Why your operator does not always love you: some observations on gross negligence, wilful misconduct and consequential loss

Abstract

Due to the nature of the role of operator under a joint operating agreement (JOA), the operator is potentially exposed to a large magnitude of risk. As a result, JOAs typically include clauses intended to allocate and limit liability between the parties. A JOA may also include clauses that release the operator from liability and provide that the participants must indemnify the operator for liability that arises in performing its functions as operator. However, such clauses often contain carve-outs that attempt to make the operator liable if loss is caused where the operator’s conduct, or that of its senior personnel, constitutes gross negligence or wilful misconduct. Given the magnitude of loss that may potentially be incurred by participants under a JOA, it is vital that participants understand the impact of their JOA on their exposure to liability and, in particular, the current interpretations of the terms gross negligence and wilful misconduct likely to be applied by Australian courts. This paper considers the practical operation of such clauses and explores: the ability of a participant to claim consequential loss against the operator and what type of loss is likely to constitute consequential loss; and, practical avenues available to participants of a JOA to minimise the risk of liability by way of drafting, including the effect of a limitation of liability clause on the ability of a JOA participant to recover from the operator.