644 North Shore Energy, L.L.C. v. Harkins, 501 S.W.3d 598 (Tex. 2016)

Monday, June 19th, 2017

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

North Shore Energy, L.L.C. v. Harkins, 501 S.W.3d 598 (Tex. 2016) (per curiam) (Option to lease and geophysical trespass) is a contract interpretation case which held that the option contract granting North Shore Energy, L.L.C. (hereinafter “North Shore Energy”)the exclusive option to select land from the described tract on which to execute oil and gas leases excluded a 400-acre tract from the optioned acreage. In a June 2009 option contract (hereinafter “the Option Agreement”), the Harkins family granted North Shore Energy the exclusive option to select land from a described tract to lease for $50 per acre optioned and an additional $200 per acre leased. In describing “Tract 2,”the relevant tract in this case, an exhibit to the Option Agreement described the tract as:

Being 1,210.8224 acres of land, more or less, out of the 1673.69 acres out of the Caleb Bennet Survey, A-5, Goliad County, Texas and being the same land described in that certain Memorandum of Oil and Gas Lease dated March 14, 1996 from The Estate of Janie Francis Harkins, Deceased, to Export Petroleum Corporation [the Export Lease] and being recorded Volume 50 at Page 454 of the Official Public Records of Goliad County Texas to which deed reference is here made for a more complete description of said land.

The Export Lease referenced in the exhibit description describes the land as:

Being 1273.54 acres situated in Goliad County, Texas, and being all of the 1673.69 acre tract described on EXHIBIT “A” attached hereto, SAVE AND EXCEPT a 400.15 acre tract described in a Memorandum of Oil and Gas Lease between the Estate of Janie Francis Harkins, deceased, and Hammond [sic] Oil & Refining, dated March 13, 1995, recorded in Volume -, Page -, of the Public Records of Goliad County, Texas.

At the time the Export Lease was executed, there was also an agreement in effect leasing land to Hamman Oil & Refining (the “Hamman Lease”).

In September 2009, North Shore Energy exercised its option to lease 169.9 acres, which contained a large portion of the Hamman Lease tract, and the well that North Shore Energy drilled on its selected acreage was also on the Hamman Lease tract. Months later, Dynamic Production Inc. (hereinafter “Dynamic Production”) made an offer to North Shore Energy so that Dynamic Production could “shoot seismic” across North Shore Energy’s optioned acreage, but North Shore Energy refused the offer.

Later, after Dynamic Production reviewed North Shore Energy’s Option Agreement and determined that North Shore Energy did not have the right to lease the land on which its well was located, Dynamic Production negotiated directly with the Harkins family to lease the 400-acre Hamman tract. North Shore Energy sued both the Harkins family and Dynamic Production for specific performance of the Option Agreement and damages from Dynamic Production’s geophysical trespass and tortious interference with the Option Agreement.

The issue was whether the Option Agreement between the Harkins family and North Shore Energy included the 400-acre Hamman tract. The Harkins family and Dynamic Production contended that the description excluded the 400-acre tract, and North Shore Energy contended that the description included the tract.

In determining whether the option contract included or excluded the 400-acre tract, the Court first had to determine whether the contract language was ambiguous. More specifically, the Court had to “determine the true intent of the parties as expressed by the plain language of the agreement. “Deciding whether a contract is ambiguous is a question of law for the court.” “A contract is not ambiguous if the contract’s language can be given a certain or definite meaning.” “On the other hand, a contract is ambiguous if it is susceptible to more than one reasonable interpretation.” As such, the Court looked to the “reasonableness of each party’s interpretation . . . in light of the circumstances surrounding its execution to determine whether an ambiguity exist[ed].”

First, the Court considered the amount North Shore Energy paid for the optioned acreage. North Shore Energy paid a total of $144,307.82 which correlates to $50 per optioned acre for 2,886.1564 acres – the total acreage described for Tract 1 (1,675.344 acres) and Tract 2 (1,210.8224 acres). As such, the Court concluded that the total payment of $144,307.82 only paid for an option on 1,210.8224 acres and not the entire 1,673.69 as part of Tract 2. The Court further concluded that North Shore’s contention that the Option Agreement gave them the option to choose any desired 1,210.8224 acres out of the 1,673.69 acre tract an unreasonable interpretation that is contradicted by the agreement’s requirement for them to pay an additional $200 per acre for each acre it decides to lease.

The Court added that North Shore’s interpretation of the Option Agreement also undermines the rules of construction. The entire description reads as:

Being [emphasis added] 1,210.8224 acres of land, more or less, out of the 1673.69 acres out of the Caleb Bennet Survey, A-5, Goliad County, Texas and being [emphasis added] the same land described in [the Export Lease] and being recorded Volume 50 at Page 454 of the Official Public Records of Goliad County Texas to which deed reference is here made for a more complete description of said land.

The two disputed clauses of the description both begin with the word “being.”

Under the doctrine of last antecedent, “a qualifying phrase must be confined to the words and phrases immediately preceding it to which it may be applied without impairing the meaning of the sentence.” North Shore Energy contends that the clause, “and being the same land described in [the Export Lease” modifies “1673.69 acres out of the Caleb Bennett Survey.” However, the Court agreed with the Harkins family and Dynamic Production interpretation that the clauses “are correlative pairs that refer to the same object described [which is] the 1,210.8224 acres of land.”

The Court stated that this interpretation is further supported by the use of the word “and” before the second clause which indicates that the two clauses are go together.

Finally, the Court considered North Shore Energy’s contention that the Harkin family and Dynamic Production’s interpretation that the 400 acre tract was excluded from the Option Agreement is unreasonable because the description of the land in the Export Lease figures in an additional 62.7176 acreage that the exhibit to the Option Agreement does not. However, the Court concluded that a “slight difference[] in acreage when the description uses the phrase ‘more or less’ will not preclude an interpretation of the description to include the large acreage.”

In conclusion, the Court held that the Harkins family and Dynamic Production’s interpretation that the Option Agreement excluded the 400- acre Hamman Lease tract from the optioned acreage is the only reasonable interpretation. The Court reasoned that based on the plain and express language of the Option Agreement, it specifically refers to the text of the Export Lease to further described the optioned acreage which explicitly excluded the 400-acre Hamman Lease tract from its description of the 1,273.54- acre tract in its description, “being all of the 1673.69 acre tract . . .SAVE AND EXCEPT a 400.15 acre tract described in [the Hamman Lease].” Therefore, the Option Agreement was not ambiguous in excluding the 400-acre Hamman Lease.

The Court also held that the Harkins family was not liable for breach of contract or attorney’s fees, and that Dynamic Production was not liable for tortious interference for taking a lease on the 400- acre tract because North Shore Energy did not have a right to the 400-acre Hamman Lease tract. Finally, the Court held that Dynamic Production did not geophysically trespass because since North Shore Energy never executed the lease attached to the Option Agreement as Exhibit B, which would have given them possessory interest and title to the optioned land, they did not have standing to sue Dynamic Production for trespass.

The significance of this case is that the Court initially sought to look to the “reasonableness of each party’s interpretation . . . in light of the circumstances surrounding its execution to determine whether an ambiguity exist[ed],” however confined its opinion to the “four-corners’ of the contract to determine the parties’ intent. There were some circumstances surrounding the execution of the Option Agreement that were arguably important in considering the parties’ intent, but the opinion did not significantly take them into consideration in its conclusion.