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Alberta Court of Appeal Allows Appeal on “Knock-for-Knock” Clause

In two previous posts, BLG commented on Alberta Court of Queen's Bench decisions on an application by Precision Drilling Canada Limited Partnership ("Precision") for summary judgment against Yangarra Resources Ltd. Although Precision was successful before both a Master and Judge at the Court of Queen's Bench, relying on a "knock-for-knock" exclusion clause, the Alberta Court of Appeal ruled against Precision and denied summary judgment in a recent decision, found here.

Background

Precision sued Yangarra to be paid for work it had done for Yangarra on three wells. At the same time, Yangarra alleged Precision had not drilled the second well in a good and workmanlike manner, and the third well was necessary because of Precision's alleged failure to drill the second well in a good and workmanlike manner. In response to Precision's claim, Yangarra counterclaimed for the value of equipment lost in the second well. Yangarra also claimed that it was not required to pay for Precision's services because Precision had not delivered a completed well.

After Precision's success before a Master and Justice of the Alberta Court of Queen's Bench, Yangarra successfully appealed to the Alberta Court of Appeal.

The Decision

The Alberta Court of Appeal held that the Chambers Judge hearing Precision's appeal seeking summary judgment erred in finding that there was no genuine issues requiring a trial. The Court of Appeal determined that the Chambers Judge made a palpable and overriding error in concluding that there was no evidence of any fraudulent misrepresentation. If such a misrepresentation were proven at trial, the court hearing the trial could hold that the exclusion clause Precision relied upon was not applicable for public policy reasons, and Yangarra could recover against Precision. The genuine issues requiring trial (the existence of a fraudulent misrepresentation and enforceability of the exclusion clause) meant summary judgment was inappropriate in the circumstances.

Importantly, the Court of Appeal specifically refused to rule on the contractual interpretation question (whether the "knock-for-knock" exclusion clause excluded liability) which drove the decisions by both the Chambers Judge and the Master at first instance. The Court of Appeal allowed the possibility that, if a finding of fraudulent misrepresentation were made at trial, the trial court could also conclude that the exclusion clause in issue was unenforceable.

Industry Implications

As noted above, the court of Appeal explicitly refused to pronounce on the interpretation of the "knock-for-knock" exclusion clause. The decisions of the Chambers Judge and Master that exclusion clauses required each party to bear their own losses will remain at least persuasive authority in Alberta. Except in circumstances where exclusion clauses are unenforceable because of bad conduct by one or both of the parties, industry players will likely be held to the wording of industry negotiated agreements. While bad conduct may provide an argument that exclusion clauses do not apply in the circumstances of a particular claim, industry participants should consider carefully whether an industry standard agreement is appropriate for their particular circumstances.