Nov 11, 2014

Proving An Operator’s Gross Negligence: Is Intention Required?

Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 (CanLII)
Establishing an operator’s gross negligence requires “a degree of intentionality”, the Alberta Court of Queen’s Bench recently held in Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 [Bernum].

In Bernum, the operator and 60-percent working interest owner, Bernum Petroleum Ltd., served independent operations notices and authorizations for expenditures (AFEs) on Birch Lake Energy Inc., the 40-percent working interest owner. The notices proposed the drilling of a number of horizontal wells. Birch Lake approved the AFEs and agreed to participate in the wells. One of the wells, however, failed and was abandoned.

Bernum subsequently issued cash calls to Birch Lake, which Birch Lake refused to pay. Bernum brought an application for summary judgment, and Birch Lake resisted on the basis that Bernum was grossly negligent in its conduct of the drilling operations. Specifically, Birch Lake alleged that errors made in the operation of one well, and repeated on a second, constituted gross negligence. The allegation involved Bernum’s decision to employ the same mud system on the second well, after experiencing problems with it on the first.

Gross Negligence

The joint venture relationship was governed by the 2007 Canadian Association of Petroleum Landmen Operating Procedure. Section 4.02 of the Operating Procedure provides that an operator is not liable for losses except those directly attributable to the Gross Negligence or Wilful Misconduct of the operator, 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. However, Gross Negligence or Wilful Misconduct does not include any act, omission 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, insofar as the act, omission or failure to act otherwise constituting Gross Negligence or Wilful Misconduct was inherent in those instructions or that approval.

In addition to the contractual definition, the Court canvassed a number of other common law descriptors of “gross negligence” as follows:

  1. “conduct in which, if there is not conscious wrongdoing, there is a very marked departure from the standards”: McCulloch v Murray, [1942] SCR 141 at 145.

  2. “a very marked departure from the standards by which reasonable and competent companies in a like position [would act]“: United Canso Oil & Gas Ltd v Washoe Northern Inc, (1991) 121 AR 1 (QB).

  3. “very great negligence” or a “conscious wrongdoing” or a “very marked departure” from the standard of care required: Adeco Exploration Company Ltd v Hunt Oil Co of Canada Inc, 2008 ABCA 214 at para. 55, citing the Supreme Court of Canada decision in Holland v Toronto (City), [1927] SCR 242.

  4. “such a degree of negligence as excludes the loosest degree of care”: Horizon Resource Management Ltd v Blaze Energy Ltd, 2011 ABQB 658 at para. 989; varied on other grounds at 2013 ABCA 139.

In reviewing the foregoing, the Court opined that “the definition of gross negligence is clear and unambiguous” (para. 55) and stated that “[t]he definition of gross negligence in the CAPL and case law all point to a degree of intentionality in the act or omission” (para. 48). While elsewhere the language used by the Court arguably retreated from the necessity of a mental element (“a very marked departure from the standard expected of an operator”: para. 51; “very marked departure from expected standards or signs of very great negligence”: para. 52; and “very great negligence”: para. 54), the Court again concluded at para. 55 that “intentionality or conscious indifference” is necessary to ground gross negligence or wilful misconduct (para. 55).

As described by our colleagues in an earlier article (Gross Negligence: How Bad Does it Have to Be?):

[t]here have been a few cases suggesting that a party will only be grossly negligent where there is some conscious wrongdoing or conscious indifference to consequences. While both of these factors will be persuasive indicators of gross negligence, the current predominant view in Canadian law is that gross negligence does not require a mental intention element. Of course, this is always subject to a statutory or contractual definition of gross negligence that expressly or implicitly imposes a mental element …

Bernum thus stands as an example of a case suggesting the necessity of conscious wrongdoing or conscious indifference. However, Bernum may also be viewed as an illustration of the parties’ ability to impose a mental element by contract, given that section 4.02 of the Operating Procedure explicitly requires either conscious intention, reckless disregard, or wanton indifference. Such a view, however, is not explicitly endorsed by the Court.

In concluding that Bernum was not grossly negligent, the Court commented on the absence of evidence that would suggest a more favourable drilling result would have followed had Bernum employed a different mud system (para. 50). Birch Lake’s failure to lead evidence of industry standards to enable the Court to compare Bernum’s actions was also problematic (para. 51). Given the recent “cultural shift” in the court’s approach to summary judgment, Birch Lake was required to put its “best foot” forward now, not later (para. 50). Furthermore, the definition of gross negligence in the Operating Procedure explicitly excluded procedures Birch Lake consented to, and Birch Lake had raised no issue with the drilling operation plan until well after the fact (paras. 52 and 55).

Takeaways for Non-Operators

Non-operators who believe that an operator is acting in a grossly negligent manner should consider creating a record by contemporaneously recording their objections and concerns. Written correspondence, including the presentation of viable alternatives, should be considered. If the operator proceeds to disregard such correspondence, the non-operator will likely have an easier time establishing that the operator acted with an element of intentionality, if such an element is required by the Court.