Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

In western Canada, the Canadian Association of Petroleum Landmen (CAPL) publishes operating, farmout and royalty procedures, which are very broadly used in conventional oil and gas development. In addition, the Petroleum Accountants Society of Canada publishes standard form accounting procedures that are used in conjunction with operating agreements.

CAPL has also published a property transfer procedure for the sale of oil and gas assets that is less broadly used than other CAPL publications.

In regard to oilfield services, the Petroleum Services Association of Canada has developed a standard master service agreement. Agreements for drilling services may use the standard-form drilling contracts published jointly by the Canadian Association of Oilwell Drilling Contractors and the Canadian Association of Petroleum Producers.

Standard forms published by the Petroleum Joint Venture Association are also commonly used and include, for example, contract well operating agreements, construction ownership and operating agreements, and gas handling, transportation or purchase agreements.

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Canada’s well-developed body of case law regarding the interpretation of contracts applies to the interpretation of energy contracts.

When interpreting a contract, a court aims to ascertain the intentions of the parties at the time of contract formation, having regard to the language used, the factual context, and industry customs (where appropriate). The analysis is objective: the court considers what a reasonable person, in the position of the parties, would have understood by the contract, rather than looking at the parties’ subjective understandings.

Describe any commonly recognised industry standards for establishing liability.

For oil and gas joint drilling operations, the usual standard of care expected of an operator imposes liability above the operator’s working interest only in instances of gross negligence or wilful misconduct. In service contracts, there is no standard for establishing liability and parties may apportion liability as they see fit. As an example, in the standard-form drilling contracts published jointly by the Canadian Association of Oilwell Drilling Contractors and the Canadian Association of Petroleum Producers, the parties agree to a ‘knock-for-knock’ indemnity scheme, with specific exceptions carved out, including, for example, for blowouts and loss of, damage to or destruction of the reservoir, downhole equipment and the wellbore.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

Canadian common law recognises the doctrine of frustration, pursuant to which the occurrence of an unforeseeable event subsequent to the making of the contract that makes performance impossible, impracticable or fundamentally different from what the parties expected, will provide an excuse for non-performance.

Additionally, parties can (and often do) choose to include a force majeure clause in their contracts. Force majeure clauses include specific events beyond the parties’ reasonable control and foresight that excuse non-performance. Examples of events that can be covered by force majeure clauses include civil commotion, ‘acts of God’ (such as earthquakes, fires, floods), war and third-party strikes.

These concepts generally do not excuse parties from non-performance owing to commodity price or supply volatility. Courts have stated that the fact that a contract has become more expensive to perform is not a ground to relieve a party of its obligations, and a force majeure clause is not to be resorted to where an event makes performance of the obligations ‘commercially impractical’ (unless the parties have expressly agreed otherwise): see, for example, Domtar Inc v Univar Canada Ltd, 2011 BCSC 1776 at paragraph 90.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

Operators may be liable both in nuisance and in negligence where energy development causes adverse effects on neighbouring properties that materially interfere with an occupier’s right to enjoy the land. Private law actions in nuisance can exist irrespective of whether the activities of the operator were authorised by statute. A distinction exists between private nuisance, involving an infringement of a plaintiff’s right to occupancy of property, and public nuisance, involving claims that an operator’s actions interfere with public welfare. There is no private right of action in public nuisance unless the plaintiff suffers a special or particular injury not common to the public.

In addition, an action in negligence may lie against an operator whose negligent actions cause environmental damage, injury or property damage.

A plaintiff may also obtain an injunction to halt development or other activity where that activity has caused or will cause a nuisance, if the plaintiff establishes he or she has a reasonable argument for liability, a substantial risk of imminent harm that will not be compensable by an award of monetary damages, and that the balance of convenience favours an injunction. The plaintiff must also usually provide an undertaking to be responsible for any damages caused by the injunction if it is ultimately found to have been unjustified.

Liability and limitations

How may parties limit remedies by agreement?

In Canada, courts are more inclined to enforce limitations of liability provisions as opposed to outright exclusions of liability; however, a full exclusion of a particular liability is still possible, if harder to obtain. Canadian courts will likely uphold a limitation of liability or an exclusion of liability clause if it is clearly drafted and unambiguous, brought to the attention of the party against whom the limitation will be exercised, and negotiated by parties of equal bargaining power. The exclusion of liability for consequential or indirect losses is often included in Canadian contracts. Parties are prohibited in Canada from contracting out of two areas of law: limitation periods (ie, they cannot be made shorter than mandated by statute) and fraud.

In addition, parties may limit available remedies through a liquidated damages clause; however, the courts will not enforce such a clause if it is found to be a penalty. Such clause will be considered a penalty if it is extravagant and unconscionable relative to the loss that could have flowed from a related breach of contract.

Is strict liability applicable for damage resulting from any activities in the energy sector?

The rule in the English case Rylands v Fletcher (1868), LR 3 HL 330 (UK HL) is followed in Canada, including in the energy sector, holding that strict liability applies for damages caused by the escape of a dangerous substance onto a neighbouring property, where that substance is not naturally occurring, and does not result from a natural or ordinary use of the lands.

However, the rule in Rylands v Fletcher has been limited in Canada to circumstances where the defendant’s use of the land is special or extremely hazardous. The rule is applicable only where the escaped substance was known to be dangerous, or likely to cause mischief if it escaped, at the time that it was brought onto the defendant’s land. Furthermore, the rule in Rylands v Fletcher applies only to an escape of a dangerous substance that results from an accidental or unintended mishap or accident, and does not apply to gradual seepage that is a normal and intended consequence of the defendant’s activities on the neighbouring property.