Face Challenges Confidently

572 ROCA Resource Company, Inc. v. Devon Energy Production Company, L.P., No. 4:14-CV-085-DAE, 2015 WL 4479118 (W.D. Tex. July 22, 2015)

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.

ROCA Resource Company, Inc. v. Devon Energy Production Company, L.P., No. 4:14-CV-085-DAE, 2015 WL 4479118 (W.D. Tex. July 22, 2015), held that breach of the terms of an assignment of overriding royalty (including an express duty of good faith and fair dealing) created a contractual liability, not a tort liability. Assignor assigned to Assignee an overriding royalty interest in various oil and gas leases operated by Assignor in Loving County, Texas. The assignment provided that “Assignor owes Assignee a duty of good faith and fair dealing when taking any action which might have an effect on Assignee’s overriding royalty interest . . . .” Actions by Assignor resulted in the oil and gas leases expiring, which extinguished the overriding royalty. Assignee sued for breach of contract, negligence, breach of the duty of good faith and fair dealing, and sought both actual and exemplary damages.

On motion for partial judgment on the pleadings, Assignor contended that the negligence claim was barred under the economic loss rule, that the breach of duty claim was a contract not a tort claim, and because there was no independent tort, there could be no award of exemplary damages. If the motion was granted, Assignee’s only remaining claim would be for actual damages for breach of contract. Recovery in tort is precluded for economic losses that result solely from a breach of a duty based on the contract between the parties. Assignee claimed that Assignor’s duties arose not only under contract, but also under common law as the duty to “protect the leasehold and to act as a reasonably prudent operator by virtue of the implied covenants contained in the oil and gas leases.” The court held that under Texas law, breach of implied lease covenants sound in contract not tort. Although the partial judgment does not make clear whether the court will or will not read the lease implied covenants into the assignment of overriding royalty, it is clear that the source of the duty is contract, not tort. Further, because the only injury claimed by Assignee was the economic loss under the contract, the economic loss doctrine bars the negligence claim.

Next, the court addressed Assignor’s breach of the duty of good faith and fair dealing claim. This duty can arise out of a contract or out of a relationship between the parties. Although there was a contractual duty expressly created in the assignment, there was otherwise no special, confidential, or fiduciary relationship between the parties that would give rise to a legal duty of good faith and fair dealing. That kind of relationship is not implied in an assignment under Texas law.

Finally, the court addressed the claim of exemplary damages. To support a claim of exemplary damages, a distinct tort is required to be alleged and proved. A claim for breach of contract alone will not support recovery of exemplary damages. Because only contractual duties existed between the parties, the court determined that Assignee had “no remaining tort causes of action to support a claim for exemplary damages.”

The significance of this case is the holding that liability for breach of the terms of an overriding royalty assignment is based on breach of contract, not tort. It seems likely that any duties imported from the underlying leases would also be contractual duties.