Opinion
NO. 14-20-00070-CV
03-02-2021
CRIMSON EXPLORATION OPERATING, INC., Appellant v. BPX OPERATING COMPANY F/K/A BHP BILLITON PETROLEUM (TXLA OPERATING) COMPANY D/B/A PETROHAWK OPERATING COMPANY, Appellee
On Appeal from the 334th District Court Harris County, Texas
Trial Court Cause No. 2016-02583
MEMORANDUM OPINION
In this contract dispute between an oil and gas well operator, BPX Operating Company, and a non-operator, Crimson Exploration Operating, Inc., appellant Crimson challenges the judgment in favor of BPX. The judgment is based on a jury finding that Crimson failed to comply with the parties' Participation Agreement and Joint Operating Agreement. Crimson asserts it is entitled to a new trial because the trial court failed to instruct the jury regarding (1) the standard of care imposed by the contract; and (2) all of the elements of BPX's breach-of-contract claim. BPX also filed notice of appeal and asserts that if this court reverses and remands for a new trial, the trial court should permit BPX to introduce evidence related to Crimson's assessment of potential risks. Concluding the trial court did not abuse its discretion in refusing Crimson's requested jury instructions, we affirm.
BACKGROUND
Because neither party challenges the sufficiency of the evidence to support the jury's verdict, we address the relevant background in its broadest outlines, as follows: On June 15, 2010, BPX and Crimson, with others, signed a Participation Agreement "for the purpose of setting forth the terms and conditions under which Crimson and [BPX] shall jointly conduct exploration and development operations on the lands comprising Crimson's Pawnee NW Prospect located in Bee County, Texas" (the "Agreement"). As part of the project Crimson and BPX agreed to drill a horizontal well known as the McCarn A1H well. Two other wells, known as the Windham A1H and Born A1H, were also drilled under the Agreement.
The Agreement was originally signed by Petrohawk. Petrohawk changed its name in March 2013 to BHP Billiton Petroleum TxLa Operating Company, which after the trial in this case, changed its name to BPX Operating Company. Any reference to BPX in this opinion includes these entities.
The Agreement adopted a Joint Operating Agreement ("JOA"), which was attached and incorporated into the Agreement. The JOA governed the drilling and operation of the well and outlined the roles and responsibilities of the operators and non-operators. Under the JOA, BPX was the operator, and Crimson was a non-operator. BPX bore 73.75 percent of the costs and liabilities of drilling the well, and Crimson bore twenty percent. In March 2012 Crimson signed an election letter in which it elected to participate in the McCarn well.
The JOA provided that BPX agreed to conduct its activities as a reasonably prudent operator in a good and workmanlike manner. The JOA also contained an exculpatory clause, which stated that BPX "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."
Almost two years later, on June 5, 2012, the McCarn well experienced an event, which prohibited further drilling. The parties dispute whether this event was a "gas kick" or a "blowout." The parties agreed to plug and abandon the well as a result of the event. BPX subsequently billed Crimson for its proportionate share of the McCarn well drilling expenses, but Crimson refused to pay the bill. BPX sued Crimson for the amount owed under the Agreement. Crimson answered, asserting affirmative defenses, one of which was prior material breach by BPX. Crimson also asserted counterclaims, which it abandoned before trial.
In asserting prior material breach Crimson alleged that BPX, in drilling the McCarn well, deviated from its past practices and against its geologist's advice, using knowingly substandard methods and materials. BPX presented the testimony of its drilling engineer, Barry Cresap. Cresap designed the McCarn well, including the casing size and the depth at which the casing should be set. Cresap reviewed the geologic prognosis prepared by BPX's geologists. Cresap testified extensively on the general area where the well was drilled, and the method and materials used for drilling. Crimson asserted that BPX ignored warnings from its geologist that the decisions about the casing size, well depth, and general drilling environment, would lead to issues with the well. Crimson argued that BPX breached the Agreement by failing to meet the standard of care imposed by the Agreement.
Crimson asserted an affirmative defense in which it argued that BPX breached the Agreement by not performing as a reasonably prudent operator. In that regard, Crimson argued that it was excused from paying twenty percent of the operating expenses of drilling the well. Crimson argued that the standard of care was one of a "reasonably prudent operator." BPX argued that an exculpatory clause in the Agreement prohibited its liability for Crimson's proportionate share of the expenses unless the jury determined that BPX acted with gross negligence or willful misconduct.
BPX presented evidence of its operations on the McCarn well and Crimson's refusal to pay the proportionate expenses on the well. In support of its affirmative defense of prior material breach, Crimson did not present its own evidence but relied on BPX's burden to prove Crimson was responsible for the expenses under the contract.
The parties stipulated before trial that if Crimson was not excused from paying its proportionate share of the drilling expenses under the Agreement, it would owe BPX $1,253,830.34.
The jury charge included separate broad-form questions on whether Crimson or BPX failed to comply with the contract as follows:
Question No. 1:
Did Crimson fail to comply with its Agreement with [BPX]?
Answer "Yes" or "No."
Answer: Yes
If you answered yes to Question 1, answer Question 2, otherwise do not answer Question 2.
Question No. 2:
Did [BPX] fail to comply with its Agreement with Crimson?
Answer "Yes" or "No."
Answer: No
If you answered yes to Question 2, answer Question 3, otherwise do not
answer Question 3.Based on the jury's findings the trial court rendered final judgment for BPX in the amount of the agreed damages of $1,253,830.34. This appeal followed.
Question No. 3:
Who breached the Agreement first?
Answer "[BPX]" or "Crimson."
Answer: __________
If you answered yes to Question 2, answer Question 4, otherwise do not answer Question 4.
Question No. 4:
Is the failure to comply by [BPX] excused?
Failure to comply by [BPX] is excused if compliance is waived by Crimson. Waiver is an intentional surrender of a known right or intentional conduct inconsistent with claiming the right.
Answer "Yes" or "No."
Answer: __________
ANALYSIS
The reach of the Agreement's exculpatory clause and the standard of care required for BPX is one of the key questions of this appeal. The exculpatory clause in the JOA established a standard of care applicable to drilling operations, but provided that, if BPX falls short of this standard, it will not be liable in the absence of gross negligence or willful misconduct. The clause provides in pertinent part:
Operator [BPX] shall conduct its activities under this agreement as a reasonably prudent Operator, i.e., in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, in compliance with the applicable lease(s) and agreements and in compliance with the applicable law and regulation. 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 fundamental dispute at trial and on appeal involves BPX's liability under the Agreement. BPX asserted at trial that it was not liable for breach of the Agreement unless Crimson proved BPX acted with gross negligence or willful misconduct. Crimson asserted that it was not responsible for expenses under the Agreement if BPX failed to operate as a prudent operator in a good and workmanlike manner.
During the jury charge conference, Crimson objected to the broad-form questions and proposed the following questions and instructions:
1. Did Crimson fail to comply with its agreement with [BPX]?
To show that Crimson failed to comply, [BPX] must prove by a preponderance of the evidence all of the three following elements:
1) A valid contract exists between Crimson and [BPX]; and
2) [BPX] performed as contractually required; and
3) Crimson failed to perform as contractually required.
The trial court denied Crimson's requested questions and instructions. In two issues on appeal Crimson asserts the trial court erred in denying its requested questions and instructions.
Under the Agreement, [BPX] is required to "conduct its activities under this agreement as a reasonably prudent Operator, i.e., in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, in compliance with the applicable lease(s) and agreements and in compliance with the applicable law and regulation."
2. Did [BPX] fail to comply with its agreement with Crimson?
Under the Agreement, [BPX] is required to "conduct its activities under this agreement as a reasonably prudent Operator, i.e., in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, in compliance with the applicable lease(s) and agreements and in compliance with the applicable law and regulation."
I. The trial court did not abuse its discretion in refusing to submit Crimson's proposed instruction to Question No. 2 in the jury charge.
A. Standard of Review
"Determining necessary and proper jury instructions is a matter within the trial court's discretion, and appellate review is for abuse of that discretion." Columbia Rio Grande Healthcare, L.P. v. Hawley, 284 S.W.3d 851, 856 (Tex. 2009). When a trial court refuses to submit a requested instruction, the question on appeal is whether the request was reasonably necessary to enable the jury to render a proper verdict. See Tex. R. Civ. P. 277; Hawley, 284 S.W.3d at 855-56. For an instruction to be proper, it must: (1) assist the jury; (2) accurately state the law; and (3) find support in the pleadings and the evidence. See Tex. R. Civ. P. 278; Hawley, 284 S.W.3d at 855-56. The trial court does not abuse its discretion in refusing to submit unnecessary instructions, even when the instructions represent correct statements of law. Vast Constr., LLC v. CTC Contractors, LLC, 526 S.W.3d 709, 722 (Tex. App.—Houston [14th Dist.] 2017, no pet.). A judgment will not be reversed for charge error unless the error probably caused the rendition of an improper verdict or probably prevented the appellant from properly presenting the case to the court of appeals. Thota v. Young, 366 S.W.3d 678, 687, 693 (Tex. 2012).
B. The "reasonably prudent operator" was not the correct standard under the pleadings and evidence.
In Crimson's first issue it challenges the trial court's refusal to submit a definition of the standard of care in Question No. 2. Crimson argues on appeal that the standard of care under the Agreement was that of a "reasonably prudent Operator" and the trial court erred in refusing to instruct the jury on that standard. BPX, on the other hand, argues that the exculpatory clause of the Agreement only imposes liability if BPX's conduct amounts to willful misconduct or gross negligence. This was a central issue argued to the jury. We first address whether the "reasonably prudent operator" was the appropriate standard of care under these circumstances.
We begin by deciding whether the exculpatory clause in the JOA sets the standard to adjudicate the breach of contract claims. The construction of an unambiguous agreement presents a question of law that we review de novo. Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011). Our primary concern in interpreting an agreement is to ascertain and give effect to the intentions of the parties as expressed in the instrument. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). We therefore give terms their plain and ordinary meaning unless the contract indicates that the parties intended a different meaning. Dynegy Midstream Servs., Ltd. P'ship v. Apache Corp., 294 S.W.3d 164, 168 (Tex. 2009). An exculpatory clause is a "clause in a contract designed to relieve one party of liability to the other for specified injury or loss incurred in the performance of the contract." Reeder v. Wood Cty. Energy, LLC, 395 S.W.3d 789, 792-93 (Tex. 2012) (quoting Howard Williams & Charles Meyers, Manual of Oil and Gas Terms 372, 373 (12th ed. 2003, updated and revised by Patrick Martin & Bruce Kramer)).
Neither side here argues that the agreements were ambiguous, and we have discerned no relevant ambiguity.
Commenting on the language of an almost identical exculpatory clause, one authority has stated:
The more serious question is the effect of the . . . language of Art. V [which] state[s] that the operator shall have no liability to the other parties for losses sustained or liabilities incurred, "except such as may result from gross negligence or willful misconduct." Thus the operator is not liable to the nonoperators for injury caused by the operator's ordinary negligence. . .. Such clauses do not, of course, purport to authorize the operator to act in a negligent manner. They do however, purport to exculpate the operator from liability for negligent injury to the joint property and partially indemnify him against liability for
negligent injury to third parties. Under Art. V., the operator would not be liable to the nonoperators if his negligent drilling resulted in the well blowing out.Ernest E. Smith, Duties and Obligations Owed By An Operator to Nonoperators, Investors, and Other Interest Owners, 32 Rocky Mtn. Min. L. Inst. 12-30 (1986).
The Supreme Court of Texas and our sister court of appeals have held that exculpatory clauses nearly identical to the clause in this case "exempt[] the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or willful misconduct." Reeder, 395 S.W.3d at 795; see also IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 116 S.W.3d 888, 896 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) (exculpatory clause applied to claim that operator failed to conduct operations in a good and workmanlike manner). To the extent Crimson attempted to avoid liability due to BPX's allegedly negligent conduct in operating the well, the exculpatory clause applies in this case.
Crimson attempts to distinguish IP Petroleum and Reeder arguing that in those cases the non-operator sued the operator thus triggering the exculpatory clause. Here, Crimson argues that the exculpatory clause is not triggered by Crimson's assertion of the affirmative defense of prior material breach because BPX as operator sued Crimson, a non-operator. We disagree.
Crimson asserted the affirmative defense of prior material breach. "It is a fundamental principle of contract law that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance." Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 436 (Tex. 2017) (quoting Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 196 (Tex. 2004)). By contrast, when a party commits a nonmaterial breach, the other party is not excused from future performance but may sue for the damages caused by the breach. Z.M. Shayjayadam3, LLC v. Omnova Sols., Inc., No. 14-19-00623-CV, 2020 WL 6278615, at *11 (Tex. App.—Houston [14th Dist.] Oct. 27, 2020, no pet.) (mem. op.). What constitutes a breach of contract is a question of law, but whether the breaching conduct occurred is a question of fact. See Bartush-Schnitzius Foods, 518 S.W.3d at 436.
An "affirmative defense" is "[a] defendant's assertion of facts and arguments that, if true, will defeat the plaintiff's or prosecution's claim, even if all the allegations in the complaint are true." Zorrilla v. Aypco Constr. II, LLC, 469 S.W.3d 143, 155-56 (Tex. 2015) (quoting BLACK'S LAW DICTIONARY 509 (10th ed. 2009)). In this case, Crimson sought to defeat BPX's attempt to collect under the Agreement by asserting the defense of prior material breach, which required Crimson to show that BPX breached the contract and was therefore liable for Crimson's portion of the expenses.
To be sure, the exculpatory clause is usually applied when a party to the Agreement asserts a claim or counterclaim against the operator. In this case, by asserting an affirmative defense, Crimson asserted facts and arguments seeking to defeat BPX's claim if the allegations were true. Crimson admitted it agreed to pay twenty percent of the operating costs for the McCarn well and that it failed to pay, but asserted its payment was excused due to BPX's failure to perform under the contract. In other words, BPX would be held liable for Crimson's share of the expenses if Crimson successfully asserted its affirmative defense. In that regard, the exculpatory clause prohibits BPX's liability under the Agreement unless its actions constituted gross negligence or 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. See Chesapeake Operating, Inc. v. Sanchez Oil & Gas Corp., CIV.A. H-11-1890, 2012 WL 2133554, at *3 (S.D. Tex. June 12, 2012) (interpreting almost identical exculpatory clause and holding that party could not avoid the clause by asserting an affirmative defense).
Therefore, under the Agreement, the standard of care to be applied to BPX's alleged prior material breach was that of gross negligence or willful misconduct, not the reasonably prudent operator standard.
C. Crimson has not shown the trial court abused its discretion.
A jury instruction is proper if it (1) assists the jury, (2) accurately states the law, and (3) finds support in the pleadings and evidence. See Gunn v. McCoy, 554 S.W.3d 645, 676 (Tex. 2018). The trial court has considerable discretion to determine proper jury instructions, and if an instruction might aid the jury in answering the issues presented to them, or if there is any support in the evidence for an instruction, the instruction is proper. Thota, 366 S.W.3d at 687; Garden Ridge, L.P. v. Advance Intern., Inc., 403 S.W.3d 432, 443 (Tex. App.—Houston [14th Dist.] 2013, pet. denied).
As noted above, the instruction requested by Crimson, which would have included the "reasonably prudent operator" standard, was not supported by the pleadings or the evidence. The evidence established that the exculpatory clause exempted BPX from liability unless it engaged in willful misconduct or gross negligence. Crimson's pleading of an affirmative defense required a showing of BPX's liability under the Agreement. The proposed instruction on the reasonably prudent operator standard was not supported by the pleadings or the evidence. The trial court, therefore, did not abuse its discretion in refusing to submit an erroneous instruction. See Hawley, 284 S.W.3d at 855 (requiring instruction to find support in pleadings and evidence). Because Crimson has failed to show the trial court abused its discretion in refusing the instruction, we overrule Crimson's first issue.
II. The trial court did not abuse its discretion in refusing Crimson's requested Question No. 1.
In its second issue Crimson asserts the trial court abused its discretion by submitting a question to the jury that omitted an element of breach of contract, specifically, whether BPX performed under the contract.
To recover on a breach of contract claim, a claimant must prove: (1) the existence of a valid contract; (2) the claimant performed or tendered performance; (3) the other party breached the contract; and (4) the claimant was damaged as a result of the breach. USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479, 502 n.21 (Tex. 2018); Z.M. Shayjayadam3, LLC, 2020 WL 6278615, at *4. "In all jury cases the court shall, whenever feasible, submit the cause upon broad-form questions." Tex. R. Civ. P. 277; Thota v. Young, 366 S.W.3d 678, 689 (Tex. 2012) (observing that the court has "repeatedly reaffirmed [its] longstanding, fundamental commitment to broad-form submission").
The use of a broad-form jury question for a cause of action does not mean that the question may omit the necessary elements of the claim. Diamond Offshore Mgmt. Co. v. Guidry, 171 S.W.3d 840, 844 (Tex. 2005) ("Broad-form submission does not entail omitting elements of proof from the charge."). "Whether a granulated or broad-form charge is submitted, the trial court's duty is to submit only those questions, instructions, and definitions raised by the pleadings and the evidence." Harris Cnty. v. Smith, 96 S.W.3d 230, 236 (Tex. 2002).
Crimson complains that Question No. 1 did not require a finding that BPX performed under the Agreement. Such a question goes to the issue of whether Crimson's breach was excused by BPX's failure to perform. See Koukhtiev v. Hiner, No. 01-13-00356-CV, 2014 WL 4952430, at *7 (Tex. App.—Houston [1st Dist.] Oct. 2, 2014, no pet.) (mem. op.) (holding that question of plaintiff's performance went to defense of repudiation and was appropriate in a separate question). Here, the trial court asked the jury in Question No. 2 whether BPX complied with the agreement. Because the trial court asked the jury about BPX's performance in Question No. 2, it did not abuse its discretion by refusing to include a duplicate question in Question No. 1.
Relying on Ford Motor Co. v. Ledesma, 242 S.W.3d 32, 44 (Tex. 2007), Crimson asserts the trial court erred by omitting an essential element of BPX's claim. In Ledesma, a products liability case, the Supreme Court of Texas held that the trial court reversibly erred in charging the jury by giving an incomplete definition of "manufacturing defect." Id. at 35. Specifically, the court held the jury "received a legally incorrect charge that omitted an indispensable element: that the product deviated, in its construction or quality, from its specifications or planned output in a manner that rendered it unreasonably dangerous." Id. at 41. We find the holding in Ledesma is distinguishable as Ledesma was a products liability action in which manufacturing defect was a term required to be defined and an essential element of the products-liability claim.
In this breach-of-contract action, as in Koukhtiev, the trial court was not required to submit questions or instructions on each element of breach of contract. Moreover, the court's Question No. 2, in asking the jury whether BPX complied with the Agreement, necessarily included a question on whether BPX performed under the Agreement. Because the trial court did not abuse its discretion in refusing Crimson's proposed Question No. 1, we overrule Crimson's second issue on appeal.
CONCLUSION
BPX filed its own notice of appeal and asserted a conditional cross-issue addressing exclusion of evidence in the event this court reverses and remands for a new trial. Having overruled Crimson's issues on appeal we affirm the trial court's judgment, and we need not address BPX's cross-issue.
/s/ Jerry Zimmerer
Justice Panel consists of Justices Wise, Zimmerer, and Poissant.