Well Operator Protected by the Model Form JOA

Originally published by Charles Sartain.

Co-author Rusty Tucker

What is the standard of care imposed by the Model Form JOA on the well operator?  Crimson Exploration Op., Inc. v. BPX Op. Co. gives us the answer, and it is no surprise.

Background

Under a Model Form JOA, BPX as operator and Crimson and other non-operators drilled the McCarn A1H well. After a problem that prevented further drilling the parties agreed to plug and abandon the well.

BPX billed Crimson for its proportionate share of drilling expenses; Crimson refused to pay. In BPX’s suit to recover Crimson’s share of costs, Crimson asserted the affirmative defense of prior material breach by BPX’s failure to act as a prudent operator in drilling the well.  Crimson argued the standard of care was a “reasonably prudent operator” while BPX relied on the exculpatory clause in Art. V.A of the JOA that excused liability unless BPX acted with gross negligence or willful misconduct.

At trial BPX presented evidence of its operations and Crimson’s refusal to pay. Rather than presenting evidence, Crimson relied on BPX’s burden to prove Crimson was responsible for its share of expenses, arguing that Crimson was excused from paying.  The parties stipulated that if Crimson was not excused it would owe BPX $1.2 MM.

The jury questions

The jury charge included four broad-form questions:

Question 1: “Did Crimson fail to comply with its Agreement with BPX?”

The jury answered “yes” and was instructed to answer Question 2

Question 2:  “Did BPX fail to comply with its Agreement with Crimson?”

The jury answered “no,” and was instructed not to answer the remaining questions.

Based on the jury’s findings the trial court rendered judgment for BPX.

A key question was the reach of the exculpatory clause:

Operator shall conduct its activities under this agreement as a reasonably prudent Operator, i.e., in a good and workmanlike manner … . 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.

BPX asserted it was not liable for breach unless Crimson proved BPX acted with gross negligence or willful misconduct. Good luck with that, Crimson!

Crimson responded that it was not responsible if BPX failed to operate as a prudent operator in a good and workmanlike manner. Crimson proposed including the four elements of a breach of contract claim in the instructions for the question whether it failed to comply with the agreement.  In both questions, Crimson defined BPX’s duty by the “reasonably prudent operator” standard. The trial court denied Crimson’s requested questions and instructions.

The result

The trial court did not abuse its discretion when it refused to submit Crimson’s proposed instructions to Questions 1 and 2.

The Supreme Court held in Reeder v. Wood County Energy, LLC that exculpatory clauses nearly identical to the clause in this case exempt the operator from liability except for gross negligence or willful misconduct.  Crimson distinguished Reeder by arguing that there the non-operator sued the operator, whereas here the operator sued the non-operator and the exculpatory clause was triggered by Crimson’s affirmative defense of prior material breach. The court disagreed.

Crimson could not escape the exculpatory clause via an affirmative defense rather than a counterclaim. The standard of care for BPX’s alleged prior material breach was gross negligence or willful misconduct.

Crimson also submitted an instruction that omitted an element of breach of contract: whether BPX performed under the contract. This failed for reasons trial lawyers would care about. Read it if you wish.

Stuck in traffic? Which musical detour would you choose: Door Number 1 … or Door Number 2?

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