White Resource Management Ltd. v. Durish

McLachlin J. -- The issue in this case is which of two competing parties, Durish or WRM Resources Ltd. (WRM), held the mineral rights in a parcel of oil-producing land in Alberta. White Resource Management Ltd. (White) is involved as a previous holder of interests in the mineral rights. The bank is named as creditor to White and WRM and as holder of the profits from the well.

Leonard Carlson, a farmer, owned a parcel of land, including its minerals. In 1969, he made two transactions. In January, he granted a lease in the mineral rights to Pawnee Petroleums Ltd. Later, in October, he entered an agreement for sale of the lands, including the mineral rights, to Ralph Vold. Under the Torrens land registry system in place in Alberta, agreements for sale of land are registrable by caveat. Vold registered a caveat evidencing his agreement with Carlson on November 5, 1969.

Carlson died in March, 1970. Despite the agreement with Vold, Carlson's heirs granted a second lease of the mineral rights to Pawnee on November 25, 1971, which was caveated on December 10, 1971. This created a second competing claim on the mineral rights. In 1972, the Land Titles Office severed the land into the surface rights and the mineral rights, issuing separate certificates for each. Vold sold the surface rights, which are not in issue, to Hughes, keeping the mineral rights.

The second Pawnee lease was assigned to Brascan Resources Ltd. on March 13, 1973, which assignment was caveated by Brascan on May 17, 1973. The lease was in turn assigned to Haida Resources Ltd. on August 31, 1976, who caveated their interest on October 1, 1976.

A search of the Register on October 2, 1976, would have revealed a caveat in the name of Pawnee, a caveat in the name of Vold, and caveats in the names of Pawnee again, Brascan and Haida. In effect, the Register would have disclosed two chains of interest in the mineral rights: one derived from the Vold interest and the other from the Pawnee claim.

To further complicate matters, a third chain of interests was created on October 4, 1976, when the heirs of Carlson, who still held the underlying title, granted lease options of the mineral rights to Normac Oils Ltd. Normac assigned these options and leases to White on January 21, 1977. White registered caveats with respect to the Normac leases in March 1977. In November 1977, Durish entered the picture. White granted a one-year drilling option with respect to the lands to Durish, which option was not exercised.

Under the land registry system in Alberta, a caveat is only a notice of an interest. The holder of a subsequent interest in the land may call on a caveator to prove its claim by taking proceedings on the caveat, under s. 144 of the Land Titles Act (now s. 137). If this is not done, or if the proceedings are unsuccessful, the caveat lapses, or is struck from the title. Following this procedure, White, who claimed under the third chain of interest, gave notice on December 7, 1977, to those claiming under the first and second chains of interest, being Pawnee, Vold and Haida, to take proceedings on their caveats (the Brascan caveat having been discharged in November). Haida defended its caveat by filing a statement of claim and lis pendens. The other caveated claimants did not, with the result that the 1969 and 1971 Pawnee caveats and the Vold caveat lapsed in February and March, 1978. At this point, a search of the Register would have shown the Haida caveat, the White caveats of the Normac leases, followed by the Haida lis pendens.

On May 27, 1978, Vold granted a lease to White, who in turn caveated it on June 13, 1978. White now claimed through two roots -- the Carlson/Normac root, and the Vold root.

On October 25, 1978, Durish entered into a Farmout Agreement with White, acquiring an option on 50 percent of White's interest in the minerals, whatever its source. This essentially merged White's two chains of title. Durish caveated the Farmout Agreement on February 18, 1981. On November 30, 1978, Durish assigned his interest in this option to Lobell Oil and Gas Ltd., which Durish controlled. When this option was later exercised, Lobell had a claim to 50 percent of the minerals, with White retaining the remaining 50 percent.

While White had consolidated the Normac and Vold claims of interest in the mineral rights, his right to them was clouded by the outstanding Haida claim to the same mineral rights, as well as by any reversionary rights which Vold might hold. Durish, who held from White, became aware of these problems just as his company Lobell was about to drill an exploratory well on the lands. To protect his investment, Durish acquired any reversionary interest that Vold had on April 28, 1979, and took assignment of Haida's interest in the 1971 Pawnee lease on May 24, 1979. Durish caveated these interests on June 6, 1979 and July 3, 1979, respectively. On August 24, 1979, pursuant to an arrangement with Durish, Haida discharged its lis pendens. Its caveat, however, remained on title.

At this point Durish had purportedly acquired in total the two interests which had clouded the option he took from White. They continued, however, to cloud the interest which White had retained. If the "cloud" on White's claim proved valid, it would follow that Durish would be entitled to the whole of minerals. If not, White would have a claim to one-half of them.

A successful exploratory well was drilled in May 1979. WRM Resources Ltd. was formed in 1981 to purchase the 50 percent interest acquired from White by Durish's company Lobell pursuant to the 1978 Farmout Agreement. The funds for this acquisition were borrowed from the respondent Royal Bank of Canada. Offers were also made by WRM to acquire Durish's interests in the land, pursuant to both the Haida lease, and the reversionary interest from Vold. These acquisitions, however, did not come to fruition. As relations between White and Durish soured, both parties moved to confirm the strength of their relative interests in the lands, resulting in this action. The well produced oil commencing in early 1982. WRM, the producer, paid all the royalties to Durish, as owner of Vold's reversionary interest. WRM paid no royalties to White. The net revenues were deposited with the Royal Bank, which also took White and WRM's interests in the land as security under s. 177 of the Bank Act, S.C. 1980-81-82-83, c. 40.

White sued seeking a declaration that the lease from Vold in 1978 under which he claimed had priority over Durish's subsequently acquired interests. Durish counterclaimed that the lease interest acquired in 1979 from Haida to consolidate his position had priority. The action proceeded on the counterclaim. A non-suit motion brought by the White interests was allowed (per Mason J. (1990), 77 Alta. L.R. (2d) 131). The Alberta Court of Appeal dismissed an appeal from this motion (per Kerans J.A. (1992), 5 Alta. L.R. (3d) 372). Durish now appeals to this Court.

The following chart summarizes the transactions that led to this litigation (see chart at p. 643).

Leonard Carlson

(and heirs)

January 8, 1969

Lease to

Pawnee Petroleum

October, 1969

Agreement of Sale to Vold

November 25, 1971

Lease to Pawnee Petroleum

March 31, 1973

Assignment of Lease to Brascan

August 31, 1976

Assignment of Lease to Haida

October 4, 1976

Option to Lease to Normac

January 21, 1977

Assignment of Option to White

November, 1977

One Year Option to Durish

May 27, 1978

Lease to White

October 25, 1978

Farmout Agreement to Durish

November 30, 1978

Assignment of rights to Lobell

Assignment of Lease to Durish

June 10, 1981

Assignment of rights to WRM

April 21, 1983

Security Agreement with Royal

Bank of Canada

April 28, 1979

Assignment of Reversionary

Interest to Durish

A number of different claims have been raised by both parties as to the validity and priority of the various interests involved. The issues affecting these claims can be divided into Land Titles Act issues, upon which decisions of the courts below were based; and other issues.

Durish's claim rests on the Haida lease. Durish claims priority on the ground that on the Register, the Haida caveat was prior to the caveat through which the White camp claims. Durish argues that under the Land Titles Act, the Register is determinative of priority and hence that his claim should prevail. White raises three arguments against Durish's claim under the Land Titles Act. I will consider each of these in turn.

1. The Effect of s. 195 of the Land Titles Act

Durish relies in part on s. 195 of the Land Titles Act, R.S.A. 1980, c. L-5, which would grant him protection against any interests which were not registered at the time he acquired the Haida lease. Section 195, as it stood in 1979, read as follows:

195 Except in the case of fraud, no person contracting or dealing with or taking or proposing to take a transfer, mortgage, encumbrance or lease from the owner of any land in whose name a certificate of title has been granted shall be bound or concerned to inquire into or ascertain the circumstances in or the consideration for which the owner or any previous owner of the land is or was registered or to see to the application of the purchase money or of any part thereof, nor is he affected by notice direct, implied or constructive, of any trust or unregistered interest in the land, any rule of law or equity to the contrary notwithstanding, and the knowledge that any trust or unregistered interest is in existence shall not of itself be imputed as fraud. [Emphasis added.]

"Owner" is defined in s. 1 of the Act as a person entitled to any interest in land. Similarly, "land" is defined as including any estate or interest in land.

The White camp argues that s. 195 does not assist Durish, because Durish was not dealing with "the owner of any land in whose name a certificate of title has been granted". Mason J. accepted this argument.

The Alberta Court of Appeal, dismissing the appeal on other grounds, cast doubt on this conclusion. Kerans J.A. commented that a broader application of s. 195 was more in keeping with both the principles of the Torrens system and with settled practice in Alberta.

I agree with the Court of Appeal that the strict application of the section to only those dealing with the registered owner in fee simple is not in keeping with the principles of the Torrens system. One of the most important features of the Torrens system is the reliability of the Register. By obviating the necessity to look behind the title, the Register allows those who deal with land to do so more efficiently. The Register may reflect many interests and transactions. To confine the s. 195 protection to a small portion of these potential transactions -- those involving the registered owner in fee simple -- would be to diminish the efficacy of the Land Titles system.

The broader interpretation favoured by the Court of Appeal is supported by the fact that in consequence of this litigation and recommendations by the Alberta Law Reform Institute, Report No. 63, the Alberta Legislature has amended s. 195 so as to include those dealing expressly with "owners" of other interests under the scope of the protection provided by the provision. The amendment was enacted so as to be retroactive to the date of the first Alberta The Land Titles Act, S.A. 1906, c. 24. As I read this amendment, it is intended to be a clarification of the scope of the section, rather than an expansion of the section to cover new classes of parties. It follows that the original s. 195 should be interpreted in conformity with the amended section, and that Durish can rely on the protections of s. 195.

2. The Effect of the Intervening White Caveat

The second argument brought against Durish's claim is that since Durish took from Haida when White's caveat of the 1978 lease from Vold was on title, Durish cannot now assert priority over the White interest. In other words, even though the Haida caveat is prior to White's caveat, the Haida caveat did not confer priority on Durish because Durish took subject to White's caveat, which had been registered in the interim. This was the basis upon which the Court of Appeal upheld the result of Mason J.

This argument must fail for two reasons. The first is the principle that an assignee of a caveated interest can claim priority through the original caveat: Calford Properties Ltd. v. Zeller's (Western) Ltd., [1972] 5 W.W.R. 714 (Alta. C.A.), at pp. 722-23, adopting the reasoning of Graham J. in Gas Exploration Co. of Alberta Ltd. and Lee v. Cugnet (1954), 12 W.W.R. (N.S.) 177 (Sask. Q.B.), at p. 180. It follows from this principle that when Durish took an assignment of Haida's interest in the Pawnee lease in 1979, Durish took all the interest Haida had in that lease, including Haida's position of priority, undiminished by White's intervening interest.

I see no reason to disturb this principle. To hold that Durish could not assert priority over White would be in effect to allow White to assert priority over the interest held by Haida, even though White came onto the Register after Haida. Haida's caveat gave priority to the interest described by the caveat, and Haida was free to assign that interest free of subsequent claims. If a caveated interest in land were to lose its priority, and hence much of its value, because of subsequent claims, the holder of the caveated interest could only transfer a portion of what he or she holds. This would undercut the free and convenient alienability of land, one of the principles of the Torrens system. (See W. H. Hurlburt, "Priorities and the Discharge of Caveats (No. 2): White Resource Management Ltd. v. Durish" (1993), 31 Alta. L. Rev. 411, at pp. 422-23.)

In 1982, the Land Titles Act was amended to more clearly reflect this principle. Before 1982, Durish, in order to preserve the priority of the Pawnee lease of which he had taken an assignment, would have had to claim through the Haida caveat. Since 1982, however, s. 135.1 of the Act specifically allows for assignment of the caveat itself, obviating the former more circuitous method of asserting priority. On April 15, 1985, Durish took assignment of the Haida caveat itself pursuant to s. 135.1, giving him the same priority that Haida had prior to the assignment. Durish can therefore claim priority through the Haida caveat not only because the underlying lease which it protected was assigned to him, but also because he has taken an assignment of Haida's caveat itself. This is the second reason why the argument that Durish took subject to White's interest must fail.

Durish presents a third objection to White's second argument. He argues that even if this Court held that he took Haida's interest subject to White's subsequent caveat, the White caveat could not be considered sufficient notice of the Vold interest because it does not warrant the extent and validity of the Vold interest, which remains undefined on the Register. To give it this effect, it is argued, would be to require the person relying on the Register to look behind the caveats to determine the source of the title on which they are based. My conclusion that Durish took Haida's full interest unencumbered by the White caveat makes it unnecessary to decide this issue in this case.

3. The Effect of Lapse of a Caveat upon Priority

The third argument raised against Durish is that the Vold interest, upon which the White camp relies, has priority over the Haida lease, notwithstanding the lapse of the Vold caveat in 1978. The issue is whether the priority of the Vold interest lapsed when the caveat protecting it lapsed. If so, Haida gained priority over Vold, which can now be asserted by Durish over White.

It is important to note that this argument is not concerned with the lapse of the underlying interest, which clearly survives, but with the loss of the priority secured to that interest by the caveat.

In my view, the argument that the priority of the Vold interest did not lapse with the caveat protecting it must fail. In Union Bank of Canada v. Boulter Waugh Ltd. (1919), 58 S.C.R. 385, this Court held on facts similar to those in the case at bar that the lapse of a caveat resulted in a corresponding loss of priority in the underlying interest. In Boulter Waugh, one Frank Phillips granted an assignment of his interest under an agreement of purchase and sale through several assignees to Boulter Waugh, as security for a debt. Phillips later assigned a mortgage interest to the Union Bank, who caveated the interest on title, after Boulter Waugh's caveat. The Union Bank gave notice to Boulter Waugh to enforce its caveat, and the caveat lapsed after Boulter Waugh failed to take action in the appropriate time. A priority dispute then arose between the Union Bank and Boulter Waugh. This Court unanimously decided, on the basis of the Saskatchewan Act's equivalent of s. 195, that the Bank's interest took priority over Boulter Waugh's interest, due to the lapsed caveat. There was no finding that the interest underlying the caveat was itself defeated, merely that the interest lost priority over the other competing interest.

Kerans J.A. for the Court of Appeal in this case (at p. 380) characterized the decision in Boulter Waugh as one involving "abuse of process", in that the Court "refused relief to Boulter-Waugh because it had no good reason for its earlier failure". I find myself unable to agree with this interpretation. Rather, as I read the case, the Court refused relief to Boulter Waugh because its caveat had lapsed, with the result that it lost priority under the Land Titles Act. While Davies C.J. and Mignault J. referred to the carelessness of Boulter Waugh, the case cannot be reduced to a simple matter of propriety of conduct.

Although this Court's decision in Boulter Waugh appears to be determinative, the White camp raises two appellate level cases in support of its argument that the lapse of a caveat does not alter the priority of the underlying interest: Bensette and Campbell v. Reece, [1973] 2 W.W.R. 497 (Sask. C.A.), and Re Passburg Petroleums Ltd. and Landstrom Developments Ltd. (1984), 8 D.L.R. (4th) 363 (Alta. C.A.).

In Bensette, a purchaser of lands took subject to a caveat respecting a right to royalties in the minerals. The purchaser then gave notice to the holder of the caveat, who allowed it to lapse. The Saskatchewan Court of Appeal held that the lapse of the caveat did not erase the underlying claim to the royalties. Hall J.A. stated at p. 512: "As the rights of a caveator are not created by filing the caveat, they cannot be extinguished by the lapse of the caveat. . . ." The issue was not the priority of the underlying claim, but whether that claim had been erased entirely when the caveat lapsed.

In Passburg, as in Bensette, the issue was the effect of lapse of a caveat, not on priority, but on the underlying interest itself. The owner of land assigned his interest in the land to a purchaser, subject to a caveated lease. The lessee under this lease assigned its interest to a new lessee. The original lessee then discharged its caveat. The new lessee, on discovering the discharge, filed a caveat of its own. The purchaser of the land relied on the discharge of the first lessee's caveat to argue that the new lessee could not enforce the lease against him. In effect, he argued that when the caveat giving notice of the lease was removed, the lease interest itself disappeared. The Alberta Court of Appeal rejected this argument, holding that since the purchaser took when the caveat was in place, the purchaser was bound by the lease, regardless of subsequent assignments or discharges of caveat.

It has been suggested that the cases on this issue are in conflict. (See Thomas W. Mapp, Torrens' Elusive Title (1978), at p. 156; and two case comments by W. H. Hurlburt, "Priorities and the Discharge of Caveats: White Resource Management Ltd. v. Durish", 29 Alta. L. Rev. 905 ("No. 1"), and "Priorities and the Discharge of Caveats (No. 2): White Resource Management Ltd. v. Durish", supra. With respect, I do not agree.

Boulter Waugh holds that the lapse of a caveat results in loss of priority of the underlying interest. Passburg and Bensette are concerned with the different issue of whether the lapse of a caveat destroys the underlying interest. Although it is true that it is possible to read Passburg and Bensette as dealing with priorities, this is to miss their true import. In both Passburg and Bensette, the contest was between the owner of the land and a caveator claiming a lesser interest. It is well established that the interest underlying a caveat remains enforceable against the owner of land who has taken the land subject to that interest. For this reason, it is not appropriate to speak of priorities between the owner of the land and the holders of prior interest. The owner of the land takes only what the vendor can convey according to the record at the time of conveyance. That interest is not increased by the subsequent lapse of the caveat protecting the exception. Despite the lapse of the caveat, the underlying interest remains enforceable against the owner who took subject to it.

The situation between rival encumbrancers is different, as Boulter Waugh attests. Each encumbrancer holds an independent claim against the owner. The claimants have privity with the owner but not with each other. The obligations between each encumbrancer and the owner continue independently of the caveat. As between fellow encumbrancers, however, priority is determined by the dates of the protecting caveats. It is clear from the combination of ss. 59 and 16(5) of the Act that "priority" is a concept applicable only between the holders of competing derivative interests:

59 Instruments registered in respect of or affecting the same land have priority the one over the other according to section 16 and not according to the date of execution.

16...

(5) For purposes of priority between mortgagees, transferees and others, the serial number assigned to the instrument or caveat shall determine the priority of the instrument or caveat filed or registered.

Thus a dispute between a caveator and a registered owner in fee simple is not one of "priority". Section 135 gives priority to caveators "[so] long as a caveat remains in force", against another registered interest; this is the rule in Boulter Waugh. This does not derogate from the rule, however, that an interest underlying a caveat is still enforceable against an owner; this is the rule in Bensette and Passburg.

There is good reason to maintain the distinction between contests between different encumbrancers and between an encumbrancer and a registered owner. The inherent value of a caveated interest typically depends on its priority with respect to other competing interests. In order to determine the value of a caveated interest, the caveator must be able to rely on the register as indicative of priorities. The owner of the land, on the other hand, who takes subject to all underlying interests, is able conclusively to determine the value of his interest, regardless of priority competitions on title.

It follows that White's argument that the lapse of the Vold caveat did not affect the priority of the interest it represented vis-à-vis other encumbrancers must fail. The lease protected by the Haida caveat gained priority over the Vold interest, as against Carlson, when the Vold caveat lapsed in March, 1978. White could not then revive Vold's priority simply by taking a lease from Vold and caveating it; indeed Vold himself could not have regained priority by re-caveating his interest. Durish's priority through the Haida chain of title stands unimpeached.

Durish also objects that the interest assigned by Carlson to Vold could not have included the mineral rights, as there was a caveat on title with respect to the first Pawnee lease to those rights at the time of the assignment. I cannot agree. The existence of a caveated lease on title in no way prevents the owner from assigning the entire ownership interest, subject, of course, to the caveated lease. In addition, it is difficult to impute, in the face of the contract, an intention between Carlson and Vold to transfer only the surface rights, based on either the first Pawnee lease or the subsequent granting of the Normac lease by Carlson.

Counsel for both parties made submissions with respect to other issues which might govern the rights to the profits from the well. In particular, the continued validity of the lease itself underlying the Haida/Durish caveats was questioned, as was the ability to claim against the bank either for conversion or as a constructive trustee. As this case comes to us on a motion for non-suit, the respondents have not been given the opportunity to adduce evidence on these matters. Given the insufficient evidentiary record on these points, and the fact that they have not been considered by the Courts below, it would not be appropriate for this Court to rule on them at this time.

The grounds upon which it has been argued that Durish's counterclaim discloses no good claim in law are not established. I would allow the appeal, quash the order of non-suit and remit the matter to trial for determination of the outstanding issues. The appellant is entitled to his costs in this Court and the courts below, taxed on a party and party basis.