The recent decision of the Alberta Court of Queen’s Bench in Bernum Petroleum Ltd v Birch Lake Energy Inc (Bernum), outlines the requirements to establish gross negligence in losses involving the drilling and operation of oil wells.
In Berunum, the plaintiff and defendant entered a joint operation agreement to develop oil wells on certain lands and to contribute proportionally to the related costs. Bernum, the operator of the drilling operations, sought to recover Birch Lake’s share of development costs in relation to a specific well. Birch Lake refused to pay its share of development costs, contending that Bernum was grossly negligent while drilling and developing the well.
Bernum and Birch Lake’s relationship in the joint operation agreement was governed by the 2007 Canadian Association of Landmen Operating Procedure (the “CAPL”), which limited Bernum’s liability to Birch Lake to cases of gross negligence or wilful misconduct. Birch Lake alleged that Bernum was grossly negligent though employing a mud system it had experienced problems with in a prior well. Birch Lake’s expert witness contended that this inadequate mud system prevented Bernum from drilling as far down as the well, which led to issues with its ability to prevent collapse.
The Court’s Description of Gross Negligence
In articulating the standard for gross negligence, the Court made reference to prior definitions in the caselaw, which included, “a…marked departure from the standards [of] reasonable companies…in a like position” and “conscious wrongdoing…or a very marked departure from the standard of care required.” The Court also looked for guidance in the definition of gross negligence in the CAPL, which defines it as,
any act omission or failure to act…by a person that was intended to cause, or was in reckless disregard of, or wanton difference to, the harmful consequences to the safety or property of another person…which the person acting or failed to act knew (or should have known) would result from such act…
After looking at these authorities, the Court stated that the unifying characteristic is the requirement that the wrongful actor have an intention to commit the grossly negligent act alleged. As a result, the Court concluded that in order to establish that a person was grossly negligent, there must be some “degree of intentionality in the act or omission.”
The Court’s Conclusion in Bernum
The Court concluded that Birch Lake failed to establish Bernum was grossly negligent in drilling the oil well. Birch Lake did not provide any evidence that the difficulties experienced in the well would have been avoided if Bernum had used a different mud system.
In the Court’s view, it was problematic that Birch Lake did not lead any evidence of the industry standards to compare the actions of Bernum. The Court noted that determining whether a particular individual acted grossly negligent must be determined in a context specific manner with reference to the oil and gas industry. Factors to be considered include that oil and gas is a “high-risk, speculative business…many things can go wrong in the course of drilling, resulting in unanticipated delays and cost overuns. Often the decisions in the course of drilling must be made quickly without time for extended consultation.”
This decision is of importance to insurers looking to pursue subrogation for a losses relating to oil drilling and well development. While this decision outlines a very high threshold to satisfy gross negligence, it demonstrates the Court’s willingness to address the issue in the context of oil well operation and development by providing a standard required when conducting drilling operations. When assessing recovery potential for such claims, attention should be paid to the court’s comments on assessing gross negligence through a context-specific analysis of the oil and gas industry and the importance to consider industry standards.
This decision is also important for insurers looking for recovery potential from acts of gross negligence outside the oil and gas industry when a tortfeasor has limited its liability to an insured. The Court’s articulation of the standard for gross negligence will likely also be applicable to other loss scenarios when a defendant’s liability is limited by contract to acts of gross negligence.