Joint Operating Agreement

By Tod J. Everage

The modern day contract is a direct result of trial and error. Generally speaking, transactional lawyers try to negotiate “bulletproof” contracts providing exactly what their client wants or needs. Despite their best efforts, litigators in later disputes try their level best to find the “errors” in those contracts that could benefit their client. Then the pattern repeats. Take Seismic Wells, LLC v. Sinclair Oil and Gas Co., 2018 WL 43377234 (5th Cir. 9/13/2018), for example. In that dispute, the parties had included a “prevailing party” fee provision in their Joint Operating Agreement (JOA): “In the event any party is required to bring legal proceedings to enforce any financial obligation of a party hereunder, the prevailing party in such action shall be entitled to recover … a reasonable attorneys’ fees.” At first blush, this provision appears fairly standard and innocuous. But, with over $1 million at stake in attorneys’ fees, the meaning of every word in that provision is fair game.

The facts leading up to the dispute aren’t relevant here, other than Seismic sued Sinclair under various agreements when it was concerned that Sinclair would not be holding up their end of the bargain. Seismic’s amended complaint included 17 counts, including claims of fraud, breach of contract, conspiracy, tortious interference, defamation/libel, and business disparagement. At the end of Seismic’s case at trial, the court granted Sinclair’s motion for judgment as a matter of law. Sinclair then moved for over $1 million in attorneys’ fees incurred in defending itself, citing specifically to the prevailing party provision in the JOA. The district court denied the motion for three reasons: (1) failure to properly plead under RFCP 9(g) (failure to plead special damages); (2) the provision did not apply because Seismic’s suit was not a legal proceeding brought to enforce a “financial obligation under the JOA”; and (3) Sinclair did not adequately segregate its fee to isolate the work performed defending fee-eligible claims. The Fifth Circuit only addressed the second issue.

The Fifth Circuit agreed that Sinclair was obviously the “prevailing party,” a decision the Court had previously affirmed. The operative question though was whether Sinclair was the prevailing party in a lawsuit “to enforce any financial obligation of a party” under the JOA. The first issue was one of context. How was the dispute brought? The prevailing party provision applies when a party brings a legal proceeding to enforce a financial obligation. The Court noted that many of the claims Seismic brought against Sinclair alleged fraud that induced Seismic to sign the contracts; those claims sought to void the contracts, not enforce them. In other words, those claims sought to render the contract unenforceable and therefore would not satisfy the fee provision.

Two other claims though asserted breach of contract allegations; however, only one of those claims was grounded in the JOA, so the Court focused in there. Count 12 provided that Sinclair breached the JOA by refusing to assign Seismic a leaky well or operate that well on its terms. So, it appeared that this provision did seek to enforce the JOA. But, that was not enough because the legal proceeding must be brought to enforce a financial obligation under the JOA. The Fifth Circuit noted that “financial obligation” is synonymous with “monetary obligation,” and was not persuaded that Seismic’s claim seeking monetary damages made this claim a financial one. Rather, this claim was to turn over a leaky well, which the Court held was not a financial obligation. As such, the prevailing party fee provision was not triggered.

Seismic filed this lawsuit, lost, then got away without having to pay for Sinclair’s attorneys’ fees under a provision that Seismic probably would have sought to enforce itself if it had won at trial. Without knowing anything about the negotiations, including the term “financial obligation” in the JOA’s prevailing party provision narrowed the remedies available to either party in this dispute. Using the term “enforce” arguably did as well given Seismic’s attempts to invalidate the contract. Whereas, had the parties used the more boilerplate language awarding attorneys’ fees to the prevailing party in any legal proceeding brought by “any party arising under this Agreement,” Sinclair may have recovered. Well, assuming that was their original intent.

This case presents a good example of the interplay between the words used in the contract, and the words used in the complaint filed to enforce/or invalidate that same contract. Both transactional lawyers and litigators should take note.