Exculpatory ClausesBlawgletter's seven-part exposition of the hottest oil and gas claims for 2015 (which we co-wrote for the Institute for Energy Law's 66th Oil & Gas Law Conference in Houston) moves into an area that plaintiffs hate and defendants love — the exculpatory clause. Specifically, the ones that the American Association of Petroleum Landmen put in the AAPL's standard-form joint operating agreements, or JOAs.

Changes in the JOA from the 1977 and 1982 forms to the 1989 version present the question of whether the exculpatory clause excuses breach of contract and, if so, which kinds of breach. We'll address that before turning to what fact patterns make avoiding the preclusive effect of JOA exculpatory clauses more likely.

Legal Backdrop

Since 1977, the dominant model for JOAs has excused the operator from “losses sustained or liabilities incurred” unless they “result from gross negligence or willful misconduct.”But what if the operator broke a  promise in the JOA itself? Does the non-operator still have to show gross negligence or willful misconduct to win a claim of breach?

The answer may depend on which version of the model JOA applies. Under the 1989 form, the Supreme Court of Texas held in Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012), a party to a JOA does have to prove a higher degree of fault even for a simple contract claim.The Court pointed out that 1977 and 1982 models spoke of “operations” by the operator but that the 1989 form dealt, in contrast, with “activities under this agreement”.As the Court explained:

Reading the clause as written, we conclude that the model form transformation is significant, as the change in language broadens the clause’s protection of operators. . . . The agreed standard exempts the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or willful misconduct.

Id. at 795. The Court thus held that the clause barred Reeder’s liability for failing (negligently) to repair oil wells. Id. at 797.

The older clauses, on the other hand, do not apply to pure claims for breach of the JOA, the Tenth Circuit has held, contrary to a 1992 ruling by the Fifth Circuit. In 4Shell Rocky Mountain Production, LLC v. Ultra Resources, Inc., 415 F.3d 1158, 1171 (10th Cir. 2005), the court declined to require gross negligence or willful misconduct for a claim that the operator mishandled “administrative and accounting duties”.5 A district court in Houston reached the same conclusion under Texas law, noting that Reeder had the effect of overruling a contrary Fifth Circuit decision. MDU Barnett Ltd. P’ship v. Chesapeake Expl. Ltd. P’ship, No. H-12-2528, 2014 WL 585740, at *1 & *7 (S. D. Tex. Feb. 14, 2014) (holding that 1982 exculpatory clause did not cover claims for breach of JOA and rejecting Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5th Cir. 1992), under Reeder).

Plaintiff perspective

In contrast to the other issues this paper addresses, the question of what effect a JOA exculpatory clause may have presents a challenge more for the plaintiff than for the defendant. What factors will aid a plaintiff whose defendant claims a contractual right to exculpation for wrong-doing less culpable than “gross negligence or willful misconduct”?

  • Absence of contractual privity between the plaintiff and defendant under the JOA (e.g., the plaintiff or defendant did not become a party to the JOA and does not qualify as a third-party beneficiary);
  • Applicability of a pre-1989 JOA form – and therefore a narrower exculpatory clause – to some or all of the damage-causing conduct (as a result, for instance, of conduct occurring at a time or place to which an older JOA form applies);
  • For JOAs using the 1989 form, the source of injury to the plaintiff does not involve the operator’s “activities under this Agreement” or concern its role “as Operator”;
  • For JOAs using the 1977 or 1982 form, the harm to the plaintiff does not relate to the operator’s “operations on the Contract Area” or its behavior “as Operator”; and
  • Big damages.

Looking ahead, and back

We have two more topics to cover yet. For those who missed the first four parts, you can check them out here:

1 For a brief history of the Form 610 JOA since its advent in 1956, see “The 1989 JOA: Horizontal Modifications and Other Crucial Updates”, Oil and Gas Law Digest, Sept. 17, 2014 (available as of Jan. 21, 2015 at http://www.oilandgaslawdigest.com/newscaselawupdate/the-1989-joa-horizontal-modifications-and-other-crucial-updates/).

The 1989 clause (with our emphasis) speaks of “activities” rather than only “operations”, as follows:

Operator shall conduct its activities under this agreement as a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, 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 1977 and 1982 clause provided as follows (with our emphasis):

[Operator] … shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of, this agreement. It shall conduct all such 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.

4 The Fifth Circuit ruled that the 1977 and 1982 language applied to contract claims in Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5th Cir. 1992) (applying Texas law). At least one court has noted the split between the Fifth and Tenth Circuits on the issue. See Forest Oil Corp. v. Union Oil Co. of Am., No. 3:05-cv-0078, 2006 WL 905345, at *3 (D. Alaska Apr. 7, 2006) (adopting Ultra Resources holding and rejecting Stine’s) (applying Alaska law).

The court cited its decision in Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 923 (10th Cir. 1993) (noting that clause may cover “tortious acts related to the performance of the contract” but did not apply to “actions taken deliberately and . . . in breach of the contract involving shifting costs between the contracting” working interest owners) (applying Colorado law).