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Energy & the Law

Option Contract Ruling Reversed by Texas Supreme Court.

Posted in Contract Disputes, Lease Disputes

pancake 3North Shore Energy v. Harkins interpreted an Option Agreement between landowners and a producer over a 400 acre tract. In football they would say the Texas Supreme Court pancaked the plaintiff. In the law, some would call it business as usual.

What the court really did?

A contract interpretation case might have little interest to most readers, what with the “doctrine of last antecedent” and such. The significance is that the court, as it has the power to do, reversed and rendered, substituting its interpretation of a contract in place of two lower courts and a jury verdict awarding the producer $709,000 in actual damages, $1.148 million in punitives, and $400,000 in legal fees.

The heart of the dispute was whether a certain 400 acres was included in the Option.  The trial court construed the contract in favor of the producer. There was a jury trial on the producer’s tortious interference and breach of contact claims. The court of appeal sent the case back to the trial court, holding that the contract was ambiguous and thus, interpretation of the description was a fact issue. The Supreme Court held that the description was not ambiguous and interpreted the contract in favor of the defendant landowners.

The facts 

The agreement described a 1,210 acre tract out of a 1,673 acre tract described in an oil and gas lease with Hammon (sic). So far, so good.  The oil and gas lease described 1,273 acres out of the 1,673, SAVE AND EXCEPT a 400 acre tract.

North Shore exercised the option on 169 acres, which happened to contain a portion of the 400 acres.  North Shore drilled its well on the Hammon tract. Not good.

Along comes Dynamic, who, concluding that North Shore didn’t have the right to lease the 400 acres, took a lease from the family. North Shore sued everybody to quiet title to the Hammon lease tract and to reform the Option Agreement.

The court concluded that the description of land in the Option Agreement did not include the 400 acres.

How the court interprets a contract

The high court considered the contract in light of the circumstances surrounding its execution to determine whether it was ambiguous. North Shore paid $144,000 for 2,886 acres, which is $50 per acre; thus, they concluded that North Shore only optioned 1,210 acres.  This would exclude the 400.

The Option was a legally enforceable selection agreement, but it didn’t give North Shore the option to choose any 1,210 acres out of the 1,673.

The court considered the doctrine of last antecedent (English majors, see page 8 for more). The court then considered the word “being”.  The two “beings” in the description were a correlative pair that refer to the same object – the 1,210 acres.  (See page 7) The court then looked at “and” as a conjunction. The court concluded that the family and Dynamic’s interpretation was the only reasonable one.  The Option referred specifically to the lease, which explicitly excluded the 400 acres. Thus, the plain language of the Option specifically excluded the 400 acres. With that, the damages and attorney fees went away.

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