Face Challenges Confidently

073 Grace Petroleum Corp. v. Williamson

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.
Grace Petroleum Corp. v. Williamson,, S.W.2d(No. 12-93-00101-CV, Tex. App. Tyler, May 12, 1995) considered whether a breach of the lease covenants to prevent drainage and to reasonably develop would support an award of exemplary damages. In 1980 lessee Grace prepared a unit designation that included the Williamson lease in the plat, but failed to include the lease among the schedule of pooled leases. Grace then sent its employee Wheeler to see the Williamsons to secure a lease extension and a ratification of the unit. The Williamsons agreed orally to Wheeler’s request but then decided to confer with an attorney to further review the transaction. The lawyer then arranged for Wheeler’s representations of Grace’s future pooling intentions to be reduced to writing. “When a well is drilled adjoining the above mentioned tract, it is the intention of Grace, et al., to place all of the remaining acreage from the Williamson leases into the units being formed.”
Several units were subsequently formed and then re-formed, and it is not clear what happened to the Williamson lease. However, by 1984 and 83 acres of the Williamson lease were left out of all the surrounding units. At trial, Williamson recovered $25,000 in damages for drainage and $500,000 in exemplary damages. Williamson obtained an express jury finding that Grace (Wheeler) made fraudulent representations that it would place all of the lease acreage into units. The issue on appeal was whether exemplary damages were recoverable on a claim for breach of contract.
Held: the award of exemplary damages were reversed and rendered so that the award of exemplary damages was stricken. Under Texas law, exemplary damages are not awarded for breach of contract, but may be awarded for tort claims, such as fraud. The courts are struggling to made that distinction in cases involving “contorts,” that is cases in which contract issues and tort issues (e.g., fraud) are mixed. A contractual relationship may create duties under both contract and tort law. This court said it is the nature of the injury that most often determines which duty has been breached. To recover in tort, Williamson must prove a “distinct” tortious injury with actual damages arising from that injury. The court found that even though Williamson proved a tort (the fraud), there was not proof of any damage separate and apart from the drainage. This was an economic loss to the subject matter of an enforceable contract, meaning a contract loss.
The significance of the case is that it establishes a precedent for “failure to pool” cases being limited to economic damages for drainage, even when the lessee fraudulently represented that an actual pooling would occur. Perhaps the case may be limited to its facts and the limited proof offered at trial. If the lessor entered into a lease (or renewal) in reliance on such a representation and lost some other opportunity to lease, then there may be other damages (lost bonus, lost pooling into some other unit).