The American Association of Professional Landmen ("AAPL") Model Form Operating Agreement commonly used in the energy industry contains broad exculpatory language protecting the Operator. For example, the 1982 AAPL Model Form Operating Agreement contains the following language:
________ 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 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.
This form imposes an obligation on the Operator to conduct
operations in a good and workmanlike manner. At the same time,
it exempts the Operator from liability as Operator, except for
gross negligence or willful misconduct.
Does this language exempt the Operator from liability for breach
of contract? Given the fact that this form has been in common
use for 30 years, one might think that the courts would have
definitively decided that question long ago. Not
so. There has been a split of authority on the
issue.
In Stine v. Marathon Oil Co., 976 F.2d 254 (5th Cir.
1992), Stine alleged that Marathon breached duties owed him under
the JOA in connection with testing and completion of wells; that
Marathon tortiously interfered with his gas sale contract; and that
Marathon, by failing to drill certain exploratory wells, abandoned
a substantial portion of the lease acreage and, therefore, Stine
was entitled to an assignment of that acreage.
The exculpatory language of the joint operating agreement in
Stine was identical to the 1982 model form quoted
above. The Fifth Circuit construed it as exempting the
Operator from liability for breach of contract unless the Operator
was grossly negligent or committed willful misconduct:
It is clear to us that the protection of the exculpatory clause extends not only to "acts unique to the operator," as the district court expressed it, but also to any acts done under the authority of the JOA "as Operator." This protection clearly extends to breaches of the JOA. It also reaches other acts including acts performed "as Operator" under the authority of the JOA that amount to tortious interference with contracts with third parties. We, therefore, hold that the exculpatory clause protects Marathon from liability for any act taken in its capacity "as Operator" under the JOA (except for gross negligence or willful misconduct).
Id. at 261 (emphasis added).
Not all courts agreed with the ruling in Stine. For
example, the district court in PYR Energy Corp. v. Samson
Resources Co., 470 F. Supp.2d 709 (E.D. Tex. 2007), pointed
out that "[T]hree separate Texas courts of appeals suggest
that Stine may no longer correctly state Texas
law." The issue, however, had not been addressed by the
Texas Supreme Court.
So does this standard form operating agreement protect the
Operator from breach of contract liability or
not?
Enter the Texas Supreme Court in Reeder v. Wood County Energy,
LLC, 2012 Tex. LEXIS 735; 55 Tex. Sup. J. 1366 (Tex. August
31, 2012). Reeder involved a claim that Reeder
breached his duty as Operator by failing to maintain production in
paying quantities. The JOA being construed by the Supreme
Court in Reeder was based on the 1989 version of the AAPL
form. The Court noted that while the 1982 form says the
Operator "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," the 1989 form says that the Operator
"shall conduct its activities under this
agreement ... in a good and workmanlike manner,
... 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 Court found the difference between "all such
operations" and "its activities under this
agreement" to be significant, and held that the 1989 form
provided broader protection to the Operator:
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 model forms from 1977 and 1982 both contained clauses that protected operators from "all such operations," while the 1989 model form protects "its activities." Here, the parties modeled their JOA after the 1989 model form—recognizing the distinction between "such operations" and "its activities." The modifier "such" references operations under the JOA, while the deletion of that word and use of the term "its activities" includes actions under the JOA that are not limited to operations. The modification implicates a broader scope of conduct following the language of the contract. The agreed standard exempts the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or willful misconduct.
Based on this analysis, the Supreme Court reversed and rendered
a take nothing judgment. Is this the final word on the
subject? Not quite yet. A motion for rehearing has been
filed in Reeder and the Supreme Court has requested a
response.
Stay tuned for more.
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