332 Reeder v. Wood County Energy L.L.C.

Wednesday, September 2nd, 2015

Richard F. Brown
 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Reeder v. Wood County Energy, L.L.C., 320 S.W.3d 433 (Tex. App.—Tyler 2010, reversed); Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012), held that the gross negligence or willful misconduct exculpatory clause in the 1989 Model Form Operating Agreement applied to breach of contract claims, but in this case, there was insufficient evidence to support a finding against the operator.  Reeder became the “Operator” of a property subject to a Joint Operating Agreement (“JOA”) modeled after the 1989 Model Form JOA.  It contained an exculpatory clause that limited the Operator’s liability for “its activities under this agreement” to actions involving gross negligence and willful misconduct.  There was an unusual provision incorporated into this JOA which provided that the Operator “agrees to produce and/or conduct operations on the [Contract Area] sufficient to maintain the leases and the unit.”  The Operator had a poor relationship with his non-operating working interest owners (“non-operators”).  Consequently, when it became apparent that several of the wells would have to undergo expensive testing and repairs, the Operator was unable to obtain the consent of some of the non‑operators.  The JOA forbade the Operator from undertaking any project expected to cost more than $5,000.  The Operator put in some of the Operator’s own money, until the Operator ran out of money.  Because the testing and repairs were not performed, the Texas Railroad Commission suspended production, ordered the well to be plugged, and the underlying leasehold interest was lost.  The JOA required the Operator to offer the well to the non-operators if the Operator elected to abandon or plug the well, but the Operator made no such offer.
 
Multiple claims were asserted, but this appeal was focused on the damages awarded to the non-operators by the jury because the Operator failed to maintain production and failed to offer the well to the non-operators before it was plugged.  The trial court applied the gross negligence and willful misconduct standard and properly instructed the jury on that standard.
 
The court first considered the applicability of the JOA’s exculpatory clause to adjudicate the breach of contract claims against the Operator.  The exculpatory clause in the 1977 and 1982 Model Form Operating Agreements limited liability for “all such operations,” but the 1989 Model Form Operating Agreement limited liability for “activities under this agreement.”  Case law under the earlier forms generally held that the exculpatory clause applied only to operations on the Contract Area and not to contract claims.
 
The court first noted that some commentary concludes that the change in language effectively broadened the scope of the exculpatory clause.  The court also applied its own semantic analysis:
 
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.
 
According to the court, this expanded application of the exculpatory clause meant that the Operator in this case was not liable for breach of contract unless the Operator’s conduct rose to the level of gross negligence or willful misconduct.
 
Applying this standard, the court evaluated the sufficiency of the evidence for the claims in the case.  The court noted that gross negligence requires that, “‘the defendant knew about the peril, but his acts or omissions demonstrate that he did not care.’”  The substance of the breach of contract claims appeared to be the Operator’s failure to complete testing and repairs that the wells required, and the Operator’s failure to comply with the JOA provision that required the Operator to offer the well to the non‑operators prior to plugging it.  In regards to the former, the Operator testified that he sought permission and funding from the non‑operators, but they declined his requests.  In regards to the failure to offer the well to the other non‑operators, the court noted that the Operator was ordered to plug the well, and thus there was no opportunity for him to offer it to the non‑operators.  Considering this evidence in the context of the entire record, the court held that there was no evidence to support a finding of gross negligence or willful misconduct.
 
This case is important because it determines the scope of the exculpatory clause under the 1977, 1982, and 1989 Model Form Operating Agreements and clearly holds that the operator’s liability under the 1989 form is significantly less than the operator’s liability under the 1977 and 1982 forms.