Canada: Estoppel By Representation – Operator Has Duty To Communicate Clearly And Deal Fairly

Last Updated: November 5 2008
Article by Mike Laffin and Taryn Motter

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Energy – Oil & Gas, November 2008

The main question in Solara Exploration Ltd. v. Richmount Petroleum Ltd. is whether Richmount Petroleum Ltd. (Richmount) is estopped from denying that a test well was complete and, therefore, that Dyno Energy Ltd. (Dyno) earned an interest in the lands at 2-40-26W4M (the Farmout Lands).

Background

Richmount and Dyno, now Solara Exploration Ltd., entered into a Farmout Agreement on September 1, 2005 (the Agreement), whereby Richmount, the farmor, farmed out 25% of its interest to Dyno, the farmee. Twin Peaks Holdings Corp. (Twin Peaks) and R.M.U. Resources Ltd. (RMU) also had working interests in the Farmout Lands, but were not parties to the Agreement. Richmount was the operator. Under the Agreement, Dyno would contribute funds, and Richmount was obligated to "drill, test, complete, cap or abandon the test well" to enable Dyno to earn.

Richmount would send out authorizations for expenditures (AFEs) to the non-operators (Dyno, Twin Peaks and RMU) to pay for the costs of drilling and development of the test well. Pursuant to the Agreement, prior to earning, which only occurred after "completion, capping or abandonment" of the test well, Dyno was obligated to pay all amounts or lose their interest in the well and any future wells on the Farmout Lands. Richmount initially sent two AFE to the non-operators. AFE #801605 was characterized as relating to "Development Drilling", and AFE #110501, which was characterized as "Completion", each of which were promptly paid by Dyno, as well as the other parties.

On November 18, 2005, after completion of the above operations, the test well was flow-tested to establish an initial productive rate for gas. On November 19, 2005, the testers indicated that the test well flowed for seven hours at a final gas rate of 1.8267 103m3/day which was expected to stabilize at 1.521 103m3/day after six months. This flow rate was considered uneconomical, so Richmount determined that fracture stimulation was required in order to stimulate gas production. To pay for the fracture, Richmount sent out AFE #512003 which was described as a "Workover" on the first page and "Completion" on the second page, and costs were described as "Completion/Workover/Re-entry". Dyno decided the fracing was not going to be economical so they verbally informed Richmount it was not going to participate "in the workover". Following this discussion, Dyno sent a letter to Richmount on January 13, 2006 which advised that they had elected not to participate in the activities and indicated that they would be going penalty. It is well known in the oil and gas industry that a farmee can elect to not participate and go "penalty" only after they have earned their interest. It was clear Dyno was of the belief that the test well had been completed and that it had already earned.

Richmount did not respond to the letter until June 2006 when they informed Dyno that it had failed to earn an interest. Richmount asserted that Dyno's failure to comply with its obligations under the Agreement to pay its proportionate share of the costs resulted in repudiation of the Agreement.

In June 2006, the test well was tied in, equipped and placed on production, and a second well was drilled by Richmount on the Farmout Lands in the fall of 2006 which has been on production since January 9, 2007.

Result

1990 CAPL Operating Procedure: "Completion" means the installation in, on, or with respect to a well of all such production casing, tubing and wellhead equipment and all such other equipment and material necessary for the permanent preparation of the well for the taking of petroleum substances therefore up to and including the outlet valve on the wellhead and includes, as necessary, the perforating, stimulating, treating, fracing and swabbing of the well and the conduct of such production tests with respect to such well as are reasonably required to establish the initial producibility of the well.

The judge at the Court of Queen's Bench of Alberta considered the definition of "Completion" in the 1990 CAPL Operating Procedure and interpreted it to have three aspects: the first addressing the equipment and material necessary for the permanent preparation of the well for the taking of petroleum substances; the second being that "completion" includes, as necessary, the perforating, stimulation, fracing and swabbing of the well; and the third being directed towards the production tests that are reasonably required to establish the initial productivity of the well. Dyno argued the need to "establish the initial producibility of the well" is the key aspect of that definition, and that that element had been met. The judge was of the view that the definition required "installation of all equipment and material necessary for the permanent preparation of the well for the taking of petroleum products", and that the onus of proving these elements were satisfied rested on Dyno. After consideration of all the evidence, the judge was not satisfied that Dyno had proven the above on a balance of probabilities.

The judge also determined that no breach of contract on the part of Richmount had been established that would lead to a declaration that Dyno had earned an interest. It was, however, determined that Richmount had an obligation, as operator under the Agreement, to disclose information which would impact on Dyno's ability to earn its interest. Despite earlier case law, when a party has a duty to disclose information, choosing to remain silent can amount to a representation. By failing to respond to the January 13, 2006 letter, the judge was of the view that Richmount represented the condition of completion had been met, which it could not now deny, and therefore was subject to estoppel by representation. Steven Waddams in The Law of Contracts (5th ed. at para.193) states: "The basic concept of estoppel is that a person is precluded from retracting a statement upon which another has relied". The judge found the AFEs sent by Richmount sent mixed messages, and through the letter, Richmount knew Dyno believed it had earned; Richmount's silence created reliance on that state of belief. The judge accepted that had Dyno known it needed to pay its share of the fracing to earn, that it would have contributed the requested funds.

As estoppel can be used as a sword when dealing with estoppel by representation, the judge found that Richmount had an obligation to respond to Dyno's assertion that it earned and was therefore now estopped from denying that Dyno earned 25% of Richmount's interest in the Farmout Lands. The judge declared that Dyno earned their interest in both wells on the Farmout Lands, that Richmount was required to provide a full accounting in relation to all costs and production for the test well, and that Dyno was required to pay at the penalty rate.

Conclusion

Operators are, by the nature of their position, privy to information that non-operators are not. When an operator/farmor is aware of information that affects a non-operator/farmee's ability to earn, remaining silent will not be deemed adequate to meet the operator's duties. It is the farmor's responsibility to ensure the farmee has sufficient and correct information to make informed decisions, if the farmor fails in this duty, and the farmee relies on such misinformation which results in loss to the farmee, then the farmor may be estopped from benefiting from the lack of information or from misinformation.

This case emphasizes the obligation that operators have to non-operators to communicate clearly and deal fairly, especially when the information is critical to a party's earning. While it is not a common situation for the farmor to also be the operator, it is easy to see that the duty to communicate clearly and provide adequate information could be applied to any situation involving operators. Operators must keep these duties in mind when corresponding with non-operators.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
30 Oct 2019, Other, Toronto, Canada

The materials on the Blakes Business Class website are provided for informational purposes only. Accessing this information does not create a lawyer-client relationship.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions