Canada: Alberta Court Of Queen's Bench Upholds Exclusion Clauses In Industry Standard Agreement

In Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd 2015 ABQB 433  (QB Master) [ found here] the Alberta Court of Queen's Bench confirmed that a contractor can enforce its right to be paid for its work, even if that work is done in a less-than workmanlike manner. Where a standard industry agreement allocates liability between the parties, even where that allocation seems contrary to the expected results under negligence and tort law, the Court will enforce the parties' negotiated allocation of liability.


Precision Drilling Canada Limited Partnership ("Precision") sued Yangarra Resources Ltd. ("Yangarra") for payment on work it had done for Yangarra on three wells, one successful, one abandoned, and one drilled after the second was abandoned. Precision sought summary judgment asking the Court to force Yangarra to pay for work on the second and third wells, even though Precision had not drilled the second well in a good and workmanlike manner and the third well was only necessary because of Precision's failure to drill the second well in a good and workmanlike manner. In response to Precision's claim, Yangarra counterclaimed for the value of equipment lost in the second well.  Yangarra also claimed that it was not required to pay for Precision's services because Precision had not delivered a completed well.

The Decision

The Master disagreed, holding that Yangarra had agreed to pay for day work, not a completed well, so it had to pay for Precision's services. Notwithstanding Precision's failure (and there was clear evidence that it had not met the required standard), the Master ruled that Yangarra had to pay for the services Precision had performed. The Master dismissed the counterclaim because, by entering into the agreement it did with Precision, Yangarra bore the risk of loss of its own equipment downhole.

Although Yangarra objected to the matter being determined summarily, the Master, referencing the SCC decision in Hryniak v Mauldin 2014 SCC 7 and the Alberta Court of Appeal's discussion of Alberta's summary judgment rule in Maxwell v Wal-Mart Canada Corp. 2014 ABCA 383, decided that summary disposition was appropriate as a disposition that was fair and just to both parties could be made on the existing record.

Key to the Court's ultimate decision was that Precision and Yangarra agreed that, no matter what happened, each of them would bear the risk of their own losses for specified risks. Precision and Yangarra had entered into a standard form agreement negotiated between the Canadian Association of Oilwell Drilling Contractors  (CAODC) and the Canadian Association of Petroleum Producers. This was primarily a "no fault" agreement, under which Precision and Yangarra each bore their respective risks "regardless of the negligence or other fault of [the other party] or howsoever arising." Yangarra also assumed the risk of re-drilling a lost or damaged hole, including fishing operations.

The Court, applying the leading decision of the SCC in Tercon Contractors Ltd v BC (Minister of Transportation and Highways) 2010 1 SCR 69, confirmed that the exclusion clauses in the agreement between Precision and Yangarra could be enforced. This was not a case where, as a result of unequal bargaining power, a party includes an exclusion clause, then seeks to rely on it to escape damages caused by its own fault. Rather, this was a case of two large and sophisticated parties choosing to enter into an industry-negotiated no-fault agreement. Because the standard form agreement was negotiated by industry representatives, enforcing the exclusion clauses was not commercially absurd. The Master also ruled that enforcing the exclusion clauses was not unconscionable; the agreement went both ways and each party benefited from the no-fault provisions. Therefore, the agreement was not grossly unfair or improvident.


Industry participants will note the Master's reliance on Precision and Yangarra's choice, as commercially sophisticated entities, to enter into an industry negotiated agreement. Effectively, the Court has said that it will hold industry players to the wording of these agreements, even though the result may be contrary to what might ordinarily be expected under tort law. Industry participants should consider carefully whether an industry standard agreement is appropriate for their particular circumstances. While relying on an industry standard agreement may be faster and easier than negotiating a unique agreement for every situation, the parties must ensure they can live with all the terms included, including the outcome directed by the contract when things go wrong.  Oil and gas operators might also consider whether, in these challenging economic times, it may be possible to obtain terms from service providers that are more favourable to the operator than those contained in standard form contracts like the CAODC standard form contract.

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