397 EOG Resources Inc. v. Hurt

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
EOG Resources, Inc. v. Hurt, 357 S.W.3d 144 (Tex. App.—Fort Worth, 2011, pet. denied) held that an oil and gas lessee was not obligated to compensate lessor’s tenant for the tenant’s lost cattle, because lessor’s tenant was not a third party beneficiary of the oil and gas lease.  The owners of Standard Investment Company (“SIC”) included John E. Houston and Molly D. Houston, and SIC held the executive right over the Houston Ranch.  In 2004, SIC, as Lessor, and Lessee entered into an oil and gas lease covering the Houston Ranch.  In 2005, SIC leased the grass on the Houston Ranch to Hurt for one year to graze cattle.  In 2006, “Molly Houston (in care of Jim Howard . . .)” leased the grass to Hurt for another one year term.  The grass lease expired by its terms in 2007, but apparently the parties kept operating under it.  In 2008, Hurt lost some cattle through a break in the fence near one of Lessee’s wells.  Hurt argued that he was a “Lessor’s tenant” pursuant to Section 13(d) of the oil and gas lease.  Section 13(d) states in relevant part:
 
“(d) Lessee will not cut or go over any fence or fences of Lessor, or Lessor’s tenant, at any time or in connection with any operations of the Land without first obtaining Lessor’s and Lessor’s tenant[’]s, expressed consent thereto in writing . . . .  Lessee agrees to pay to Lessor the replacement cost for any livestock lost or killed as a result of Lessee’s operations upon the Land or Lessee’s entry or exit from the Land.”
 
Hurt sued Lessee for breach of contract under the oil and gas lease, alleging he was a third-party beneficiary.
 
“A third party may recover on a contract made between other parties if the parties (1) intended to secure a benefit to that third party and (2) entered into the contract directly for the third party’s benefit.”  “[A] party is presumed to contract only for its own benefit, and any intent to benefit a third party must be clearly apparent and will not be presumed.”  The court explained that “to qualify as an intended third-party beneficiary, a party must show that she is either a ‘donee’ or ‘creditor’ beneficiary of the contract.”  “A creditor beneficiary is a third person to whom the contract promisee owes a debt, contractual obligation, or other legally enforceable commitment.”
 
Here, the oil and gas lease was made and entered into between Lessee and SIC.  In exchange for royalties paid by Lessee to SIC, Lessee acquired the right to explore and develop the Houston Ranch.  The obligations set out in the oil and gas lease run between the Lessee and SIC and an examination of the entire instrument confirmed neither Lessee nor SIC intended to confer a benefit to Hurt when they executed the oil and gas lease.
 
The court also determined that Hurt was not “Lessor’s tenant” because his grass lease with SIC expired by its own terms in January 2006.  There was no evidence that SIC renewed the grass lease, nor was there any evidence that SIC, the holder of the executive right, even had the power to grant a grass lease.  Finally, Section 13(d) of the oil and gas lease requires Lessee to pay replacement costs for lost livestock to only the “Lessor,” not to the “Lessor’s tenant.”
 
The case is consistent with other cases involving third party beneficiaries.  Establishing a donee or creditor third party beneficiary is difficult.  Surface use provisions or landowner addendums to oil and gas leases are notoriously sloppy in establishing rights and obligations as between lessee and lessor’s tenant.