Jun 14, 2018

Recklessness is properly considered an alternative which satisfies the second element of the test for fraud.~

BACKGROUND: The Respondent, Precision Drilling Canada Limited Partnership, brought a summary judgment application for unpaid fees for drilling three oil wells for the Appellant, Yangarra Resources Ltd. The Appellant resisted payment on the basis of set-off and damages, alleging breach of contract, gross negligence, wilful misconduct, fraudulent misrepresentation, and breach of duties of honesty and good faith. The agreement between the parties was a standard form industry contract, under which each party would bear the risk of damage to its own assets. During the night shift on December 2, 2011, an employee of the Respondent mistakenly mixed sulfamic acid instead of caustic potash into drilling mud. For the rest of that shift and into the day shift, the Respondent advised the Appellant that the drilling mud was in order, when it knew or ought to have known it was not. The drill string and bit became stuck in the hole on the afternoon of December 3, 2011. The Respondent conceded that it failed to inform the Appellant of the mixing error until after the bit became stuck. The Respondent’s attempt to extract the Appellant’s equipment from the well was unsuccessful, and the well was subsequently abandoned with $300,000 worth of the Appellant’s equipment lost. The cost of drilling the replacement well that was now required was roughly $2 million. The Respondent sued the Appellant for the work it had performed and the equipment it had provided. The Appellant replied that the Respondent had breached its contractual commitment to drill the well in a good and workmanlike manner, in accordance with good drilling practices. The Appellant sought a set-off and counterclaimed for the loss of its equipment in the original well, the cost of drilling the replacement well, and other associated costs. In late 2012, the Respondent’s initial summary judgment application was adjourned at the Appellant’s request. It wished to gather more evidence to support its allegation that the Respondent had acted improperly following the mixing error. In June 2015, a Master granted the summary judgment application, finding that the Appellant’s set-off defence and counterclaim were barred by the exclusion of liability clauses in the contract. The appeal of that decision to the Court of Queen’s Bench was unsuccessful. The chambers judge found no evidence to support the claims of fraudulent misrepresentation, and agreed with the Master that the contract excluded liability for the type of damage the Appellant was claiming.

APPELLATE DECISION: The appeal was allowed. The majority held that there was a genuine issue requiring trial on the record before the court in the summary judgment application. It was a palpable and overriding error to find that there was no evidence of fraud. The majority found that the chambers judge erred both in the conclusions he drew on the issue of fraudulent misrepresentation, and by failing to identify and apply the proper test for fraud. The facts assumed by the chambers judge for the purpose of the summary judgment application suggested not only a failure to disclose the mixing error, but active steps to deceive or, at the very least, recklessness. Beyond not informing the Appellant of the error, the Respondent proceeded to convey false information about it. This was an issue that required determination at trial. The chambers judge also appeared to understand that the Respondent had to intend to conceal critical facts in order for the representation to be actionable. This is not the test for fraud. While there is some uncertainty as to whether intention to deceive is an element of fraud, there is no specific requirement in the test to prove intention to deceive. Recklessness, which the judge did not consider, is an alternative which satisfies the second element of the test for fraud. In the majority’s opinion, there was sufficient evidence to support an inference that the Respondent “shut its eyes” to the potential consequences of the mixing error.

Madam Justice Paperny dissented. She characterized the contract between the parties as a bilateral no-fault agreement. Neither the Master nor the chambers judge found any ambiguity in the terms of the agreement. Both concluded that negligence and gross negligence are specifically encompassed in the exclusion clauses. One clause expanded the release to include “any other theory of legal liability”. She saw no palpable or overriding error in the chambers judge’s decision.