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Government Contracts

Monetary Sanctions for Environmental Damages

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The meaning of monetary sanctions came into question in the case of Epic Energy LLC. v. Encana Oil & Gas (USA) Inc. Epic Energy was held liable for environmental contamination and remediation failures of Encana by the Oil Conservation Division (Division of New Mexico. Epic Energy, LLC, a New Mexico company with its principal place of business in Colorado, entered into a Purchase and Sale Agreement (PSA) with Encana Oil & Gas (USA) Inc. The PSA was for Encana’s interest in oil wells and oil tank batteries in New Mexico with the effective date of July 1, 2016. Epic Energy entered into the PSA with Encana Oil & Gas  Inc. before the contamination occurred, leading to the argument of who was responsible for remediation costs and cleanup.

Epic Energy was forced to develop a costly remediation plan to clean up the contaminated soil. On January of this year, a suit was filed by Epic Energy to recuperate from the "monetary sanction" of creating the $150,000 remediation plan. Epic Energy, LLC asserted claims against Encana for declaratory judgment and injunctive relief; breach of contract and warranties; fraud and deceit; and breach of contract with respect to taxes.

Case Background

On December 8, 2015, one of Encana’s tank valves froze and leaked oil into the soil. According to regulations set by the New Mexico Oil Conservation Commission, Encana was required to report the leak to the Division within 24 hours and file release notification documentation. Encana failed to abide by both requirements. It reported the leak six days after it occurred, and filed an incomplete Release Notification document stating, “[a]ll liquids and contained soil were removed and disposed of in accordance with State rules.” Encana also failed to provide the Division soil sample data and evidence that the contaminated soil had been remediated. The Division formally recognized Epic Energy as the new operator of the wells on July 27, 2016. On April 13, 2016, a Division inspector found the oil release had not been remediated after conducting an inspection.

Cost of Remediation Plans = Sanctions

The Court found the facts of the case were sufficient for Epic Energy to state a claim for breach of contract of the PSA. Epic Energy argued Encana inadequately remediated the 2015 oil leak and falsely reported its remediation. Epic Energy stated that the cost of the remediation plan was a monetary sanction imposed by a government authority. Encana responded by arguing that no “fines, penalties or monetary sanctions’’ were ever imposed by the government. Encana disagreed with Epic Energy’s definition of “monetary sanction.” The Court decided in favor of Epic Energy. It stated that the costs of the remediation plan were result from Encana’s failure to remediate soil from the oil leak. Failure to remediate the soil led to the order for remediation. The cost of performing the remediation can be construed as a sanction resulting from Encana’s failure to comply with State rules. Encana also argued that construing monetary sanctions to mean “assume responsibility and pay for the costs of any remediation’ constitutes the ‘widest extent’ of those words." The Court again disagreed stating that remediation occurred because of the release.

Epic Energy argued the oil leak and lack of remediation were of a "material fact," that Encana knew about it, and failed to disclose it while having a duty to do so. Encana argued it had no duty to disclose the oil leak and imposing a duty to do so is precluded by law. Also, Epic Energy was required to do its due diligence and investigate Encana’s records. The Court again found in favor of Epic Energy. It noted a holding by the New Mexico Supreme Court that, “[w]hen one is under the duty to speak but remains silent and so fails to disclose a material fact, he may be liable for fraud.” The Court also stated due diligence will forestall a claim of reliance on representations, but only when both the buyer and seller have equal knowledge or access to the facts.

Acting In Good Faith As A Good Business Practice

The Court also held in favor of the Plaintiff with regards to breach of contract for contracts with respect to taxes. This case can serve as a learning experience for oil and gas companies. It is better to act in good faith and not attempt to get away leaving the bill for cleanup and fines to buyers. Cleaning and performing environmental remediation of spills can help save money in the long run by avoiding the cost of trial and unnecessary fines while keeping one’s name untarnished in the community. If you have concerns regarding environmental remediation or want to ensure you are not held liable for environmental claims, contact Whitcomb, Selinsky Law PC at (866) 476-4558 or complete an online contact form.

About the AuthorRaymundo Ribota

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