Court Considers Unreasonably Withholding Consent under CAPL Operating Procedure in Precedent-Setting Decision

December 15, 2014

In IFP Technologies (Canada) v Encana Midstream and Marketing, 2014 ABQB 470, the Court clarified for the first time the circumstances in which a party that waives its right of first refusal under Article 24 of the 1990 CAPL Operating Procedure may withhold its consent to a disposition of the operator's interest.

The background facts leading to the case were that IFP purchased an unusual working interest in a heavy-oil field from Encana's corporate predecessor. The field was being developed with conventional production, but may have been a candidate for enhanced production by Steam Assisted Gravity Drainage (SAGD) or other enhanced recovery methods. The agreements between the parties limited IFP's working interest to thermal and enhanced production, with no benefit accruing to IFP for primary production. The agreements did not require Encana to undertake enhanced recovery operations.

In the early 2000s, Encana decided to pursue larger scale SAGD projects elsewhere and put the field up for sale. The purchaser proposed to continue development of the field with primary production. IFP waived its right of first refusal for the transaction, but withheld its consent to the disposition on the basis that the disposition would be detrimental to its working interest because the purchaser intended to develop the field only through conventional production and did not have the technology to pursue enhanced recovery. Encana proceeded to dispose of its interest in any event. After the purchaser proceeded with primary production, IFP sued Encana in breach of contract alleging that the primary production had ruined the prospect for thermal development and claiming losses between $45 and $70 million.

The Court accepted the argument advanced by Bennett Jones LLP, acting on behalf of Encana, that IFP acted unreasonably in withholding its consent. While IFP may have held the expectation that Encana would commence thermal enhanced recovery operations, there was no basis for such an expectation in the agreements and IFP could not have forced those operations. Encana had never committed to undertaking thermal operations, and IFP did not propose independent operations itself. Ultimately, IFP was no worse off after the disposition than it had been before.

In reaching its decision, the Court articulated several important principles:

• Given the absence of oil and gas jurisprudence, legal principles from the landlord/tenant context are relevant to considering whether consent was unreasonably withheld. These principles include that:
  • The burden of proof is on the party asserting that consent was unreasonably withheld;
  • The party whose consent is required is entitled to base its decision on its own interests alone;
  • Whether a person has acted reasonably in withholding consent depends on all the factual circumstances; and
  • A party must not refuse consent where such refusal is calculated to achieve a collateral purpose or benefit that is not contemplated by the original contract.
• A refusing party need not detail all of the reasons for its decision at the time that the refusal is given, but those reasons must have influenced the mind of the refuser at the relevant time, including after acquired evidence demonstrating reasonableness.
• If consent is unreasonably withheld, the operator is "freed" from the consent requirement.

Going forward, the case indicates that the Court will look at all the circumstances and undertake a contextual analysis to determine whether a party has unreasonably withheld consent under the standard form CAPL oil and gas operating agreement. Further, withholding consent will be unreasonable when the withholding party stands to compel as much under the proposed disposition as it would have been entitled to receive under the original agreement.

The case is currently under appeal.

If you have any questions about the decision and how it may affect you or your business, please contact Grant Stapon, QC, or Laura Gill.

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