Canada: Gross Negligence: How Bad Does it Have to Be?

In the wake of the Deepwater Horizon blow-out in the Gulf of Mexico, the legal term gross negligence has achieved prominence in the mainstream media. It is certainly being discussed by energy players on both sides of the border and around the world.

Most Canadian agreements providing for operatorship of oil and gas assets (other than contract operatorship) require all participants in the project to contribute to the costs and liabilities incurred by the operator except in cases of gross negligence. This article provides readers with a review of the law of gross negligence in Canada, with particular focus on its application in the energy business.

Gross Negligence at Common Law

It is difficult to know exactly which conduct will amount to gross negligence in any particular situation. This results in part from the inherently fact-driven nature of the exercise and in part from the absence of an independent tort of gross negligence at common law. The difficulty is compounded in the oil and gas context because the original use of the term gross negligence in Canada was in statutes dealing with issues such as motor vehicle liability, municipal responsibility or Good Samaritan rescuers. The specific facts and findings in cases decided by reference to those statutes can be difficult to translate to the operation of a well or management of a gas plant. However, judges have established general principles of gross negligence that will apply to energy industry disputes. Some of the commonly referenced Canadian judicial definitions of gross negligence include:

• Very great negligence;
• A marked departure from the applicable standard of care; some older cases refer to a very marked departure from the applicable standard of care;
• Positive or affirmative negligence rather than passive negligence;
• Conduct so arbitrary it reflects complete disregard for the consequences.

There have been a few cases suggesting that a party will only be grossly negligent where there is some conscious wrongdoing or conscious indifference to consequences. While both of these factors will be persuasive indicators of gross negligence, the current predominant view in Canadian law is that gross negligence does not require a mental intention element. Of course, this is always subject to a statutory or contractual definition of gross negligence that expressly or implicitly imposes a mental element (see below) or otherwise to the context in which the phrase is used.

The Court may consider factors such as the likelihood of harm and the magnitude of potential damage when assessing whether conduct is grossly negligent. It is possible for a finding of gross negligence to be based on a series of acts or failures to act that, alone, would not constitute gross negligence.

Gross Negligence Relating to Oil and Gas Operations

Given the prevalence of industry contracts in which liability or limits on liability depend on whether there was gross negligence, there are surprisingly few reported cases addressing the topic in the context of oil and gas operations.

In United Canso Oil & Gas Ltd. v. Washoe Northern, Inc. (Alberta Q.B.), two successive managing operators of a gas plant undertook the joint venture accounting, but did not include any carried interest or production payment accounting. This resulted in revenues that ought to have gone to a carried party being distributed to the non-carried parties. The Joint Operating Agreement provided for managing operator liability only in cases of gross negligence or wilful misconduct. In making a finding of gross negligence, the Court focused on the fact that when each of these managing operators took over operatorship, they were aware that the carried party was claiming that payout had been achieved and that there was an unresolved accounting dispute. While the managing operators made some effort to resolve the dispute, when that did not happen, they simply continued on as if payout had not been achieved. The Court said: "The outstanding issues were either ignored or else a calculated risk was taken that the Husky [previous operator] accounting was correct or that the plaintiff would not pursue the issues. I find this to be gross negligence as defined as a very marked departure from the standards by which reasonable and competent companies in a like position to that of Asamera and Lasmer as Managing Operators in charge of joint ventures or accounting should habitually govern themselves. This was a conscious indifference to the rights or welfare of United Canso and its predecessors." The Court went on to state that the operators should have sought direction from the Court on the outstanding issues rather than pressing on as if they did not exist.

In Adeco Exploration Company Ltd. v. Hunt Oil Company of Canada Ltd., the Alberta Court of Appeal found an operator under a Joint Operating Agreement governed by the 1990 CAPL operating procedure grossly negligent in failing to renew Crown leases for two nonproducing parcels. The operator submitted a continuation application to Alberta Energy but did not include interpretive mapping. Alberta Environment brought the deficiency to the operator's attention and granted a one-month extension. The employees dealing with the issue determined, wrongly, that the required map was not available and let the leases lapse.

The Court placed particular emphasis on the fact that the operator did not appear to have any reliable system in place for dealing with lease renewals. No particular internal process was triggered when Alberta Energy advised that the original application was deficient; the employees dealing with the matter did not know what was required to continue the leases; there was no automatic process to refer the issue to knowledgeable people.

It is noteworthy that, in both these cases, the operators had knowledge that there was at least some issue that required attention. The failure to heed a warning or address a known problem seems to be a particular trigger for a finding of gross negligence. Further, the Adeco ruling suggests that gross negligence will be easier to prove where there is a failure to institute a reasonable system as opposed to just an individual error within an otherwise acceptable system.

Defining Gross Negligence by Contract

It is becoming increasingly common for parties to include a definition of gross negligence in their contracts. This provides parties with certainty at least as to what the standard will be and it allows them to adopt a more or less rigorous standard than developed by the courts or under statute.

The trend is evident in a number of the model agreements commonly used by Canadian energy companies. For example, the 2007 CAPL (Canadian Association of Petroleum Landmen) Operating Procedure includes:

Article 1.36 of the 2002 AIPN (Association of International Petroleum Negotiators) Model Form International Operating Agreement also combines gross negligence with wilful misconduct, defining them collectively as follows:

The PJVA (Petroleum Joint Venture Association) October 2003 model Unit Operating Agreement includes:

"Gross Negligence" means:

1. a marked and flagrant departure from the standard of conduct of a reasonable Person acting in the circumstances at the time of the alleged misconduct, or
2. such wanton and reckless conduct or omissions as constitutes in effect an utter disregard for harmful, foreseeable and avoidable consequences....

Parties choosing a definition should note that the PJVA definition comes closest to mirroring the Canadian case law. The other two definitions set a higher bar for gross negligence, combining it with wilful misconduct and requiring a mental element of either intent or disregard/indifference.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.