Canada: Interpreting ROFR Exception Clause 902(D) In The PJVA Model Agreement: Canlin Resources Partnership V Husky Oil Operations Ltd. 2018 ABQB 24

Last Updated: April 6 2018
Article by Julie JM Taylor and Brendan Downey

Background

In the recent Alberta case of Canlin Resources Partnership v Husky Oil Operations Ltd.1 , the Court of Queen's Bench (the Court) focused on the interpretation of s. 902(d)—a ROFR exception clause—in a Construction, Ownership and Operation Agreement (CO&O) modelled on the Petroleum Joint Venture Association's (PJVA) 1999 standard form CO&O.

Husky Oil Operations Ltd. (Husky), Canlin Resources Partnership (Canlin), and Canadian Natural Resources Ltd. (CNRL) were joint venture participants and successors in interest to the Erith Dehydration and Flow Splitter Facility (the Facility). The purpose of the Facility was to flow split inlet gas between various downstream facilities and dehydrate raw gas; its operations were governed by the CO&O. Husky was the operator.

The CO&O granted Canlin a right of first refusal (ROFR) if either Husky or CNRL attempted to sell their interest in the Facility. But in the event of a "disposition made by an Owner of all or substantially all...of its petroleum and natural gas rights in wells producing to the Facility...",2 s. 902(d) of the CO&O allowed them to sell their interests without triggering Canlin's ROFR.

By May 2016, Husky had decommissioned the dehydrator unit in the Facility and bypassed the inlet separation and flow splitter unit with a jumper pipeline. As a result, the Facility no longer separated, split, or dehydrated gas as per its purpose. Since the decommissioning, Canlin insisted that the Facility become operational again and told Husky it was interested in assuming ownership and operatorship of the Facility.

In September 2017, Husky notified Canlin of its intention to sell a number of assets to Ikkuma Resources Corp. (Ikkuma), including its interest in the Facility. Husky took the position that s. 902(d) captured the Ikkuma sale, precluding Canlin from exercising its ROFR; Canlin disagreed, arguing that Husky installed the jumper pipeline to bypass the decommissioned Facility and, as a result, no wells were producing to the Facility and the exception in s. 902(d) was not triggered.

Interpretation of the ROFR Exception

The outcome of the dispute hinged entirely on the interpretation of s. 902(d) of the CO&O and in particular the meaning of the words "wells producing to the Facility".

The Court applied the modern approach to contractual interpretation. In doing so, the Court reiterated that contracts should be: i) interpreted in a practical and common sense manner; ii) read and interpreted as a whole, focusing on the exact wording; but should also iii) know the commercial purpose of a contract in conjunction with the relevant surrounding circumstances. 3

Husky's first argument was that courts should interpret model industry contracts in a uniform manner, and that the ROFR decision in Blaze Energy Ltd v Imperial Oil Resources (Blaze)4 was of precedential value. In Blaze, the Court had to interpret a CO&O agreement that contained a ROFR and exception clause similar to that contained in s. 902(d): "Any Owner may, without restriction, dispose of an interest in the Plant in conjunction with the disposal of the Owner's corresponding working interest in the lands in the West Pembina Area from which Gas is being produced into the Plant." 5

The Court found that the dispute in Blaze occurred in a much different context and was distinguishable on the facts. 6 In particular, the Court distinguished Blaze on two grounds: i) the language of the provision was similar, but not the same as the language in s. 902(d); and ii) the facility that the dispute in Blaze focused on continued to produce natural gas in accordance with one of its two functions—the Facility in this case did not. 7

Husky also argued that s. 902(d) should be interpreted in the context of the annotations to the 1996 PJVA model CO&O, which used language suggesting that the clause applied to wells that were associated with the Facility. Interpreted this way, the wells in the area remained associated with the Facility via the jumper pipeline.

To support this interpretation, Husky introduced expert evidence that indicated the purpose of s. 902(d) of the 1996 PJVA model CO&O—the "white mapping" provision (pertaining to the sale of all of one's interests in wells and facilities in a given area)—remained unchanged in the 1999 PJVA model CO&O. As a result, the 1996 annotation remained relevant and should inform the court's interpretation of s. 902(d). Husky also asserted that if Canlin's interpretation was correct, a joint venture party could deprive a transferee of the facilities it needed to handle production, undermining the purpose of the white mapping provision.

The Court disagreed with this argument as well, finding that Husky's approach to contractual interpretation was "backwards: the language of the Annotations does not prevail over the language of the contract." 8 While the language of the annotations of a model contract can be used as an "interpretative aid", it does not supersede or change the wording in the actual contract. 9 As the Court stated, "if the original signators intended "wells producing to the Facility" to mean "wells associated with the Facility" or "wells tied-into the Facility", they would have been at liberty to change the language of section 902(d) to express that intention." 10 and interpreted as a whole, focusing on the exact wording; but should also iii) know the commercial purpose of a contract in conjunction with the relevant surrounding circumstances.

After applying the principles of contractual interpretation, the Court concluded that "wells producing to the Facility" referred to wells that were "being processed by the dehydrator and inlet separation and flow splitter units of the Facility..."11 As the Facility no longer accepted gas for processing, there were no "wells producing to the Facility". As a result, the Court concluded that the exception set out in s. 902(d) of the CO&O did not apply to the Ikkuma sale and Canlin was entitled to a ROFR notice.

Specific Performance

With respect to remedies, the Court agreed with Canlin that the Facility was unique insofar as it provided a "critical link between Canlin's wells and infrastructure owned partly or wholly by Canlin." 12 Without the right to purchase a majority interest in the Facility, it would be left at the mercy of whoever assumed operatorship. Accordingly, Canlin was entitled to specific performance.

Takeaways

  1. The annotations to a model industry contract do not supersede principles of contractual interpretation.
  2. The breadth of applicability of an apparent "white map" provision in a ROFR exception clause will be limited by the actual language used in the contract.
  3. When entering into model industry contracts, ensure the standard form provisions actually reflect the parties' intentions. As shown in this case, "wells associated with a facility" has a different meaning than "wells producing to a facility".
  4. The Court's acknowledgement that:

While it is true that a proper interpretation of provisions of agreements such as the CO&O Agreement that are based on a Model Agreement in wide use in the oil and gas industry in Alberta has precedential value, and that it is untenable for a section to be given an interpretation by one trial judge and another by a different one, I have not been referred to an existing decision that interprets section 902(d) in such a way that would give rise to the mischief of conflicting interpretations13

Footnotes

1 2018 ABQB 24.

2 Canlin at para 3 [Emphasis added].

3 Canlin at paras 7 to 11, 15: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at paras 47 and 57; Investors Compensation Scheme Ltd v West Bromwich Building Society, [1998] 1 All ER 98 (UKHL); and Vallieres v Vozniak, 2014 ABCA 290 at para 26.

4 Blaze Energy Ltd v Imperial Oil Resources, 2014 ABQB 326 [Blaze].

5 Blaze at para 37.

6 Canlin at para 22.

7 Canlin at paras 19-20.

8 Canlin at para 33.

9 Canlin at para 40.

10 Canlin at para 38.

11 Canlin at para 41-43.

12 Canlin at para 50.

13 Canlin at para 17 [Emphasis added].

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