Canada: Pay First, Dispute Later (Or Trial Now, Pay Later)?

Last Updated: September 12 2017
Article by Miles F. Pittman and Leanne Desbarats

Most Read Contributor in Canada, October 2017

In Talisman Energy Inc. v Questerre Energy Corporation, 2017 ABCA 218 the Alberta Court of Appeal considered the pay first, dispute later provisions common in oil and gas joint operating agreements. These provisions generally provide that invoices issued under an operating agreement are a liquidated demand and a party receiving an invoice has no right to set-off or counterclaim. In another recent case, SemCAMS ULC v Blaze Energy, 2016 ABCA 113 ("SemCAMS") (discussed by BLG here, here and here), the Court of Appeal enforced one of these provisions, upholding an award of summary judgment against a non-operator for unpaid invoices notwithstanding that the non-operator disputed the operator's accounting methods. However, in this case the Court of Appeal distinguished SemCAMS and denied summary judgment to recover amounts pursuant to unpaid invoices in favour of Talisman Energy Inc. ("Talisman") on the basis that the issues were complex and warranted a trial. In particular, the Court of Appeal found that the facts were unclear as to which agreement the parties were operating under.

This case is significant as it demonstrates that the pay first, dispute later provisions are not always appropriate for determination through the summary judgment process and can warrant a trial in certain circumstances. The case also highlights the limits on the utility of summary judgment in resolving issues expeditiously and in a cost-effective manner.

Background

Talisman and Questerre Energy Corporation ("Questerre") were parties to a farmout agreement (the "Farmout Agreement") with respect to two properties in Quebec. The Farmout Agreement incorporated the 1990 CAPL Operating Procedure by reference and included a clause which allowed Talisman to:

... maintain an action or actions for such unpaid amounts and interest thereon on a continuing basis as such amounts are payable, but not paid by such defaulting Joint-Operator, as if the obligation to pay such amounts and the interest thereon were liquidated demands due and payable on the relevant dates such amounts were due to be paid, without resort of such Joint-Operator to set-off or counterclaim.

In early 2010, Talisman proposed to drill the Fortierville well and issued an Independent Operations Notice (an "ION") to Questerre for the well, enclosing an Authorization for Expenditure ("AFE"). If Questerre elected to participate it would be required to pay 25% of the well costs and failure to participate would result in Questerre being in penalty for the well. The ION did not include completion costs.

Talisman and Questerre traded several apparently ambiguous communications about the AFE. Questerre advised Talisman that it would not participate in the Fortierville well unless Talisman agreed to complete, test and evaluate the well as part of a comprehensive program and would run microseismic monitoring as part of the completion program on the well. After the expiry of the ION, Talisman sent a letter stating that it would drill and complete the well but it did not issue an ION or an AFE with respect to both drilling and completion. Questerre subsequently executed the original AFE.

In May 2016, Questerre sent an email to Talisman stating that it was interested in joint operations with respect to the Ste. Gertrude well on the same basis as the Fortierville well. Talisman issued an ION and AFE for the Ste. Gertrude well and this AFE also included the drilling of the well, but not its completion.

Talisman proceeded to take steps to complete both wells and then sought to recover 25% of the costs of that work from Questerre. Questerre refused to pay the amounts outstanding, stating that completion required a supplemental AFE.

In its action against Questerre, Talisman sought to recover liquidated damages for Questerre's proportionate share of the costs of the drilling and completion of both wells and the drilling costs for four other wells that it had drilled with Questerre's participation. Questerre defended Talisman's claim, and counterclaimed for breach of Talisman's promise to complete both wells. Questerre's position was that the correspondence between the parties was a collateral contract whereby the parties agreed that Questerre would only pay for costs if Talisman agreed to both drill and complete the wells.

Queen's Bench Decisions

Master Prowse granted summary judgment to Talisman for the drilling costs claimed by Talisman but declined to award summary judgment for the completion costs on the basis that a trial would be required to determine whether the correspondence between the parties regarding the completion costs evidenced the existence of a collateral contract. On appeal, Justice Hawco found a trial was required with respect to the entirety of Talisman's claim given that a finding that there was a collateral agreement might have impacted Talisman's claim with respect to the drilling costs.

Court of Appeal Decision

The Court of Appeal upheld Justice Hawco's decision, finding that a trial was necessary to determine the nature, scope and effect of the alleged collateral agreement. The Court of Appeal held that ordinarily Talisman would be entitled to summary judgment for the drilling costs claimed by Talisman with respect to the other four wells, but it found that because Talisman continued to exercise its operator's lien over those wells until the litigation concerning the other two wells was resolved it "brings the fate of the four other wells into the ambit of the litigation, where a trial is necessary to resolve the outstanding issues".

Implications

The case is significant as it demonstrates a limit on the immediate recourse an operator has under the pay first, dispute later provisions of the CAPL operating procedures. A joint-operator can take the position that the provision does not apply to the operation in question in order to resist a summary judgment application. The scenario where the scope of an agreement is unclear is not that uncommon in the oil and gas industry where there are often a multitude of different agreements that govern jointly owned lands and an abundance of correspondence between the parties, including AFEs, that could arguably amend existing agreements or constitute separate collateral agreements. This can make it difficult to determine what, if any, agreements apply in specific circumstances.

As BLG commented here, while summary judgment is an appealing alternative to the trial process, due to the fact that a summary judgment or dismissal action is heard first before a Master, is subject to a right of appeal, and then there is the possibility of a further appeal to the Court of Appeal, its usefulness in speeding up the trial process and providing for a less costly avenue to resolve disputes is somewhat compromised. In this case, Master Prowse initially issued his decision in December 2015. The Court of Appeal's decision was issued in June 2017 and now, if the parties proceed to trial, they will be looking at scheduling likely at some point later in 2018 at the earliest. That is a significant delay and presumably proceeding directly to a trial from the outset would have been led to a faster and more final resolution of the matters in dispute. While an accounting dispute under a CAPL operating procedure may seem like an appropriate dispute for summary determination, this case demonstrates that a summary judgment application could in fact cause more cost and delay than proceeding with the regular trial procedure.

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