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Energy & the Law

Railroad Commission Not Off the Hook for Plugging the Wrong Well

Posted in Regulations

beasts of southern wild“You are my friend, kind of.” Hush Puppy, as she stares down the Aurochs in Beasts of the Southern Wild. Is our “friend” the Texas Railroad Commission?

Gulf Energy bought a package of offshore wells out of bankruptcy. Eight needed to be plugged and the Commission undertook that task, given the operator’s insolvency. Oops! The Commission’s contractor plugged one it shouldn’t have. Can Gulf Energy recover damages? The jury, trial court, and appellate court said yes. The Texas Supreme Court said maybe not. The question: Was the Commission entitled to have a jury determine whether it was in good faith when it mistakenly plugged the well?

The Commission awarded Superior Energy Services a contract to plug the wells. A Commission employee made a clerical error by transposing well numbers and Superior plugged well 708S-5 instead of well 707S-5.

Gulf sued the Commission and Superior for breach of contract and negligence. Superior settled.

Lawyers: See the discussion about preserving error when the court rejects your objection to a jury charge.  The result was the jury was not asked to determine whether the Commission was in good faith when it plugged the well.

The Statutory Defense

Under Commission rules, if the owners of a well can’t be found or don’t have sufficient assets, the Commission may plug an abandoned well. Under Chapter 89 of the Natural Resources Code the Commission and its employees “… are not liable for any damages that may occur as a result of acts done or omitted to be done by them … in a good—faith effort to carry out this chapter.”

How many ways can you say “good faith”

Gulf Energy alleged that the defense applies only to acts that involve discretion and do not extend to ministerial acts like plugging a well.  The Supreme Court rejected the argument based on the plain reading of the statute.

The Court had to determine what “good faith” means. After considering definitions from Webster’s Third New International Dictionary, Black’s Law Dictionary, the Uniform Commercial Code, and earlier Supreme Court rulings, it decided that good faith:

“refers to conduct which is honest in fact, free of improper motive or willful ignorance of the facts at hand.  It does not require proof of “reasonable” investigation … stating the proposition conversely …, “bad faith” means more than merely negligent or unreasonable conduct; it requires proof of an improper motive or willful ignorance of the facts.”

Good faith – judge or jury?

Was the good faith defense to be determined by the jury as a fact question or by the judge as a matter of law?  There were enough contradictory facts to raise a question about whether the Commission acted in good faith. For example, there was evidence that the employee presented correct information to Superior several days before the 708S-5 plugged, but they failed to pass it on to the crew boat conducting the operation. Energy urged that there was willful ignorance, which would nullify the good faith defense.


Back to the trial court from whence it came for a new trial.

Things you only learn here 

Beasts of the Southern Wild is, to my knowledge, the only movie ever that employed a nutria consultant.

And a musical interlude worthy of Hush Puppy.

What is an Adequate Description For a Mineral Lien ?

Posted in Land Titles, Title Issues

wild goose chaseCo-author Alexandra Crawley

Thanks to In re Reichmann Petroleum Corp., we know one that works in Texas: A lien affidavit attaching either a plat or a plat and a Texas Railroad Commission Form W-1 provides an adequate property description for a mineral lien against an entire lease under the Texas Property Code.

Current practice – chase the wild goose

To have a valid mineral lien the claimant must file an affidavit in the Official Public Records of the county where the lease lies containing a “description of the property”.

Contractors often only identify a well name and county on their invoices.  When they run to their lawyers at the last minute for a lien, the wild goose chase ensues:  The lawyers navigate the user-unfriendly Railroad Commission web site and online county records (where available) seeking a “sufficient” description of the property for the affidavit. (Clients: Why do you wait so long? You’ve known for weeks the operator is a deadbeat.)

A better way

Reichmann provides much needed clarity, especially when the claimant can’t obtain the best description – from the lease – because of the pressure of time. Now, a plat or a plat and a Form W-1 will get you a lien on the entire lease, not just the portion depicted on the plat.

The court looks at what the statutory says 

Reichmann was an operator of oil and gas properties and sought bankruptcy protection. Creditors claimed mineral liens on  leases. Reichmann objected to several liens on the grounds that the property descriptions were inadequate, arguing that “a description of the land, leasehold interest, pipeline, or pipeline right-of-way involved” should be construed to be equivalent to the statute of frauds standard, which requires “exactness”.

In finding that Chapter 56 does not require a description as stringent as the statute of frauds, the court looked to the statutory mechanic’s lien standard, which requires a “legally sufficient” description.  That is lesser than the statute of frauds standard, and the mineral lien statute requires even less, by omitting “legally “sufficient”.

Said the  court: An affidavit with an RRC plat was adequate because it would “enable a party familiar with the locality to identify with reasonable certainty the premises intended.”

The objectors argued that the lien did not attach to the entire lease, but only to that part reflected in the attached plat.  The court disagreed, citing Mercantile National Bank at Dallas v. McCollough Tool Co., where in 1953 the “Texas Supreme Court gave a materialman a lien on an entire lease for work done on just one well under what is now Sections 56.001 and 56.003”, and Dunigan Tool  & Supply v. Burris (1968) “where a Texas Court of Appeals interpreted what is currently Chapter 56 to hold that the statutory language allows a lien to exist upon an entire leasehold interest upon which materials were delivered to or used.”

The liens applied to the entire lease “because the information provided helped to identify the nucleus of information that would identify relevant leases even without a complete lease attached.”

Musical interlude

The common element of today’s offerings is feathers: This kind and then there is this kind.

108 Year-Old Lease Survives

Posted in Lease Disputes

Honus-Wagner-100-Years-Ago-Today1-650x365Co-author Brooke Sizer

A baseball question: You’ve got men on late in the game; a base hit to the right side wins. Do you put the bat on the ball for a single or swing for the deep seats, risking the game-ending strikeout?

The Stiles leases were executed in 1907, when Honus Wagner was in his prime. Covering 3,214 acres in Caddo Parish, Louisiana, they were for a primary term of ten years ” … and as much longer thereafter as gas or oil is found or produced in paying quantities … ”  The leases are held by several hundred shallow wells.  In 2007, in Regions Bank v. Questar Exploration the plaintiffs sued for failure to reasonably develop at depths below 6,000 feet. The suit was amended to assert that the leases had terminated by operation of Civil Code Art. 2679, which limits the duration of a lease to 99 years.

The trial court dismissed the case: Civil Code Art. 2679 does not apply to mineral leases.  Plaintiffs appealed.

Plaintiffs’ argument

Article 2679 applies because of Mineral Code Section 2: The Code is supplementary to the Civil Code and its provisions apply specifically to the subject of mineral law.  In the event of conflict between the two, the Mineral Code prevails. If this Code does not expressly or impliedly provide for a particular situation, the Civil Code or other laws apply.

Exxon’s argument

The habendum clause (“thereafter … ”) is connected directly to the production of oil and gas and Article 2679 has no application for mineral leases.  Mineral Code Section 115(A) requires that a mineral lease have a term, and prohibits a term of more than 10 years without operations or production.

The conclusion

Exxon wins. The Stiles leases are are mineral leases governed by their terms and the Mineral Code.  The habendum clause balances the interests of the lessor and lessee.  Plaintiff’s argument runs contrary to well-established practices.

The habendum clause is two-tiered. The first is of a definite duration and the second is of an indefinite duration.  For the habendum clause to  extend the lease a well must have already been drilled and tested or began producing, and still producing, when it entered the second term.  That the “secondary term” is limited to 99 years is contrary to the concept of maintaining a lease for as long as minerals are producing in paying quantities.

The 99-year limit has no rational application to mineral leases. Article 115 provides for a maximum secondary term based upon continued operations or production.  A mineral lease will terminate at the expiration of the agreed term or upon the occurrence of an express resolutory condition.

The takeaway

Should plaintiffs have stayed with failure to reasonably develop instead of swinging for the fences? (We ask rhetorically, ignorant of why they did what they did.) The court said that if it found the leases were perpetual then they would be void from inception, as in from 1907. What were the chances of such a radical and unsettling result? About as much as Jeb Bush winning in Iowa. Or a Bigfoot sighting. Or Bigfoot winning in New Hampshire. Intermediate appellate courts are not known for legal adventurism.

 A musical interlude about Louisiana by a Texan.

Operator: Be Careful Handling Ad Valorem Taxes

Posted in Taxation

taxesThis is to be expected in these dark days of diminished cash flow. Imagine:  You are the operator and the non-ops have given you their share of ad valorem taxes, expecting you to pay them to the taxing authority at the right time. Things are a little tight, if you know what I mean, so you divert “borrow” the funds for more pressing obligations. You intend, of course, to replace the money “when things get better”.  Time passes; “things” don’t get better; your entity – a corporation, LLC, whatever – collapses. Not to worry; your personal assets are protected because that’s what corporations are for, right?  Wrong, at least in Texas.

The Texas Tax Code imposes personal liability upon any person who receives or collects an ad valorem tax from another person. The recipient holds the funds in trust for the benefit of the taxing unit and is liable to the taxing unit for the full amount collected plus penalties and interest.

Who is the ”responsible individual”?

It’s not just the entity that is liable:

“ … [A]n individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who willfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money, plus all interest, penalties, and costs, not paid or caused to be paid.”

Lest there be doubt, the Code defines a ”responsible individual” for us:

“A  ‘responsible individual’ includes an officer, manager, director, or employee or a corporation, association, or limited liability company or a member of a partnership who, as an officer, manager, director, employee, or member, is under a duty to perform an act with respect to the collection, accounting, or payment of a tax or money … “.

If you are “robbing” Peter to pay Paul, make sure Peter isn’t a governmental entity.

The other side of the coin

Non-operator, do you know what your operator is doing with the tax money being collected from you?

Musical interlude

Where to start! RIP David Bowie and Glenn Frey.

Texas Property Code Change – No More Subordinations?

Posted in Land Titles, Lease Disputes, Title Issues

elvis_presleySpecial thanks to Gray Reed colleagues Paul Yale and Dominic Salinas for this post.

Weary of having to solicit those pesky subordinations of pre-existing mortgages to your recently-acquired oil and gas leases? Tired of chasing down the third assistant to the fourth vice president for loan servicing just to obtain one simple document? The 2015 Texas legislature was listening to you.

Beginning on January 1, the “first in time, first in right” rule no longer applies to the relationship between a real estate mortgage and a later-recorded oil and gas lease. By House Bill 2207 a prior mortgage is, for the most part, subordinated to a subsequent oil and gas lease.  Where a lease is taken on land that is already subject to a mortgage and the mortgage is foreclosed, the oil and gas lease will not terminate, even if the lease has not been subordinated to the mortgage.

But wait – a practice tip!

It’s not that simple. One historical effect of mortgage foreclosure does not change: The lessee loses the right to use the surface of the foreclosed property for oil and gas operations. It is an improvement; prior to HB 2207 the entire lease was extinguished.  The loss of surface rights will not likely be an issue on smaller tracts, but could pose a problem on larger tracts. If you intend to use the lease for a drillsite, go ahead and get the subordination.

Another thing that didn’t change:  Royalty payments coming due after the sale pass to the purchaser of the foreclosed property.

A question remains

The Bill does not apply to a security interest that does not attach to a mineral interest. So what about proceeds of the sale of oil and gas, which are personal property, not a real property interest. If a security interest covers proceeds (and many of them do), could a foreclosure in effect wash out the oil and gas lease anyway? We don’t pretend to know the answer to that question.

Why did it pass?

The legislation will result in savings in time, energy, and legal and land costs. The bill was supported by producers and industry groups such as TIPRO and the Texas Alliance of Producers. Think about urban and suburban areas such as the Barnett Shale, where most lessors are homeowners with a mortgage. Under the new law the lease will continue. The only change will be that royalties payable to the lessor pre-foreclosure become payable to the purchaser post-foreclosure.

In 1954 Sam Phillips was looking for white guy who could sing like a black guy. He found him in Elvis Presley. To celebrate Elvis’s birthday (and with apologies to David  Bowie) our musical interlude features a worthy successor, Saint Paul and the Broken Bones.


Things That Never Change in the Oil Patch: How to Aggravate the SEC

Posted in Litigation

ponziIn the spirit of Charles Ponzi, today we offer advice for attracting special attention from powerful federal authorities who want to punish you. Helms and Kaelin marketed a limited partnership to hold royalty interests in 2,000 oil and gas wells  Here’s how they did it, and you can too!

Make promises

In a private placement memorandum in which you raise $31,000,000 from 129 investors, promise:

  • 99.14% of the proceeds raised will be for  purchasing royalty interests;
  • Investment proceeds will be used for only two kinds of business expenses: loan payments and promotional expenses;
  • Every dollar that comes in goes out in acquisitions, “so if you put $1MM into the company, that $1MM is spent on acquisitions.”;
  • There are no material pending legal proceedings (when there are several).

Spiff up the resume

  • Represent in the PPM that you have “worked with various mineral companies over the last ten years advising managerial issues involving the acquisition and management royalty interests, mineral properties and related legal and financial issues” (none of which is remotely true);
  • Represent that you have managed other investments fund to the tune of $300MM (which is not remotely true);
  • Describe at length your “extremely successful history” in the off-shore oil and gas industry and your business relationship with a successful and well-known oil man and his $500MM energy fund (when your actual experience was cold-calling land owners to buy minerals).

Break the promises, what were they thinking?

  • Spend at least $8.4MM on yourselves, families, friends and associates, including $247,000 for your daughter’s wedding in Hawaii, $110,000 for airfare, $102,000 for tuition, $287,000 for mortgage payments, and the cost of a 23-day trip around the world;
  • Brag on social media about your “Journey of Man”, in which you (Helms, with girlfriend Kaelin) use 50 hours of flight time on a private jet, meet elephants in Thailand, ride camels in Jordan, and other fun adventures;
  • Spend $12.8MM on business expenses, including $1.1MM in bank loans, without telling your investors.

Create and cover up evidence

  • Forge an audit letter from a well-respected engineering firm, asserting that you own over 18,000 properties worth over $26MM.  In fact, there is nothing to audit because you own no properties;
  • Of the $31MM raised, make distributions using new investor funds totaling $4.7MM. Have the SEC’s witness deem every distribution a Ponzi payment.
  • Engage in “round-trip transactions” (moving money around in transactions for which there is no legitimate business purpose) to make it look like royalty revenue;
  • If you are Kaelin repeatedly fail to comply with subpoenas, court orders and the Federal Rules, assert mental incompetence without supporting evidence, engage in “evasive and manipulative” conduct to avoid discovery obligations.

What about the salesmen?

If you are Sellers and Barrera:

  • Receive a commission of 14% of a $3.1MM investment, more than eight times the PPM’s $50,000 limit for total promotional expenses;
  • Have lunch with the investor and lie to him when directly asked about the commission, call it “small”;
  • Allow a federal judge to define “small”;
  • Do all this while not a registered broker;
  • Don’t bother to participate in the legal proceedings.

What will happen to you?

  • The SEC will sue you and your corporate entities, throwing in a kitchen sink of securities fraud allegations.
  • There will be a judgment for $31MM, disgorgement, permanent injunction, and a civil fine of another $31MM.
  • The two lovebirds will end their sordid journey here.

What if a Partition Deed Doesn’t Consider the Minerals?

Posted in Climate Change, Land Titles, Title Issues

mosesDid Moses worry about the mineral rights when he parted the Red Sea?  Maybe Charlton Heston knows. What we know is that 3,500 years later if you plan to partition surface rights, the time to pay attention to the minerals is now.

In Hosek v. Scott, the parties had a deed partitioning the surface estate of 338.54 acres in Atascosa County, Texas. The partition deed said:

“This partition does not include any of the oil, gas and other, minerals in, on or under the [land], and same are to remain undivided for a period of [25] years from date hereof and as long thereafter as oil, gas or other minerals are produced in paying quantities from the [land].”

The question

Did the minerals revert to the owners of the surface estates after the period lapsed during which partition of the minerals was prohibited?

After the partition Hosek owned 207.77 acres (except 38.5 owned by Scott) and Scott owned 130.77. Scott conveyed the 38.5 acres to Hosek subject to the reservation of all minerals reserved in the partition deed.

Scott argues: Since the minerals were never partitioned he continues to own an undivided half interest in minerals under the Hosek tract.

Hosek responds:  The meaning of the deed is ambiguous and thus a fact issue exists.  The language intended that the undivided mineral interests revert to the surface owners after the expiration of 25 years and cessation of production.

Are there two reasonable interpretations of the partition deed?  If so, we need a trial. If not, judgment for Scott.

(I’ll skip the rules of contract construction that you’ve seen in this space before).

The answer

The minerals did not “revert” to the surface owner at the end of the 25 years. The deed expressly excluded minerals from the partition and the deed does not have language stating that the minerals would be partitioned at the end of the 25 years. Accordingly, Hosek’s interpretation would require the court to add language to the partition deed.  That, the court is not permitted to do.

The court ruled that the partition deed can be given a definite and certain meaning as a matter of law and is therefore unambiguous. The parties’ intent is expressed in the four corners and restricted partition of the minerals for the 25 years. At the end of that period, the restriction was lifted and the parties had the unrestricted right to partition the minerals, or not. They did not partition the minerals after the end of the 25 year restricted period. Scott wins.

I’m breaking my promise …

… never to write on climate change because the subject is too politicized. But this, from the announcement following the Paris climate change conference is too good to ignore:

Also request the Subsidiary Body for Scientific and Technological Advice to undertake a work programme under the framework for non-market approaches to sustainable development referred to in Article 6, paragraph 8, of the Agreement, with the objective of considering how to enhance linkages and create synergy between inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, and how to facilitate the implementation and coordination of non-market approaches.”

This 66-word morass of abstractions is what we’ve come to expect from bureaucrats, and it dismisses free markets for … what?  Here is Forbes‘ take on it. Michael Lynch says only a lawyer would love it. I object; that monstrosity is an insult to lawyers.

In honor of our special guest Moses we wish you Happy Holidays.

A Corporate Opportunity? … Stolen?

Posted in Litigation

rejectedCo-author Alexandria Moore

If you want to get to the meaning of a case, one exercise is to put yourself in the shoes of one participant or the other and see how you react to the events. (This also works well with Bible stories, by the way.) Last week we discussed Huff Energy fund LP v. Longview Energy Company. If you are Longview, how unjust was it? Can you try to see it the way the majority did? If not, you have company.

Today, the dissent

The dissent chastises the majority for disregarding significant evidence favorable to Longview:

  • Longview became involved and dedicated time and energy at the urging and encouragement of Huff and D’Angelo;
  • Huff would not fund Longview’s Eagle Ford purchase because he funded the Riley-Huff resource play;
  • Huff’s leasing through Riley-Huff directly hindered Longview’s plan to lease Eagle Ford acreage;
  • The area’s Riley-Huff leased were in areas being considered by Longview and were leased through brokers with whom Longview was also in negotiations;
  • By diminishing the supply of acreage in a high demand market, the Riley-Huff purchase contributed to the soaring cost to lease Eagle Ford acreage that ultimately priced Longview out of the investment.

Are they saying the majority substituted its own wisdom for the jury’s? I think they are.

Lawyers, still paying attention?

On the pleading question, the dissent devotes most of the opinion after page 7 to say that Longview gave fair notice of the competition claim and the majority incorrectly applied Delaware law.

Concurrance – a different route to the same place

Relying on far too much legalese for this space, the concurring opinion differs with the majority’s analysis of question one. Here are the meaningful parts:

  • The Delaware Supreme Court describes a business opportunity as consisting of “specific property.” Longview didn’t present evidence of a specific business opportunity. Instead they presented a strategy unsupported by identification of specific leases, acreages, prices, landowners or even drilling partners.
  • A corporation can forfeit an interest or expectancy in an opportunity by disclaiming any interest in it. Longview rejected this opportunity. (Ed note: Of course they did; the directors pulled the funding).  At the board meeting where Longview presented the plan, no vote was taken.
  • A director may take a corporate opportunity for himself once the corporation has rejected it. By rejecting the opportunity, Longview disclaimed any tie between the alleged opportunity and the nature of its business.
  • Longview argued that Huff’s backing down off his promise to pay was the reason Longview had to pass on the opportunity. Because this promise was never in writing there was no enforceable agreement between Huff and Longview.
  • Even if the opportunity did exist, Longview did not show that it was financially able to pursue it. Longview needed $40MM in capital to pursue the opportunity but had $27MM in debt. A stock offering might not have raised the money soon enough.

A Musical Interlude that seems to fit Longview’s situation.

What is a Corporate Opportunity?

Posted in Litigation

board of directorsCo-author Alexandria Moore

Let’s say two fellows are in the oil business and one of his activities is as a director of an exploration company. A deal comes in, they present it to the company, but take it for themselves, Did they steal the opportunity from the company? In Huff  Energy Fund LP v. Longview Energy Company, the jury said yes, to the tune of several hundred million dollars. Not so fast, said the court of appeals. Reversed and rendered for the directors.

The law

Here is when a director may take a corporate opportunity:

  • The opportunity is first presented to the director in his individual capacity;
  • The opportunity is not essential to the corporation;
  • The corporation does not have an interest or expectancy in the business; and
  • The director has not wrongfully employed the resources of the corporation pursuing the opportunity.

What they did        

  • HEF purchases stock in Longview, which entitled HEF to appoint Huff and D’Angelo to Longview’s Board of Directors.
  • HEF and Riley form Riley-Huff Energy.
  • HEF encourages its portfolio companies, including Longview, to explore opportunities in the Eagle Ford shale.
  • HEF and Longview discuss investment strategies, including the Eagle Ford shale.
  • Longview claims that Huff agreed to fund any investment that “Rick Pearce likes.” (Pearce is Longview’s COO and senior petroleum engineer.)
  • Longview meets with land brokers who do not present any specific leases; instead they drew circles on a map to indicate general areas where leases are available.
  • Management and D’Angelo meet to discuss plans to develop the Eagle Ford shale.
  • The same land broker is meeting with Riley.
  • At a meeting where management presents an investment proposal to the Board, Longview’s president distributes reading materials proposing a strategy for investing and economic projections.
  • Pierce presents the proposal to invest $40 million in Eagle Ford shale acres and shows a map that includes available acreage but not specific leases.
  • The Board does not vote on the proposal because D’Angelo and Huff won’t support an Eagle Ford investment.
  • Longview learns that three days before the Board meeting Riley-Huff signed a contract to purchase the same acreage that Longview was considering through the same land brokers.
  • Longview takes no further action on the Eagle Ford investment plan.

Longview sues Huff and D’Angelo for breach of fiduciary duty by taking a corporate opportunity that belonged to Longview.

The question for the jury

Did Huff and/or D’Angelo fail to comply with their fiduciary duty to Longview by taking a corporate opportunity?  The jury answered yes and the trial court rendered judgment on the verdict.

What so bad about that?

Not much, said the majority. The evidence was legally insufficient to hold that Huff and D’Angelo failed to comply with their fiduciary duty.

Longview did not have an expectancy in the opportunity. Longview was “in a general way, negotiating for and endeavoring to purchase the interests involved.” The Eagle Ford shale encompasses millions of acres across thousands of miles. Longview would acquire 20,000 acres and drill one well per tract to prove up the prospects. To characterize this strategy as an expectancy would give Longview “a virtual monopoly of extensive fields into which its officers and directors were forever precluded from entering.” An opportunity must be more than a desire to invest, especially if the investment is in an area as large as the Eagle Ford shale.

The purchase by Huff and Riley did not hinder or defeat Longview’s plans to also acquire Eagle Ford acreage.

Lawyers, pay attention

By virtue of what some (including the dissent) would see as legal mumbo-jumbo, the majority decided that a second question should not have been asked because it was not pled, and it was thus ignored.  See “Jury Question Number 2” on pages 13 through 21.


The other side of the story.

We are within a few days of the 35th anniversary of John Lennon’s death. Hence, this musical interlude. (Not saying it beats the Isley Brothers)

Les Miles is Like the Oil Business

Posted in Contract Disputes

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.