How Does the Model Form JOA Address an Operator/Non-Operator Dispute? | Gray Reed
Texas Crude v. Burlington Resources Oil and Gas considers the relationship between the operator and non-operators under Articles V and VI of the 1982 Model Form Joint Operating Agreement.
Burlington owed 87.5.% of a prospect and was the operator. Texas Crude owned 12.5. Warwick acquired a 10% working interest from Texas Crude. That interest was later acquired by Burlington.
The JOA provisions (summarized):
V.A: Burlington as operator shall conduct all such operations in a “good and workmanlike manner” but would have no liability “ … for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”
V.B.1: Authorizes removal of the operator by the affirmative vote of 2 or more non-operators owning a majority interest if operator fails or refuses to carry out his duties.
VI.B.1: The operator shall commence a proposed operation within 90 days if all parties elect to participate. If the operation is not commenced by then, any party desiring to conduct the operation must resubmit the proposal.
What happened
Warwick proposed drilling a total of 39 wells and Burlington and Texas Crude elected to participate. Shortly before expiration of the 90 days, Burlington said it would not be drilling the wells because it would be imprudent to do so.
Warwick and Texas Crude sued for breach of contract and sought a declaration that:
- Burlington’s refusal to drill was a breach of the JOA,
- The JOA’s other provisions did not apply and did not excuse Burlington’s breach, and
- Burlington’s failure to commence subjected Burlington to removal as operator.
Burlington said it was not required to drill wells a reasonably prudent operator would not drill and any party still desiring to conduct the operation must resubmit the proposal under VI.B.1.
Texas Crude said the resubmittal requirement does not provide a remedy for Burlington’s failure, and the VI.A exculpatory clause does not apply to Burlington’s obligations under VI.B.1.
After several rounds of motions, the trial court ruled:
- The JOA did not require Burlington to conduct operations in any way other than in a good and workmanlike manner,
- The JOA required Burlington to commence the proposed operation within the deadline but the resubmittal process gives direction to any party wishing to proceed with a proposed operation that has not been properly commenced.
- Burlington’s failure to timely commence the operation was not a breach of JOA .
On appeal
Burlington breached the JOA. “May” is permissive, while the common meaning of “shall” is mandatory. The JOA uses “shall” in VI.B.1.
The exculpatory clause
“Good and workmanlike manner” means an operator owes a duty to perform as a reasonably prudent operator. Burlington contended that that standard applies to decisions whether, when and how to drill. Texas Crude maintained that the clause did not apply to Burlington’s refusal to conduct proposed drilling operations.
In Reeder v. Wood County Energy the Supreme Court held that the exculpatory clause in the 1989 form protects operators from “activities”, which is broader than “operations”. Lower courts have declined to extend Reeder so that the exculpatory clause in the 1982 form excused the operator who failed or refused to perform a mandatory contractual duty.
The result
The court concluded:
- The trial court erred in concluding that an operator cannot breach the JOA by failing to timely commence a proposed drilling operation.
- The resubmittal requirement is not a remedy for an operator’s breach of the JOA; nor does it excuse an operator from fulfilling its contractual duty to commence a well. It does not eliminate a party’s ability to pursue legal remedies for an operator’s breach, such as monetary damages, instead of proceeding with the operation.
- The case was remanded for the trial court to consider removal of Burlington as operator. (Good luck with that now that Burlington owns Warwick’s interest.)
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