Protection of Operators under Joint Operating Agreements

On February 14, 2014, the U.S. District Court for the Southern District of Texas – Houston Division, followed the expansive protections granted to operators under Reeder v. Wood County Energy, 395 S.W.3d 789 (Tex. 2012).  MDU Barnett Ltd. P’Ship v. Cheasapeake Exploration Ltd. P’Ship, No. H-12-2528, 2014 U.S. Dist. LEXIS 18769 (S.D. Tex. Feb. 14, 2014).  MDU Barnett is significant because it is one of the first decisions to follow Reeder and it departed from prior Fifth Circuit precedent, Stine v. Marathon Oil Co., 976 F.2d 254 (5th Cir. 1992), to follow Reeder.

In 2012, the Texas Supreme Court in Reeder concluded that the exculpatory clause in AAPL Form 610-1989 Joint Operating Agreement applied to a breach of contract claim, which expanded the scope of the activities an operator would not be held liable for absent gross negligence or willful misconduct.  Reeder v. Wood County Energy, 395 S.W.3d 789 (Tex. 2012).  In Reeder, the Texas Supreme Court considered whether the exculpatory clause in the Joint Operating Agreement (“JOA”) operated to bar breach of contract claims.  Id., at 792.  The Texas Supreme Court focused on the difference in language between the 1989 Form and the 1982 Form and earlier versions of the Form JOA.  Specifically, the Court focused on the phrases “shall conduct its activities” and “shall conduct all such operations.”  Reeder explained that “all such operations” extended “only to claims that the operator failed to act as a reasonably prudent operator for operations under the contract, and not for other breaches of the JOA.”  Id., at 793 (citing Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741 (Tex. App. – El Paso 2000, no pet.).  Reeder concluded that use of “activities” instead of “operations” expanded the scope of the exculpatory clause of the JOA:  “use of the term ‘its activities includes actions under the JOA that are not limited to operations.  The modification implicates a broader scope of conduct following the language of the contract.  The agreed standard exempts the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or will misconduct.”  Reeder, 395 S.W.3d at 795.

It was under the new framework of Reeder that MDU Barnett considered an exculpatory clause in a modified Form 610-1982 JOA.  In MDU Barnett, the Operator “agreed to conduct operations ‘in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.’”  2014 U.S. Dist. LEXIS 18769, at *6.  Plaintiffs filed suit against the Operator for Operator’s alleged failure to development information and acreage maps in a timely and accurate manner.  Id., at *7.  The Court in MDU Barnett considered whether the exculpatory clause, which was similar to the language in the 1977 and 1982 Form JOAs, barred Plaintiffs’ claims.  Id., at *21.  MDU Barnett explained that earlier Texas intermediate appellate courts concluded that use of the phrase “all such operations” in the exculpatory clause limited the scope and protection of the exculpatory clause “to the operator’s activities at the wellsite and did not extend to other breaches of the agreement.”  Id., at *22 (citing Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741, 759 (Tex. App. – El Paso 2000, no pet.).  In reaching that conclusion, Abraxas and the other Texas intermediate appellate implicitly rejected Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5th Cir. 1992), which held “that the 1977 and 1982 exculpatory clause extends to any action performed by the operator under its authority from the JOA, including failures to account to working interest holders.”  MDU Barnett, 2014 U.S. Dist. LEXIS 18769, at *22-23.  Thus, under Stine, the exculpatory clause had a much broader application than applied by Abraxas and the other Texas intermediate appellate courts.

The Court also discussed the significance the Texas Supreme Court placed on the use of the phrase “its activities” instead of the “all such operations.”  The Court in MDU Barnett declined to follow the Fifth Circuit’s decision in Stine and explained that Reeder “demonstrates a clear departure from Stine’s reasoning and agreement with the courts of appeals that had imposed a restrictive interpretation of the previous exculpatory clause.”  Id., at *24.  Therefore, in MDU Barnett the Court concluded that exculpatory clause did not apply to Plaintiffs’ claims because Plaintiffs’ claims were “limited to accounting breaches and do not concern defendants’ conduct as the well operator. . . .”  Id., at *24-25.

Thus, it is important for both the operator and non-operators to review carefully the exculpatory clause in the JOA and determine whether the parties intend to protect the operator from liability (excepting gross negligence and willful misconduct) for any breach of the JOA by using the phrase “its activities” (Reeder) or whether the parties intend to limit the exculpatory clause to only bar liability relating to the operator’s conduct as well operator by using the phrase “all such operations” (MDU Barnett).  The AAPL Model Form 610-1989 uses the phrase “its activities” and provides greater protection to the operator.  The AAPL Model Forms 610-1982 and 1977 use the phrase “all such operations” and limit the protection afforded to the operator.