So, you found all the heirs and you have an agreed judgment stipulating title. Time to pay royalties? Maybe. And you have signed division orders. Surely, you can pay now? Maybe. These were the questions facing the parties in Perdido Properties LLC v. Devon Energy Production Company et al.

Facts and events

Ross Brady dies, bequeathing a royalty interest in Ector County, 75% to wife Pauline and 12.5% each to his two sisters.

Pauline dies intestate survived by next `husband Smitherman, Sr. and her siblings Claire Bremer and William Watson.

A title opinion for Devon the operator links Pauline to the Brady interest.

Enerlex acquires 1/4th of the interest in the royalty from William. That was all he owned.

William’s conservator, Devon and Enerlex execute an agreed judgment setting aside the Enerlex deed and a release of claims. Devon prepares and the conservator signs division orders reflecting that 100% of the Brady interest is payable to Watson and his lawyer De León. Devon pays William and De Leon.

William dies and his interest goes to the Watson Group (descendants, it appears).

Perdido sues Devon and the Watson Group on behalf of Smitherman, Jr./Bremer for failure to pay royalties, claiming they own 50% of the Brady interest, and asserts alternative claims against Watson Group.

Watson Group obtains summary judgment on Perdido’s claims based on limitations. Devon obtains summary judgment that Smitherman/Bremer’s claims are precluded because Devon paid royalties under a division order, limitations, and no evidence of fraudulent inducement.

What about the judgment?

An agreed judgment is an adjudication and a contract, but only applies to the parties who are before the court. That does not include the Watson Group.

Aren’t division orders binding?

Not always. In Gavenda v. Strata Energy the producer who prepared erroneous division orders and then underpaid royalty owners retained part of the proceeds for itself was liable to the underpaid owners, overcoming the general rule that DO’s are binding until revoked.

One of the principles underlying the general rule is detrimental reliance. Generally, when there are proper division orders the underpaid royalty owner is entitled to recover royalties from the overpaids, not the operator.

In Gavenda the producer was liable to the underpaid owner for the portion of the royalties the producer retained, although it was not liable for royalties paid to other royalty owners. Here, Smitherman/Bremer did not sign DO’s. They were only signed by Watson.

The basis of the result in Gavenda was unjust enrichment. Here, Devon argued that it had paid all the royalties to Smitherman/Bremer under DO’s executed by other royalty owners. Relying on several North Dakota cases, the appellate court held that Gavenda did not preclude Smitherman/Bremer’s claim against Devon even though it would result in double payment from Devon. Devon was not unjustly enriched, but it could not have detrimentally relied on the actions of Smitherman/Bremer because they did not sign the DO’s.

Limitations and other issues

Interesting as it might be to those of us who procrastinate, space does not allow for the court’s analysis of limitations.

Mispayment of the royalties to the Watson Group did not occur as a result of a change in ownership and failure of notice under the lease’s change of ownership clause. The failure to pay was not the result of a change of ownership.   

The release agreement did not release Smitherman/Bremer’s claim royalties on past production. See the opinion for a detailed analysis of the agreement’s language and of emails on the issue of whether Devon acknowledged a debt to Smitherman/Bremer.

The result

Judgment for Devon on limitations reversed and remanded. Judgment affirmed on all other claims.

Your musical interlude.

Most states call it a third-party beneficiary contract. Leave it to Louisiana to be different. In Adams v. Chevron USA Inc., the plaintiffs claimed that oilfield pipe-cleaning activities of Chevron and others contaminated their land with NORM. The Grafers owned the land where, pursuant to a lease, the pipes and other equipment were cleaned. Plaintiffs also sought damages from the Grefers for their own alleged negligence.  Adams settled with most of the defendants by a settlement agreement in 2014 but continued to seek damages from the Grafers.

The question: Were the Grefers included in the settlement as released/indemnified parties? No. The appellate court concluded that the trial court erred by disregarding testimony presented at an evidentiary hearing of the actual intent of the parties to the settlement agreement concerning whether the Grefers were or were not to be released.  

Extrinsic evidence of the parties’ intent

Under Louisiana’s extrinsic evidence rule when words of the agreement are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. Compromise agreements are a jurisprudential exception. When a dispute arises as to the scope of a compromise agreement, extrinsic evidence can be considered to determine exactly what differences the parties intended to settle. Intent is determined by reading the compromise instrument in light of the surrounding circumstances at the time of execution of the agreement. 

There was no stipulation pour autrui.

In any state, a contracting party may stipulate a benefit for a third-party who is not named in the contract. In Louisiana it is done via a stipulation pour autrui. Such a stipulation is never presumed.

In the settlement agreement, the definition of released parties was very broad, including indemnitees and indemnitors and any other person for which the named settling defendants may be liable, whether in contract, tort or equity, in connection with or arising from the claims asserted in the litigation. The Grefers were not parties to the agreement, had no hand in drafting it, and did not contribute to the settlement payment.

The settlement agreement failed to meet the criteria for a stipulation pour autrui.

  1. There was no manifestly clear intent to benefit the Grefers. The agreement itself provided that the parties did not intend to make any person a third-party beneficiary nor create a stipulation pour autrui.
  2. There was no certainty as to the benefit bestowed upon the Grefers.
  3. Any benefit for the Grefers was a mere incident of the settlement between the settling defendants and plaintiffs.

The Grefers were not released by the 2014 settlement agreement.

Your musical interlude

Foreshadowing a grim future for family weddings and funerals, Bell and Petsch v. Petch is a property dispute over five tracts of land in Gillespie County, Texas, in which siblings are the combatants. The events are less important than the takeaway: To win an adverse possession claim, the claimant must establish all six of the elements.

Adverse possession, the requirements

  1. actual and visible possession of the disputed property that is
  2. adverse and hostile to the claims of the owner of record title;
  3. open and notorious;
  4. peaceable;
  5. exclusive; and
  6. involves continued cultivation, use or enjoyment throughout the statutory period.

The events

The four “Disputed Tracts” are 160, 166, 11 and 17 acres each. A fifth, 118 acres, involved a conveyance by Jeannine (Bell) of her undivided half interest to Darrell (Petsch).

1975: Grandma Thekla dies and devises to Darrell an undivided half interest in the Disputed Tracts, subject to a life estate in Emil.

1976: Jeannine, at the ripe old age of 12, conveys the 118 acres to Darrell by deed.

1976: Grandad Emil conveys the 160, 166 and 11-acre tracts to Darrell by deed.

1979: Emil dies, Darrell acquires the 17-acre tract under Emil’s will.

2020: Jeanine and sister sue for judgment declaring that the deed to the 118 acres is void because she was 12 years old when she signed. Darrell, wanting it all, pleads limitations. The trial court grants summary judgment for Darrell that he acquired title to the Disputed Tracts by adverse possession, limitations bars Jeanine’s claim on the 118 acres, and declaratory judgment is an improper vehicle for adjudicating title (you knew that because you’ve been reading Energy and the Law for years).

The parties became cotenants of the Disputed Tracts when Emil died in 1979. Thus, the court reviewed the evidence in light of the heightened standard applicable to cotenants. A cotenant’s use of common property is presumed not adverse unless the cotenant repudiates his cotenant’s title. Repudiation must be evidenced by actions or declarations that clearly manifest intent to repudiate the cotenancy.

Upon Thekla’s death ownership of the Disputed Tracts was:

 Emil 50% fee, Emil 50% life estate, Jeannine 50% remainder.

In 1976 (after Emil’s deed to Darrell), ownership became:

 Darrel 50% fee, Darrell 50% life estate, Jeannine 50% remainder.

Upon Emil’s death in 1979 ownership became:

 Darrell 50% fee, Jeannine 50% fee.

No adverse possession by Darrell

Darrell asserted that his deed from Emil purporting to convey the entirety of the property in fee was a repudiation of the cotenancy between him and Jeanine. The court disagreed. First, Emil and Jeanine were not cotenants because her interest did not become possessory until Emil’s death. Second, Darrell’s deed was filed of record after Jeannine acquired the remainder interest from Thekla. Thekla could not impart constructive notice on Jeannine after repudiation. Recordation on a date after the other cotenants have already acquired their property interests does not put those cotenants on constructive notice that their cotenant claimed an adverse interest. Darrell failed to conclusively establish notice of repudiation of the cotenancy.

Limitations and Jeannine’s voidable deed

Responding to Jeanine’s challenge to the deed to the 118 acres, Darrell claimed the affirmative defense of three-year statute of limitations under Civil Practice and Remedies Code 16.024. This defense failed because Darrell could not prove every element of his adverse possession claim (See above). The parties continued to jointly use the 118 acres until at least September 2020.

Your musical interlude.

The question in Self v, BPX Operating Company is how to balance the Louisiana Civil Code Art 2292 principle of negotiorum gestio against Louisiana’s conservation statutes.  

When a tract of land is subject to a unit formed under La. R.S. 30:9(B) and 30:10(A(1) and the tract is not subject to a lease, the unit operator can sell the landowner’s share of production but must pay the landowner his pro rata share of “proceeds”.

The Selfs own unleased mineral interests that are in a forced drilling unit. BPX is the operator. The Selfs allege for themselves and for a class that BPX has been improperly deducting PPCs from their pro rata share of production. BPX has also been withholding amounts related to minimum volume commitments and capacity reservation fees. The district court granted BPX’s motion to dismiss, holding that the doctrine of negotiorum gestio provides a mechanism for BPX to properly deduct PPCs not otherwise covered by specific statutes.

Self contends that La. R.S 30:10(A)(3) requires BPX to pay on gross proceeds from the sale of production. BPX counters that “proceeds” is ambiguous and should be interpreted to mean net proceeds after deduction of PPCs. Regardless, 30:10(A)(3) is harmonized with the Louisiana Civil Code regime under the negotiorum gestio doctrine. The relationship between the parties is quasi-contractual under Louisiana law.

If negotiorum gestio applies, Art. 2297 allows reimbursement by a manager of another of all necessary and useful expenses. The gestor must act (1) voluntarily and without authority, (2) to protect the interests of another, and (3) in the reasonable belief that the owner would approve of the action if made aware of the circumstances.

The Selfs assert that BPX’s acts are not voluntary and without authority because it acts pursuant to a statutory duty and it acts to protect its own interests, not the interests of unleased mineral owners.

The Fifth Circuit determined that there is no controlling case law dealing specifically with the facts at hand and that it could not make a reliable guess as to the applicability of the doctrine. Thus, it certified to the Louisiana Supreme Court:

Does Louisiana Civil Code Art. 2292 apply to a unit operator selling production in accordance with La. R.S. 30:10(A)(3)?

Justice Dennis dissented, arguing that under 30:10(A)(3) a unit operator who sells an owner’s production under the authority of the statute cannot be a gestor because it acts with authority.  The majority disregarded the plain text of Art. 2292, he says. Rather than elaborate, we will wait for a definitive answer from the Louisiana Supreme Court.

Your musical interlude. Yes, there is music from North Louisiana after Jerry Lee.

Barkley v. Connally, a “bet-the-farm” case if there ever was one, invokes the merger clause, a basic principle of contract law. Clients and lawyers: Read this analysis so as to avoid boundless grief and disappointment for client and lawyer alike.

Jim Barkley, having undergone bankruptcy and nearing retirement, agreed to sell his farm to Connally, owner of an adjacent tract, if Jim and Ms. Barkley could buy back their residence and the 40-acre pasture across the road. Connally agreed. A Purchase and Sale Agreement was signed by all parties.  Connally was represented by a real estate lawyer and a bankruptcy lawyer. A merger clause in the PSA said:

This Agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understanding or written or oral agreements between the parties respecting the within subject matter. This expressly includes the Offer to Purchase submitted to the Seller on or about April 10, 2017 … ..

The “Offer to Purchase” was to buy back the family home.

The transaction closed. The Barkleys remained on the property and emailed to the Connallys their readiness to buy back the home place and pasture for $60,000, the agreed price. The Connallys responded that there was no enforceable agreement for the sale and they had no intention of doing so due to the Barkleys’ “recent behavior toward the Connellys” (gotta wonder what that was all about).

The Barkleys sued. The court granted Connally’s motion for summary judgment dismissing the Barkleys claims for breach of contract, trespass to try title and promissory estoppel. After a trial the jury determined that the Connnallys had not induced the Barkleys into entering the PSA through fraud.

The merger doctrine

The general rule is that the courts presume that all prior oral and written agreements are merged into a subsequent written contract. A written merger clause is essentially memorialization of the merger doctrine. When parties have entered into a valid written integrated contract the parole evidence rule precludes enforcement of prior or contemporaneous agreements that address the same subject matter and are inconsistent with the written contract.

The court found that the subject matter was the same as the written agreement and rejected the Barkleys’ assertion that enforcement of the agreement for purchase of the house was collateral to and not inconsistent with the PSA and thus was enforceable. 

A collateral agreement is one that is supported by separate consideration and that the parties might naturally make separately under the circumstances and would not ordinarily be expected to embody in the writing. The agreement to purchase the house was barred by the parole evidence rule.

Trespass to try title

The Barkleys did not assert any of the four methods allowed by the trespass-to-try-title statute and that claim was rejected.

Promissory estoppel as a claim for affirmative relief

The Barkleys’ promissory estoppel claim was denied. According to some Texas appellate courts, promissory estoppel can constitute the basis for a claim for affirmative relief, but in this one (the 7th Court in Amarillo), promissory estoppel is defensive in nature and not an independent cause of action.

Your musical interlude.

Parish of Plaquemines v. Northcoast Oil Co. is yet another remand of yet another of the 43 suits filed in state courts against a legion of oil and gas companies under the Louisiana’s State and Local Coastal Resources Management Act of 1978. The suits arise out of the defendants’ decades-long oil production activities on the Louisiana coast.

So far, the message seems to be: Producers, surrender to the jurisdiction of the state courts and trust in the wisdom of the well-intentioned citizen-jurors of the coastal parishes. You are not likely to find solace in the relative safety of the federal courts.

The decision is long and dense, including a tutorial on prior rulings. The long and short of it is that after being remanded repeatedly upon the failure of a variety of theories of removal jurisdiction, the defendants crafted a new one: World War II era oil production activities, conducted during a time of significant governmental regulation and oversight, allow for federal officer removal.

The removing defendants failed to show that they were acting pursuant to a federal officer’s or agency’s direction. They argued that at the very least they should be treated as federal subcontractors because, even though they had no contracts of their own with the federal government for oil production, at least Gulf Oil Corporation had contracts with refineries who had contracts with the federal government to deliver fuel used in the war effort. But the crude oil production was not under federal direction. The federal district court was not persuaded that the argument satisfied either the acting-under requirement or the related-to requirement for federal officer removal. Both must be satisfied for there to be removal jurisdiction.

Which leads to this query

They don’t teach metaphors in law school, and lawyer-bloggers are well-advised to delete their naval-gazing before publication. That said, here goes anyway: Some species of animals eat their young. Older male, king-of-the-jungle lions, for example, will devour young males in order to eliminate the competition (and to clear the decks for more “quality time” with the ladies).  One can rationalize the myriad suits against “Evil Oil” by anti-fossil fuel blue governments on the principle that Evil Oil competes with undependable but virtuous alternative energy, ergo Evil Oil must be destroyed by vexing litigation before hometown juries. I get it.

But in a state in which oil and gas production is so vital to economic prosperity, are these suits also “eating the young”? Will they chase off producers’ exploration dollars in favor of friendlier locales? From my corner of the oil patch, that’s what the legacy contamination suits have done.

On the other hand, coastal deterioration is real. Maybe the millions in potential recoveries will actually be put to work to save the wetlands that also drive prosperity. And maybe, as some believe, the producers have exploited the state like it was a third-world backwater and its time for payback. Here is a podcast from Baton Rouge NPR station WRKF that might answer the questions.

Your musical interlude is one way to look at it.

Can the Texas lessee perpetuate his oil and gas lease by “constructive participation” in wells drilled by another? Under the facts in Cromwell v. Anadarko E&P Onshore, LLC, the answer is no.

Cromwell and Anadarko’s wells

In 2009 Cromwell obtained the Ferrer and Tantalo leases covering small fractional interests in several sections. Anadarko owned working interests in the same sections. Before Cromwell obtained his leases Anadarko executed joint operating agreements with other working interest owners and was the operator. Cromwell asked for a JOA and to participate in Anadarko’s wells. Anadarko never responded.

Anadarko drilled the 75 – 26 –1 well, which paid out in August 2009. Anadarko sent Cromwell JIB’s for his share of the working interest and revenue checks. Cromwell paid the JIBs, including charges for a variety of operating costs. Anadarko netted Cromwell’s debts against his share of production proceeds in months when costs exceeded revenues. In letters Anadarko addressed Cromwell as a “working interest owner”. Anadarko claimed this was in error. 

The primary term of Cromwell’s leases passed in 2012 and 2014 respectively. Anadarko realized this but did not tell Cromwell, and continued sending JIBs and cutting revenue checks and communicating as if his leases were effective. Anadarko said this also was a mistake. Anadarko took leases from Ferrer and Tantalo in January 2017 and in March 2018 informed Cromwell that because it never received an executed well election the leases had expired and had been leased to “third parties”.

Cromwell sued for declaratory judgment, trespass to try title and damages alleging that his leases never expired because he constructively participated in drilling sufficient to perpetuate his leases and that he and Anadarko had formed a partnership. The trial court granted Anadarko’s motion for summary judgment.

Were Cromwell’s leases still valid?

Production had occurred in paying quantities and Cromwell participated in the costs and production. But Anadarko’s production could not be attributed to Cromwell. The court of appeals ruled that Cromwell was required to take some action of his own to cause production on the leased property to keep his leases alive despite the use of the passive voice in the habendam clauses that might indicate otherwise.

The costs Cromwell referred to as his “constructive participation” reflected his proportionate share of operating expenses ordinarily owed by a nonparticipating cotenant. Those costs were not indicative of the parties’ intent that Cromwell shouldered any risk or liabilities inherent in the operation of the well.  

Despite Anadarko’s reference to Cromwell as a working interest owner and to the existence of an operating agreement, the parties did not engage in conduct that would otherwise suggest they had a joint operating relationship. Cromwell’s course-of-conduct argument could not overcome the absence of an agreement to share in expenses of development and operation.

Anadarko treated Cromwell as if his leases had not expired after their primary terms lapsed, but the habendam clauses defined the terms under which the leases could be perpetuated. The leases terminated at the end of their primary term. The habendam clause was a special limitation, the failure which does not result in forfeiture.

Was there a partnership?

In a word, no. Of the five factors under the Business Organizations Code to determine whether there is a partnership the court accepted only Cromwell’s receipt of profits as proving a partnership. But this was equally consistent with Anadarko’s accounting to Cromwell as a cotenant.

Also, Cromwell’s evidence could not overcome the statute of frauds. Cromwell and Anadarko were cotenants, not partners.

Your musical interlude.

Co-author Katherine Sartain*

If you are scoring at home, count Permico Royalties LLC v. Barron Properties, Ltd., as a win for “floating” in the fixed-or-floating royalty battles. Permico, successor to grantors in a 1937 Deed for a tract in Ward County, argued that a mineral reservation was of a ½ floating royalty interest. Barron, successor to grantee and owner of the mineral estate subject to the reservation, claimed that the deed reserved a 1/16 fixed royalty. Grantors reserved:

“… a one-sixteenth (1/16) free royalty interest (being ½ of the usual 1/8th free royalty) … And the Grantors, …. shall be entitled to receive 1/16th of the oil and/or gas produced, saved and sold from said land, being ½ of the usual 1/8th royalty therein.”

In dueling motions for summary judgment the trial court denied Permico’s motion and granted Barron’s, ordering that Permico take nothing.

The double-fraction question and the usual doctrines

In reversing and rendering judgment that the deed reserved a ½ floating royalty, the court of appeals cited Hysaw v. Dawkins. Under the “legacy of the 1/8th royalty”, use of “1/8” has a special meaning. In deeds of that era the parties had an erroneous belief that a royalty in a lease would always be 1/8. The fraction was used as a placeholder for future royalties generally. It was “shorthand” for what the mineral owner believed was the entire royalty a lessor could retain under a mineral lease. It had no mathematical value.

Then you have the estate misconception doctrine recognizing that in that era mineral owners erroneously believed that they only retained a 1/8th interest in their mineral estate after leasing for a 1/8th royalty, citing Van Dyke v. Navigator Group.

Barron urged the court to reject the legacy doctrine, arguing that it is incorrect to presume that all mineral interest owners at the time believed that their royalty interest would always be 1/8. By the 1930s oil and gas leases existed providing for royalties other than 1/8. The court responded that Van Dyke shows continued reliance on the legacy doctrine.

Barron also argued there was no need for the legacy doctrine because there were no inconsistencies in the Deed that required harmonization of provisions. The Court responded: That is not true here, but even if so, Hysaw says the courts can use the doctrine even if there are no internal inconsistencies. Under the estate misconception doctrine the use of a double fraction created the rebuttable presumption that the parties intended to use the 1/8th as a placeholder for the grantor’s entire mineral estate.

Barron also contended that the court should ignore the double fractions as nonessential to the deed language, therefore to grantor’s intent, because the double fractions were in non-restrictive clauses.  The court rejected that assertion as taking the grammatical argument to an extreme.  Applying grammatical rules may be helpful in interpreting a deed, but the focus is still on harmonizing the entire deed.

The conclusion

If grantors had meant to reserve a fixed 1/16th royalty interest, there would have been no reason for them to use the double fractions in not one, but two clauses. The only way to give meaning to all of the Deed’s provisions was to apply the legacy doctrine and find that grantors’ use of the 1/8 fraction was a placeholder.

The Deed consistently demonstrated the parties’ intent to reserve a ½ floating royalty interest given its repeated use of the “usual 1/8 royalty” in the double fraction describing that interest.

Your musical interlude.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Co-author Katherine Sartain *

We begin with a document-drafting tip: When reserving an interest in minerals, before cutting and pasting from your old document that would be yellowed and dusty if it remained in its original papyrus format, lawyers and non-lawyers alike should consider Devon Energy Prod. Co. v. Enplat II, LLC. The Court was asked to determine whether a 1940 deed from Harris et al to Lopoo conveying a tract in Reeves County, Texas, reserved a cost-free royalty interest or a cost-bearing non-executive mineral interest.

The reservation was of an:

“… undivided one-sixteenth (1/16) of any and all oil, gas or other minerals produced on or from under the land above described. Lopoo …  shall have the right to lease said land for mineral development without the joinder of Grantors or their heirs and assigns, and to keep all bonus money, as well as all delay rentals, but when, if and as Oil, Gas or other mineral is produced from said land, one-sixteenth (1/16) of same, or the value thereof, shall be the property of Grantors,.”(emphasis ours)

Enplat, successor of Harris, sued Devon, successor of Lopoo, for a judgment declaring that Harris granted the entire mineral interest and reserved a 1/16 royalty interest. Devon counterclaimed saying that Harris conveyed a 15/16 mineral interest. On cross-motions for summary judgment the trial court granted judgment for Enplat; The deed reserved a fixed royalty interest. Devon appealed.

The result

The court of appeals reversed. The deed reserved a mineral estate shorn of all attributes but for the right to receive a royalty, if and when there was production.  

This deed did not use “in, on or under”, which indicates a mineral interest, not a royalty. However, a deed need not use the exact term to denote a mineral interest; it may instead use terms “of similar import.”

Emplat argued:

  • The language did not meet the “of similar import” standard because “produced on or from under” reflected the grantor’s specific intent to reserve a royalty interest after production.
  • Courts interpret “produced, saved and made available for market” as a royalty interest because they denote the grantor’s intent to reserve a post-production interest only.
  • “1/8th of all minerals that may hereafter be produced and saved on the land conveyed” was “akin” to a royalty interest.    

The Court acknowledged Enplat’s argument that  the last provision alone may denote a royalty interest, but that clause must be read with other portions of the document to determine the type of interest that was reserved.

The magic language historically associated with a post-production intent was not used. “Produced on or from under” is not the same as “produced, saved and made available,” and is not necessarily a royalty interest.

According to the Court, Harris specifically stated their intent not to strip themselves of the fourth attribute of their estate – the right to receive royalty payments (the first three being right to develop, right to lease, and right to receive the bonus) – because they specifically stated “but when, if and as Oil, Gas or other mineral is produced … ”  The deed as a whole indicated reservation of a mineral interest.

The Court distinguished a reservation with similar language in which “royalty” was used “no less than six times”. Here, the Harris grantors did not use the term once in describing the reservation.

Caveat: Don’t generalize from this post. Each case turns on the specific language of the reservation in light of previous decisions, and there are many.  

Your musical interlude. This is what the appellate court is for.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Unit Petroleum Company v. Koch Energy Services, LLC is another force majeure case arising out of winter storm Uri. Unlike a similar case, summary judgment was denied because, said the United States District Court,

The word “reasonable”, although not ambiguous, is a question of fact that must be answered by looking into the circumstances of the case at issue, including the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade.

The facts

Unit agreed to sell gas to Koch under a Base Agreement (the North American Energy Standards Board General Terms and Conditions Base Contract for Sale and Purchase of Natural Gas). Specific transactions were memorialized in Transaction Confirmations. The parties’ obligations were “firm”, meaning that either party may interrupt its performance without liability only to the extent that performance is prevented by events of force majeure.

The operative portion of the clause was, “Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of force majeure and to resolve the event or occurrence once it has occurred in order to resume performance”.

In January 2021 Unit informed Koch that in February it would sell 25,000 MMBTU/day as a base load and up to 6,500 as a swing option. Then came Uri, which damaged Unit’s wells. Unit alerted Koch that it was declaring force majeure, explaining that Uri had reduced gas supply such that it could not fill Koch’s order. Koch rejected the declaration insisting that Unit perform by either buying back its contract obligation or buying gas on the spot market for Koch. Unit did neither. During this time Unit delivered gas to two other purchasers with whom it had interruptible contract obligations.

Koch bought spot gas for substantially greater sums for its spot gas and the next month withheld $1.3 million from Unit as cover damages and invoiced Unit $5.1 million for gas that it purchased on the spot market.

Arguments

Unit argued that because the storm was a qualifying force majeure event it had no obligation to buy gas on the spot market or buy back its obligation, arguing that to require Unit to either buy spot gas or buy back its obligation would effectively eliminate the force majeure clause.

Koch responded that there were fact questions precluding summary judgment, such as whether the storm caused Unit’s nonperformance and whether Unit undertook reasonable efforts to avoid the effects of the event. Koch also argued that industry practice requires the seller to either buy back its obligation or buy gas on the spot market during an event such as Uri and that Unit should have allocated to Koch gas that it sold under interruptible contracts.

Result

Summary judgment denied. Whether a particular gas allocation was fair and reasonable was a fact issue. The experts disagreed on what activities were reasonable in the context of “resonable efforts”. A jury could disagree both as to whether Unit’s gas allocation waa fair and reasonable and whether Unit exerted reasonable efforts to avoid the effects of the force majeure event.

Your musical interlude.