Under Louisiana law, does the operator’s bad faith preclude recovery for the non-operator’s breach of a joint operating agreement if the operator caused the non-operator to breach the JOA but did not itself breach?

Apache’s choice

In Apache Deepwater, LLC v. W&T Offshore, Inc., the litigants were parties to a JOA for operations on offshore deepwater wells. Apache proposed to use two drilling rigs or P&A three wells at a much higher cost than a vessel that had been considered for the operation. W&T contended that Apache’s proposal was for the purpose of offloading to W&T half of $1 million per day stacking costs of a bad rig contract. Apache’s AFE for the P&A using the two rigs was $81 to $104 million, which would be cheaper for them (but not in total) than the alternative. Apache’s story was that the federal regulators would not have approved the original vessel for the operation after Deepwater Horizon.

W&T declined to approve Apache’s AFE. Apache used the two rigs anyway. The work was successful and Apache billed W&T for its 49% share, or $68 million (Note to self: You can’t afford offshore operations). W&T paid $24 million, its share of the original estimate. Apache sued for breach of contract.

The ambiguous JOA

Section 6.2 of the JOA prohibited the operator from conducting any operation costing more than $200,000 without an AFE approved by the non-operator. But Section 18.4 directed the operator to conduct abandonments required by governmental authority and the risks and costs would be shared by the participating parties. No AFE was required.

The jury

With these conflicting provisions, the JOA was deemed ambiguous. After trial the jury found (1) W&T breached the JOA; (2) Apache’s damages were $43 million; (3) Apache was not required to obtain W&T’s approval; (4) Apache engaged in bad faith; thereby causing WMT not to comply with the JOA; and (5) W&T was entitled to an offset of $17 million.

The result

Overruling the jury, the trial court and the Fifth Circuit ruled that as a matter of law Apache’s bad faith did not preclude Apache’s recovery for breach of contract. W&T was not entitled to the offset.

This was a diversity case, so the court employed Louisiana civil law methodology to reach its decision by first examining primary sources of the law, the codes and statutes, rather than case law, which is secondary in Louisiana, unless the Supreme Court has ruled on the question. The court decided that Lamar Contractors Inc. v. Kacco Inc. was controlling.

Civil Code Article 2003 requires a contract to be performed in good faith, but that duty is not to be considered in isolation and is circumscribed by obligations imposed by the contract. The question, then: Must a party seeking to recover for breach of contract demonstrate that the non-breaching party failed to perform its obligations which in turn contributed to the breaching party’s breach. Here Apache’s bad faith did not become relevant until it was determined that Apache failed to perform its contractual obligation that in turn caused W&T’s failure to perform.

The court concluded that the good-faith inquiry in Article 2003 is limited to situations where the obligee (Apache here) has breached. The jury did not find that Apache breached the JOA, so article 2003 did not bar Apache’s recovery of its full damages as a matter of law.

From a distance, it looks like W&T got the answer it wanted (Apache’s bad faith) to the wrong question (the right one being, did Apache breach?)

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