I. Introduction:

Joint ownership of petroleum interests is a frequent fact of life for most oil and gas companies. Most often it is a joint owner, rather than a third party contract operator, which assumes responsibility to develop and operate the joint interests for the benefit of all working interest owners. The topic under consideration in this presentation is the standard of care imposed upon an operator ("the Operator") towards non-operators regarding joint operations. This examination will be conducted with particular reference to the standard forms of joint operating procedure in widespread use in the oil and gas industry in Western Canada, the 1974, 1981 and 1990 Canadian Association of Petroleum Landmen forms of Operating Procedure ("CAPL Procedure"). Despite the passage of years, earlier versions of the CAPL Procedure continue to be applicable in many situations.

Particular attention is paid to the question whether the Operator's liability to fellow participants is limited to acts of gross negligence or wilful misconduct. Many Operators of joint properties in the oil and gas business may have thought that such was the case. The standard of care expected from an Operator has been the subject of litigation, despite the existence of these standardized joint operating procedures. To date, Alberta courts have decided that the usual standard of care is that of the prudent operator acting in accordance with good oilfield practice, rather than the markedly less demanding standard of gross negligence or wilful misconduct.

The United Canso case provides an example where a CAPL Procedure was not incorporated by reference but rather another form of joint operating agreement was incorporated which expressly made a gross negligence standard of care applicable. It provided that "Joint-Operator's right of action against Managing-Operator is strictly limited to action for loss, damage, or costs caused by the gross negligence or wilful misconduct of the Managing-Operator". The United Canso case thus illustrates the principle that the Operator's liability depends upon the language of the governing operating agreement.

The Renaissance Resources and Passburg Petroleums cases considered the 1974 version of the CAPL Procedure which does not incorporate the supplemental AFE concept introduced into Clause 301 of later versions of the CAPL Procedure. The other cases discussed in this paper deal with the 1981 version. As yet there is no judicial consideration known to the author considering the 1990 CAPL Procedure.

II. Contractual Control of Duty:

A basic principle regarding the Operator's duty of care is the elementary legal proposition that joint owners in contracts governing their relationship may formulate and agree upon the standard of care required by the Operator. For purposes of certainty and ease of proof, the terms of any such arrangement should be recorded in writing and signed by all participants.

By analogy to other legal relationships, in the absence of agreement providing otherwise the standard of care likely to be imposed by an Alberta court on an Operator is that of a reasonable person having the special knowledge and skills expected of an oil and gas operator. The judiciary in Canada has repeatedly ruled that clauses which restrict or exclude liability below the standard of care which the law would otherwise imply are to be "strictly construed". This means that contracting parties which want to limit liability by lowering the standard of care from that which would be otherwise implied by the court must be very precise about the standard of care intended to be applicable and about all circumstances in which the lower standard of care is intended to apply.

Consequently, careful attention must be given to determine the particular operating agreement governing any situation. This presentation contends that a "gross negligence" standard of care is intended to be applicable under the 1990 CAPL Procedure, rather than the ordinary negligence standard applicable under the other versions of the CAPL Procedure or that which the law would imply, absent different agreement. Parties are free to formulate under any particular operating agreement whatever standard of care they choose. Further, tricky issues of contractual interpretation may arise regarding the point in time at which any particular Operating Procedure becomes applicable. For instance, farmout agreements often state that after earning by the farmee, which typically requires the drilling and completion of a test well to the target zone, some attached version of a CAPL Procedure is to apply and be incorporated by reference. This begs the question regarding what duty of care is intended to be applicable before earning. In such example, even were a 1990 CAPL Procedure attached, there is a strong argument that this sort of language incorporating it leaves the ordinary negligence standard applicable to operations during drilling of the earning well by the Operator.

III. Yardsticks for the Operator's Standard of Care:

a. The Ordinary Negligence Standard:

Subject to the duty to consult with the non-operators which emerged in the 1981 CAPL Procedure, the Operator is delegated management of the exploration, development and operation of joint lands under all versions of the CAPL Procedure.

Clause 304 of all versions of the CAPL Procedure provides:

The Operator shall conduct all joint operations diligently, in a good and workmanlike manner, in accordance with good oilfield practice and the Regulations. [emphasis added]

The Oil and Gas Law in Canada text by Professors Lucas and Hunt (as she then was) (Calgary: Carswell, 1990) described good oilfield practice as the "good workmanship standard". (at 167, 8, footnote 78)

In an early authoritative American work Williams and Meyers' Oil and Gas Law (New York: Matthew Bender & Co., Inc.), the authors discussed the standard of care expected of an Operator:

…the standard of care is that degree of care that a reasonable man would exercise under the same or similar circumstances, which is simply another way of stating the prudent operator standard. (at 5:86 1.1)

In discussing this standard, Williams and Meyers wrote that although it is not an absolute, neither is it a good faith standard, and that "the prudent-operator standard has the same function in oil and gas litigation as the reasonable man standard has in negligence litigation." In summation, they observed:

[t]his analogy to the reasonable man of tort law also helps to explain the meaning of the prudent operator standard. The prudent operator is a reasonable man engaged in oil and gas operations. He is a hypothetical oil operator who does what he ought to do with respect to operations on the leasehold. Since the standard of conduct is objective, a defendant cannot justify his act or omission on personal grounds or by reference to his particular circumstances. (at 1:218.10)

The contractual standard of "good workmanship" is connected in this way with the "reasonable man" standard imposed by the general law of negligence.

In Gustavson International v. B.P. Explorations, the Alberta Supreme Court discussed the standard of care imposed on a contract driller Peebles as follows:

[I]t must be remembered that the defendants are alleging negligence and breach of contract against the plaintiff and negligence against Peebles. Possibly this raises two different standards of care to be considered. At page 162 of the 5th Edition of Charlesworth on Negligence, the standards of care to be observed by skilled persons or persons having special competence are considered. One statement is that such a person "is bound to exercise the skill and competence of an ordinarily competent practitioner in that profession" and further down the page it is said:

The test is the standard of the ordinary skilled man exercising and professing to have that special skill.

I think those tests are applicable to Peebles in determining whether he is liable for the tort of negligence. I think that requires him to exercise the care and skill of an average or ordinary driller. (at 228-9)

In the more recent 1997 decision in Morrison Petroleums v. Phoenix Canada, Justice Moshansky equated "negligence with not following good oilfield practice" (at 108).

b. The "Gross Negligence/ Wilful Misconduct" Standard:

Language limiting the Operator's liability is found in provisions such as Clause 401 of the 1990 CAPL Procedure which provides:

INDEMNITY AND LIABILITY OF OPERATOR

401 LIMIT OF LEGAL RESPONSIBILITY

Notwithstanding Clauses 303 and 304, the Operator, its Affiliates, directors, officers, servants, consultants, agents and employees shall not be liable to the other Joint-Operators, or any of them, for any loss, expense, injury, death or damage, whether contractual or tortious, suffered or incurred by the Joint-Operators resulting from or in any way attributable to or arising out of any act or omission, whether negligent or otherwise, of the Operator or its Affiliates, directors, officers, servants, consultants, agents, contractors or employees in conducting or carrying out joint operations, except:

2. when and to the extent that such loss, expense, injury, death or damage is a direct result of, or is directly attributable to, the gross negligence or wilful misconduct of the Operator or its Affiliates, directors, officers, servants, consultants, agents, contractors or employees, provided that an act or omission of the Operator or its Affiliates, directors, officers, servants, consultants, agents, contractors or employees shall be deemed not to be gross negligence or wilful misconduct, insofar as such act or omission was done or was omitted to be done in accordance with the instructions of or with the concurrence of the Joint-Operators.

To the extent that the conditions in Subclauses (a) or (b) of this clause apply (but subject to the exceptions provided therein), the Operator shall be solely liable for such loss, expense, injury, death or damage and, in addition, shall indemnify and save harmless each other Joint-Operator and its Affiliates, directors, officers, servants, consultants, agents and employees from and against the same and also from and against all actions, causes of action, suits, claims and demands by any person or persons whomsoever in respect of any such loss, expense, injury, death or damage, and any costs and expenses relating thereto. However, in no event shall the responsibility of the Operator prescribed by this clause extend to losses suffered by the Joint-Operators respecting the loss or delay of production from the joint lands, including, without restricting the generality of the foregoing, loss of profits or other consequential or indirect losses applicable to such loss or delay of Production. [emphasis added]

The concept of "gross negligence" goes undefined except in the 1988 Accounting Procedure. It defined the term as follows:

…such wilful misconduct or such wilful omissions or such wanton and reckless conduct or omissions, as constitutes in effect a wilful or utter disregard for harmful, foreseeable and avoidable consequences.

The absence of a definition of gross negligence is in contrast to the volumes of judicial opinion on the concept found elsewhere in the law - particularly regarding the degree of care lacking on the part of a motor vehicle driver to render the driver liable to a gratuitous passenger.

In United Canso Oil & Gas Ltd. v. Washoe Northern Inc. et al, Justice Hutchinson of the Alberta Court of Queen's Bench found in the oil and gas context that gross negligence required:

…a very marked departure from the standards by which reasonable and competent companies in a like position ...should habitually govern themselves ....a conscious indifference to the rights or welfare of United Canso and its predecessors. (at 115)

The court in United Canso concluded that ignoring the existence of outstanding accounting issues or taking a calculated risk that the plaintiff would not pursue these issues and challenge the correctness of the accounting approach previously adopted by the Operator constituted gross negligence.

In coming to his decision, Justice Hutchinson had numerous authorities before him including the Supreme Court of Canada's decision in McCulloch v. Murray. In that case, the Supreme Court defined "gross negligence" in the context of motor vehicle legislation as follows:

[a]ll these phrases, gross negligence, wilful misconduct, wanton misconduct, imply conduct in which, if there is not conscious wrong-doing, there is a very marked departure from the standards by which responsible and competent people in charge of motor cars habitually govern themselves. (at 145)

Additionally, Justice Hutchinson considered American authorities in his search for a definition including Texas Pacific Coal & Oil Co. v. Robertson. There the Supreme Court of Texas stated:

[t]he definition of gross negligence which has probably been quoted oftener than any other by the courts of this state is that given by Judge Stayton in the Missouri Pacific Co. v. Shudford 72 Tex. 165, 10 S.W. 408, 411 and is as follows:

'Gross negligence, to be the ground for exemplary damages, should be that entire want of care which would raise the belief that the act or omission complained of was the result of a conscious indifference to the rights or welfare of the person or persons to be affected by it.'

…

It is to be observed that the definition quoted used the words 'conscious indifference', thus stressing the mental attitude of the person charged to have been grossly negligent. Gross negligence is positive or affirmative, rather than merely passive or negative as ordinary negligence often, perhaps usually, is. (at 831)

Although Justice Hutchinson took these authorities into account, he was careful to note that in imputing into the concept a mental requirement, Missouri Pacific Ry. Co. dealt with gross negligence as grounds for awarding punitive or exemplary damages and the analysis in McCulloch was conducted within the framework of gratuitous passenger legislation.

Regardless, these formulations clearly indicate that for conduct to constitute gross negligence, the adverse consequences suffered have to effectively result from a positive act or active omission on the part of the wrongdoer as opposed to the situation in ordinary negligence where such party is a passive participant or has merely failed to act. Madam Justice Hunt observed in Erehwon Exploration Ltd. v. Northstar Energy Corp. that '[w]hatever "gross negligence "may mean in an oilfield context, it is undoubtedly a less onerous standard for the Operator to show that it has met than the standard of "negligence" '(at 224). As a matter of law, the requirements of a marked departure or conscious indifference to establish gross negligence by an Operator means that there should be a considerable difference between it and the simple negligence standard of care.

c. Proving Compliance with the Standard in Court:

Good oilfield practice in the operational sense is nowhere defined in the different versions of the CAPL Procedure. Nor apart from the subject of joint venture accounting does it appear to be codified in technical manuals, professional standards or government regulations.

In the absence of further definition or codes, proof in court to establish achievement of this standard of conduct requires testimony from expert witnesses regarding the knowledge and expertise practised by operators in the oil and gas industry. Not unexpectedly, these experts often differ in their opinions about prudent practice.

This lack of external authoritative sources defining good oilfield practice means that experts must testify in court whenever there are disputes about whether this standard of care has been met in any particular situation. As many different types of expert may be required for trial as there are different technical specialties involved in the operation under dispute. It follows that the need for and the expense faced to retain such experts becomes a significant consideration in most court disputes regarding the adequacy of operations conducted, especially unsuccessful or expensive ones.

In R. v. Abbey v. Justice Dickson, writing for the Supreme Court of Canada, held:

"With respect to matters calling for special knowledge, an expert in the field may draw inferences and state his opinion. An expert's function is precisely this: to provide the judge and jury with a ready-made inference which the judge and jury, due to the technical nature of the facts, are unable to formulate." An expert's opinion is admissible to furnish the Court with scientific information which is likely to be outside the experience and knowledge of a judge or jury. (at 217)

One duty of the Operator receiving attention in recent Alberta caselaw is the Operator's function in accounting for joint operations. The United Canso case dealt with several complex issues of joint venture accounting. There Justice Hutchinson held that a succession of Managing Operators breached the gross negligence duty of care applicable in that case and were grossly negligent; however, the subsequent case of Erehwon Exploration Ltd. v. Northstar Energy Corp. also dealt with the Operator's responsibility for accounting matters. Justice Hunt there decided that when a 1981 CAPL Procedure applied, the ordinary negligence rather than the gross negligence standard of care applied to accounting relations between participants.

The Morrison Petroleums decision held that the Operator's duty of care extends to preparation of AFEs and the pricing and bidding for materials and services required to conduct operations. An Operator needs not only to consider, but also to document the offset well data which it considered in order to prepare each AFE, as well as service company inquiries and arrangements. The Erehwon Exploration case illustrates the formalities that an Operator is required to observe to justify expenditures as reasonable when using any affiliated service companies or personnel. In this case, well drilling costs from an affiliated service company and well operating fees charged for work done by employees of the Operator were disallowed.

Justice Hunt stated:

"Pinchin agreed that the Defendant could legitimately charge for third party costs of operating the wells and thus it seems reasonable that it could also levy a fair charge for such services when it performs the services itself, in the capacity of plant operator. However, because in so doing the Operator is spending the money of the Non-Operator, I consider that it is acting in a fiduciary capacity and must behave in a way consistent with fiduciary obligations. Entering into a contract with itself does not meet the necessary standard, unless, of course, there is advance disclosure of this fact to affected parties and their consent is obtained. That did not occur in this case. Antonenko's evidence convinced me that there may be good reasons of safety and efficiency to have the plant operator as well operator. The question is whether the amount charged was reasonable. Given the fiduciary context here, I consider that the Defendant bears a heavy obligation to meet the evidence of the Plaintiff that a reasonable well operating cost without a profit margin would have been about $325."

The judicial tendency to impose the ordinary negligence standard unless expressly agreed otherwise is demonstrated again in the 2001 Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co. decision concerning the development of the Kotaneelee gas field in the Yukon. The applicable operating agreement limited the liability of the Operator to any Joint Operator to "fraud, dishonesty or gross neglect". The Plaintiff had earlier converted to a carried interest position. Justice MacLeod narrowed the scope of this exemption, ruling the Plaintiff was no longer a Joint Operator. The court held that the Plaintiff was able to hold the Operator to a good and a workmanlike standard. There was a consequential reduction to the carried interest account relating to $5 million overspending on facilities, although a claim alleging a needless well workover was rejected.

The duty of the Operator to monitor and report on the tracking of actual compared to anticipated drilling costs was also high-lighted in both the Morrison Petroleums decision and the 1999 Saskatchewan Coachlight Resources decision.

The court in Coachlight Resources had stated that it "agree[d] entirely with the interpretation of Clause 301 of CAPL 1981 as found in Morrison" - namely "that an operator under CAPL 1981 is required to obtain authorization from the Joint operators prior to incurring expenditures in excess of the AFE and is also required to issue an AFE for the excess expenditures. Further, the court said that it is "the Operator's responsibility to advise its Joint Operators when to expect that they would be incurring overexpenditures." (at 136.)

The timing and burden of this requirement may come as a surprise to many operators and lend further credence to the petroleum's engineer's worry that accounting has come to dominate the energy business. The legal requirement upon the Operator to be proactive by considering and communicating with their participants promptly about "expected" cost overruns is in stark contrast with the common practice of issuing supplementary AFEs only once final figures are received, until then relying on participants to draw appropriate conclusions from the cumulative costs reported to them through daily drilling and completion reports.

Continuous cost monitoring and coordination between operational and accounting functions by an Operator are obviously required in such situations in order for the Operator to undertake promptly the discussions with and approvals from participants made legally necessary once any over expenditure of an AFE seems likely. Better still, before proceeding with any operations governed by earlier versions of the CAPL Procedure, it would be better for the Operator to amend the applicable operating procedure to the 1990 CAPL Procedure, or some other acceptable version.

The old Renaissance Resources Ltd. v. Metalore Resources Ltd. used to be considered the leading judicial authority for the proposition that approval of an AFE constituted approval for the operations described in an AFE. This case considered the legal effect of the 1974 CAPL Procedure. Unfortunately for operators, the more recent Alberta caselaw considering the 1981 CAPL and supplementary AFE requirements reached the opposite conclusion. This needs to be recognized and taken into account until there is further appellate consideration of the issue ruling differently.

Guidance is offered by the decision of the Alberta Supreme Court in Challand v. Bell regarding the appropriate approach to be taken by a court when assessing whether due care has been exercised in situations where a measure of subjective judgment by the Operator is involved. This case involved a claim for negligence against a medical practitioner; however, the court's comments regarding the standard of care and expert opinion appear equally applicable to the situation of an oil and gas Operator.

Justice Riley quoted extensively from the Supreme Court of Canada's decision in Swanson v. Wilson:

[i]n the presence of such a delicate balance of factors, the surgeon is placed in a situation of extreme difficulty; whatever is done runs many hazards from causes which may only be guessed at: what standard does the law require of him in meeting it? What the surgeon by his ordinary engagement undertakes with the patient is that he possesses the skill, knowledge and judgment of the generality or average of the special group or class of technicians to which he belongs and will faithfully exercise them. In a given situation some may differ from others in that exercise, depending on the significance they attribute to the different factors in the light of their own experience. The dynamics of the human body of each individual are themselves individual and there are lines of doubt and uncertainty at which a clear course of action may be precluded.

There is here only the question of judgment; what of that? The test can be no more than this: Was the decision the result of the exercise of the surgical intelligence professed? Or was what was done such that, disregarding it may be the exceptional case or individual, in all the circumstances, at least the preponderant opinion of the group would have been against it? If a substantial opinion confirms it, there is no breach or failure.

An error in judgment has long been distinguished from an act of unskilfulness or carelessness or due to lack of knowledge. Although universally accepted procedures must be observed, they furnish little or no assistance in resolving such a predicament as faced the surgeon here. In such a situation a decision must be made without delay based on limited known and unknown factors; and the honest and intelligent exercise of judgment has long been recognized as satisfying the professional obligation. (at 186, 7)

The Operator involved in drilling, completing or working over oil and gas wells is typically under pressure during operations and is frequently faced with judgment calls when problems develop. Drilling consultants and operators may differ in the methods employed or the actions taken, depending upon each individual's appraisal of any particular situation. Like the human body, each well is somewhat unique. There are often different ways to drill or complete a well or cope with rapidly emerging problems. The very nature of working miles beneath the surface of the earth makes it impossible to know precisely what an Operator will encounter. As in most problematic circumstances, this usually precludes one single course of action as obvious or correct.

As the above quotation indicates, an error in judgment should not constitute negligence. An Operator may make certain decisions relying on the skill and experience of its personnel which after the fact turn out not to have been the best strategy; however, such lack of perfection should not constitute breach of this standard of care. Liability should not be imposed simply because an initiative went badly unless it was demonstrably careless to undertake the procedure in the first place.

In Challand, Riley J. concluded as follows regarding the conflicting expert opinions presented in that case:

[w]here the experts disagree but some of them support the treatment given, then surely the treatment given by the general practitioner should not be criticized, and one must always keep in mind the importance of viewing the treatment and seeing matters through the eyes of the attending physician.

And further:

[n]o medical practitioner becomes an insurer that he will effect a cure, nor do the courts condemn an honest exercise of judgment even though other practitioners may disagree with that judgment. (at 188)

Actions and decisions of an Operator are easily criticized retrospectively after a problem has occurred and the consequences of any particular course of action taken are known. Though courts are supposed to assess an Operator's conduct from the perspective of the Operator at the outset when faced with alternative courses of action with uncertain outcomes, it often seems in practice that courts impose liability for actions taken by an Operator expecting a level of perfection only attainable using hindsight. Where there is credible technical evidence supporting operating decisions taken by an Operator, a court should not readily condemn an honest exercise of judgment simply because other experts testify after the fact that the Operator should have taken a different course of action with better results.

One final observation may be useful regarding the subject of the expert evidence required in legal action by an Operator to recover joint venture expenditures. As a practical matter a joint venture audit is required whenever an Operator sues its participants to recover joint venture debts to prove the expenditures incurred for the joint venture. The auditor engaged for this assignment should preferably be independent, highly qualified and experienced, and an articulate witness instilling confidence in his opinions. In the author's experience, such expert testimony is essential to the effective presentation of such claims and formal proof establishing how much is owed.

d. Breach of Duty of Care as Impediment to Cost Recovery by Operator:

From a practical perspective, lawsuits initiated by Operators typically result after an unsuccessful operation when an Operator sues disgruntled working interest owners to recover unpaid joint venture expenses resulting when expenditures exceeded amounts originally approved by AFE. The defence from participants frequently alleges that the Operator breached its duty of care and caused the over-expenditures, thus extinguishing the participant's liability to pay for such cost overruns.

As a general proposition, absent request or agreement to reimburse it from other owners, a joint owner of property has no legal right to recovery expenditures made on joint property from the other owners, especially where the value of the joint property has not been increased in the process. Thus the first issue in most joint venture disputes is whether all of the expenditures claimed by the Operator were properly authorized by the participants in accordance with the requirements of the applicable operating procedure.

Despite compelling arguments to the contrary, cases such as Morrison Petroleums and Coachlight Resources held that an Operator acting under the 1981 CAPL Procedure is required to obtain authorization from its participants prior to incurring expenditures more than 10% over AFE. In this context the Operator's duty to track expenditures and issue a supplemental AFE as soon as cost overruns are expected becomes more critical. Failing receipt of the approved supplementary AFE, in cases involving the 1981 CAPL Procedure, it is hazardous for an Operator to proceed with further operations beyond such point without receiving written acknowledgement approving any further steps proposed - as impractical as this course of action may be. While this gives the now unwilling participant an unintended veto over completion of the operation originally planned, this appears to be the result dictated by these two court decisions.

Notwithstanding that an Operator has obtained authorization for certain expenditures, breaches of the Operator's standard of care may still be alleged by its participants as the basis for counterclaim. If upheld, such counterclaim can not only extinguish liability for the expenditures incurred which relate to the breach but also further amounts owed to the Operator if there are greater damages caused by the breach.

e. Overcoming Judicial Interpretation of the Standard of Care in Earlier CAPL Procedures:

The decision in Erehwon Exploration mentioned above addressed the relationship between the Operator's standard of care imposed under Clause 304 of the 1981 CAPL Procedure and limits on the Operator's liability under Clause 401.

Revisions made to the 1990 CAPL Procedure will hopefully suffice to overcome the conclusion reached in Erehwon Exploration and other cases imposing an ordinary negligence standard of care upon the Operator.

In Erehwon Exploration, Madam Justice Hunt interpreted the 1981 version of the CAPL Operating Procedure. In this case, the parties had entered into a gas exploration agreement incorporating the 1981 CAPL. Various problems began to arise after a number of years of successful joint operations. The Plaintiff claimed among other allegations that the Defendant had acted inappropriately as operator by overcharging for certain activities and overpaying royalties. In her analysis endeavouring to reconcile the standard of "diligently, in a good and workmanlike manner, in accordance with good oilfield practice" with the "gross negligence" one, she concluded that:

Most importantly, I reject the suggestion that Art. IV was meant to relate to the standard of care applicable to the relations between the CAPL parties themselves, and in particular to the Operator's duty to the Non-Operators in carrying out the joint operations. In my opinion, Art. IV is most likely intended to deal with third party losses.

…Clause 304 obliges the Operator to carry out all operations "diligently, in a good and workmanlike manner, in accordance with good oilfield practices". With this starting point, it is hard to imagine that the parties could have intended Art. IV to mean that the Operator could then carry out its accounting obligations in a grossly negligent fashion. That they would agree, by contract, to stand behind the Operator for uninsured third party losses arising from actions that are "negligent" as opposed to "grossly negligent" is more understandable. Many operations carried out under CAPL are high-risk and the Non-Operators may be willing to accept that, as a "first among equals" acting on behalf of co-venturers, it would be expecting too much for the Operator to have responsibility for losses caused by its negligence. (at 222-3).

Proponents of the gross negligence standard tried to argue that this precedent was restricted in its application to joint venture accounting, a subject which admittedly permits of greater precision than the risky and unpredictable business of oil and gas exploration and development. This distinction was rejected by Justice Moshansky in the Morrison Petroleums decision. There he wrote:

[a]lthough the Erehwon Exploration case dealt with "accounting matters", I am of the view that the reasoning of Hunt J.'s therein applies equally to the question of the standard of care imposed upon an operator by the requirement in Clause 304 of CAPL 1981 to employ "good oilfield practices" with respect to all operations.

Clearly, if the plaintiff had intended that the defendants were to relieve it from liability for losses caused by its own negligence, other than third party claims, that could have been accomplished by requiring from the defendants an undertaking in the Participation Agreement not to sue for anything except wilful or gross negligence. ...[it is] hard to accept that parties herein intended such a cumbersome procedure as the use of Article IV of CAPL 1981 to exclude liability for negligence on the part of the operator Morrison. (at 106)

Thus there are two Alberta trial decisions ruling that the ordinary negligence standard is applicable to in Operator acting under a 1981 version of the CAPL Procedure.

Clause 401 in the 1990 version of the CAPL Procedure, quoted above, was revised in three important respects with the objective of limiting the Operator's general liability to the gross negligence or wilful misconduct standard of care. In an effort to negate by contractual drafting the effect of Erehwon and Morrison rulings, the language in bold type above was added.

As indicated by the marginal notes to the 1981 CAPL Procedure, "notwithstanding Clause 303 and 304" was added at the beginning of Clause 401, presumably to override the legal effect given these Clauses by the Erehwon and Morrison decisions. It is Clause 304 which specifies the good and workmanlike manner and good oilfield practice standard of care by the Operator.

Further additional language "whether contractual or tortious" is added in the fourth line and "whether negligent or otherwise" in the sixth line, presumably to overcome other aspects of the Erehwon rationale and to deter courts from interpreting Clause 401 as applicable solely to tortious liability.

These drafting changes will hopefully persuade Alberta Courts in future cases to impose upon an Operator acting pursuant to the 1990 CAPL Procedure the more lenient gross negligence standard of care - as intended by the oil and gas industry; however, these changes do not operate to lessen the duty of care imposed upon an Operator acting under earlier versions of the CAPL Procedure or other operating procedures.

John Petch is a partner with the Calgary office of Borden Ladner Gervais, LLP. He received his designation as Queen's Counsel in 1994. His practice focuses primarily on commercial litigation including oil and gas industry disputes.

INDEX OF CASES
1. Missouri Pacific Ry. Co. v. Shudford 72 Tex. 165, 10 S.W. 408, 411
2. Texas Pacific Coal & Oil Co. v. Robertson (1935), 79 S.W. 2d 830
3. McCulloch v. Murray, [1942] S.C.R. 141
4. Swanson v. Wilson (1956), 18 W.W.R. 49
5. Challand v. Bell (1959), 27 W.W.R. 182
6. Gustavson International v. B.P. Explorations (1977), 3 A.R. 221
7. R. v. Abbey (1983), 138 D.L.R. (3d) 202
8. Renaissance Resources Ltd. v. Metalore Resources Ltd. [1984] 4 W.W.R., 430
9. Passburg Petroleums v. San Antonio Explorations Ltd. and D. W. Axford & Associates Ltd. [1988] 2 W.W.R., 645
10. United Canso Oil & Gas Ltd. v. Washoe Northern Inc. et al (1991), 121 A.R. I
11. Erehwon Exploration Ltd. v. Northstar Energy Corp. (1994), 15 Alta. L.R. (3d) 200 at 224
12. Novalta Resources Ltd. v. Ortynsky Exploration Ltd. (1994) 151 A.R. 161
13. Morrison Petroleums Ltd. v. Phoenix Canada Oil Co. (1997), 198 A.R. 81
14. Coachlight Resources Ltd. v. Duce Oil Ltd. (1999), 181 Sask.R. 125
    Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Company (2001) ABQB 803