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Alberta's Limitations Act

Problems and Solutions for the Oil & Gas Industry

The Petroleum Accountants Society of Canada (PASC) has developed a set of Accounting Procedures that are widely used throughout the Canadian oil & gas industry. These Accounting Procedures establish an audit process, also widely accepted in the industry, that permit audits to be conducted up to twenty-four months after the end of the calendar year in which operations occur.

The coming into force of the Limitations Act (Alberta) has created a conflict between industry audit procedures and limitations rules in Alberta. The Limitations Act requires that a claimant file a statement of claim within two years of when it knew or ought to have known of the existence of its claim. This creates the possibility that the limitation period for bringing a claim may expire before an audit even occurs .

The changes resulting from the Limitations Act also conflict with the standard dispute resolution practices of the oil & gas industry, where claims often are still being negotiated two years after the event. However, the problem is particularly apparent for audits, and it poses a serious threat to the proper functioning of this important process.

As the organization responsible for establishing these industry audit procedures, PASC instigated the formation of the "Limitations Task Force" to study and make recommendations to resolve this problem. The Limitations Task Force has made two major recommendations. The first is that the oil & gas industry include a clause in all future agreements that extends the limitation period for claims arising under such agreements. The Limitations Task Force has prepared and the PASC Board of Directors has approved a new limitations clause that would allow sufficient time for audit and dispute resolution processes to occur before the limitation expires.

The second recommendation of the Limitations Task Force is that existing industry agreements be amended to adopt this new limitations clause. However, if this recommendation is to be adopted, there are tens of thousands of agreements that require amendment. In order to tackle this potentially monumental task, the Limitations Task Force recommends that industry utilize a procedure similar to that created in 1993 when industry altered its practices regarding the usage of novation agreements. The Task Force has developed, and the PASC Board of Directors has approved, the "Industry Agreement regarding Limitations" that will adopt the new limitations clause in all relevant industry agreements upon execution by the parties to those agreements.

Click on the hyperlinks below to view the following documents in Adobe Acrobat format: (i) the PASC Commentary on the Limitations Clause and the Industry Agreement regarding Limitations, which includes the new limitations clause and a more detailed explanation of the need for its adoption by industry, (ii) the Industry Agreement regarding Limitations in a form ready for execution, (iii) the Limitations FAQ, which is a list of answers to some frequently asked questions about the limitations clause and the Industry Agreement regarding Limitations, and (iv) the Listing of Parties to Industry Agreement. The Limitations FAQ will be updated as additional relevant questions are identified.

PASC urges every oil and gas company with Alberta operations (or who may have claims that could be pursued in Alberta courts) to:

  1. adopt the new limitations clause in all future oil & gas agreements to which the company is a party;
  2. have the company (and its affiliates) sign the Industry Agreement regarding Limitations and deliver a counterpart execution page by courier or fax to PASC on or before February 15, 2001 (which is the final deadline for execution); and
  3. encourage its industry partners to sign the Industry Agreement regarding Limitations as well, because oil & gas agreements will only be amended if all of the parties to an agreement also sign the Industry Agreement.

Every company's accounting, land and joint venture personnel should be informed of this initiative.

A great deal of effort has gone into the development of the new limitations clause and the Industry Agreement regarding Limitations. Everyone who participated in that process is to be commended for their contribution. In addition to representatives from industry associations such as PASC, PJVA, CAPL and CAPLA, the Limitations Task Force included representatives from Anadarko, Anderson, BP, Chevron, Gulf, Husky, Imperial Oil, Mobil, PanCanadian, Petro-Canada, Shell and Talisman. Although PASC cannot provide assurances that each of these companies will sign the Industry Agreement regarding Limitations, it is already evident that the Industry Agreement will have broad support within the oil and gas industry.

Click on the hyperlink below for a current listing of the oil & gas companies who have signed the Industry Agreement regarding Limitations.

Current Listing of Parties to Industry Agreement (as of February 2001)

Wayne Forrest
President, Petroleum Accountants Society of Canada (2001)

Jay Park
Director, Petroleum Accountants Society of Canada and Chair, Limitations Task Force (2001)


Regarding Industry Agreement Supplement

A potential flaw has been identified in the Industry Agreement regarding Limitations.

The Industry Agreement adopts a new limitation clause that extends the limitation period provided for in section 3(1)(a) of the Limitations Act. However, the Limitations Act also contains another reference to the availability of a limitation defence in section 2(1.1). This section states that where the claimant knew or ought to have known of a claim before March 1, 1999, it must commence an action to protect that claim before March 1, 2001 (if not sooner under the old Limitation of Actions Act), or else the defendant is entitled to a limitations defence under that section.

The Industry Agreement regarding Limitations did not make reference to section 2(1.1). Some persons have argued that, as a consequence of this, the Industry Agreement does not protect claims of which the claimant knew or ought to have known before March 1, 1999. PASC does do not agree that this is the proper conclusion to draw from the Industry Agreement (especially in light of clause 3.2(a) of the Industry Agreement), but it is conceded that the argument is at least tenable, and there is a risk that it could be successful if argued in court. PASC is confident that no party involved in the preparation of the Industry Agreement regarding Limitations intended that it not apply to claims that were known before March 1, 1999.

PASC is not prepared to accept a risk that such an argument could be successful. After much consideration (and with no small amount of distress), PASC has decided that the Industry Agreement regarding Limitations should be clarified to resolve this problem.

Accordingly, PASC has prepared and circulated by mail to all of the signatories to the Industry Agreement a document called the Industry Agreement Supplement . It adds a new section 2.2 to the Industry Agreement which clarifies the intent that the extended limitation period established in the Industry Agreement applies to claims that a party knew, or in the circumstances ought to have known, before March 1, 1999. See below to print a copy of the Industry Agreement Supplement. If you would like a hard copy of this page please call the office at 262-4744 and they will be happy to forward one to you.

All signatories to the Industry Agreement are asked to review and sign the Industry Agreement Supplement and provide it to PASC by mail, courier or fax. If you have any questions about this document, please contact the PASC office. Only parties to the Industry Agreement regarding Limitations are permitted to sign the Industry Agreement Supplement.

Although no deadline has been established for the execution of the Industry Agreement Supplement, the impending end of the transition period under the Limitations Act on February 28, 2001 makes it important that all parties to the Industry Agreement sign the Supplement as soon as possible, and ideally not later than February 28, 2001.

PASC will be reporting on the status of the execution of the Industry Agreement Supplement by sending a letter to all parties to the Industry Agreement on March 1, 2001. If you are interested in knowing the status of execution of the Industry Agreement before or after that date, this will be maintained on the PASC website, on the page showing the final list of signatories to the Industry Agreement. It will be updated on a daily basis.

157948.v4

SUPPLEMENT TO INDUSTRY AGREEMENT REGARDING LIMITATIONS

dated February 16, 2001

AMONG:

OIL AND GAS INDUSTRY PARTICIPANTS

WHEREAS each of the parties to this agreement (the "Industry Agreement Supplement") are Parties to the Industry Agreement regarding Limitations (the "Industry Agreement") dated January 1, 2001;

AND WHEREAS the parties to this Industry Agreement Supplement wish to add a provision to the Industry Agreement to clarify their intent;

NOW THEREFORE in consideration of the mutual promises and agreements of current and future signatories, the Administrator and each of the parties, by its execution of this Industry Agreement Supplement, agree to accept and be bound by the terms and conditions set out below.

  1. Terms defined in the Industry Agreement shall have the same meaning in this Industry Agreement Supplement.
  2. The following is added as section 2.2 of the Industry Agreement:
    "2.2 For greater certainty, section 2.1 of this Industry Agreement extends the two year period under section 2(1.1)(b) of the Act to the time specified in section 2.1 of this Industry Agreement."
  3. Each party to this Industry Agreement Supplement agrees that it is not only an agreement between it and each other party as at the date of its execution, but is also an offer to each of the Parties to the Industry Agreement. This Industry Agreement Supplement shall be a continuing agreement binding each party to its terms on and after the date of that party's subscription notwithstanding that other Parties may be added. An Agreement shall be amended by this Industry Agreement Supplement effective February 15, 2001 once all of the parties to the Agreement on that date are also Parties to this Industry Agreement Supplement.
  4. To subscribe to this Industry Agreement Supplement, a party shall deliver to the Administrator one executed counterpart execution page. The counterpart execution page may be delivered by courier or mail to the Administrator at the Administrator's address for service, or by fax (as specified below).
  5. This Industry Agreement Supplement may be executed in counterpart and, when a counterpart has been executed by a party, that counterpart shall be binding against that party. All counterparts together shall constitute one agreement.
  6. The Industry Agreement, as amended by this Industry Agreement Supplement, is ratified and confirmed.

Party's Full Name:
PETROLEUM ACCOUNTANTS SOCIETY OF CANADA

Per: ____________________
Per: ____________________
Per: ____________________
Per: ____________________

Date: February 16, 2001