The oil and gas industry often involves substantial projects that are accompanied by high price tags. However, when something goes wrong, the additional costs associated with litigation and delays can be detrimental to all parties involved. Further, issues can be complex when international parties are involved or technical expert evidence is required. When an issue involving lost time, money, or unnecessary spending arises, it can be difficult to determine who is at fault and who is entitled to compensation. A recent decision by the Alberta Court of King’s Bench illustrates how the courts might approach these types of disputes and when a court may deem a summary judgment appropriate.

Broken equipment leads to abandonment of oil well

In the matter of CWC Energy v Acquisition Oil Corp., the plaintiff company, “CWC,” was hired by the defendant company, “AOC,” to provide drilling services for an oil well. CWC sought summary judgment in order to collect the $1.6 million it claimed was owed by AOC. Conversely, AOC argued that the project was abandoned due to a drilling failure that arose when a drill string in a well sheared off and was lost in the hole. AOC sought to recoup over $5 million from CWC for costs associated with the abandoned project.

The Court of King’s Bench acknowledged that this matter was not a traditional contractual dispute. AOC noted that the contract between the parties contained “a so-called ‘knock-for-knock’ or no-fault regime, which allocates risk for losses and damages according to ownership or control, rather than fault.”

Defendant claims misrepresentations made during negotiations

The contract generally assigned risk for above-ground losses on the driller (CWC), while risks of under-ground losses are the operator’s responsibility (AOC). With respect to the allocation of risk, the contract stated that:

“shall prevail in the place and stead of any other allocation of risks, responsibilities, or potential losses or liabilities that might be made on the basis of negligence or other fault of either party or howsoever arising or any other theory of legal liability and notwithstanding the breach or alleged breach of any provision of the drilling program not included in this article X.”

AOC’s claim for damages was based on their belief that the salesperson for CWC made misrepresentations during negotiations leading up to the contract, which allowed AOC to seek damages outside of what they were contractually bound to. The Court considered these allegations in order to determine whether they should be allowed to counter CWC’s claim for unpaid work.

Representations by salesperson regarding equipment were true

In support of their arguments, AOC provided evidence with respect to three alleged misrepresentations made by CWC’s salesperson. The first alleged misrepresentation was with respect to the quality of the pipes used. AOC told the Court that CWC’s salesperson represented that the equipment being supplied, including drill pipes, was suitable for its intended purpose. AOC argued that this was not true and the pipes were not as strong as originally promised.

However, the Court was not satisfied by the way in which AOC conducted this analysis of the pipe strength. The Court found that the representations made by the salesperson with respect to the equipment being “(i) “be freshly inspected,”; and (ii) “be good premium pipe”; and (iii) “have 95% wall thickness remaining”” were true. Further, the Court did not accept AOC’s argument that the pipe strength contributed to the drill’s failure.

Insufficient evidence provided to support misrepresentation claims

The second alleged misrepresentation concerned “Rig #3”. CWC’s salesperson indicated that the rig had “approximately 1.1% repair time and had experienced zero incidents over an operating period exceeding 200 days.” Despite AOC’s claims that Rig #3 experienced longer repair times during its use, this did not make the represented figure false. The Court found that AOC did not provide enough evidence to demonstrate that any of the “incidents” reported actually amounted to downtime. The Court noted that even if they did, that did not mean the prior experiences with Rig #3 were false.

The final misrepresentation alleged by AOC was in relation to the services to be performed by CWC. AOC claimed that they were told that “the services provided throughout the drilling program would be performed with proper care and skill by properly trained, qualified, and experienced employees and contractors.” However, AOC took the position that the failure of the project indicated that this was not true. Again, the Court found no evidence to support this claim and deemed it speculation rather than fact.

Matter Appropriate for Summary Judgment

With AOC’s argument not holding any strength before the Court, the only issue left to be determined was whether CWC was able to collect the money it claimed it was owed under the contract.

The Court ruled that there was, in fact, sufficient evidence to allow the matter to progress to summary judgment. While no decision has been issued as of the date this blog was written, developments will be monitored.

The Oil and Gas Lawyers at DBH Law Offer Trusted Legal Advice and Representation in Oil and Gas Disputes

Oil and gas is a large and important piece of Alberta’s economy, and it is far-reaching in terms of the areas of law that are involved with it. Real estate, finance, and contract litigation are intertwined in the oil and gas industry. At DBH Law, our Calgary-based litigation lawyers are uniquely positioned to advise clients on issues that may arise in the oil and gas realm. We frequently represent clients in various disputes spanning across the oil and gas and construction industries and aim to ensure that clients are positioned to obtain the best possible outcome. Please contact us online or by phone at 403.252.9937 to schedule a confidential consultation with a member of our team.