Contract Disputes

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You may recall our report that the Supreme Court of Texas was to take up the question of  whether an insurance policy required indemnification of over $100 million in defense costs related to the Macondo well blowout. The court has ruled in Anadarko Petroleum Corp. v. Houston Casualty Company. Anadarko, the insured, prevailed on the coverage question and the case was remanded to the trial court.

Rather than try to explain it myself, I direct your attention to this definitive summary of the opinion from Gray Reed’s insurance practice group:

Darin Brooks
Kristin Kelly
Brian Waters

I invite you to contact one of them for a more detailed explanation of the opinion.

Litigants and young lawyers, never been to federal court? Here is all you need to know.

 

An opinion that observes “Obviously the jury was not overly enamored with Appellants.” is worth discussing. The decision is Stephens et al v. Three Finger Black Shale Partnership et al.

What to know about partnerships 

Parties to a transaction need to be mindful that if a business deal is a partnership, there will be rights and duties not present in arms-length commercial transactions. The main question in Stephens: Was a partnership formed by a letter agreement, a participation agreement and the actions of the parties? Continue Reading Texas Court Addresses Bad Acts in a Lease Play

Co-author Chance Decker

It’s a tale as old as the oilfield: A non-operator doesn’t pay joint interest billings, operator sues, non-payer claims the expenses were unwarranted and the operator was negligent—no, grossly negligent—for incurring them in the first place. Welcome to OBO, Inc. v. Apache Corporation et al. Despite a creative argument by non-operator OBO that contract operator Apache didn’t have authority to charge JIB’s in the first place, OBO must pay.

The facts Continue Reading Contract Operator Not Liable for Breach of a Unit Operating Agreement

Co-author Lydia Webb

Q: How many New York federal judges does it take to make a mess of Texas property law?

A: In In Re: Sabine Oil and Gas Corp., five. One to get it wrong, another to affirm the wrongness, and three more for reinforcement.

For the third time, a federal court in New York has allowed an E&P debtor to reject its gas gathering agreements because its midstream counter-parties could not establish that the agreements were covenants running with the land under Texas law. This time it was the Second Circuit, which upheld a district court ruling, which upheld a  bankruptcy court ruling.

E&P debtor Sabine sought to reject a series of above-market gas gathering agreements. The bankruptcy court allowed the debtor to do exactly that, over the objection of the midstream counter-party. The question on appeal: Under Texas law, are midstream agreements covenants running with the land (and thus, cannot be rejected in bankruptcy)?

This result could have wide-reaching negative effects on the oil and gas industry.  We won’t delve deep into the weeds of the legal analysis.  But we will raise a serious question about the process.

Horizontal privity?

The key question was whether Texas law requires a showing of horizontal privity as part of the covenant analysis.  The New York courts concluded that Texas requires horizontal privity, which was not satisfied under the present circumstances. This allowed Sabine to escape from its midstream agreements.

Horizontal privity requires that the parties make their covenant in connection with, and at the same time as, a conveyance of real property.  The Second Circuit acknowledged that the trend across the country is to do away with the horizontal privity requirement. However, the Court went on to rationalize that “[i]t would be improper for us to read a traditional requirement of real covenants out of Texas state law when there is no Texas law instructing courts to do so.”

The maddening reality

The test, according to the Texas Supreme Court, does not include horizontal privity as a requirement for a covenant to run with the land!

Rather than opining on the nuances of Texas property law, the Second Circuit could have (and should have) certified the question to the Texas Supreme Court so that the law could be uniformly applied by all federal courts in similar cases arising from contracts for the transportation or sale of Texas oil and gas production.  This option would have made the most sense and was proposed by several trade groups.

The Texas high court, the ultimate authority on Texas common law, should decide what it takes to constitute a covenant running with the land in this state – not a federal court sitting thousands of miles away and not at all versed in Texas property law. Leave it to the experts and let Texas tell the world how its laws should be interpreted and enforced.

Railroaded?

Co-author Niloufar  “Nikki” Hafizi

The 2012 Macondo Well blowout and Deepwater Horizon rig explosion gave rise to a slew of lawsuits. Our subject today is one of them. In Houston Casualty Company v. Anadarko Petroleum Corp. the Beaumont court of appeals construed an insurance policy’s excess liability coverage provision. At stake was whether Underwriters had to indemnify Anadarko for over $100 million in defense costs. In an opinion much-decried by energy companies, the court thought not.

The Texas Supreme Court will review the decision, so let’s look at what the court of appeals said.  Continue Reading Texas Supreme Court to Consider Macondo Blowout Insurance Dispute

Did Texas law or New Mexico law apply to knock-for-knock indemnity provisions in a Master Work and Services Agreement?  When a contract explicitly calls for Texas law, that is likely to be the outcome, as it was in North American Tubular Services LLC v. BOPCO, LP.

Takeaways

  • Decide before something bad happens what law you want to apply to a transaction.
  • Think about it. You’ll have to live with the choice.
  • Providing a safe work place is a moral imperative; financial risk goes a long way toward assuring the imperative is satisfied.
  • (Better left for another post: Does that also apply to leaking methane?)
  • The parties’ choice of law was was bolstered because under the contract the indemnity and insurance requirements would be liberally construed in order to effectuate their enforceability.
  • It would have helped the choice of law if the contract had also said that the choice was without regard for the chosen state’s conflict of law provisions.

Continue Reading Choice of Law Matters in an Oilfield Indemnity Suit

Co-author Ethan Wood

Like breaking into CIA headquarters, sneaking into the Vatican, or hanging off the side of the Burj Khalifa, sometimes getting the deal done seems impossible. The key to any successful mission is planning for disastrous contingencies—be they rats in an air duct, malfunctioning suction gloves, or having to reach out to a third party to finance the bid you just won. Your mission—should you choose to accept it—is to learn how to avoid the fallout of an oil and gas acquisition gone bad by studying Pacific Energy & Mining Co. v. Fidelity Exp. & Prod. Co. Continue Reading Attempt to Prove a Texas Partnership Fails

Co-author Trenton Patterson*

We’re not saying you should do it, but there is a recipe for ridding oil and gas leases of pesky burdens: Enter into a new lease covering the same interest as the earlier lease and omit any reference to an intent that the later be subordinate to the earlier. You don’t even have to release the earlier lease. So says TRO-X, L.P. v. Anadarko Petroleum Corp.

You might remember a report on this case at the court of appeal, where we marveled at the skillful (or fortuitous, we’ll never know) way the Anadarko landman won the day via email. Continue Reading Texas Supreme Court Affirms Washout of a Back–in Interest