TABLE OF CONTENT

LIST  OF ABBREVIATIONS  3

CHAPTER 1  INTRODUCTION.  4

1.0  INTRODUCTION  4

CHAPTER 2  MEANING OF FIDUCIARY DUTIES  5

2.1:  What is a fiduciary duty?  5

2.2:  Importance of fiduciary duties  6

2.3  Fiduciary duties in joint ventures  7

CHAPTER 3  THE MODEL FORM AGREEMENTS.  8

3.1  An analysis of the Model Form Agreements.  8

3.2  Model Forms and parties’ duties  10

CHAPTER 4  CASE LAW DECISIONS  11

4.1  Cases where the courts find in favour of fiduciary duties  11

4.2  Cases where the courts agree with the Model Forms  14

CHAPTER 5  CONCLUSION  17

5.1  CONCLUSION  17

REFERENCES  :  19

BOOKS  :  19

ARTICLES   19

CASES   20

MODEL  AGREEMENTS  21

INTERNET............................................................................................   21

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LIST OF ABBREVIATIONS AAPL AMERICAN ASSOCIATION OF PROFESSIONAL LANDMEN

AIPN AMERICAN INSTITUTE OF PETROLEUM NEGOTIATORS

JOA JOINT OPERATING AGREEMENT

UK UNITED KINGDOM

USA UNITED STATES OF AMERICA

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CHAPTER 1 INTRODUCTION

1.0 INTRODUCTION

In order to facilitate the drilling of thousands of wells within the United States annually, the oil industry has over the years relied on Model Form agreements as a guide for negotiating Joint Operating Agreements. The American Association of Professional Landmen (AAPL), has, over the decades (since 1956) formulated standardized Joint Operating Agreements. The first of such forms drafted in 1956 was revised in 1997, 1982 and 1989. ¹ The 1989 Model Form was an improvement over the previous Model Forms. This form substantially influenced the Association of International Petroleum Negotiators (AIPN) in formulating the 1990, 1995 and 2002 Model Form Joint Operating Agreements. ² The AIPN Model Form is currently utilized worldwide even though some of its provisions have been under criticisms. Since Joint Operating Agreements form the backbone of the Oil and Gas industry, the importance of fiduciary duties of the operator cannot be overemphasized. The operator is usually entrusted with the task of managing the finances of the oil field operations; ³ hence it is important for non-operators to see that in instances of mismanagement of funds entrusted to the operator, fiduciary duties can be invoked against the operator in a court of law.

As we shall see in this paper, the Model forms have sought to exempt the operator from being liable as a fiduciary , thereby limiting, or exempting the operators from liability arising from damages, costs, losses, expenses and liabilities arising out of, or resulting from the performance or failure to perform, even if caused by a pre-existing defect, or the negligence (whether

¹ Andrew, B.D., Amadeo .I., the 1989 AAPL Model Form Operating Agreement: Why are we not using it?

www.landmen.org/landmanarchive/archive/DermanJOA(1).doc. ( last visited on 25/06/09).

² Ibid.

³ See Article 4.2 AIPN Model Form Joint Operating Agreement (2002).

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sole, joint or concurrent), willful misconduct, gross negligence, strict liability and other legal fault of the Operator. 4

This paper will firstly consider the meaning, importance and creation of fiduciary duties in law. Then the US Model Form Agreements will be analyzed. Since the Model Form Agreements originated from the USA, it is then vital to consider how the courts within the USA jurisdictions have viewed or interpreted the duty of the operator in a Joint Operating Agreement( i.e., do the courts view the operator as a fiduciary or not). The research findings will demonstrate that the courts in the USA have in some cases interpreted the model forms in a way favourable to the protection of non-operators investment despite operator friendly language found in the Model Forms. Recently, however, as we shall see, in some cases, the courts are less willing to read beyond the contractual language.

CHAPTER 2

MEANING OF FIDUCIARY DUTIES

2.1: What is a fiduciary duty?

A fiduciary duty is a form of legal relationship that involves trust or confidence between two or more parties; in most instances, a fiduciary or trustee on one hand and a principal or beneficiary on the other hand. One party thus acts in a fiduciary capacity to another party, where funds are remitted to the former for investment purposes for example. ⁵ To be a fiduciary means agreeing to act on behalf of another person in exercising power or discretion where such discretion may affect the interest of the other person. A fiduciary duty can be said to command the highest standard of care at Common Law and Equity. A fiduciary, therefore, must not put his or her personal interest before the duty and must not unduly profit from his or her position as a fiduciary, except with the consent of the principal. 6

⁴ See Article 4.6(A) AIPN Model Form Joint Operating Agreement (2002).

⁵ legal-dictionary.thefreedictionary.com/fiduciary+duty - Cached - Similar (last visited on 20/06/09).

⁶ Bristol and Western Building Society v. Mathew, Chancery 1 @ 18(1998).

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Generally, fiduciary duties arise from general law and not from the agreement between the parties. The terms of the parties’ agreement could, however, affect the extent of the fiduciary duties which could arise in a particular scenario or case. 7

If it can be demonstrated that the relationship between the operator and non-operator is that of agency, then it is easier to invoke fiduciary obligations based on case law decisions deeming an agent to be a fiduciary. 8

2.2: Importance of fiduciary duties

Why do companies struggle to avoid fiduciary duties? Why are interested parties eager to assert it? And why are courts reluctant to uphold it in some cases? These are the questions put forward for consideration in this paper. It is worth noting as a starting point, that a fiduciary duty alters the position of the parties in a Joint Operating Agreement in many ways. We shall consider two of such important factors.

Firstly, a fiduciary duty holds the operator in a high standard of disclosure and conduct. Secondly, a wilful breach of the duty will expose the operator to certain punitive damages. 9

Fiduciary duties impose a standard of sincerity and honesty on the operator. This high expectation of standards makes it easier for co-venturers to make a claim in court in instances where the operator conceals information or fails to disclose unpleasant facts. 10

The importance of the duty to disclose can clearly be illustrated if we compare a claim relating to a breach of fiduciary duty to a claim of fraud. In the fraud case, the plaintiff has to determine or prove that an omission or

⁷ Brownstead on the Law of Agency, p. 156, (15 ^th ed), ( London, Uk; Sweet & Maxwell, 1985).

⁸ Ibid.

⁹ McArthur, J.B., the restatement (first) of the Oilfield Operator’s Fiduciary Duty, 45 (3) Natural Res. Journ., p.

587-776 (2005).

¹⁰ Dime Bo Petroleum Corporation v La Land and Exploration Company, 717 F. Supp 717, D., Colorado (1989).

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