Here we continue our discussion of the Texas Supreme Court’s opinion in Piranha Partners et al. v. Joe B. Neuhoff et al. determining that an assignment of an overriding royalty in minerals unambiguously conveyed the override in production under an entire lease. The Court concluded that circumstances surrounding the transaction didn’t matter. Here was the first round.

Surrounding circumstances …

May be considered in construing a deed or other instrument to

  • aid the understanding of an unambiguous contract,
  • inform the meaning of the language actually used, and
  • provide context or elucidate the meaning of the words employed.

It is not the same as

The parole evidence rule …

Which prohibits reliance on evidence to

  • create ambiguity in the text,
  • altar or contradict the terms of an unambiguous contract,
  • show what the parties probably meant,
  • admit something other than what their agreement stated, or
  • make the language say what it unambiguously does not say.

No help to nobody

Piranha purchased Neuhoff’s interest through an oil and gas clearinghouse auction involving 1,200 properties located in 14 states. There was no negotiation between parties and the winning bidders typically acquired interests as-is, where-is, and without warranty of title. To enter its interests at the auction Neuhoff agreed:

  • To use “reasonable efforts” to accurately and completely describe the properties and all WI’s, ORRI’s and other interests on an exhibit attached to the agreement and on all property datasheets,
  • To provide additional information that prospective bidders might reasonably request for the purpose of verifying the accuracy and completion completeness of the information concerning the properties,
  • To use reasonable efforts to respond to reasonable questions from bidders,
  • It had not fractionalized its interests but was selling all of his interest in same, and
  • All interests in the property were available for sale.

Piranha had to register as a qualified bidder and to make representations such as it:

  • Was a sophisticated buyer,
  • Received all documents and information it reasonably required to evaluate the properties,
  • Performed its own due diligence to its complete satisfaction, and
  • Understood that the terms of the conveyance document would prevail.

A Sale Brochure and Auction Catalog identified the well “Puryear B 1-28″ N. Mills Ranch, Wheeler County, TX, a .0375 overriding royalty interest …”. A Property Data sheet identified the description as the “NW/4 Sect. 28 … .”. After the sale the auction house provided a Detail Invoice describing the interest as the Puryear B #1-28.

The parties argued back and forth about what the Sales Brochure and related documents meant, but the Court said the documents didn’t matter. The buyer was required to look at the data package and conveyance documents for a complete representation of restrictions associated with the property. The catalog said it was provided for convenience purposes only and bidders should verify all information. The data sheet said due diligence and verification by buyer were required.

The dissent: The deed is ambiguous

Two justices would have found the property description ambiguous, remand to a jury to “break the logjam”, and let each side emphasize the surrounding circumstances in favor of its interpretation. When competing interpretations are reasonable and no context favors one over another, the contract is ambiguous.

The dissent relied on “… INSOFAR AND ONLY INSOFAR as set out in Exhibit A … ”, which described the NW/4 and the well. The majority, they say, ignored those descriptive limitations. Because the description contained an expressed geographic reference to the NW/4 the majority’s construction was the least reasonable of the three readings.

That the court should take a holistic and harmonizing approach to deed construction does not also mean that all provisions of the document will be helpful in interpreting an ambiguous provision.

Today’s musical interlude describes a place that would be nice to find.