Executive Summary: Key Legal and Evidentiary Issues

• The Court had to determine whether a gross overriding royalty (GORR) is an interest in land or merely a contractual right.

• Interpretation of the 1975 Letter Agreement was central, despite the absence of direct evidence from the original parties.

• Whether Durham Creek is bound by an assigned GORR depended on its legal characterization as real or personal in nature.

• The decision engaged with conflicting interpretations post-Dynex SCC regarding the proper approach to assessing parties’ intent.

• Emphasis was placed on the economic logic of the farmout arrangement as supporting a land interest characterization.

• The Court affirmed that modern principles of contract interpretation must include context and commercial purpose.

Background and facts of the dispute

Durham Creek Energy Ltd (“Durham Creek”) sought a declaration that a gross overriding royalty (“GORR”) now held by Chimera Management Group Ltd (“Chimera”) and Wtrshed Resources Ltd (“Wtrshed”) is not an interest in land. The dispute originates from a 1975 Letter Agreement under which Hudson’s Bay Oil and Gas Company Limited (“HBOG”) farmed out its lease to Pacific Petroleums Ltd (“Pacific”), granting Pacific a working interest “subject to” a GORR in favor of HBOG. Durham Creek currently holds Pacific’s successor working interest, and Chimera and Wtrshed claim entitlement to the GORR as successors to HBOG via Sequoia Resources Corporation, which had held the GORR before its bankruptcy.

Initially, Durham Creek argued the GORR was extinguished in Sequoia’s bankruptcy. However, the Court noted that the GORR was an asset, not a liability, and had been sold by the trustee to Chimera and Wtrshed under an Approval and Vesting Order dated December 2, 2024. Durham Creek then shifted its argument, asserting that if the GORR is only contractual in nature, it is not bound by the assignment, but if it is an interest in land, it must accept it.

Relevant policy terms and legal context

The critical contractual language appeared in the 1975 Letter Agreement: the earned working interest was “subject to a gross overriding royalty to Hudson’s Bay Oil and Gas Company Limited of 1/150 sliding scale (5–15%) on oil and 15% on gas.” No additional clarification was included in the agreement as to whether the GORR was to be real or contractual in nature.

The Court discussed longstanding uncertainty about how to determine whether parties intended a GORR to be an interest in land. Although the Supreme Court of Canada in Bank of Montreal v Dynex Petroleum Ltd confirmed that a GORR can be an interest in land, lower courts have faced difficulty applying that principle, especially given the Supreme Court's ambiguous endorsement of the “magic words” approach from Vandergrift. Justice Feasby favored the Alberta Court of Appeal’s Dynex CA contextual approach, which identifies three indicia for finding an interest in land: (1) the underlying interest is itself a land interest, (2) the parties intended to convey an interest in land, and (3) the interest is capable of lasting as long as the underlying estate.

Judicial analysis and rationale

Justice Feasby held that the first and third Dynex CA indicia were met. The underlying working interest is a leasehold interest in land, and the GORR, as created, was capable of lasting the full duration of that interest. The third indicium was not undermined by subsequent changes to the GORR's application because the inquiry concerns the original capacity at the time of grant.

On the second indicium—intention of the parties—there was no direct evidence from the time of the agreement due to its age and the fact that neither party before the Court was original to the transaction. The Court instead inferred intent from the structure and language of the agreement and from the commercial context. Justice Feasby highlighted three critical points: (1) both the GORR and the working interest originated from the same paragraph, implying parallel treatment; (2) the use of “subject to” suggests that the working interest was subordinated to the GORR; and (3) HBOG’s only consideration for transferring the lease was the GORR, which indicates an intention to ensure that the royalty obligation would follow the lease, not depend on personal acceptance by future assignees.

The economic logic, supported by the Court of Appeal’s reasoning in Dynex CA, showed that a GORR functions as an investment in property, not in the operator. This reinforced the conclusion that the parties intended to create a real property interest that would bind successors.

Outcome

The Court concluded that the GORR in question is an interest in land. As such, Durham Creek is bound by its assignment from Sequoia to Chimera and Wtrshed. Justice Feasby dismissed Durham Creek’s application. The parties were invited to submit brief written submissions on costs if they could not agree.