Damages for Royalty Error Limited to Two Years: Ignorance of Mistake May Not Stop Limitations Clock

Written By Scott H.D. Bower, Alison J. Gray and Russell J. Kruger

A royalty holder must make reasonable inquires to confirm that a royalty has been properly paid and will be limited to a two-year recovery if not, the Alberta Court of Appeal has ruled in Canadian Natural Resources Limited v Jensen Resources Ltd, 2013 ABCA 399.

Limitation periods restrict how far back in time a plaintiff can recover damages for a past wrong.  Petroleum and natural gas royalty holders are required to bring a lawsuit within two years of when they first knew, or ought to have known, that they have not been paid the proper royalties, that the defendant was responsible for the error, and that their loss is large enough to warrant bringing a lawsuit.  There is also a ten-year "drop dead" provision, so that, generally speaking, no lawsuit can be brought for a royalty that was due more than ten years ago.  Finally, each missed or incorrect payment is considered a new claim even if the same mistake keeps being made.  As a result, in most royalty disputes, the question is whether the royalty holder can claim for two years or ten years of royalties, measured from the date when the lawsuit was filed.  See Limitations Act, RSA 2000, c L-12, s 3 and Meek (Trustee of) v San Juan Resources Inc, 2005 ABCA 448.

Often when a royalty mistake has occurred, it is because no royalty was paid or there has been a calculation error that has been repeated for years.  In such cases, it is usually straightforward to determine when the royalty holder first discovered the mistake, who made the mistake, and whether the amounts involved are large enough to warrant bringing a lawsuit.  The controversy is usually over when the royalty holder first "ought to have known" about the mistake.

The courts have previously taken two different approaches to determining when a royalty holder ought to have known of the mistake.  The first is that the royalty holder has the responsibility to monitor its own contracts and put in place mechanisms to discover errors, and so should discover an error sooner rather than later:  Luscar v Pembina Resources Ltd, 1994 ABCA 356 (CanLII).  The second is that the royalty holder is entitled to expect that the royalty payor will honour its obligations and absent "clear information to show an improper payment" the royalty holder is not expected to take positive steps to ensure the correct payment is being made:  Meek, supra.  The Luscar approach usually results in a two-year limitation period being applied; the Meek approach usually results in a ten-year period.  Some lawyers have speculated that the Luscar test applies if the royalty holder is a relatively sophisticated corporation and the Meek test applies if the royalty holder is a "little guy".

This case largely overrules the Meek test.  It clarifies that in all cases, royalty holders are expected to exercise reasonable diligence.  Even where the royalty holder does not have "clear information to show improper payment", the royalty holder may still have sufficient knowledge to give rise to an obligation to make reasonable inquires.  In this case, the plaintiff was the holding company of an experienced land man.  He knew he held equivalent royalty rights over lands in close proximity to the lands in question, and that he was receiving royalties from those lands.  He had not taken any steps to monitor whether he was receiving the correct royalty payments from the lands in question.  On those facts, the Court of Appeal held that he had sufficient notice to make the necessary inquiries years ago, and so ought to have known of the error sooner.  He was limited to a two-year recovery period from when the lawsuit was started.  The trial judge had given him ten.

The "clear information to show an improper payment" test is now much restricted, if not dead.  All royalty holders must make reasonable inquiries.  Whether such inquires are reasonable in any particular case will depend on the facts.  In some cases more inquiries will be expected than in others.  Knowledgeable counsel can significantly limit or increase the damages in a lawsuit by being conversant in the law of limitations, a notoriously complex speciality.

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