A Texas Appellate Court Defines “Willful Misconduct” In A Model Form JOA In Apache Corp. v. Castex Offshore Inc.

Vinson & Elkins LLP

A Texas appellate court recently issued guidance on the meaning of “willful misconduct” in the exculpatory clause of a model form joint operating agreement (“JOA”). 1 The exculpatory clause in many JOAs limits an operator’s liability to only those losses caused by “gross negligence or willful misconduct.”2 While the Texas Supreme Court has specifically addressed the meaning of “gross negligence” in this context,3 there has been little guidance on the meaning of “willful misconduct.”4 The Texas Fourteenth Court of Appeals’ recent opinion in Apache Corp. v. Castex Offshore Inc. is the first Texas case to define “willful misconduct” as “deliberate mismanagement committed without regard for the consequences,” which does not require a showing of purposeful intent to harm.5

The underlying dispute between Apache Corporation (operator) (“Apache”) and Castex Offshore Inc. (non-operator) (“Castex”) involved several JOAs that governed mineral interests in the Gulf of Mexico. Apache sued Castex to recover unpaid joint interest billings, and Castex counterclaimed alleging Apache breached certain JOAs, referred to as the “Belle Isle JOA” and the “Potomac JOA.” Castex alleged that Apache’s mismanagement of those projects led to overspending on Belle Isle and damage to the reservoir at Potomac. To avoid the exculpatory clauses, Castex alleged both gross negligence and willful misconduct. The jury found in favor of Castex, and found that Apache’s failure to comply with both JOAs was the result of willful misconduct.

The primary issue on appeal was whether the trial court erred in failing to instruct the jury that “willful misconduct” requires a “subjective, intentional intent to cause harm.” Relying on a recent Texas Supreme Court decision that suggests willful misconduct is “short of genuine intentional injury,”6 and referring to the dictionary definitions of “willful” and “misconduct,” the court concluded that conduct is “willful” if a person acts deliberately and disregards the likely consequences of their actions, even if they do not subjectively desire those consequences.7

Applying its new definition of willful misconduct, the court ultimately concluded there was sufficient evidence that Apache was consciously indifferent with respect to the Belle Isle JOA, but that there was insufficient evidence to support the jury’s verdict on the Potomac JOA. For Belle Isle, the court held there was evidence that the project manager was aware of cost overruns for months and did nothing about them. At Potomac, however, Apache encountered numerous operational issues that led to the abandonment of its original drilling plans. The court concluded there was no evidence that Apache had actual knowledge of any mismanagement of its drilling operations. Overall, the decision was a significant win for Apache, as it reduced the jury’s verdict by over $60 million.

1 Apache Corp. v. Castex Offshore, Inc., No. 14-19-00605-CV, 2021 WL 1881213, at *1 (Tex. App.—Houston [14th Dist.] May 11, 2021, no pet. h.).

2 This language appears in the 1977, 1982, 1989, and 2015 versions of the A.A.P.L. Form 610 Model Form Operating Agreement.

3 Reeder v. Wood Cty. Energy, LLC, 395 S.W.3d 789, 796 (Tex. 2012) (finding that jury charge properly defined gross negligence as “that entire want of care which would raise the belief that the act or omission complained or [sic] was a result of a conscious indifference to the right or welfare of the person or persons to be affected by it.”). The court also emphasized that the conduct must be likely to result in significant harm. Id at 797.

4 See IP Petrol. Co. v. Wevanco Energy, L.L.C., 116 S.W.3d 888, 898 (Tex. App.—Houston [1st Dist] 2003, pet. denied) (concluding willful misconduct “required evidence of ‘a specific intent by [the Defendant] to cause substantial injury to Plaintiffs.’”).

5 Apache Corp., 2021 WL 1881213, at *1. Notably, the Fourteenth Court of Appeals disagreed with the 2003 IP Petrol. Co. decision from its sister court in Houston, the First Court of Appeals.

6 Mo-Vac Serv. Co. v. Escobedo, 603 S.W.3d 119, 125–26 (Tex. 2020).

7 Apache Corp., 2021 WL 1881213, at *5.

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