2019 In Review: Top Judicial Decisions And Trends In Canada's Energy Industry

The year began with a decision of great importance to the energy industry: the Supreme Court of Canada's January ruling in the Redwater case that overturned the findings of the Alberta courts, which held that a trustee in bankruptcy could disclaim uneconomic assets of a bankrupt debtor. The full ramifications of the Redwater decision are still being worked out among the affected stakeholders.

The year ended with another Supreme Court of Canada decision that reset how courts are to deal with reviews of decisions by administrative bodies.

In between were a number of decisions that dealt with pipeline politics, the carbon tax debate, interprovincial and constitutional spats, and much more. Below are the 2019 court decisions that are of the greatest import to the Alberta and Canadian energy industries.

1. Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5

   At the end of January, the Supreme Court of Canada issued its much-anticipated judgment in the so-called Redwater decision. The decision followed judgments of the Alberta Court of Queen's Bench and Court of Appeal, which had held that a receiver can disclaim or renounce uneconomic assets, including those that are subject to environmental liabilities.

   On the facts of the case, Grant Thornton had been appointed as receiver for Redwater Energy Corporation (Redwater), a publicly listed oil and gas company. The receiver took possession of Redwater's most valuable assets for sale under the Bankruptcy and Insolvency Act (the BIA) and sought to disclaim the remaining Redwater assets, including those suspended and abandoned wells that would likely have environmental liabilities and obligations associated with them. The Alberta Energy Regulator (AER) and Orphan Well Association (OWA) opposed this process, claiming that the receiver was required to sell all the assets of Redwater, not just those that had value, as the effect would be to leave the uneconomic assets in the hands of taxpayers. This argument effectively preferred the AER's claims to those of Redwater's secured creditors.

   The question before the Supreme Court was whether the AER and OWA could require Grant Thornton, as receiver and then trustee in bankruptcy of Redwater, to comply with abandonment, reclamation and remediation orders issued by the AER, or whether the trustee was entitled to "disclaim" the assets subject to the orders so as to not comply with them.

   By a 5-2 majority, the Supreme Court allowed the appeal of the AER and OWA. The decision has the effect of elevating environmental obligations to a super-priority status within a receivership.

   The majority, through reasons written by Chief Justice Richard Wagner, held that section 14.06(4) of the BIA concerns the personal liability of trustees-in-bankruptcy and does not entitle a trustee to walk away from the environmental liabilities of the bankrupt estate it is administering. Grant Thornton had argued that the Regulator's environmental orders conflicted with the power of disclaimer provided under section 14.06(4) of the BIA and thus should be subordinated to the BIAunder the constitutional doctrine of "paramountcy." The majority rejected arguments that there was a conflict between the BIA and provincial legislation requiring abandonment and remediation of oil and gas assets and thus held that there was no need to trigger the paramountcy doctrine.

   The decision highlights Canada's shift toward environmental protection.

   By and large the oil and gas industry had supported the AER and OWA, given that the OWA is funded by industry. For the industry, the majority decision restored the balance between environmental obligations and creditor interests to that which existed for many years before the Redwater case. The industry's position is that the OWA and the orphan fund should be a last resort and only used after all other sources of funding are exhausted, including any value in the bankrupt's estate.

   The result of the minority decision is that a bankrupt's liabilities that are disclaimed by trustees and receivers would have continued to be sent to the already overburdened orphan well program, funded solely by the surviving oil and gas companies. The orphan levy increases every year as a result of the number of disclaimed liabilities sent to the OWA. Oil and gas companies unable to pay the levy face enforcement by the AER, which has the potential to put them out of business or into insolvency. This would also increase the number of liabilities sent to the OWA.

   It appears that, in the long term, the majority decision may achieve the environmental protection purpose and curb the influx of liabilities into OWA and to the orphan well fund. However, how and when the decision will be fully implemented may affect that prediction, given the current state of Canada's oil and gas market.

   The court's decision has significant implications for the energy industry and extends to other sectors. The decision engages a multitude of stakeholders including businesses, directors and officers, lenders, insolvency professionals, environmental groups, land owners, governments, regulators and the public. If not properly managed, the majority decision may be a pyrrhic victory for the AER and OWA.

   For a more in-depth review of the Redwater decision, available here. For commentary on the decision's effect on insolvency practice, available here.

2. Reference re. Environmental Management Act (British Columbia), 2019 BCCA 181

   In May 2019, the British Columbia Court of Appeal issued a significant decision for Alberta's oil industry and the federal system for oil and gas transportation, providing much-needed clarity for industry. The reference case arose from amendments proposed by the B.C. government to the province's Environmental Management Act (EMA) concerning provincial regulatory authority over interprovincial pipelines, specifically the Trans-Mountain Expansion Project (TMX) ( Proposed Amendments).

   A reference decision is an advisory opinion rendered by a higher level court on a major legal issue at the request of either a provincial government or the federal government. In this case, the B.C. government had referred three constitutional questions to its Court of Appeal to determine if it had the power to implement a discretionary permitting system specifically targeting "heavy oil." Technically a reference case is not a binding decision but, in practice, reference decisions are given as much weight as decisions rendered in regular proceedings.

   A unanimous five-member panel of the Court of Appeal held that the Proposed Amendments were outside the jurisdiction of a provincial legislature, as they were primarily focused on a federal interprovincial undertaking.

   TMX is a proposed twinning of the existing Trans-Mountain crude oil pipeline running from Strathcona, Alta. to Burnaby, B.C. The project received approval from the Canadian government in November 2016. However, the Federal Court of Appeal quashed that approval in August 2018. The approval process was restarted and in February 2019, the National Energy Board (NEB) published its reconsidered opinion that TMX approval was still in the public interest. The federal cabinet again approved the project in June 2019 and construction on the expansion has begun, though legal challenges brought by Indigenous communities remain unresolved.

   At the Court of Appeal, the Government of Canada and the supporting interveners argued that the Proposed Amendments were aimed specifically at the construction and operation of TMX, which is a federal undertaking that falls under the exclusive jurisdiction of Parliament by virtue of 92(10) of the Constitution Act. Further, since "heavy oil" is predominately produced in Alberta and Saskatchewan and shipped through British Columbia almost exclusively via current Trans Mountain infrastructure, the Proposed Amendments effectively only apply to Trans Mountain's heavy oil in transit from Alberta to tidewater.

   The Court of Appeal went on to determine that the pith and substance of the Proposed Amendments relates to the regulation of interprovincial undertakings designed to carry heavy oil from Alberta to tidewater. The Proposed Amendments, therefore, fell outside of provincial jurisdiction. Accordingly, it was not necessary for the court to consider the application of the constitutional doctrines of interjurisdictional immunity and paramountcy.

   The court agreed with Canada's submissions that the Proposed Amendments did not constitute a law of general application and effectively only regulated the TMX...