Canada: Alberta Court Of Appeal Opens The Door In Yangarra v Precision Drilling: Exclusion Clauses May Not Bar Liability For Reckless Misrepresentation

Last Updated: November 21 2017
Article by Paul A. Beke, Trevor R. McDonald and Deirdre Fleming

In Yangarra Resources Ltd v Precision Drilling Canada Limited Partnership, 2017 ABCA 378, the Alberta Court of Appeal (ABCA) addressed the scope of exclusion clauses in no-fault contracts. Under no-fault contracts, each party typically accepts the risk of damage to its own assets, rather than allowing fault to allocate the risk. The ABCA held that those provisions might fail to exclude liability for fraud claims, because of public policy concerns.

Key Lessons

1. A court may exercise its discretion based on public policy considerations to decline to enforce an exclusion clause in a no-fault contract that purportedly limits claims for gross negligence and willful misconduct.

2. Public policy may prevent parties from relying on exclusion clauses where fraud results from either intentional or reckless misrepresentation.

3. Public policy is more likely to intervene when a sophisticated firm (seeking to avoid an allegation of fraud) promised to do potentially dangerous work in a good and workmanlike manner.

Drilling contractor failed to tell operator of error in mixing drilling mud

The appellant operator (Yangarra) entered into a no-fault drilling contract with the respondent drilling contractor (Precision). Under the agreement, Yangarra assumed the risk for all damage to its own equipment and the underground formation. This provision limiting Precision's liability came into issue when Precision employees made damaging drilling errors.

Specifically, a Precision employee mistakenly mixed sulfumic acid instead of caustic potash into drilling mud. Over the course of the following day, Precision advised Yangarra that the drilling mud was in order, when Precision knew or ought to have known that it was not. The drill bit became inextricably stuck, and Yangarra had to abandon the well, along with $300,000 worth of equipment. In addition, Yangarra had to drill a replacement well at a cost of about $2,000,000.

Lower courts grant Precision's summary judgment application

Precision sued Yangarra for the cost of Precision's work in drilling the original well. Yangarra counterclaimed, alleging that Precision breached its contractual commitment to drill the well in a good and workmanlike manner. Yangarra also claimed negligence, gross negligence and fraudulent misrepresentation, because Precision had failed to inform Yangarra of the error.

Precision brought an application for summary judgment, including summary dismissal of Yangarra's counterclaim. A master granted Precision's application, and the chambers judge upheld summary judgment on appeal. The chambers judge dismissed Yangarra's claim on the grounds that the counterclaim was meritless, and no genuine issue for trial existed.

The chambers judge did identify that public policy might intervene to prevent parties from contracting out of liability for fraud. But he found that issue unnecessary to resolve, since he concluded that there was no evidence to support the fraud claim. The chambers judge also held that the contract excluded the negligence claims, and that the claim for bad faith was just another way of articulating the negligent misrepresentation claim.

ABCA overturns decision—trial necessary to consider evidence of reckless misrepresentation

Counsel for Yangarra, BD&P's Trevor McDonald and Sydney Black, successfully appealed the summary judgment decision, before the ABCA. The ABCA agreed with the chambers judge that public policy might prevent exclusion clauses from encompassing fraud claims, though it rejected his finding that there was no issue that warranted a trial. The Court held that (1) the chambers judge applied the incorrect test for fraud, and (2) evidence existed that warranted a trial.

In his decision, the chambers judge failed to lay out the test for the tort of civil fraud, which was recently stated by the Supreme Court of Canada in Bruno Appliance and Furniture Inc v Hyniak, 2014 SCC 8. Instead, he adopted Precision's position that there was no evidence "to suggest that there was any intentional concealment, never mind fraud." By adopting the word "intentional" and failing to set out the test, the chambers judge appeared to have misunderstood that a successful fraud claim required that a representor intended concealment. However, the SCC had clearly established that recklessness is sufficient to meet the knowledge component of fraud.

The ABCA set aside the entire summary judgment. The ABCA left it for a trial judge to determine whether public policy should intervene on the evidence. Still, the ABCA advised courts that they must carefully examine all of the circumstances when assessing misconduct. The ABCA suggested that a public policy argument would likely be stronger when there are serious allegations of fraud against a sophisticated firm that promised to do potentially dangerous work in a good and workmanlike manner.

Concluding thoughts

This decision reveals that no-fault contracts between sophisticated firms may not exclude liability for reckless misrepresentations. That is especially so when the contract involves a duty to perform potentially dangerous work like drilling, in a good workmanlike manner. The risks will become clearer if this case leads to a decision at trial.

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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