1. Introduction
Chevron Canada Resources v Canada[1] is a most interesting case that explores issues of trust law, unjust enrichment, payment under mistake, and the change of position defence. The courts have not previously addressed some of these issues, so the case is particularly significant for that reason.
The reserves of four Indian Bands near Pigeon Lake in Alberta included oil and gas reserves. Oil and gas producers extracted hydrocarbons from those reserves. Chevron and Fletcher Challenge held an equal 50% interest in 12.16% of one gas unit. Others owned the other 87.84%. The producers had to pay royalties to Her Majesty in Right of Canada in trust for the bands concerned, pursuant to section 4 of the Indian Oil and Gas Act.[2] For a period of more than six years, from January 1991 until August 1996, Chevron overpaid the royalties it owed. Instead of calculating them by reference to the 12.16%, Chevron calculated them on 100% of the interest in the gas unit in question. Consequently, it paid about eight times more than required.
2. The Facts
Chevron paid the royalties to Indian Oil and Gas Canada, a Crown department that was responsible for the management of oil and gas rights. The department deposited the royalties into accounts to the credit of the Receiver General of Canada. The royalties were credited to the Four Nations Capital Account and were then allocated to the individual trust accounts of the Four Bands. Interest earned was allocated to the Revenue Accounts of the Bands. The Receiver General did not segregate the funds but included them in the Consolidated Revenue Fund. A group within Indian and Northern Affairs Canada administered the funds and disbursed them based on requests made by the Bands if they were qualified and approved.
By the time the error was discovered, Chevron had overpaid by more than $10 million. It requested repayment and when the request was not honoured, it brought an action against Her Majesty the Queen in Right of Canada, Represented by the Executive Director on Indian Oil and Gas Canada, as well as the four Indian Bands who shared the entitlement to the royalties. It sought recovery from Canada and the Bands on a joint and several basis. Chevron’s claim was for restitution based on unjust enrichment or in the alternative on the basis of payments made under a mistake of fact.
The Bands defended and counterclaimed. They denied any overpayment but pleaded that if there was an overpayment, they had changed their position, so that it would be inequitable to make them repay the funds. Further, they claimed that the errors were caused by Canada’s negligence and breach of fiduciary duty and that it was responsible for the repayment. The Bands also issued third party notices against Canada, and if found liable they claimed indemnity and contribution from Canada because the loss arose from Canada’s breach of trust and fiduciary obligations. Canada also issued third party notices against the Bands claiming indemnity for any judgment awarded to Chevron against it.
3. The Judgment at Trial
The trial judge[3] found that it should been immediately obvious to Chevron that there was a problem and concluded that it was grossly negligent in making the error. His Honour also found that the error should have obvious to Indian Oil and Gas Canada and found that the Crown’s failure to identify the errors was negligent and in breach of the duties it had taken upon itself. He did not specifically find that the Bands were negligent in failing to notice the error. However, he drew the logical inference that, with proper attention, it would have been clear to the Bands that Chevron was paying eight times more than Fletcher Challenge, the party that held the other 50% in the 12.16% interest of the gas unit in question.
The trial judge found that the payments were made by mistake but held that as a matter of law Chevron’s negligence did not disentitle it from recovering the overpayments. His Honour held that, on a straight economic approach both Canada and the Bands were enriched by the overpayments and Chevron suffered a corresponding deprivation. The fact that the overpayments were made under a lease did not mean that there was a juristic reason for the overpayments because the overpayments were not required to be paid under the lease. Nor did the contractual relationship between Chevron and Canada and the Crown’s fiduciary obligations provide a juristic reason for the overpayments. Further, the trial judge held that the Bands’ argument of a ‘residual defence’[4] based on public policy was more properly dealt with as a change of position defence. His Honour also held that Chevron had established its parallel claim for ‘monies had and received’ and therefore it was not necessary to decide whether such a claim is now part of the law of unjust enrichment.
Regarding the change of position defence, the Bands claimed that they had changed their position materially, having spent the overpayments in good faith. However, the trial judge held that a mere expenditure of funds is not sufficient to make out this defence. The recipient must show that a material change in position, such as the undertaking of a special project or special financial commitments that would not otherwise have been made The Bands were not able to show a material change in position.
Finally, the trial judge held that each Band had to indemnify Canada for the judgment granted against it to Chevron.
His Honour thus awarded judgment to Chevron against Canada and proportionately against each Band. And he held that Canada was entitled to be indemnified by each Band. He also awarded interest on the overpayments to Chevron to be calculated beginning 30 days after the last defendant was served with the statement of claim, instead of the date the cause of action arose, that being the presumptive beginning date.
4. The Appeal
Two bands having settled their claim, only the two remaining Bands appealed the judgement awarded to Chevron against them and the judgment requiring them to indemnify Canada. Canada did not appeal the judgment against it and had paid it. Chevron cross-appealed the interest award.
The Court of Appeal first rightly addressed the status of the defendants, noting that a trust is not a person and that the legal title to the trust corpus vests in the trustee. The trustee cannot derive a personal benefit from the assets and therefore cannot be personally enriched by any mistaken payment into the trust. If it were personally enriched by it, it would be in breach of fiduciary duty. This means that, for the purpose of the law of unjust enrichment, an enrichment of the corpus of the trust must be distinguished from the long-term benefit that the beneficiaries (the Bands) might gain from the enrichment. Canada acted as trustee as all times and Chevron was dealing with it and only with it.
It follows that a payor, such as Chevron, that makes overpayments to the trustee, must look to the trustee for a remedy, not to the beneficiaries. Save for a few exceptions, the beneficiaries are not liable for the debts of the trust or of the trustee. Therefore, Chevron’s claim was properly brought against Canada. But it also meant that the claims Chevron made against the Bands were improper and the judgment awarded against the Bands was wrong and should be set aside, as well as the judgments for indemnity that Canada obtained against the Bands.
There does not appear to be a reported case on a mistaken payment to a trustee.[5] However, since Chevron was always required to deal with the trustee, the law of unjust enrichment cannot look through the trust to the ultimate beneficiaries. Such ‘leapfrogging’ would infringe that principle. The court distinguished the case of Moore v Sweet[6] in which the claimant was allowed to reach beyond her ex-spouse to the new beneficiary of an insurance policy after he changed the beneficiary designation on the policy. That is different from the question whether a claimant can follow an enrichment from the original recipient to third parties.
In any event, when the mistaken payments were discovered, the trust accounts still contained significant funds. Thus, it was not necessary to decide what would happen if the trust funds were fully depleted before the mistaken payments were discovered. That question might arise, for example, if the trustee could validly argue that it changed its position by disbursing the trust funds in good faith.
This was also not a case of mistaken payments made out of a trust, as was the case in Minister of Health v Simpson.[7] In that case the House of Lords held that the claimant must first exhaust its remedies against the executor before proceeding against the recipients of the mistaken payments. In those circumstances the recipients have opportunity raise a change of position defence.
Since in this case the funds remaining in the trusts were more than sufficient to pay Chevron’s claim, Canada as trustee could have paid the judgment out of the trust funds. Canada apparently paid the judgment out of other sources, but it would be entitled to indemnify itself out of the trusts.[8]
The court also considered the public policy consideration, referred to in Garland,[9] when it addressed the existence of a juristic reason for retaining an enrichment The appellants argued on its basis that as a matter of public policy Canada, as a trustee, ought to bear the loss. However, the court held that since the Bands had not changed their position, this would be excessive.
The court then considered the issue of indemnification. A trustee has the implied power to revise trust accounts to correct any errors. And prima facie a trustee is entitled to indemnify itself from trust funds. Can Canada be barred from doing so? The fact that Canada was negligent in not identifying the error did not matter, since Canada gained nothing from the overpayments. In contrast, the Bands were enriched and liability for unjust enrichment is strict. Thus, unless the Bands could demonstrate that they changed their position as a result of Canada’s passing on the overpayments to them, there was no reason why Canada could not indemnify itself. It was a fiduciary toward the Bands, but its negligence did not amount to a breach of fiduciary duty that might otherwise prevent it from indemnifying itself.
The test for change of position is that it would be inequitable to require the benefit to be returned.[10] The trial judge rightly placed the burden of proof on the Bands, and he found that the Bands had not changed their position sufficiently to prevent either Chevron or Canada from recovering the funds. All that they had done was to spend the funds and that is insufficient to establish the defence. They must show that when they received the payments, they spent them on a special project or made a special financial commitment, such as a donation to a charity, or going on an expensive vacation in reliance on the payment they have received.[11] Moreover, while the Bands did spend some of the funds because they believed that the royalties had been calculated properly, they derived some lasting value from those expenditures. Thus, the Bands failed to establish the change of position defence.
Finally, the court dismissed Chevron’s cross-appeal on the calculation of interest. It held that the trial judge’s decision to calculate interest from 30 days after the statement of claim was served was reasonable.
—
[1] 2022 ABCA 108.
[2] RSC 1985, c I-7.
[3] 2019 ABQB 418.
[4] A defence recognized in Garland v Consumers’ Gas Co, 2004 SCC 25.
[5] The court did mention Baylis v Bishop of London, [1913] 1 Ch 127 (CA), but it was a different case, since there were no identifiable beneficiaries and it was decided before the change of position defence was established.
[6] 2018 SCC 52.
[7] [1951] AC 251.
[8] Citing In Re Robinson, [1911] 1 Ch 502 at 513.
[9] Footnote 4, supra, para 46.
[10] Citing Lipkin Gorman v Karpnale Ltd, [1991] 2 AC 548 at 579, per Lord Goff of Chieveley.
[11] Citing Lipkin Gorman, ibid.; Shortoaks (Rural Municipality) v Mobil Oil Canada Ltd, [1976] 2 SCR 147; International Longshore & Warehouse Union Local 502 v Ford, 2016 BCCA 226 at para 48; and International Longshore & Warehouse Union Local 502 v Ford, 2016 BCCA 226.
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Written by: Albert Oosterhoff
Posted on: July 26, 2022
Categories: Commentary, WEL Newsletter
1. Introduction
Chevron Canada Resources v Canada[1] is a most interesting case that explores issues of trust law, unjust enrichment, payment under mistake, and the change of position defence. The courts have not previously addressed some of these issues, so the case is particularly significant for that reason.
The reserves of four Indian Bands near Pigeon Lake in Alberta included oil and gas reserves. Oil and gas producers extracted hydrocarbons from those reserves. Chevron and Fletcher Challenge held an equal 50% interest in 12.16% of one gas unit. Others owned the other 87.84%. The producers had to pay royalties to Her Majesty in Right of Canada in trust for the bands concerned, pursuant to section 4 of the Indian Oil and Gas Act.[2] For a period of more than six years, from January 1991 until August 1996, Chevron overpaid the royalties it owed. Instead of calculating them by reference to the 12.16%, Chevron calculated them on 100% of the interest in the gas unit in question. Consequently, it paid about eight times more than required.
2. The Facts
Chevron paid the royalties to Indian Oil and Gas Canada, a Crown department that was responsible for the management of oil and gas rights. The department deposited the royalties into accounts to the credit of the Receiver General of Canada. The royalties were credited to the Four Nations Capital Account and were then allocated to the individual trust accounts of the Four Bands. Interest earned was allocated to the Revenue Accounts of the Bands. The Receiver General did not segregate the funds but included them in the Consolidated Revenue Fund. A group within Indian and Northern Affairs Canada administered the funds and disbursed them based on requests made by the Bands if they were qualified and approved.
By the time the error was discovered, Chevron had overpaid by more than $10 million. It requested repayment and when the request was not honoured, it brought an action against Her Majesty the Queen in Right of Canada, Represented by the Executive Director on Indian Oil and Gas Canada, as well as the four Indian Bands who shared the entitlement to the royalties. It sought recovery from Canada and the Bands on a joint and several basis. Chevron’s claim was for restitution based on unjust enrichment or in the alternative on the basis of payments made under a mistake of fact.
The Bands defended and counterclaimed. They denied any overpayment but pleaded that if there was an overpayment, they had changed their position, so that it would be inequitable to make them repay the funds. Further, they claimed that the errors were caused by Canada’s negligence and breach of fiduciary duty and that it was responsible for the repayment. The Bands also issued third party notices against Canada, and if found liable they claimed indemnity and contribution from Canada because the loss arose from Canada’s breach of trust and fiduciary obligations. Canada also issued third party notices against the Bands claiming indemnity for any judgment awarded to Chevron against it.
3. The Judgment at Trial
The trial judge[3] found that it should been immediately obvious to Chevron that there was a problem and concluded that it was grossly negligent in making the error. His Honour also found that the error should have obvious to Indian Oil and Gas Canada and found that the Crown’s failure to identify the errors was negligent and in breach of the duties it had taken upon itself. He did not specifically find that the Bands were negligent in failing to notice the error. However, he drew the logical inference that, with proper attention, it would have been clear to the Bands that Chevron was paying eight times more than Fletcher Challenge, the party that held the other 50% in the 12.16% interest of the gas unit in question.
The trial judge found that the payments were made by mistake but held that as a matter of law Chevron’s negligence did not disentitle it from recovering the overpayments. His Honour held that, on a straight economic approach both Canada and the Bands were enriched by the overpayments and Chevron suffered a corresponding deprivation. The fact that the overpayments were made under a lease did not mean that there was a juristic reason for the overpayments because the overpayments were not required to be paid under the lease. Nor did the contractual relationship between Chevron and Canada and the Crown’s fiduciary obligations provide a juristic reason for the overpayments. Further, the trial judge held that the Bands’ argument of a ‘residual defence’[4] based on public policy was more properly dealt with as a change of position defence. His Honour also held that Chevron had established its parallel claim for ‘monies had and received’ and therefore it was not necessary to decide whether such a claim is now part of the law of unjust enrichment.
Regarding the change of position defence, the Bands claimed that they had changed their position materially, having spent the overpayments in good faith. However, the trial judge held that a mere expenditure of funds is not sufficient to make out this defence. The recipient must show that a material change in position, such as the undertaking of a special project or special financial commitments that would not otherwise have been made The Bands were not able to show a material change in position.
Finally, the trial judge held that each Band had to indemnify Canada for the judgment granted against it to Chevron.
His Honour thus awarded judgment to Chevron against Canada and proportionately against each Band. And he held that Canada was entitled to be indemnified by each Band. He also awarded interest on the overpayments to Chevron to be calculated beginning 30 days after the last defendant was served with the statement of claim, instead of the date the cause of action arose, that being the presumptive beginning date.
4. The Appeal
Two bands having settled their claim, only the two remaining Bands appealed the judgement awarded to Chevron against them and the judgment requiring them to indemnify Canada. Canada did not appeal the judgment against it and had paid it. Chevron cross-appealed the interest award.
The Court of Appeal first rightly addressed the status of the defendants, noting that a trust is not a person and that the legal title to the trust corpus vests in the trustee. The trustee cannot derive a personal benefit from the assets and therefore cannot be personally enriched by any mistaken payment into the trust. If it were personally enriched by it, it would be in breach of fiduciary duty. This means that, for the purpose of the law of unjust enrichment, an enrichment of the corpus of the trust must be distinguished from the long-term benefit that the beneficiaries (the Bands) might gain from the enrichment. Canada acted as trustee as all times and Chevron was dealing with it and only with it.
It follows that a payor, such as Chevron, that makes overpayments to the trustee, must look to the trustee for a remedy, not to the beneficiaries. Save for a few exceptions, the beneficiaries are not liable for the debts of the trust or of the trustee. Therefore, Chevron’s claim was properly brought against Canada. But it also meant that the claims Chevron made against the Bands were improper and the judgment awarded against the Bands was wrong and should be set aside, as well as the judgments for indemnity that Canada obtained against the Bands.
There does not appear to be a reported case on a mistaken payment to a trustee.[5] However, since Chevron was always required to deal with the trustee, the law of unjust enrichment cannot look through the trust to the ultimate beneficiaries. Such ‘leapfrogging’ would infringe that principle. The court distinguished the case of Moore v Sweet[6] in which the claimant was allowed to reach beyond her ex-spouse to the new beneficiary of an insurance policy after he changed the beneficiary designation on the policy. That is different from the question whether a claimant can follow an enrichment from the original recipient to third parties.
In any event, when the mistaken payments were discovered, the trust accounts still contained significant funds. Thus, it was not necessary to decide what would happen if the trust funds were fully depleted before the mistaken payments were discovered. That question might arise, for example, if the trustee could validly argue that it changed its position by disbursing the trust funds in good faith.
This was also not a case of mistaken payments made out of a trust, as was the case in Minister of Health v Simpson.[7] In that case the House of Lords held that the claimant must first exhaust its remedies against the executor before proceeding against the recipients of the mistaken payments. In those circumstances the recipients have opportunity raise a change of position defence.
Since in this case the funds remaining in the trusts were more than sufficient to pay Chevron’s claim, Canada as trustee could have paid the judgment out of the trust funds. Canada apparently paid the judgment out of other sources, but it would be entitled to indemnify itself out of the trusts.[8]
The court also considered the public policy consideration, referred to in Garland,[9] when it addressed the existence of a juristic reason for retaining an enrichment The appellants argued on its basis that as a matter of public policy Canada, as a trustee, ought to bear the loss. However, the court held that since the Bands had not changed their position, this would be excessive.
The court then considered the issue of indemnification. A trustee has the implied power to revise trust accounts to correct any errors. And prima facie a trustee is entitled to indemnify itself from trust funds. Can Canada be barred from doing so? The fact that Canada was negligent in not identifying the error did not matter, since Canada gained nothing from the overpayments. In contrast, the Bands were enriched and liability for unjust enrichment is strict. Thus, unless the Bands could demonstrate that they changed their position as a result of Canada’s passing on the overpayments to them, there was no reason why Canada could not indemnify itself. It was a fiduciary toward the Bands, but its negligence did not amount to a breach of fiduciary duty that might otherwise prevent it from indemnifying itself.
The test for change of position is that it would be inequitable to require the benefit to be returned.[10] The trial judge rightly placed the burden of proof on the Bands, and he found that the Bands had not changed their position sufficiently to prevent either Chevron or Canada from recovering the funds. All that they had done was to spend the funds and that is insufficient to establish the defence. They must show that when they received the payments, they spent them on a special project or made a special financial commitment, such as a donation to a charity, or going on an expensive vacation in reliance on the payment they have received.[11] Moreover, while the Bands did spend some of the funds because they believed that the royalties had been calculated properly, they derived some lasting value from those expenditures. Thus, the Bands failed to establish the change of position defence.
Finally, the court dismissed Chevron’s cross-appeal on the calculation of interest. It held that the trial judge’s decision to calculate interest from 30 days after the statement of claim was served was reasonable.
—
[1] 2022 ABCA 108.
[2] RSC 1985, c I-7.
[3] 2019 ABQB 418.
[4] A defence recognized in Garland v Consumers’ Gas Co, 2004 SCC 25.
[5] The court did mention Baylis v Bishop of London, [1913] 1 Ch 127 (CA), but it was a different case, since there were no identifiable beneficiaries and it was decided before the change of position defence was established.
[6] 2018 SCC 52.
[7] [1951] AC 251.
[8] Citing In Re Robinson, [1911] 1 Ch 502 at 513.
[9] Footnote 4, supra, para 46.
[10] Citing Lipkin Gorman v Karpnale Ltd, [1991] 2 AC 548 at 579, per Lord Goff of Chieveley.
[11] Citing Lipkin Gorman, ibid.; Shortoaks (Rural Municipality) v Mobil Oil Canada Ltd, [1976] 2 SCR 147; International Longshore & Warehouse Union Local 502 v Ford, 2016 BCCA 226 at para 48; and International Longshore & Warehouse Union Local 502 v Ford, 2016 BCCA 226.
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