stratigraphic formation

Co-author Brooke Sizer

How many of your mineral conveyances are described like this:

… all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands … ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765′ in the Winchester Samuels 23 # 1 well … and correlative to a depth of 9,298′ in the Tenneco Baker # 1 well …

The dispute

BRP’s predecessor, IP, sold mineral rights in 13,000 acres in DeSoto and Bienville Parishes to Chesapeake with just that description.  When BRP later went to sell more, Chesapeake claimed that the agreement conveyed rights to the Bossier Shale (lying above the Louark Group), as well as the Haynesville. BRP countered that only rights in the Haynesville Shale and lower depths were sold, thus BRP retained all interests above the top of the Louark Group. BRP LLC (Delaware) v. MC Louisiana Minerals LLC, et al. ensued.

The negotiations

The trial court could not ascertain the common intention of the parties in the IP assignment from the words of the assignment itself. So the court considered parol evidence. On one hand, the parties only talked about rights to the Haynesville Shale, and BRP believed that only the Haynesville was below the Cotton Valley formation. On the other, email from Chesapeake referenced its intent to buy all rights below the Cotton Valley.

Big fact:  No geologist was consulted about the description.

A formation is not a monument 

BRP argued that the rules governing surface limitations on servitudes apply to dividing mineral servitudes by depth. In determining the location of a boundary on the land the most important factor is natural monuments.  BRP urged that the “base of the Cotton Valley Formation” and the “top of the Louark Group” are natural monuments. That argument was unsuccessful.

Experts testified that subsurface formations do not have the permanence of natural monuments on the surface: “The location of formations and groups are subject to disagreement among geologists, and the general thought about their location can vary over time…., for this reason, stratigraphic markers, such as the well depths used in this case, are the more commonly used in the oil and gas industry.”

BRP’s problem was that the base of the Cotton Valley and the top of the Louark Group are two different boundaries and are separated by the 500 to 600 foot thick Bossier Shale.

The result

The trial court judgment in favor of Chesapeake was affirmed.

  • The stratigraphic markers represented by well depths were sufficient for designating the minerals conveyed. The depth limitation language was self-defining.
  • IP had been in a position to complete the due diligence necessary to protect its interests.

What does this case mean to you? 

  • If you talk geology, make sure your geologist is on the team.
  • IP’s dealmakers didn’t understand the geology of the formations.
  • Good try BRP, but as successor you were stuck with IP’s description, and their lack of knowledge.

The (almost) perfect musical interlude

Les was overheard last week crooning this mournful tune to his Tiger fanbase. Was it too soon?

pete fountainCo-author Michael Kelsheimer

Thinking about changing an employee policy in Texas? Kubala v. Supreme Production Services, Inc. says you can do it (almost) whenever you want. Want to make employees arbitrate their disputes? You can do that too.

Kubala’s employer Supreme announced a new policy requiring employees to arbitrate employment disputes, including Fair Labor Standards Act claims.  Continued employment was conditioned on acceptance of the agreement, which delegated to the arbitrator the power to make gateway determinations as to the arbitrability of any given claim.  Kubala did not sign that agreement after the meeting but continued his employment and accepted payment for his work.

The new policy was announced two days after Kubala had filed a FLSA collective action against Supreme but, as far as the court knew, before Supreme received notice of the suit.

The agreement to arbitrate

The first question was whether there was an agreement to arbitrate any set of claims, such as pre-existing disputes. Kubala’s obligation to arbitrate claims was imposed while he was already employed on an at-will basis.  Thus, the question:  Was there was a valid modification of the terms of his employment?

Arbitration agreements between employers and their employees are broadly enforceable in Texas. To demonstrate a modification of the terms of at-will employment, the proponent must demonstrate that the other party received notice of the change and accepted the change.

The court deemed that acceptance need not be more complicated than continuing to show up for work and accepting wages in return for work. Supreme satisfied this requirement by providing notice at a meeting where the policy was explained. Kubala knew the policy was a condition of continued employment.  He continued to work.  It doesn’t matter that he didn’t sign the agreement.

The delegation clause 

Was there was a valid delegation clause? Yes. The court was not opining on whether the agreement required that the merits of Kubala’s claim be arbitrated.  The only issue was who answers that question. The court concluded that it was plainly the right and responsibility of the arbitrator to determine his or her own jurisdiction.

Doubts

Judge Higginbotham’s cautionary concurring opinion addressed an employer’s ability to impose arbitration after the employee had filed suit. The result could be that the employer could coerce the plaintiff-employee into relinquishing his FLSA-given right to sue. Judge Higginbotham was concerned about “a regime of contracting out justice”.  Supreme’s saving grace was that it was unaware of Kubala’s suit until after the arbitration agreement became effective.

Worried about the presidential election?

Don’t be:

“Democracy is the worst form of government except for all the others that have been tried.”  Winston Churchill.

Be:

“The best argument against democracy is a five-minute conversation with the average voter.” Winston Churchill.

Remember the campaign ad about the 3:00 a.m. phone call? Let Gary Clark, Jr. answer it.

Great New Orleans musician Pete Fountain RIP.

angry woman

Co-author Skyler Stuckey

The big trade-secret case, Southwestern Energy v. Berry-Helfand, reported on these pages here and here, has been worked over by the Texas Supreme Court. Highlights:

  • Lack of certainty in damages does not preclude recovery.
  • A “Flexible and imaginative” approach to damages in trade secret cases has its limits
  • For the limitations clock to begin running, notice must be more than a suspicion or subjective belief.

A good tactical call

A defendant’s decision not to call an expert damages witness is reminiscent of the suicide squeeze. Judgment is withheld until the result is in. Run scores – manager is a genius; runner out at the plate – manager is reckless and should be fired. Here Southwestern introduced no witness of its own, but instead attacked factual underpinnings of Helfand’s expert’s methodology and the reliability of his calculations. Decision vindicated? Looks like yes. The jury awarded far less than Helfand’s expert calculated.

Reduced damages for misappropriation

As the court saw it, the only figure in the calculations that bore a relationship to the jury’s award was three-percent override applied to past production revenue on the disputed wells. There was no basis for valuing an override in Southwestern’s deep-rights sale. An estimate based on that sale was no evidence to support the jury’s $10.6 million award. The remainder of his calculations, though overstated, was sufficient evidence of actual damages for trade-secret misappropriation.

The proper measure was the reasonable royalty that would be obtained for the trade secret’s use, not an override. Relying on a “flexible and imaginative approach” for trade secret misappropriation is not justified when objective evidence is available. The compensation in the comparable Petrohawk agreement was probative of the trade secret’s value, and not necessarily of a reasonable royalty. Legally sufficient evidence existed to support actual damages, but insufficient evidence exists to support the entire amount the jury awarded.

The expert’s opinion was insufficient to support the entire judgment because he applied the total average payout (3%) received by the plaintiff under an exemplar agreement with Petrohawk to the total number of wells drilled by the defendant. He should have applied the specific formula for payout in the exemplar contract to each well to determine the exact amount that would have been paid for the trade secret.

Damages remanded – not rendered

Overstated damages do not entirely defeat recovery when legally sufficient evidence shows damages exist. There were damages to be had, just not in the amount awarded.

Breach of contract do-over

The court of appeals’ take-nothing judgment on breach of the confidentiality agreement was reversed and remanded. The jury award, based on the “value of the trade secret”, was not a proper measure of contract damages. Error in the measure of contract damages was not before the appeals court because Southwestern abandoned it on appeal. There was evidence of damages, but not enough to support the full award.

Limitations and the discovery rule – plaintiff survives

For the statute to begin to run on a trade secret misappropriation claim based solely on notice of sufficient facts that would cause a reasonable person to make further inquiry, the facts of which the plaintiff has notice must be egregious. Suspicions, subjective beliefs, and concerns are not sufficient. Southwestern failed to establish the date the misappropriation was discovered or as a matter of law, should have been, and couldn’t identify evidence revealing what Helfand would have discovered had she made further inquiry.

And we close with this enticement from the Supreme Court to unhappy defendants.

gliderLet’s start with a little background: Under the Accommodation Doctrine an oil and gas lessee has an implied right to use the land as reasonably necessary to produce and remove the minerals, but must exercise the right with due regard for the landowner’s rights.

As a result of Coyote Lake Ranch v. City of Lubbock, the doctrine now applies between the landowner and the owner of an interest in the groundwater. You think this decision pertains to ranchers? I report it because as we know from Bernie, you oil people frack the earth, poison our babies, and spend undeserved riches that should go to the government on vast, water-starved ranches in West Texas.

How did we get here?

In 1953, the City bought the Ranch’s groundwater via a deed that had very detailed provisions regarding the City’s rights. The Ranch reserved water for certain specified uses. In 2012, the City announced plans to increase water extraction by drilling as many as 20 test wells and 60 additional wells. The Ranch objected and sued to enjoin the City from implementing its plan.

The Ranch argues … and honors the Lesser Prairie Chicken

  • The City has contractual and common law responsibility to use only that amount of the surface that is reasonably necessary for its operations and to conduct operations with due regard to the rights of the surface owner.
  • Mowing or removing vegetation would cause destructive wind erosion.
  • The City could drill only where the Ranch allows it as long as full access to groundwater is not impaired.
  • Elevated power lines would allow hawks to roost and prey on the Lesser Prairie Chicken, a threatened species. So bury them (the lines, not the chickens).

The City argues

  • The deed gives the City very broad rights to pursue its plan.
  • The City owes no duty to surface owners (as would mineral owners to accommodate surface owners).
  • The City can drill wherever it chooses, even if it could drill in places less damaging to the surface and still access the water.

The deed governs the City’s rights to use the Ranch land.  What is unsaid is whether the City has an “all but absolute” right to use the surface, heedless of avoidable injury, or only what is necessary or incidental to fully access the groundwater.

The Result

The deed alone did not determine the City’s right to use the Ranch.  There are sufficient similarities between mineral and groundwater estates and their conflicts with the surface estate to apply the Accommodation Doctrine.

See pages 10 through 12 for a history of the doctrine in Texas. See page 13 for the elements of a surface owner’s claim under the doctrine.

A concurring opinion pointed to the written agreement allowing the City to drill water wells at any time and location.  Thus, the doctrine should not apply.  It might apply to where and when the City could construct access roads, but not to where it may locate wells.  Access roads could be built only where “necessary or incidental,” which leaves substantial room for disagreement. To that, the concurring justices would apply a reasonableness standard.

This is a Supreme Court opinion, so treat it like it is a big deal.

A musical interlude.

Let’s not forget D- Day

Several years ago I commented about D-Day – which happened 72 years ago yesterday – and my uncle, who was there. It is worth reading again.

terminatorCo-author Trevor Lawhorn ∗

Escondido and Justapor. Next up on Tiny Desk Concert? Good guess, but no. They are the parties in Escondido v. Justapor, a Texas case presenting the perils of lease termination clauses and vaguely-drawn contracts.

The agreements

Justapor as lessor and Escondido as lessee entered into an oil and gas lease in 2008 on the 803-acre Justapor Ranch in Webb County. Among other provisions,

  • Escondido must pay royalties within 60 days.
  • Annual “true-up” of royalty underpayments.
  • Termination if Escondido doesn’t pay the correct royalty.

In 2011, the parties entered into a separate agreement under which Escondido would convey certain interests it acquired in the Ranch to an entity designated by Justapor.

The lawsuit

Justapor sued in 2013, alleging intentional failure to make up underpayments in 2012 and 2013, breach of contract, bad-faith trespass, trespass to try title, and declaratory judgment on lease termination and the parties’ rights relating to a 42-acre “vacancy tract” Escondido was to convey per the 2011 agreement.

Everybody moved for summary judgment on lease and vacancy tract issues. The (home town) trial court granted a final summary judgment for Justapor and denied Escondido’s cross-motion. Escondido appealed.

The court of appeals speaks                                         

  • The lease did not terminate due to Escondido’s breach of the true-up provision. The court parsed the lengthy and complicated termination clause and said it could not be applied without rendering the true-up provision superfluous or giving Escondido conflicting deadlines to make payments.
  • Judgment rendered for Escondido on Justapor’s remaining claims.
  • Because the trial court said the lease terminated in 2012, Justapor’s claim for breach of the true-up provision in 2013 was never addressed.  That claim was remanded so that the trial court could address a typo and determine if Escondido breached the true-up provision in 2013.
  • Judgment on the vacancy tract reversed. Justapor never designated an entity for Escondido to convey interests to. Justapor, therefore, could not establish a breach of contract claim.

Lawyers, pay attention

Escondido waived its defenses to Justapor’s breach of contract claim by failing to expressly present the defenses in its summary judgment response. A “mere reference” to facts supporting affirmative defenses was not enough. Summary judgment for Justapor affirmed for Escondido’s breach of the lease.

Takeaways

  • Lessees: Faced with a termination clause? Don’t agree to this Sword of Damocles! At best, it produces sleepless nights. At worst, it could mean an ugly end to your investment.
  • Drafters: Avoid using confusing language that leads to an unanticipated result.
  • Plaintiffs: Make sure you have performed your own obligations before seeking specific performance.
  • Defendants: Never make Her Honor have to guess about your defenses.

∗ Trevor is a 2-L at SMU’s Dedman School of Law, LSU undergrad, clerking at Gray Reed for the summer.

The New Orleans version of the gospel standard is really two halves of one song: The first half is the dirge, wherein the departed is brought to the final resting place; the second half is the march, the celebration by those left behind. Don’t give up on this one too soon.  Whatever it is you need to get back to can wait.

gas processingWhat’s a sure way to destroy untold millions of dollars of energy infrastructure value built in reliance on the promise of reimbursement for huge capital investments necessary to move a producer’s product to market for the next 20 years or more?

Here’s another one: What’s a helpful way to effect the goal of bankruptcy reorganization, to give a bankrupt energy producer and its shareholders a fresh start by shedding burdensome contracts?

The answer to both questions: Allow a bankrupt energy producer to reject, as in walk away from with no remorse, gas gathering, processing and transportation agreements.

This is the hot issue

Can the E&P debtor reject, under Section 365 of the Bankruptcy Code, what is in today’s environment an above-market agreement?

The typical contract dedicates the producer’s oil and gas interests and associated acreage to its midstream counterparty.  These dedications assure that the producer and everyone who follows will be bound by the original bargain. Midstream companies invest billions of dollars to develop the infrastructure necessary to gather, process, and transport oil and gas for their E&P counterparty-producer.

A significant right of a debtor is to reject burdensome executory contracts. Upon rejection, the debtor no longer can be compelled to perform, leaving the counterparty with a breach of contract claim, which generally an unsecured claim worth very little. Bankruptcy courts apply a business judgment standard to the debtor’s decision, and generally do not consider the effect on the counterparty.

The legal question

From the midstream company‘s point of view: Dedications of producers’ underlying mineral interests are covenants running with the land that are real property interests and therefore, cannot be rejected in bankruptcy.

From the debtor’s point of view: The gathering and processing agreements are executory commercial services agreements and only affect personal property interests – oil and gas that has already been severed from the land.

How it will be resolved

Reconciling the issue requires examination of state law. At least in Texas, courts have not been asked to determine whether a producer’s dedication of reserves is a real property interest or a commercial agreement. Bankruptcy courts are left to speculate how a state court would rule on this issue.

What does it mean for the future?

The resolution could have a far-reaching effect on the structural and financial underpinnings of both midstream and E&P companies. If these agreements can be shed, the sanctity of thousands of bargained-for contracts is in jeopardy, investor confidence in midstream companies will be shaken, and the cost of capital and thus the price producers would have to pay for gathering and processing services, will increase.

On the other hand, saddling a bankrupt producer with an above-market contract would limit its ability to restructure.

Bragging on Gray Reed

In the Quicksilver bankruptcy, see the objection by Crestwood Midstream Partners to the debtor’s motion to reject a gathering, processing and transportation agreement. Kudos to Gray Reed lawyers Philip Jordan, Lydia Webb, Jonathan Hyman and James Ormiston.

Our musical interlude: A message from litigants to judges everywhere.

“Back in the day, when the Yankees always won the World Series and you could name a park after a Confederate general, we didn’t need no written contract; a man’s word was his bond, … yadda, yadda, yadda”.

Three things about that saying strike me. First, it was always a man; second, “the day” was always a time before the listener came on the scene; third, those fellows used some really bad grammar. R E LeeThe timeless truth is, a written agreement is always better, which returns us to Railroad Commission v Gulf Energy, discussed last week. Another question arose in that dispute: When did the Commission and Gulf Energy form a contract?  The trial court, in effect, decided as a matter of law that the parties had a binding contract.

What the trial court missed: Contract formation

The trial court deprived the jury of the ability to determine when the contract was formed:  At a May 19 meeting between the Commission and Gulf, or shortly after via conversations and emails, either of which was before the well was plugged – or on June 9 when a formal agreement was signed, which was after the unfortunate incident.  You can’t have a breach of contract claim without a contract, so the question was essential.

At trial there was disagreement aplenty among the witnesses about whether a meeting of the minds between the parties was achieved before or after the well was plugged. The Supreme Court decided that when a meeting of the minds occurred was a question of fact to be answered by the jury.

Practice tip

In lieu of our usual, customary, and frequently unconscionable fees for matters such as this, here is some free advice: If you want to avoid the “When was the contract formed?” dilemma, or worse, “Do we even have a contract?”, make it clear in your negotiations (emails, draft agreements, phone calls) something to the effect that that your understandings are subject to a final, binding agreement satisfactory to all parties. Or, if an enforceable agreement is your goal, say something like: The parties agree to cooperate in drafting and execution of future documents. The fact that such additional documents are contemplated does not affect the binding nature of this agreement.

Caveat

I call it “advice”, but what I say in this blog is not fact- or case-specific; I don’t know your situation, so don’t rely on what I say here without consulting a lawyer of your own choosing.

Musical interlude

At a loss for a song celebrating contract formation, think about this: New Orleans isn’t alone in the Africa-inspired musical universe, right? How about the Godfather of Soul and Africa itself?

les milesHow is that, you say?

  • Recruits well
  • Sometimes can’t get to TD
  • Occasional blowouts
  • Lingo often not understood by others
  • Eats/uses no more turf than necessary
  • Surely benefits from “white privilege”
  • Down but not out.

More on the Les mess:

  • Next time you encounter incompetence in action, just say, “They must work for Joe Alleva”.
  • If President F. King Alexander handles academics like he does athletics, LSU will be a bottom-tier university by the end of the decade.
  • After making a tactical error exiting campus after the game (note classy absence of Aggie-directed trash talk), I came to realize that the ObamaCare website and LSU’s post-game traffic directives must have been designed and implemented by the same people.

And now, on to our case

Co-author Brooke Sizer.

  NorAm Drilling Co. v. E & Pco Intern., LLC is important if you:

  • Use the IADC form Daywork Contract,
  • Wonder when letters and emails can amend a contract (hint: after, not before)
  • Wonder what it takes to  waive the benefits of a contract.

The events

E&P acquired two leases in Caldwell Parish, Louisiana, and began discussing a deal in August 2007 for NorAm to be its drilling contractor.

12/06/07 – E&P circulates an Addendum to a contract stating, if a deposit is not made by E&P the contract will be null and void.  Note:  There was no evidence that this addendum was ever signed by NorAm. 

12/12/07 – The parties execute a Drilling Bid Proposal and Daywork Contract.  NorAm is obligated to commence operations by 12/15/07, or by a date mutually agreed to.  The contract  required an escrow account to be set up with an amount to cover mob and demob, interest, and three months of operations. Note: E&P never paid a cent into escrow and NorAm never demanded that the escrow be paid.

1/16/08 – NorAm contacts E&P: The rig cannot continue to sit idle; offers a standby rate of $15,000 effective 1/21.

1/18  – E&P emails NorAm: The contract was contingent upon a Letter of Credit or Escrow Deposit, and was surprised that NorAm was proposing to mitigate the losses.

2/18 – NorAm emails E&P: It was NorAm’s understanding that the Daywork Contract would go on a standby rate of $15,000 per day commencing February 11 and continue on that rate until the rig is read to move to the first location.

2/21 – E&P responds, acknowledging the email request to place the rig on standby at $15,000 per day.

5/27 – NorAm contacts E&P: The rig has been on standby for six months.  The outstanding balance by the end of May will be $2,182,500.

6/02 – E&P emails NorAm: In the final stages of securing financing.

6/25 – NorAm sends E&P a letter: Based on discussions, NorAm could rent the rig to other operators in order to mitigate E&P’s damages, the contract was in full force and effect and E&P would continue to seek funding.  E&P acknowledges this letter by signature on June 26.

Ultimately, E&P received funding, but used a different operator. E&P never paid NorAm. NorAm filed suit in Louisiana. The contract selected Texas law to govern.

E&P argued that the parties both understood that the contract was subject to E&P obtaining funding. The trial court found that the Daywork Contract was in effect, starting on 2/11, per the email agreement. E&P’s conduct from 12/07 through 6/08 was inconsistent with a claim that E&P didn’t have an obligation under the contract. The court found breach of contract by E&P and damages at the standby rate from 2/11 through 6/25.

The Law

Under Texas law the escrow clause did not create a condition precedent for the existence of the contract. Additionally, Texas law permits the party that the condition precedent favors to waive it.  Thus, it was untenable for E&P to argue that because the escrow clause was not satisfied the Daywork Contract was unenforceable.  NorAm’s conduct showed a willingness to waive the condition.  Texas law additionally recognizes the right of parties to modify a contract by the use of letter agreements.

The appellate court affirmed the judgment of $2.01 million plus interest and attorney fees.

Our musical interlude is for sports fans everywhere.

controlAre you an operator who hires contractors on location, … a contractor who hires subcontractors, … the party to be indemnified for injuries to the other party’s employees? This post is for you.

Salas v. Allen Keller Company One, LLC, is not about master service agreements, but it is instructive. Want to avoid responsibility for your sub’s employees? Don’t assert control over them.  Think Jason Garrett and his Cowboys, … John Boehner and the Freedom Caucus.

Mr. Saurez was killed while working for his employer, subcontractor C&B, on a highway construction project.  C&B and contractor AKC had a written construction subcontract in which C&B was to perform concrete work. His widow sued AKC for negligence.

The sub’s obligations – looks like an MSA

C&B represented and agreed:

  • It was capable and experienced in the construction,
  • It would supply its own materials, labor, tools and equipment,
  • It would procure its own insurance,
  • It would assume responsibility for claims arising out of death to injuries to persons or damages to property sustained in connection with C&B’s performance of the contract, and
  • It would take all reasonable safety precautions and comply with applicable laws.

C&B was to perform traffic control.  On the day of the accident Suarez was performing traffic control duties.

Did the contractor owe a duty?

Here is Texas law on a contractor’s duty to a sub’s employees:

  • Ordinarily, there is no duty to insure that an independent contractor performs its work safely.
  • A limited duty arises if the contractor retains some control over the manner in which the independent contractor performs its work. The contractor’s duty of care to the sub’s employee is commensurate with the control it retains over the independent contractor’s work.
  • There must be a nexus between the contractor’s retained control and the activity that caused the plaintiff’s injury.
  • The key is the actual exercise of control.
  • There must be more than a general right to order the work stopped or resumed to inspect progress, or make suggestions and recommendation which need not necessarily be followed, or prescribe alterations and deviations.
  • There must be such a retention of a right of supervision that the sub-contractor is not entirely free to do the work in its own way.

Factors that matter

AKC did not have a contractual right to control C&B’s performance but could have actually exercised such control in a manner that would give rise to a legal duty to C&B’s employees.

  • On-site orders or instructions on the means or methods to carry out a work order are important.
  • TxDOT’s inspections and directions was no evidence that AKC retained supervisory control over operations of the sub.
  • AKC never instructed the C&B crew on how to actually move and set out cones and signs.
  • There was no nexus between any exercise and control and Salas’ conduct which caused his injuries.

Salas Simplified

  • You can tell the sub what you want; don’t tell him how to do it.
  • Suggestions ≠ instructions.
  • Make sure your field personnel is mindful of the difference.

A musical interlude.

red zoneFootball pundits like to discuss Red Zone effectiveness. Driving to the goal line doesn’t much matter if you don‘t score. So, why would a negotiating party fail to score an enforceable contract while negotiating from the Red Zone:

  • He’s in a hurry;
  • He has a “handshake deal”;
  • He won’t sign an agreement until he gets the deal he “deserves”;
  • He’s stubborn;
  • He doesn’t understand that “meeting of the minds” does not mean “reading of the minds”;

To summarize the facts in Conglomerate Gas II, L.P. v. Gibb (a Texas case that applies anywhere):

  • Gibbs is a licensed real estate broker.
  • MTV real estate owned 100% of the surface and 50% of the minerals under the 2,232-acre Rock Creek Ranch and agreed to sell the surface to Crestview and grant an oil and gas lease to Crestview Resources or Anterra Resources.
  • Crestview needed help to cover the purchase price and hired Eichberg to find a buyer. He contacted Gibb, who started working to sell the tract even though he didn’t have a brokerage agreement.  According to Gibb, time was of the essence.
  • From May 23rd to late October there were offers, rejections, and counteroffers. Players came and players went; terms came and terms went. Eichberg would make an offer, Gibb would counter, rinse and repeat.
  • The issue for Gibb was always a minimum commission, which Eichberg would never accept. At one point Eichberg offered a “3% back in working interest on a well by well basis”
  • The parties finally agreed on a cash commission but not on the 3% back in, and Gibb received a cash commission that met his minimum.

The Result

In reversing a jury award to Gibb of $1.8MM in damages and $1.7MM in attorney fees, the court of appeal made the following points:

  • The meaning of the “3% back in working interest on a well-by-well basis” was subject to dispute. There was no meeting of the minds regarding that interest. Without more, it was too vague to have meaning.
  • Although Gibb finally accepted one material term in the original offer (the cash commission) he never agreed on the other (the 3% back in).
  • A counteroffer, which Gibb repeatedly did,  operates as a rejection of the original offer.
  • Contract law requires that an acceptance be identical with the offer in order for there to be a meeting of the minds and therefore a binding contract.
  • The original offer had two material terms, a cash commission and the back in. Gibb always countered with a demand for a minimum commission.  Crestview/Eichberg always said that would not happen.
  • Gibb’s testified about what was “in my mind”. In determining whether parties have formed a contract, objective manifestations of intent to be bound are relevant; unexpressed subjective intentions are not.
  • Testimony about whether a party “countered” or “rejected” is conclusory and of no evidentiary value.
  • A party can’t accept by performance an offer that he has previously rejected by a counteroffer.

How to score? Avoid Gibbs’ mistakes.

Mr. Gibbs’ musical interlude