Exculpatory Clause Does Not Save Operator From Liability

Gray Reed
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Gray Reed

Non-operators under the 1989 Model Form JOA have been hoping to drive a stake through the dark heart of Reeder v. Wood County Energy, LLC. Bachtell Enterprises, LLC v. Ankor E&P Holdings Corp might be a start. The question was whether the Article V.A. exculpatory clause exonerated the operator who intentionally passed expenses to non-operators without their consent.

The clause did not allow the operator to engage in such activities. The term “activities” is not so broad as to protect an operator such that it can have no liability for breach of any contract, absent willfulness.

Facts

Ankor the operator negotiated with CDM to construct a gas plant and told the non-operators that third-party ownership of the plant would, among other things, “eliminate[ ] the need for the [nonoperators] to provide capital for construction.”

The non-operators approved AFE’s for expenses totaling $385,000. Additional AFE’s would cover certain other expenses. The JOA required non-operator consent for “ .. any single project reasonably estimated to require an expenditure in excess of $50,000.”

Article V.A. required Ankor to [c]onduct its activities …  as a reasonably prudent Operator, … It shall have no liability as Operator … for losses sustained or liabilities incurred, except such as may result from willful misconduct.

A year after the CDM agreement, Ankor told the non-operators that until the plant was paid off CDM would “retain[ ] all plant revenue as credit towards the full operating costs, transfer and fractionation fees, and amortized capital. Any balance due [CDM] is born by the Ownership. The balance … due [CDM] is approximately $1,590,000.” Ankor then sent a JIB totaling $1.6MM. The non-operators refused to pay.

Trial court

Ankor sued the non-operators claiming breach of the JOA for failure to pay the JIBs. Non-operators responded that Ankor breached first by:

  • charging for gas plant construction without consent,
  • withholding revenue without consent or authority,
  • committing non-operators’ gas to CDM without authority,
  • agreeing not to disclose the CDM service agreement, and
  • charging unauthorized attorney’s fees.

The jury found that both Ankor and the non-operators breached the JOAs but Ankor breached first (and its breach was the result of willful misconduct). Both sides were awarded damages by the jury. The trial court awarded damages and attorneys’ fees to Ankor and a take-nothing judgment against the nonoperators.

The appeal

The exculpatory clause did not absolve Ankor of liability for failing to obtain consent for charges over $50,000. Other clauses were a factor in the holding, for example:

  • imposing individual liability for performance of each party’s obligations, and
  • prohibiting Ankor from withholding oil revenues to reimburse costs in the absence of a non-operator delinquency.

In response to Ankor’s argument that “activities” should be construed broadly to include even intentional breaches of contract that do not rise to the level of willful misconduct, non-operators countered that “Ankor’s interpretation of the exculpatory provision turns [it] into a provision that allows the operator to impose liability on the Non-Operators when it is intended only to be a shield to the Operator’s liability.”

The clause was substantially similar to the one in Reeder in which the SCOTX held that the term “activities” broadened the scope of the clause to include actions under the JOA beyond operations. (The 1982 form protects the operator’s “operations”; the 1989 protects “activities”.) InReeder the operator was shielded from liability for

The appellate court refused to extend Reeder to excuse Ankor’s willful misconduct. Ankor could not use the exculpatory clause offensively to impose liabilities on non-operators that Ankor knowingly incurred without consent. The non-operators were excused from their payment obligations. Judgment for Ankor was reversed.

Your musical interlude, as you ease back to work.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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