When you are not the Operator of your assets, you have less control over the types of litigation risks that you may face. If your Operator is not paying royalties correctly, is in dispute with one of its vendors, is facing a regulatory claim, or is in dispute with other Operators, you, as a Non-Operator, may be dragged into the ensuing lawsuit merely because you own a joint interest in the underlying assets.

Fortunately, the standard provisions of the AAPL Joint Operating Agreement (“JOA”) establish guardrails for litigation that affect the joint account. Article X of the 1989 Model Form JOA establishes that the Operator has the authority to manage and settle any uninsured third-party claim under a certain dollar threshold. These types of claims are simply addressed by the Operator (with or without expenses for outside counsel), and each JOA party is billed its working interest share of the total amount expended. These claims are effectively out of the hands of the Non-Operators, so attention to this threshold is important when negotiating or accepting JOAs. Too big of a threshold could mean that the Non-Operator has to pay a significant amount of money to settle a matter for which it has little if any, line of sight. Too low a threshold and each Non-Operator runs the risk of spending time and money on matters it realistically have no control over.

Often, the Operator and Non-Operators can reach a mutually beneficial middle ground with respect to matters that exceed the Article X threshold, either in the JOA or via a separate side agreement. Such arrangements may allow the Operator to manage the defense or prosecution of litigation matters with counsel collaborating for the benefit of each working interest owner, so long as there is no material conflict in such counsel representing both the Operator and Non-Operators.

The legal fees can be split along working interest lines or upon some other agreed allocation. This arrangement avoids a small working interest owner obtaining separate counsel at full expense. Further, it avoids the risk of each party’s counsel taking positions that are detrimental to one another. It also preserves the ability of the Non-Operator to seek its own counsel if it believes that the Operator is acting in bad faith or the underlying claim is due to the Operator’s gross negligence or willful misconduct.

The litigation portfolio for Non-Operators is largely dictated by how often their Operators are sued, and knowing the track record of your Operator may shine some light on what you can expect.

If you’re dealing with Non-Op litigation management, RR&A can help. Our team has vast experience in this area and can assist you in understanding your rights and potentially negotiating a sensible agreement with your Operators to avoid any potential legal complications. Contact RR&A today to receive the support you need.