Talisman Energy Inc v Questerre Energy Corporation, 2015 ABQB 775

Court of Queen ’ s Bench of Alberta Citation: Talisman Energy Inc v Questerre Energy Corporation, 2015 ABQB 775 Date: 20151207 Docket: 1101 07520 Registry: Calgary Between: Talisman Energy Inc. and Talisman Energy Canada Plaintiff / Defendant by Counterclaim - and - Questerre Energy Corporation Defendant / Plaintiff by Counterclaim _______________________________________________________ Reasons for Judgment of J.T.

Prowse , Master in Chambers _______________________________________________________ [ 1 ] The plaintiff Talisman Energy Inc. (“Talisman”) claims as operator under a farmout agreement against the defendant Questerre Energy Corporation (“Questerre”). Talisman says that Questerre agreed to participate in a drilling operation but failed to pay its proportionate share (25%) of drilling costs. [ 2 ] Questerre defends the claim and also, or in the alternative, asserts a set-off and counterclaim resulting from Talisman’s breach of a promise to both drill and complete two wells.

Talisman drilled the two wells in question (Fortierville and Ste. Gertrude) but failed to complete them.

[ 3 ] Without more, we would be examining the law of equitable set-off. Talisman would argue that it had a liquidated claim for 25% of the drilling costs, while Questerre, if its defence failed, would argue that any judgment granted to Talisman should be stayed until its counterclaim for damages is heard. [ 4 ] Talisman says that set-off should not be allowed and it should immediately be granted judgment based on a clause contained in the 1990 CAPL Operating Procedure, which is attached to and forms part of the farmout agreement.

The clause allows Talisman to: maintain an action or actions for such unpaid amounts and interest thereon on a continuing basis as such amounts are payable, but not paid by such defaulting Joint-Operator, as if the obligation to pay such amounts and the interest thereon were liquidated demands due and payable on the relevant dates such amounts were due to be paid, without any resort of such Joint-Operator to set-off or counterclaim. (emphasis added) [ 5 ] I will now review the chronology of events to shed light on whether the evidence is consistent with Questerre having a defence to the claim as opposed to having a counterclaim for breach of collateral contract.

Chronology of events regarding the Fortierville and St. Getrude wells • October 4, 2005 – the parties entered into a farmout agreement on October 4, 2005. It incorporated by reference as its ‘operating procedure’ the standard form 1990 CAPL Operating Procedure. • Early 2010 – Talisman proposed to drill the Fortierville well. It wanted Questerre to participate. Under the terms of the farmout agreement Talisman was not obliged to include in its proposed operation the completion (as opposed to the drilling) of the well.

By ‘completion’ I mean not just the drilling of the well to its required depth, which Talisman proposed to do, but also the coring, fracture stimulation and testing of the well, which Questerre wanted done. • March 3, 2010 - Talisman issued an Independent Operations Notice (“ION”) for the drilling of the Fortierville well and enclosed an Authorization for Expenditure (“AFE”). If Questerre elected to participate it would pay 25% of the costs; if it did not participate it would incur an exploration production penalty.

The ‘operation’ did not include the completion of the well as hoped for by Questerre. • April 1, 2010 - Questerre wrote to Talisman, advising that it would not participate in the Fortierville well unless Talisman provided its written confirmation that it would complete, test and evaluate the well as part of a comprehensive program.

Further, Questerre asked for Talisman’s written confirmation that it would run microseismic monitoring as part of the completion program on the well. • Mid-April 2010 - The 30 day time period for Questerre’s response to the ION dated March 3, 2010 expired so at that point Talisman was entitled to proceed with the drilling.

If it did so it would bear 100% of the cost of drilling the Fortierville well, and Questerre would go into an exploration penalty. • April 26, 2010 – Talisman sent a letter to Questerre setting out its intentions to not only drill but to complete the Fortierville well. [ 6 ] Here is where the problem arises. Talisman could have issued a new ION and AFE contemplating both the drilling and completion of the Fortierville well, and the parties would then have been governed by the terms of the 1990 CAPL operating procedure, including the ‘no set-off’ clause.

Instead, a series of communications ensued which, according to Questerre, resulted in Talisman committing to: (

i) drill the well pursuant to the 1990 CAPL operating procedure. Questerre in fact signed an ‘authorization for expenditure’ (“AFE”) which was unamended from the earlier March 3, 2010 AFE and dealt only with the drilling of the well, and (ii) complete the well. [ 7 ] With this background in mind, I will continue with the chronology of events. • May 5, 2010 – Questerre sent a letter to Talisman confirming its agreement to participate in the Fortierville well “based on the revised plans as outlined in our correspondence, AFEs and programs”.

Questerre’s position is that this letter confirmed Talisman’s commitment to both drill and complete the well. Significantly, Questerre was anticipating that this commitment would be documented under the 1990 CAPL operating procedure, as Questerre’s letter stated: If Talisman is welcoming of [Questerre’s] participation please forward to [Questerre] amended AFEs, detailing the additional operations on this well for our signature. (emphasis added) • May 6, 2010 – Questerre sent an email to Talisman confirming that it would be interested in joint operations with respect to the St.

Gertrude well on the same basis as being discussed for the Fortierville well (that is, the well would be taken to completion). • May 7, 2010 – Talisman sent a letter to Questerre regarding the Fortierville well which, unfortunately, was ambiguous and vague. It arguably reflected some kind of modification to the ION of March 3, 2010 but it enclosed an AFE which was identical to the AFE forwarded on March 3, 2010 – that is, which contemplated only the drilling and not the completion of the Fortierville well.

The body of the letter did indicate that: Talisman is prepared to cut rotary sidewall cores and run microseismic using surface array on the Fortierville Well in accordance with the Letter. The foregoing is also subject to there being no time delays that would impact the completion

schedule for the Fortierville Well, as specified in the Letter, as well as wellbore stability, as provided in accordance with the Operating Procedure attached to the Agreement. If necessary, a supplemental AFE will be prepared to incorporate the additional costs associated with the above. (emphasis

added) • May 10, 2010 – Notwithstanding its earlier indication that it was expecting an AFE which dealt with both drilling and completionof the Fortierville well, Questere signed and returned to Talisman an AFE which only dealt with the drilling of the well. Questerre alsosigned and returned the May 7, 2010 letter. [8] Given the ambiguity of the documentation, a trial will be necessary to determine the extent to which Talisman committed todo more than drill the Fortierville well. However, for the purpose of this application, I will assume that Questerre’s assertion as to theexistence of a collateral contract is correct. [9] Where conflicting facts are deposed to by a respondent to a

summary judgment application, a conclusion cannot be made onthe conflicting affidavits. The facts asserted by Questerre as respondent, unless those facts are clearly without evidentiary foundation,will be assumed to be accurate for the purpose of the application. See Clarke v. Connell, (AB KB), 1997CarswellAlta 513, 10 C.P.C. (4th) 276, 298 A.R.1, at para 4; Sherwood Steel Ltd. v. Odyssey Construction Inc., 2014 CarswellAlta1750, 2014 ABCA 320, at para 8; and 776826 Alberta Ltd. v.

Ostrowercha, 2015 CarswellAlta 155, 2015 ABCA 49 at para 10. [10] I will again return to the chronology: • June 3, 2010 – Talisman sent Questerre an ION and AFE for the Ste. Gertrude well. Questerre asserts that in following discussionsTalisman confirmed that it would complete the Ste. Gertrude well on the same basis as had been discussed for the Fortierville well. • July 5, 2010 – Questerre executed the Ste. Gertrude Drilling Notice and AFE. As with the Fortierville well, the AFE encompassedonly the drilling of, and not the completion of, the Ste.

Gertrude well. • September of 2010 - Talisman stopped working to complete the Fortierville and St. Getrude wells and unilaterally decided topostpone completion of the wells to the spring of 2011. • April of 2011 – Talisman wrote to Questerre reconfirming that it was “committed to the completion of the Fortierville and St.Gertrude wells”. • May 6, 2011 – Talisman issued to Questerre IONs and AFEs for completion of the Fortierville and St. Gertrude wells, butwithdrew those three days later.

Notwithstanding that it therefore did not have signed AFEs, Talisman proceeded to do completion workon the wells and is seeking to recover 25% of the cost of that work from Questerre. Of the $5,839,168.98 being claimed by Talismanfrom Questerre, $1,095,213.68 relates to this completion work. • Talisman subsequently withdrew from Quebec and has not attempted to undertake any further completion operations in respect ofthe Fortierville or the St.

Getrude wells. [11] Talisman acknowledges that a trial of Questerre’s counterclaim is necessary to determine to what extent Talisman may havemade a binding commitment to Questerre ( to complete the Fortierville and Ste. Gertrude wells), whether it breached that commitment,and what if any damages have resulted from this breach. However, Talisman says that it is clear that Questerre signed AFEs for thedrilling work on these wells, it did that drilling work, and its claim falls under the 1990 CAPL operating agreement, which contains a ‘noset-off’ clause.

I agree with Talisman’s position in that regard. [12] What if Questerre’s expectation had been met (see the entry above for May 5, 2010), and both drilling and completion hadbeen included in the Fortierville and Ste. Gertrude AFEs? Questerre’s position on set-off would have been even weaker.

The ‘no set-off’clause would clearly apply to the whole situation. [13] Also, if the AFEs had included both drilling and completion, Questerre’s remedy for Talisman abandoning completion work,after having obtained approval of AFEs which included completion work, would have fallen to be decided under the CAPL procedure. [14] ‘No set-off’ would clearly apply if the AFEs had included both drilling and completion.

My conclusion is that ‘no set-off’applies to drilling expenses when the AFEs included only drilling. [15] Questerre does not claim that there was any discussion of a waiver of the ‘no set-off clause’ for drilling work when the partieswere contemplating the additional completion work. [16] The drilling work done by Talisman was done pursuant to signed AFEs. The drilling was done on its behalf and on behalf ofQuesterre as a 25% participant. The CAPL operating procedure was followed with respect to that drilling work. Talisman is entitled topayment of the 25% without set-off. [17] Talisman is not entitled to

summary judgment for the $1,095,213.68 in completion work for which there is no signed AFE.Talisman cannot claim the benefit of the ‘no set-off’ clause in the CAPL procedure for this work because Talisman did not follow theCAPL procedure when it did this portion of the work. [18] This conclusion is consistent with the decisions made in the two cases noted below. [19] In Bernum Petroleum Ltd. v.

Birch Lake Energy Inc., 2014 CarswellAlta 1965, 2014 ABQB 652, 35 B.L.R. (5th) 234, theplaintiff (“Bernum”) was an operator under a CAPL operating procedure and sought payment of 40% from the defendant (“Birch Lake”)for its share of expenses incurred. [20] Birch Lake raised two defences. For one of those defences there was insufficient supporting evidence but for the other (thatBernum was grossly negligent in failing to negotiate an extension of a lease) there was sufficient evidence that it should go to trial. The

question then arose as to whether Bernum’s judgment for expenses should be stayed, pursuant to equitable set-off, until the issue of thefailure to obtain a lease renewal went to trial. [21] Bernum argued that set-off was not appropriate given the effect of s 5.05 B(

d) of the 2007 CAPL agreement which stated thatBernum, 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 allsuch unpaid amounts and interest thereon on a continuing basis, as if those payment obligations were liquidated demands payable on thedate they were due to be paid, without any right of that Non-Operator to set-off or counter-claim. [22] The Court cited Societe Generale(Canada) v. Gulf Canada Resources Ltd., 1995 ABCA 259 , 169 A.R. 317 (Alta.C.A.), as supporting the proposition that parties can contract out of the equitable right to set-off.

The Court declined to order a stay andobserved that Birch Lake had not demonstrated irreparable harm if the stay was not granted. [23] Questerre has not adduced any evidence of irreparable harm if Talisman’s judgment is not stayed. [24] In SemCAMS ULC v. Blaze Energy Ltd., 2015 CarswellAlta 604, 2015 ABQB 218, the plaintiff (“SemCAMS”) was anoperator of a gas processing facility, and had invoiced the defendant (“Blaze”) for its share of expenses. Blaze did not pay andSemCAMS sought

summary judgment. [25] Blaze asserted a counterclaim against SemCAMS for failing to properly measure volumes, utilizing erroneous analysis andproduct allocation methodologies (which under allocated volumes and over allocated costs to Blaze), and by shutting in Blaze'sproduction. [26] SemCAMS relied on the following contractual provisions: Operator shall bill Producer on or before the thirtieth (30th) Day of each Month for the estimated charges payable by Producerattributable to the transportation of Producer Gas for the preceding Month, ...

Notwithstanding the terms of any other agreement betweenOperator, Producer or any of their respective Affiliates, whether entered into prior to or subsequent to this Agreement, Producer shallpay, in full, all bills which become payable pursuant to this Agreement within thirty

(30) Days after receiving them without any nettingor set-off on account of any amounts which may be due from Operator or its Affiliates to the Producer or its Affiliates.... (emphasisadded) Producer, in order to secure any indebtedness to Operator under this Agreement, hereby gives and grants to Operator a lien and charge onProducer Gas and Producer's share of Residue Gas and Plant Products, to pay any transportation charge or other amount payable toOperator by Producer hereunder.

In the event Producer defaults in payment of its bills hereunder and such default shall continue for five(5) Days after receipt of written demand from Operator, Operator may, without limiting Operator's other rights in this Agreement orotherwise held at law or in equity: ... (

d) maintain an action or action for such unpaid amounts and interest thereon on a continuing basisas such amounts are payable but not paid by Producer, as if the obligation to pay such amounts and the interest thereon were liquidateddemand due and payable on the relevant date such amounts were due to be paid, without any right or resort of such Producer to set-off orcounterclaim. (emphasis added) [27] The Court awarded

summary judgment to SemCAMS and made the following observation: It is recognized that this is not the usual case on a

summary judgment application in most commercial agreements. Typically in orderfor a party who provides services under an agreement to collect on an unpaid account that they must satisfy the Court that the amountsare ultimately owing under the agreement, not that they have simply been billed. It is unusual that a party would be able to obtainsummary judgment on the basis of amounts billed, subject to subsequent adjustment following an audit. However, in this case thelanguage used by the parties in the Agreements in the context of an Operator providing gas processing and transportation services tonumerous parties supports that

interpretation as reflecting the true intention of the parties. Characterization of Questerre’s counterclaim [28] I will now comment on Questerre’s attempt to categorize Talisman’s promise to complete the Fortierville and Ste. Gertrudewells as a ‘misrepresentation’. It presumably advances this argument so that it can claim the remedy of rescission, which will sweepaway the farmout agreement and the ‘no set-off’ clause contained in that agreement. [29] I do not accept Questerre’s argument.

Among the problems with that argument are the following: • the statements made by Talisman are statements of future intended conduct (we will take the wells to completion) rather thanstatements of existing fact, and, • there is no air of reality to the assertion that Talisman did not really intend to take the wells to completion. Talisman spent millionsof dollars attempting to complete the two wells.

In that context it is hard to fathom that, when Talisman stated that it intended tocomplete the wells, it did not hold that intention. [30] One of Questerre’s alternative arguments, with which I agree, is that we are dealing with a contractual counterclaim. To quote

from Questerre’s written argument: Finally, even if Talisman’s representations concerning the scope of the operations on the Well were statements of future intention, they are actionable. The Alberta Court of Appeal in Motkoski Holdings Ltd. v. Yellowhead (County) , 2010 ABCA 72 explains that a representation about how the party intends to act in the future is actionable if the representation amounts to a covenant that the party will act in that way or if consideration had been given.

Both these requirements are satisfied in this case. [ 31 ] As well, I cannot understand Questerre’s argument that a misrepresentation made a number of years into an existing contract can somehow result in the contract being rescinded, as opposed to a misrepresentation made prior to a contract being finalized. Talisman’s claims regarding the ‘other’ wells [ 32 ] Talisman also applies for

summary judgment with respect to invoices it issued to Questerre pursuant to the Gentilly, La Visitation, St. David and St. Edouard wells (the ‘other wells’). These principal amounts claimed for the other wells total approximately $2.5 million. [ 33 ] Questerre has no defence to these claims other than its set-off arising from Talisman’s breach of its promise to complete the Fortierville and St. Gertrude wells. For the reasons already given, this counterclaim does not disentitle Talisman to

summary judgment. Conclusion [ 34 ] Having reviewed the facts in detail it is clear that Talisman provided drilling services pursuant to approved AFEs signed by Questerre for the Fortierville and Ste.Gertrude wells. Questerre undoubtedly owes Talisman for 25% of those expenses. [ 35 ] Questerre, on the other hand, has a counterclaim for breach of a collateral agreement to complete the two wells. For the purpose of this application Questerre’s factual assertions regarding the existence of that collateral agreement are deemed to be true. [ 36 ] Typically one would expect Questerre to seek equitable set-off.

In other words, Questerre would be expected to argue that it should not be forced to pay Talisman’s liquidated claim for drilling expenses until Questerre’s counterclaim for damages is heard and determined. [ 37 ] Questerre neither pleads nor argues equitable set-off. While it presents an alternative argument for breach of a collateral agreement, its primary argument is that somehow Talisman’s failure to fulfill its promise to complete the wells is a misrepresentation which vitiates the existence of the primary farmout contract or the AFEs under which Questerre promised to pay its share of drilling expenses.

For the reasons given above, there is no merit in law to that argument. [ 38 ] Questerre has no defence to Talisman’s liquidated claim, but merely a counterclaim for damages. Talisman is entitled to

summary judgment for the amounts claimed, including interest, other than for completion work done on the Fortierville and Ste. Gertrude wells for which no AFEs were obtained. [ 39 ] Costs may be spoken to. Heard on the 01 st day of December, 2015. Dated at the City of Calgary, Alberta this 7 th day of December, 2015. J.T. Prowse M.C.C.Q.B.A. Appearances: David Tupper and Ian Breneman Blake, Cassels & Graydon LLP for Talisman Energy Inc

Michael P. Theroux and Christine Plante Bennett Jones LLP for Questerre Energy Corporation