Oil Operators' Liability: Study on Contractor Relationship in Oil & Gas, Exercises of Law

Download Oil Operators' Liability: Study on Contractor Relationship in Oil & Gas and more Exercises Law in PDF only on Docsity! 108 ALBERTA LAW REVIEW THE LIABILITY OF A DRILLING CONTRACTOR* The facts presented for the purposes of this paper are as follows: Oil operator C hired a drilling contractor D as an independent contractor to drill a well for the purpose of obtaining production of oil and gas. During the course of drilling the well, while D was carrying out an in­ herently dangerous act, an explosion took place which resulted in loss of the hole, loss of the drilling rig, and loss of a third party's nearby equipment. Six separate questions are based on these facts, along with certain other facts which were added for the purposes of questions five and six. These questions are as follows: (1) Assuming D was not negligent in carrying out the inherently dan­ gerous act, what liability arises-with regard to D?-with regard to C? (2) Assuming D was negligent, what liability arises-with regard to D?-with regard to C? (3) What conditions are essential to ensure that D will be accorded the status of an independent contractor? ( 4) Give some examples of drilling, testing or completion operations that you would consider to be inherently dangerous acts. (5) M, C's invitee, was on the derrick floor and was killed in the ex­ plosion. Who was liable for his death? What difference would it make if M was D's invitee? (6) On the instructions of Sneak Company, a trespasser scout was under the derrick floor and was also killed in the explosion. Who is liable for his death? The basic purpose of this paper is to examine the relationship of em­ ployer-independent contractor and its application in the oil and gas industry to the relationship that exists between an oil well operator and a drilling contractor. A reading of the above questions will show that the problem is presented in the light of various types of liability, for example, strict liability, liability with regard to inherently dangerous chattels, and occupiers' liability. Prior to dealing with the specific questions set out above, we wish to comment briefly on the law under the following general headings: - A. LIABILITY GENERALLY Generally speaking, liability rests on fault, that is, on the concept of actionable negligence. The components of a cause of action for negli­ gence are: a duty recognized by law, a breach of that duty, and damages flowing from that breach. The classic statement of the law setting out the relationship between persons that gives rise to such duty is that of Lord Atkin in the case of Donoghue v. Stevenson: • This paper was prepared through the combined efforts of D. C. Prowse, Q.C., P'enerlY & Co., Calgary; R. c. Muir, Sollcitor, British American Oil company Limited, CalSarY; Murray F. Mackintosh, Solicitor, Hudson's Bay Oil & Gas Co. Ltd., caigary; R.R. Mahaffey, Solicitor, California, Standard Company, Calgary; D. O. Sabey, Chambers, Saucier & Co., ~ W. B. Macinnes, Lougheed, Ballem, McDill & Macinnes, Calgary; and J. L. Ftnsarson, ~enerty & Co., Calgary. THE LIABilJTY OF A DRll.,LING CONTRACTOR 109 The rule that you are to love your neighbour becomes, in law, you must not injure your neighbour; and the lawyer's question, Who is my neighbour? re­ ceives a restricted reply. You must take reasonable care to avoid acts or omis­ sions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be-persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. 1 The consideration of whether or not any given conduct amounts to a breach of that duty, once a duty is established, involves a consider­ ation of the concept of the standard of care which the law establishes. It will be appreciated that "the risk reasonably to be perceived defines the duty to be obeyed. "2 The principle was expanded on by Lord Atkin at another portion of the Donoghue case where he stated at page 596: The nature of the thing may very well call for different degrees of care, and the person dealing with it may well contemplate persons as being within the sphere of his duty to take care who would not be sufficiently proximate with the less dangerous goods; so that not only the degree of care but the range of persons to whom a duty is owed may be extended. 8 On the other hand, "people must guard against reasonable probabi­ lities, but they are not bound to guard against fantastic possibilities."' Assuming a duty, breach and some damages, the further question that arises is whether the damages are recognzied in law as flowing from the breach; the question of remoteness of damage. In this regard we refer you to OveTseas Tankship v. Mort's Dock/• B. EXCEPTIONS TO THE GENERAL RULES WITH REGARD TO LIABILITY. Under this heading we propose to deal with the rule in Rylands v. FletcheT,6 and to comment on the Court's attitude toward liability for inherently dangerous chattels and extra hazardous operations. In the course of his judgment in Rylands v. FletcheT, Blackburn, J. stated: We think that the true rule of law is, that the person who for his own purposes brings on his lands and collects and keeps there anything likely to do mischief if it escapes, must keep it in at his J>eril. and, if he does not do so, he is prima facie answerable for all the damage which is the natural consequence of its escape. 7 If a situation falls within this rule, then liability is absolute. The rule has been used to impose liability for the escape of water, electricity, gas, oil, fire and explosions. Liability for damages arising out of the use of dangerous chattels and extra hazardous acts and operations is theoretically not absolute, but the tendency of our Courts has been to impose such a high standard of care that in fact the liability does become absolute. We refer you again to the Donoghue v. Stevenson where Lord Mac­ Millan stated: 1 (1932) A.C. 562, 580, 62 N E 99 2 l>alsomf v. Long Island Rail1'04d Company (1928), 248 N.Y. 339; 1 . . , Pff s ~~~;ample of this principle is given In Winfield on To1't, at 260, where the author compares the duty the law casts on a man carrylns a Pound of bu~r as compared to a Pound of dynamite. Reference should also be had to Dominion Natunl Ga.a v. Collins, (1909) A.C. 640. Ref sh uld • Fci1'don v. Harcourt (1932), 146 L.T. 391, 392, Pe1' Lord Dunedin. erence o also be had to Bolton v. Stone, [ 1951) A.C. 850. 511961) A.C. 388. e 1866 L.R. 1 Ex. 265, affd. [1868) L.R. 3 H.L. 330. T d., at 2'79-280, 112 ALBERTA LAW REVIEW Of the two exceptions to the rule that an employer is not liable for the acts of his independent contractor, the exception based on inherently dangerous chattels and extra hazardous acts is of more interest to persons concerned with the oil industry. In St. John v. Donald, Anglin, C. J.C., stated this exception as follows: The employer is never responsible for what is termed casual pr collateral negligence of such a contractor or his workmen in the carrying out of the contract: and it is not universally true that he is responsible for injury oc­ casioned by improper or careless performance of the very work contracted for; he is not so where the work is not intrinsically dangerous and if executed with due care, would cause no injury, and the carrying out of it in that manner would be deemed to have been the thing contracted for. His vicarious respon­ sibility arises, however, where the danger of injurious consequences to others from the work ordered to be done is so inherent in it that to any reasonably well-informed person who reflects upon its nature the likelihood of such con­ sequences in so doing, unless precautions are taken to avoid them, should be obvious, so that were the employer doing the work himseli his duty to take such precautions would be indisputable. That duty imposed by law he cannot delegate to another, be he agent, servant or contractor, so as to escape liability for the consequences of failure to discharge it. That, I take it, is a principle applicable in such a situation whatever be the nature otherwise or the locus of the work out of which it arises. 111 E. OCCUPIERS' LIABILITY Before beginning a general discussion of occupiers' liability, we must set out our conclusion as to the liability of the operator and the liability of the contractor for injuries suffered by persons who are not on the pre­ mises. We are of the opinion that if D, in carrying out an inherently dangerous act, is negligent, and if by that negligence some person off the premises is injured, then both D, and C, his employer, will be liable for those injuries. The next question which must be considered is whether or not the fact that the injured party is on the land occupied by the employer changes that party's position in the eyes of the law with regard to potential rights of action against the employer-occupier? We have assumed for the purposes of this paper that the operator, and not the driller, is the occupier of the premises and as such, reference should first be made to the liability of a non-occupier to persons visiting the premises. The primary question that arises is whether or not an in­ dependent contractor carrying on an operation on the land of another has the same defences available as the occupier would have with respect to loss suffered on the premises by other persons coming on to the land. The leading case on the subject appears to be Billings v. Riden 16 where the House of Lords held that an independent contractor, not in possession of the premises, owed a duty "to take reasonable care for the safety of visitors" and further held that the independent contractor's duty was not co-extensive with that of the occupier of the premises. Another English case dealing with the problem was Buckl.and v. Gu,ildfoTd Gas1 7 where a thirteen year old girl, who was trespassing on the land of a farmer, climbed a tree and came into contact with the Defendants' high-voltage electric wires which were hidden in the foliage. In holding the Defendants liable, the Court relied on the classic test of Lord Atkin as to whether or not the Defendants had been guilty of u (1926) 2 D.L.R. 185, 191. Reference should also be had to The Paa of Baaate,,, (1942) at 112: HoneJ11Dill v. Larkin, (1934) 1 K.B. 191, at 196 and 197: Bennett v. Imperial Oil Limited (1961), 28 D.L.R. (2d) 55. 16 f 1958) A.C. 240. 11 1949 1 K.B. 410. THE LIABILITY OF A DRILLING CONTRACTOR 113 negligence and held that the fact that the child was a trespasser as re­ gards the farmer did not constitute a defence which the gas company could take advantage of. It should also be noted that the Court distin­ guished the case of Robert Addie v. Dumbreck. 18 It is our opinion that the liability of persons carrying on activities on land in possession of another is based on the broad principles of negli­ gence as laid down in Donoghue v. Stevenson. Support for this principle is found in a number of recent cases, and in the writings of leading au­ thorities on the subject. 19 Questions 5 and 6 (Ante), dealing with an invitee and a trespasser, · respectively, raise the problem of the liability of an occupier-employer for the results of activities conducted on his premises. As stated above, we have assumed that the operator is the occupier of the premises within the meaning of the term as used in the cases. Most of the cases and many textbook writers 20 dealing with occupiers' liability treat the duty owed to a person visiting the premises as one in relation to the state of the premises. However, there appears to be a tendency in some recent de­ cisions for the Courts to extend the rules relating to an occupier's liability to include liability not only for the state of the premises but for activities conducted on those premises. 21 These decisions appear to have served the purpose of giving a remedy to the Plaintiff in particular circumstances. We are of the opinion that, while the trend to equate the state of the premises with activities conducted thereon may provide a remedy in certain circumstances, such an approach to the problem limits and re­ stricts the general development of the law along the lines of the broad principles of negligence. There can be no question that this area of the law is in a state of flux and as the Supreme Court of Canada has in­ dicated, 22 it is prepared to move with the times. We would, therefore, expect and hope that we can look forward to bold steps in this respect if and when the Supreme Court of Canada is given an opportunity to deal with this question. If one can conclude that the law will develop along the lines set out above, then an occupier's liability, with respect to activities conducted on the premises, will be determined by the ordinary principles of negli­ gence. If the activities are conducted by a servant, then the occupier will be vicariously liable. On the other hand, if the activities are con­ ducted by an independent contractor, then the occupier will not neces­ sarily be liable; the rules discussed above in relation to an employer's liability and the exceptions thereto would apply. Mention should also be made of the position of a trespasser, with respect to the question of an occupier's liability for operations being carried out on the premises. Recent decisions indicate that it will be difficult to overcome the effect of the categories of occupier's liability, 28 but again this area is open for a final pronouncement on the part of the 1a [1929) A.C. 358. 19 Fleming on Torls, 3d ed., at 439; Salm01ld 01l Tons, 14th ed., at 413; Nb:<m v. Manitoba Pown (1960), 21 D.L.R. (2d) 68; LeBlank v. The Citi, of MonctO'R (1962), 33 D.L.R. (2d) 395. 20 Salm01ld 01l Tons, 14th ed., c. 12; Fleming on Tons, 3d ed., c. 19. 21 Lehnert v. Nielson, [1947) 2 w.w.R. 25; Fleming 01l Tons, 3d ed., at 405. 22 Hillman v. MacIntosh, (1959) S.C.R. 384, wherein the Supreme Court to all Intents and purposes overruled Fai1"ffl4n v. Perpetual Investment, [1923) A.C. 74. 2a StcintO'R v. Tas,lcn', Pearson & Carson, (1965), 54 W.W.R. 449;Com'r. for Ri,s. v. Quinlan, (1964 J 1 All E.R. 897. 114 ALBERTA LAW REVIEW Supreme Court of Canada and we are inclined to the view that the ordinary rules of negligence should apply. We now propose to apply the principles set out above to discuss and to solve each of the questions set out at the start of this paper. (1) D NOT NEGLIGENT-INHERENTLY DANGEROUS ACT. On the basis that D is an independent contractor throughout, and on the basis that he was not negligent at anytime whatsoever, it is our opinion that with regard to damage to the hole and the rig, D will not be liable in the absence of negligence. In United States jurisdictions absolute liability attaches to persons dealing with or performing what can be termed ultra-hazardous activities. In that regard we refer you to the American Restatement of Torts: One who carries on an ultra-hazardous activity is liable to another whose person, land or chattels the actor should recognize as likely to be harmed by the unpreventable miscarriage of the activity for harm resulting thereto from that which makes the activity ultra-hazardous, although the utmost care is exercised to prevent the hann.H Although it is certainly not unforeseeable that such law could be brought into this jurisdiction by way of statute sometime in the future, we are of the opinion that, at present, despite the turn toward strict liability, the law will still not attach liability to a person carrying on ultra­ hazardous activities unless there is some indication of negligence. This being the case, it is our opinion that no liability will attach to D for the damage to the hole and rig. We should refer again, however, to our comments regarding inherently dangerous chattels and activities and the fact that the standard of care in such situations becomes so stringent as to almost impose strict liability. Examining the question from the point of view of C, the operator who hired D, one must come to the same conclusion. Not only is it the general rule that an employer cannot be liable for the acts of his in­ dependent contractor, but how can an employer be liable if the con­ tractor himself cannot? We have assumed for purposes of posing this question that the employer himself is not guilty of any negligence in directing C to carry out the ultra-hazardous activity. With regard to the third party's equipment which is located nearby (we have assumed somewhere off the premises), we are of the opinion that the principle enunciated in Rylands v. Fletcher is applicable. It will be appreciated that to fall within the Rylands v. Fletcher rule there must be a non-natural user of the land, something brought onto that land likely to do mischief if it escapes, and an escape. We are of the opinion that bringing a rig and drilling equipment onto land amounts to a non-natural user so as to fall within the principle set out above. The Privy Council, in Rickards v. Lothian stated: It is not every use to which land is put that brings into play that principle. It must be some special use bringing with it increased danger to others, and must not merely be the ordinary use of the land or such a use as is proper for the general benefit of the community. 25 We are also of the opinion that the explosion which presumably caused HS, 519, 25 [1913) A.C. 263. THE LIABILITY OF A DRILLING CONTRACTOR 117 clause in a drilling contract purporting to create the status of indepen­ dent contractor at all times and for all purposes is meaningless as re­ gards third parties. The question of control is of special interest to the oil industry, where many drilling contracts make provision for the operator to assume complete control of the rig and drilling operations once any indication is had that the pay zone is being reached. We are of the opinion that, depending upon the circumstances of each individual case, the assuming of such control could well amount to changing the status of the drilling contractor from an independent con­ tractor to a servant of the operator at the tiine control is assumed. The American jurisdictions appear to have reached a similar conclusion. We would refer you to Lone StaT Gas Company v. Kelly,u where the Texas Commission of Appeals said: An independent contractor is one whom the employer has no right to control as to the manner in which the work is done, or the means by which it is ac­ complished.35 Keeping the above question in mind, we must now turn to the man­ ner in which control is exercised over the drilling of an oil and gas well and investigate what the . Courts have said as to what circumstances create the status of an independent contractor. In an article by Wilmer D. Masterson, Jr. entitled The Legal Position of the Drilling ContractoT,86 he states that practically every drilling contract provides for inspection of work as it progresses by the operator. He points out that a right to inspect without any right of control does not destroy or affect in any way the status of an independent contractor, and this is true whether the right to inspect accrues after the work is completed, or as the work progresses. He quotes with approval Arkansas Natural Gas Company v. Miller 1 where it is stated: The mere retention by the owner of the right to inspect work of an independent contractor as it progresses, for the purpose of determining whether it is com­ pleted according to plans and specifications does not operate to create the re­ lation of master and servant between the owner and those engaged in the work. This rule is not altered by the fact that the employer may stop work which is not properly done. It also appears clear that a drilling contract can create the status of independent contractor for some acts in the drilling operation and re­ frain from doing so as to other parts. For example, the drilling con­ tractor may be an independent contractor as the well is drilled in that the operator maintains little or no control over the operation at that time, and then as the well nears completion, the operator may well as­ sume sufficient control to destroy the previous relationship. Some of the conclusions set out by Masterson in his article are both interesting and helpful in dealing with what provisions should be in­ serted into drilling contracts. He suggests as follows: "1. Define and limit authority of employees to modify the contract, particularly the provisions thereof relating to control of the work; 2. Define which party shall have control at each of the various steps in drilling, fixing liability for damage which may occur at any such step, both as be­ tween the parties themselves, and as between them and specialty contractors or other third parties; 3. Provide in detail what machinery shall be used and the method of use­ that is make the drilling of a well as safe as a contract can make it .... " ----3' [1932) 46 s.w. (2d) 656. 35 Zd., at 657. ste Le,.~, F d ti ae The First Annual Institute on on and Gas Law {1949), Southwe m ocu oun a on. at 183. 8T (1912} 152 S,W. 147. 118 ALBERTA LAW REVIEW (4) INHERENTLY DANGEROUS OPERATIONS-DRILLING, TESTING AND COMPLETION. In Beckett v. Newals Insulation Company, 88 the Court stated: The true question is not whether a thing is dangerous in itself, but whether, by reason of some extraneous circumstances, it may become dangerous. There is really no category of dangerous things; there are only some things which require more and some which require less care. We are of the opinion that drilling operations per se are not inherently dangerous. However, by reason of the risk that during the course of such operations gas under pressure may be encountered at any time, drilling operations are potentially dangerous. The potential is realized and they become inherently dangerous when during the course of such operations gas is encountered. The danger arises from the risk of an uncontrolled release of gas under pressure, ignition, or its poisonous characteristics in some circumstances. The danger of striking pockets of gas of the ordinary variety or marsh gas is one example of an inherently dangerous act, another example is the use of air in place of a drilling fluid where gas may be encountered. The same danger arises in testing and completion opera­ tions. Aside from risks involved in drilling itself there are ancillary sources of risk such as acidizing. Such procedures bring onto the pre­ mises a dangerous substance and the risk here is not only in the use but in transportation and storage of such substances. (5) and (6) OCCUPIERS' LIABILITY In our earlier remarks we expressed the opinion that a distinction should be drawn between the duty owed with respect to the state of the premises and the duty that arises when operations or activities are con­ ducted on the premises. With respect to the duty owed to an invitee in relation to risks arising from operations conducted on the premises, in our view, the occupier will be liable in our circumstances when the operations are inherently dangerous and the driller is guilty of negligence. If th~ driller is negli­ gent and the operations are not inherently dangerous, in our view liabi­ lity should not attach to the operator. Turning to the case of the trespasser, certainly there is some doubt that the law will develop as far along the lines set out herein as we have predicted. Fleming states: But this timely reappraisal, evidently appealing even to English courts, was abruptly caught short by the Privy Council which would brook no such com­ promise with the old verities, thus dispelling again all sanguine hope of re­ placing the presently fragmented pattern of legal rules by a more systematic and reformed modem solution. 89 If development of the law in this. branch does not take place then the occupier will not be liable for mere negligence on the part of the driller even though the act is inherently dangerous. The driller's liability, which will also be the basis of the occupier's liability if the predicted development in the law takes place, will depend upon evidence to support the conclusion that the driller was or should have been aware of the presence of the trespasser. The risk that a trespasser is present must be substantial and not a mere possibility. 88 '1953] 1 WL.R. 8. 89 Flemfns, The Leno of Tons, 3d ed., at 432.