From: Legal Department
To: Accounts Payable
Re: What we learned from Shell Western E&P, Inc. v. Pel-State Bulk Plant, LLC
Just received notice of a Texas subcontractor’s mineral lien? DO NOT continue to pay the contractor. He hasn’t paid the subcontractor. Think you owe nothing on the well on which the lien will be filed? Think what you owe the contractor is not related to the lien? Both good questions, but it might not matter.
If your contractor is insolvent you’ll pay twice, and your standing with the boss will take a major hit.
Under Chapter 56 of the Texas Property Code a property owner receiving a mineral subcontractor’s lien notice may withhold payment to the contractor in the amount claimed until the debt on which the claim is based is resolved.
Pel-State was a subcontractor for frac jobs in 11 Shell wells. Pel-State sent Shell a notice that the contractor was not paying for the sub’s work and then perfected a mineral lien.
The dispute was whether the lien amount was $3.19 million or $713,000. The mineral property owner is not liable to the subcontractor for more than the amount the owner owes the original contractor when the notice of lien is received.
A lesson on the Master Service Agreement
The source of Shell’s misery was its Master Service Agreement with the contractor. When Shell received Pel-State’s lien notice Shell owed the contractor $11 million and thereafter continued to make payments to the contractor. Bad call.
Shell owed nothing to the contractor on what it considered to be the contract under which Pel-State claimed a lien. Shell owed only $713,000 for the wells on which Pel-State performed work.
Under the MSA no specific work or a price was agreed upon. Those were determined by separate work orders for each job. The court concluded that the multiple work orders under the MSA comprised a single contract. Where several instruments executed contemporaneously or at different times pertain to the same transaction they will be read together although they did not expressly refer to each other.
What about the Property Code?
Under Section 56.006 the operator cannot be liable to a subcontractor for an amount greater than the amount agreed to be paid under the contract for furnishing material or labor. Because the MSA was one contract, the court rejected Shell’s argument that a lien should only apply on the work orders for the wells upon which Pel-State provided work.
Pel-State was entitled to collect from Shell for all work performed under the Shell/contractor MSA, under which Shell owed $11 million. The court affirmed Pel-State’s $3.19 million recovery.
Section 56.043 – a safe harbor
This provision, if used properly, protects the operator from liability. But he has to stop paying the contractor once he receives a notice. Under this opinion, any limitation on the amount of the subcontractor’s lien must be determined by the state of the account between the property owner and the operator, not by amounts that might be owed on a particular work order or field ticket.
Musical interlude – more Bob
Can’t get enough of Bob Dylan songs of loss, sadness and unrequited love, especially when he’s not singing?