A state appeals court this week upheld a trial court judgment in an oil and gas contract case between two Houston companies in which the crux of the appeal stemmed from the jury charge.
Crimson Exploration Operating asked Houston’s Fourteenth Court of Appeals to reverse a $3.39 million judgment in favor of BPX Operating company. The judgment came after a 2019 trial in which a Houston jury found Crimson did not pay its part of expenses laid out in a joint operating agreement to drill a horizontal well in Southeast Texas.
Crimson had argued that the trial judge abused his discretion by failing to instruct the jury regarding the standard of care imposed by the contract and all of the elements of the breach of contract claim that BPX brought in the lawsuit.
In a 14-page opinion issued Tuesday, the Fourteenth Court sided with BPX, ruling that the trial court was not required to submit questions or instructions on each element of breach of contract and rejecting Crimson’s argument that the reasonably prudent operator standard applied as the standard of care. Instead, the standard of care relied on an exculpatory clause in which BPX would only be held liable for Crimson’s share of the expenses if Crimson had proven to the jury that BPX was grossly negligent or engaged in willful misconduct.
“Crimson cannot escape the exculpatory clause by filing an affirmative defense to BPX’s action rather than a counterclaim asserting BPX’s prior material breach,” said the opinion, authored by Justice Jerry Zimmerer.
Land Murphy, a partner at Smyser, Kaplan & Veselka and BPX’s lead lawyer, said the appellate ruling “recognized the well-understood plain meaning of the parties’ industry-standard model form operating agreement as it had been interpreted for decades.
“As the Court of Appeals held, BPX’s joint operating agreement prevents a company like Crimson from second-guessing operational decisions with the benefit of 20-20 hindsight and from refusing to pay its share of costs after consenting to operations,” Murphy said.
Crimson’s lead lawyer, Todd Mensing, expressed his side’s intent to appeal to the Supreme Court of Texas because he said the clash between the reasonably prudent operator standard and the exculpatory clause is one that needs more clarity and will likely arise again in larger disputes.
He said the current interpretation by the Fourteenth Court is that “you have to be a reasonably prudent operator but you won’t be held accountable unless you’re grossly negligent,” which “doesn’t make sense.”
“[Operators] are effectively immunized from lawsuits because the gross negligent standard is nearly impossible to meet,” said Mensing, a partner at Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing. “This issue is going to be important for cases much larger than this one. It’s a really interesting legal issue and we hope the Supreme Court takes a look at it.”
BPX and Crimson entered a joint operating agreement in 2010 to drill a well called the McCarn A1H well in Bee County, Texas. BPX, the operator, agreed to cover 73.75% of the costs, while Crimson, a non-operating partner, agreed to 20%. Other parties held the remaining interest in the JOA.
The dispute between the parties arose after the well “experienced an event,” the opinion says, leading the parties to plug and abandon the well. Crimson refused to pay its 20% of the drilling expenses, arguing that in drilling the McCarn well, BPX deviated from its past drilling practices and against its geologist’s advice. Crimson dropped its counterclaims before trial, instead relying on BPX’s burden to prove Crimson was responsible for the expenses instead of presenting its own evidence for its affirmative defense of prior material breach.
The SKV team representing BPX also included partner Sydney Scott and associate Sam Jarvis.
The AZA team representing Crimson also included partner Jane Robinson and associate Ward Goolsby.