The Alberta Court of Queen’s Bench recently upheld the no-fault provisions of the standard form, Canadian Association of Drilling Contractors (CAODC) Master Daywork Contract (MDC) in Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd., 2016 ABQB 365 [Precision]. In Precision, Mr. Justice E.C. Wilson upheld the July 6 and October 14, 2015, decisions of Master J.T. Prowse (collectively, the Master’s Decision) granting Precision’s application for summary judgment against Yangarra and awarding Precision interest at a rate of 18 percent per annum on its unpaid invoices pursuant to the MDC.
Bennett Jones acts for Precision in this litigation.
In western Canada, most conventional oil and gas wells are drilled under the 2001 standard form MDC negotiated by the Canadian Association of Petroleum Producers and the CAODC. The MDC contains a so-called ‘knock-for-knock’ or no-fault regime which differs from the common law in that risks for certain categories of loss and damage are allocated according to ownership or control, rather than fault. Generally speaking, parties to an MDC are responsible for all loss or damage to their own property and death or personal injury to their own employees, regardless of the negligence or other fault of the counterparty. Furthermore, the operator under an MDC generally assumes all risks for matters originating below the well-bore (e.g., a blow-out) with the contractor assuming all risks for matters arising above the well-bore (e.g., damage to the rig). However, it is important to note that unless a particular risk is identified and expressly allocated to either party, each party remains liable to the other for their own negligence.
The utility of a no-fault liability regime is widely recognized as providing two primary benefits. First, it eliminates the need for parties to obtain overlapping insurance coverage thereby reducing aggregate insurance premiums. Second, and more importantly, parties should be able to avoid complex, costly and protracted litigation because the need to determine fault and causation according to principles of contract and tort law is eliminated. Instead, by clearly allocating certain risks of loss to each party, the determination of liability should become a simple matter of contractual interpretation.
In 2011/2012, Precision drilled three wells for Yangarra pursuant to an MDC and invoiced Yangarra approximately $3.5M for this work. However, Yangarra refused to pay based on an allegation that a Precision employee had mixed the wrong chemical into the drilling mud causing the rig to get ‘stuck in the hole’. Based on the clear allocation of risk in the MDC to Yangarra for this risk, Precision applied for summary judgment. In response, Yangarra raised a myriad of legal theories and defences including that the knock-for-knock provisions of the MDC should not be enforced because of alleged gross negligence, fraud, breach of duty of good faith and public policy considerations.
Decision of Master Prowse, Q.C.
On July 17, 2015, Master Prowse granted Precision’s application for summary judgment finding that Yangarra’s losses were “exactly the type of loss envisaged by the bilateral no fault contract between the parties”. In a follow-up decision issued on October 14, 2015, Master Prowse also rejected Yangarra’s argument that the 18 percent per annum interest provision under the MDC amounted to an unenforceable penalty.
Appeal Decision of Justice E.C. Wilson
Yangarra appealed Master Prowse’s decision and on June 30, 2016, Justice Wilson dismissed this appeal concluding that Yangarra’s allegations of gross negligence, fraud, breach of duty of good faith, etc., “individually and cumulatively, lack merit”. Justice Wilson further rejected Yangarra’s argument that it would be contrary to public policy to enforce the MDC, noting that this was a private contract between two companies which did not impact the public interest.
Finally, the Court rejected Yangarra’s argument that the 18 percent per annum rate interest provision should not be enforced because it would amount to an unenforceable penalty. Justice Wilson held that the outstanding interest was only as large as it was because Yangarra decided not to pay and that it must “live with the consequences of that decision”.
Yangarra has filed an appeal of Justice Wilson’s decision.
When one considers only those costs incurred by an innocent party following a loss for which they have accepted the risk pursuant to an MDC, the no-fault provisions may appear unfair. However, when the bilateral sharing of risks between an operator and a contractor are viewed as a whole, this contractual approach makes much more sense. In particular, a no-fault risk regime allows companies involved in oil and gas drilling to anticipate and properly insure for risks undertaken and should allow each to avoid the delay and expense associated with complex litigation which would otherwise occur. However, to avoid surprises, it is critical that parties to an MDC carefully review and understand their rights, obligations and risks assumed before signing and before drilling commences.