Canada: Alberta Court Sheds Light On Gross Negligence Standard Required Of Oil & Gas Operators

The Alberta Court of Queen's Bench recently addressed whether an operator of oil wells was grossly negligent in its development of a well, and in so doing added clarity to that term.

BACKGROUND

In Bernum Petroleum Ltd v. Birch Lake Energy Inc, (Bernum), Bernum Petroleum Ltd. (Bernum), the operator, sought to recover the share of drilling costs of Birch Lake Energy Inc. (Birch Lake) for jointly developed wells. Birch Lake defended the action on the basis that Bernum was grossly negligent in drilling one of the wells. Bernum and Birch Lake's venture was governed by the 2007 Canadian Association of Petroleum Landmen Operating Procedure (2007 CAPL Operating Procedure).

The matter had been addressed by a master who granted partial summary judgment in favour of Bernum, but issued a stay of the summary judgment order pending resolution of other issues in dispute. Birch Lake appealed the summary judgment while Bernum appealed the stay of enforcement.

Under the 2007 CAPL Operating Procedure, Bernum's liability as operator was limited to instances of its gross negligence or wilful misconduct. The Operating Procedure defines "Gross Negligence or Wilful Misconduct" as:

...any act, omission or failure to act (whether sole, joint or concurrent) by a person that was intended to cause, or was in reckless disregard of, or wanton indifference to, the harmful consequences to the safety or property of another person or to the environment which the person acting or failing to act knew (or should have known) would result from such act, omission or failure to act. However Gross Negligence or Wilful Misconduct does not include any act, omission or failure to act insofar as it: (i) constituted mere ordinary negligence; or (ii) was done or omitted in accordance with the express instructions or approval of all Parties, insofar as the act, omission or failure to act otherwise constituting Gross Negligence or Wilful Misconduct was inherent in those instructions or that approval.

Parties are able to define by contract the meaning of gross negligence. In the case of the 2007 CAPL Operating Procedure, the definition of "Gross Negligence or Wilful Misconduct" requires that the operator "intended to cause, or was in reckless disregard of, or wanton indifference to, the harmful consequences to the safety or property of another."

COURT OF QUEEN'S BENCH DECISION

In assessing the meaning of gross negligence, Justice D. L. Pentelechuk relied on the definition in the 2007 CAPL Operating Procedure as well as various court decisions suggesting gross negligence requires conscious indifference—a marked departure from ordinary standards—or very great negligence. Justice Pentelechuk observed that the "definition of gross negligence in the CAPL and the case law all point to a degree of intentionality in the act or omission."

The court considered a variety of factors in assessing whether an operator was grossly negligent. These include the high-risk and speculative nature of the oil and gas industry, the likelihood that things can go wrong during the course of drilling, and the need for decisions to be made quickly.

Justice Pentelechuk commented that Birch Lake failed to present evidence of what Bernum should have done, and accordingly it was difficult to assess whether Birch Lake's criticisms of Bernum were well founded. The court explained that the record did not disclose any evidence of conscious indifference or a very marked departure from the standard expected of an operator. The comparison to the standard expected of an operator is necessary to allow the court to assess whether the behaviour of a particular operator amounts to gross negligence, allowing avoidance of the limitation of liability clause.

Additionally, Birch Lake faced issues because it failed to object to Bernum's drilling plan. Under the 2007 CAPL Operating Procedure, gross negligence is precluded where all parties to the agreement approved of the actions taken.

APPLICATION

The Bernum decision is important for operators and non-operators in the oil and gas industry. This decision demonstrates the court's willingness to address gross negligence in the context of the development of wells. Previous decisions have often been limited to whether there was gross negligence for administrative acts, such as the renewal of leases. Bernum gives context to the standard required of operators in the field.

While the court was willing to address the potential existence of gross negligence in the context of an operator agreement, the degree of misconduct to establish gross negligence remains very high. The predominant thrust of law, as continued in Bernum, is that establishing gross negligence does not require intention and can be demonstrated by a very great departure from the standards of conduct expected of a prudent operator. However, indicia of intention or conscious indifference will assist a non-operator in establishing that an operator was grossly negligent.

Bernum is equally important for the guidance it gives on the evidence required to prove an operator's gross negligence. Justice Pentelechuk explained that evidence of the standard expected in the industry, and alternative courses of conduct, is necessary to assess whether an operator was grossly negligent. Non-operators seeking to establish gross negligence must be able to point to alternative courses of conduct that would have had a better prospect of success when compared to the steps actually taken by the operator. Likewise, operators may defend against a gross negligence allegation by demonstrating that their conduct was not grossly inconsistent with the conduct expected of a prudent operator.

Finally, to avoid liability, operators may seek to obtain, and document, the agreement of all parties to a venture to detailed development plans. Likewise, non-operators should document any disagreement to an operator's plans to avoid a finding that the non-operator agreed to a course of action precluding a finding of gross negligence under the 2007 CAPL Operating Procedure.

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