Co-author Alexandra Crawley
Oh, how a simple Favored-Nations clause in an oil and gas lease can get complicated, with large financial consequences! In BP America Production Company v. Zaffirini, BP paid Solis a $1,300 per acre bonus for a lease covering 30% of the mineral estate and agreed that if paid a more favorable bonus or royalty term with any other co-owner in the same mineral estate, BP would pay lessor Solis according to the more favorable terms.
BP later obtained the Zaffirini lease covering the remaining 70% of the mineral estate and paid $1,750 per acre for a paid-up bonus and for lessor’s consent for BP to assign to a third party. Also, if BP’s title examination later revealed a greater number of net mineral acres, then BP would pay the difference on the basis of $1,300 and $450 per net mineral acre (for a total of $1,750). The Zaffirini lease included the same Favored-Nations clause.
Upon executing the Zaffirini lease, BP paid the $450 per acre difference to Solis (the $1,750 bonus in the Zaffirini lease minus the $1,300 bonus in the Solis lease). After BP paid Solis, Zaffirini demanded that BP pay another $450 per acre as bonus under her Favored-Nations clause, claiming their bonus was only $1,300 per acre and that the additional $450 was a consent-to-assign fee, separate and distinct from the bonus. Zaffirini stated the “plain language of the lease expressly called for such segregation.”
The trial court agreed with Zaffirini, awarded over $2 million in damages and $600,000 in attorney’s fees to Zaffirini, and declared that the disputed $450 per acre was not bonus and even so, Solis was entitled to retain the additional payment to her.
The appellate court reversed. The Zaffirini lease was unambiguous and the parties’ intent, expressed in the lease, was that the bonus was to be $1,750 per acre. A determining factor was the prior negotiations of the parties, wherein BP specifically rejected several proposals from Zaffirini requesting a paid up bonus of $1,300 per acre and $450 per acre for lessor’s consent-to-assign.
- Perhaps this dispute could have been avoided had someone taken a little more time to examine their documents before signing. Scriveners, here is a way to do that: Write the language, put the document away for a day or so, get back to it while keeping in mind the purpose of the provision. Is it still as clear as it was the first time? If not, fix it.
- For provisions in a lease, or any contract for that matter, which could be subject to more than one interpretation, specifically define meanings and implications in the document itself.
- As we often see in lease disputes, home town justice prevailed at the trial court, to be corrected on appeal.
- Each side argued the agreement was unambiguous and should be decided in their favor. Unless the court was going to award a trophy to everebody for showing up, that just can’t be.