Court of Appeal Upholds Limit On "Pay First, Dispute Later" Principle

Written By Michael P. Theroux and Christine Plante

In a recent decision in Talisman Energy Inc v Questerre Energy Corporation, 2017 ABCA 218 [Talisman], the Alberta Court of Appeal upheld the decision of the Court of Queen's Bench, to place limits on the "pay now, dispute later" structure, common in agreements governed by the Canadian Association of Petroleum Landmen (CAPL) operating procedure.

This decision comes in the wake of the 2015 decision in SemCAMS ULS v Blaze Energy Ltd [SemCAMS], which was also upheld last year by the Alberta Court of Appeal. In SemCAMS, the court awarded a gas facility operator summary judgment for its unpaid invoices totaling over $6 million, even though the non-paying producer alleged accounting errors, overcharges and various set-offs. The court recognized that it is unusual for a party to obtain summary judgment when the amount of the bills is disputed and may be subject to adjustment following an audit. However, the court awarded summary judgment to the operator on the basis of the "pay first, dispute later" structure of the gas transportation, processing and facility operating agreements which included the CAPL operating procedure—if Blaze alleged accounting errors, overcharges and other concerns with the amount of the invoice, it had to pay those invoices first, then dispute the amount through an audit or civil claim.

In Talisman, the operator, Talisman, also applied for summary judgment of unpaid drilling invoices based on the "pay now, dispute later" structure of its joint operating agreement with Questerre, and relying on the reasoning in SemCAMS.

In this case, the summary judgment application was denied. The court acknowledged that the parties had incorporated the CAPL operating procedure into their farmout agreement and agreed that Questerre would ordinarily be required to pay all invoices from Talisman notwithstanding the right to audit or dispute the charge later. However, Questerre asserted that it was not required to pay any invoices as Talisman had not performed the agreed operations on the two wells in Quebec. Questerre asserted that it had only agreed to participate in operations (and share in those costs and risks) based on Talisman's agreement to not only drill but also complete those wells. Ultimately, neither well was completed and Questerre did not pay its proportionate share of those drilling costs, leading to the dispute and Talisman's application for summary judgment.

The courts' earlier decisions in SemCAMS were distinguished on these facts and Talisman's application for summary judgment of its unpaid invoices (approximating $6 million) was dismissed. Questerre did not dispute the nature or the quantum of the drilling costs; its defence was more fundamental. Questerre claimed that Talisman was not entitled to have those costs paid unless and until it complied with the agreement reached by the parties to complete the wells. The courts determined that the CAPL operating procedure did not automatically apply to require Questerre to "pay now, dispute later" simply because the parties had agreed that the CAPL operating procedure would apply to their joint operations. Before deciding whether the CAPL operating procedure applied, the court would first need to determine what the parties actually agreed to (was it an agreement to complete, or an agreement for combined (drill and complete) operations). This dispute, the court determined, would need to proceed to trial to be fully adjudicated.

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