A gas facility operator was recently awarded summary judgment for its unpaid invoices, even though the non-paying producer disputed the amounts owing and claimed various set-offs. In SemCAMS ULC v Blaze Energy Ltd, 2015 ABQB 218 [SemCAMS], the Court accepted that the various contracts between the operator, SemCAMS ULC, and the producer, Blaze Energy Ltd., entitled SemCAMS to payment, albeit subject to Blaze’s right to seek a future adjustment of amounts owing. The decision confirms the “pay first, dispute later” structure of many oil and gas industry agreements, and is likely to impact other Alberta natural gas producers and facility operators to the extent they are subject to similar contracts.

Blaze had five contracts with SemCAMS, the operator, for gas transportation, gas processing, and facility operation services (the Agreements). The Agreements required monthly invoicing based on estimated costs and production volumes, with an annual adjustment (sometimes called the 13th month adjustment) based on actual costs and throughput. The Agreements provided for the payment of invoices within 30 days of receipt, but also included audit provisions for questioning the invoices. Certain of the Agreements expressly provided that payment could not be withheld even if the producer contested an invoice, while others provided that the operator could sue on any overdue invoice as if it were a liquidated demand, without any right of set-off or counterclaim for the producer.

From July 2012 to April 2013, SemCAMS issued 11 invoices totaling $6.1 million after agreed adjustments and set-offs. After Blaze failed to pay, SemCAMS exercised an operator’s lien over the producer’s interest in certain residue gas, recovering approximately $1 million, and then sued for the total amount of the unpaid invoices (approximately $6.14M), less an uncontested adjustment.

SemCAMS argued it was entitled to summary judgment for the total amount invoiced, notwithstanding the possibility of an adjustment after an audit, on the basis that the parties did not intend to allow the audit provision to delay payment. The Court agreed and granted summary judgment for the total amount outstanding in the amount of $5.1M. In reaching this decision, Madam Justice Strekaf applied both the modern approach to summary judgment (summarized in Myth of Trial No Longer Governs: Alberta Embraces New Summary Judgment Test) and the Supreme Court of Canada’s recent guidance on contractual interpretation (Sattva Capital v Creston Moly, 2014 SCC 53).

The Court did not accept the argument that this result was commercially absurd. Instead, inferring that the operator needed to be able to rely on a steady cash flow, the Court found that the parties had reasonably allocated the risk of inaccurate monthly invoices to the producer. Justice Strekaf held that the parties’ contracts mandated this result, but acknowledged that service providers will not ordinarily be able to obtain judgment unless the amounts claimed are proven to be owing and not simply billed. The Court highlighted the fact that the invoices “were prepared in good faith in the ordinary course of business” (para 50). As noted, the judgment preserved the producer’s right to seek contractual adjustments and to maintain its Counterclaim.

Although SemCAMS largely turned on the wording of the parties’ Agreements, the Court was clearly attuned to the broader concept that commercial contracts reflect deliberate decisions about risk allocation. Parties commonly adopt “pay first, dispute later” arrangements so as to protect the operator’s legitimate cash flow needs. SemCAMS confirms that producers subject to similarly worded contracts may not validly delay payment by requesting an audit.