Dangers of a Self-Drafted Letter Agreement

Court Unwilling to Impose a Reasonableness Limit on Expenditures

By Scott H.D. Bower and Russell J. Kruger

Exploration expenditures incurred to earn into a mining claim did not have to be reasonable, the B.C. Court of Appeal recently held in American Creek Resources Ltd v Teuton Resources Corp, 2015 BCCA 170 [American Creek], in interpreting a short letter agreement drafted without counsel.

In American Creek, Teuton Resources Corp., a mineral "prospect generator" company, entered into an option agreement with American Creek Resources, whereby American Creek would earn a 51-percent undivided interest in a mineral claim upon making "exploration expenditures" of $5,000,000. American Creek incurred over $5,000,000 in expenditures from 2007-2009 and included these amounts in assessment reports accepted by the B.C. Mineral Titles Branch. When American Creek sought to trigger its 51-percent interest, Teuton refused, asserting that some of the expenditures were unreasonable because, in part, of an alleged "lack of expertise and general incompetence" of American Creek. American Creek sued for specific performance, and succeeded at trial.

On appeal, the Court of Appeal noted the deferential standard of review owed to findings of mixed fact and law as recently set out by the Supreme Court of Canada in Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, and concluded after a thorough review of the trial judge's findings that no error, much less a palpable and overriding error, was demonstrated. While Teuton maintained that the "exploration expenditures" incurred to earn-in had to be reasonably incurred whether because of the meaning of the phrase or because such a requirement must be an implied term of the agreement, the trial judge rejected this position. The trial judge noted that: 1) there was no expert evidence led to establish any industry standard with respect to "exploration expenditures"; 2) some of Teuton's past option agreements had included qualifying terms such as "reasonable" while this one did not; and 3) interpreting a "reasonableness" requirement could create uncertainty, raising questions such as from whose perspective should reasonableness be judged and at what point in time?

While it was reasonable to presume that the contract must have contemplated some limit or control on "exploration expenditures", it would be commercially unreasonable to expect American Creek to undertake expense "without knowing its rights until a retrospective forensic investigation" of the expenses was conducted. Instead, the judge found that the control on expenditures could be met by understanding "exploration expenditures" to be those expenditures made in good faith in relation to "exploration and development work" within the meaning of the relevant regulation and accepted by the Mineral Titles Branch.

American Creek is an important reminder of imposing explicit control mechanisms on cost or other expenditures in a contract if they are desired. It further highlights the importance of defining key terms to avoid unnecessary and expensive judicial intervention, and the risk of a court-imposed definition at odds with the parties' intentions. A short, self-drafted letter agreement can be a risky endeavour.

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