All For One and One For All
WRITTEN BY
MICHAEL A. THACKRAY, Q.C.
MCMILLAN AND ASSOCIATES
Spyglass Resources Corp. v. Bonavista Energy Corporation 2017 ABQB 504AS NOTED BY C.M. JONES J. IN THE SECOND PARAGRAPH OF HIS LENGTHY DECISION IN THIS CASE, the “facts of this matter are… convoluted”. My job for these pages is to make them not so.
To that end, at the constant and clear risk of over-simplifying, the streamlined facts are as follows. Operator (Bonavista) incurs abandonment costs at the direction of the AER. Joint-Operator (Spyglass, in receivership) does not pay its proportionate share of these costs on the basis that (for the most part), Joint-Operator did not approve the same. Operator sets-off “revenues” (actually non-cash gas-over-bitumen royalty credits, the “GOB Credits”) otherwise owing to the Joint-Operator as against the abandonment costs owing by the Joint-Operator. Joint-Operator (actually its receiver) cries fowl. CAPL Operating Procedures (1981 and 1990) and a CO&O Agreement govern, the CO&O Agreement importantly providing:
At the weigh-in, it was determined that the Operator largely ignored the Joint-Operator’s requests for a meeting to discuss the abandonment program and that the Joint Operator in fact never did approve the abandonment program.
602 Operator’s Lien
[…]
If an Owner fails to pay or advance any of the costs or expenses incurred for the Joint Account which are to be paid or advanced by it within the time period prescribed by the Accounting Procedure, Operator may, without limiting the Operator’s other rights as contained in this Agreement or otherwise held at law or in equity:
[…]
Set-off against the amount unpaid by such defaulting Owner, any sums due or accruing to such Owner from Operator pursuant to this Agreement. (emphasis C.M. Jones J.’s)
The above versus what is provided in Clause 505(b)(iii) of the CAPL 1990 Operating Procedure (there is no express set-off provision in the 1981 CAPL Operating Procedure) being:
505 (b) If a Joint-Operator fails to pay or advance any of the costs or expenses incurred for the joint account which are to be paid or advanced by it within the time period prescribed by the Accounting Procedure or Clause 502 or 503, as the case may be, the Operator may, without limiting the Operator’s other rights as contained in this Operating Procedure or otherwise held at law or in equity:
[…]
(iii) set-off against the amount unpaid by such defaulting Joint-Operator, any sums due or accruing to such Joint-Operator from the Operator pursuant to this Operating Procedure or any other agreement between the Operator and such Joint-Operator, whether executed before or after the effective date of the Agreement… (my emphasis)
Before getting to the main event, on the undercard was the issue of whether the Joint-Operator was liable for the abandonment costs in the first place. At the weigh-in, it was determined that the Operator largely ignored the Joint-Operator’s requests for a meeting to discuss the abandonment program and that the Joint Operator in fact never did approve the abandonment program. However, this notwithstanding and although his reasons are a bit skinny on this (sorry, sometimes I can’t help myself) and might in the future be restricted in application to these very particular facts, C.M. Jones J. determined that the Operator did not require approval from the Joint-Operator to incur expenses for the joint account relating to the regulatory obligation to abandon the subject assets and that while the Operator’s “… lack of responsiveness is unfortunate, I find that it does not make what was otherwise a proper expense for the Joint Account [the Operator’s] sole responsibility”. Third round TKO, now on to the main event being whether the Operator was entitled to net the abandonment costs against the GOB Credits.
Forced against the ropes early in the first round, the Joint-Operator acknowledged that the Operator could set-off the GOB Credits against unpaid amounts due or accruing to the Operator from the Joint-Operator under the CAPL Operating Procedures. However, fighting off the ropes, the Joint-Operator maintained that the CAPL Operating Procedures did not authorize the Operator to withhold the GOB Credits to offset disputed charges the Operator claimed owing to it under the CO&O Agreement and that the Operator had to maintain all of the assets for the joint account “in accordance with the distinct terms of [the two JOA’s and the CO&O]”. The Joint-Operator then maintained that Clause 602 of the CO&O Agreement (set out above) required the Operator to determine what, if any, amounts accruing to the Joint-Operator under the CO&O Agreement could be set-off against the abandonment costs and then factor that amount into the overall netting of the joint account. This would apparently have had the effect of reducing the set-off amount. The Operator countered that Clause 505(b)(iii) of the CAPL Operating Procedure (also set out above) clearly permits the Operator to set off any sums due or accruing due pursuant to any agreement between it and the Joint-Operator. In short, the broad set-off rights granted by the Operating Procedure are not prejudiced by the more limited set-off rights in the CO&O Agreement. The referee stepped in between the parties and bravely determined:
[79] While I agree that clause 602(b)(iii) of the CO&O purports to limit set-off to amounts due to a defaulting owner from the Operator pursuant to that Agreement, I do not view that clause as prohibiting Bonavista from netting receipts and disbursements arising in connection with the Joint Operations.
[80] I believe it would be inimical to the interests of parties whose activities are governed by a number of agreements, but for whom a single joint account is maintained, to deny the Operator the ability to net amounts coming into the joint account under some of those agreements against amounts payable from the joint account under other agreements. In my view, such netting should be permissible when various revenues and expenses, accounted for through the use of the joint account, reflect integrated operations.
[81] In this case, some aspects of the Joint Operations are governed by the JOAs and others by the CO&O, but the Joint Operations are directed at a common undertaking. While the unique terms of the various Agreements must be respected, I consider it appropriate to interpret the Agreements in the aggregate as permitting netting the GOB credits against the Abandonment Costs. Such an interpretation, in my view, gives business efficacy to the Agreements.
The Court then went on to discuss whether or not the Operator was entitled to legal set-off and equitable set-off (i.e., as distinct from the contractual set-off discussed above) specific to the GOB Credits. C.M. Jones J. determined that the GOB Credits were to be treated in a manner similar to other forms of revenue and therefore subject to rights of set-off. Further, as the equities favoured the Operator, this was also not a bar to recovery via set-off.
So, there we have it. In our already, ordinarily complicated contractual world of resource play exploration and development, caution must be taken when considering single agreement pieces of the puzzle in isolation. This decision serves as a good reminder that in many circumstances, joint account economics and operations will require that we consider and interpret each of the governing agreements with reference to each of the others.
Someday our industry might get simpler, but I doubt it…
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