At a recent CAODC-sponsored meeting, Brian Reid, litigation partner with Bennet Jones, described his involvement in a protracted legal case between his client, Precision Drilling, and Yangarra Resources over an alleged act of negligence by a Precision righand. CAODC’s standard day-work contract was in place at the time but when Yangarra failed to pay based on the terms of the contract, what followed was a three-year “kitchen sink” defense by Yangarra that ultimately got dismissed under Brian’s legal counsel. Here’s what happened.
The background to the dispute between Precision and Yangarra goes back to late 2011 and early 2012 when Precision drilled three wells for Yangarra. The cost was roughly a million dollars per well. This was under a day-work basis using the CAODC master day-work contract.
During the drilling of the second well there was a new derrickhand working on the rig. He had some experience but he hadn’t worked for some time. He, perhaps in a bit of a hurry, was asked to mix certain products into the well bore but he mixed the wrong components together so instead of making mud heavier for the purposes of drilling through a coal seam, he ended up with something that turned the mud into the consistency of water.
The rig got stuck while trying to drill out through a coal seam and was unsuccessful through fishing operations and Yangarra was forced to abandon that well. Precision invoiced for the work it had done on three wells (including the failed well). Yangarra refused to pay and, in fact, filed a counter-claim for its own damages which amounted to all of their costs related to drilling all three of the wells, their fishing costs, the lost equipment, and their consultant cost. They said not only do they not owe Precision anything but that Precision actually owed them close to $4 million dollars.
In July 2012, Precision applied for what’s called a summary judgment, which is basically a dismissal, with Yangarra to pay their invoices. Unfortunately, that started a lengthy, multi-year saga where Yangarra pursued a variety of different theories, including fraud. They claimed there was a cover up which led to extensive questioning of various Precision employees, righands, management, and phone records, to name a few. Yangarra charged Precision with fraud because they felt that the Precision employee knew that they had mixed the wrong product and attempted to conceal that from Yangarra. However, there was simply no evidence to support that allegation.
Another argument was that the day-work contract doesn’t exclude gross negligence.
There were also arguments made of breach-of-contract and public policy, that somehow it’s a threat to the public at large if contractors can engage in risky behavior knowing their contract will protect them. Yangarra suggested that the public policy argument puts the public at increased risk. The problem for them was that two different levels of court had sided with Precision on this point.
In July 2015, the lowest levels of our courts held that Precision should receive judgment for the full amount it was claiming and Precision was also awarded 18% interest, which is, of course, the standard rate of interest payable under the master day-work contract. There is a fill-in-the-blank in the standard for contract which is filled in by the parties to determine when does that 18 per cent start to run. In this case, it was set at 30 days. So, the contract was clear that overdue amounts at 18 per cent were payable, which, because of the delays involved, ended up being close to the principle amount of the invoices, just over $2 million.
Yangarra agreed to bear this cost, but could not use its set off claim to set off the amounts that Precision was owed under the day-work contract. That then led to an appeal by Yangarra to the next level of court, the Court of Queen’s Bench where that judge also agreed with Precision’s arguments. The judge held that Yangarra’s allegations of gross negligence, fraud, and breech of good faith individually and cumulatively lacked merit.
Yangarra argued that that interest rate should be unenforceable because it amounted to a penalty (there is a legal principle that says a court will not enforce a damages provision if it amounts to a penalty). The court dismissed that argument and again said that the reason the interest had risen to a significant level was because Yangarra decided to fight this for two/three years. They had the opportunity to pay upfront but chose to roll the dice and now it was their problem.
Critical to all of this is the nature of the CADOC day-work contract itself. It is significantly different from most contracts because the parties agree in advance to assume risk. Drilling contractors assume the risk for anything that generally happens above the ground (subject to certain exceptions). The operator, on the other hand, assumes the risks for what happens or originates below the well bore. The nature of this type of contract tries to avoid fingerpointing by dealing in advance with the risks.
Article 10 of the CAODC day-work contract deals directly with this. It says, “The allocation of risks to one party or the other that are in this contract prevail and place it instead of any other allocation of risks that might be made on the basis of negligence or fault or other fault or any other theory of legal liability.”
Yangarra tried to argue that its risks shouldn’t be covered by article 10. As already mentioned, Yangarra was forced to try to fish for several days to get its lost pipe out of the well. Precision says article 10.3 deals with that expressly. It says “operator,” in this case Yangarra, “assumes all risks and shall be fully liable for any loss, damage or destruction of whole reservoir underground formation including, without limitation loss or damage” etc. etc. and then it goes on to say, “regardless of the negligence or other fault or how-so-ever rising,” and this was an obvious attempt to rule out any types of legal challenges that Yangarra made here.
Yangarra also argued fairness suggesting that the contractor clearly screwed up, mixed the wrong product, caused this problem, and Yangarra has to pay for this? But a deal’s a deal, and Yangarra assumed the risk.
A lot of people say you can’t contract out of gross negligence. That would be a principle in the United States, but that’s not a principle of Canadian law. The courts have said you’re free to contract out of whatever you want to contract out of including gross negligence.
The takeaway message here is that those working and supervising rigs need to understand the importance of being honest and forthright in their dealings with the operator. If there’s an error made which impacts the drilling of a well, it needs to be reported immediately.