Co-authored by Marty Averill
If you are a non-operator under the 1989 Model Form Operating Agreement, pay close attention to Reeder v. Wood County Energy, LLC, et al. The Texas Supreme Court ruled that the operator is not liable to non-operators for breach of the agreement except in the cases of gross negligence or willful misconduct.
This is a departure from Texas decisions which historically have held that the exculpatory language at the heart of the case extends only to claims that the operator failed to act as a reasonable prudent operator in connection with operations, but not for breaches of the JOA.
The question before the court: What is the standard for resolution of a breach of contract claim against the operator? Article V.A.1. requires the operator to “ . . . conduct its activities under this agreement as a reasonable prudent operator, in a good workmanlike manner, with due diligence and in accordance with good oil field practice, …”. So far so good. But then comes the exculpatory clause: “. . . but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”
The difference between the forms is, “its activities under this agreement …” (‘89 form) and “… all such operations …” (’77 and ’82 forms). The court concluded that there is a substantial difference between those terms.
The parties were not getting along on major operations decisions. Reeder, the operator, sued Wood County Energy (in which he was a 45% partner) and the other non-operators alleging that as operator he had the exclusive right of possession of certain well bores and for other claims. The defendants counterclaimed that he illegally produced oil, fraudulently reported oil from one formation as being produced from another, and failed to sustain production in the quantities required by the JOA. All parties alleged conversion, violations of the Texas Thief Liability Act, and a host of other misdeeds.
The jury found that Reeder breached his duties as operator. The non-operators were awarded damages and a declaration that Reeder owned no interest in the two formations at issue. The Court of Appeals agreed, but the Supreme Court reversed.
It will be more difficult for non-operators under te 1989 form to recover against the operator for any claim, including breach of the contract, unless the non-operator can prove that the operator is guilty of gross negligence or willfulness conduct. Those are difficult burdens to meet.
The court also discussed the legal sufficiency of the evidence necessary to support a jury verdict for gross negligence or willful conduct.
Stay tuned for a more thorough analysis of the case, including how the court could have resolved it in favor of the non-operators, why that result might have been better for the industry, how the ruling can be addressed when negotiating future agreements, and the sufficiency of evidence in this kind of case.