The Supreme Court of Canada recently dismissed an application for leave to appeal application from an Alberta Court of Appeal decision that awarded over $11.5 million in damages against an oil and gas company after it cancelled a purchase order.
Parties Agree to US $8.1 Million Purchase Order
The appellant company is engaged in midstream oil gas and services, including pipeline and other petroleum transportation services.
The respondent company is a provider of custom natural gas compression services, including the assembly of natural gas compressor units.
In 2014, the appellant decided to expand one of its natural gas processing plants in North Dakota. The respondent expressed an interest in bidding on six gas compressor units necessary for that plant, which were essential components for the proposed expansion. The respondent provided quotations for different compressor packages, valued at approximately US $8.1 million. The quotations were accompanied by letters of intent to be signed by the appellant, a list of proposed options for the units, the respondent’s terms and conditions, and a manufacturing warranty.
The appellant signed three intents to purchase in November 2014. On each document, the appellanthad written “Terms and final option selection to be defined on a forthcoming PO”, although no purchase order was ever provided. Additionally, the appellant sent its master services agreement to the respondent, although that agreement was never completed or signed by the parties.
Appellant Cancels Order
By November 27, 2014, the respondent had finalized shipping dates for all six units. It later sent invoices to the appellant for milestone completions totalling US $4,247,545.
However, on January 12, 2015, the appellant advised the respondent that it wanted to cancel its order and inquired about “costs to cancel and or delay for each unit as of today”.
On January 23, 2015, the appellant cancelled its order for the remaining five units, which forced the respondent to cancel its purchase orders from suppliers. Additionally, the respondent was forced to lay off approximately 40 employees.
Appellant Refuses to Pay Cancellation Fees
Subsequently, the respondent advised the appellant of a final cancellation amount of US $845,208, for total cancellation charges of US $5,092,753. It stated that there was a binding contract between them and an obligation by the appellant to pay all outstanding invoices, cancellation costs, and losses.
In response, the appellant claimed that the parties did not have a binding contract.
Lower Court Orders Appellant to Pay Respondent Over $11.5 Million
The parties went to court. The judge found that there was a binding contract between the parties and ordered the appellant to pay the following amounts to the respondent:
- $4,190,286 for cancellation charges;
- $440,142 for storage fees,
- $6,073,407 for pre-judgment interest; and
- $816,662 for indemnity costs.
The total amount equalled over $11.5 million.
Court of Appeal Dismissed Appeal
The appellant appealed the decision to the Court of Appeal of Alberta.
Specifically, the appellant sought to challenge the following findings by the trial judge:
- The liquidated amounts for termination provisions of the respondent’s terms and conditions were enforceable, and not a penalty;
- The respondent lost the opportunity to sell the stock cylinders to other jobs after they were assigned to the appellant job;
- Amounts for cancelled equipment and equipment returned to suppliers as part of the respondent’s efforts to reduce the debt should not be deducted from the amount awarded to it; and
- Pre-judgment interest of 24% per annum was applied to the entire judgment.
The Court of Appeal reviewed the appellant’s grounds of appeal, but found no reason to interfere with the lower court’s findings. As a result, it dismissed the appeal.
Further, on June 17, 2021, the Supreme Court of Canada dismissed the application for leave to appeal from the Court of Appeal’s judgment.
When disputes arise in the oil and gas industry they can be complex, involving international parties and various pieces of specialized legislation. If you are involved in such a dispute, it’s important for you to have a legal team in place that knows how these interests and laws work together and can help you navigate this intricate terrain.
At DBH Law, our Calgary-based lawyers are uniquely positioned to advise clients on issues that may arise in oil and gas. We have worked with clients in Alberta, across Canada, and around the world and are intimately familiar with the global nature of this ever-changing industry.
Our extensive experience representing clients in the oil and gas industry has given us the tools to help our clients with their unique needs. Please contact us online or by phone at 403.252.9937 to find out how we may be able to help you.