Face Challenges Confidently

046 Stine v. Marathon Oil Company

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 some significance to you.
Stine v. Husky Oil Company, F.2d (5th Cir. 1992 Nos. 90-2570 and 91-2220) construes the effect of the exculpatory language in the JOA which reads:

[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 as may result from gross negligence or willful misconduct.

Nonoperator Stine complained that Operator Marathon failed to test and complete certain wells, failed to timely complete in formations which later proved productive, damaged certain wells by improperly plugging and abandoning them, failed to deliver well information, and tortiously interfered with Stine’s gas contract by overcharging Stine for nonconsent penalties and collecting them from Stine’s gas purchaser. The scope of the exculpatory clause was the key issue in the trial. Stine wanted to limit the clause to physical acts by the operator within the geographic limits of the contract area under the JOA. Marathon wanted to extend the clause to any act done under color of the JOA, both torts and breaches of contract. The trial court interpreted the clause to apply only to acts “unique to the operator under the [JOA].” The trial court refused to require as a condition to liability for the operator that the operator’s conduct must be “gross negligence.” Stine’s judgment was for millions in actual and punitive damages.
Held: reversed and remanded for a new trial. The exculpatory clause protects the operator from liability for any act taken in its capacity “as Operator” if authorized by the JOA (except for gross negligence or willful misconduct), whether the conduct at issue is connected with administrative acts or physical operations. The operator is not liable for good faith performance of its duties under the agreement. The protection of the exculpatory clause extends to breaches of the JOA itself and to other acts of operator performed “as Operator” that amount to tortious interference with third parties. Thus, the operator is not liable for any action taken in connection with completion, testing, turnover, accounting, billing, and recovery of costs, unless operator was grossly negligent or willful.
The significant of the case is that the exculpatory clause is given an interpretation that is extremely favorable for operator. Gross negligence is difficult to prove, and operators will generally be protected against any breach of the JOA, unless its actions are with reckless disregard for ordinary care or willful misconduct.