564 Anderson Energy Corp. v. Dominion Oklahoma Texas Expl. & Prod., Inc., 469 S.W.3d 280 (Tex. App.—San Antonio 2015, no pet.)

Tuesday, July 12th, 2016

Richard F. Brown

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

Anderson Energy Corp. v. Dominion Oklahoma Texas Expl. & Prod., Inc., 469 S.W.3d 280 (Tex. App.—San Antonio 2015, no pet.), held that the Contract Area under a JOA was not limited to the leases and lands the parties owned at the time the JOA was executed, but also included the leases and lands acquired under an area of mutual interest (“AMI”) provision. The parties aligned as successors-in-interest to the “Seller” and “Buyer” under a March 7, 1980 letter agreement (“Letter Agreement”). Seller agreed to sell for $6,000,000 and a $1,700,000 drilling commitment: (1) an undivided 50% interest in 37 wells on multiple leases located in multiple Texas counties, including approximately 62,000 net acres, and (2) the right to participate in the drilling program as stated in the Letter Agreement. The Letter Agreement stated that “[b]y participating in the drilling program [Buyer] will earn an undivided fifty percent (50%) interest in the wells and fifty percent (50%) of your [Seller’s] leasehold interests lying within the areas outlined on the attached plats, hereinafter collectively referred to as ‘Such Properties….’” It also provided that “[t]his proposal extends to the whole of your [Seller’s] interests in Such Properties. . . .” The Letter Agreement further stated that Seller would deliver the assignments of a one-half interest in the existing 37 wells, their equipment, and their leasehold estates at closing, but that “assignments of the balance of the leasehold interests to be acquired hereunder shall be made from time to time as earned and required.”

The Letter Agreement provided that all operations (with Seller as the operator) were to be conducted under the terms of a Joint Operating Agreement, which became effective on April 1, 1980 (“JOA”). The JOA governed the exploration, development, and operation of the mineral interests within the “Contract Area”. The Contract Area was defined in Article I of the JOA as “all of the lands, oil and gas leasehold interests, and oil and gas interests intended to be developed and operated” under the JOA as described in Exhibit A, attached to the JOA. Exhibit A to the JOA identified the “land and leases subject to [the JOA]” as “all interest of [the] parties in the land located within the areas outlined on the attached plats marked Exhibits A1 through A8.” Exhibits A1 through A8 were maps or plats identifying specific areas of the AMI. The JOA contained a preprinted preferential right to purchase (“PRP”) provision governing any sales of the parties’ interests subject to the JOA, and a typewritten AMI provision added under Article XV(B) governing future acquisitions of interests subject to the JOA. In Article XIII of the JOA, the parties failed to select either of the two options for designating the term of the JOA.

In July 2007, Buyer filed a breach of contract suit under the PRP and AMI provisions of the JOA alleging that Seller had acquired lease, mineral, or fee interests in land included within the AMI and drilled more than one hundred gas wells within the Contract Area without notifying Buyer and providing Buyer the opportunity to participate.

The “Contract Area” dispute turned on whether the scope of “Contract Area” extended to future acquisitions of interests as Buyer contended, or whether it was limited to the original interests owned by the Seller’s predecessor on April 1, 1980. The parties and the court agreed that the JOA was unambiguous. Thus, the meaning was construed by the plain language used by the parties within the four corners of the contract. The JOA was based on the 1977 AAPL Model Form Operating Agreement. The printed form definitions identifying the leases and lands subject to the JOA on the form are expressed in the present tense, which Seller argued was evidence the parties did not intend to include future acquisitions in the Contract Area. The court was more persuaded by the parties’ intent regarding future acquisitions as shown by their insertion of the typewritten AMI provision under Article XV of the model form agreement. The parties agreed that the model form did not include an AMI as a standard provision.

An AMI agreement is generally used by the parties to describe a geographic area within which they agree to share certain additional leases acquired by any of them in the future, which necessarily contemplates that oil and gas leasehold interests will be conveyed in the future. A joint operating agreement “by its nature is intended to govern the parties’ acquisitions, development and operation of mineral interests beyond the date of its execution.” Though the specific AMI provision in the JOA does not bear the title AMI or use any “magic words,” the substance of the provision equates to an “area of mutual interest” obligation agreed to by the original parties to the JOA. Additionally, the present tense language used in the definition of Contract Area may be reasonably read as inclusive of the interests that the parties subsequently acquired, which then become interests that “are owned” by the parties under the JOA. Exhibit A of the JOA designates the “land and leases” included in the Contract Area, which indicates an intent to include unleased lands. Harmonizing all the provisions of the JOA and giving effect to the plain language of the contract, the court held that “interests acquired in the future by [Seller and Buyer], or by their successors, within the lands outlined by the hash marks on Exhibit A’s eight maps, i.e., within the Contract Area, are subject to the JOA.”

Because the parties did not check an election box in Article XIII establishing an express term for the JOA, Seller contended the JOA was terminable at will. The court held that the JOA was not terminable at will, rather, a reasonable time should be implied into the JOA based on the nature of a joint operating agreement and in particular the nature of the AMI and PRP provisions as real property covenants running with the land. The court construes contracts “from a utilitarian standpoint bearing in mind the particular business activity sought to be served and we avoid when possible a construction that is unreasonable, inequitable, and oppressive.” The trial court erred in ruling that the JOA was terminable at will, and the case was remanded for a factual determination of what constitutes a reasonable term under the circumstances at the time the JOA was executed.

The case also included a dispute as to whether the legal descriptions used, and particularly the maps used on Exhibit A, satisfied the Statute of Frauds. It illustrates the risks inherent in the common industry practice of drawing big black lines on tiny maps and not following section lines.

The significance of this case is the holding that a typewritten AMI provision will be read into the printed definitions of leases, lands, and Contract Area under the 1977 MFOA, so that the JOA covers interests acquired under the AMI. It also establishes a precedent for the term of a JOA as being a “reasonable term” at the time of execution, if the parties fail to expressly define the term.