Face Challenges Confidently

111 Lazy M Ranch, Ltd. v. TXI Operations, L.P.

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.
Lazy M Ranch, Ltd. v. TXI Operations, LP, 978 S.W.2d 678 (Tex. App.—Austin 1998, pet. denied) considers the consequences of unauthorized mineral exploration outside a permitted area. TXI and Lazy M executed a written contract granting TXI the right to explore for sand, gravel, and other construction materials by conducting subsurface tests on a specific 1,669 acres of the Lazy M. In the contract, Lazy M also granted TXI an irrevocable option to lease 300 of the 1,669 acres to mine for sand and gravel. The contract provided a specific time period in which TXI had to exercise the option to lease the land for a set consideration. When TXI attempted to exercise the option, Lazy M refused to lease any of the land to TXI because TXI had allegedly breached the contract by entering upon and testing on ranch land outside the 1,669 acres specified in the contract. TXI then sued Lazy M and was granted specific performance on a motion for summary judgment.
A party to a contract may terminate a contract and be excused from performance of any future obligation if the other party repudiates the contract or commits a “material” breach. The Court of Appeals acknowledged that refusing to enforce the contract against Lazy M would effectively forfeit TXI’s right to an option, and that forfeitures are to be avoided unless enforcement of the contract would be unreasonable, inequitable and oppressive. Lazy M’s summary judgment evidence established that TXI had repeatedly explored outside the contractually permitted area, and that TXI’s trespasses were intentional and repeated over several protests by Lazy M. The Court of Appeals employed a “fairness” test and considered the following factors from the Restatement of Contracts (Second) §241(a) (1981) in reaching its decision that the contract was unenforceable against LazyM:

  1. the extent to which the injured party [Lazy M] can be adequately compensated for the part of the benefit of which he will be deprived;
  2. the likelihood that the party failing to perform [TXI] will cure his failure, taking into account all of the circumstances including any reasonable assurances; and
  3. the extent to which the behavior of the party [TXI] failing to perform comports with standards of good faith and fair dealing

Lazy M also alleged that TXI had “unclean hands” and was not entitled to the equitable remedy of specific performance. Under the doctrine of “unclean hands,” a court can refuse to grant equitable relief (specific performance) to a plaintiff who has been guilty of unlawful or inequitable conduct regarding the issue in dispute.  The Court of Appeals ruled that the doctrine of “unclean hands” applied as TXI’s misconduct was directly related to the contract for which TXI sought specific performance. The summary judgment was reversed and the case was remanded to the trial court.
The significance of this case is that if a mineral interest owner and an exploration company execute a seismic permit and lease option agreement, and the exploration company shoots seismic or conducts other exploration operations outside the area permitted by the agreement, the company could lose its right to lease the mineral interest owner’s lands.