General

Development

Describe the areas of energy development in the country.

Canada has the world’s third-largest proven reserves of crude oil, and is currently the fifth-largest producer of both oil and natural gas in the world. The majority of reserves are held in oil sands located in Alberta, but substantial quantities of oil and gas are also produced in British Columbia, Saskatchewan, New Brunswick, Nova Scotia, and Newfoundland and Labrador. While production of conventional oil and natural gas has been declining in recent years, production of unconventional oil and gas (eg, tight gas, coalbed methane and shale gas) has been rising.

Canada has significant coal reserves, with coal mines located primarily in British Columbia, Alberta, Saskatchewan and Nova Scotia. Canada is the world’s second-largest uranium producer, with production mainly originating in northern Saskatchewan, and is also the world’s second-largest producer of hydroelectricity, with large quantities of hydroelectricity produced in Quebec, British Columbia, Newfoundland and Labrador, Manitoba and Ontario.

Wind, solar, biomass and tidal energy are increasingly being used throughout Canada for electricity generation, owing to a combination of government subsidies, tax measures and procurement programmes. Large carbon capture projects are also in operation and development, including the first large-scale power plant carbon capture storage project in the world.

Role of government

Describe the government’s role in the ownership and development of energy resources. Outline the current energy policy.

In Canada, natural resources are owned by a mix of federal and provincial governments, private persons, First Nations groups, and corporate entities. First Nation-owned oil and gas resources are managed on behalf of First Nations groups by the federal government through Indian Oil and Gas Canada.

Each province administers oil and gas ownership and development independently. Neither the provincial nor federal governments participate as working interest owners in oil and gas development; instead, governments enter into standard lease or licence arrangements with resource developers. Such arrangements grant resource developers the right to produce oil and gas resources in exchange for a rental on the lands leased and a royalty on the production obtained from the lands.

In addition to natural resource ownership, the federal government has jurisdiction over interprovincial, national and international matters - including pipeline development across provincial and international borders and development of offshore resources. Similarly, and in addition to natural resource ownership, provincial governments have jurisdiction over local works and undertakings, including control of regulatory requirements for upstream development and management of midstream development within the province’s borders.

While the regulation of energy development is largely left to arm’s-length tribunals in each jurisdiction, both the federal and provincial governments influence this development through changes to legislation governing the industry and tribunals, or via policy statements or interpretation bulletins. The federal government has also recently taken the unprecedented step of purchasing a proposed, once-private pipeline to pursue energy independence from the United States.

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.

Commercial/civil law – procedural

Enforcement

How do courts in your jurisdiction resolve competing clauses in multiple contracts relating to a single transaction, lease, licence or concession, with respect to choice of forum, choice of law or mode of dispute resolution?

Competing choice of law clauses are resolved by determining the law to which the instruments have their closest and most real connection. In the absence of express or implied agreement that particular terms or issues will be governed by different laws, the obligations of both parties will be governed by the same system of law.

Competing choice of forum clauses will be resolved by a court determining whether there is a strong case for not enforcing one choice of forum clause over the other. Where one party seeks to avoid a choice of forum clause that it previously agreed to, it faces a heavy onus.

Competing mode of dispute resolution clauses will be resolved by the rules of the chosen system of law and in accordance with that chosen system of law’s rules of contractual interpretation. If the parties do not nominate a law for the interpretation of their contract, the court will determine the applicable system of law by examining which jurisdiction bears the closest connection to the contract.

Are stepped and split dispute clauses common? Are they enforceable under the law of your jurisdiction?

Arbitration clauses are authorised by statute. Agreements to arbitrate are enforceable, subject to certain restrictions set out in provincial legislation.

Stepped or multi-tiered dispute clauses are common in Canada and the 2007 CAPL Operating Procedures contain an optional form of dispute resolution clause requiring negotiation prior to the reference of a dispute to arbitration.

Split dispute resolution clauses, providing for certain disputes to be resolved through different means, are less common. A split dispute clause will be enforceable if it otherwise complies with the statutory requirements, including that it provide a process that is fair and equitable as between the parties.

How is expert evidence used in your courts? What are the rules on engagement and use of experts?

Expert evidence can be admitted on technical matters outside the ordinary knowledge and experience of the judge or jury. To be admissible, expert evidence must be relevant, necessary to assist the trier of fact, and must be given by a properly qualified expert. Additionally, the court has discretion to exclude expert evidence where its potential to distort the fact-finding process outweighs the evidence’s probative value. Experts must be independent and impartial. An expert’s duty is to assist the court and not to advocate the position of any particular party to the dispute. Expert evidence that crosses into advocacy has been viewed as partial or biased and has been excluded by courts.

What interim and emergency relief may a court in your jurisdiction grant for energy disputes?

Canadian courts have jurisdiction to grant interim and emergency injunctive relief to compel or prevent certain conduct. The categories of injunction that exist are: mandatory injunctions (to compel action), preventative injunctions (to prohibit action), Mareva injunctions (to freeze liquid assets and prevent evasive removal from jurisdiction) and Anton Piller orders (to seize documentary evidence on an emergency basis).

To obtain injunctive relief an applicant must satisfy a three-part test by demonstrating that: (i) there is a serious issue to be tried, (ii) there will be irreparable harm if the injunction is not granted, and (iii) the balance of convenience favours granting the injunction. The applicant must usually also provide an undertaking to be responsible for any damages caused by the injunction if it is ultimately found to have been unjustified.

What is the enforcement process for foreign judgments and foreign arbitral awards in energy disputes in your jurisdiction?

Foreign judgments are subject to a defined process under the rules of civil procedure applicable to each jurisdiction in Canada. Generally, a foreign judgment awarded by a court of competent jurisdiction is enforceable in Canada and gives rise to a binding obligation that will be recognised by Canadian courts, provided that the foreign proceeding was not conducted in a manner that was contrary to natural justice, and the facts proved would constitute a cause of action in the jurisdiction.

Foreign arbitral awards are similarly enforceable in Canada subject to the terms of the International Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted in Canadian jurisdictions by statute.

A foreign judgment may be enforced on the application of the judgment creditor in any jurisdiction where the court has jurisdiction over the subject matter of the judgment, in the place of residence of the judgment debtor.

Alternative dispute resolution

Are there any arbitration institutions that specifically administer energy disputes in your jurisdiction?

There are no government-run arbitration institutions in Canada, but Canada does possess a rich network of arbitration organisations that provide expert arbitrators in various fields, including energy. Arbitral awards are enforceable through the court system.

Is there any general preference for litigation over arbitration or vice versa in the energy sector in your jurisdiction?

There is not a general preference with respect to the choice of dispute resolution method. Arbitration is generally used when there is an arbitration clause in the governing contract. Additionally, arbitration is typically sought by disputing parties to allow flexibility of time and place, potentially reduced costs, increased confidentiality through private proceedings, less opportunity to appeal, and where disputed issues require adjudicators that have subject-matter expertise.

Are statements made in settlement discussions (including mediation) confidential, discoverable or without prejudice?

Statements made in settlement discussions and mediation are without prejudice, meaning they are non-discoverable for the purposes of production in a litigation proceeding and non-admissible as evidence before a court.

Privacy and privilege

Are there any data protection, trade secret or other privacy issues for the purposes of e-disclosure/e-discovery in a proceeding?

E-disclosure is protected in Canada by the Implied Undertaking Rule, which applies to all litigation proceedings and mandates that any document produced in the course of litigation cannot be used for collateral or ulterior purposes by the party who receives the document. In certain circumstances, litigants can also seek confidentiality or sealing orders in court proceedings, so as to protect the integrity of any information filed on the court record, limit who is able to view such information (for example, for ‘counsel’s eyes only’), and prevent media publication.

What are the rules in your jurisdiction regarding attorney-client privilege and work product privileges?

Solicitor-client privilege applies to any and all communications between clients and their lawyers made during the seeking and giving of legal advice. Solicitor-client privilege is lost if the privileged information is disclosed to a third party, unless that third party shares a common interest with the disclosing party or disclosure was required pursuant to a statutory obligation. Solicitor-client privilege applies equally to in-house lawyers.

Litigation privilege applies to any and all documents that are made for the dominant purpose of existing or anticipated litigation. It can be used to protect certain investigations, internal communications, or communications with experts. Litigation privilege terminates once the related litigation has ended.

Jurisdiction

Must some energy disputes, as a matter of jurisdiction, first be heard before an administrative agency?

Canadian energy regulators, such as the National Energy Board, the British Columbia Oil and Gas Commission, the Alberta Energy Regulator and the Ontario Utilities Board, have exclusive jurisdiction over all matters falling within their statutory authority. Disputes that touch upon the exclusive jurisdiction of these energy regulators must be heard before the given administrative agency.

Canadian energy regulators do not, however, hear contractual disputes between private parties.

Regulatory

Relevant agencies

Identify the principal agencies that regulate the energy sector and briefly describe their general jurisdiction.

Projects in the energy sector are regulated by both provincial and federal agencies.

In most provinces, the exploration for development, production and operation of energy is regulated provincially. Provincial agencies conduct environmental assessments; manage surface rights; issue approvals, permits, licences and leases; monitor for compliance; oversee intra-provincial transportation; enforce safety procedures; and oversee abandonment, reclamation and remediation.

Where energy projects involve inter-provincial, national, international or offshore matters, federal agencies also have authority. For example, the National Energy Board (NEB) regulates inter-provincial and international energy imports and exports and the construction and operation of interprovincial and international pipelines, and the Canadian Environmental Assessment Agency requires assessments for projects that are considered to be federal in nature.

The provincial governments and federal government jointly regulate offshore oil and gas development in Newfoundland and Labrador and Nova Scotia. The NEB has authority over all oil and gas exploration activities in Nunavut, while authority in the Northwest Territories (NWT) is split between the NEB and the government of the NWT.

Access to infrastructure

Do new entrants to the market have rights to access infrastructure? If so, may the regulator intervene to facilitate access?

In each province, the relevant regulators have the authority to issue ‘common carrier orders’ to facilitate access to a particular pipeline upon application by an interested party.

In Alberta, for example, an application by an interested party for a common carrier order must demonstrate that the proposed access entitlement is the only economically feasible way to exploit the resource, the most practical way to transport the substance in question, or a clearly superior option in regard to the environment: see Alberta Energy Regulator, Directive 065: Resources Applications for Oil and Gas Reservoirs. Further, applicants must also demonstrate that they have made all reasonable efforts to obtain access to the subject pipeline on a market basis but have been obstructed by the pipeline’s owner.

Federally regulated oil pipelines in Canada operate as common carriers under the National Energy Board Act (NEBA), RSC 1985 c.N-7. The NEBA imposes a duty on oil pipeline operators to receive, transport and deliver all oil offered by means of its pipeline. Natural gas pipelines are contract carriers and are not required to accept all gas offered by a supplier, but the NEB has authority to direct a pipeline operator to offer capacity to a supplier.

Oil and gas developers also utilise Canadian railways to transport crude oil to market. In Canada, the federally-regulated railways are common carriers and are required to accept crude oil for transport.

Judicial review

What is the mechanism for judicial review of decisions relating to the sector taken by administrative agencies and other public bodies? Are non-judicial procedures to challenge the decisions of the energy regulator available?

Typically, administrative decisions can be appealed or judicially reviewed on questions of law, jurisdiction or procedural fairness. Canadian courts are generally deferential to specialised tribunals or government-decision makers, especially when the decision appealed from involved an exercise of discretion. As such, a decision will likely be upheld if it was justified, transparent and intelligible, and fell within a range of possible, acceptable outcomes defensible. Certain questions of law are reviewed on the correctness standard.

The legislation governing each energy regulator generally permits a party to seek a review and variance of the regulator’s decision from the regulator itself. Such a request is usually pursued in parallel with the court process, where the court process will be stayed until the review and variance is decided.

Fracking

What is the legal and regulatory position on hydraulic fracturing in your jurisdiction?

In British Columbia, Alberta, Saskatchewan and Manitoba, hydraulic fracturing operations are permitted and are regulated by the relevant provincial regulator. Regulations regarding safety and casing requirements differ in each jurisdiction.

There is a moratorium on hydraulic fracturing in Newfoundland, New Brunswick and Nova Scotia. Other provinces indicate that projects involving hydraulic fracturing will be considered on a case-by-case basis.

Other regulatory issues

Describe any statutory or regulatory protection for indigenous groups.

The rights of Canada’s indigenous peoples are entrenched in Canada’s Constitution. These rights may be founded on treaties or historic use and occupation. Government conduct that infringes established rights and titles of Canada’s indigenous peoples is prohibited unless it is necessary for a valid legislative objective and involves as little infringement as possible. Where the federal or provincial government contemplates conduct that has the potential to adversely impact asserted or proven aboriginal/treaty rights or title, it has a duty to consult and, where appropriate, accommodate indigenous peoples. The scope of consultation is commensurate with the strength of the asserted right and the severity of the potential impact. Consultation is aimed at finding means to avoid, minimise and mitigate any potential impact on the right or title to achieve an appropriate balance between the indigenous group’s interest and the societal benefit of the intended conduct. Where consultation is inadequate, indigenous groups have recourse to the courts. Where the court is satisfied consultation was insufficient or not undertaken in good faith, it has broad jurisdiction to grant appropriate remedies, which may include quashing the intended project.

Many energy regulators involve indigenous groups in their hearing processes, including evidence as to whether or not the government has met its duty to consult in the circumstances. This also regularly includes project proponents filing evidence as to their own engagement with indigenous peoples in planning and developing the project.

As noted above, natural resources underlying First Nation reserve lands are managed and regulated on behalf of First Nations by the federal government.

Describe any legal or regulatory barriers to entry for foreign companies looking to participate in energy development in your jurisdiction.

Foreign investment is regulated by the Investment Canada Act, RSC 1985, c.28. The acquisition of a Canadian business that has an enterprise value in excess of a specified amount must be reviewed by the federal government. Investment approval will be granted if the foreign investment is found to be a ‘net benefit to Canada’, taking into consideration the impact of the investment on various economic factors.

Investments by foreign state-owned enterprises are subject to lower threshold triggers and additional review requirements. Such reviews examine corporate governance and the reporting structure of the state-owned enterprise against Canadian standards for governance. Other considerations include whether the business will continue to operate on a commercial basis and whether there are reasonable grounds to believe the transaction ‘could be injurious to national security’.

Although not specific to foreign investment, certain transactions that exceed the threshold set forth in Part 9 of the Competition Act (RSC 1985, c. C-34) need to be approved by the Canadian Competition Bureau prior to closing.

What criminal, health and safety, and environmental liability do companies in the energy sector most commonly face, and what are the associated penalties?

Occupational health and safety is regulated provincially. As an example, in Alberta, penalties range from C$10,000 to C$1 million, or more for continuing contraventions or offences, or imprisonment of up to 12 months: see Occupational Health and Safety Act, RSA 2000, Chapter O-2 (Alberta) at sections 40.3 and 41. However, charges can also be laid under the Criminal Code, which imposes criminal liability on persons, including corporations, who direct the work of others, and whose failure to take reasonable steps to prevent bodily harm to those persons arising in the course of that work results in injuries or death: see Criminal Code RSC 1985, Chapter C-46 at section 217.1.

The environment is regulated both provincially and federally. Environmental liabilities range from administrative penalties (with no charge) to fines (with the charge of an offence) of tens of thousands of dollars to millions of dollars or imprisonment or both. Most environmental legislation provides for the liability of directors and officers where a corporation commits an offence and the director or officer authorised, assented to, acquiesced in or participated in the commission of the offence: see Environmental Protection and Enhancement Act, RSA 2000, Chapter E-12 at sections 232 and 237.

Companies may also face civil actions based in contract or tort, as a result of health, safety or environmental incidents.

Companies in the energy sector must also be mindful of their obligations under the Extractive Sector Transparency Measures Act, SC 2014, c 39, s 376, as well as the Corruption of Foreign Public Officials Act, SC 1998, c 34.

Other

Sovereign boundary disputes

Describe any actual or anticipated sovereign boundary disputes involving your jurisdiction that could affect the energy sector.

Canada’s principal relevant boundary dispute is with the United States in the Beaufort Sea, which is located between the Canadian territory of Yukon and the US state of Alaska. The dispute is over a wedge-shaped slice on the international boundary. The Beaufort Sea holds reserves of natural gas, liquid natural gas and crude oil.

The Northwest Passage international waters dispute also exists, wherein Canada claims that waters of the Canadian Arctic Archipelago are internal to Canada and give Canada the power to bar transit in these waters. Several maritime nations dispute Canada’s characterisation of the Northwest Passage and claim that these waters are an international strait that allows a right of passage. Access through the Northwest Passage by large tankers and other similar vessels during the ice-free summer months is potentially more favourable than the alternate route of circumnavigating the tip of South America.

Energy treaties

Is your jurisdiction party to the Energy Charter Treaty or any other energy treaty?

Canada is a signatory to the European Energy Charter, which is a concise expression of the principles that underpin international energy cooperation, based on a shared interest in a secure energy supply and sustainable economic development. By virtue of its membership to the European Energy Charter, Canada has observer status, but not member status, to the Energy Charter Treaty.

Investment protection

Describe any available measures for protecting investors in the energy industry in your jurisdiction.

The federal government and all of the Canadian provinces, except the Province of Ontario, have implemented the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The Province of Ontario has only implemented the Model Law. Therefore, Canadian courts are required to recognise and enforce foreign arbitral awards. Furthermore, Canada ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States in 2013.

Canada is also a party to several investment treaties that provide foreign investors in Canada with substantive legal protection and a direct right of action against the federal government before an independent arbitral tribunal.

Cybersecurity

Describe any legal standards or best practices regarding cybersecurity relevant to the energy industry in your jurisdiction, including those related to the applicable standard of care.

Public Safety Canada, a federal department responsible for national security, has established a Canadian Cyber Incident Response Centre (CCIRC). The CCIRC has recommended the following main mitigation strategies to prevent cyberattacks: use application whitelisting to prevent malicious software and unapproved programmes from running; patch applications and patch operating system vulnerabilities to reduce the number of entry points available to an attacker; and restrict administrative privileges to operating systems and applications based on user duties to limit the ability of malware to spread through the network.

The CCIRC also provides technical advice and support to industry partners, by issuing cybersecurity bulletins, best practices, reference documents and research reports, and by providing security workshops and training. The CCIRC has also established a Cyber Incident Management Framework for Canada that specifies the role of private sector organisations and the assistance they may obtain.

Update and trends

Update and trends

List any major developments (case law, statute or regulation) that are anticipated to affect the energy sector in your jurisdiction in the next 12 months, including any developments related to the taxation of energy projects. What is the anticipated impact of climate change regulations, treaties and public opinion on energy disputes?

No updates at this time.