Protecting Operators Under The 1989 AAPL Form Of Operating Agreement

Article V.A. of the 1989 AAPL form of Joint Operating Agreement ("JOA") contains the following exculpatory clause:

"Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except as may result from gross negligence or willful misconduct. [emphasis added]"

How broad is that release? The answer may depend upon which AAPL form JOA you've used.

On August 31, 2012, the Texas Supreme Court released its opinion in Reeder v. Wood County Energy, LLC et al. Wendell Reeder, an individual, was the operator under a 1989 form of JOA, which covered existing, producing wellbores located in Wood County, Texas. Reeder did not own any working interest in the wellbores personally, but he did own a percentage interest in a limited partnership which held 87.5% of the working interest in the wellbores covered by the JOA. Individuals and estates held the remaining 12.5% of the working interest in the wellbores. The wells covered by the JOA needed expensive repairs but the working interest owners ("WIOs"), including the limited partnership (which was not controlled by Reeder), refused to pay. Reeder, as operator, spent his own money trying to preserve the wells but, ultimately, the RRC suspended production from the wells. The WIOs sued Reeder for damages for failing to maintain production in paying quantities, for lost leases and loss of the unit.

In the trial court, the jury found that Reeder had breached his duty as operator by failing to maintain production in paying quantities or other operations in the field and that the exculpatory clause above applied to the breach of contract claim. The court of appeals disagreed and held that the gross negligence and willful misconduct instruction should not have been included in the jury charge. Reeder then appealed to the Texas Supreme Court.

The Court started by asking whether the exculpatory clause in the JOA sets the standard to adjudicate breach of contract claims.

The Court then compared the language to prior cases analyzing the exculpatory clause. A similar clause was found in Castle Tex. Prod. Ltd. P'ship v. Long Trusts, 134 S.W.3d 267 (Tex. App. - Tyler 2003, pet denied):

[Operator] ... shall...