In IFP Technologies (Canada) v Encana Midstream and
Marketing, 2014 ABQB 470, the Court clarified for the
first time the circumstances in which a party that waives its right
of first refusal under Article 24 of the 1990 CAPL Operating
Procedure may withhold its consent to a disposition of the
The background facts leading to the case were that IFP purchased
an unusual working interest in a heavy-oil field from Encana's
corporate predecessor. The field was being developed with
conventional production, but may have been a candidate for enhanced
production by Steam Assisted Gravity Drainage (SAGD) or other
enhanced recovery methods. The agreements between the parties
limited IFP's working interest to thermal and enhanced
production, with no benefit accruing to IFP for primary production.
The agreements did not require Encana to undertake enhanced
In the early 2000s, Encana decided to pursue larger scale SAGD
projects elsewhere and put the field up for sale. The purchaser
proposed to continue development of the field with primary
production. IFP waived its right of first refusal for the
transaction, but withheld its consent to the disposition on the
basis that the disposition would be detrimental to its working
interest because the purchaser intended to develop the field only
through conventional production and did not have the technology to
pursue enhanced recovery. Encana proceeded to dispose of its
interest in any event. After the purchaser proceeded with primary
production, IFP sued Encana in breach of contract alleging that the
primary production had ruined the prospect for thermal development
and claiming losses between $45 and $70 million.
The Court accepted the argument advanced by Bennett Jones LLP,
acting on behalf of Encana, that IFP acted unreasonably in
withholding its consent. While IFP may have held the expectation
that Encana would commence thermal enhanced recovery operations,
there was no basis for such an expectation in the agreements and
IFP could not have forced those operations. Encana had never
committed to undertaking thermal operations, and IFP did not
propose independent operations itself. Ultimately, IFP was no worse
off after the disposition than it had been before.
In reaching its decision, the Court articulated several
Given the absence of oil and gas jurisprudence, legal
principles from the landlord/tenant context are relevant to
considering whether consent was unreasonably withheld. These
principles include that:
The burden of proof is on the party asserting that consent was
The party whose consent is required is entitled to base its
decision on its own interests alone;
Whether a person has acted reasonably in withholding consent
depends on all the factual circumstances; and
A party must not refuse consent where such refusal is
calculated to achieve a collateral purpose or benefit that is not
contemplated by the original contract.
A refusing party need not detail all of the reasons for its
decision at the time that the refusal is given, but those reasons
must have influenced the mind of the refuser at the relevant time,
including after acquired evidence demonstrating
If consent is unreasonably withheld, the operator is
"freed" from the consent requirement.
Going forward, the case indicates that the Court will look at
all the circumstances and undertake a contextual analysis to
determine whether a party has unreasonably withheld consent under
the standard form CAPL oil and gas operating agreement. Further,
withholding consent will be unreasonable when the withholding party
stands to compel as much under the proposed disposition as it would
have been entitled to receive under the original agreement.
The case is currently under appeal.
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.
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