Canada: Interpretation Of Model Contracts

Last Updated: March 12 2018
Article by Caireen Hanert

THE OIL AND GAS INDUSTRY USES MANY MODEL CONTRACTS FOR, AMONG OTHER THINGS, INDUSTRY CONSISTENCY, REDUCTION IN NEGOTIATION TIME AND REDUCTION OF LEGAL RISK.

The model contracts are developed by industry groups to meet the specific needs of the industry, and usually are accompanied by an annotation to provide an explanation as to the reasoning behind each provision.

In Canlin Resources Partnership v Husky Oil Operations Limited and Ikkuma Resources Corp.,i the Court of Queen's Bench of Alberta examined how a model contract should be interpreted, and whether annotations may be used to aid the interpretation of specific provisions. In Canlin Resources, Canlin Resources Partnership ("Canlin") and Husky Oil Operations Limited ("Husky") were successors in interest to a Construction, Ownership and Operation Agreement (the "CO&O Agreement") for the Erith Dehydration and Flow Splitter Facility (the "Facility"). The CO&O Agreement was based on the model CO&O Agreement (1999) developed by the Petroleum Joint Venture Association ("1999 Model"). The Facility was to flow split inlet gas between downstream facilities and if required, dehydrate raw gas prior to its entry into the Erith pipeline. The CO&O Agreement did not require the owners to deliver or produce to the Facility, and did not list specific wells.

Canlin had a right of first refusal ("ROFR") if either of the two other joint venture parties wanted to sell their interest in the Facility. There were exceptions to the ROFR: an owner was permitted to transfer all or a part of its interest in the Facility without providing a ROFR, provided one of the enumerated exceptions applied. In this case, the exception which was argued to apply was the "disposition made by an Owner of all or substantially all... of its petroleum and natural gas rights in wells producing to the Facility" ii (the "ROFR Exception") [emphasis added].

Because of changes to the Facility undertaken by Husky starting in 2014, no gas had flowed through either the inlet separator or the dehydrator units since 2016. Although gas still flowed through the Facility, it was routed through a jumper or bypass arrangement and was being processed elsewhere. Since those changes had been implemented, Canlin had repeatedly requested that the Facility become operational again and had indicated that it wanted to assume ownership and operatorship of the Facility. However, Husky wanted to maintain the shut-in and non-operational status of the Facility.

In September 2017, Husky notified Canlin that it intended to sell some of its assets to Ikkuma Resources Corp. ("Ikkuma"), including its interest in the Facility. Husky took the position that Canlin was not entitled to a ROFR on the basis that the sale fell within the ROFR Exception.

The Court noted that the modern approach to contractual interpretation requires a "practical, common-sense approach not dominated by technical rules of construction." iii to determine the intent of the parties and the scope of their understanding at the time they entered into the contract, in view of the surrounding circumstances known to the parties.iv Evidence of the surrounding circumstances is used by the court to "deepen [its] understanding of the mutual and objective intenv However, the court "must not use [the surrounding circumstances] to deviate from the text such that the court effectively creates a new agreement."vi

In this case, Husky argued that because the CO&O Agreement was based on the 1999 Model, the intention of the drafting committee was relevant to the interpretation process, specifically with respect to the meaning of the ROFR Exception. Husky also argued that the interpretation of the CO&O Agreement had been "predetermined" by the drafting committee, and that the contracting parties to the CO&O Agreement had not exercised their own intention in selecting the words used.

Husky adduced evidence from an individual who had been involved in the development of the 1996 PJVA model agreement (the "1996 Model"), which was the predecessor to the 1999 Model. He stated that the purpose of the ROFR Exception was to allow owners to avoid issuing ROFRs for a disposition of a facility interest when they were selling their assets in large areas, that is, white mapping an area. The provision was added to the 1996 Model by the committee to ensure that the exercise of a ROFR could not frustrate a white map sale to a new owner. The concern was that a new owner could be left without adequate gathering and processing facilities to handle production from those assets. This is summarized in the annotation to the 1996 Model.

Husky argued that this was the exact situation the committee had tried to address by including the ROFR Exception as an option in the 1996 Model, and that the initial signatories, by opting to include the ROFR Exception in the CO&O Agreement, had wished to ensure that a sale of wells associated with the Facility would not be frustrated by the exercise of a ROFR. It further argued that the references to "associated wells" in the annotation to the 1996 Model meant that "wells producing to the Facility" should be interpreted to mean "wells associated with the Facility" in the CO&O Agreement. Husky further argued that "associated wells" specifically means "wells tied-in to the Facility" in the oil and gas industry. Since the wells in this case still flowed through the Facility (albeit through the jumper), the wells should be considered "associated wells" and the ROFR Exception should apply.

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Footnotes

i. 2018 ABQB 24 ("Canlin Resources").

ii Ibid. at para 3.

iii Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 ("Sattva") at para 47.

iv Ibid.

v Ibid. at para 57.

vi Ibid.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2018

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