Central Canada Potash Co. Ltd. et al. v. Government of Saskatchewan

Is the potash prorationing scheme constituted by the Province of Saskatchewan pursuant to the Potash Conservation Regulations 1969 numbered 287/69, and the Orders in Council O/C 1733/69 and O/C 404/70 enacting and amending them, and the Potash Allocation Formula effective January 1, 1970, and the Minister’s Directive PCD‑1, Potash Prorationing, effective July 1, 1972, enacted pursuant to the Mineral Resources Act, R.S.S., 1965, Chapter 50, and the various Notices, Directives, Ministerial Orders and Licenses issued from time to time by the Minister of Mineral Resources for Saskatchewan and his Deputy implementing the schemes, ultra vires the Province of Saskatchewan?

Is extrinsic evidence admissible in this case in relation to the constitutional issue and, if so, to what extent and of what kind?

The Attorneys-General of Quebec, New Brunswick, Manitoba, Alberta and Newfoundland intervened to support the judgment in appeal. The Attorney-General of Canada had become a co-plaintiff at the trial in respect of the constitutional question raised by the action and remained a party to the proceedings in the Saskatchewan Court of Appeal and in this Court.

The Mineral Resources Act, R.S.S. 1965, as amended, through which the Potash Conservation Regulations, 287/69, were promulgated, is skeleton legislation, giving very wide authority to the responsible Minister and wide regulation-making power to the Lieutenant‑Governor in Council. The Act itself is not challenged. It is common ground that at the time the 1969 Regulations were passed almost all of Saskatchewan-produced potash was sold outside the Province and that the larger part of the production, about 64 per cent, was marketed in the United States. Saskatchewan production, moreover, represented almost half, about 48 per cent, of the United States potash market. The appellant company itself had about 34 per cent of the Saskatchewan share of the United States market. So far as forecasts of future world con-

[Page 50] sumption can be based on present knowledge and on scientific assessment of known or proven reserves, evidence was given that Saskatchewan could supply world demand for potash for almost 1,500 years or for even a longer period. The trial judge relied on this evidence for finding that the Potash Conservation Regulations could not be said to be a response to threatened shortages of the mineral or to conservation needs.

Potash is also produced in the State of New Mexico but production and quality, according to the evidence, did not match that of Saskatchewan and reserves were, apparently, minimal. There was concern about the penetration of Saskatchewan potash into the United States market, and a dumping inquiry was instituted in the United States not only in respect of Canadian exporters but as well in respect of French and West German exporters. A finding of dumping was made by the United States Bureau of Customs in August of 1969 and the matter was referred, as required by United States law, to the United States Tariff Commission, which fixed a hearing for October 7, 1969. Although the hearing commenced on that date and a determination was obligatory by the end of November 1969, in the events that happened the tariff inquiry did not prove damaging to Saskatchewan interests, although a determination of injury and the likelihood of continuing injury was made on November 21, 1969. The Government of Saskatchewan was aware of the course of proceedings in the United States affecting Saskatchewan potash, and was concerned about the damaging effect of a tariff levy on exports from Saskatchewan. Equally, the New Mexico authorities were concerned about loss of tax revenues from declining production and a federal tariff would not in itself be of any help to them. Both were concerned about overproduction and, in consequence, a drop in world price.

In the result, a meeting took place in Santa Fe, New Mexico, on October 6, 1969, between the then Governor of New Mexico and the then

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Premier of Saskatchewan and their respective associates, at which time a draft of proposed Saskatchewan potash regulations was produced and considered. A follow-up meeting took place in Regina, Saskatchewan, on October 17, 1969. There is no doubt that the Potash Conservation Regulations, 1969, were the product of the two meetings and were prompted by the economic conditions that I have described. They were passed on November 17, 1969, under Order in Council 1733/69 and amended on March 8, 1970, under Order in Council 404/70. I will consider the proration scheme established by the Regulations and the amendment thereof after I deal with the position of the appellant Central Canada Potash Co. Limited in respect of its involvement in the potash industry.

The appellant was born of an agreement between Noranda Mines Limited and Central Farmers Fertilizer Company, a Chicago-based co-operative association which supplied large quantities of fertilizer to numerous co-operative associations and thus to farmer members thereof. Noranda had done exploration work in Saskatchewan in respect of potash mining and proposed to establish a mine if it could find a secure market for the production. It had extensive mineral rights in Saskatchewan under freehold interests and under Crown lease and held options to buy additional mineral lands. Its agreement with Central Farmers, dated July 1, 1965, provided that it would establish a mine with ancillary facilities, with a production capability of not less than one million tons of muriate of potash annually. Central Farmers agreed to buy half a million tons annually over a period of twenty-years, with the right to increase its purchases to one and one-half million tons annually. The price fixed for the purchases was the prevailing commercial price less 15 per cent. Central Farmers was given the option of requiring that the mine and facilities be conveyed to a new company in which Noranda would have a controlling 51 per cent interest and Central Farmers the remaining 49 per cent. The option was exercised, and the appellant was incorporated and took a conveyance of the mine as a going concern at a price just short of $90,000,000. The Crown lease which Noranda held was assigned to the appellant on July 15,

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1970, with the consent of the Saskatchewan Government. The lease covered mineral rights under statutory road allowances and, overall, gave Noranda and later the appellant a continuous ore body running through and connected with its other holdings. I should add that the original agreement between Noranda and Central Farmers was amended on July 1, 1970, and on the same day a novation agreement was made between them and the appellant affirming the obligation to supply potash to Central Farmers and the latter’s obligation to buy. Supply under the agreement began in February 1970.

The provisions of The Mineral Resources Act, which were relied on to underpin the Potash Conservation Regulations and orders and directives made thereunder, were ss. 3, 9 and 10, reading as follows:

The purposes of this Act are:

(a) to promote and encourage the discovery, development, management, utilization and conservation of the mineral resources of Saskatchewan;

(b) to regulate the disposition of Crown mineral lands;

(c) to protect the correlative rights of the owners of surface rights and of mineral rights;

9. The minister may do such things as he deems necessary to discover, develop, manage, utilize and conserve the mineral resources of Saskatchewan and, without limiting the generality of the foregoing, the minister may:

(a) make geological or mineralogical surveys or examinations of Saskatchewan and carry on such operations as may be considered necessary in connection therewith;

(b) make and carry out investigations, examinations, experiments, tests and analyses of or pertaining to minerals for the purpose of determining their scientific and economic value;

(c) prepare and publish such reports, diagrams, drawings, maps and plans in connection with the mineral resources of Saskatchewan as he deems necessary;

(d) establish and operate facilities for instruction and training in the art of conserving, developing, exploring for or prospecting for minerals;

(e) grant assistance upon such terms and conditions as he deems advisable to promote exploration for,

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development, management, utilization and conservation of the mineral resources of Saskatchewan;

(f) prescribe the fees to be paid for any information or services and reports, maps and other documents furnished by the department to the public; and

(g) purchase and sell or otherwise dispose of or utilize any product of the mineral resources of Saskatchewan.

10. (1) The Lieutenant Governor in Council may make such regulations and orders not inconsistent with this Act as he may deem necessary for the purpose of carrying out its provisions according to their obvious intent or to meet cases that may arise and for which no provision is made therein and without limiting the generality of the foregoing may make regulations and orders:

…

(k) governing the issue of licences under this Act;

(l) prescribing, in cases not otherwise provided for, penalties for the breach of any regulations or orders made under this Act;

(m) prescribing forms to be used under this Act;

(n) requiring from the holders, owners, occupiers or operators of mines or mineral lands, reports and statements respecting the work and operations conducted at any time or on any mineral land;

…

(3) Every regulation and order made under this section shall be deemed to be a part of this Act.

The Potash Conservation Regulations, passed on November 17, 1969, provided for a prorationing scheme to take effect on January 1, 1970. Sections 2, 3, 4 and 5 of the Regulations, so far as relevant to these proceedings, were as follows:

2. (1) On and after January 1, 1970, the production of potash is prohibited unless a producing licence authorizing the production is granted by the minister which licence shall be in such form and subject to such conditions as the minister may determine.

(2) The minister may issue a producing licence to produce potash in compliance with these regulations in such form as the minister may determine and subject to such conditions as may be stated in the licence, or he may refuse to grant a producing licence.

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3. (1) On and after January 1, 1970, the disposal of potash is prohibited unless a licence authorizing the disposal is granted by the minister.

(2) The minister may issue a licence to dispose of potash in compliance with these regulations and subject to such conditions as may be stated in the licence, or he may refuse to grant a disposal licence.

(1) For the proper utilization and conservation of potash and for the protection of correlative rights of the owners of mineral rights the minister may, if he deems it advisable, order that a public inquiry may be held at such time and at such place as he may designate for the purpose of determining any or all of the following:

(a) a fair and reasonable price to the producer of potash, free on board at the potash plant gate in Saskatchewan, for all potash produced in the province;

(b) the productive capacity of each potash mining property;

(c) a proportionate share of production, if any, that may be allocated to each potash mining property required to meet the market demand for potash;

(d) the demand for potash or potash products for reasonable current requirements and current consumption or use within and outside the province, together with such amounts as are reasonably necessary for building up or maintaining reasonable storage reserves and working stocks of potash and potash products;

(e) any other matter that the minister deems advisable.

…

(1) Where the minister decides that it is advisable to limit the total amount of potash that may be produced in the province he shall allocate the allowable production among the potash mining properties introduction in the province and may, in determining such allocation, consider the following factors:

(a) basic allowables;

(b) definite and bona fide requirements for disposal;

(c) inventory requirements;

(d) any other matter that the minister deems advisable.

(2) The minister may amend, revise or vary the allowable production allocated to any or all potash mining properties in production, with or without an inquiry as he deems advisable, to meet changing conditions or circumstances.

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The requirement of a disposal licence was abandoned by an amending Regulation 64/70 of March 18, 1970, which repealed s. 3 and substituted a new s. 2 and a new s. 4(1)(a). These amendments were as follows:

2. (1) The production of potash is prohibited unless a producing licence authorizing the production is granted by the minister which licence may be issued on such basis and in such form and subject to such conditions as the minister may deem appropriate to each proposed production.

(2) Where the minister is satisfied that the production proposed by the applicant for a licence to produce is consistent with sound utilization and conservation principles relating to the potash resources of the province he may issue a producing licence, and where not so satisfied he may refuse to issue such licence.

4. (1) …

(a) the economic viability of the proposed production, including such things as cost of production, method of production, reserves for control of pollution, methods of mining, costs of transportation and sale price.

On November 25, 1969, shortly after the Potash Conservation Regulations were promulgated and pursuant thereto, the responsible Minister sent the following notice to Saskatchewan potash producers:

NOTICE UNDER THE POTASH CONSERVATION REGULATIONS, 1969

To all potash producers in Saskatchewan:

Notice is hereby given that I, Alexander C. Cameron, Minister of Mineral Resources, do hereby declare that a fair and reasonable price to the producer of potash, free on board, at the potash plant in Saskatchewan, shall be not less than thirty-three and three‑quarters cents (33.750) Canadian per unit of potassium oxide equivalent for the purpose of:

(a) determining the demand for potash or potash products for reasonable current requirements, and current consumption or use within and without Saskatchewan on and after January 1, 1970; and

(b) prorationing the production and disposal of potash and potash products in Saskatchewan commencing January 1, 1970; and

(c) issuing producing licences and disposal licences in Saskatchewan.

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The minimum producer price was thus fixed, for the stated purposes, clause (a) of the notice referring to “current consumption or use within and without Saskatchewan”.

The foregoing notice was followed by a Ministerial directive of February 24, 1970, which elaborated on the minimum or floor price fixed by the notice. It sought to outlaw any device or arrangement that would reduce the established floor price. The directive is reproduced in full in the reasons of the Saskatchewan Court of Appeal, and I reproduce it here as well:

On November 25, 1969, the Minister of Mineral Resources issued a directive concerning the minimum selling price of thirty-three and three-quarter cents (33.75¢) per unit of potassium oxide equivalent, free on board, at the plant gate in Saskatchewan, effective January 1, 1970.

In order that there is a common understanding of the interpretation and meaning of ‘33.75¢ Canadian per unit K2O equivalent f.o.b. Saskatchewan plant’, the Department issues the following clarification:

1. MARKETING STRUCTURE—i.e.

(a) sales by producers with integrated operations for production, marketing, sales and distribution; and

(b) sales by producers through third party or independent brokers, distributors, wholesalers, dealers and other agents.

The established floor price is the minimum net selling price for potash f.o.b. Saskatchewan plant and no discount, commission or other consideration will be allowed out of the established floor price, whether the producer has an integrated operation or employs third party or independent contractors for its sales and distribution.

2. FREIGHT EQUALIZATION

The practice of absorbing freight costs by way of freight equalization is in effect a discount and if such practice reduces the established floor price, it will not be permitted.

3. NATURE OF DISCOUNT AGREEMENTS AND ARRANGEMENTS:

(a) for North American dealers;

(b) for offshore dealers.

No discounts that reduce the established floor price will be allowed in either case.

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4. DISCOUNTS ON CASH SALES

The established floor price shall not be reduced by discounts for cash. The floor price is based on cash sales or payment within 30 days of sale. No credit sales for over 30 days that in effect reduce the established floor price will be permitted.

5. ARRANGEMENTS BETWEEN PRODUCER AND PRODUCER TO MEET THE OVERALL PRORATED ALLOWABLES

Subject to prior application to, and approval of, the Minister of Mineral Resources, internal arrangements may be made by a Saskatchewan potash producing company to meet its market requirements from the allocated allowable of another Saskatchewan producer, without regard to the established floor price in so far as such transfer of allowable between one Saskatchewan producer to another Saskatchewan producer is concerned, provided that the sale price of potash so produced complies with the requirements of the established floor price when such potash moves out of Saskatchewan.

APPLICATION OF FLOOR PRICE TO ALL GRADES OF POTASH

The established floor price applies to potassium oxide equivalent content, regardless of grades of potash.

UNDERESTIMATED COSTS FOR FREIGHT, STORAGE, CONTAINER EXPENSES, ETC.

The department will not make any allowance for errors, miscalculation of unexpected increases in freight, storage and other costs on sales of potash, whether for present or future delivery. Sales contracts must so provide that the floor price for potash f.o.b. Saskatchewan plant will not be violated.

CONSIGNMENT SALES

All sales on consignment will be treated as the consignor’s (seller’s) inventory and must comply with the floor price requirement.

COST OF LEASING FREIGHT CARS, DEMURRAGE, UNLOADING, ETC.