Co-author Ashley Atwood*

Apache Corporation v. Castex Offshore Inc. et al, answers the question, What constitutes willful misconduct in oil field operations? This was a breach of contract suit involving operator Apache and non-operator Castex.

In the exculpatory clause of the model form JOA, the operator can be liable only in the event of gross negligence or willful misconduct. In considering willful misconduct, under both the Texas and Louisiana definitions of “willfulness”, intent to cause harm is not required.

The question is whether the evidence establishes that a defendant-operator intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his acts or omissions.

Severe overspending, breaching company policy, and failing to timely notify the other party DO (THIS IS THE CORRECTION) meet the standard.  The existence of better decisions and routes to take do not create an inference of willful misconduct. A company selling its own assets only offers a scintilla of evidence that the company doesn’t care about the consequences of its actions.  The opinion has plenty of detail about the facts behind the decision.

The facts

Apache was operator under several agreements: (1) the “Belle Isle Agreement”, to expand a natural gas facility; (2) the “Potomac Agreement”, for the drilling of a well; and (3) the “Apache Contracts” (which we will not discuss).

Apache sued Castex for failure to pay its proportionate share of costs. Castex countersued alleging that Apache’s mismanagement caused gross overspending at Belle Isle and irreversible damage to the reservoir at Potomac. The jury found in favor of Castex and awarded $62 million. The appeals court reduced the judgment to $13.5 million.

Belle Isle Agreement

This was not a JOA but the parties used the willful misconduct standard. Apache’s outside engineering firm hired and fired numerous project managers who were underqualified and inexperienced. There was objective proof that one such manager was aware of the cost overruns for months but failed to act, having the attitude money was no object throughout the process, and knowingly misrepresented the amount he planned on spending.

For example, an AFE for $16.9 million was followed by a supplemental AFE for $37.7 million, and a second supplemental AFE for $78.5 million. Total AFE’s were $102 million by the time the project was completed.

Apache claimed that the cost overruns were ordinary negligence at most (with a whiff of stupidity) and asserted the legal maxim that “no sane company would purposefully increase its own costs”. The jury found Apache failed to comply with the Belle Isle Facility Agreement as a result of willful misconduct, awarding $5.5 million in damages.

Relying on Mo- Vac Serv. Co. v. Escobedo, (from the Texas Supreme Court) the appeals court turned to the ordinary meaning of willful misconduct since there is no technical legal definition. Relying on the Oxford dictionary definitions of “willful” and “misconduct,” the court set this standard: “A plaintiff can show that a defendant is liable for willful misconduct if the evidence establishes that the defendant intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his acts or omissions.”

Potomac Agreement

This dispute was over Apache’s alleged mismanagement in failing to set liners which would have protected gas reserves from the influx of water that crippled the profitability of the project. Castex sought damages for its share of drilling cost overruns and watered-out gas reserves.

Here, the appellate court found that evidence of willful misconduct was not legally sufficient to show “that Apache knew, but did not care, that it was mismanaging the drilling operation.”  The main consideration was that Apache took actions that showed it did care. The $52 million damage award was reversed.

This choice of law under this agreement was Louisiana. The predominant understanding of willfulness in Louisiana describes a degree of fault that falls short of intent to do wrong. The sufficiency of evidence standard is the same as in Texas (so says this Texas court).

Your musical interlude just in time for Memorial Day.

*Ashley is a 2L st SMU law school and a Gray Reed summer intern.