Texas' New (And Old) Take On Exculpatory Clauses

After more than two decades, at least one US federal court in Texas has followed the view of Texas state appellate courts on the limitation of the application of the exculpatory clauses found in both the AAPL 1977 and 1982 model form operating agreements to claims for breach of the operating agreement.

On February 14, 2014, the US District Court for the Southern District of Texas, Houston Division, entered its order on a motion to dismiss in MDU Barnett Limited Partnership v. Chesapeake Exploration Limited Partnership, 2014 U.S. Dist. LEXIS 18769 (S.D. Tex. Feb. 14, 2014). In doing so, the district court relied on the Texas Supreme Court's recent decision in Reeder v. Wood County Energy, 395 S.W.3d 789 (Tex. 2012), which was determined to endorse previous Texas appellate court's limited application of the exculpatory clause contained in both the 1977 and 1982 AAPL model form operating agreements, as held in in Castle Tex. Prod. Limited Partnership v. Long Trusts, 134 S.W.3d 267 (Tex. App. - Tyler 2003, pet. denied) and Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741 (Tex. App. - El Paso 2000, no pet.).

State and federal courts in Texas have taken conflicting positions on the scope and application of the exculpatory clause in the AAPL 1977 and 1982 model form operating agreements. Specifically, in 1992 the Fifth Circuit addressed the issue in Stine v. Marathon Oil Co., 976 F.2d 254 (5th Cir. 1992), which reviewed the following exculpatory clause language contained the AAPL 1977 and 1982 operating agreement at section V.A.:

[Operator] ... shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of, this agreement. It shall conduct all such operations in a good and workmanlike manner, but 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.

The Fifth Circuit in Stine held that the exculpatory clause's "protection clearly extends to breaches of the JOA," and therefore the exculpatory clause protects an operator "for any act taken in its capacity as 'Operator' under the JOA (except for gross negligence or willful misconduct)." On that basis, the Fifth Circuit held that the exculpatory clause extends past the purely operational functions of an operator, and instead covers administrative functions as well as claims for breaches of the JOA.

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