Ernst vs Encana in Top 10 Canadian Judicial Decisions in 2014 of Import to the Oil and Gas Industry

2014 IN REVIEW: TOP 10 CANADIAN JUDICIAL DECISIONS OF IMPORT TO THE OIL AND GAS INDUSTRY by Michael A. Marion, Daniel Johnson, Michael G. Massicotte, Alan Ross, Rick Williams, January 29, 2015, in Oil and Gas Bulletin, Border Ladner Gervais

Introduction
2014 saw the Supreme Court of Canada significantly develop the law in areas critical to the oil and gas industry, including Aboriginal title, the interpretation and performance of commercial contracts, intentional torts, access to justice and summary judgment. Other courts have rendered important decisions on standing to participate in administrative and court processes involving oil and gas issues, applying the concept of gross negligence to the conduct of oil and gas operators, and putting limits on who can be sued for damages arising out of oil and gas operations.

In this Bulletin we highlight ten of the most important judicial decisions of 2014 that
oil and gas industry participants should be aware of as they settle into 2015.

1. Tsilhqot’in Nation v British Columbia (SCC)1 (Aboriginal Title)
In this much-discussed case, the Supreme Court of Canada granted a declaration of Aboriginal title for the first time in Canadian history. This case is significant for the potential impact on resource development in the area in south central British Columbia that was at issue in the case and other areas where Aboriginal title claims remain outstanding. …

2. Sattva Capital Corp v Creston Moly Corp (SCC)7 (Contract Interpretation and Domestic Arbitration)
The Sattva decision involved an attempted appeal of a domestic arbitral award made under British Columbia’s Arbitration Act. There are three important aspects to the Supreme Court of Canada’s decision. … The Supreme Court’s decision means that complex commercial contracts in the oil and gas industry and other industries will be interpreted having regard to what the parties knew at the time they wrote their contract. Oil and gas industry participants should keep this in mind when drafting agreements and when later interpreting or litigating them. …

3. Bhasin v Hrynew (SCC)11 (Good Faith and Honest Performance of Contracts)
In another key contract decision, Bhasin, the Supreme Court of Canada tackled the long-standing debate over whether there is an implied duty to perform contracts in good faith. Ultimately, the Supreme Court of Canada held that parties to a contract owe one another a duty to act honestly when performing their obligations under that contract. Bhasin involved a contract that contained a provision that it renewed automatically unless notice of non-renewal was given six months prior to the end of the term. One of the parties terminated the Agreement, with the required notice, but had deceived the other party about its intention to do so.

The Supreme Court reasoned that it was time to take two incremental steps in order to make the common law more coherent and just. The first step was to acknowledge that “good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.12

The second step was to “recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.”13

As the Court recognized, an “organizing principle” is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines. “The organizing principle of good faith exemplifies the notion that in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.”14 The Court was careful to clarify that the principle of good faith is different from the much higher obligations of a fiduciary, and does not require a party to put the interests of the other contracting party first. It merely requires that a party not seek to undermine those interests in bad faith.

The general duty of honesty in contractual performance simply means, as explained by the Court, that parties must not “lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”15 Again, the Court made clear that this duty does not impose a duty of disclosure, loyalty, or require a party to forego advantages flowing from the contract. As to its legal status, this duty is not an implied term; it operates independent of the intentions of the parties and is, to this extent, analogous to equitable doctrines which impose limits on the freedom of contract. Since it is a general doctrine of contract law which applies to all contracts, like unconscionability, the parties are not free to exclude it16 (although they may relax it so long as they respect its minimum core requirements).17

As we have previously noted (found here), the Bhasin case will have far-reaching implications and create some uncertainty until further guidance is provided by courts. When contracts are created, parties will have to consider whether they will attempt to relax the requirements. Currently, it is unclear how this can be done in an enforceable way without impacting the undefined “minimum core requirements”. When performing contracts, parties will need to consider whether they are discharging this duty. We expect that in most cases common sense and commercial reasonableness will prevail. However, it will not always be clear whether conduct has crossed the line to become actionable as a breach of the duty of honest performance. When disputes arise, we expect that the duty of honest performance will be included in many claims and may expand the scope of disclosure and discovery from what is normally expected in contract cases. Given that the Supreme Court noted that “it is not necessary in this case to define in general terms the limits of the implications of the organizing principle of good faith”,18 we expect that there will be significant further development of the duty of good faith and the duty of honest performance in the years to come.

4. A.I. Enterprises Ltd. v Bram (SCC)19 (Tort of Unlawful Means)
In A.I. Enterprises, the Supreme Court of Canada tackled the “unsettled” scope of a tort that had previously been called “unlawful interference with economic relations”, “interference with a trade or business by unlawful means”, “intentional interference with economic relations’, or simply “causing loss by unlawful means”.20 These many incarnations of the tort have, for years, been the subject of inconsistent and confusing judicial consideration and have been the subject of many disputes across many industries, including the oil and gas industry. While A.I. Enterprises involved the question as to whether one of several owners of an apartment building was liable for his attempts to thwart the sale of the building, it has implications for all businesses.

The Supreme Court started by sweeping away the different names and rebranded the tort as the tort of “unlawful means”. It then went on to address the scope of the tort, and made these findings:21
• The tort of unlawful means should be kept within narrow bounds. It will be available in three-party situations in which party A commits an unlawful act against a third party and that act intentionally causes economic harm to party B. Party A must use unlawful means and must intend to harm Party B through the use of the unlawful means against the third party;
• Conduct is unlawful if it would be actionable by (or give rise to civil liability to) the third party or would have been actionable if the third party had suffered loss as a result of it;
• The tort is available even where there are other causes of action available to party A against party B; and
• The tort is not subject to exceptions.

In clarifying this tort, the Supreme Court’s decision reflects a reticence to “intrude too far into the realm of competitive economic activity”.22 Given its three-party requirement, the tort of unlawful means will rarely be established (and does not detract from existing intentional torts that can apply between two parties). However, all participants in the oil and gas industry, and business generally, should be aware that the now clarified tort of unlawful means is another method by which Courts can encourage and enforce commercially reasonable behavior and impose liability.

5. Hryniak v Mauldin/Bruno Appliance and Furniture Inc v Hryniak (SCC)23 (Summary Judgment)
In these companion cases, the Supreme Court of Canada interpreted the summary judgment rules in Ontario. However, the case has broad implications in all jurisdictions in Canada as the Court has attempted to increase access to justice by making it easier for litigants and courts to use summary judgment as a fair and just resolution of disputes. The Court stated:

[27] There is growing support for alternative adjudication of disputes and a developing consensus that the traditional balance struck by extensive pre-trial processes and the conventional trial no longer reflects the modern reality and needs to be re-adjusted. A proper balance requires simplified and proportionate procedures for adjudication, and impacts the role of counsel

[28] This requires a shift in culture. The principal goal remains the same: a fair process that results in a just adjudication of disputes. A fair and just process must permit a judge to find the facts necessary to resolve the dispute and to apply the relevant legal principles to the facts as found. However, that process is illusory unless it is also accessible — proportionate, timely and affordable. The proportionality principle means that the best forum for resolving a dispute is not always that with the most painstaking procedure.

The Court went on to consider the “shift in culture” in the context of summary judgment motions: the “… question is whether the added expense and delay of fact finding at trial is necessary to a fair process and just adjudication”.24 The Court then interpreted the specific Ontario rules in issue and concluded that there is no genuine issue requiring a trial if the summary judgment process, or other alternative evidence gathering procedure, provides the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure.25

The cultural shift mandated by the Supreme Court of Canada, although dealing with the Ontario rules, has been widely relied on by courts in all significant oil and gas jurisdictions in Canada.26 While there remains some uncertainty as to when a particular court will feel that summary judgment provides enough evidence to fairly and justly adjudicate the dispute, what is clear is that courts are eager to improve access to justice and it is very likely that the number of oil and gas cases that will be decided in Canada by way of a summary procedure will increase significantly. Early indications are that the Courts may be willing to apply the “culture shift” to procedural steps other than simply summary judgment.27

6. Forest Ethics Advocacy Assn v Canada (National Energy Board) (Fed CA)28 (Standing)
This case arose out of the application by Enbridge Pipelines Inc. for National Energy Board (NEB) approval of the Line 9B Reversal and Line 9 Capacity Expansion project. In the course of those proceedings the NEB made interlocutory rulings that were challenged by way of a judicial review application before the Federal Court of Appeal. The NEB had ruled that the environmental and socio-economic effects associated with upstream activities, the development of the Alberta oil sands, and the downstream use of oil transported by the pipeline, were all irrelevant to the application and would not be considered. The NEB had also set up a process to determine participation rights in the hearing. The Forest Ethics Advocacy Association (a group that had not participated in any way in the NEB hearing) and an individual denied participatory rights sought judicial review of the NEB’s interlocutory decision. The Federal Court of Appeal denied the application….

7. Ernst v Alberta (Energy Resources Conservation Board) (Alta QB)32 / Ernst v EnCana Corporation (Alta QB)33 (Damages Arising from Hydraulic Fracturing)
The Ernst cases involve claims by a landowner for damages allegedly caused as a result of construction, drilling, hydraulic fracturing and related activities. Ernst filed a claim against the oil and gas operator, but also claimed against the Alberta Energy Regulator (AER) for the “negligent administration of a regulatory regime” related to the oil and gas operations and for breach of her right to freedom of expression under s. 2(b) of the Canadian Charter of Rights and Freedoms as a result of the Board’s refusal to accept further communications from her. Ernst also sued the Province of Alberta alleging that it owed her a duty to protect her water supply, and that it failed to respond adequately to her complaints about the operator’s activities. The AER and the Province both brought preliminary motions to dismiss the claims.

The Alberta Court of Appeal struck the claims against the AER:
• With respect to the negligence claim, the Court of Appeal agreed that the AER owed no private duty to Ernst. It stated that the regulatory duties of the Board are owed to the public, and not to any individual, and that there exist “strong policy considerations against finding regulators essentially to be insurers of last resort for everything that happens in a regulated industry”.34 There was not sufficient proximity to give rise to a private duty of care. The Court noted that to force the AER “…to consider the extent to which it must balance the interests of specific individuals while attempting to regulate in the overall public interest would be unworkable in fact and bad policy in law.”35 The Court of Appeal also confirmed that section 43 of the Energy Resources Conservation Act (ERCA), which provided that “No action…may be brought against the Board…in respect of any act or thing done purportedly in pursuance of this Act”, was a further bar to the claim; and

With respect to the Charter claim, the Court of Appeal confirmed that it too was barred by section 43 of the ERCA. The Court noted that limits on Charter remedies, like section 43, do not offend the rule of law as long as there remains some effective avenues of redress. In this case, Ernst chose not to engage the long standing remedy for improper administrative action: judicial review.

Ernst has sought leave to appeal to the Supreme Court of Canada. Our more detailed analysis of the Court of Appeal decision in Ernst is found here.

2015 02 04 snap date of docket Ernst v ERCB (now AER) leave to appeal, Supreme Court Canada

Snap taken February 4, 2015: Ernst v AER (previously ERCB, EUB) docket at Supreme Court of Canada

The Province’s applications to strike or dismiss Ernst’s claims were brought separately from the AER’s similar applications, and were decided by the case management judge. The Court analyzed the claims against the Province under the two-part Anns test: whether there was a prima facie duty of care and, if so, whether there were any policy considerations which would limit that duty of care. The Court concluded that because Ernst’s allegations against the Province involved direct contact between her and the Province, including specific representations, they could potentially be used to establish a duty of care at trial. At an early stage of the litigation, the Court was also not satisfied that there are residual policy concerns sufficient to negate the possible existence of the duty of care. The Court also concluded that statutory provisions in Alberta’s Environmental Protection and Enhancement Act and Water Act were not sufficiently broad to protect the Province from liability.

Ernst’s claims against the Province were allowed to proceed to trial. In December 2014, the Crown advised that it would not appeal the dismissal of its application.

At this stage of the proceedings, the Ernst case has brought into focus the potential for regulator or Provincial liability arising out of oil and gas operations. Provided that claimants can establish direct contact between themselves and the regulator or Province, and provided the relevant legislation does not clearly bar an action, it appears that courts will allow these types of claims to go to trial. Each case will depend on its own unique facts and the applicable provincial legislation.36

If Ernst proceeds to trial [YES, ERNST WILL!], it will likely provide more guidance on the scope of the duty of care and the standard of care required by the Province and the oil and gas operator to discharge their duties in the context of hydraulic fracturing. The court will also have to address, among other things, the complex factual question as to whether fracture stimulation caused damage to Ernst’s water supply. The impact of fracture stimulation is presently the subject of significant debate. More broadly speaking, although Ernst involved an individual affected by the actions of the regulator and the Province, if Ernst is successful, there may be more scope for industry participants to bring actions against the Province or regulators who affect their business.

8. Blaze Energy Ltd v Imperial Oil Resource (Alta QB)37 (Rights of First Refusal)

9. Bernum Petroleum Ltd v Birch Lake Energy Inc (Alta QB)38 (Gross Negligence)
The Bernum Petroleum case is one of the first cases to apply summary judgment rules to an oil and gas dispute since the Supreme Court of Canada’s mandated culture shift set out in Hryniak v Mauldin. Bernum was the operator pursuant to the 2007 Canadian Association of Petroleum Landmen Operating Procedure (2007 CAPL). Birch Lake was indebted to Bernum for costs incurred in relation to oil and gas operations, but counterclaimed against Bernum on the ground that Bernum was grossly negligent in operating certain wells and in failing to renew certain leases, in failing to obtain a drilling licence, and in failing to offer Birch Lake participation rights in other lands.

Under 2007 CAPL, Bernum’s liability was restricted to cases of gross negligence or wilful misconduct, defined as “…any act, omission 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 or to the environment which the person acting or failing to act knew (or should have known) would result from such act, omission or failure to act”. The Court noted that the onus on someone alleging gross negligence was high.

The Court granted summary dismissal of the allegations of gross negligence regarding the operation of the wells. The Court noted that the oil and gas industry is a high risk, speculative business and that many things can go wrong during the course of drilling which can result in unanticipated delays and cost overruns. The Court was not convinced that there was evidence of the necessary “intentionality or conscious indifference” necessary to ground gross negligence or wilful misconduct. The Court gave little weight to the opinion of Birch Lake’s expert on the basis that the expert had simply provided his personal opinion on the very factual decision the Court was to make.

The Court refused to grant summary dismissal of the allegations of gross negligence regarding the failure to renew certain leases, in failing to obtain a drilling licence, and in failing to offer Birch Lake participation rights in other lands. Birch Lake had led enough evidence to present an arguable case, and these issues of liability could not be resolved on the record because they involved questions of fact and assessments of credibility. These counterclaims were allowed to proceed to trial. Further, the court refused to stay the judgment against Birch Lake pending the determination of the counterclaim because Birch Lake had not established that it would be irreparably harmed if a stay was not granted, and that it would be inconsistent with the principles of “just and fair resolution to disputes achieved in a timely, efficient and economical way” to grant a stay.

This decision is an example of how difficult it is and will be under 2007 CAPL for non-operators to allege gross negligence in relation to oil and gas operations, and that such claims may very well be the subject of summary dismissal and excision from litigation. However, in areas where there are interactions between the parties, or non-operational allegations of gross negligence, it may be easier to establish real issues which require a trial. The case is also significant because it illustrates the Court’s willingness to allow one party to a dispute to obtain and enforce a judgment against the other party, regardless of the existence of counterclaims, provided there is no irreparable harm in doing so.
Our more detailed blog post on Bernum can be found here.

10. Union Carbide Canada Inc v Bombardier (SCC)39 (Mediation and Settlement Privilege)
In Union Carbide the parties entered into a private mediation and signed a mediation agreement that provided that “nothing which transpires in the Mediation will be alleged, referred to or sought to be put into evidence in any proceeding”. After a settlement offer was accepted, a dispute arose as to the scope of the settlement and one of the parties commenced proceedings to prove the settlement agreement. The other party objected to the reference to events that had taken place in the course of the mediation process.
The Supreme Court of Canada, like it recently did in Sable Offshore Inc. v Ameron InternationalCorp.,40 confirmed the importance and purpose of settlement privilege. To promote settlement, the privilege protects communications exchanged by the parties. However, one of the exceptions to the rule has long been that communications which lead to a settlement can be used to prove the existence or scope of the settlement. In the context of the private mediation agreement, the Supreme Court of Canada held that the execution of the mediation agreement containing confidentiality provisions did not automatically displace settlement privilege and its exceptions – in order to do so the agreement would have to be clear. In this way, the Court prevented the settlement privilege being used to “frustrate the broader purpose of promoting settlements” by preventing parties from enforcing the terms of settlements they have negotiated.

In another 2014 case,41 the Alberta Court of Appeal also dealt with settlement privilege in the mediation context. In that decision, the Court upheld the settlement privilege associated with communications and a settlement agreement arrived at through mediation. One of the parties to the settlement was the Province of Alberta and the Court of Appeal held that the privilege prevented the disclosure of the settlement agreement under Alberta’s Freedom of Information and Protection of Privacy Act.

These cases confirm that courts will promote the purpose of settlement privilege in the context of mediations, by protecting the communications from disclosure except where the communications are required to prove the existence or scope of the agreement. [Emphasis added]

[Refer also to:

Birch Lake announces claim commenced by Bernum Petroleum by Scandinavian Oil.Gas Magazine, March 28, 2013

Birch Lake Energy Inc. says that Bernum Petroleum Ltd. has filed a statement of claim against Birch Lake regarding the Company’s Lochend Assets, being the non-operated working interest of 40% in certain petroleum and natural gas rights underlying 7,760 gross acres (2,718 net) in the Lochend-Bearspaw area of Alberta. …

… The Company has taken immediate steps to vigorously defend this claim and preserve its rights in the joint venture assets including a detailed review of the completion operations on the initial well which led to the apparent collapse of the production casing string during the frac operation and the resulting loss of more than half the productive well bore. The Corporation is also conducting a detailed review of the drilling operations of the second well during which intermediate casing was not able to be successfully run to depth drilled, resulting in drilling difficulties during the horizontal section and the eventual loss of the horizontal section after nearly reaching total depth.

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