2195002 Ontario Inc. v. Tribute Resources Inc.
113 O.R. (3d) 67
2012 ONSC 5412
Ontario Superior Court of Justice,
Rady J.
October 18, 2012
Contracts -- Interpretation and construction -- Respondent entering into oil and gas extraction lease and subsequently entering into gas storage lease -- Court of Appeal ruling in litigation between respondent and lessor that respondent's gas storage lease was no longer valid and that its oil and gas lease was valid -- Applicant applying successfully for order that its gas storage lease was only valid instrument permitting storage of gas on lands in question -- Respondent's oil and gas lease containing language that could be interpreted as conveying storage rights but respondent and lessor intending storage lease to replace those rights.
The respondent executed a lease with M Ltd. for oil and gas extraction on certain lands owned by M Ltd. The oil and gas lease was subsequently amended by a unit operation agreement after gas was discovered on the lands. The unit operation agreement provided that the respondent would not begin using the lands as a storage reservoir until a further agreement was reached respecting M Ltd.'s royalty entitlement. The respondent and M Ltd. subsequently executed a gas storage lease. In 2008, M Ltd. took the position that the respondent's leases had terminated. It subsequently entered into a new oil and gas lease and a gas storage lease with the applicant. In litigation between the respondent and M Ltd., the Court of Appeal found that the respondent's gas storage lease was no longer valid and that its oil and gas lease was valid and subsisting. The applicant brought an application for an order that its gas storage lease was the only valid instrument permitting the storage of gas on the lands in question. The respondent argued that it had storage rights under the oil and gas lease as amended by the unit operation agreement.
Held, the application should be granted.
The oil and gas lease contained language that could be interpreted as conveying rights to storage, but the storage lease agreement was intended by the respondent and M Ltd. to replace those rights. There was a "whole agreement" clause in the storage lease, meaning that all matters pertaining to storage were contained in that lease. The parties' conduct in executing a specific storage lease supported 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. The storage lease contained broader storage rights and privileges than what may have been contemplated in the earlier agreement. That was [page68 ]strong objective evidence that the parties intended the storage lease to provide all of the contractual rights and obligations governing storage and that it was to replace rather than supplement the earlier agreement.
APPLICATION for an order with respect to gas storage rights.
Cases referred to3869130 Canada Inc. v. I.C.B. Distribution Inc., [2008] O.J. No. 1947, 2008 ONCA 396 , 66 C.C.E.L. (3d) 89, 167 A.C.W.S. (3d) 82, 45 B.L.R. (4th) 1, 239 O.A.C. 137; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 145 (SCC) , [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1, 99 D.L.R. (4th) 577, 147 N.R. 81, [1993] 2 W.W.R. 321, J.E. 93-271, 20 B.C.A.C. 241, 75 B.C.L.R. (2d) 145, 14 C.C.L.T. (2d) 233, 5 C.L.R. (2d) 173, 37 A.C.W.S. (3d) 1202; Canadian National Railways v. Canadian Pacific Ltd., 1978 1975 (BC CA) , [1978] B.C.J. No. 1298, 95 D.L.R. (3d) 242 (C.A.); Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC) , [1980] 1 S.C.R. 888, [1979] S.C.J. No. 133, 112 D.L.R. (3d) 49, 32 N.R. 488, [1980] I.L.R. Â1-1176 at 595, 1 A.C.W.S. (2d) 169; Eli Lilly & Co. v. Novopharm Ltd., 1998 791 (SCC) , [1998] 2 S.C.R. 129, [1998] S.C.J. No. 59, 161 D.L.R. (4th) 1, 227 N.R. 201, J.E. 98-1562, 80 C.P.R. (3d) 321, 80 A.C.W.S. (3d) 871; Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 438 (ON CA) , 24 O.R. (3d) 97, [1995] O.J. No. 1609, 125 D.L.R. (4th) 193, 82 O.A.C. 25, 21 B.L.R. (2d) 165, 46 R.P.R. (2d) 153, 55 A.C.W.S. (3d) 797 (C.A.); NJY Investments Inc. v. Reen Holdings Inc., [2002] B.C.J. No. 1145, 2002 BCPC 180 ; Salah v. Timothy's Coffees of the World Inc., [2010] O.J. No. 4336, 2010 ONCA 673 , 268 O.A.C. 279, 74 B.L.R. (4th) 161; Sunnyside Nursing Home v. Builders Contract Management Ltd., 1989 4719 (SK CA) , [1989] S.J. No. 113, [1989] 3 W.W.R. 721, 75 Sask. R. 1, 33 C.L.R. 161, 14 A.C.W.S. (3d) 296 (C.A.), revg 1985 2311 (SK QB) , [1985] S.J. No. 145, [1985] 4 W.W.R. 97, 40 Sask. R. 1, 15 C.L.R. 1, 32 A.C.W.S. (2d) 84 (Q.B.)
W.D. Mitches, for applicant. C.A. Lewis, for respondent.
RADY J.: -- Introduction
[1] The applicant seeks an interpretation of the parties' contractual rights to store natural gas under certain lands. The Background
[2] The applicant is a private Ontario corporation that has entered into certain leases with McKinley Farms Limited ("McKinley") for oil and gas extraction and gas storage rights.
[3] The respondent ("Tribute") is a publicly traded corporation which is in the business of oil and gas exploration and production as well as the acquisition and development of natural gas storage. Tribute (or its predecessor) also executed certain leases with McKinley for oil and gas extraction and gas storage rights on or under the McKinley lands. The Tribute leases are at the heart of this dispute. [page69 ]
[4] McKinley is a private Ontario corporation, which provides care to poultry breeder stock and leases out surplus land. It owns 200 acres in Stanley Township in Huron County. These lands are the subject matter of the Tribute leases described below.
[5] The Tribute oil and gas lease was entered into October 12, 1977 and was registered against title on November 17, 1977. It was amended in 1984 by a unit operation agreement. A gas storage lease was finalized on September 24, 1998 and registered on December 2, 1998.
[6] In 2008, McKinley took the position that the Tribute leases had terminated and no longer bound its lands. While the parties were in litigation about this issue, McKinley entered into a new oil and gas lease and a gas storage lease with the applicant, dated March 3, 2009 and registered the following day.
[7] Both Tribute and McKinley applied to the Superior Court of Justice for a determination whether the Tribute leases had expired. Mr. Justice Little heard the applications and he held that both the oil and gas extraction lease and the storage lease had terminated according to their terms and were no longer in force.
[8] Tribute appealed. The Court of Appeal reversed Justice Little in part. It agreed that the gas storage lease was no longer valid but declared the oil and gas lease to be valid and subsisting.
[9] The decision set the stage for this proceeding. Tribute took the position that it has storage rights pursuant to its oil and gas extraction lease. The applicant commenced this action for an order that its gas storage lease is the only valid instrument permitting the storage of gas on the McKinley lands.
[10] A preliminary objection was taken by Tribute to this court's jurisdiction to hear the application. Following a hearing, Justice Bryant disposed of the issue in favour of the applicant. The Agreements
[11] The relevant portions of the oil and gas lease are reproduced below:
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 gas originally produced from other lands, Operator agrees to notify Land [page70 ]Owner of such utilization, and thenceforth to pay Land Owner double the herein specified acreage rental amount as full compensation for the storage rights herein granted and in lieu of all delay rental[.] (Emphasis added)
[12] In 1982 and 1983, gas was discovered on the McKinley lands, when Huron No. 3 & 4 wells were drilled by Tribute's predecessors. Each of the wells was drilled into productive gas formations consisting of carbonate sedimentary rocks, known as the Salina and Guelph-Lockport formations.
[13] After this discovery, the Tribute oil and gas lease was amended by the unit operation agreement. It provides as follows:
AND WHEREAS it is believe that the Salina and Guelph-Lockport formation underlying those certain lands listed and described in Schedule "B" hereunto annexed and made part hereof, (and which include all or part of the said lands) contain a gas 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 from unnecessary and wasteful drilling and depletion, and for the protection of their correlative rights therein, 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" hereunto annexed and made part hereof, with all of the other lands in the said Schedule, into a single operative unit to the extent hereinafter set forth . . .
It is understood and agreed that lessee shall endeavour to have executed by all of the other lessors in the unit area agreement with the Lessee similar to this Agreement, and that this Agreement, together with any such other agreements entered into and executed shall be interpreted and treated as a common agreement by the lessors and the Lessee for the purpose of developing and obtaining production of the leased substances from those portions of the unit area covered by the Agreement and such other agreements . . . @7 . . . . .
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 . . . @7 . . . . .
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) [page71 ]
[14] The unit operation agreement provided for a new payment calculation. Section 12 of this agreement tracks the language of the oil and gas lease except that it says "the . . . gas sand" rather than "any . . . gas sands".
[15] Tribute submits that in order to "supplement" its gas storage rights under its oil and gas lease, as amended by the unit operation agreement, it acquired a modern form of gas storage lease. It is said to contain a broader range of storage rights and other privileges than under the earlier executed agreements. It also says that this is the form of agreement familiar to the Ontario Energy Board ("OEB"), which regulates the storage of gas underground. Tribute has applied to the OEB for a designation of the McKinley lands (and other abutting property) as a gas storage area. The application is pending.
[16] The gas storage lease provides as follows:
AND WHEREAS the Lessor has agreed to lease the sub-surface of the said lands to the Lessee for the purposes and on the terms and conditions hereinafter set forth;
WITNESSETH that in consideration of the sum of FOUR HUNDRED DOLLARS ($400.00) now paid to the Lessor by the Lessee (the receipt of which is hereby acknowledged) and the further rents, covenants and agreements hereinafter reserved and contained:
The Lessor doth hereby demise and lease unto the Lessee, its successors and assigns all and singular the said lands save and except the surface rights thereto, save as hereinafter provided, (hereinafter called "the demised lands"), 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, (hereinafter collectively referred to as "gas") within or from the demised lands:
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 . . .
This Agreement expresses and constitutes the entire agreement between the Parties, and no implied covenant or liability of any kind is created or shall arise by reason of these present or anything herein contained. (Emphasis added)
[17] Schedule B to the gas storage lease agreement contains a termination provision, and sets out the 1998 compensation rates for crop damage and the mechanism for their calculation thereafter. It also stipulates that "all provisions in this schedule shall be additional and shall be paramount with any of the terms contained in the original agreement". [page72 ] The Parties' Positions
[18] The applicant submits that there are no gas sands under the McKinley lands and therefore, on the plain, ordinary and unambiguous meaning of the language used, Tribute is not permitted to store gas under the McKinley lands. It says that there are no sands or sandstones associated with reef structures anywhere in Southwestern Ontario.
[19] Tribute also submits that the agreements are unambiguous. It says that when the agreements are read as a whole in light of the surrounding circumstances, Tribute has storage rights in the oil and gas extraction lease as amended by the unit operation agreement. It points out that the unit operation agreement was entered into after gas was discovered on the McKinley lands in the Salina and Guelph-Lockport formations. Consequently, the reference in the unit operation agreement to "the underlying productive gas sand as a storage reservoir" (emphasis added) has to mean the Salina and Guelph- Lockport formations. It submits that the pre-printed lease form used in the oil and gas lease originated in the United States, where the term sand, in a formal technical sense is short for sandstone, and in its informal non-technical sense can mean other sedimentary rocks. The Evidence
[20] The applicant relies on the affidavit of Steven Colquhoun, a certified petroleum geologist. He deposes as follows:
McKinley Farms Ltd ("McKinley") owns 200 acres of land which overlays 76.441% of the Stanley Reef.
The reservoir underlying the McKinley Lands is a Silurian Pinnacle Reef that grew approximately 425 million years ago in a shallow marine inland sea that was a near perfect environment for reef growth.
Following the development of the pinnacle reefs, including the Stanley Reef, anhydrites and carbonates encased and sealed the reefs to create excellent "containers" for storing natural gas. @7 . . . . .
The subject property or premises, being Lots 7 and 8, Concession 11, in the Township of Stanley, County of Huron and more particularly described as PIN 41217-0069 (LT) (the "Lands") sit above a Silurian Reef.
The scientific interpretation of the term "gas sands" in the context of the Tribute Oil and Gas Lease is inappropriate and does not include the reef structure under the Lands.
There are no "gas sands" on or under the Lands. [page73 ]
By definition, sand(s) are unconsolidated detrital rock fragments (clasts) that vary from 1/16 to 2mm in diameter, commonly composed of quartz that have been transported by fluvial and/or marine current action or by wind.
To the best of my knowledge and belief, there are no sands or sandstones associated with reef structure anywhere in southwestern Ontario.
In contrast to the definition of sand(s) described above are the patch and pinnacle reef structures that have a wide distribution in southwestern Ontario.
Reefs are composed of carbonate rocks that have a framework of marine organisms (ie. corals, stromatopora, etc.) that accumulated as isolated structures on the seafloor rising to heights of a few metres (patch reefs) to more than 150 meters (pinnacle reefs) during their deposition in Silurian time (+/- 425 million years in the geological past).
[21] Mr. Colquhoun also deposes that it is general practice in the industry to enter into an oil and gas lease for production purposes. Prior to the conversion of the production phase to storage operations, it is standard practice to enter into a gas storage lease.
[22] Tribute objects to the evidence of Mr. Colquhoun respecting the meaning of words in an agreement. However, it relies on the affidavit of John Lester Norman, the president of Elexco Ltd., who has had long involvement in the oil and gas business. He deposes to the following:
Based upon my review of the Tribute Oil and Gas Lease, it appears that the form that was used in that Lease originated in the United States. I am familiar with oil and gas leasing in the United States as I currently own a controlling interest in and operate a corporation which is a United States affiliate of Elexco. I work approximately four days a week in New York State, U.S.A. in the oil and gas leasing business.
I have been shown and have reviewed the definition of, "sand" as contained in a book entitled, "Handbook of Oil Industry Terms and Phrases" by R.D. Langenkamp, 3rd Edition, published by PennWell Books in Tulsa, Oklahoma. That definition reads as follows:
SAND
Short for sandstone; one of the more prolific sedimentary rock formations. In informal usage, other sedimentary rocks are also referred to as "sands".
- Based upon my review of the above-quoted definition and my experience in the oil and gas leasing business, I verily believe that the meaning of the phrase, "underlying productive gas sand" as the same is used in the Tribute Oil and Gas Lease and the Unit Agreement, carries with it the informal meaning of the word, "sands" being other sedimentary rocks and not the more technical term of "sandstone".
[23] Jane Lowrie, the president of Tribute has also provided an affidavit in which she deposes to the following: [page74 ]
The reason Tribute acquired the Tribute Gas Storage Lease in 1998 was to supplement the storage rights that it held under the Tribute Oil and Gas Lease and Unit Agreement with a broader range of storage rights and other privileges as set forth in this modern form of gas storage lease agreement. These other rights and privileges include storage rights in perpetuity, a specific right to install compressors, a mechanism for computing and paying the residual gas payments and additional acreage rental and a method for calculating crop damage payments. Tribute also wished to hold a modern form of gas storage lease agreement when it applied to the Ontario Energy Board ("OEB") for the designation of the Stanley Pool as a designated gas storage area because this modern form of Tribute Gas Storage Lease was in a form familiar to the OEB.
To supplement Tribute's gas storage rights as set forth in the Tribute Oil and Gas Lease and Unit Agreement, Tribute still wishes to obtain from McKinley Farms a modern form of gas storage lease agreement for the reasons set forth above and so as to be able to present to the OEB during the hearings a modern form of gas storage lease agreement with which the OEB is familiar.
Tribute takes the position that the Tribute Oil and Gas lease and the Unit Agreement confer upon it the necessary rights to store gas in the pinnacle reef carbonate rock formations underlying the McKinley Lands. Tribute would still like to obtain from McKinley Farms a modern gas storage lease agreement if it is able to do so on terms and conditions that are satisfactory to Tribute. To date, negotiations between Tribute and McKinley Farms have not proved successful. The hearing process before the OEB would be shorter, much smoother and more efficient if Tribute was able to acquire from McKinley Farms a form of modern gas storage lease containing all of the rights that the OEB is familiar with. The Law
[24] A useful place to begin the analysis is with the Supreme Court of Canada's decision in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC) , [1980] 1 S.C.R. 888, [1979] S.C.J. No. 133. In that case, Justice Estey set out the proper approach to the interpretation of a commercial contact as follows:
Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation . . . which promotes a sensible commercial result. [page75 ]
[25] In its subsequent decision in Eli Lilly & Co. v. Novopharm Ltd., 1998 791 (SCC) , [1998] 2 S.C.R. 129, [1998] S.C.J. No. 59, the court had this to say about the relevance of intention [at paras. 54-55]:
The contractual intent of the parties to a contract is to be determined by reference to the words they used in drafting the document, possibly read in light of the surrounding circumstances that were prevalent at the time. Evidence of one party's subjective intention has no independent place in this determination.
Indeed, it is unnecessary to consider any extrinsic evidence at all when the document is clear and unambiguous on its face.
[26] The decision of the Ontario Court of Appeal in Salah v. Timothy's Coffees of the World Inc., [2010] O.J. No. 4336, 2010 ONCA 673 provides an important review of the principles of commercial contractual interpretation. The court wrote as follows [at para. 16]:
The basic principles of commercial contractual interpretation may be summarized as follows. When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, 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. In interpreting the contract, the court must have regard to the objective evidence of the "factual matrix" or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composite whole -- like a complex commercial transaction -- and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements.
[27] The Supreme Court of Canada has said that specific terms generally qualify and override more general terms in a contract dealing with the same subject. In BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 145 (SCC) , [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1, the court was called on to consider the parties' respective obligations under a contract for the construction of a hydro tower. The parties argued that the contract contained two contradictory terms, and disagreed which term should govern their relationship. The Supreme Court confirmed the principle that, within a contract, more specific terms are generally taken to qualify and override more general terms on the same subject [at para. 9]: [page76 ]
A frequent result . . . will be that general terms of a contract will be seen to be qualified by specific terms -- or, to put it another way, where there is apparent conflict between a general term and a specific term, the terms may be reconciled by taking the parties to have intended the scope of the general term to not extend to the subject-matter of the specific term. (Emphasis added)
[28] In NJY Investments Inc. v. Reen Holdings Inc., [2002] B.C.J. No. 1145, 2002 BCPC 180 , a decision of the British Columbia Provincial Court, this approach was applied to terms contained in two separate contracts between the same parties. In that case, the parties entered into a contract for the sale of a restaurant and its assets (the "asset agreement") and a second contract conveying the right to sell trademarked meat products and use the meat company's branding (the "Montreal meat agreement"). After business relations deteriorated between the parties, the Montreal meat agreement was terminated. The defendant argued that the signage related to the trademarked meat brand belonged to the restaurant as part of the asset agreement. Under the terms of that agreement, all assets related to the restaurant were sold to the defendant except two express exclusions for cash on hand and accounts receivable. The plaintiff took the position that all the signs should be returned as a result of condition 8 of the Montreal meat agreement, which stated [at para. 11]: "In the event of the contract being void, the licensee must return all signs and marketing supplies to the lessor . . .". The plaintiff argued that the terms of the Montreal meat agreement should apply as the more specific contract dealing with all matters related to the trademarked meat sales.
[29] Holding that the defendant was required to return the signage to the plaintiff, the court stated [at paras. 32-33]:
The issues with respect to these matters turns on what contractual provisions govern . . . [T]he asset purchase agreement, on a reading of it and its attachments, would include signs in its broad wording. However, the World Famous Montreal Smoke Meats document, in condition number 8, seems to include marketing items that might include signs in a far more specific sense[.]
With respect to the court's decision then as to the signage, I find that the more specific World Famous Montreal Smoke Meats contract governs. It was what the parties intended when they entered into these contracts to govern in relation to any dealings regarding the sale of the Montreal Smoked Meats and the marketing of that item.
[30] In 3869130 Canada Inc. v. I.C.B. Distribution Inc., [2008] O.J. No. 1947, 2008 ONCA 396 , the Court of Appeal considered a claim for breach of contract arising out of a complex distribution arrangement between the parties. Deciding that several [page77 ]agreements pertaining to similar subject- matter should be considered together to elucidate the intention of the parties, the court made the following comments [at para. 33]:
While the Mutual Undertaking was not signed at the same time as the Asset Purchase Agreement, the commitments it contains were contemplated in the latter Agreement and formed part of the same global transaction. In these circumstances, the court must have regard not only to the language of the particular contract that is being interpreted . . . , taken as a whole, but to the surrounding contracts as well.
[31] The courts in Canada have also recognized that the subsequent conduct of contracting parties may be relevant to determining the legitimate expectations of the parties under a contract.
[32] As a result, in Canadian National Railways v. Canadian Pacific Ltd., 1978 1975 (BC CA) , [1978] B.C.J. No. 1298, 95 D.L.R. (3d) 242 (C.A.), the British Columbia Court of Appeal articulated the purposes for which a court may properly consider the parties' actions after contracting [at paras. 46 and 82]:
The subsequent course of conduct of the authorities in relation to the agreement may be looked at, not to add to or vary the terms of the document, but to arrive at a conclusion as to the true intent and meaning of the words used in the document. @7 . . . . .
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.
[33] More recently, the Court of Appeal in I.C.B. Distribution applied this reasoning, holding that the interpretation of the contractual "transaction" between the parties should be viewed in light of their later actions. The court reaffirmed the principles from Canadian National Railways, noting [at para. 55] that "[u]nder modern Canadian law, the subsequent actions of the parties may be helpful in explaining the true meaning and intent of their agreement". It cited its earlier decision in Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 438 (ON CA) , 24 O.R. (3d) 97, [1995] O.J. No. 1609 (C.A.) and noted the following [at para. 21]:
Subsequent conduct may be used to interpret a written agreement because "it may be helpful in showing what meaning the parties attached to the document after its execution, and this in turn may suggest that they took the same view at the earlier date". Often . . . "there is no better [page78 ]way of determining what the parties intended than to look to what they did under it".
[34] Finally, there is authority for the proposition that where two contracts covering essentially the same subject- matter exist, common sense requires a finding that the later contract governs. In Sunnyside Nursing Home v. Builders Contract Management Ltd., 1985 2311 (SK QB) , [1985] S.J. No. 145, 40 Sask. R. 1 (Q.B.) (reversed on other grounds [ 1989 4719 (SK CA) , [1989] S.J. No. 113, 75 Sask. R. 1 (C.A.)]), the Saskatchewan Court of Queen's Bench considered a case in which the parties had concluded two contracts pertaining to the same matters. The plaintiff argued that the second contract made no intentional changes to the original terms, but rather was meant only to [at para. 99] "tidy up and make more clear" what the original contract had effected. In contrast, the defendant argued that the second contract had some significant differences, and was the sole document governing the parties' relationship. The court found that the second contract prevailed and it made the following comments [at paras. 97 and 99]:
Common sense points to the second contract as the contract. It would be difficult in law to ignore the second contract and opt for the first contract. Ordinarily there is but one basic contract governing the same matter. Moreover, Sunnyside's witness . . . put the matter . . . . beyond peradventure, saying, in effect, that Saskatchewan Housing Corporation was unwilling to accept the first contract since they felt it was not a normal contract and was not a form to which they were accustomed. Apparently, Saskatchewan Housing Corporation said that the first contract was confusing and could not be understood. [The witness] testified that Saskatchewan Housing Corporation's acceptance was important to Sunnyside because without it, the project would not be funded, and therefore, it was agreed that a new form of contract would be executed. @7 . . . . .
I reject . . . the suggestion of Sunnyside . . . that somehow both contracts stay alive and in some fashion operate . . . The suggestion is that "the only real difference between the two contracts is a matter of tidying up what the various prices in the budget were". That is not the evidence. That would give artificiality at its worst. [sic] Analysis
[35] I do not consider it necessary to decide the issue of the meaning to be ascribed to the words "gas sands", nor is it necessary to deal with the issue of ambiguity. I have concluded that Tribute's position cannot prevail for several reasons.
[36] I agree with Tribute that the oil and gas lease contains language that can be interpreted as conveying rights to storage. However, I have concluded that the storage lease agreement was intended by the parties to replace those rights. [page79 ]
[37] First, there is a "whole agreement" clause in the oil and gas storage lease. It provides that it contains the entire agreement between the parties. This must mean that all matters pertaining to storage are contained in that lease. Schedule B contains wording that suggests to me that the parties intended the storage agreement to replace any storage rights that may have been contained in the earlier agreement. It provides that the terms in the schedule are "paramount with" any terms in the original agreement. This is a clear expression of the parties' intention that the storage lease was to prevail, at least in respect of those matters dealt with in the schedule.
[38] There is support for this conclusion in the language of the unit operation agreement. It provides that the lessee shall not begin using the lands as a storage reservoir until a further agreement is reached respecting the lessor's royalty entitlement. The unit operation agreement also specifically provides that except as modified by it, the oil and gas lease remains in full force and effect. The storage lease, notably, does not contain the same sort of language.
[39] The parties' subsequent conduct in executing a specific storage lease supports 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. I note that the earlier agreement is silent, for example, on such issues as compensation for crop damage. The storage agreement also provides for "storage rights in perpetuity, a specific right to install compressors, a mechanism for computing and paying for the residual gas payments and additional acreage rental" as Ms. Lowrie deposes, none of which were dealt with in the earlier agreement.
[40] In my view, it is disingenuous for Tribute to say that the storage agreement was created to "supplement" the earlier lease. The fact is (and Tribute acknowledges) that the storage lease contains broader storage rights and privileges than what may have been contemplated in the earlier agreement. This is 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. It is significant that Tribute wants McKinley to execute a storage lease before it seeks approval from the OEB. It says that, thus far, negotiations have been unsuccessful and that the hearing process before the OEB would be shorter, much smoother and more efficient if such a storage lease were obtained. If Tribute seriously thought it had storage rights under the oil and gas lease, it would have [page80 ]proceeded before the OEB, relying upon it. The fact that it did not supports the conclusion that it did not consider that it had continuing storage rights in the oil and gas lease.
[41] This is also consistent with the conclusion that the parties did not give significant consideration to the issue of storage until after gas was discovered.
[42] The application is granted. If the parties cannot agree, I will receive written submissions on costs, first from the applicant within ten days and the respondent ten days thereafter.
Application granted.