By Michael O’Brien
2019 marks the second anniversary of the Alberta Court of Appeal's landmark decision in IFP Technologies (Canada) Inc v EnCana Midstream and Marketing, 2017 ABCA 157. Since its release, the decision has had a profound impact on the principles of contractual interpretation in Alberta. The decision has been considered in over 60 reported decisions, including in jurisdictions beyond Alberta. As a result of the decision, expressions such as the "factual matrix" and "terms of art" have become part of the litigator's lexicon. As we approach the decision's second anniversary, it provides a good opportunity to reflect on the key principles arising from the decision and their enduring legacy.
The appellant, IFP Technologies (Canada) Inc ("IFP"), a French-owned research and development company, entered into a series of contracts with the respondent, Pan Canadian Resources, a predecessor to Encana Midstream and Marketing (collectively, "PCR"). IFP and PCR entered into the arrangement in order to jointly pursue an enhanced recovery technology project at PCR's project at Eyehill Creek. The parties executed 4 written contracts to affect the arrangement (collectively, the "Contract").
Under the Contract, PCR conveyed to IFP the right to "a 20% working interest related to the development and production of oil and gas resources within all formations of [Eyehill Creek], whether such development and production is of a primary, assisted or enhanced nature" (para 22). A key issue in the dispute was the nature and extent of the interest held by IFP pursuant to the Contract. PCR insisted that IFP's interest in Eyehill Creek was limited to an undivided 20% interest in oil and gas produced through assisted recovery methods, while IFP claimed that its interest referred to all the oil and gas recovered, regardless of the method by which it was extracted.
The matter was initially heard over the course of a six-week trial. The Court of Queen's Bench trial judge who oversaw the trial proceedings died before a decision was rendered. The parties agreed not to hold a new trial, but rather elected to have another judge of the Court of Queen's Bench decide the matter based on the written trial record (the "Trial Judge"). The Trial Judge ruled in favour of the respondents on the basis that, among other things, the term "working interest" was not defined in IFP's contract with PCR, and that "working interests" was referenced only in relation to certain thermal and enhanced recovery methods.
IFP appealed on the claimed basis that the Trial Judge made a number of errors of law. Critically, IFP maintained that the term "working interest" was a legal term of art, which had a specific meaning in the context of the Canadian oil and gas industry. The Court of Appeal noted that the Trial Judge's decision predated two groundbreaking decisions of the Supreme Court on contractual interpretation: Sattva Capital Corp v Creston Moly Corp and Bhasin v Hrynew.
The Court of Appeal reversed the trial decision, finding in favour of IFP. In her majority reasons for judgment, Chief Justice Fraser concluded that IFP had conveyed, pursuant to the Contract, a 20% working interest in all oil and gas leases held by PCR at Eyehill Creek and ordered that IFP be entitled to an accounting for 20% of the net revenue realized through primary production on those lands. Further, she found that IFP had acted reasonably in withholding its consent to the sale.
In respect of IFP's withholding of consent, the Chief Justice concluded that it was reasonable for IFP to do so as the proposed disposition by PCR would have resulted in a significant increase in conventional production and been detrimental to IFP's plans for thermal production. Further, she concluded that IFP's obligation to perform its obligations in good faith did not require IFP to act in a manner adverse to its legitimate interests.
Most notably, the Chief Justice made a number of important statements with respect to the principles of contractual interpretation, including:
1) Factual Matrix: A trial judge must consider the surrounding circumstances or "factual matrix" of a contract, regardless of whether the contract is ambiguous. It is an error of law for a trial judge to discount or disregard evidence of the factual matrix on the basis that a contract is not ambiguous. The Court will review such an error on the correctness standard.
2) Parol Evidence Rule: A consideration of the factual matrix does not offend the parol evidence rule because evidence of surrounding circumstances is used only as an objective interpretative aid to determine the meaning of the words of the parties, rather than to vary or replace their meaning.
3) Terms of Art: A legal term of art that has a common meaning to participants in a given industry need not necessarily be defined in a contract. If the term has an accepted meaning and usage in a sector, its interpretation by the court has precedential value and it must be interpreted consistently. In that respect, a term of art is analogous to a standard form contract. For a trial judge to misinterpret a term of art is an error of law, which the Court will review on the correctness standard. Likewise, it is an error of law reviewable for correctness for a trial judge to disregard a legal term of art or to fail to recognize that a legal term of art has a certain meaning.
4) Practical, Common Sense Approach: In discussing the practice of contractual interpretation, the Chief Justice strongly promoted a practical, common-sense approach to determine what the parties to a contract intended. In doing so, she encouraged courts to determine the objective intentions of the parties in a manner that accords with commercial principles and good business sense. The Chief Justice cautioned that failing to do so would encourage parties to take their disputes out of the courts and into the private sector for resolution, which would ultimately be hurtful to the evolution of the common law.
The Enduring Legacy of the Factual Matrix
Leave to appeal to the Supreme Court was denied in 2018, making the Court of Appeal's decision the "last word" when it comes to this case. In addition to the legal principles discussed above, the Court of Appeal recognized that business "craves certainty", is "understandably risk adverse" and so ensuring the proper interpretation of contractual obligations is essential to the economic well-being of the country, especially in Alberta's oil and gas sector where investments are often measured in millions, if not billions, of dollars. If anything, the decision has served as a clarion call for a more commercially reasonable approach to contractual interpretation.