Picture this: you have a JOA dispute, and it appears likely to proceed to litigation. You know the model form JOA like the back of your hand. You have anticipated the opposing party’s arguments, and you feel comfortable with your analysis of the JOA issues. You are also comfortable with the posture of your case given your history of dealings and correspondence. You also feel comfortable that your claims are within the statute of limitations.
But, then it strikes you: could the COPAS accounting procedure arguably apply to this dispute? If so, could its 24-month contractual limitations provision apply?
To oil and gas lawyers (transactional and litigators alike) the COPAS accounting procedure is sometimes an afterthought. But, in the context of JOA disputes, whether or not directly involving accounting issues, the COPAS procedure can have a critical impacts on your case. This article briefly explores just a few.
Scope and Impact of COPAS
The COPAS model form Accounting Procedures are, by far, the most common form of accounting procedure attached to JOAs governing onshore properties in Texas. When a COPAS form is attached to a JOA, it will generally govern the accounting methodology for joint operations, including procedures for billing and payment, classification of costs and expenses, and handling of audit rights and exceptions.
Despite the widespread use of COPAS forms, there is a notable lack of case law in Texas directly interpreting COPAS provisions. This is likely due to several factors, including the collaborative process in creating the COPAS forms that seemingly results in generally well-understood forms among accountants, the effectiveness of COPAS audit procedures in resolving disputes without litigation, and perhaps the fact auditors are often able to resolve many accounting issues by reference to COPAS's additional publications such as Accounting Guidelines (or “AGs”) and Model Form Interpretations (or “MFIs”).
However, litigation regarding COPAS accounting procedures can, and does arise. Also, even when the COPAS form is not directly litigated, it is not uncommon for provisions of the COPAS form to bear indirectly, or in a secondary manner, in a variety of disputes between non-operators, or between operators and non-operators.
Scope of 24-month "conclusive presumption"
One of the most heavily litigated COPAS provisions is its 24-month adjustment clause, also known as the "conclusive presumption" or "lookback" provision. This provision, found in both the 1984 and 2005 COPAS forms, generally states that all bills and statements will be conclusively presumed true and correct after the twenty-four month period, unless a timely and sufficient written exception is made.
Case law has grappled with the scope and application of this conclusive presumption. For example, in Exxon Corp. v. Crosby-Mississippi Res., Ltd., 40 F.3d 1474 (5th Cir. 1995), the court held that the presumption only attaches to joint interest billings (JIBs) that provide all the details required under the COPAS form. Conversely, in Grynberg v. Dome Petroleum Corp., 599 N.W.2d 261 (N.D. 1999) and Willard Pease Oil & Gas Co. v. Pioneer Oil & Gas Co., 899 P.2d 766 (Utah 1995), courts applied the presumption even when the non-operator claimed not to have received the billing statements. The 2005 COPAS form was modified in several respects, including modifications bearing on the 24-month provision. For example, the 2005 COPAS form clarified that the presumption applies only to expenditures, but also clarified that it extends to payout accounting as well.
Sufficiency of "written exception"
Another common issue regarding the 24-month adjustment clause is determining whether a party has avoided its preclusive effects by submitting a timely and sufficient written exception. Case law suggests that the exception should include enough detail to put the operator on notice of the dispute. CabelTel Int'l Corp. v. Chesapeake Expl., L.L.C., 2012 Tex. App. LEXIS 5576 (Tex. App.--Fort Worth July 12, 2012, pet. denied)). Even if a party provides a timely written exception, if it is not sufficiently detailed, then the “conclusive presumption” may bar their claims. For example, in Calpetco 1981 v. Marshall Expl., Inc., 989 F.2d 1408 (5th Cir. 1993), the Fifth Circuit held that a non-operator's counterclaim failed to constitute a sufficient written exception, as it lacked sufficient specificity regarding the disputed charges or wells at issue. The 2005 Form was modified to expressly require a “specified detailed” written exception.
In performing a multi-jurisdictional study of COPAS-related litigation, though the existing case law has not developed a wide-reaching set of well-established black-letter rules, the cases do present several potential conclusions that may be drawn. For instance, here are a few:
- Handwritten markings on JIBs may constitute a sufficient written exception in some circumstances. See, e.g., Paint Rock Operating, LLC v. Chisholm Exploration, Inc., 989 F.2d 1408 (5th Cir. 1993).
- In some cases, the 24-month period may be tolled by fraudulent concealment, waiver or estoppel. See, e.g., Calpetco 1981 v. Marshall Expl., Inc., 989 F.2d 1408 (5th Cir. 1993).
- The 24-month adjustment provision may only apply to disputes between operators and non-operators, at least under forms prior to 2005. See, e.g., XCO Production Co. v. Jamison, 194 S.W.3d 622 (Tex. App—Houston [14th Dist.] 2006, pet. denied).
- In some cases, filing a lawsuit may not be sufficient to constitute a sufficient written exception. See, e.g., Calpetco 1981 v. Marshall Expl., Inc., 989 F.2d 1408 (5th Cir. 1993).
Other Considerations
At any rate, one thing that practitioners should keep in mind is that conducting an audit and diligently participating in the audit procedures under the COPAS form will not toll the 24-month conclusive presumption provision.
While the 24-month provision is a key aspect of COPAS litigation, disputes can arise in various other areas of joint operations accounting covered by the COPAS form. For example, litigation involving the COPAS form may touch on issues such as the calculation of operator overhead, classification of direct and indirect charges, and the treatment of affiliate goods and services.
Conclusion
When faced with a JOA dispute involving COPAS issues, it is crucial for oil and gas litigators to carefully consider the impact of the COPAS accounting procedure on the dispute and legal strategy. By understanding the key provisions, relevant case law, and unique facts of each case, attorneys can more effectively navigate the complexities of COPAS-related disputes and advocate for their clients' interests in joint operations accounting matters.
