Court Rules Party Cannot Rely On Exculpatory Clause To Avoid Liability For Deceit

• Published date: 06 May 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Energy and Natural Resources, Compliance, Contracts and Commercial Law, Energy Law, Oil, Gas & Electricity, Trials & Appeals & Compensation
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Michael Marion, Miles F. Pittman, Laura M. Poppel and Steven Lumbala

In NEP Canada ULC v MEC OP LLC, 2021 ABQB 180 (NEP), the Alberta Court of Queen's Bench rendered an important judgment ruling on the interplay between an action for a deceitful contractual representation and an exclusionary clause contained within that same contract. In short, a party will not be able to escape liability through reliance on a contractual limitation of liability clause where the party has made fraudulent misrepresentations in that very contract. In this case, the consequences of this finding were significant, as the Court ultimately awarded the Plaintiff approximately $185,000,000 in damages, which included a $120,750,000 award for loss of opportunity, despite a limitation of liability clause which barred liability for consequential and indirect damages, including loss of profits.

What you need to know

• The duty of good faith and honest contractual performance does not just preclude actively misleading conduct, it also precludes half-truths, omissions and silence, which mislead the other party Accordingly, a party cannot rely on opaque language in a disclosure schedule, or obfuscate disclosures with half-truths, in order to escape liability.
• A party who makes a fraudulent misrepresentation to induce another to enter into a contract may not rely upon exculpatory or limitation of liability clauses in that very contract to absolve them of liability. The consequences of this, particularly where the transaction value is high, can be significant and result in substantial damage awards.

Discussion

A. Background

NEP arose out of a share purchase transaction through which NEP Canada ULC (NEP) acquired the shares of MEC Operating Company ULC (MEP), a wholly owned subsidiary of Merit ULC (Merit). MEP's assets included wells, pipelines and facilities in various producing fields in Alberta (the Transaction Assets). The share purchase agreement (SPA) included a "Schedule D" which purported to disclose all regulatory non-compliance issues. The vendors made several contractual representations and warranties in relation to Schedule D, including that Schedule D disclosed all material violations or defaults of any applicable laws or regulations.

A few months after closing, NEP discovered that numerous regulatory non-compliance issues plagued the Transaction Assets. NEP promptly moved to disclose these issues to the Alberta Energy Regulator (AER) through a formal "self-disclosure" process. NEP came to discover that employees of the Defendants had been aware...