Introduction

MEG Energy Corp v Canexus Corp, 2015 ABQB 361 (“MEG Energy”) highlights how, in disputes involving the interpretation of a pipeline construction, interconnection and operating agreement (“Pipeline Agreement”), a court will consider circumstances giving rise to the creation of the contract. MEG Energy addressed access to a pipeline connecting with MEG Energy Corp.’s (“MEG”)  900,000-barrel Stonefell storage terminal.

Background                    

MEG Energy pertained to ownership determination for pipeline infrastructure generally, and interconnection facilities in particular. MEG and Canexus Corp (“Canexus”) entered into ​a pipeline agreement for oil bitumen transport that contemplated two phases. The first phase was to connect MEG’s oil collection facility and a 24 inch line to a pipeline continuing to a Canexus-owned rail loading terminal. The second phase was to interconnect a pipeline carrying a different oil bitumen blend with the first phase line.

The Alberta Court of Queen’s Bench held that, in accordance with the Pipeline Agreement, MEG owned the interconnection facilities that were in dispute except for the pig facilities which belonged to Canexus (a “pig” being a canister that travelled through the pipelines to clean and gather diagnostic information).

Summarized Positions of the Parties

MEG argued that the pipeline agreement was unambiguous and gave them ownership over the disputed facilities. The contract provided that “MEG shall own and retain title to the MEG Pipeline Facilities.” The MEG Pipeline Facilities meant “MEG Pipelines and the MEG Interconnection Facilities.” The MEG Interconnection Facilities meant “the welds and associated Infrastructure… together with any and all modifications and expansions thereof from time to time.” Infrastructure was defined as “all equipment, installations, and other property used to operate or support the Pipeline Facilities, including pumps, transfer pumps, foundations, utilities, interconnections with utilities, pipes, pipe racks, pipelines…”.1

Canexus argued that a review of the Pipeline Agreement and the surrounding circumstances made it clear that ownership was to be divided at the point of the interconnection weld. “Interconnection weld” was not a defined term in the agreement. Canexus further submitted that the interconnection weld provided the best single point that could demark ownership. Finally, Canexus argued their position was the most sensible commercial solution to the dispute and that the parties must be deemed to have intended their result to make the most commercial sense.

Law and Discussion

MEG Energy referenced the Supreme Court of Canada judgment, Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 (“Sattva”). Sattva stated that surrounding circumstances will be considered in interpreting the terms of a contract as such evidence will enhance a court’s understanding of the intentions of the parties. The evidence of “surrounding circumstances” will vary from case to case but is confined to objective evidence of background facts that was or reasonably ought to have been within the knowledge of both parties as they approached and reached their agreement. However, Sattva requires that evidence of surrounding circumstances must never be allowed to overwhelm or supplant the words of an agreement itself.

Sattva also maintains the parol evidence rule: evidence that would add to, subtract from, vary, or contradict a written contract will not be admissible. Parol evidence may be admissible in narrow cases where the intentions of the parties, as embodied by their agreement, are too ambiguous. A court may examine evidence of the surrounding circumstances as such evidence is an interpretive aid to the contract and not a replacement to its terms. The admissibility of evidence on surrounding circumstances is narrowed to objective facts on the circumstances and is therefore not parol evidence.

MEG Energy and Sattva affirm the principles of contractual interpretation previous applied in Alberta. BLG was counsel on two recent, pre-Sattva, cases where similar legal issues arose: Nexxtep Resources Ltd v Talisman Energy Inc, 2013 ABCA 40 (“Nexxtep”) and Talisman Energy Inc v Espirit Exploration Ltd, 2013 ABQB 132 (“Espirit”):

In Nexxtep, the court concluded that while the first step in determining the intentions of parties is to look at the words and entirety of an agreement, it is not the only step. The surrounding circumstances will be examined and can extend to facts surrounding the genesis of the agreement, the agreement’s purpose, and the commercial context surrounding the agreement. The Alberta Court of Appeal in Nexxtep affirmed that consideration of the surrounding circumstances does not depend on finding some ambiguity in the contract.

Like Nexxtep, the court in Espirit affirmed that the purpose of contractual interpretation is not simply to look at the meaning of the words of a contract but is to ascertain the parties’ intentions. While words are primary in this analysis, the surrounding circumstances remain important and will influence how a court will interpret the intentions of the parties.

The judgment of MEG Energy concluded that Canexus’ suggested interpretation of the contract was contrary to the wording of the Pipeline Agreement. In reaching its judgment, the court examined the surrounding circumstances leading to the agreement and concluded, “[w]hile I can take the surrounding circumstances and the purposes of the agreement into account, I cannot do so if the result is to torture the meaning of the words.”2 Furthermore, the Court of Queen’s Bench inMEG Energy took care to “separate what happened after the agreement was signed with what was known up to the signing of the agreement”3 and highlighted that the design of the second phase connection did not exist at the time the agreement was entered into.

Implications

MEG Energy is a useful example of contract interpretation in a pipeline context and has implications for energy companies which include the following:

  1. Following Sattva, contractual interpretation may involve a mixed question of fact and law, not a question of law alone;
  2. While the words of an agreement are of primary importance, the surrounding circumstances will be considered in order in to inform a court’s assessment of the intentions of the parties;
  3. Admitted evidence on surrounding circumstances will not be permitted to supplant an  agreement itself; and
  4. Corporations and their counsel should work to resolve ambiguity and potential for dispute prior to entering an agreement. If a dispute arises, circumstances giving rise to an agreement will influence how a court assesses the intentions of the parties entering into the agreement.