Court of Appeal Decision of the Week

Contracts: Breach; Set-Off; Gross Negligence; Fraudulent Misrepresentation; No-Fault Contracts; Standard of Review

Case: Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd, 2017 ABCA 378 (CanLII)

Keywords: Drilling; Bilateral No-fault Agreement; Summary Judgment; Test for Fraud; Bruno Appliance and Furniture Inc v Hryniak, 2014 SCC 8 (CanLII)

Synopsis:

The parties (both participants in the oil and gas drilling industry) sign a standard industry contract known as a bilateral no-fault agreement or “knock for knock” or “no-fault” contract. The ‘gist’ of the agreement is that each party bears the risk of damage to its own assets, “regardless of the negligence or other fault of [the other party] or howsoever arising”. (See para. 6).

During an early December nightshift, an employee of the Respondent, Precision Drilling Canada Limited Partnership, mistakenly mixes sulfamic acid into drilling mud instead of caustic potash. The Respondent either does not test, or does not carefully test the mud. The Appellant, Yangarra Resources Ltd., is wrongly advised the drilling mud is in order. It is not. A “drill string and bit” becomes stuck in the hole and the Respondent cannot extract it; “Precision advised Yangarra that the drilling mud was in order, when it knew or should have known it was not.” (See para. 3). The well is abandoned and $300,000 worth of the Appellant’s equipment is lost. A replacement well is drilled at a cost of $2 million.

Notwithstanding its error, the Respondent sues for fees associated with its drilling work. The Appellant raises “set-off” as a defence, and counterclaims for its own losses. For the purpose of a summary judgment application, it is conceded the Respondent failed to advise the Appellant of the problem, and the Chambers Judge assumes the rig became stuck because of the sulfamic acid in the mud.

The Respondent argues that, on the face of the “knock for knock” agreement, its application to be paid outstanding fees should be granted (notwithstanding any negligence on the part of its employees since the contract places the risk of damage to the Appellant’s property squarely on the Appellant). On the other hand, the Appellant contends the agreement does not exclude liability for gross negligence, willful misconduct or fraud. In any event, the Appellant argues that if the terms of the agreement exclude liability on those grounds, such exclusion would be contrary to public policy.

The Chambers Judge grants summary judgment in favour of the Respondent and the Appellant appeals to the Court of Appeal. The Court of Appeal allows the appeal, setting aside the summary judgment. The Majority finds the Chambers Judge is wrong – there is a genuine issue requiring trial – and, on the record before the Chambers Judge, it was a palpable and overriding error to find no evidence of fraud. Paperny J.A. dissents, dismisses the appeal, finds no palpable and overriding error and an absence of evidence to support the Appellant’s argument on fraud.

Importance:

This case engages issues of fundamental importance to Canadian industry, including any Canadian businesses tasked with applying/interpreting the standard “knock for knock” contractual provisions at issue. Both a strong contrast between the Majority and Dissent (including disagreement on the appropriate standard of review and applicable jurisprudence), and the content of the decision (which includes questions about what is required to prove fraud and the nature of summary judgment applications) suggest this case could likely be the subject of an appealing application for leave to the Supreme Court of Canada.

The Court of Appeal’s analysis documents recent developments in the world of summary judgment applications post-Hryniak v Mauldin, 2014 SCC 7. For the Court of Appeal, the appropriate questions to ask on a summary judgment application are whether there is an issue of genuine merit requiring a trial and whether the existing record can lead to a fair and just adjudication. (See para. 15).

Citing Bruno Appliance and Furniture Inc v Hryniak, 2014 SCC 8 (CanLII) at para 21, [2014] SCR 126, the Court of Appeal set out the test for the tort of civil fraud, or fraudulent misrepresentation as requiring a plaintiff to prove:

(a) false representation made by the defendant;

(b) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness) ;

(c) the false representation caused the plaintiff to act; and

(d) that the plaintiff’s actions resulted in a loss. (See para. 21).

The Court of Appeal engaged in an interesting discussion with respect to the requirements for proving fraud; considering whether an “intention to deceive” would be necessary. (See paras. 32-39). For the Court of Appeal, the Chambers Judge made a palpable and overriding error in suggesting that “intention was a necessary component” of the test and by failing to include “recklessness as a possible pathway to fraud” in his analysis. (See para. 39). [Emphasis in original].

On the record before the Court of Appeal, the panel determined the facts suggested a failure to disclose and “active steps to deceive” and/or recklessness on Precision’s part. (See para. 24; Emphasis added). The evidence was such that the Court of Appeal found failing to find fraud was an error in and of itself:

In sum, on the record before us, including the presumed facts as adopted by the chambers judge, our view is that it was a palpable and overriding error for the chambers judge to conclude that the allegation of fraud “was rooted only in speculation and conjecture with a mild dose of melodrama thrown in”. (See para. 25).

In the wider context of summary judgment applications, the Court of Appeal confirmed that “No merit” means no defence which has a hope of being successful. The Court of Appeal found the Appellant’s case had merit, that there was “sufficient evidence on the record to establish that there are difficult questions of fact or law that cannot fairly be resolved summarily.” (See para. 27).

The Court of Appeal was careful not to conclusively weigh in on any substantive outcome – “A proper understanding of Precision’s conduct is not possible until the trier of fact has made findings of fact on the relevant issues” (see para. 46) and that, with respect to the effect of the exclusion clause, a “trial judge would be in the best position to assess whether the evidence with respect to the allegations of fraud would warrant the intervention of public policy in this matter”. (See para. 47).

With respect to the appropriate standard of review, the Majority set out the framework as follows:

A chambers judge’s assessment of the facts based on the record before the chambers judge, the application of the law to those facts and the ultimate determination of whether summary judgment is appropriate are all reviewed for palpable and overriding error: Amack v Wishewan, 2015 ABCA 147 (CanLII) at para 27, 602 AR 62. Inferences drawn from the facts by a chambers judge are also assessed on the standard of palpable and overriding error: Dow Chemical Canada Inc v Shell Chemicals Canada Ltd, 2010 ABCA 126 (CanLII) at para 10, 477 AR 112, citing Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 S.C.R. 235.

Where, however, an alleged error “can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness”: Mace v Dirk, 2006 ABCA 106 (CanLII) at para 20, 412 AR 207, citing Housen at para 36. (See paras. 12-13).

In dissent, Paperny J.A. set out the applicable standard differently:

Errors of law are reviewable for correctness. The interpretation of standard form industry contracts can be such a question: Ledcor Construction v Northbridge Indemnity Insurance Co, 2016 SCC 37 (CanLII) at para 34, [2016] 2 SCR 23.

The standard of review for findings of mixed law and fact is highly deferential, requiring a palpable and overriding error before an appellate court will intervene. An assessment of whether the evidentiary record can support a finding of fraud attracts that deferential standard. Moreover, whether to grant summary judgment is a discretionary matter. The chambers judge’s assessment of the facts, the application of the law to those facts, and the ultimate determination of whether summary judgment is appropriate are entitled to deference: Hryniak v Mauldin, 2014 SCC 7 (CanLII), [2014] 1 SCR 87 at paras 81-84; Windsor v Canadian Pacific Railway Ltd, 2014 ABCA 108 (CanLII) at para 10, 371 DLR (4th) 339. (See paras. 62-63).

By examining both the Majority and Dissenting reasons on the applicable standard side by side, does it appear each is engineered or tailored to suit a desired outcome? Whereas the Majority’s framing emphasizes the appropriateness of intervention, the Dissenting framework supports a conclusion which is highly deferential both to the provisions of the “knock for knock” standard form contract and the discretion of the Chamber’s Judge. It follows, then, that Paperny J.A. dismissed the appeal on the following bases:

  • that the Chamber’s Judge’s analysis and conclusion were “eminently reasonable given the state of the evidence;
  • each party acknowledged, by the written terms of their agreement, that each is responsible for damage to their own property, even if the damage was caused by the other’s negligence;
  • that was incumbent on the Appellant to show arguable merit;
  • that evidence with respect to the failure to report the mixing error amounts to negligence (which is excluded by the agreement); and
  • that there was no evidence to support an “inference of indifference as to the truth or fraudulent intent”. (See paras. 73-74).

Counsel for the Respondent: Brian Reid and Jennie Buchanan (Bennett Jones LLP, Calgary)

Counsel for the Appellant: Trevor McDonald and Sydney Black (Burnet, Duckworth & Palmer LLP, Calgary)

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Posted: Wednesday, November 22, 2017