Co-author Rusty Tucker

Who pays for fluid containment in an oil field emergency?  It depends on your contract and, we are told in Pearl Resources, LLC v. Charger Services, LLC, oil and gas industry custom.

Working interest owner/operator Pearl Operating had a Turnkey Drilling Contract with PDS Drilling to drill the #4 Well in Pecos County, Texas. Pearl Resources was a lessee. PDS was an independent contractor and the parties disclaimed a principal-agent relationship between them or their agents and employees. Per the Turnkey Contract, PDS could not contract on or hire anyone on behalf of Pearl Operating.  PDS retained complete control of the wellsite and agreed to maintain well control equipment in good condition and use reasonable means to prevent and control fires and blowouts and to protect the hole. Bison Drilling was the rig operator hired by PDS.

A wild well incident caused freshwater to erupt from the well and an adjacent water well. Bison Drilling hired dirt contractor Charger to contain the runoff, which was an “emergency”.  Charger invoiced PDS, who promised payment from its insurers, but Charger never received payment. Charger then demanded payment from the Pearl entities, alleging PDS was Pearl Operating’s agent in procuring Charger’s services.

Charger sued Pearl (both of them) for breach of contract and quantum meruit. The trial court found no contract, but ruled that Pearl owed Charger $76,381, plus interest and costs, based on quantum meruit.

“Industry custom” says lessee pays for emergencies

The trial court’s findings of fact established, among other things, that industry custom and a generally accepted standard in the industry is that when emergency services are required on an oil and gas lease, the lease owners bear the costs to containing the emergency. Two witnesses affiliated with Charger testified to this.

Authority is required for a contract

On appeal Pearl argued that a contract was created between PDS and Charger because PDS had authority to contract with drilling contractor and Bison Drilling, the subcontractor hired by PDS, was PDS’s agent in procuring Charger’s services; thus, Charger had an implied-in-fact contract with PDS, precluding quantum meruit. But to form a contract the offeror must have authority to make the offer. Nothing in the record indicated Bison was authorized to extend an offer on behalf of PDS or anyone else.  Without a valid offer, there can be no contract.

The court, seemingly damning with faint praise, reasoned that the testimony was not so weak as to be unable to support the trial court’s finding.

To establish quantum meruit, a plaintiff must prove

  • valuable services were rendered or materials furnished;
  • the services or materials were provided for the defendant;
  • the services and materials were accepted by the defendant; and
  • under circumstances in which the person sought to be charged was reasonably notified that the plaintiff was expecting to be paid for those services or materials.

The evidence was sufficient to support the trial court’s finding that Charger satisfied all four elements of quantum meruit.

Pearl argued that industry custom cannot alter or add to the unambiguous terms of a contract.  The trial court’s findings did not alter or add to the Turnkey Contract. Rather, it was Pearls’ obligation to Charger that was affected by the judgment. PDS’s obligations to Pearl under the Turnkey Contract did not obviate Pearl’s obligation to Charger for benefits it received from Charger’s work that remain unpaid.  The judgment of the trial court made Charger whole without taking away Pearl’s ability to sue PDS under the Turnkey Contract.

In light of current events, a musical interlude.