Face Challenges Confidently

495 Capitol Wireless, LP v. XTO Energy, Inc.

Wednesday, September 2nd, 2015

Richard F. Brown

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

Capitol Wireless, LP v. XTO Energy, Inc. held that a Participation Agreement (“PA”) was an enforceable contract to drill a test well, notwithstanding that the parties failed to include a Joint Operating Agreement (“JOA”). The PA was a package of documents sent by XTO as the Operator to Capitol Wireless as the Participant with a well election letter. It included a list of the working interest owners and their ownership shares, a detailed estimate of drilling and completion costs, an authorization for expenditure (“AFE”), a drilling plan, and a well location plat.

It also included statements that a “Joint Operating Agreement will be forthcoming” and that the percentage interests of the parties were “[b]ased on initial title opinion – subject to final division order title opinion.” Capitol Wireless timely elected to participate. Operator drilled and completed the test well and sent an invoice to Participant, which refused to pay. Participant contended that the PA was unenforceable and failed because of indefiniteness, omission of material terms and because the parties failed to agree.

The elements of an enforceable contract are (1) an offer; (2) an acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds, (4) a communication that each party consented to the terms of the contract; (5)execution and delivery of the contract with an intent that it become mutual and binding on both parties; and (6) consideration. Whether a contract fails for indefiniteness is a question of law.

Participant argued that the PA did not include material terms identifying expenses it was responsible to pay and what Operator might charge, did not set out how expenses were to be calculated and disclosed, did not state when payment had to be made to Operator, and was indefinite as to Participant’s percentage interest in the test well. Participant also argued that, by stating that a proposed JOA would be forthcoming and that final percentage interests would depend on the division order title opinion, the PA left material terms open for future negotiation, created a fact issue as to whether there was a meeting of the minds on essential terms, and it was ambiguous as to whether the PA was intended to be a final agreement.

While acknowledging that contractual obligations and liabilities must be sufficiently definite for a contract to be enforceable, the court held the PA extended to the Participant a clear and unambiguous offer to participate in the drilling and completion of the test well and stated that Participant could either participate and pay its working interest share of the costs or not participate and be subject to risk of penalty under state law. The court held that the PA provided the Participant with the necessary information to respond to the offer, and the Participant accepted the offer in strict compliance with its terms by its timely acts in executing, initialing, dating and returning and following up on its election to participate in the agreement. The court held that Participant was required to pay its share of the costs within a “reasonable time,” citing the rule that a reasonable time for performance is implied in a contract. The court was possibly influenced on the billing and payment issues by the fact that the amount billed was very close to the amount estimated in the AFE, and because Participant did not question any particular charge.

In dismissing Participant’s argument that the percentage working interest was indefinite, the court found that a working interest percentage based on an initial title opinion and subject to a final division order title opinion was reasonably certain.

Participant also argued that the PA language stating a “proposed Joint Operating Agreement will be forthcoming” left terms open for future negotiation, but the court held that the PA contained all material terms and was sufficiently definite. “Whether or not a joint operating agreement is often used in these circumstances, and despite the ‘forthcoming’ language, the Participation Agreement contains all of the material terms and is sufficiently definite to constitute a binding contract to drill and complete the test well.” Finally, Participant contended that the representation that a JOA would be forthcoming created a fact issue as to whether there was a meeting of the minds on the essential terms of the PA and that the PA was ambiguous as to whether it was to be a final agreement. The court held that the PA contained no language subjecting it to the JOA and that the reference thereto did not affect the finality or enforceability of the PA, nor render it ambiguous.

Of course the JOA should have been included in the package of documents sent to Participant, and then there would have been nothing to dispute. The industry expects that the details of participating in a well will be included in a JOA, but the significance of the case is the holding that only the broad terms of a contract are necessary to form an enforceable agreement to participate in a well.