Article by Bryan Duguid, ©2006 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Energy - Oil & Gas, March 2006
There is often debate during negotiations for joint venture and services agreements about the scope of the exclusion clause. Should liability include or be limited to "gross negligence", "wilful misconduct", or both? In addition to the differing levels of immunity that can be chosen, the parties can manage the likelihood of protracted litigation by clearly defining the chosen liability firewall. Through the use of contractual definitions for these terms, liability clauses provide a mechanism to reduce the risk or scope of disputes.
The Default at Common Law
The varying degrees of possible misconduct range along a continuum, including a progression from "mere" negligence, to "gross negligence", and then to "wilful misconduct". These terms are, of course, described variously in case law and legal dictionaries.
"Mere" negligence involves conduct described as:
- The failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation: Black’s Law Dictionary.
- Carelessness amounting to the culpable breach of a duty: failure to do something that a reasonable man (i.e., an average responsible citizen) would do, or doing something that a reasonable man would not do: Oxford Dictionary of Law.
As one would expect, there is a higher hurdle for a claimant to prove that the negligence is "gross":
- Conduct in which ... there is a very marked departure from the standards by which responsible and competent people habitually govern themselves: Dictionary of Canadian Law.
- "A high or serious degree of negligence". (Holland v. Toronto (City))
- A high degree of negligence, manifested in behaviour substantially worse than that of the average reasonable man: Oxford Dictionary of Law.
Other authorities regarding "gross negligence" focus more on the magnitude of the risks involved such that, if more than ordinary care is not taken, a serious mishap is likely to occur (Ogilvie v. Donkin).
Wilful misconduct is at a point further along the misbehaviour continuum:
- Misconduct committed voluntarily and intentionally: Black’s Law Dictionary.
- Wilfully has been defined as "intentionally", but it is also used to mean "recklessly".
Although the terms "gross negligence" and "wilful misconduct" are commonly negotiated and used, it is quite uncommon, especially until recently, to see agreements that actually set out definitions of these terms. It is true that, since these concepts are, by their nature, very circumstance dependent, it is impossible to provide a definition that will create a certain yardstick to measure all of the infinitely different possible types of conduct. However, considering the definitions provided by default, it is a worthwhile exercise to choose and set out a contractual definition, to limit the inherent uncertainty involved.
The Use Of Contractual Definitions
Consideration of the use of contractual definitions for these terms has been developing in the oil and gas industry in recent years. In the standard form construction, ownership and operation agreement developed by the Petroleum Joint Venture Association (PJVA), a definition of "Gross Negligence" has been included, which states:
"101. Definitions ...
"Gross Negligence" means: (i) a marked and flagrant departure from the standard of conduct of a reasonable person acting in the circumstances at the time of the alleged misconduct, OR (ii) such wanton and reckless conduct or omissions as constitutes in effect an utter disregard for harmful, foreseeable and avoidable consequences, provided that Gross Negligence shall not include any act or omission, insofar as it was done or omitted to be done in accordance with the instructions or express concurrence of the Operating Committee;" (emphasis added)
Also, in the current draft of the 2006 Operating Procedure developed by the Canadian Association of Petroleum Landmen (CAPL), the following definition is provided:
"Gross Negligence or Wilful Misconduct" means any act or failure to act (whether sole, joint or concurrent) by a person that was intended to cause or was in reckless disregard of, or wanton indifference to, the harmful consequences to the safety or property of another person which the person acting or failing to act knew, or should have known, would result from such act or omission, provided that Gross Negligence or Wilful Misconduct does not include any act or failure to act insofar as it: (i) constituted mere ordinary negligence; or (ii) was done or omitted in accordance with the express instructions or approval of all parties." (emphasis added)
Whether specifically intended or not, these two definitions create differing levels of protection from liability. The PJVA definition allows liability for gross negligence, as it is described in most of the legal dictionaries and case law, in other words, in circumstances that do not require intention or recklessness. On the other hand, the draft CAPL operating procedure, even though it uses the defined term "Gross Negligence or Wilful Misconduct", does not allow liability for "gross negligence" as contemplated by most of the authorities. Instead, there will be no liability unless there was "wilful misconduct", being conduct that is intentional, reckless or wanton in nature.
The Benefits of Using Contractual Definitions
Neither of the above definitions is better or incorrect. However, a comparison of these two clauses, against the backdrop of the default interpretations provided at common law, illustrates the benefit of choosing some definition that sets out clearly a particular level of protection.
A decision rendered by the Court of Queen’s Bench of Alberta in the early 1990s further suggests the benefits that might be obtained from stipulating a contractual definition, and the difference in result flowing from the particular liability threshold specified. One of the issues in the United Canso case, arose from the phrase "gross negligence or wilful misconduct", which was included in a Joint Operating Agreement among the parties. The phrase was not defined in that agreement. Although there were other issues involved, this litigation culminated in a lengthy trial, involving at least 12 lawyers.
On this particular issue the question was whether Husky, then Asamera, then Lasmer, as managing operators, were grossly negligent or had wilfully misconducted themselves when payout had been improperly calculated, and monies were paid out incorrectly as a result. In the end, after the Court evaluated the various circumstances, Husky was found not to be grossly negligent and not to have wilfully misconducted itself, whereas Asamera and Lasmer were found to have done so, and were therefore held liable for the consequences.
Even with contractual definitions of "gross negligence" and "wilful misconduct", the United Canso trial may have proceeded, and may have been lengthy. Factual disputes may continue to exist, even with well-defined terms, and the parties may disagree over the interpretation of the defined term. If a settlement had not been reached, evidence would still need to have been given about what was done, what was not done, and an assessment made by the Court as to whether this represented wilful misconduct or gross negligence as defined. However, one might conclude that there is very little downside and significant potential upside in defining terms, if only because it may serve to minimize the costly and time-consuming exercise that may unfold.
When negotiating and documenting industry agreements, participants would benefit from the use of clear contractual definitions to reflect the extent of the liability firewall intended.
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.