Face Challenges Confidently

036 Texstar North America, Inc. v. Ladd Petroleum Corp.

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.
Texstar North America. Inc. v. Ladd Petroleum Corporation, 809 S.W.2d 672 (Tex. App.– Corpus Christi 1991, writ den.), addresses whether working interest owners in a well have a fiduciary duty to each other, and whether that duty can alter the terms of a joint operating agreement (“JOA”). Texstar and Ladd were competitors in the same area. Ladd drilled two wells before Texstar drilled the Zalman #1 with Ladd as an unsigned co-tenant in the well. After payout, Texstar and Ladd signed a JOA on the Zalman #1. Ladd then completed a fourth well of its own. All of the wells were producing from the same formation.
The JOA provided that no commercial well would be reworked without 100% consent. Texstar proposed to fracture stimulate the Zalman #1. Ladd refused to consent. Worried about drainage, Texstar sued for injunctive relief, contending that Ladd had violated an implied duty of “mutual cooperation” or “utmost good faith and fair dealing.”
Held: There is no implied duty of mutual cooperation or of utmost good faith and fair dealing in a JOA. A “special relationship” must exist between the parties before such a duty arises. Furthermore, there can be no implied covenant as to a matter specifically covered by the written terms of the contract.
The case is significant because it is another example of the reluctance of Texas courts to read a fiduciary standard into conventional contracts. The law pertaining to fiduciary duties has generally been written in the context of cases involving breach of formal fiduciary duties (e.g. trustee/beneficiary) and is quite onerous. A fiduciary must generally put the interests of the “beneficiary” ahead of the fiduciary’s own interest, and breach of fiduciary duty can result in exemplary damages, disgorgement of all profits, etc. In recent years, the implied duty of “utmost good faith and fair dealing” (perhaps indistinguishable from fiduciary duty) has been read into some Texas contracts. However, this has been very limited and is closely tied to special relationships which do not exist in ordinary business contracts.