JOAs and Liability
In April of this year, I wrote about a case that was currently before the Texas Supreme Court titled “Wendell Reeder v. Wood County Energy, LLC, et al.” In that case, the operator, Reeder, argued that the 1989 Model Form
Angela Staples
Joint Operating Agreement’s exculpatory clause prevented him from being held liable for any action he took as operator, unless he was found to be “grossly negligent” or acted with “willful misconduct.” This behavior was, of course, much more difficult for the non-operator parties to prove when they had a complaint about him. Instead, the non-operator parties to the JOA argued that Reeder should be held to the lower standard anyone else that is a party to a contract is held, and that only when he was conducting actual operations would he be able to escape liability to them, unless he was grossly negligent or acted with willful misconduct.
To refresh memories, the exculpatory clause at issue provides:
Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and in accordance with good oilfield practice, 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. (emphasis added).
The non-operators argued that Reeder breached a contractual duty, and that the limitation on Reeder’s liability applied only to his actual operations on the leased premises, and not to his other contractual duties. In making the argument, they relied upon previous Texas Court opinions that restricted the exculpatory clause to operations only. Unfortunately for the non-operators, the cases they cited were discussing the exculpatory clause from the 1982 Model Form Joint Operating Agreement, specifically:
[The Operator] shall be the Operator of the Contract Area, and 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 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 as may result from gross negligence or willful misconduct. (emphasis added).
The Texas Supreme Court held that, unlike the exculpatory clause found in the 1982 Model Form JOA, the language at issue (which is the standard language for the 1989 Model Form JOA) did exempt Reeder from all liability for any activity under the agreement, unless he was found to have behaved so badly that he was grossly negligent or acted with willful misconduct. As I mentioned in the previous article, this holding greatly expands the protections available to operators, as against non-operators, for the actions they take as operators. Non-operators must be aware, if they are uncomfortable with giving their chosen operator such freedom from liability, that they should either revert to using the 1982 Model Form JOA, or, at a minimum, change the language of the 1989 Model Form JOA’s exculpatory clause to the previous version’s language. At least until we get another Model Form Joint Operating Agreement to argue about…