Interpreting ROFR Exception Clause 902(D) In The PJVA Model Agreement: Canlin Resources Partnership V Husky Oil Operations Ltd. 2018 ABQB 24

Background

In the recent Alberta case of Canlin Resources Partnership v Husky Oil Operations Ltd.1 , the Court of Queen's Bench (the Court) focused on the interpretation of s. 902(d)—a ROFR exception clause—in a Construction, Ownership and Operation Agreement (CO&O) modelled on the Petroleum Joint Venture Association's (PJVA) 1999 standard form CO&O.

Husky Oil Operations Ltd. (Husky), Canlin Resources Partnership (Canlin), and Canadian Natural Resources Ltd. (CNRL) were joint venture participants and successors in interest to the Erith Dehydration and Flow Splitter Facility (the Facility). The purpose of the Facility was to flow split inlet gas between various downstream facilities and dehydrate raw gas; its operations were governed by the CO&O. Husky was the operator.

The CO&O granted Canlin a right of first refusal (ROFR) if either Husky or CNRL attempted to sell their interest in the Facility. But in the event of a "disposition made by an Owner of all or substantially all...of its petroleum and natural gas rights in wells producing to the Facility...",2 s. 902(d) of the CO&O allowed them to sell their interests without triggering Canlin's ROFR.

By May 2016, Husky had decommissioned the dehydrator unit in the Facility and bypassed the inlet separation and flow splitter unit with a jumper pipeline. As a result, the Facility no longer separated, split, or dehydrated gas as per its purpose. Since the decommissioning, Canlin insisted that the Facility become operational again and told Husky it was interested in assuming ownership and operatorship of the Facility.

In September 2017, Husky notified Canlin of its intention to sell a number of assets to Ikkuma Resources Corp. (Ikkuma), including its interest in the Facility. Husky took the position that s. 902(d) captured the Ikkuma sale, precluding Canlin from exercising its ROFR; Canlin disagreed, arguing that Husky installed the jumper pipeline to bypass the decommissioned Facility and, as a result, no wells were producing to the Facility and the exception in s. 902(d) was not triggered.

Interpretation of the ROFR Exception

The outcome of the dispute hinged entirely on the interpretation of s. 902(d) of the CO&O and in particular the meaning of the words "wells producing to the Facility".

The Court applied the modern approach to contractual interpretation. In doing so, the Court reiterated that contracts should be: i) interpreted in a practical and common sense manner; ii) read and interpreted...