Introduction and overview
Harvest Operations Corp v Obsidian Energy Ltd, 2022 ABKB 848[1] is an appeal of a decision of Application’s Judge Prowse granting summary judgment in favour of the plaintiff, Harvest Operations Corp (“Harvest”), as operator of four petroleum facilities, regarding unpaid invoices from its joint venture partner, the defendant, Obsidian Energy Ltd (“Obsidian”). While not strictly construction related, this decision is of interest in all industries where the payment of invoices is typically longer than contractually provided, an issue that the Alberta construction industry is attempting to address by the implementation of the new Prompt Payment and Construction Lien Act, RSA 2000, c P-26.4.
Harvest sued Obsidian on June 26, 2019[2] for unpaid invoices for the years 2012 to 2016, in the amount of approximately $2.9 million.[3] Obsidian opposed the application by arguing that Harvest’s claim was statute barred by the Limitations Act,[4] (although in this case, the limitation was four years owing to the agreements between the parties). Obsidian also claimed it was owed approximately $750,000 by Harvest, as the operator of several other unrelated joint ventures.
The main issues before both the Applications Judge and Justice Romaine were whether all or portions of Harvest’s claim were statute barred, whether there was admissible evidence of an acknowledgement of debt that prevented the limitation period from expiring, and whether Harvest would set off a limitation barred claim against Obsidian’s counterclaim.
Background facts
Harvest and Obsidian were parties to four petroleum facilities agreements that provided that Harvest, as operator, would issue bills on a monthly basis (joint interest billings). At the end of every year, Harvest was also required to perform certain adjustments and issue equalization credits or invoices.[5] According to the agreements, these equalization invoices were to be issued within 180 days of the preceding year.[6] Specifically, three of the facilities agreements provided that the operator “shall within [180] days of the end of the preceding year adjust the distribution of the costs, fee income and Surplus Capacity usage charges made [in monthly invoices]”.[7] The other agreement provided that Harvest would “make reasonable efforts to adjust within… [180] Days of the end of the proceeding year, the distribution of the costs, fee income and Surplus Capacity usage charges made” [in monthly invoices].”[8]
Harvest completed and issued the 2012 equalization invoice on December 6, 2016 and Obsidian advised on March 2, 2017 that it was reviewing the 2012 invoices.[9] On August 3, 2017, Harvest advised Obsidian that the 2012 equalization invoice had been adjusted through the verification process and that equalization invoices for 2012 through 2016 had been completed based on the “Methodology as approved by the [joint venture owners] for 2011 thirteenth month adjustments,” totaling $2,903,891 plus GST. This was well beyond this 180 day time frame contemplated in the agreements.
Obsidian responded by stating that “We have been and are willing to pay the [operating expense] portion of the [equalization invoices] in short order and without delay…”[10] Later that day, an Obsidian employee sent a further email claiming that Obsidian’s acceptance of the operating expense portion of the equalization invoices was “contingent” on an agreement on another point of dispute.[11]
Obsidian failed to pay the equalization invoices and the relationship between the parties deteriorated resulting in Harvest commencing its claim to recover payment. Both parties agreed that the four facilities agreements at issue extended the relevant limitation period to four years[12] such that the only claims at issue were those that arose in 2012 and 2013.[13]
Applications Judge’s decision
In reasons reported at Harvest Operations Corp v Obsidian Energy Ltd, 2020 ABQB 563, the Applications Judge concluded that none of Harvest’s claims were time barred. Obsidian had given a written acknowledgement of indebtedness which has prevented the limitation period from expiring and that the parties’ past practice and industry standards meant that the limitation period did not begin until issuance of the invoice, even if it was issued after the 180 day time frame. If that was wrong, the Applications Judge would have allowed Harvest use its time barred claims to set-off Obsidian’s counterclaim.
Analysis by the Court of King’s Bench
On appeal by Obsidian, the Court considered the following issues:[14]
- Whether all or portions of the claims of Harvest were barred under the Limitations Act;
- If so, whether there was admissible evidence of an acknowledgement of debt that prevented the limitation period from expiring; and
- Whether Harvest could set-off a limitation-barred claim against the counterclaim of Obsidian.
In dismissing the appeal, Justice Romaine accepted uncontested expert evidence of oil and gas industry practice that equalization invoices are typically issued and paid far after the deadlines prescribed in the applicable periods, and that the 180 day deadline is rarely complied with in the industry.[15] As a result, she found that in these circumstances the provision requiring the issuance of invoices within 180 days was not reasonable, not in accordance with industry standards, and not consistent with the business relationship between the parties.[16]
Alternatively, if the claims were statute barred, the Court would have held that there had been an acknowledgement of the debt.[17] According to Section 8 of the Limitation Act, this would have effectively extended the limitation period to begin at the time of the acknowledgement.[18] Obsidian’s after-the-fact attempt to make this acceptance contingent did not affect the nature of the earlier statement as an acknowledgement of debt.[19] The Court concluded that Harvest’s August 3, 2017 letter setting out the equalization invoices for the years 2012 to 2016 constituted an unconditional assertion of rights and not protected by settlement privilege.[20] Similarly, the Court found that while Obsidian’s response hinted at negotiations, it ultimately constituted an acknowledgement of this portion of the debt in writing.[21] Obsidian’s arguments that these emails were protected by settlement privilege were also unsuccessful. Justice Romaine considered the test for settlement privilege and concluded that there was no evidence to meet the second part of that test- that the parties intended to keep the communications confidential.
Further in the alternative, the Court would have permitted Harvest to set off its claim against Obsidian’s counterclaim.[22] The Court noted that it makes no difference that the claims that Harvest intends to use for its defence are statute-barred because, by using its contractual set-off rights, Harvest is not seeking relief from Court, and the immunity from claims under the Limitation Act is only immunity from court action.[23]
Takeaways
Harvest v Obsidian illustrates that courts may find contractual terms setting specific dates for the issuance of invoices unreasonable, particularly if those provisions are inconsistent with standard industry practice, or a history of a “relaxed” approach to billing between the parties. Courts will consider past practice of the parties and industry standards in determining what is considered reasonable, but always on the specific facts of each case. These considerations are not just applicable to oil and gas disputes, but will be relevant in other industries, particularly in construction matters and invoice disputes under the new Prompt Payment and Construction Lien Act, RSA 2000, c P-26.4, where we can expect the payment obligations under the act to be a very relevant factor in determining when limitations periods begin to run.
Practically speaking, parties and their counsel should engage in a detailed review of the governing contractual provisions in the initial stages of a dispute to ensure that they are not bringing a court action in the face of a limitation period that time bars their claim or erroneously defending a claim on that basis. Failing to properly understand the commencement of the applicable limitation period means that a court may dismiss the court action, leaving the plaintiff without legal recourse.
Parties should also be careful if attempting to resolve an invoice payment dispute. If a claim for settlement privilege is to have any merit at a future date, the parties need to be clear that the correspondence is meant to be confidential. Parties also need to understand that the acknowledgement of a debt should, moreover, be approached with caution as this can be used to re-start the limitation clock.
For further questions about this area of law, the applicability of the Harvest v Obsidian decision, or the pursuit or defence of legal action when a potential limitation period is present, please contact Miller Thomson’s Construction Litigation Group.
Upcoming event
Connect with us at the upcoming Construction Adjudication Prompt Payment Symposium Alberta in Calgary on April 20, 2023. The program brings together construction industry stakeholders to discuss the latest developments in prompt payment and adjudication, including exploring best practices for its practical implementation. Emma Johnston will be on a panel covering “Alberta’s Prompt Payment and Construction Lien Act and Regulations, Part 1 – prompt payment, construction lien revisions, and trust provisions”. Learn more about this event.
[1] [Harvest v Obsidian]
[2] Para 8(a).
[3] Para 4, 5, 10.
[4] RSA 2000, c L-12.
[5] Para 8(c).
[6] Para 8(c).
[7] Para 8(c).
[8] Para 8(c).
[9] Para 8(d).
[10] Para 8(e).
[11] Para 10.
[12] Para 8(a).
[13] Para 8(b).
[14] Para 3.
[15] Para 26.
[16] Para 27.
[17] Para 48.
[18] Para 35.
[19] Para 47.
[20] Para 46.
[21] Para 46.
[22] Para 57.
[23] Para 54.
