Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652

Court of Queen ’ s Bench of Alberta Citation: Bernum Petroleum Ltd v Birch Lake Energy Inc, 2014 ABQB 652 Date: 20141028 Docket: 1301 03481 Registry: Calgary Between: Bernum Petroleum Ltd. Plaintiff/ Defendant by Counterclaim - and - Birch Lake Energy Inc. Defendant/ Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice D. L. Pentelechuk _______________________________________________________ Overview [ 1 ] Birch Lake appeals an O rder of the Master awarding

summary judgment to Bernum.

Bernum appeals that portion of the Order staying enforcement of its judgment until July 31, 2014 or until the determination of Birch Lake’s Counterclaim in relation to a leasehold interest on lands known as “Section 17”. [ 2 ] The parties entered a joint operation agreement to acquire petroleum and natural gas leases to certain lands located near the Lochend field, west of Calgary, with a view to exploring and developing operations for horizontal oil wells. [ 3 ] Bernum was the operator and held a 60 percent working interest with respect to the acquisition of mineral rights and petroleum production on the lands and could propose, to Birch Lake, the drilling of wells as independent operations.

Birch Lake held a 40 percent working interest on those projects it chose to participate in, and a corresponding obligation to pay 40 percent of the drilling

costs. If Birch Lake chose not to participate, however, it would be subject to production penalties. [4] Bernum obtained judgment for the debt owed to it by Birch Lake under an Area of Mutual Interest Agreement (the AMIAgreement) and the Canadian Association of Landmen Operating Procedure ( the CAPL). [5] Birch Lake resisted

summary judgment on the basis Bernum’s operation of the well in question was “grossly negligent”.Birch Lake also argued Bernum breached its duty of care and was grossly negligent in failing to negotiate an extension of the lease onSection 17 to Birch Lake’s detriment. [6] The Master held there was no evidence of facts to support the allegation Bernum was grossly negligent in its operations ofthe 4-3 well and granted Bernum

summary judgment for $1,131,143.27, less set-offs. [7] The Master held Birch Lake’s claim for damages in relation to the

Section 17 lease should go to trial. As Birch Lake had anarguable case for equitable set off, the Master ordered that Bernum’s judgment be stayed until the earlier of July 31, 2014 or thedetermination of Birch Lake’s Counterclaim for damages in relation to

Section 17. [8] The question raised in these appeals is whether the following issues can be determined fairly and justly on the record or isthere an issue of merit that genuinely requires trial: • Whether Bernum was grossly negligent in its operation of the wells; • Whether Bernum owed Birch Lake a duty of care in relation to its dealings on the leases and whether Bernum was grosslynegligent or breached its fiduciary duty in that regard; • Whether there is a reasonable prospect that equitable set-off would be the determination at trial with respect to Birch Lake’sCounterclaim for damages, and whether, if

summary judgment is granted to Bernum, the Court should exercise its inherent discretionand impose a stay pending determination of Birch Lake’s Counterclaim. [9] In my view, a sufficient record exists before me to conclude the Master was correct in granting

summary judgment toBernum. Further, I agree with the Master that Birch Lake’s Counterclaim for damages in relation to Bernum’s handling of the leasesshould go to trial. I have concluded that the terms of the 2007 CAPL prevent Birch Lake from claiming set-off as a defence to Bernum’sclaim and this is not an appropriate case to stay Bernum’s

summary judgment.

The Appeal is De Novo and the Standard of Review is Reasonableness [10] Since the Master issued his Reasons for Decision in July 2013, both parties have adduced further evidence under rule 6.14,which they agree is relevant and material to this appeal. [11] Despite rule 6.14 referring to an appeal “on the record”, the appeal is de novo: Van Camp v Chrome Horse Motorcycle Inc,2012 ABQB 175, 535 AR 271 ; Bahcheli v Yorkton Securities Inc, 2012 ABCA 166, 524 AR 382; Paramount Mortgage Corp vAvenue AH Construction GP Corp, 2014 ABQB 84 at paras 7-11. [12] The standard of review is set out in P Burns Resources Ltd v Locke, Stock & Barrel Company Ltd, 2014 ABCA 40 at para 11:The decision to grant

summary judgment is reviewed for reasonableness, and the identification of the legal test for

summary judgment isreviewed for correctness: Mraiche Investment Corp v. Paul, 2012 ABCA 95 (Alta. C.A.) at para 31, (2012), 524 A.R. 151 (Alta. C.A.).Contractual

interpretation involving questions of law are reviewed on the correctness standard: Meyer v. Partec Lavalin Inc, 2001ABCA 145 (Alta. C.A.) at para 11, (2001), 281 A.R. 339 (Alta. C.A.); leave denied, (2002), [2001] S.C.C.A. No. 453 (S.C.C.); Jager v.Liberty Mutual Fire Insurance Co, 2001 ABCA 163, 281 A.R. 273 (Alta. C.A.) at para 14. Test for

Summary Judgment [13] Rule 7.3 of the Alberta Rules of Court provides: A party may apply to the Court for

summary judgment in respect of all or part of the claim on one or more of the following grounds: (

a) there is no defence to a claim or part of it; (

b) there is no merit to a claim or part of it; (

c) the only real issue is the amount to be awarded. [14] Traditionally, the bar on a motion for

summary judgment was high. The party seeking

summary judgment had to show “nogenuine issue of material fact requiring trial”: Guaranteed Company of North America v Gordon Capital Corp, (SCC), [1999] 3 SCR 423, 178 DLR (4th) 1. It had to be plain and obvious or beyond doubt that no genuine issue for trial existed:732311 Alberta Ltd v Paradise Bay Spa & Tub Warehouse Inc, 2003 ABCA 362, [2004] 5 WWR 59. [15] The landscape for

summary judgment applications has since changed with the Supreme Court of Canada’s decision in Hryniak v Mauldin, 2014 SCC 7, 366 DLR (4th) 641. The Court spoke of the necessity of a “cultural shift” because resolving disputesthrough trial is, in the majority of cases, an overly protracted and expensive process. The court process should allow for resolution ofmatters well before they are ready for trial. As a consequence, the Court said

summary judgment rules should be interpreted broadly,with a focus on proportionality and affordable, efficient and just resolution. [16] In Hyrniak, the Court focused on Ontario’s two-stage approach to

summary judgment under its recently amended Rule 20.

The second stage of that rule involves a discretionary use of enhanced fact finding powers to weigh evidence, evaluate credibility and draw reasonable inferences from the evidence and order presentation of oral evidence, which is a very different procedure from

summary judgment applications under our Rule 7.3. [ 17 ] However, the test espoused in Hyrniak for

summary judgment is still applicable: 49 There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits of a motion for

summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the Judge to apply the law to the facts, (3) is a proportionate, more expeditious and less expensive means to achieve a just result. [ 18 ] The Alberta Court of Appeal has confirmed that the modern test for

summary judgment is to examine the record to see if a disposition that is fair and just to both parties can be made on the existing record: Windsor v Canadian Pacific Railway Ltd , 2014 ABCA 108 at paras 13-16 , 371 DLR (4 th ) 339. The Court also endorsed the culture shift referenced in Hryniak , stating that the purpose of interlocutory applications is primarily to prepare an action for resolution, not to prepare an action for trial: Windsor at para 15 . [ 19 ] Traditionally, questions of fact and credibility required trial, while questions of law and uncontested facts need not.

As Master Schlosser recently noted, it remains to be seen whether a Chambers Judge in this Province can now find facts or determine credibility: 1214777 Alberta Ltd v 480955 Alberta Ltd , 2014 ABQB 301 at para 15 . Similarly, Burrows, J. noted that the Court in Windsor did not directly address the scope of a Judge’s authority to weigh evidence, assess credibility or to draw inferences from the evidence: AT Films Inc v Plastics Inc , 2014 ABQB 422 at para 19 .

The Master, however, concludes that when a Court determines whether there is ‘any issue of merit that genuinely requires a trial’ the evidential threshold remains ‘plain and obvious’ or ‘beyond doubt’, not the lower standard akin to a balance of probabilities: 12147771 Alberta Ltd at paras 21-22. Burrows, J., meanwhile, held that in determining whether there is “in fact any issue of ‘merit’ that genuinely requires trial”, the standard is no longer “plain and obvious or clear or beyond doubt”: AT Films Inc at para 22 . [ 20 ] With respect, I agree with Burrows J. that the test for

summary judgment is now less stringent, but the test does not require the judge to weigh the evidence or “determine whether that party’s evidence actually proves the fact sought to be proved”. This approach, in my view, best encapsulates the goals of proportionality, increased expediency and decreased cost if the matter can be determined on the existing record, in a manner that is fair and just to both parties. Gross Negligence in the Operation of the Wells Background [ 21 ] The lawsuit involves five sections of land to which the parties held a mutual interest.

They acquired the leases for the mineral rights and petroleum exploration and drilling occurred on two of these sections. [ 22 ] In October 2012, Bernum served an Independent Operations N otice ( ION) on Birch Lake , indicating its intention to drill a well on S ection 19 (the 16-19 well).

It also served an Authorization for Expenditures (AFE), estimating the cost of drilling at $3,345,300. [ 23 ] Birch Lake approved the AFE and agreed to participate, thus agreeing to pay 40 percent of the costs and expenses incurred in the operation. [ 24 ] On October 17, 2012, Bernum also served notice on Birch Lake of its intention to drill another well on

Section 3 (the 4-3 well). Birch Lake elected to participate and did pay its share of costs in the amount of $1,197,280. Drilling of the 4-3 well began in November 2012. In December, Bernum issued another AFE to complete the 4-3 well. Birch Lake agreed to participate and paid in 40% share being $466,200.00. [ 25 ] The operations on the 4-3 well were completed in February, 2013. The 4-3 well remains in production. [ 26 ] The 16-19 well, however, was a failure and was abandoned on January 4 , 2013. Problems were encountered in drilling the 16-19 well which necessitated abandoning the horizontal

section of the well to drill a new horizontal

section adjacent to it. Bernum issued an ION to Birch Lake on February 14 in relation to the new horizontal section, but Birch Lake elected not to participate, thus ending its involvement in this well. [ 27 ] In December , 2012, Bernum issued a cash call to Birch Lake for $1,338,120.00 in relation to the 16-19 well, and a cash call in February, 2013 for $193,920.00 for to equipping the 4-3 well. [ 28 ] Birch Lake issued emails to Bernum acknowledging its indebtedness but later refused to pay alleging Bernum was grossly negligent in its operations of the 16-19 and 4-3 wells.

Bernum has been setting off Birch Lake’s 40 percent share on the 4-3 well to reduce the indebtedness. Bernum estimates the amount currently owing is just under $1 million. [ 29 ] The evidence establishes Birch Lake’s indebtness to Bernum. [ 30 ] Under the 2007 CAPL, Bernum’s liability to Birch Lake is restricted to cases of gross negligence or wilful misconduct.

Section 4.02 of the CAPL states:

Limit of Operator’s Legal Responsibility: The Operator, its Affiliates and their respective directors, officers and employees will not be liable to any of the Non-Operators for anyLosses and Liabilities resulting from or in any way attributable to or arising out of any act, omission or failure to act, whether negligentor otherwise, of the Operator or its Affiliates and their respective directors, officers, agents, contractors or employees in the performanceof the Operator’s duties under this Agreement (including those in planning or conducting any Joint Operation), except insofar as: (

a) those Losses and Liabilities are a direct result of, or are directly attributable to the Gross Negligence or Wilful Misconduct of theOperator, its Affiliates or their respective directors, officers, employees, agents or contractors; (

b) the Operator may otherwise be liable to any Party for breach of any of its contractual obligations as Operator under thisAgreement, other than for its duties under Clause 3.04, Subclause 3.05A or Subclause 3.10A. [31] The CAPL defines “Gross Negligence or Wilful Misconduct” as: .... any act, omission or failure to act (whether sole, joint or concurrent) by a person that was intended to cause, or was in recklessdisregard of, or wanton indifference to, the harmful consequences to the safety or property of another person or to the environment whichthe person acting or failing to act knew (or should have known) would result from such act, omission or failure to act.

However, GrossNegligence or Wilful Misconduct does not include any act, omission or failure to act insofar as it: (

i) constituted mere ordinarynegligence; or (ii) was done or omitted in accordance with the express instructions or approval of all Parties, insofar as the act, omissionor failure to act otherwise constituting Gross Negligence or Wilful Misconduct was inherent in those instructions or that approval. [32] At common law, “gross negligence” has been defined as: • “conduct in which, if there is not conscious wrongdoing, there is a very marked departure from the standards”: McCullochv Murray, (SCC), [1942] SCR 141 at p 145, [1942] 2 DLR 179; • “a very marked departure from the standards by which reasonable and competent companies in a like position to that ofAsamera and Lasmer as Managing Operators in charge of joint ventures”: United Canso Oil & Gas Ltd v Washoe Northern Inc, (1991) (AB KB), 121 AR 1; 78 Alta LR (2d) 79. [33] The Alberta Court of Appeal considered the test for gross negligence in the context of the 1990 CAPL and concluded the caselaw directs that gross negligence is “very great negligence”, or a “conscious wrongdoing” or a “very marked departure” from thestandard of care required: Adeco Exploration Company Ltd v Hunt Oil Co of Canada Inc, 2008 ABCA 214 at para 55, 437 AR 33,citing the Supreme Court of Canada decision in Holland v Toronto (City), (SCC), [1927] SCR 242, 59 OLR 628 at 634. [34] Finally, courts have suggested gross negligence requires “such a degree of negligence as excludes the loosest degree of care”:Horizon Resource Management Ltd v Blaze Energy Ltd, 2011 ABQB 658 at para 989, 526 AR 206; varied on other grounds at 2013ABCA 139. [35] With that backdrop, I will summarize the “foot” Birch Lake has put forward regarding its allegation of gross negligence.

A. 4-3 Well [36] Birch Lake relies on the expert evidence of Larry Smith, a petroleum engineer who consulted to Birch Lake. [37] In his first Affidavit, Mr. Smith points to errors in the operation of the 4-3 well which are summarized as follows: • Bernum drilled the casing down 101 meters less than the well, and this was due to an inadequate mud program or poor executionof that program.

As a result, the well was not cemented to its full depth and this put the well at risk for collapse; • Following fracking, Bernum attempted to drill out the frac ports and balls to try to increase flow rates and production, but wasunable to do so as it could not penetrate to the depth of the production liner.

In Smith’s opinion, the obstruction was caused by Bernumexceeding the industry standards for collapse pressure rating of the liner during a stage of the fracking process, causing the liner tocollapse; • Bernum’s completion program did not address collapse pressure. [38] Smith does not detail what he bases his opinion on nor does he explain the factual underpinnings to his conclusion that thedifferential pressure of the liner was exceeded such that the exterior pressure exceeded the interior pressure to the extent a collapseoccurred.

B. 16-19 Well [39] After the application before the Master, Birch Lake filed a second Affidavit from Smith detailing issues with the 16-19 well: • The casing of the16-19 well was drilled and cemented 200 meters less than the well, leaving 200 metres uncased below the shoe,at the very end of the well.

The failure to case the entire depth was due to an improper mud system; • Bernum attempted to run the well casing with poor well bore conditions, and then shut down the drilling operations for five daysin December, which exposed the uncompleted well bore to adverse conditions resulting in the ultimate loss of the well bore; • When drilling resumed, Bernum drilled the well but had to pull out to make repairs to the drilling rig. When it resumed drilling,

Bernum was only able to reach a depth over 1000 meters short of well depth. Smith attributes this to Bernum’s inadequate mud system; • As a consequence, Bernum abandoned the nearly complete horizontal section, cut a “window” in the intermediate casing and began a new horizontal section. [ 40 ] In particular, Birch Lake argues Bernum’s decision to employ the same mud system on the 16-19 well, after experiencing problems with the 4-3 well, constitutes gross negligence. The mud system is critical as it holds the oil and gas while drilling, preventing its escape to the surface.

It also holds the drilling hole open and it carries the cuttings away to the surface. [ 41 ] In response, Bernum denies it was either negligent or grossly negligent in its operations of the 4-3 and 16-19 wells.

Bernum does not offer an expert opinion but provides Affidavits from Michael Ponto, Bernum’s Vice President of Land and Development. [ 42 ] The evidence shows that in late October, 2012 before the 4-3 well was drilled, Bernum sent Birch Lake a copy of the drilling program that indicated the proposed use of the water based mud system. [ 43 ] Although Smith said he did raise concerns with the use of Bernum’s mud program, no evidence was produced to indicate those concerns were raised before drilling was initiated on the wells.

Further, Birch Lake was aware of the obstruction encountered during drilling of the 4-3 well by December 19 and acknowledged that many things can go wrong during drilling including excessive drag, wandering out of the zone of interest, mechanical problems, cave in or sloughing of the well. [ 44 ] Birch Lake had knowledge that Bernum intended to use the same mud program on the 16-19 well in early December.

In early January, Birch Lake was advised of the revised directional plan on 16-19 and Bernum agreed to change the mud program as raised in discussions with Smith and Bernum. [ 45 ] Most importantly, Smith acknowledged on cross examination that the elevated pressure reading referenced in his Affidavit (54.6 MPa’

s) which occurred during the stage 9 fracturing was a surface break down pressure reading and not a differential pressure reading, which is the critical reading in determining whether the liner is at risk for collapse. The materials before the Court suggest the differential pressure for the liner on the 4-3 well was 52.1 MPa’s, meaning the external pressure would have had to have been 52.1 Mpa’s greater than the internal pressure to risk collapse of the liner. As stated previously, in his Questioning on Affidavit, Smith admitted he did not take the differential pressure into account.

The records shows that on December 11, the maximum pressure reached was 58 MPa’s but it is not clear what that pressure reading refers to. [ 46 ] The determination of each case of gross negligence or wilful misconduct is not only fact- but context-specific. The oil and gas industry is a high risk, speculative business, particularly for junior participants who often operate on precarious financial foundations. As admitted by the parties, many things can go wrong during the course of drilling, resulting in unanticipated delays and cost overruns.

Often, decisions in the course of drilling must be made quickly without time for extended consultation or analysis. A well may not produce as expected or may not produce at all. [ 47 ] It appears that over the years, the protection afforded an operator has expanded under various versions of the CAPL. No doubt, there are sound policy reasons for doing so as the operator shoulders the majority of the financial risk in drilling operations. [ 48 ] Bernum held a 60 percent working interest and was motivated to ensure the drilling operations were carried out as expeditiously and economically as possible.

Its own revenue depended on it. The definition of gross negligence in the CAPL and the case law all point to a degree of intentionality in the act or omission.

While there is an arguable issue as to whether or not Birch Lake expressly consented to the drilling operation proposed, there is extensive evidence that they were kept informed during the process and were consulted with. [ 49 ] In my view, what is critically absent from Smith’s opinion is what process Bernum should have used to avoid the delays and loss of production in question. [ 50 ] There is nothing on the record to suggest the 4-3 well would have produced at a higher rate had a different mud system been employed or that the difficulties with the 16-19 well would have been avoided if different drilling operations were employed.

In other words, while there is criticism aimed primarily at the mud system utilized, it begs the question whether utilization of a different mud system would have led to a different result.

With the benefit of hindsight and time, it may be established that utilization of a different mud system would have been preferable in the circumstances, but Birch Lake must put its “best foot” forward now. [ 51 ] Taking Birch Lake’s evidence at its highest and ignoring the evidence put forward by Bernum, Birch Lake has failed to establish that its defence of gross negligence in relation to the operation of the wells is an issue of merit requiring a trial. The record does not disclose evidence showing a conscious wrongdoing or a very marked departure from the standard expected of an operator like Bernum.

Part of the problem is Birch Lake’s failure to lead evidence on industry standards by which the actions of Bernum could be compared. For example, Birch Lake points to Bernum’s choice of mud programs, and its decision to use the same program on the 16-19 well, but provides no evidence to suggest the mud system utilized was contrary to industry standards. In contrast, Bernum led evidence that the mud program utilized is the standard program used by operators in the area. [ 52 ] Further, the second part of the liability exclusion in the CAPL excludes acts or omissions approved by the parties.

Bernum points out that Birch Lake did not raise an issue with Bernum’s operation of the wells until after it was sued and further, that Birch Lake had knowledge of and participated in the drilling operation plan. Birch Lake is a sophisticated partner with experts of its own, including Larry Smith. Had there been a very marked departure from expected standards or signs of very great negligence, one would expect Birch Lake to have expressed its concerns earlier. [ 53 ] Nor do I think Mr. Smith deposing on the ultimate issue gets Birch Lake over the threshold.

In Smith’s second Affidavit, filed after the Master’s decision, he deposes that in his opinion, Bernum’s conduct was “grossly negligent”, was a “very marked departure from the typical standards [of] competent oil field operators” and “in reckless disregard and wanton indifference to the consequences of its actions”: Affidavit of Larry Smith sworn January 6, 2014.

[54] While there is no automatic rule that an expert’s evidence on the ultimate issue must be excluded, courts should proceedcautiously in accepting such opinion evidence. To be admissible, expert evidence must satisfy the requirements established in R v Mohan, (SCC), [1994] 2 SCR 9, 114 DLR (4th) 419, including the threshold tests of reliability and necessity. Whetheror not Bernum was grossly negligent is a question of fact within the purview of the trier of fact. Here, Mr.

Smith’s opinion on theultimate issue- whether Bernum was guilty of gross negligence or wilful misconduct- must be considered an expression of his personalopinion. It is not grounded in an analysis of the standard expected of an operator like Bernum, nor is it grounded in an analysis of whyBernum’s actions crossed the Rubicon and became the intentional disregard or the “very great negligence” that would translate toliability under the CAPL. [55] In

summary, the definition of gross negligence is clear and unambiguous. Not only is the onus high but it specifically exemptsany procedures which Birch Lake expressly consented to.

In my view, even with the additional Affidavit evidence proffered by Smith,there is no evidence of the necessary intentionality or conscious indifference necessary to ground gross negligence or wilful misconduct.Further, Smith’s opinion, taken at its highest, is eroded by his admission that he did not take into account or determine the differentialpressure readings on the liner of the 4-3 well which is the critical reading and assessing when the liner is at risk for collapse.

There is noevidence that Birch Lake was misled as to the drilling plan to be implemented or that it objected to the mud system being utilized prior tosigning the AFE’s. [56] On this question, I agree with the Master that Bernum should be granted

summary judgment in the amount of $1,131,143.27less applicable set offs and that Birch Lake’s claim for damages in relation to the operation of the 4-3 and 16-19 wells is for the reasonsoutlined, summarily dismissed. Gross Negligence, Wilful Misconduct or Breach of Fiduciary Duty in Relation to the

Section 7, 8 and 17 Leases Background [57] Birch Lake alleges Bernum is liable for damages for failing to renew the leases on Sections 7, 8 and 17, for failing to obtain adrilling license on

Section 17, for failing to offer Birch Lake participation rights on these leases, and for failing to offer it participationrights in the other lands. [58] Bernum’s liability depends on the determination of two issues: • Whether the AMI Agreement was still in force in 2012 and 2013; and • Whether Bernum was grossly negligent in its handling of the lease renewals, drilling licences and participation rights or whetherits actions amount to wilful misconduct or breach of fiduciary duty. [59] The parties acquired their leasehold interests through assignments to an Area of Mutual Interest Agreement (the AMIAgreement) that was in force until December 31, 2010.

Through mutual agreement of Bernum and Birch Lake, the term of the AMIcould be amended: 4.Areas of Mutual Interest (

b) Either the term and/or the boundaries of the Area of Mutual Interest may be amended with the mutual agreement of the partieshereto. [60] The parties entered into an Inclusion Agreement in March of 2011 to include additional lands under the AMI. The partiesagree all of the lands and leases in question are referenced in the AMI and Inclusion Agreements. The Inclusion Agreement provides thatleases acquired by the parties would be governed by the terms and conditions of the AMI Agreement.

The Inclusion Agreement alsostates the AMI Agreement was “ratified and confirmed and all terms, provisions and covenants thereof shall remain in full force andeffect.” [61] Under the AMI, the development of any AMI lands obtained prior to December 31, 2010 is subject to the AMI, includingapplicable operating procedures, for as long as those lands are jointly held by the parties to the AMI, which typically runs past thetermination date of the AMI. Was the AMI Agreement in Effect?

Decision of the Master [62] The Master held there was a triable issue on whether or not the AMI Agreement had expired as this involved the interplay ofthe AMI Agreement, the Inclusion Agreement and the terms of the CAPL which was expressly incorporated into the AMI Agreement.At the time of his decision, Birch Lake claimed damages only in relation to Bernum’s failure to offer it participation rights on therenewal of the

Section 17 lease. [63] The Master stated: It seems difficult to accept that Birch Lake was going to take a 40 percent interest in

section 17, and for the reasons expressed earlier inthis judgment, there is some real doubt in my mind whether the AMI had actually expired and been left expired, or whether the inclusionagreement had essentially renewed it.

[ 64 ] While the parties acknowledge the five sections of land in issue are referenced in the AMI Agreement, they disagree on whether or not the AMI Agreement had expired at the relevant times. While Birch Lake acknowledges the terms of the AMI Agreement were never expressly extended in writing, it argues the terms of the AMI do not require amendments (and an extension) to be in writing.

It argues the parties have treated the AMI as being in full force and effect and continually binding on the parties. [ 65 ] Bernum, however, argues that the AMI Agreement had expired at the point the original leases on Sections 7, 8 and 17 ended and it had no further obligations to Birch Lake. Although it offered Birch Lake participation rights in lands in May of 2011, after the expiration of the AMI, it expressly qualified the offer to state the offer did not indicate a willingness to extend the terms of the AMI.

Relying on the terms of the CAPL, it argues any extension of the AMI term had to be made in writing. [ 66 ] It is clear the AMI Agreement incorporates the terms and conditions of the CAPL. [ 67 ] Clause 1.09 of the CAPL states: No Amendment Except in Writing Except as otherwise provided herein, amendments to this Agreement must be in writing and executed by all Parties. However, clause 1.04 of the CAPL states: Conflicts A. Conflicts Within Agreement or With Regulations If there is a conflict between a provision of the Head Agreement and that of a

Schedule (including this Operating Procedure), the provision of the Head Agreement will prevail. .... [ 68 ] Giving effect to the clear terms of these agreements, the terms of the AMI agreement govern and the term of the AMI can be extended “with the mutual agreement of the parties hereto”.

This does not require that the amendment be in writing. [ 69 ] As operator, Bernum was also the “Title Administrator” under the CAPL, tasked with keeping the leases in good standing and maintaining them, “including all amendments, renewals, extensions, continuations or replacements”: CAPL clause 1.10 [ 70 ] Bernum admits that as operator, it was responsible to manage the joint property diligently, in accordance with good oil field practice, and that it also had a duty to act in the best interest of all parties.

It was also responsible for keeping Birch Lake informed of developments regarding the property, provide them with copies of correspondence and to consult with Birch Lake regarding any material decisions about the maintenance of title documents. Bernum’s liability in this regard is limited to gross negligence and willful misconduct [ 71 ]

Section 3.04 of the CAPL states: Proper Practices in Joint Operations The Operator will manage all Joint Property and conduct all Joint Operations diligently, in a good and workmanlike manner, in compliance with the Title Documents and the Regulations and in accordance with good oilfield practice, including prudent reservoir management and conservation principles. Insofar as the Operator hires contractors hereunder, it will supervise them as is reasonable.

Notwithstanding the preceding portion of this Clause, a breach of the obligations contained in this Clause will not result in any form of liability (whether in tort, contract or otherwise) of the Operator to the Parties, except insofar as the conduct to which the breach pertains constitutes Gross Negligence or Wilful Misconduct for which the Operator is solely responsible under

Article 4.00. [ 72 ] Bernum suggests it is non-sensical that the AMI, Inclusion Agreement and CAPL should be interpreted as giving Birch Lake perpetual rights of participation in the lands. That may be so, but the record discloses that Bernum, through its actions and communication with Birch Lake, acknowledged its obligation to maintain their respective interests through lease renewals or by commencing drilling operations.

The CAPL terms expressly state these obligations. [ 73 ] The fact Bernum offered participation rights to Birch Lake in May of 2011, expressly stating such offers were not to be considered an extension of the AMI , is not, in my view, conclusive of the matter.

The issue of whether Bernum had ongoing duties and responsibilities to Birch Lake to negotiate lease renewals or commence drilling operations and to keep them informed in that regard, cannot fairly be decided on the record before me as it involves questions of fact and assessments of credibility. [ 74 ] Additionally, it may be that the Statute of Frauds would apply to the alleged ongoing nature of the AMI as a result of the amendment. This was not pleaded. In any event, it is not clear on the record as to whether the Statute of Frauds should apply in the case at bar.

This is but one more reason why this aspect of Birch Lake’s claim should proceed to trial. Gross Negligence, Wilful Misconduct or Breach of Fiduciary duty in Bernum’s Handling of the Leases [ 75 ] As stated previously, in order to establish liability against Bernum, Birch Lake must establish that its loss of participation rights under these leases is a result of Bernum’s gross negligence or wilful misconduct. [ 76 ] In Adeco Exploration , the Alberta Court of Appeal considered the equivalent liability provision in the 1990 CAPL.

The earlier CAPL provision limited liability “ for any loss, expense, injury, death or damage, whether contractual or tortious....” At issue

was whether the operator was liable for failing to renew a lease. The Court applied this

section to limit the operator’s liability to grossnegligence and held that the operator’s system for renewals was ad hoc, reactionary, and overseen by unqualified personnel andamounted to gross negligence. Further, this case is authority that an operator may well have fiduciary duties to non-operators like BirchLake. Most cases involving the imposition of a fiduciary duty will involve intentional conduct or gaining of an advantage. [77] Bernum signed 3-year petroleum and natural gas leases with Signalta Resources Ltd. (Signalta) on Sections 7, 8 and 17. [78] These leases formed part of the AMI & Inclusion Agreements. [79] Under the terms of those agreements, the lease on

Section 17 would expire in March 2013 and the lease on Sections 7 and 8would expire in September 2013 unless Bernum and Birch Lake commenced operations before those dates. [80] Birch Lake led evidence that Bernum explored renewing the leases with Signalta through most of 2012. Birch Lake was notcopied with this communication nor was it involved in the negotiations. Operations did not commence on

Section 17 before the end ofthe lease; therefore, to preserve the parties’ rights, the lease would have to be renewed. Birch Lake led evidence that Bernum withdrewfrom negotiations without informing them and later advised the lease would expire as they were unable to meet the drilling deadline. [81] It was later discovered that in January 2013, Bernum reached an agreement with Signalta to sign four new leases each for aquarter

section of

Section 17. The leases were dated March 13, 2013, the day after the original lease had expired. The new leases did notinclude Birch Lake. [82] In January 2013, Bernum advised Birch Lake it was moving ahead with attempts to drill on Sections 7 and 8 but later advisedBirch Lake they were unable to get licenses before the expiration of these leases and as a result, the leases on Sections 7 and 8 wouldexpire in September. [83] Concurrently, Bernum advised Signalta it was withdrawing from negotiations for renewal of the

Section 7 and 8 leases.Sometime later, Bernum entered into new leases with Signalta for Sections 7 and 8 and obtained licenses to drill these sections inOctober of 2013, without involving Birch Lake. [84] Birch Lake filed a Statement of Defence and Counterclaim alleging in part, that Bernum breached its fiduciary duty to BirchLake by failing to renew the petroleum and natural gas lease on

Section 17, resulting in decreased production of the well. Following theMaster’s decision, Birch Lake filed an Amended Statement of Defence and Amended Counterclaim to also reference the leases onSections 7 and 8. [85] Bernum’s response to these claims is that the AMI had expired in December of 2010 and therefore, it was not required todisclose details of its lease renewal negotiations or its drilling applications. [86] The issue of whether or not the AMI had been renewed through the parties’ conduct is, as the Master found, an issue thatshould be determined at trial.

Bernum’s communication with Birch Lake suggests it recognized a duty to commence drilling operationsbefore the end of the leases or negotiate renewals in order to preserve the parties’ rights. [87] The evidence led by Birch Lake presents an arguable case that Bernum failed to communicate, or worse, misled Birch Lakeon the true status of the leases and obtained an advantage at Birch Lake’s expense. [88] Determination of Bernum’s liability for its handling of the leases cannot properly be determined on the record before me.

Equitable Set Off [89] Having determined that Birch Lake’s Counterclaim for these damages should go to trial, the final issue for determination iswhether the Master was correct in staying Bernum’s judgment pending determination of Birch Lake’s Counterclaim, on the basis ofequitable set off. [90] The principles of equitable set off are found in the Supreme Court of Canada decision of Holt v Telford, (SCC), [1987] 2 SCR 193, 41 DLR (4th) 385: • the party relying on a set off must show some equitable grounds for being protected against his adversaries demands; • the equitable grounds must be at the root of the Plaintiff’s claim before set off will be allowed; • the counterclaim must be closely connected with the demand of the Plaintiff that it would be manifestly unjust to allow thePlaintiff to enforce payment without taking into consideration the counterclaim; • the plaintiff’s claim and the counterclaim need not arise out of the same contract; • unliquidated demands are on the same footing as liquidated demands. [91] The parties did not raise with the Master or at the appeal hearing, the effect of s 5.05 B(

d) of the 2007 CAPL agreement whichstates that Bernum, as operator, may, “without limiting its other rights hereunder or otherwise held at law or in equity”: (

d) maintain actions against that Non-Operator for all such unpaid amounts and interest thereon on a continuing basis, as if thosepayment obligations were liquidated demands payable on the date they were due to be paid, without any right of that Non-Operator to

set-off or counter-claim. [92] I invited both Counsel to provide supplementary written submissions on the applicability and effect of this

section and of s. 17of the Judicature Act and Rule 1.4(2)(h), which provide the Court with discretion to order a stay, in the event

summary judgment isgranted to Bernum. Does Clause 5.05(B)(

d) Prevent Birch Lake from Raising Set-off as a Defence? [93] The clause in question is part of the

section dealing with an operator’s lien and default remedies and is attached to thesereasons as

Schedule A. [94] In reading this

section as a whole, it is clear these provisions provide an operator with expedited and enhanced remedies notavailable to an ordinary creditor. For example, under clause 5.04(B)(b), an operator’s claim for operating costs is deemed to be liquidateddamages. The operator need not first prove those operating costs. [95] These enhanced remedies reflect the high risk and high reward world of oil and gas exploration.

These provisions discouragenon-operators from delaying payment of their agreed upon share of operating costs because production is lower than expected. [96] The parties were unable to provide any judicial consideration of this provision. [97] Parties can contract out of the equitable right to set-off: Société Generale (Canada) v Gulf Canada Resources Ltd 1995ABCA 259 , [1995] 169 AR 317 (ABCA), at para. 13.

Various authors and cases have looked at this interplay between contractand equity: (i) “[I]t may be found that a right to a legal set-off or defence (or even to an equitable set-off or defence) is excluded byan agreement of the parties, whether expressly or, for example, by implication through a course of dealing or custom”: I.C.F. Spry, ThePrinciples of Equitable Remedies, 5th ed., (Agincourt, Ont.: The Carswell Company Ltd., 1997) at p. 174; (ii) “[W]ithin the bounds of legality and public policy, parties are free to contract whatever result they wish.

Accordingly, agreements to set-off which would, aside from the agreement, not be granted relief due to the absence of the requirementsof set-off, will be upheld... As well, agreements not to set-off will be similarly upheld”: Kelly R. Palmer, The Law of Set-Off in Canada,(Aurora, Ont.: Canada Law Book Inc., 1993) at p. 263; (iii) “There is no general principle to the effect that contracting parties may not contract out of equitable remedies (subjectof course to the doctrines of undue influence and unconscionability)”: Pan Canadian Mortgage Group Inc v 679972 B.C.

Ltd, 2014BCCA 113 at para. 45; (iv) “It is open to the parties to make their own arrangements, and [a party] is competent to contract himself out of theprotection of the equitable rule”: Bauer v Bank of Montreal, (SCC), [1980] 2 SCR 102 (SCC) at para. 7; (v) “[T]he appellants have contracted out the equitable defences that they may otherwise have had”: Seattle-FirstHolding Co v Western Crane Services Ltd, (AB KB), [1987] 56 Alta LR (2d) 39 (QB), 82 AR 171. [98] Notwithstanding that the law recognizes that parties can contract out of equitable relief such as set-off, Birch Lake submitsthis clause has no application.

It argues that the parties did not intend to exclude Birch Lake’s ability to set-off or counterclaim, that themonies owed are not owing due to the gross negligence of Bernum and the default remedies of clause 5.05(

B) may only be applied on abona fide basis. [99] Birch Lake argues that if the CAPL was intended to eliminate a non-operator’s right to refuse payment of operating costs,regardless of that operator’s gross negligence or breach of its fiduciary duties, the wording should be clear and specific. [100] Birch Lake argues it is unconscionable to interpret s 5.05(

B) to deny a non-operator the right of set-off and counterclaim incases of gross negligence, wilful misconduct, breach of fiduciary duty, or bad faith because of the inherent conflict created between s4.02 and 5.05(

B) of the CAPL. [101] Birch Lake further argues that Bernum has exercised rights under s 5.05(B)(b)(

c) and(

e) but has at no point, objected to BirchLake’s ability to set-off or counterclaim on the basis of subsection (d). Analysis [102] It is true that Bernum did not specifically rely on clause 5.05B(

d) before the Master or at the appeal hearing. This, in my view,is not fatal as Bernum reserved its right to exercise its CAPL remedies, which would include the provision in question: default noticemarked as Exhibit P to the Affidavit of William Petrie filed April 2, 2013. [103] Rather, the issue is whether this clause should be interpreted to preclude a non-operator from refusing to pay its share ofoperating costs, when it claims damages from the operator and pleads set off as a defence. [104] The 2007 CAPL agreement provides significant protection and remedies to an operator. It limits an operator’s liability to casesof gross negligence or wilful misconduct.

Section 5.05 outlines numerous remedies afforded an operator to facilitate enforcing its claimfor operating costs from a non-operator. Logically, the claims referenced in clause 5.05B(

d) are the permissible claims under the CAPL;that is, claims alleging the gross negligence or wilful misconduct of an operator. There is no need for a provision precluding set-off forclaims that cannot succeed under the clear wording of the CAPL. A non-operator can pursue any number of claims against an operatorinvolving that operator’s gross negligence or wilful misconduct, but such claims cannot be raised as a means to refuse or delay payment

of operating costs due and owing. [ 105 ] The terms of the CAPL agreement are weighted heavily in favour of operators like Bernum. The check and balance for a non- operator like Birch Lake is found in jurisprudence recognizing the relationship between operators and non-operators as a fiduciary one: Powermax Energy Inc v Argonauts Group Ltd 2003 ABQB 71 , 334 AR 1; Adeco Exploration . If the operator’s actions are precipitous or its conduct egregious, it exposes itself to significant damages, including potential aggravated or punitive damages. Should a Stay be Imposed? [ 106 ] The parties agree I have wide inherent discretion to grant a stay of execution of Bernum’s

summary judgment on any terms if I feel in all the circumstances, it is appropriate to do so. The authority is found in s 17 of the Judicature Act and Rule 1.4(2)(h). [ 107 ] There has been extensive judicial treatment about stays pending an appeal – but not so much with respect to stays pending a counterclaim.

The learned authors Stevenson & Côté note that “The new Rule [1.4(2)(h)] names no test for a stay of execution pending appeal, but it reasonable that the longstanding 3-part test from McCabe v Westlock Roman Catholic School District [1999 ABQB 666] should apply” ( Alberta Civil Procedure Handbook 2012 , Juriliber: Edmonton, at p. 1-12). [ 108 ] The tripartite test for a stay is well known.

The party applying for a stay must show it has an arguable issue, that it will suffer irreparable harm if the stay is not granted and the balance of convenience between the parties favours the granting of a stay. [ 109 ] While Birch Lake has demonstrated an arguable issue on its Counterclaim for damages arising from Bernum’s handling of the leases, it has not demonstrated irreparable harm if the stay is not granted. In the Affidavit of William Petrie filed April 2, 2013, Mr.

Petrie deposes that: Due to the problems with the drilling operations and resulting mechanical issues, the production... has impacted Birch Lake’s expected revenues from the 4-3 Well and has significantly affected Birch Lake’s ability to raise capital (at para 43). [ 110 ] He further deposes that: Due to the failures of the 4-3 Well and substantially diminished production of that well, Birch Lake’s ability to raise capital through an offering of flow-through shares was significantly impacted and has compromised Birch Lake’s ability to pay the outstanding amounts (at para 47). [ 111 ] In my view, this falls short of demonstrating irreparable harm.

There is no evidence Birch Lake is on such financially precarious footing that without a stay, it faces insolvency or an inability to prosecute its Counterclaim. Accordingly, Birch Lake has failed to meet the second part of the tripartite test for a stay. It matters not whether the balance of convenience between the parties favours the granting (or continuation) of a stay.

The failure to meet the second part of the test is fatal to Birch Lake’s submissions. [ 112 ] Nonetheless, the Court may still order a stay where exceptional circumstances exist and it is fit and just to do so : Rap Designs Inc v Dean, 2010 ABQB 751 at para. 18 . [ 113 ] I do not find such exceptional circumstances to exist here. [ 114 ] While I am mindful that Birch Lake’s Counterclaim for damages greatly exceeds the amount awarded Bernum, it must be remembered that Bernum has established its right to

summary judgment while Birch Lake, in contrast, has only established an arguable Counterclaim that should proceed to trial. [ 115 ] In the past, Counterclaims were issued, on occasion, for primarily tactical reasons, to stall or frustrate a plaintiff’s claim and to provide some negotiating leverage where none might otherwise exist. The new Rules of Court make Counterclaims independent actions and do not, in and of themselves, prevent a plaintiff from obtaining

summary judgment: Soler & Palau Canada Inc v Meyer’s Sheet Metal Ltd , 2012 ABQB 496 at para 47 . Similarly, a dismissal of the action does not result in a deemed dismissal of the Counterclaim. [ 116 ] The Foundational Rule 1.2, which provides the lens through which the Rules of Court should be interpreted, underscores just and fair resolution to disputes achieved in a timely, efficient and economical way. The proportional approach to

summary judgment espoused in Hryniak , is consistent with these goals. [ 117 ] To impose a stay would undermine both these goals and the provisions of the CAPL that the parties agreed to be governed by. Conclusion [ 118 ] Bernum is granted

summary judgment against Birch Lake for $1,131,143.27 less applicable set-offs from well revenues made to date. There will be no set-off in relation to Birch Lake’s Counterclaim and no further stay will be ordered. Birch Lake is free, however, to continue its Counterclaim against Bernum in relation to its handling of the leases. [ 119 ] If the parties are unable to agree on costs, they may provide me with written submissions within 30 days.

Heard on the 9 th day of April, 2014. Dated at the City of Edmonton, Alberta this 23 rd day of October, 2014. Dawn Pentelechuk J.C.Q.B.A. Appearances: Heather L. Treacy, Q.C. and Laura Easton Davis LLP for the Plaintiff/Defendant by Counterclaim Michael B. Niven and Natalie L. Climenhaga Carscallen LLP for the Defendant/Plaintiff by Counterclaim

Schedule A 5.05 Operator's Lien And Default Remedies A.. Operator's Lien -As of the effective date of the Agreement or such later date as this

Schedule applies to the affected Joint Lands, the Operator will have a lien and charge with respect to the interest of each Party in the Joint Lands, the wells and equipment thereon, the Petroleum Substances produced therefrom and any other Joint Property, to secure payment of that Party's share of the costs and expenses incurred for the Joint Account.

Subject to the Regulations, that lien and charge has priority over any other lien, charge, mortgage or other security interest applicable to those interests, provided that this will not preclude a Party from entering into any bona fide financing that requires a pledge or the granting of other security. B. Default Remedies -It is the Parties' general intention that the remedies in this Clause only be used on a bona fide basis with respect to failure to pay amounts owing hereunder.

Subject to the last paragraph of this Subclause and the Regulations, if a Non-Operator does not pay as and when due any amounts required to be paid by it under Clause 5.02, the Operator may, without limiting its other rights hereunder or otherwise held at law or in equity: (

a) charge that Non-Operator compound interest, as computed monthly, on that unpaid amount from the day that payment is due

until the day it is paid. Interest will accrue at the rate of 2% per annum higher than the rate designated as the prevailing prime rate for Canadian commercial loans by the principal Canadian chartered bank used by the Operator, regardless of whether the Operator has notified that Non-Operator in advance of its intention to charge interest on that unpaid amount; (

b) withhold from that Non-Operator any further information and rights with respect to Joint Operations, which information and rights will be supplied or restored to it promptly after the default is fully rectified, provided that this does not permit the Operator to: (

i) incur any expenditure for the Joint Account that requires approval under Subclause 3.01B; (ii ) deny the right of that Non-Operator to issue or receive any notice served hereunder; or (iii) deny that Non-Operator's rights hereunder with respect to any such notice; (

c) set-off against that unpaid amount, any amount payable to that Non-Operator from the Operator hereunder or under any other agreement then in effect between them (including any separate agreement created under

Article 13.00 because of an inconsistency in Working Interests), without any right of that Non-Operator to set-off or counter-claim; (

d) maintain actions against that Non-Operator for all such unpaid amounts and interest thereon on a continuing basis, as if those payment obligations were liquidated demands payable on the date they were due to be paid, without any right of that Non-Operator to set-off or counter-claim; (

e) treat the default as an immediate and automatic assignment to the Operator of that Non-Operator's share of produced Petroleum Substances and the right to dispose of them on its behalf at a Market Price on whatever terms the Operator can arrange, acting reasonably, after having given at least 5 Business Days' prior notice to that Non-Operator of the specific intention to use this remedy. The Operator will apply the proceeds from any such disposition to the amount owed by that Non-Operator hereunder, including accrued interest.

The Operator will thereafter acquire the proceeds from any such disposition for that Non​ Operator's account until such time as it resumes responsibility for disposing its share of those Petroleum Substances. Insofar as the Operator has acted within the authorities granted to it in this Paragraph, that Non-Operator will indemnify the Operator for any Losses and Liabilities suffered by the Operator because of defects in that Non-Operator's title lo those Petroleum Substances, including any contractual obligations to deliver any of those Petroleum Substances to a third party; (

f) assume that defaulting Non-Operator's share of unpaid and remaining costs pertaining to a Joint Operation to which the default pertains, by specific notice to that defaulting Non-Operator and the other Non-Operators of the exercise of the remedy in this Paragraph. The Operator will also identity in that notice the amount then owing by that defaulting Non-Operator for that Joint Operation and any application of Subparagraph 5.05B(f)(iii) to that Joint Operation. That defaulting Non-Operator will then be deemed to be a Non- Participating Party with respect to the unpaid and future costs of that Joint Operation, and

Article 10.00 respecting Independent Operations will apply, mutatis mutandis , thereto, notwithstanding any prior election by it to participate in that Joint Operation ,subject to the following: (

i) that Non-Operator may avoid the consequence in this Paragraph by paying the amount owed by it for that Joint Operation, including accrued interest, within 5 Business Days after being notified by the Operator of the application of this remedy to its participation in that Joint Operation; (ii) within 5 Business Days after being notified by the Operator of the application of this remedy to that defaulting Non-Operator's unpaid share of costs of that Joint Operation, each other Non​Operator may elect if it will assume any share of that defaulting Non- Operator's share of costs therein on the same basis as under Subclause 10.02C, mutatis mutandis , provided that: (1) the Operator will be deemed to have elected thereunder to assume its proportionate share of all available interest on a pro rata basis without any limitation thereunder; and (2) a Non-Operator that does not respond to the Operator's notice during that period will be deemed to elect not to assume any portion of that defaulting Non-Operator's share of costs; (iii) the Operator will reimburse to that defaulting Non-Operator any costs already paid by it for that Joint Operation if a forfeiture of any Joint Lands will apply to that defaulting Non-Operator under Clause 10.10 as a result of it becoming a Non-Participating Party.

The Operator will reimburse that amount to that defaulting Non-Operator within 20 Business Days after the Parties' election to assume that defaulting Non-Operator's share of the cost of that Operation under this Paragraph. The Parties will share responsibility for that reimbursed amount in the same proportions as determined under Subparagraph 5.05B(f)(ii); (iv) the Operator will not be permitted to recover any such unpaid amount from the Non-Operators through the reimbursement process in Clause 5.06; and

(

v) the Operator waives its rights to pursue the defaulting Non-Operator for any amount owing by it with respect to a Joint Operation if the Operator effects the remedy in this Paragraph for casts not paid by that Non-Operator with respect to that Joint Operation; and (

g) provided that the Operator obtains any required court order confirming a disposition under this Paragraph before it is completed, enforce the lien referred to in Subclause 5.05A on the following basis: (

i) by taking possession of and using free of charge any part of that defaulting Non-Operator's Working Interest in the Joint Lands and other Joint Property and all of its rights relating to that Working Interest until the default is fully rectified; (ii) subject to Paragraph 5.05B(

f) and the other Subparagraphs of this Paragraph (but notwithstanding Clauses 6.01 and 24.01 respecting the handling of production and dispositions respectively), by disposing of any Working Interest of which it has taken possession in whole, in part or in separate parcels, at public auction or by private tender on whatever terms it may arrange, having given at least 10 Business Days' prior notice to that Non-Operator of the time and place of that disposition; (iii) the Operator may only dispose of that Working Interest for such price and on such conditions as it determines on a bona fide basis are reasonable, having due regard to the possible recovery of funds for that Non-Operator in excess of the amount owed by it hereunder; (iv) that disposition will be without prejudice to the Operator's claim for deficiency, and will be free from any right of redemption by that Non-Operator, which right is hereby waived, and that Non​ Operator also waives all formalities prescribed by custom or by law respecting that disposition; (

v) the Operator will apply the proceeds of that disposition to the amount then owing to it by that Non-Operator under this Agreement, including accrued interest and reasonable costs incurred by it in making that disposition, such as reasonable legal fees and disbursements on a solicitor and its own client basis; and (vi) the Operator will promptly pay the balance then remaining to that Non-Operator. Any such disposition will be a perpetual bar at law and in equity against that Non-Operator and its assigns and against all other persons claiming an interest through it in that disposed Working Interest.

The Operator will deliver to that Non-Operator all transfers, assignments and other conveyance documents required to effect that disposition. That Non-Operator will execute and return them to the Operator within 5 Business Days after their receipt. It hereby authorizes the Operator to act as its attorney for their execution without further authorization at the time if it does not execute and return them to the Operator within that period, and it agrees to ratify all lawful actions taken on its behalf by the Operator as its attorney.

The Operator may issue a notice to that Non-Operator specifying the default and requiring it to be remedied, and the Operator will provide a copy of that notice to the other Non-Operators for informational purposes. The Operator may exercise the rights granted in Paragraph 5.05B(

b) immediately after issuance of that default notice. Subject to compliance with any additional notice requirement prescribed by the applicable Paragraph, the Operator may not exercise the rights granted in Paragraphs 5.05B(c)-(

g) until expiry of the following periods after issuance of that default notice: (1) 30 days for Paragraphs 5.05B(c)-(f); and (2) 60 days for Paragraph 5.05B(g). C. Operator To Issue Statement Of Account -After request by a Party subject to a notice of default served under this Clause, the Operator will issue a statement to it in a timely manner that identifies in reasonable detail the amount it owes hereunder and all debits and credits against that amount on a month-by-month basis. D.

Remedies Are Cumulative -The rights and remedies granted to the Operator under this Clause are cumulative, and may be exercised separately or in combination.

Subject to any application of Clause 1.07 to the time for commencing legal proceedings and any application of Paragraph 5.05B(f)to cause a defaulting Party to become a Non-Participating Party, the Operators exercise, or failure to exercise, any rights and remedies available to it hereunder, at law, in equity or under the Regulations does not limit its rights or remedies for the particular default or release the defaulting Non-Operator from any other obligations that have accrued to it under this Agreement.

E. No Merger -The obligation to pay interest at the rate specified in Paragraph 5.05B(

a) applies until the financial default is rectified, and will not merge into a judgment for principal and interest, or either of them. The Parties waive the application of any Regulations to the contrary, insofar as permitted thereunder. F. Operator's Records As Prima Facie Proof- The Operator's bona fide records constitute prima facie proof of the existence of any financial default hereunder, subject to a Non-Operator's rights of inspection and audit hereunder. G.

Default By Operator -The Non-Operators that assumed the Operator's share of costs or expenses incurred for the Joint Account because of a default of the Operator may appoint a Non-Operator as their representative to enforce their rights under this Clause, pending the appointment of a new Operator under

Article 2.00. That appointed representative may then exercise any of the rights and remedies otherwise available to the Operator hereunder, mutatis mutandis , to rectify that default. H. Recovery Of Royalty Amounts -A Party that is required to pay royalties on behalf of another Party (or its predecessor in interest) to maintain any of the Title Documents in good standing after that other Party's default in payment of royalty to the grantor thereof may exercise any of the rights and remedies otherwise available to the Operator under this Article, mutatis mutandis , to recover the additional royalties paid by it because of that default