Joint Operating Agreements and the Reasonably Prudent Operator Standard By: Jonathan Baughman
Partner, McGinnis Lochridge
Background on Joint Operating Agreement Forms The reasonably prudent operator standard is not only applicable to the lessor-lessee relationship. It also applies, for instance, to the operator-non-operator relationship. In this context, Joint Operating Agreement (JOA) forms typically provide an express provision indicating the standard by which the operator is expected to perform. Modern operating agreements will expressly include within that standard reference to the “reasonably prudent operator.” The most commonly used JOA form for on-shore US assets in Texas is the “Model Form 610,” published by the American Association of Professional Landmen (“AAPL”). Over the last several decades there have been multiple revisions of the Form 610, including material differences in the provisions defining the operator’s standard of performance and the exculpatory provision. While the first version of the Form dates back to 1956, this article will briefly touch on the standards set forth in the 1982, 1989, and 2015 AAPL Forms. Evolution of JOA Standards from "Good and Workmanlike Manner" to "Reasonably Prudent Operator" The 1982 version of the AAPL JOA form stated that the Operator “shall conduct all such operations in a good and workmanlike manner.” Courts have generally construed that standard to be similar to the “reasonably prudent operator” standard. The 1989 version of AAPL’s JOA form
was amended to actually incorporate the phrase “reasonably prudent operator” within its provision. When the AAPL most recently updated the Model Form 610 JOA in 2015, they maintained the “reasonably prudent operator” standard within the form. Exculpatory Provisions in Joint Operating Agreements One of the most hotly contested aspects of the operating agreement has been the scope of the exculpatory provision. Generally, an exculpatory clause relieves the operator of liability in the event damages are caused by the operator during its performance unless the operator was “grossly negligent” or engaged in “willful misconduct.” In other words, while the JOA form provides that an operator must act as a “reasonably prudent operator,” the exculpatory provision relieves the operator of liability for certain types of operations or activities. Again, however, that limitation on liability will not apply if the liability results from the operator’s “gross negligence” of “willful misconduct.” A number of courts have addressed the scope of model form exculpatory clauses. These decisions vary and, in some cases, demonstrate two different scopes that have been applied to exculpatory clauses. Stine v. Marathon Oil Co. was an earlier case discussing this standard where the Fifth Circuit extended the exculpatory clause to all of the operator’s actions including breaches of contract for administrative and accounting duties.1 A number of other courts in and outside of Texas have directly or indirectly rejected the Fifth Circuit’s interpretation of the exculpatory clause in Stine. For instance, in Hornberg, the court limited the reach of the exculpatory clause to the operator’s operations on the contract area. 2
