368 Aurora Petroleum, Inc. v. Cholla Petroleum Inc.

CASE NOTE

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Aurora Petroleum, Inc. v. Cholla Petroleum, Inc., , No. 07-10-0035-CV, 2011 WL 652843 (Tex. App.—Amarillo Feb. 23, 2011, no pet.) (mem. op.) held a farmout agreement to be unenforceable because the parties did not agree upon the location of the test well site. Aurora assigned four leases to Cholla, Cholla paid $50,000 to Aurora, and Cholla agreed to commence drilling a test well at a location on the prospect that was “mutually acceptable” to both parties before January of 2008. The agreement also provided that if Cholla failed to timely commence drilling, Cholla would assign all interests in the Prospect (including Cholla’s leases) to Aurora. Before the deadline lapsed, Cholla proposed two sites for the test well, but Aurora rejected both. When the deadline passed, Aurora demanded that Cholla reassign to Aurora the four Aurora leases and that Cholla assign Cholla’s leases to Aurora. In response, Cholla reassigned the four Aurora leases to Aurora but refused to assign the Cholla leases. Aurora filed suit seeking specific performance of the exploration agreement, and Cholla sought to recover its $50,000 payment.
 
Cholla claimed that the agreement was unenforceable because the parties failed to agree to an essential term: the location of the test well. Cholla claimed that Aurora was unjustly enriched by the $50,000 and sought a refund.
 
For a court to enforce a contract, the agreement must contain all of the material terms, and “whether a term is material is determined on a case-by-case basis.” A term is material when “the uncertainty imposed [without the term] derails the greater purposes embodied in the agreement.” Based on these legal principles, the court found the agreement unenforceable because the location of the well was a material term. According to the court, Aurora and Cholla entered the agreement in order to pool resources for oil and gas production, and, without a timely agreement as to the location of the well, the contract could not achieve this purpose. Finally, the court determined that Aurora would be unjustly enriched if Aurora kept the $50,000 Cholla paid in preparation for performance under the contract.
 
The significance of the case is the holding that a farmout agreement, which requires the drilling of the test well at a mutually acceptable location, is unenforceable as an agreement to agree. However, this case turned on particularly bad facts, as Aurora was positioned to give nothing, acquire $50,000, and acquire additional leases by simply refusing to agree upon a location. Another farmout agreement, imposing some provision defining or regulating how that mutual agreement was to be obtained (e.g., in good faith, reasonably, some parameters on the location, et cetera), could be enforceable.