The year began with a decision of great importance to the energy industry: the Supreme Court of Canada’s January ruling in the Redwater case that overturned the findings of the Alberta courts, which held that a trustee in bankruptcy could disclaim uneconomic assets of a bankrupt debtor. The full ramifications of the Redwater decision are still being worked out among the affected stakeholders.
The year ended with another Supreme Court of Canada decision that reset how courts are to deal with reviews of decisions by administrative bodies.
In between were a number of decisions that dealt with pipeline politics, the carbon tax debate, interprovincial and constitutional spats, and much more. Below are the 2019 court decisions that are of the greatest import to the Alberta and Canadian energy industries.
At the end of January, the Supreme Court of Canada issued its much-anticipated judgment in the so-called Redwater decision. The decision followed judgments of the Alberta Court of Queen’s Bench and Court of Appeal, which had held that a receiver can disclaim or renounce uneconomic assets, including those that are subject to environmental liabilities.
On the facts of the case, Grant Thornton had been appointed as receiver for Redwater Energy Corporation (Redwater), a publicly listed oil and gas company. The receiver took possession of Redwater's most valuable assets for sale under the Bankruptcy and Insolvency Act (the BIA) and sought to disclaim the remaining Redwater assets, including those suspended and abandoned wells that would likely have environmental liabilities and obligations associated with them. The Alberta Energy Regulator (AER) and Orphan Well Association (OWA) opposed this process, claiming that the receiver was required to sell all the assets of Redwater, not just those that had value, as the effect would be to leave the uneconomic assets in the hands of taxpayers. This argument effectively preferred the AER's claims to those of Redwater's secured creditors.
The question before the Supreme Court was whether the AER and OWA could require Grant Thornton, as receiver and then trustee in bankruptcy of Redwater, to comply with abandonment, reclamation and remediation orders issued by the AER, or whether the trustee was entitled to “disclaim” the assets subject to the orders so as to not comply with them.
By a 5-2 majority, the Supreme Court allowed the appeal of the AER and OWA. The decision has the effect of elevating environmental obligations to a super-priority status within a receivership.
The majority, through reasons written by Chief Justice Richard Wagner, held that section 14.06(4) of the BIA concerns the personal liability of trustees-in-bankruptcy and does not entitle a trustee to walk away from the environmental liabilities of the bankrupt estate it is administering. Grant Thornton had argued that the Regulator’s environmental orders conflicted with the power of disclaimer provided under section 14.06(4) of the BIA and thus should be subordinated to the BIAunder the constitutional doctrine of “paramountcy.” The majority rejected arguments that there was a conflict between the BIA and provincial legislation requiring abandonment and remediation of oil and gas assets and thus held that there was no need to trigger the paramountcy doctrine.
The decision highlights Canada’s shift toward environmental protection.
By and large the oil and gas industry had supported the AER and OWA, given that the OWA is funded by industry. For the industry, the majority decision restored the balance between environmental obligations and creditor interests to that which existed for many years before the Redwater case. The industry’s position is that the OWA and the orphan fund should be a last resort and only used after all other sources of funding are exhausted, including any value in the bankrupt’s estate.
The result of the minority decision is that a bankrupt’s liabilities that are disclaimed by trustees and receivers would have continued to be sent to the already overburdened orphan well program, funded solely by the surviving oil and gas companies. The orphan levy increases every year as a result of the number of disclaimed liabilities sent to the OWA. Oil and gas companies unable to pay the levy face enforcement by the AER, which has the potential to put them out of business or into insolvency. This would also increase the number of liabilities sent to the OWA.
It appears that, in the long term, the majority decision may achieve the environmental protection purpose and curb the influx of liabilities into OWA and to the orphan well fund. However, how and when the decision will be fully implemented may affect that prediction, given the current state of Canada’s oil and gas market.
The court’s decision has significant implications for the energy industry and extends to other sectors. The decision engages a multitude of stakeholders including businesses, directors and officers, lenders, insolvency professionals, environmental groups, land owners, governments, regulators and the public. If not properly managed, the majority decision may be a pyrrhic victory for the AER and OWA.
For a more in-depth review of the Redwater decision, available here. For commentary on the decision’s effect on insolvency practice, available here.
In May 2019, the British Columbia Court of Appeal issued a significant decision for Alberta’s oil industry and the federal system for oil and gas transportation, providing much-needed clarity for industry. The reference case arose from amendments proposed by the B.C. government to the province’s Environmental Management Act (EMA) concerning provincial regulatory authority over interprovincial pipelines, specifically the Trans-Mountain Expansion Project (TMX) ( Proposed Amendments).
A reference decision is an advisory opinion rendered by a higher level court on a major legal issue at the request of either a provincial government or the federal government. In this case, the B.C. government had referred three constitutional questions to its Court of Appeal to determine if it had the power to implement a discretionary permitting system specifically targeting “heavy oil.” Technically a reference case is not a binding decision but, in practice, reference decisions are given as much weight as decisions rendered in regular proceedings.
A unanimous five-member panel of the Court of Appeal held that the Proposed Amendments were outside the jurisdiction of a provincial legislature, as they were primarily focused on a federal interprovincial undertaking.
TMX is a proposed twinning of the existing Trans-Mountain crude oil pipeline running from Strathcona, Alta. to Burnaby, B.C. The project received approval from the Canadian government in November 2016. However, the Federal Court of Appeal quashed that approval in August 2018. The approval process was restarted and in February 2019, the National Energy Board (NEB) published its reconsidered opinion that TMX approval was still in the public interest. The federal cabinet again approved the project in June 2019 and construction on the expansion has begun, though legal challenges brought by Indigenous communities remain unresolved.
At the Court of Appeal, the Government of Canada and the supporting interveners argued that the Proposed Amendments were aimed specifically at the construction and operation of TMX, which is a federal undertaking that falls under the exclusive jurisdiction of Parliament by virtue of 92(10) of the Constitution Act. Further, since “heavy oil” is predominately produced in Alberta and Saskatchewan and shipped through British Columbia almost exclusively via current Trans Mountain infrastructure, the Proposed Amendments effectively only apply to Trans Mountain’s heavy oil in transit from Alberta to tidewater.
The Court of Appeal went on to determine that the pith and substance of the Proposed Amendments relates to the regulation of interprovincial undertakings designed to carry heavy oil from Alberta to tidewater. The Proposed Amendments, therefore, fell outside of provincial jurisdiction. Accordingly, it was not necessary for the court to consider the application of the constitutional doctrines of interjurisdictional immunity and paramountcy.
The court agreed with Canada’s submissions that the Proposed Amendments did not constitute a law of general application and effectively only regulated the TMX and certain railcars that export heavy oil to tidewater. The court held that the “default position of the law” represents “an immediate and existential threat to a federal undertaking,” which could “hardly be described as incidental or ancillary effects.”
The Court of Appeal also noted that it would be impractical for “different laws and regulations to apply to an interprovincial pipeline every time it crosses a border,” as it would stymie its operation by forcing it to “comply with different conditions governing its route, construction, cargo, safety measures, spill prevention and the aftermath of an accidental release of oil.” Parliament was given exclusive jurisdiction to regulate this type of situation, “allowing a single regulator to consider interests and concerns beyond those of individual provinces.”
The Court of Appeal concluded that “at the end of the day, the NEB is the body entrusted with regulating the flow of energy resources across Canada to export markets. Although the principle of subsidiarity has understandable appeal, the TMX project is not only a ‘British Columbia project.’ The project affects the country as a whole, and falls to be regulated taking into account the interests of the country as a whole.”
The decision provided much needed legal clarity on the regulatory jurisdiction of interprovincial projects at a time of uncertainty in the energy industry. In substance, the decision was the strongest possible signal for project proponents, as it struck down the Proposed Amendments at the validity stage – holding outright that provinces do not have constitutional authority to regulate interprovincial pipelines – without having to apply the complex and murky doctrines of inter-jurisdictional immunity and federal paramountcy.
NOTE: On January 16, 2020, the Supreme Court of Canada unanimously dismissed the B.C. government’s appeal of the Court of Appeal decision, stating in an oral decision from the bench that it agreed with the B.C. court’s reasons. BLG lawyers Michael Marion, Alan Ross and Brett Carlson acted as counsel to an intervening party, the Canadian Energy Pipeline Association, at both the B.C. Court of Appeal and Supreme Court of Canada.
For a more in-depth review of the B.C. Court of Appeal decision, see here.
3. Reference re Greenhouse Gas Pollution Pricing Act, 2019 SKCA 40
4. Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544
Last year was a big one for the federal government’s carbon tax scheme, and a successful one in the courts. Challenges to the tax played out in courtrooms across Canada, including in Alberta. The Alberta Court of Appeal heard arguments from the provincial and federal governments over three days in mid-December, reserving its decision on the constitutionality of the taxation scheme. A decision from the court is expected in early 2020. The Manitoba government has also filed a legal challenge to the tax.
Elsewhere, provincial Courts of Appeal in Saskatchewan and Ontario came down in favour of the federal legislation in the face of constitutional challenges from the two provincial governments. In the span of two months in the spring, the two courts ruled that the federal carbon tax was constitutional.
In June 2018, the federal government introduced the Greenhouse Gas Pollution Pricing Act (the Act), which forms the legislative foundation for the federal carbon tax. As of April 1, 2019, the federal carbon tax of $20 per tonne of GHG emissions applied to every Canadian jurisdiction that had not adopted its own provincial or territorial carbon pricing scheme in satisfaction of the criteria established by the federal government – Ontario, New Brunswick, Saskatchewan and Manitoba. All other Canadian jurisdictions had implemented their own carbon pricing scheme as of that date; though, after a 2019 provincial election, the new Alberta government repealed the provincial carbon tax legislation. New Brunswick has since introduced legislation to establish its own carbon tax.
The Act places a regulatory charge on carbon-based fuels, imposing that charge on various producers, distributors and emitters of certain greenhouse gases, including carbon. It also establishes a regulatory trading system for large-scale industrial emitters, giving credits to those who remain within their limits and imposing charges on those who surpass them.
The Saskatchewan Court of Appeal, by a slim 3-2 majority in May, determined that the federal carbon tax is constitutional. Both the majority and dissent considered at length Parliament’s authority relating to the imposing taxes under Section 53 and laws for peace, order and good government (POGG) under Section 91 of the Constitution Act.
Saskatchewan's main argument was that Parts 1 and 2 of the Act impose an unconstitutional tax, because they give Cabinet too much discretion to decide where and when it applies. They argued that this offended Section 53 of the Constitution Act, which requires that bills imposing a tax must originate in the House of Commons. However the majority agreed with Canada, finding that the levies were regulatory charges and not taxes within the meaning of Section 53. Even if the levies were taxes, the majority would have found that the scheme was a valid use of Parliament's taxation power and did not offend the Constitution.
Saskatchewan alternatively argued that, if the Act is not an invalid tax, it is nonetheless unconstitutional because it infringes on the province's exclusive jurisdiction over property and civil rights. The majority disagreed, finding that the pith and substance of the Act was the establishment of a minimum national standard of price stringency for GHG emissions.
The majority found that the Act was a valid use of Parliament's jurisdiction to legislate on matters of national concern under its POGG power, because a national standard price was a matter with sufficient singleness, distinctiveness and indivisibility, and its recognition as a matter of national concern would have a reconcilable impact on provincial jurisdiction so as not to undermine the division of powers.
Though unnecessary to its final decision, the majority rejected arguments by supporting interveners that the Act could be sustained under Parliament's trade and commerce power, treaty implementation power, national emergency power under POGG and criminal law power.
The Ontario Court of Appeal’s ruling followed in late June, similarly holding in a 4-1 decision that the Actis constitutional under the federal government’s POGG powers. The court reasoned that while the environment is, broadly, an area of shared responsibility under the Constitution, it is not merely a local concern but a concern to the nation as a whole. The majority held that minimum national standards to reduce greenhouse gas emissions is a national concern and that the reduction of emissions is predominantly extra-provincial and international, being beyond the capacity of the provinces individually. It reasoned that the harmful effects of greenhouse gases are “diffuse, persistent and serious” and “of virtually infinite duration,” rendering them an appropriate target for federal legislation under the National Concern branch of POGG.
The majority also rejected the province’s argument that Canada’s regulation of greenhouse gases would limit provincial autonomy, reasoning that the Act’s scope is constrained to address the risk of provincial inaction and merely establishes minimum standards for greenhouse gas reduction measures. Similar to the Saskatchewan court, the majority also held that the fuel and emissions charges imposed by the federal legislation constituted regulatory charges, not taxes. It rejected Ontario’s argument that the revenue raised by the regulatory charge had to be used to further the purposes of the regulatory scheme.
Much more legal news regarding the tax is expected in 2020. The Supreme Court is expected to hear both Saskatchewan and Ontario’s appeals in March and a decision from the Alberta Court of Appeal respecting Alberta’s challenge is expected early in the new year.
For a more in-depth review of the Saskatchewan Court of Appeal decision, see here.
5. British Columbia (Attorney General) v Alberta (Attorney General), 2019 ABQB 121 & 2019 ABQB 550 & 2019 FC 1195
In May 2018, the Alberta legislature passed the Preserving Canada’s Economic Prosperity Act, colloquially known as its “Turn off the Taps” legislation. The Act, passed during a period of escalating tensions between Alberta, British Columbia and the federal government over the expansion of the Trans-Mountain pipeline, would allow Alberta to control the exports of natural gas, crude oil, or refined fuels on the basis of “public interest.” Though the Act passed the legislature and was given Royal Assent in 2018, it was not proclaimed until spring 2019 upon the UCP government coming into power in Alberta.
In direct response to the legislation, the B.C. government filed a claim with the Alberta courts seeking a declaration that the Act was unconstitutional. B.C. argued that the Act falls outside Alberta’s provincial jurisdiction under the Constitution, as the federal government is granted the exclusive authority to legislate in relation to interprovincial and international trade, excepting provincial laws relating to exports as authorized under section 92(a) of the Constitution Act.B.C. further argued that, under section 121 of the Constitution Act, Alberta’s resources are to be admitted “free” into other provinces. Before the court, B.C. provided evidence that the majority of its gasoline and diesel is imported from Alberta refineries and that B.C. would be unable to viably replace those supplies in the event of Alberta “turning off the taps.”
In the court’s first decision in the action, it found that B.C.’s claim was premature, given that the Act was not in force. The court thus refused to exercise its discretion to grant B.C. declaratory relief, given that the dispute was only theoretical or merely hypothetical at that point. The court struck B.C.’s claim, but reserved the province’s right to recommence the action should the Act become law in Alberta.
On April 30, 2019, two weeks after the Alberta election, the Act was proclaimed into force. B.C. immediately filed an application seeking the suspension of the Act’s operation, pending final determination of the constitutional questions. The court had to decide whether a provincial attorney general had standing to seek declaratory relief as to the constitutional validity of legislation passed in another province. The court stayed the action, holding that the federal court was the proper forum for interprovincial disputes of this nature.
Despite those failures, B.C. had already filed a claim in the federal court seeking a declaration of unconstitutionality of the legislation. In September, the federal court allowed B.C.’s motion for an interlocutory injunction, preventing the Alberta Minister of Energy from exercising any of the powers under the Act.
In coming to this decision it noted the substance and rationale for the law, which had been clearly stated by then-Premier Rachel Notley when the bill was going through the legislature; if B.C. was going to try to limit energy products flowing across its borders, Alberta would do the same regarding what energy products it would export to B.C. The court reasoned that B.C. would be more prejudiced by the Actbeing in force than Alberta would be by the injunction being granted. The constitutionality of the Actremains to be decided through further litigation in federal court.
The legal wrangling over the Trans Mountain Pipeline expansion project continued throughout 2019 and will likely remain in the courts throughout 2020.
The above-mentioned decision concerned motions by 12 sets of applicants seeking leave to apply for judicial review of the federal cabinet’s decision to approve the pipeline expansion project. The cabinet approved the project in June 2019 for a second time after the Federal Court of Appeal quashed the first approval in August 2018 for inadequate consultation with Indigenous communities and lack of consideration of the environmental impacts from increased marine traffic associated with the project.
The court allowed six of the applications for leave, while rejecting the other six. The court likened the requirement for parties challenging a cabinet decision of this nature to a customs inspection at the border rather than a cursory checkpoint, noting the purpose of the statutory framework under the National Energy Board Act. As the court stated, “a project is not to be hamstrung by multiple, unnecessary, long forays through the justice system. Any recourse to the judicial system must be necessary and as short as possible.”
The court found the applicants’ complaints about conflict of interest and bias were not made out, as the owner of the pipeline is the Government of Canada, not the federal cabinet. Nor was there any evidence before the court that the cabinet blindly approved the project once it had been purchased by the federal government. The court also held that arguments about getting leave to argue environmental issues were not made out, as those issues had already been, or should have been, litigated during the initial challenge to the project that led to the Federal Court of Appeal quashing.
The court did grant leave to apply for judicial review to certain applicants, however, based on arguments relating to consultation with Indigenous groups. The court did not make a finding that the further consultation process after the Federal Court of Appeal decision was inadequate, leaving that determination to the court in a future hearing.
In granting leave to apply, the court noted that the forthcoming proceedings would be narrower and more focused than the initial successful challenge to the expansion project. The court noted the substantial public interest in having the proceedings decided quickly.
Subsequent to the Federal Court of Appeal’s decision, two of the parties who were successful in obtaining leave discontinued their applications for judicial review. Meanwhile, the parties whose leave applications were denied have filed applications for leave to appeal the Federal Court of Appeal decision to the Supreme Court.
The Federal Court of Appeal held its judicial review hearing for the four remaining applicants in mid-December. A decision can be expected sometime in 2020.
Another case in which the duty to consult with Indigenous groups was the central issue, William was a significant decision, as it illustrates the approach courts will take when the Crown and Aboriginal rights holders fundamentally disagree, such that reconciliation cannot be achieved.
The case arose after British Columbia, as represented by the Chief Inspector of Mines, had approved the exploratory mining program (the Decision) of a mining company, Taseko Mines Ltd. (Taseko). The Xeni Gwet'in First Nations government and the Tsilhqot'in Nation (the Petitioners) sought an order to quash the province's decision, arguing that the province had not satisfied the duty to consult. The trial judge declined to grant the petition. On appeal, the court upheld that decision.
The Petitioners held proven Aboriginal hunting, trapping and trading rights throughout the area targeted by Taseko, roughly 125 square kilometres southwest of Williams Lake, B.C. (the Area). Taseko proposes to develop a gold and copper mine in the Area and holds a mineral lease and mineral claims for this purpose. The Area may contain one of the largest undeveloped gold and copper deposits in the world.
Taseko had commenced the provincial and federal approval process, and was stymied by the federal process over concerns about adverse environmental effects and other issues. In the midst of seeking judicial review of that rejection by the federal government, Taseko prepared a new exploratory program for provincial approval, which the Tsilhqot’in Nation opposed. British Columbia engaged with the Petitioners over a number of years, and ultimately approved the proposed exploratory work. The Petitioners sought judicial review. The B.C. court granted an injunction preventing the start of the exploratory program pending the final determination of the judicial review. In the meantime, the federal court rejected Taseko’s judicial review of the federal government’s decision to reject the initial project.
After the trial judge held that British Columbia’s decision fell within the range of reasonable outcomes such that the honour of the Crown was maintained, the Petitioners appealed. They argued that B.C. breached its procedural duty to consult and that the trial judge upheld the approval based on a purpose that did not form any part of the consultation efforts, that purpose being to inform future environmental assessment applications.
The Court of Appeal examined the B.C. government’s conduct and found that the senior mines inspector engaged in sufficient consultation, giving full consideration of the Petitioners’ concerns before making a reasonable decision. It also found that the potential alternative use of the information derived from the exploratory drilling program, namely to inform future environmental assessment applications, was brought to the Petitioners’ attention during the consultation process. Finally, it reasoned that the fact there was an honest disagreement about whether the project should proceed did not mean that the process was inadequate or that the Crown did not act honourably.
This decision shows that an honest and fundamental disagreement may exist between the Crown and Aboriginal rights holders such that reconciliation cannot be achieved. Such disagreement does not render the consultation process inadequate. The honour of the Crown may be upheld even when reconciliation cannot be achieved.
The Petitioners filed leave to appeal to the Supreme Court, but leave was refused.
For a more in-depth review of this decision, see here.
ConocoPhillips concerned a complex dispute over ownership of five abandoned wells in the Mackenzie Delta. Two companies, ConocoPhillips Canada Resources Corp. (Conoco) and Shell Canada Limited (Shell), both argued that the other was the owner responsible for remediating the wells.
The case is significant for industry participants who have sold or purchased assets or an interest in land where abandoned wells are present. The case is also significant as Master Hanebury decided a complex commercial case, with contested and lengthy facts from both parties, on summary judgment.
Conoco’s predecessor, Gulf Canada Resources Ltd. (Gulf), and Shell entered into a Purchase and Sale Agreement (PSA) and other associated agreements in 1991. Pursuant to the PSA, Gulf transferred its assets on an “as is” basis to Shell. From 2005-2011, Conoco employees who did not have knowledge of the PSA took part in activities to evaluate and assess certain wells and well sites in the Mackenzie Delta region. In 2011, these individuals took steps to ascertain ownership of one of these wells and discovered the 1991 PSA. Conoco filed the action in 2014 after Shell stated it had never intended to take over the impugned wells pursuant to the PSA.
The main issue before Master Hanebury was whether the PSA and associated agreements transferred Gulf’s interest in the wells and sumps to Shell.
On Conoco’s application for summary judgment, Master Hanebury granted Conoco a declaration that Shell owned the wells in question. She found that the PSA and associated agreements did transfer Gulf’s interest in the wells to Shell.
Master Hanebury found that the wells constituted an asset under the PSA before considering the PSA as a whole, focusing on clauses relating to environmental liability, to decide the objective intent of the parties. The PSA provided that Shell was liable for environmental liabilities, including well abandonment and reclamation, save for a 180-day period following the closing wherein Gulf was responsible for such liability. Master Hanebury emphasized that if the parties intended for the impugned wells to remain with Gulf after closing, Shell would not have agreed to the six-month limitation on environmental liability. The PSA also included a clause whereby Shell acknowledged that it was acquiring the assets (as defined in the PSA) on an “as-is” basis, and Shell acknowledged it was familiar with the condition of the wells.
Finally, Master Hanebury considered the surrounding documents from the time as the most reliable evidence available. Master Hanebury emphasized the corporate memory loss relating to the PSA following the execution thereof, and chose only to rely on the documents made at the time of the PSA’s execution. These documents included emails, notes to file, consequential agreements and the regulatory regime in place at the time. Master Hanebury found that the notes to file and emails demonstrated that both parties knew the wells were abandoned and the parties were unaware of any environmental issues at the time. Master Hanebury did not consider post-execution conduct of the parties, as she did not find the PSA to be ambiguous.
In response to a counterclaim by Shell, Master Hanebury found that there was no nexus between the parties sufficient to find that Conoco had a duty to advise Shell of its ownership of the wells, or to advise Shell of any contamination on the sites, or to undertake remediation. The decision therefore emphasizes that a vendor of land does not owe a duty to warn the purchaser of ongoing liability beyond that contracted for in an agreement.
ConocoPhillips ties into the larger trend of judicial consideration of Canada’s aging infrastructure. As regulators pursue private parties to remediate abandoned wells, industry participants are being forced to deal with ownership of abandoned oil wells from the 1970 and 1980s. Remediation of failing oil and gas infrastructure carries massive liabilities. A company may mistakenly assume responsibility for remediation if they are unaware of an agreement, like the PSA in ConocoPhillips, which transferred assets to another party. ConocoPhillips sends a strong message that oil and gas companies should investigate ownership issues, particularly regarding abandoned wells, as soon as possible.
Though not an oil and gas or resource case, the Supreme Court’s decision in Vavilov is sure to affect such litigation going forward. In Vavilov, the Supreme Court rewrote the standard of review for appeals of administrative decisions, with the aim of simplifying the standard for litigants and the courts in pursuing judicial reviews of decisions by administrative bodies.
The Vavilov case arose out of a denial of a passport to Alexander Vavilov, who was born in Canada and whose parents were later revealed to be Russian spies. Officials told Vavilov that he needed proof he was Canadian, and his birth certificate would not suffice. He obtained a certificate of Canadian citizenship as required, but was still rejected. Instead he was contacted by the Registrar of Citizenship, who is the final decision maker on Canadian citizenship. She denied Vavilov a passport renewal based on her conclusion that he was not a Canadian citizen under the federal Citizenship Act, and cancelled his certificate of citizenship. The Registrar based her decision on a report prepared by a junior analyst who concluded that Vavilov fell within an exception to the general rule that anyone born in Canada is a Canadian citizen because his parents were “representatives or employees … of a foreign government.”
Vavilov sought judicial review of the Registrar’s decision and was initially unsuccessful at the federal court, which deemed the Registrar’s decision “correct.” The Federal Court of Appeal disagreed, and the Supreme Court upheld the Federal Court of Appeal’s conclusion that the Registrar’s decision was to be judged on a reasonableness standard and that his decision relating to Vavilov’s citizenship was unreasonable. The judges of the Supreme Court held that the Registrar had not justified her view of the law, failing to properly consider a number of sources that undermined her position.
The majority of judges at the Supreme Court confirmed the two longstanding standards of review for administrative decisions – “reasonableness” (whether a decision makes sense in light of the law and facts) and “correctness” (whether a decision was the only right answer based on the law and facts). The seven majority judges held that the usual standard of review should be reasonableness, with it often possible for there to be more than one reasonable outcome. If a decision is deemed “reasonable,” the reviewing court must accept it even if it would have decided something different itself.
The majority held that there are two exceptions where the “reasonableness” standard will not apply. The first is when a different standard has been specifically enumerated in law or where a right of appeal to a court from an administrative decision is provided. Where appeals are provided in law, different standards apply. The standard of review on an appeal will be “correctness” where a decision is about the law or the decision-maker’s jurisdiction to decide the question at issue.
The second exception is where the rule of law is at issue. Such situations include constitutional questions and other general questions of law affecting the legal system as a whole. The other situation where “correctness” will apply is where the powers of two administrative bodies overlap. In those cases, courts have to determine which decision is “correct,” as there can only be one.
Where a “correctness” standard applies the reviewing court will determine the correct decision itself, while where the decision is based on a “reasonableness” standard, a court will regularly remit the case to the administrative body for redetermination based on the court’s findings.
This clarification of the standards of review should be helpful to administrative bodies, courts and litigants. Where cabinet decisions or those of energy regulators are challenged in future, the guidance from Vavilov will inform how those judicial reviews play out.
For a more in-depth review of this decision, see here.
This decision from fall 2019 concerned offset well obligations under petroleum and natural gas leases. The plaintiff, Whitecap, sought return of compensatory royalties paid under protest to the defendant, CNRL, who counterclaimed for additional royalties it alleged remained owing.
As lessee, Whitecap was required to drill wells within certain time periods so as to fulfill its exploration and development obligations. It also had to protect the leased lands from potential drainage of its resources, specifically concerning wells drained on adjacent lands (the “offset wells”). This required it to either drill defensively, surrender or drop certain portions of the lands from the lease, or pay compensatory royalties in order to extend the time in which to drill defensively.
CNRL had alleged default by Whitecap of its defensive drilling/offset well obligations and demanded compensatory royalties. To avoid default, Whitecap paid the amounts under protest and correspondingly commenced this action to recover the entire amount paid. Though the wells in question were in Saskatchewan and governed by Saskatchewan legislation and regulations, the parties attorned to the Alberta Court. Whitecap was largely successful, as the court awarded it judgment for nearly $1 million to compensate for certain royalty payments.
The “drill, drop or pay” clause at issue in this case was a complex one common in recent leases. The court considered a number of issues, including when the obligation to “drill, drop or pay” arises and whether CNRL could enforce the defensive drilling provisions at various points in time. The court also considered whether CNRL’s methodology and approach to the dispute breached its duty of good faith, disentitling it to payment of compensatory royalties.
Justice Slawinsky determined that Whitecap’s “drill, drop or pay” obligations arose under the lease whenever production was obtained from a laterally or diagonally adjoining spacing unit. Though it may be industry practice for the lessor to provide notice to the lessee when it considered offsetting production to be occurring, that fact could not override the plain language of the agreement.
Justice Slawinsky decided that the compensatory royalties largely had to be returned. Concerning one situation in which CNRL demanded defensive action or compensatory royalties from Whitecap, Justice Slawinsky held that the phrase “at the date of the lease” in the defensive drilling clause meant the date the parties executed the contract, not the “effective date of lease” that was backdated. This finding was based in part on commercial efficacy; no one would enter into a lease that would immediately trigger drilling obligations for new wells in order to protect a few hundred dollars of production. Thus, only those adjacent wells that began producing after the date of execution of the lease engaged the offset well obligations, a finding that required the return of significant compensatory royalty payments.
Among other findings, Justice Slawinsky rejected CNRL’s argument that more than one offset well was needed in the circumstances. She observed that such an interpretation would constitute an unenforceable penalty, as it would be disproportionate and unreasonable when compared to the damages sustained. She wrote:
As previously stated, the purpose of an offset well clause is to protect the lessor against loss of the oil and gas underlying his land through drainage. The traditional industry approach to this problem has been to limit defensive drilling or payment in lieu of drilling to the adjacent spacing unit only. It would be excessive and punitive to require two or three defensive wells in response to a single offset well, royalties equal to double or triple the total production of the offset well, or royalties calculated on production from non-adjacent lands.
Finally, Justice Slawinsky was highly critical of CNRL’s conduct in its dealings with Whitecap, finding that it failed to consider the legitimate contractual interests and expectations of Whitecap in the performance of the contracts, and unfairly disregarded Whitecap’s legitimate business interests. She concluded that CNRL had not acted in good faith by attempting to maximize its compensation by taking unreasonable positions in the circumstances. This finding, she reasoned, should be dealt with in the consideration of a costs order, and not disentitle CNRL to the compensatory royalties she found awardable to CNRL.