Face Challenges Confidently

705 Glassell Non-Operated Interests, Ltd. v. Enerquest Oil & Gas, L.L.C., No. CV H-16-1573, 2017 WL 6626652 (S.D. Tex. Dec. 28, 2017)

Thursday, September 6th, 2018

Richard F. Brown

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

Glassell Non-Operated Interests, Ltd. v. Enerquest Oil & Gas, L.L.C., No. CV H-16-1573, 2017 WL 6626652 (S.D. Tex. Dec. 28, 2017) held that the terms of an area of mutual interest agreement (“AMI”) required a party to the AMI acquiring an interest from another party to the AMI to offer participation in the tract acquired to all parties to the AMI. The AMI covered an area of forty square miles, and it included interests acquired within that AMI after August 1, 2010 (the effective date of the AMI). One of the parties to the AMI proposed to sell, then “Enerquest” (another party to the AMI) sent an email to all parties telling them that Enerquest planned to bid and acquire the interest, and that Enerquest would share. At least one other AMI party withdrew from the bidding to allow Enerquest to make the acquisition. After acquiring the property, Enerquest changed its position and contended it was not obligated to share. The other AMI parties sued Enerquest for breaching the agreement.

Enerquest claimed that it did not breach the AMI agreement because the AMI parties from whom Enerquest acquired the interests had obtained those interests before August 1, 2010. However, the agreement provided that the AMI “includes interests acquired within the area after August 1, 2010.” The agreement excluded only what a party already owned, but it did not exclude transfers of previously-owned interests. Therefore, the court concluded that Enerquest breached the agreement because it was required to offer to share its interests.

Enerquest also contended that even if it did breach the agreement, the statute of frauds bars enforcement of the agreement. The court effectively rejected the report of the surveyor hired by Enerquest. Although the opinion is very brief, the court also apparently found a one-half mile wide “halo” to be an industry term that means an area around the property described.

Additionally, the court concluded that partial performance would exempt the agreement from being void under the statute of frauds. Because Enerquest informed the other parties of its plan to acquire and share the interests, and those parties reasonably relied on Enerquest’s intent to offer participation and thus refrained from bidding, the agreement is fully enforceable. Enerquest was required to share its newly acquired interests with the other parties to the AMI.

This is a contract interpretation case which primarily holds that interests “acquired” after a fixed date does not exclude acquisitions acquired from another party to the AMI. Perhaps the case makes “halo” an industry term.