IN THE SUPREME COURT OF TEXAS
`444444444444
`NO. 10-0887
`444444444444
`
`WENDELL REEDER, PETITIONER
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`v.
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`WOOD COUNTY ENERGY, LLC, WOOD COUNTY OIL & GAS, LTD., NELSON
`OPERATING, INC., DEKRFOUR, INC., BOBBY NOBLE, EXZENA OIL CORPORATION,
`DAVID FRY AND PATRICIA FRY, RESPONDENTS
`
`4444444444444444444444444444444444444444444444444444
`ON PETITION FOR REVIEW FROM THE
`COURT OF APPEALS FOR THE TWELFTH DISTRICT OF TEXAS
`4444444444444444444444444444444444444444444444444444
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`Argued February 27, 2012
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`JUSTICE WAINWRIGHT delivered the opinion of the Court.
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`This case involves the duties and standard of care of an oil and gas operator under an
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`exculpatory clause in a joint operating agreement (JOA). The language of the exculpatory clause in
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`the JOA exempts the operator from liability for activities under the agreement unless it arises from
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`gross negligence or willful misconduct. Based on that language in the exculpatory clause, the trial
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`court instructed the jury that to find a breach of the JOA the operator’s conduct must have risen to
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`the level of gross negligence or willful misconduct. The jury found that the operator, Petitioner
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`Wendell Reeder (Reeder), breached his duties under the JOA to the working interest owners. The
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`trial court signed a final judgment that Reeder take nothing on his claims for exclusive possession
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`of the wellbores, and instead awarded damages to Patricia Fry, Dekrfour, Inc., Nelson Operating,
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`Inc., Bobby Noble, Wood County Energy, LLC, and Wood County Oil & Gas, Ltd.1
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`The court of appeals disagreed that the exculpatory clause applies to the claims, holding that
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`the “standard[] of care provided in the exculpatory clause do[es] not apply to what this case was all
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`about—a breach of contract. Thus, the gross negligence and willful misconduct instruction should
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`not have been included in the charge.” 320 S.W.3d 433, 444.
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`We decide whether 1) the exculpatory clause in the JOA applies to the claims against Reeder,
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`and if so, 2) whether there is legally sufficient evidence that Reeder was grossly negligent or acted
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`with willful misconduct. We hold that the clause applies to the claims against Reeder. Because
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`there is legally insufficient evidence that Reeder acted with gross negligence or willful misconduct,
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`we reverse the judgment of the court of appeals.
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`Background Facts and Procedural History
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` The Forest Hill Field in Wood County encompasses two oil-bearing formations, the Sub-
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`Clarksville Unit and the Harris Sand Unit. The two units overlap, and oil was being produced from
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`both units. Through his company, Dekrfour, Inc. (Dekrfour), David Fry bought a working interest
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`in the Sub-Clarksville Unit. The next year Dekrfour entered into a mutual agreement with Secondary
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`Oil Corporation (Secondary) and the mutual agreement became part of a JOA that the parties
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`executed eleven days later. Id. at 439. Under the JOA, Dekrfour, Secondary, and Secondary’s sister
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`1
` Wood County Energy, LLC and Wood County Oil & Gas, Ltd. no longer wish to prosecute any claims in this
`lawsuit or to execute on or otherwise enforce any judgment in their names. They consider their claims resolved and we
`do not address any of their claims in this opinion. Bobby Noble passed away during the pendency of this appeal and his
`wife is the estate’s independent executrix pursuing this appeal on his behalf. See TEX. R. APP. P. 7.1(a)(1).
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`2
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`corporation would share the existing wellbores in the production of the Sub-Clarksville and the
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`Harris Sand Units. Dekrfour transferred an 85% working interest to Secondary, transferred a 10%
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`carried working interest to Nelson Operating, Inc. (Nelson), another of David Fry’s companies, and
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`transferred its interest in all other formations in the wells to Nelson. Wendell Reeder became the
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`operator of the Harris Sand Unit when he and Don Dacus purchased 87.5% of the working interest
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`in the unit wells previously transferred to Secondary. Reeder then formed a limited partnership,
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`Wood County Oil and Gas, Ltd. (Wood County), with James Wade and Hattie Scherbach in which
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`Reeder and Wade each owned 45% and Scherbach owned 10%.
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`Reeder continued to act as operator, but the relationship with his partners and David Fry
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`became strained. Reeder alleged that four wells required expensive testing or repairs and he sought
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`funding from Wood County. Wade, as President of Wood County, denied his requests. Reeder
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`claims that because those repairs were not made, the Texas Railroad Commission (Commission)
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`severed the Harris Sand Unit and eventually suspended its production. Reeder alleges that he spent
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`at least $150,000 of his own money in an attempt to pay bills and preserve operations.
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`In May 2004, Reeder filed suit against Dekrfour, Nelson, and Bobby Noble (collectively the
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`“Fry Interests”), asserting he was the operator and had the exclusive right of possession of the
`2
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`wellbores for the purpose of producing oil. Id. at 440. Reeder sued on claims of trespass, ouster,
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`conversion, violation of the Theft Liability Act, physical damage to existing wells, and sought both
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`declaratory and injunctive relief.
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`2
` In April 2003, Bobby Noble purchased a portion of Dekrfour’s and Nelson’s Sub-Clarksville interest. Noble
`aligned himself with Dekrfour and Nelson throughout the trial, and he is, therefore, included in the “Fry Interests.” 320
`S.W.3d at 439 n.2.
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`The Fry Interests filed a counterclaim against Reeder, alleging that Reeder “illegally
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`produced oil from the Sub-Clarksville formation” and “fraudulently reported it as production from
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`the Harris Sand Unit to the Railroad Commission.” They claimed that Reeder removed oil and
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`concealed production in the Harris Sand Unit, giving rise to claims for conversion and violations of
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`the Theft Liability Act. They alleged that Reeder failed to obtain production in paying quantities,
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`as required by the JOA, and converted their personal property. Patricia Fry alleged that she had been
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`fined by the Commission because Reeder failed to file a document with the Commission. They
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`claimed that while Reeder promised to comply with the Commission and get the unit producing
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`again, he did nothing.
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`Wood County later asserted that if the Fry Interests suffered any damages, those damages
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`were caused by Reeder as operator of the Harris Sand Unit. Id. Wood County filed a cross claim
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`against Reeder, seeking damages for his actions as operator, lost leases, and loss of the unit. Wood
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`County also nonsuited its damages claims against the Fry Interests but continued to seek declaratory
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`relief. Reeder’s partner Wade asserted that he invested time and money to increase production, only
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`to have Reeder squander the effort, knowing that he would cause the loss of millions of dollars worth
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`of valuable leasehold rights.
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`The case proceeded to trial, and a jury found that Reeder breached his duty as operator “by
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`failing to maintain production in paying quantities or other operations in the Forest Hill Field.” The
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`trial court entered a final judgment ordering Reeder take nothing, awarding damages to Dekrfour,
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`Nelson, Noble, Patricia Fry, and Wood County, and declaring that Reeder owned no mineral interest
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`in the leases covering the Harris Sand Unit or the Sub-Clarksville Unit.
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`Reeder timely appealed the damages award against him, raising seventeen issues challenging
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`the trial court’s conclusion that he was bound by the JOA, the jury’s findings that he breached the
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`JOA, and the award of damages. Id. at 439. The court of appeals disagreed that the exculpatory
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`clause applied to the claim, instead holding that the gross negligence and willful misconduct
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`instruction should not have been included in the charge. Id. at 444. The court of appeals held that
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`the evidence is legally and factually sufficient to support the jury’s findings that Reeder breached
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`his duty as operator when measured against the elements of breach of contract. Id. at 452–53. The
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`court also held that the evidence is legally and factually sufficient to support the damage awards, but
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`held that the trial court’s judgment did not conform to the jury’s damage awards. Id. at 453.
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`The court of appeals affirmed the trial court’s judgment but modified the prejudgment
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`interest, suggested a remittitur in attorneys’ fees, and conformed the damage awards to the jury’s
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`findings. Id. Reeder filed a petition for review with this Court challenging the court of appeals’
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`judgment.
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`Discussion
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`A. Applicability of the Joint Operating Agreement’s Exculpatory Clause
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`We begin by deciding whether the exculpatory clause in the JOA sets the standard to
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`adjudicate the breach of contract claims against Reeder. An exculpatory clause is a “clause in a
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`contract designed to relieve one party of liability to the other for specified injury or loss incurred in
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`the performance of the contract.” Howard Williams & Charles Meyers, Manual of Oil and Gas
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`Terms 372, 373 (12th ed. 2003, updated and revised by Patrick Martin & Bruce Kramer); see, e.g.,
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`Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605, 612–13 (Tex. 2004); Dresser Indus.,
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`Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 507 n.1, 508–11 (Tex. 1993); Tex. Gas Utils. Co. v.
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`Barrett, 460 S.W.2d 409, 413 (Tex. 1970). The court of appeals held that this exculpatory clause
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`does not apply to the breach of contract claims and, therefore, the gross negligence and willful
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`misconduct instructions should not have been included in the jury charge. 320 S.W.3d at 444.
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`Reeder argues, however, that the operator’s exculpatory clause must be interpreted as written.
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`The exculpatory clause in the JOA provides, in relevant part:
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`Operator shall conduct its activities under this agreement as a reasonable prudent
`operator, in a good and workmanlike manner, with due diligence and in accordance
`with good oilfield practice, but in no event shall it have any liability as Operator to the
`other parties for losses sustained or liabilities incurred except such as may result from
`gross negligence or willful misconduct.
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`In a prior case, the court of appeals considered a similar exculpatory clause and saw “no
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`meaningful difference between the two exculpatory clauses.” Id. (citing Castle Tex. Prod. Ltd.
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`P’ship v. Long Trusts, 134 S.W.3d 267, 283 n.4 (Tex. App.—Tyler 2003, pet. denied)). The similar
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`exculpatory clause from the prior case reads, in relevant part:
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`[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.
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`Id. (citing Long Trusts, 134 S.W.3d at 283 n.4). The court of appeals noted that the exculpatory
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`clause in this case contains the phrase “its activities under this agreement” while the contract in the
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`prior case used the terms “all such operations.” Id. The court of appeals nevertheless held that the
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`exculpatory clause applies only to claims that Reeder breached his duty in operations and not to
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`claims that he otherwise breached the JOA, because the clause is located within the paragraph
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`describing “operations on the contract area.” Id.
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`Other courts of appeal have similarly considered the previous exculpatory clause language
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`requiring the operator to “conduct all such operations in a good and workmanlike manner.” Those
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`courts of appeal have held that the clause extends only to claims that the operator failed to act as a
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`reasonably prudent operator for operations under the contract, and not for other breaches of the JOA.
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`See, e.g., Long Trusts, 134 S.W.3d at 267; IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 116
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`S.W.3d 888 (Tex. App.—Houston [1st Dist.] 2003, no pet.); Cone v. Fagadau Energy Corp., 68
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`S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied); Abraxas Petroleum Corp. v. Hornburg, 20
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`S.W.3d 741 (Tex. App.—El Paso 2000, no pet.). In Abraxas, the court of appeals held that “the
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`operator’s limitation of liability is linked directly to imposition of the duty to act as a reasonably
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`prudent operator, which strictly concerns the manner in which the operator conducts drilling
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`operations on the lease.” 20 S.W.3d at 759. The court held that “the exculpatory clause is limited
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`to claims based upon an allegation that Abraxas failed to act as a reasonably prudent operator and
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`does not apply to a claim that it breached the JOA.” Id.
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`The Fifth Circuit analyzed the same language and stated, contrary to the direction of the
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`courts of appeal, that the clause’s “protection clearly extends to breaches of the JOA.” Stine v.
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`Marathon Oil Co., 976 F.2d 254, 261 (5th Cir. 1992). “It is clear to us that the protection of the
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`exculpatory clause extends not only to ‘acts unique to the operator,’ as the district court expressed
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`it, but also to any acts done under the authority of the JOA ‘as Operator.’” Id. The Court held that
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`the clause protects Marathon from liability “for any act taken in its capacity as ‘Operator’ under the
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`JOA (except for gross negligence or willful misconduct).” Id.
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`The exculpatory clauses that the courts of appeal and the Fifth Circuit considered were
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`modeled after either the 1977 or 1982 Model Form Operating Agreement of the American
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`Association of Petroleum Landmen. The exculpatory clause in the 1977 Model Form JOA stated
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`that operator “shall conduct all such operations in a good and workmanlike manner . . . .” A.A.P.I.
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`Form 610, Model Form Operating Agreement-1977, American Association of Petroleum Landmen,
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`at 3. The 1982 Model Form provided that operator “shall conduct all such operations in a good and
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`workmanlike manner,” mirroring the language from the 1977 Model Form JOA. A.A.P.I. Form 610,
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`Model Form Operating Agreement-1982, American Association of Petroleum Landmen, at 4. The
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`cases limiting the scope of the exculpatory clauses in JOAs were interpreting language in either the
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`1977 Model Form JOA or the 1982 Model Form JOA. See, e.g., Abraxas, 20 S.W.3d at 758–59
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`(construing “shall conduct all such operations” and holding that clause does not extend to claims that
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`operator breached the JOA); Long Trusts, 134 S.W.3d at 283 (construing “shall conduct all such
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`operations” and applying Abraxas); IP Petroleum, 116 S.W.3d at 894–96 (construing “shall conduct
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`such operations,” and applying Abraxas); Cone, 68 S.W.3d at 154–55 (construing “shall conduct all
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`such operations” and applying Abraxas).
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`The exculpatory clause in this case, however, is taken from the 1989 Model Form JOA,
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`referring to “its activities under this agreement” instead of “all such operations.” A.A.P.I. Form 610,
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`Model Form Operating Agreement-1989, American Association of Petroleum Landmen. Legal
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`commentators conclude there is a meaningful difference in the change in language from “all such
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`operations” to “its activities.” “By way of contrast, the 1982 Form and prior forms differ markedly
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`. . . . Because ‘such operations’ refers to operations on the Contract Area, the 1989 Form provides
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`for more expansive exoneration of the Operator.” Robert C. Bledsoe, The Operating Agreement:
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`Matters Not Covered or Inadequately Covered, 47 ROCKY MTN. MIN. L. INST. § 15.03[1] (2001).
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`Under the 1977 agreement, the language “conduct all such operations” applied to activities
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`conducted by an operator on the “Contract Area” or at the well site, but “the 1989 [version] language
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`seems to provide a broader spectrum of coverage.” Wilson Woods, Comment, The Effect of
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`Exculpatory Clauses in Joint Operating Agreements: What Protections Do Operators Really Have
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`in the Oil Patch?, 38 TEX. TECH. L. REV. 211, 214–15 (2005).
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`“In construing a written contract, the primary concern of the court is to ascertain the true
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`intentions of the parties as expressed in the instrument.” Valence Operating Co. v. Dorsett, 164
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`S.W.3d 656, 662 (Tex. 2005) (citations omitted). To achieve this objective, contract terms are given
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`“their plain and ordinary meaning unless the instrument indicates the parties intended a different
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`meaning.” Dynegy Midstream Servs., Ltd. P’ship v. Apache Corp., 294 S.W.3d 164, 168 (Tex.
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`2009) (citation omitted).
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`Reading the clause as written, we conclude that the model form transformation is significant,
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`as the change in language broadens the clause’s protection of operators. The model forms from 1977
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`and 1982 both contained clauses that protected operators from “all such operations,” while the 1989
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`model form protects “its activities.” Here, the parties modeled their JOA after the 1989 model
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`form—recognizing the distinction between “such operations” and “its activities.” The modifier
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`“such” references operations under the JOA, while the deletion of that word and use of the term “its
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`activities” includes actions under the JOA that are not limited to operations. The modification
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`implicates a broader scope of conduct following the language of the contract. The agreed standard
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`exempts the operator from liability for its activities unless its liability-causing conduct is due to gross
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`negligence or willful misconduct.
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`B. Legal Sufficiency of the Evidence of Gross Negligence or Willful Misconduct
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`We turn next to determine whether there is legally sufficient evidence that Reeder was
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`grossly negligent or acted with willful misconduct. Reeder argues that there is no evidence that gross
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`negligence or willful misconduct caused the loss of production in paying quantities, and terminated
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`the leases. The court of appeals held that the exculpatory clause did not apply to the claims
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`addressed by the breach of contract Questions 8 and 18, and therefore measured legal and factual
`3
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`sufficiency against the elements of breach of contract, not gross negligence or willful misconduct.
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`320 S.W.3d at 444.
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`In reviewing a verdict for legal sufficiency, we “must view the evidence in the light most
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`favorable to the verdict, crediting favorable evidence if reasonable jurors could, and disregarding
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`contrary evidence unless reasonable jurors could not.” City of Keller v. Wilson, 168 S.W.3d 802,
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`807 (Tex. 2005). A legal sufficiency challenge will be sustained when, inter alia, the evidence
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`offered to prove a vital fact is no more than a mere scintilla. Volkswagen of Amer., Inc. v. Ramirez,
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`3
` Question 8 asks: “Do you find that Wendell Reeder breached his duty as operator to Dekrfour, Inc., Nelson
`Operating, Inc. and/or Wood County Oil & Gas Ltd. by failing to maintain production in paying quantities or other
`operations in the Forest Hill Field?” Question 18 asks: “Do you find that Wendell Reeder breached his duty to Dekrfour,
`Inc., Nelson Operating, Inc., and/or Wood County Oil & Gas, Ltd., by failing to offer Well No. 116 to them prior to
`plugging the well?”
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`159 S.W.3d 897, 903 (Tex. 2004) (citing Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706,
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`711 (Tex. 1997)).
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`Reeder challenges the jury’s affirmative answers and the court of appeals’ holding that he
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`breached his duty as operator. The jury was given the same instruction to Questions 8 and 18
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`regarding his duty as operator:
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`You are instructed that the joint operating agreement requires the Operator to conduct
`operations in a good and workmanlike manner. A good and workmanlike manner
`requires the operator to act as “a reasonably prudent operator.”
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`You are further instructed that the Operator is not liable under this standard unless
`Operator’s conduct amounts to gross negligence or willful misconduct.
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`You are further instructed that “gross negligence” means that entire want of care
`which would raise the belief that the act or omission complained or [sic] was a result
`of a conscious indifference to the right or welfare of the person or persons to be
`affected by it.
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`320 S.W.3d at 443. In holding that the exculpatory clause did not apply to the claims against Reeder,
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`the court of appeals measured the sufficiency of the evidence against the elements of breach of
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`contract. Id. at 444–45.
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`On appeal, Reeder contended that the evidence is legally and factually insufficient to support
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`the jury’s answer to Question 8 that he breached his duty as operator by failing to maintain
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`production in paying quantities or other operations in the Forest Hill Field. Id. at 445. The court
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`held that his challenge was without merit because there was some evidence that Reeder did not
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`maintain production in paying quantities or take necessary action to maintain the leases. Id. at 446.
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`The court reasoned that it need not address Reeder’s arguments regarding the gross negligence and
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`willful misconduct standards. Id.
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`Because the exculpatory clause applies to these claims, however, our task is to determine
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`whether there is legally sufficient evidence that Reeder acted with gross negligence or willful
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`misconduct in breaching his duty as operator. The parties agreed by the language of the JOA that
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`liability for a failure to perform contractual obligations requires more than a mere breach; rather, it
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`requires a breach attended by gross negligence or willful misconduct. The jury was properly
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`instructed. But we disagree that there is legally sufficient evidence to support the proper standard.
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`The court of appeals emphasized that the “evidence shows that Reeder had no production from the
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`Harris Sand Unit from September 2006 forward and that production had begun declining
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`precipitously in the preceding months.” Id. Further, “Reeder presented no evidence of any actions
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`he undertook or other operations he attempted that would maintain the leases and the unit.” Id.
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`Gross negligence has both an objective and a subjective component. Transp. Ins. Co. v.
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`Moriel, 879 S.W.2d 10, 21–22 (Tex. 1994) (citation omitted). In examining proof of the subjective
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`component, courts focus on the defendant’s state of mind, examining whether the defendant knew
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`about the peril caused by his conduct but acted in a way that demonstrates he did not care about the
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`consequences to others. Diamond Shamrock Ref. Co., L.P. v. Hall, 168 S.W.3d 164, 173 (Tex.
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`2005) (“[T]he plaintiff must show that the defendant knew about the peril, but his acts or omissions
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`demonstrate that he did not care.”); Tex. Dept. of Parks and Wildlife v. Miranda, 133 S.W.3d 217,
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`232 (Tex. 2004) (citation omitted). Determining whether an act or omission involves peril requires
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`“an examination of the events and circumstances from the viewpoint of the defendant at the time the
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`events occurred, without viewing the matter in hindsight.” Moriel, 879 S.W.2d at 23.
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`The court of appeals noted that Reeder testified that he maintained production as long as he
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`could before he had to spend his money on other pressing business interests that he owned and
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`admitted to his partners that he did not have the money to fund his share of the operations. 320
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`S.W.3d at 446. The Fry Interests point to Reeder’s absence from the well-sites, Reeder’s failure to
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`file a form with the Commission after he assumed duties as operator, the Commission’s severance
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`of the Harris Sand and Sub-Clarksville Units due to failed fluid tests for certain wells, and the
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`cessation of production in September 2006 as examples of Reeder’s gross negligence and willful
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`misconduct. We consider this evidence in the context of the entire record for evidence of gross
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`negligence or willful misconduct. Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 922 (Tex. 1998)
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`(citing Moriel, 879 S.W.2d at 25 (further citation omitted)); see City of Keller, 168 S.W.3d at 817;
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`see also Burk Royalty Co. v. Walls, 616 S.W.2d 911, 922 (Tex. 1981) (“In determining whether there
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`is some evidence of the jury’s finding of gross negligence, the reviewing court must look to all of
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`the surrounding facts, circumstances, and conditions, not just individual elements or facts.”).
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`The Operating Agreement expressly forbade Reeder from “undertak[ing] any project”
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`expected “to cost more than $5,000,” except in emergencies. Reeder was notified that remaining
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`wells required testing and repairs, costing well in excess of $5,000, but he could not authorize the
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`repairs without the consent of the other owners. Reeder testified that his partners Wade and
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`Scherback refused his request for additional funding for the repairs. Fry testified that Reeder should
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`have made his partners pay for the repairs, but Reeder testified that he tried and was rebuffed.
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`Reeder testified that he “put in [$]154,000” of his own money to bring the wells back into
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`compliance with Commission requirements before running out of funds. An act or omission that is
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`merely ineffective, thoughtless, careless, or not inordinately risky is not grossly negligent. Moriel,
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`879 S.W.2d at 22. “Only if the defendant’s act or omission is unjustifiable and likely to cause
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`serious harm can it be grossly negligent.” Id. After reviewing the record, we find no evidence that
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`Reeder knew about the peril but did not care about the consequences.
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`Reeder also contended on appeal that the evidence is legally and factually insufficient to
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`support the jury’s answer to Question 18 that he breached a duty with gross negligence or willful
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`misconduct to Dekrfour, Nelson, and Wood County by failing to offer Well No. 116 to them prior
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`to plugging the well. 320 S.W.3d at 446. Reeder argued that he was ordered to plug the well by the
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`Commission and that he neither elected to abandon nor plug the well. Id. at 447. The court of
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`appeals did not address Reeder’s argument that the evidence is legally and factually insufficient to
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`support a finding that his actions amounted to gross negligence or willful misconduct, but found that
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`the evidence was legally and factually sufficient to support the elements of a breach of contract. Id.
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`at 447–48. That may be so, but we find no evidence that Reeder acted with gross negligence or
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`willful misconduct when he breached a duty to offer Well No. 116 prior to plugging the well.
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`Conclusion
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`Because the parties modeled their joint operating agreement after the revised exculpatory
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`clause in the 1989 Form, the operator is exempted from liability for activities under the agreement
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`unless the liability arises from gross negligence or willful misconduct. We hold that the exculpatory
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`clause establishes the standard for the claims against Wendell Reeder. Because there is legally
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`insufficient evidence that Reeder acted with gross negligence or with willful misconduct, we reverse
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`the judgment of the court of appeals and render a take-nothing judgment.
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`____________________________________
`Dale Wainwright
`Justice
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`OPINION DELIVERED: August 31, 2012
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`15