Canada: The Interplay Between Summary Judgment And Allegations Of Gross Negligence In The Oil And Gas Industry

In Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 [found here], the Alberta Court of Queen's Bench was faced with an application to summarily dismiss a counterclaim alleging gross negligence against an operator both in relation to its oil and gas operations as well as in relation to its failure to renew leases, obtain drilling permits, and offer participation rights to a joint-operator.  This is one of the first cases in which an Alberta court had to apply the culture shift in the application of summary judgment principles, as mandated by the Supreme Court of Canada in Hryniak v Mauldin, 2014 SCC 7 [found here] and the Alberta Court of Appeal in Windsor v Canadian Pacific Railway, 2014 ABCA 108 [found here], to an oil and gas dispute. 

Implications

This decision has several important elements. It is an example of how difficult it is and will be under the 2007 Canadian Association of Petroleum Landmen Operating Procedure (the "2007 CAPL") for joint operators to allege gross negligence in relation to oil and gas operations, and illustrates that these  claims may be subject to dismissal and excision from litigation. On the other hand, in areas where there are interactions between the parties, or non-operational allegations of gross negligence, the case supports the notion that it may be easier to establish real issues which require a trial. The case is also significant because it illustrates a willingness of courts to allow one party to a dispute to obtain and enforce a judgment against the other party while the other party's counter claim continues in litigation provided there is no irreparable harm in doing so. Interestingly, the Court also enforced a particular clause of the 2007 CAPL which entitled the operator to expedited and enhanced remedies not available to an ordinary creditor and in turn did not allow the defendant to file counterclaims to "stall or frustrate a plaintiff's claim and to provide some negotiating leverage where none might otherwise exist". Finally, the decision is further confirmation of the evolution of CAPL Operating procedures being drafted increasingly for the benefit and protection of oil and gas operators.

Background

The parties in this case, Bernum and Birch Lake, entered a joint operation agreement to acquire petroleum and natural gas leases to certain lands west of Calgary. Bernum was the operator and held a 60% working interest. Birch Lake held a 40% working interest in the drilling and exploration projects that it chose to participate in. If Birch Lake chose not to participate, it was subject to production penalties. Ultimately, Birch Lake ended up indebted to Bernum for operating costs associated with certain well sites and refused to pay. Bernum sought summary judgment for the debt owed to it under an Area of Mutual Interest Agreement (the "AMI") and 2007 CAPL. Birch Lake resisted summary judgment on the basis that Bernum's operation of a particular well (the "4-3 Well") was grossly negligent. Birch Lake also argued that Bernum had breached its duty of care and was grossly negligent in failing to negotiate an extension of certain leases (the "Leases").

The Master's Decision

Master Robertson, who first heard the matter, held that there was no evidence supporting Birch Lake's allegation that Bernum was grossly negligent in its operations of the 4-3 Well and ultimately granted Bernum summary judgment. The Master also held that Birch Lake's Claim for damages relating to the Leases should go to trial. Finally, since Birch Lake had an arguable case for equitable set off, Master Robertson ordered that Bernum's judgment be stayed until the earlier of July 31, 2014 or the determination of Birch Lake's Counterclaim for damages in relation to the Leases.

The Alberta Court of Queen's Bench Decision

The question facing the Alberta Court of Queen's Bench on appeal was whether the following issues could be determined fairly and justly on the record or whether there was an issue of merit that genuinely required a trial: (1) was Bernum grossly negligent in its well operations; (2) did Bernum owe Birch Lake a duty of care in relation to its dealings on the Leases and whether Bernum was grossly negligent or breached its fiduciary duty in that regard; (3) was there was a reasonable prospect that equitable set-off would be the determination at trial with respect to Birch Lake's counterclaim for damages, and (4) if summary judgment was granted to Bernum, should the Court should exercise its inherent discretion and impose a stay pending determination of Birch Lake's Counterclaim.

The Court, citing Hryniak v Mauldin and Windsor v Canadian Pacific Railway Ltd, began its analysis by explaining that summary judgment rules were now less stringent, should now be interpreted broadly, and that the modern test for summary judgment is to examine the record to see if a disposition that is fair and just to both parties can be made on the existing record. 

Gross Negligence in the Operation of the Wells

Following the application before Master Robertson, Birch Lake adduced new evidence pertaining to another well site, the 16-19 Well, and on appeal claimed that Bernum was liable to it for gross negligence in its operation of both the 16-19 Well and the 4-3 Well. More specifically, Birch Lake argued that the mud system Bernum used was inadequate and that its decision to use that mud system at the 16-19 Well, after experiencing problems with that same system at the 4-3 Well, amounted to gross negligence. Birch Lake also complained of a number of other problems, including, among other things, the fracking methods Bernum used.

The Court granted summary dismissal of the allegations of gross negligence regarding the operation of the wells. The Court noted that the oil and gas industry is a high risk, speculative business and that many things can go wrong during the course of drilling, which can result in unanticipated delays and cost overruns.  The Court was not convinced that there was sufficient evidence of the necessary "intentionality or conscious indifference" to ground gross negligence or wilful misconduct.  In coming to this conclusion, the Court gave little weight to the opinion of Birch Lake's expert on the basis that the expert had simply provided his personal opinion on the very factual decision the Court was to make.

The Court also relied on the fact that Birch Lake was informed of the use of the mud system during the drilling process and noted that if it had concerns it could have expressed them at the time.

Gross Negligence, Wilful Misconduct or Breach of Fiduciary Duty in Relation to the Leases

With respect to the second issue, the parties had previously acquired leasehold interests in certain lands through assignments to the above-mentioned AMI agreement. Under the AMI agreement, Bernum was obligated to Birch Lake to negotiate lease renewals, commence drilling operations, and keep Birch Lake informed until the expiry of the agreement in December 2010. Sometime after this date, Bernum, assuming that the AMI agreement had expired, chose not to renew the Leases. However, at a later date, Bernum changed its position and decided to renew some of the Leases. Bernum did not include Birch Lake in this subsequent lease renewal. Upon discovering this, Birch Lake contended that the AMI agreement had not expired, but instead was actually continued by way of conduct and agreement. Birch Lake alleged that Bernum was liable for damages as a result of failing to renew the Leases, failing to obtain drilling licences, and failing to offer Birch Lake participation rights on the Leases.

On this issue, the Court held  that the evidence presented by Birch Lake amounted to an arguable case that Bernum had failed to communicate, or worse, misled Birch Lake on the true status of the Leases, thereby obtaining an advantage at Birch Lake's expense. The Court upheld Master Robertson's finding that this was an issue that should be determined at trial.

Equitable Set Off and Stay

Regarding the final issue, the Court pointed out that an important clause in the 2007 CAPL (5.05(B)(d)) was not previously raised in front of Master Robertson, and therefore invited both parties to provide submissions as to the effect of the clause. In essence, the clause entitled an operator, such as Bernum, to expedited and enhanced remedies not available to an ordinary creditor, including a right to maintain actions against non-operators "without any right of that Non-Operator to set-off or counterclaim". The Court found that this clause precluded Birch Lake's attempt to set-off the amounts it owed to Bernum against the potential amounts Bernum may owe it under its counterclaim.

The Court then decided that a stay of Bernum's judgment against Birch Lake should not be granted. In so doing, the Court referred to the well-known tripartite test for stays which requires the party applying to show: (1) it has an arguable issue (2) that it will suffer irreparable harm if the stay is not granted (3) the balance of convenience between the parties favours the granting of a stay. The Court found that while Birch Lake had demonstrated an arguable issue on portions of its Counterclaim, it had not demonstrated irreparable harm if the stay was not granted. More specifically, the Court explained that there was no evidence that Birch Lake was in such a financially precarious situation that it faced insolvency and an inability to prosecute its counterclaim. The Court further opined that to impose a stay would not only undermine the provisions of the 2007 CAPL that the parties agreed to be governed by, but would also undermine the goals in Rule 1.2 of the Rules of Court, which provides that the purpose of the Rules of Court is to allow for just and fair resolution of disputes, achieved in a timely, efficient and economical way.

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