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Summary judgment is increasingly unavailable for disputes involving oil and gas contracts

Energy Newsletter - November 2019
18.11.19
by Katy Josephs (Student-at-Law)

On October 2, 2018, the Alberta Court of Queen’s Bench refused to grant summary judgment in a case involving a farmout agreement between Teine Energy Limited (Teine) and Audax Investments Ltd. (Audax). In the unreported oral decision (Teine Energy), Master Farrington dismissed Teine’s application for judgment related to Audax’s failure to drill under a “Commitment Wells” clause of a farmout agreement. This decision is on par with the growing trend that summary judgment is increasingly unavailable for cases involving oil and gas contracts.

Summary judgment may be granted where there is no genuine issue requiring trial

The current law regarding summary judgment is outlined in the Supreme Court of Canada decision Hryniak v Mauldin. Courts may grant summary judgment where there is no “genuine issue requiring a trial.” In a first step, the court should ask whether there is a genuine issue requiring trial solely on the basis of the evidence before the court. If the answer is no, the court may grant summary judgment. If the answer is yes, the court must then ask whether the need for a trial can be avoided by using the powers outlined under Alberta Rules of Court rules 20.04(2.1) and (2.2). These powers give a judge the ability to weigh evidence, evaluate credibility, draw reasonable inferences and order oral evidence in a summary judgment application. If the need for a trial can be avoided using these powers, then the court may grant the summary judgment application.

The Teine-Audax farmout agreement contained a Commitment Well obligation Audax did not fulfill

Teine and Audax entered into a farmout agreement on November 24, 2016. Under the agreement, Teine, the farmor, would farmout its interest to Audax, the farmee. Audax agreed to a “Commitment Wells” clause whereby it committed to drill and complete one horizontal well or two vertical wells (the Commitment Well) on or before January 31, 2017, “subject to rig availability, surface access, weather, terrain, and regulatory approval.” In return, Audax would earn a 100% interest in Teine’s lease, subject to a 17.5% gross overriding royalty in favour of Teine.

Clause 4 of the agreement provided that if Audax failed to spud the Commitment Well on or before the prescribed date, then Audax would pay $250,000 to Teine as liquidated damages due to the failure to drill.

After executing the agreement, Audax ran into significant regulatory issues and delays stemming from land conditions it was originally unaware of, and it had difficulty acquiring the necessary approvals to drill the Commitment Well. Teine extended Audax’s original deadline to drill the Commitment Well to November 30, 2017, but as of March 14, 2018, the date Teine filed the Statement of Claim for this action, Audax still had not drilled the Commitment Well.

Teine argued that the Commitment Well obligation was binary

Teine’s main argument was that the Commitment Well obligation was of a binary nature. Essentially, it was of the view that Audax could either drill the Commitment Well before the deadline or pay the $250,000 liquidated damages. Teine advanced an interpretation of the “Commitment Wells” clause that did not consider the language “subject to rig availability, surface access, weather, terrain, and regulatory approval” and argued that the failure to drill by the deadline automatically triggered the damages payment. Therefore, even if it was impossible for Audax to drill the Commitment Well due to its inability to receive regulatory approval, Clause 4 was still triggered and Audax was liable for payment of the damages.

Master Farrington held that there was a genuine issue for trial and dismissed the application

After hearing Teine’s argument and without hearing from Audax, Master Farrington held that summary judgment was not available. In his decision, he said that the “Commitment Wells” clause was subject to interpretation and was not binary in nature. Specifically, he noted that his interpretation of the clause would incorporate the considerations of rig availability, surface access, weather, terrain and regulatory approval that Teine downplayed. Given this contractual interpretation and other related issues, Teine did not make its case for summary judgment and there was a genuine issue requiring a trial. In addition to the main contractual interpretation issue, Master Farrington also noted there were triable issues around good faith, potential counterclaims and “various other things”. He dismissed the application.

Teine later appealed the decision unsuccessfully and Audax was awarded costs.

Clarity provided on the summary judgment test after Teine Energy

In February 2019, the Alberta Court of Appeal released a decision, Weir-Jones Technical Services Incorporated v Purolator Courier Ltd., that provided some much-needed clarity in regard to the summary judgment test. In that decision, the Court highlighted four key considerations courts should use when deciding whether to grant summary judgment. The considerations are as follows (in no particular order):

  1. Having regard to the state of the record and the issues, is it possible to fairly resolve the dispute on a summary basis, or do uncertainties in the facts, the record or the law reveal a genuine issue requiring a trial?
  2. Has the moving party met the burden on it to show that there is either “no merit” or “no defence” and that there is no genuine issue requiring a trial? At a threshold level the facts of the case must be proven on a balance of probabilities or the application will fail, but mere establishment of the facts to that standard is not a proxy for summary adjudication.
  3. If the moving party has met its burden, the resisting party must put its best foot forward and demonstrate from the record that there is a genuine issue requiring a trial. This can occur by challenging the moving party’s case, by identifying a positive defence, by showing that a fair and just summary disposition is not realistic or by otherwise demonstrating that there is a genuine issue requiring a trial. If there is a genuine issue requiring a trial, summary disposition is not available.
  4. In any event, the presiding judge must be left with sufficient confidence in the state of the record such that he or she is prepared to exercise the judicial discretion to summarily resolve the dispute.

Summary judgment is increasingly rare in disputes regarding oil and gas contracts

The decision in Teine Energy follows a trend in the case law supporting an overall hesitancy to grant summary judgment in oil and gas contract cases. This is likely due to the complex factors and fact-specific analysis necessary to decide issues surrounding the contractual clauses. While the clarification in Weir-Jones provides better guidance for judges hearing summary judgment applications, given the increasingly complex regulatory field and the multitude of contractual clauses in the oil and gas industry, it is likely that this trend will continue into the future.

References can be found in the attached PDF.