In the Texas oil and gas industry, many business ventures begin with a verbal agreement and a firm handshake. However, reality may not always go as well. You may face a standoff with an unresponsive operator or deal with a breached Joint Operating Agreement (JOA). Knowing when to shift from negotiation to litigation can save your operation thousands of dollars and preserve valuable mineral rights.
The warning signs
Negotiations can stop when the operator keeps ignoring written demands and deadlines. They may also keep violating the JOA even after repeated notices. Watch for warning signs like no response after you send a formal breach notice.
Many JOAs include a “cure period” that lets the other party fix the problem. Under many standard JOA default terms, this period is often 30 days. If the cure period ends and nothing is fixed, the operator may still be in material breach. At that point, you may have the legal basis to use contract remedies, seek removal of the operator or file a lawsuit.
Financial red flags
Pay close attention to subtle warning signs. Revenue distributions can suddenly stop, or the other party may exclude you from Authority for Expenditure (AFE) approvals you are entitled to review. The operator may even unilaterally charge your account for questionable expenses. These actions are often indicators of deeper contractual breaches that you cannot easily resolve through negotiation.
If your operator is commingling funds, failing to maintain adequate insurance or refusing to provide required accounting records, it may be past time to negotiate.
When to pivot
The decision to litigate should depend on several factors. Here are some to consider before moving to this stage:
- The monetary value at stake
- Whether you need legal intervention to resolve the issue
- Whether the operator’s conduct points to bad faith actions
In Texas, you may need to act quickly to protect your business and prevent unauthorized assignments. Consider litigation when you need court intervention to resolve complex issues or to remove an operator for just cause.
Protecting Your Position
Before filing suit, assemble and preserve all documentary evidence. Your correspondence, disputed JOA provisions and other information that showcases the violations. Additionally, Texas courts expect parties to honor contractual dispute resolution procedures. Under Texas law, you must exhaust all mandatory mediation or arbitration clauses before proceeding with litigation.
Moving away from negotiation is not a failure, but a strategic protection of your investment. Consider reaching out to an experienced legal professional to determine viable strategies for your dispute.