambiguous”. I would not accept this argument. The motion judge was scrupulous in her self-instruction on the use to which subsequent conduct could be put, including this court’s decision in Shewchuk. Her analysis did engage with the factual question of whether there was an ambiguity. She stated, at para. 39:

In my view, the words "carried interest in the project" are arguably a layperson's way or an informal manner of indicating an interest which would run with the land and be enforceable against whoever owned the property and earned profits which was Conquest at that time. However, I do note that the Letter Agreement says "carried interest in the project" and not "carried interest in the property." As well, there is specific reference to Conquest as opposed to anyone who owns the land. This raises some ambiguity as to whether the carried interest may refer to the joint venture as opposed to the Properties, although Prism's counsel argues that "project" means the mines. [Emphasis added.]

[36] Immediately after pointing this ambiguity out, the motion judge dealt with surrounding circumstances, which she was entitled to consider under Sattva, even without an ambiguity. Only then did she turn to subsequent conduct. There was nothing erroneous in this methodology.

[37] The motion judge concluded that the subsequent conduct showed that Prism’s royalty interests were considered by Conquest, and hence by its contracting party, Detour, to be a permitted encumbrance. She said, at para. 59:

In my view, Conquest's conduct in continually making reference to the Letter Agreement as a permitted encumbrance in its agreements with Detour is objective evidence from which I infer that Prism and Conquest intended at the time they made the agreement, that the Letter Agreement would create an interest in land. As directed in the case law, I have considered the weight to be given to this evidence, which in my view in this case is high given its consistency and the fact that it was demonstrably intentional given it involves what they included in detailed and elaborate negotiated agreements which appear to have been drafted by lawyers: Shewchuk at para 54. This subsequent conduct is overwhelmingly consistent with the interpretation that Prism and Conquest had intended to create an interest in land.

[38] The motion judge expressly noted that Conquest’s subsequent conduct on which Prism relied did not have the dangers referred to by this court in Shewchuk because the conduct occurred before any dispute between Prism and Detour, so “it could not possibly have been contrived to benefit Prism in this proceeding. It could only have been a sincere expression from Conquest as to what it intended by the letter agreement,” which was known to and binding on Detour.

[39] The motion judge’s chain of reasoning led her to conclude: “In all the circumstances, I am satisfied that the Letter Agreement created a property interest which runs with the lands in question”. The appellant has demonstrated no error in the motion judge’s methodology or chain of reasoning, nor any error in principle or palpable and overriding error of fact.

[40] Finally, the appellant argues that, upon finding an ambiguity in the 2004 Letter Agreement, the motion judge ought to have ordered the trial of that issue and refused summary judgment. This argument misunderstands the nature of summary judgment. As the motion judge pointed out, on the “best foot forward” principle, she was entitled to assume that all the relevant evidence was before her. Her decision on that evidence was well-rooted in the evidence.

[41] I would dismiss the appeal with costs payable to the respondent in the amount of $25,000, all-inclusive.

Released: April 27, 2022 “P.L.” “P. Lauwers J.A.” “I agree. Grant Huscroft J.A.” “I agree. Coroza J.A.”