Proving An Operator’s Gross Negligence: Is Intention Required?

Establishing an operator's gross negligence requires "a degree of intentionality", the Alberta Court of Queen's Bench recently held in Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 [Bernum].

In Bernum, the operator and 60-percent working interest owner, Bernum Petroleum Ltd., served independent operations notices and authorizations for expenditures (AFEs) on Birch Lake Energy Inc., the 40-percent working interest owner. The notices proposed the drilling of a number of horizontal wells. Birch Lake approved the AFEs and agreed to participate in the wells. One of the wells, however, failed and was abandoned.

Bernum subsequently issued cash calls to Birch Lake, which Birch Lake refused to pay. Bernum brought an application for summary judgment, and Birch Lake resisted on the basis that Bernum was grossly negligent in its conduct of the drilling operations. Specifically, Birch Lake alleged that errors made in the operation of one well, and repeated on a second, constituted gross negligence. The allegation involved Bernum's decision to employ the same mud system on the second well, after experiencing problems with it on the first.

Gross Negligence

The joint venture relationship was governed by the 2007 Canadian Association of Petroleum Landmen Operating Procedure. Section 4.02 of the Operating Procedure provides that an operator is not liable for losses except those directly attributable to the Gross Negligence or Wilful Misconduct of the operator, defined as:

... any act, omission or failure to act (whether sole, joint or concurrent) by a person that was intended to cause, or was in reckless disregard of, or wanton indifference to, the harmful consequences to the safety or property of another person or to the environment which the person acting or failing to act knew (or should have known) would result from such act, omission or failure to act. However, Gross Negligence or Wilful Misconduct does not include any act, omission or failure to act insofar as it: (i) constituted mere ordinary negligence; or (ii) was done or omitted in accordance with the express instructions or approval of all Parties, insofar as the act, omission or failure to act otherwise constituting Gross Negligence or Wilful Misconduct was inherent in those instructions or that approval.

In addition to the contractual definition, the Court canvassed a number of other common law descriptors of "gross negligence" as follows:

"conduct in which, if there is not...