Contract Operator Not Liable for Breach of a Unit Operating Agreement

Originally published by Charles Sartain.

Co-author Chance Decker

It’s a tale as old as the oilfield: A non-operator doesn’t pay joint interest billings, operator sues, non-payer claims the expenses were unwarranted and the operator was negligent—no, grossly negligent—for incurring them in the first place. Welcome to OBO, Inc. v. Apache Corporation et al. Despite a creative argument by non-operator OBO that contract operator Apache didn’t have authority to charge JIB’s in the first place, OBO must pay.

The facts

OBO owns a minority working interest in a gas unit in Andrews County, Texas. Permian Basin Joint Venture, LLC owns 81.4% of the working interest in the unit and was designated as the unit operator. The Unit Agreement and Unit Operating Agreement require the operator to be a working interest owner.

PBJV contracted with Apache to serve as contract operator. Apache sent JIB’s, OBO wouldn’t pay, Apache and PBJV sued for the unpaid JIB’s.

The fight

OBO agreed that it didn’t pay the JIB’s. Its defense was that Apache didn’t have authority to issue the JIB’s because Apache was not a working interest owner. Alternatively, if Apache could be operator, it breached the operating agreement and was “grossly negligent” in continuing to spend money on marginal wells. OBO didn’t assert counterclaims against PBJV.

Apache and PBJV argued that the contract services agreement (and power of attorney) between them authorized Apache to send JIB’s, and that Apache operated the unit just fine.

The law

As a general rule all contractual duties—including operator duties under a JOA — can be delegated to someone else. There are exceptions. For example, contracts for personal services (Bill O’Brien can’t delegate his coaching duties with the Texans to another coach, even if Texans fans wish he would), or when delegation is contrary to public policy (a critical government contractor agreement, for example). Unless one of these exceptions applies, or the contract prohibits delegation—and in this case the agreements did not — then delegation is perfectly fine. But you already knew that (and deep down, OBO probably did to), as contract operators are commonplace in the oilfield.

OBO can’t get off the hook

The court of appeal affirmed summary judgment for Apache and PBJV on all counts. OBO was ordered to pay the disputed JIB’s plus interest; its claims against Apache were dismissed.

Breach of contract and gross negligence – wrong target

The problem with these claims was OBO assumed Apache was the operator under the unit agreement. That missed a critical point: When PBJV contracted with Apache for operator services, Apache did not become the operator. Rather, Apache was merely performing operator services for PBJV under a contract with PBJV, not the other working interest owners. If Apache operated the unit negligently or in a manner that breached the unit agreement, the other working interest owners needed to sue PBJV, not Apache. OBO never sued PBJV. Thus, regardless of how Apache operated the unit, OBO’s claims failed because it sued the wrong party.

All this talk of “operations” makes us think of doctors, and more doctors.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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