264 Subissi Holdings, L.P. v. Hilcorp Energy I, L.P.

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.
 
SubISSI Holdings, L.P. v. Hilcorp Energy I, L.P., No. 04-07-00674-CV, 2008 WL 2515698 (Tex. App.-San Antonio June 25, 2008, no pet.), holds that tendering an assignment and the obligation to pay were concurrent obligations under a Joint Operating Agreement (“JOA”) and that it was not necessary for the assignment to be executed to trigger the obligation to pay. SubISSI and Hilcorp jointly operated mineral leases pursuant to a valid JOA. Hilcorp acquired property that was inside the Area of Mutual Interest (“AMI”) described in the JOA, and Hilcorp offered SubISSI the opportunity to participate in this acreage. SubISSI elected to participate, and Hilcorp delivered a letter enclosing three originals of an unexecuted assignment, a bill of sale, and wire transfer instructions. The JOA provided that if the party receiving the offer to participate does elect to participate, “then the Offering Party shall execute, acknowledge, and deliver to [the receiving party] an assignment thereof…, and [the receiving party] shall pay . . . the Offering Party” the associated purchase price. Payment was due within thirty days following the date the assignment was tendered. SubISSI did nothing for a period of time that exceeded thirty days, and then it attempted to pay Hilcorp. Hilcorp refused to take the money, contending SubISSI had forfeited its right to participate because it missed the thirty-day deadline to pay. SubISSI argued that Hilcorp was obligated to deliver a fully executed assignment before SubISSI was obligated to pay and to trigger the thirty-day clock. Hilcorp argued that the obligations were mutual covenants, and that its tender of an unexecuted assignment was sufficient.
 
The court found that the JOA did not create a condition precedent that obligated Hilcorp to deliver a fully executed assignment to SubISSI in order to become entitled to receive payment from SubISSI. A condition precedent is an act or event “that must occur before there is a right to immediate performance and before there is a breach of contractual duty.” Where the intent of the parties is not clear, the agreement is interpreted as creating a covenant instead of a condition. The election to participate was a condition precedent. Electing to participate was required to obligate Hilcorp to assign the interest and to obligate SubISSI to pay for the assignment.
 
However, once this election was made, Hilcorp and SubISSI had concurrent obligations. Once SubISSI elected to participate Hilcorp “shall execute, acknowledge, and deliver an assignment . . . and [SubISSI] shall pay . . . the associated Purchase Price.” The court noted that the JOA explicitly used the conjunctive word “and” rather than a temporal word such as “then” or “afterward.” The court found that based on the plain language in the JOA, this portion of the agreement created concurrent obligations.
 
The court also determined that Hilcorp’s delivery of the letter and unexecuted assignment was an acceptable tender triggering SubISSI’s thirty-day period to pay under the JOA. The legal definition of “tender” depends on the circumstances of the agreement. “If a contract calls for successive acts, . . . there is no breach by one if the precedent act has not been performed by the other; but if the contract contemplates concurrent acts, it is sufficient to put one party in default that the other party is ready, willing, and offers to perform his part of the contract.”
 
After finding the obligation to pay was a concurrent obligation, the court found Hilcorp was ready, willing, and had offered to perform.  The letter from Hilcorp provided in part:

after execution return all three [original assignments] to my attention for further execution and handling. Hilcorp will return one fully executed original to your attention.

The court found that this was a clear indication that Hilcorp would comply with its concurrent obligation to “execute, acknowledge, and deliver” the assignment. Therefore, the letter and the unexecuted assignment was a sufficient “tender” to trigger the deadlines imposed under the JOA.
 
The case highlights the importance of strict compliance when exercising optional rights. “Because an option to purchase property is a unilateral benefit to the optionee, options must be exercised strictly according to the terms of the agreement.”