In Cromwell v. Anadarko E & P Onshore LLC the Supreme Court of Texas did what it so often does: In order to provide “legal certainty and predictability”, the Court considered the plain language of a contract in order to arrive at the parties’ intent.
At issue were habendum clauses in two oil and gas leases written in the passive voice; that is, the clauses did not specify who has to do the producing in order to perpetuate the lease beyond its primary term. The Court reversed a court of appeals ruling that it had to be lessee, Cromwell himself, to cause production in order to keep the leases alive.
The facts
After Anadarko drilled three wells on a tract, Cromwell obtained two leases on the same tract. Under the habendum clause, the Ferrer lease would be in effect for three years “and as long thereafter as oil, gas or other minerals are produced from said land, or land with which said land is pooled hereunder, … .”
The Tantalo lease was for a primary term of five years “and as long thereafter as oil, gas liquid hydrocarbons or their constituent products or any of them is produced in commercial paying quantities from the land … .”
The Court identified Cromwell’s repeated efforts to participate in operations, all of which were rebuffed by Anadarko. But, among other actions, Anadarko sent him an AFE and monthly JIBs and after the first well paid out referred to him as a working interest owner. Anadarko asserted that all of this was a mistake (Given the size and complexity of large organizations, that is not difficult to imagine).
Anadarko produced oil and gas at all relevant times. After the primary terms of the two leases ended Anadarko asserted that the leases terminated because Cromwell himself failed to obtain production. Anadarko did not tell Cromwell his leases had expired and continued sending JIBs. Anadarko then acquired top leases.
The result
The plain language of the habendum clauses does not specify who must produce to maintain the leases beyond the primary term. The clauses could have said the leases continue as long as oil or gas is produced by the lessee, but the leases were not written that way. The Court refused to write in a term specifying which party must do the producing.
The Court did not accept the court of appeals’ reasoning that the leases’ stated purpose was drilling and declined to ensure that every provision in a contract comports with some grander theme or purpose, particularly when the parties have not said which purpose matters most, and that everything in the contract should be subject to that purpose.
Paragraph 16 of the Tantalo lease would be extended beyond the primary term “if Lessee has completed a well as a producer … .” That clause was expressly subject to other paragraphs having passive voice language. The Court found Paragraph 16 to be ambiguous and therefore governed by the default rule against forfeiture of mineral interests. Texas courts decline to impose a special limitation on a grant unless the language is so clear, precise and unequivocal that it can be given no other meaning. Neither habendum clause met that standard, so the Court declined to imply such a requirement to cause forfeiture of Cromwell’s interest.
In reversing the court of appeals, the Court disapproved of a line of cases to the extent that they hold otherwise: Mattison v. Trotti, Hughes v. Cantwell, and Cimarex Energy Co. v. Anadarko Petroleum Corp.
A query – not an opinion
We’re into extra innings here, but there are some who will question whether this is the correct result or the best result for the industry. The Ferrer lease was “for the purpose of exploring by geological, geophysical and all other methods, and of drilling, producing and operating wells for the recovery of oil, gas and other hydrocarbons … .” The Tantalo lease was “for the sole and only purpose of exploring, drilling, operating power stations, and construction of roads and structures thereon to produce, save, care for, treat and transport oil, gas and liquid hydrocarbons … .”
The Supreme Court faulted the court of appeals for “unduly focusing” on the purpose of the leases set forth in the granting clauses, and cited the 1923 case of Texas Co. v. Davis for the proposition that the “vital consideration” in an oil-and-gas lease is royalties on mineral production. That wasn’t what the parties here agreed to.
The doubters might also be concerned that the opinion will embolden free-riders who will seek to benefit from operations without sharing in the drilling risk.
Musical interludes; everybody loves to sing about Memphis