In Apache Corp. v. Castex Offshore, Inc., the Texas Fourteenth District Court of Appeal announced that showing an oil-and-gas operator’s “willful misconduct” under an operating agreement’s exculpatory clause does not require proof of intent to harm non-operators, but instead proof of “deliberate mismanagement committed without regard for the consequences.” 2021 WL 1881213, *1 (Tex. App.—Houston [14th Dist.], May 11, 2021) (no pet. h.). Apache represents a significant development in Texas oil-and-gas law because it lowers the burden of proof for non-operators who claim that an operator has engaged in willful misconduct. Non-operators no longer have to prove intent to cause substantial harm. Evidence that an operator was indifferent to cost overruns and was “hiding the ball” on its financial mismanagement is enough.
First, the Court settled what “willful misconduct” in an operating agreement means for purposes of a non-operator proving that kind of breach of contract: “that the defendant intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his acts.” Id. at *5 (citing Mo-Vac Serv. Co. v. Escobedo, 603 S.W.3d 119 (Tex. 2020)). A plaintiff alleging such misconduct does not have to show “subjective intent to cause harm.” Id. The standard is whether a defendant “deliberately engaged in misconduct without regard for the consequences—not . . . whether the defendant sought the consequences of his own misconduct.” Id. at *7.
The Court then held the evidence showed willful misconduct because Apache, the operator, had been “aware of the cost overruns for months and did nothing about them.” Id. at *6. Apache had received the non-operator’s consent to the initial budgeted expense of a project and to several subsequent increases, see id. at *2, but had not been candid about the full extent of future costs and had ignored the impact of its financial mismanagement. See id. at *6-7. Apache’s employee admitted to not seeking timely supplemental approval from the non-operator for overages, and that alone was “plain evidence of misconduct.” Id. at 6. Despite his knowledge of mounting costs, Apache’s manager had decided “money was not a problem,” so the jury “reasonably determined from this evidence that [the manager] was consciously indifferent to the cost overruns.” Id. In sum, the operator “knew, but did not care,” about the overspending, and that was willful misconduct. Id. at *8.