417 Chesapeake Operating, Inc. v. Sanchez Oil & Gas Corp

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Chesapeake Operating, Inc. v. Sanchez Oil & Gas Corp., Civ. A. No. H-11-1890, 2012 WL 2133554 (S.D. Tex. June 12, 2012),  held that the exculpatory clause in a joint operating agreement applies to breach of contract claims.  Chesapeake, as Operator, and Sanchez, as Non-operator, entered into a joint operating agreement (“JOA”), and a well was drilled.  Operator alleged that Non-operator breached the JOA by failing to pay its proportionate share of drilling and completing costs.  Non-operator answered by asserting twelve affirmative defenses.  The federal district court in this case applied Texas law to interpret the exculpatory clause in the JOA.
 
The exculpatory clause in the JOA provided the following:
 
[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.
 
(Note that this is identical to the language used in the A.A.P.L. 1977 and 1982 M.F.O.A.).
 
In 1992, the Fifth Circuit in Stine v. Marathon Oil Co., applying Texas law, held that the “‘tenor of the wording of the exculpatory clause is that [the operator] is not liable for good faith performance of “duties under [the JOA]” but is liable for acts “outside the scope of [its] power under the agreement’”. . . and that the protection of the exculpatory clause extended to breaches of the JOA.”  Since the holding in Stine, three Texas appellate courts, at odds with Stine’s holding, held that breaches relating to an operator’s administrative functions were not covered by the exculpatory clause.  However, federal district courts can “only rely on subsequent appellate decisions if ‘such precedent comprise[d] unanimous or near-unanimous holdings from several—preferably a majority—of the intermediate appellate courts of the state in question.’”  Consequently, “this court must follow Stine when determining Texas law” as “there are fourteen intermediate courts of appeals in Texas, and three of them is clearly not a majority.”  Adhering to the ruling set forth in Stine, the court held that the exculpatory clause in the JOA applies to breaches of contract asserted as affirmative defenses.
 
The significance of this case is the court’s holding that (in federal court) this version (1977/1982 M.F.O.A.) of the exculpatory clause in a JOA applies to breaches of contract, including breaches related to the operator’s administrative functions, regardless of whether the issue is raised by a claim or an affirmative defense.  The application of the exculpatory clause is an important issue under JOAs, and the law has been unsettled.  Although this case reaffirms the position of the federal courts in construing JOAs under Texas law, there has been a more recent Texas Supreme Court ruling on this issue that appears to reject the holding in Stine as to claims under the 1977/1982 M.F.O.A. version of the exculpatory clause.