Face Challenges Confidently

117 Energen Resources MAQ, Inc. v. Dalbosco

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.
Energen Resources MAQ, Inc. v. Dalbosco, 2000 Tex. App. LEXIS 4039 (Tex. App.—Houston [1st Dist.]), is an interesting case that relies upon custom and usage in the oil and gas industry to impose liability on an operator who abandons a well without notice to the non-operators. Dalbosco farmed out leases to Energen’s predecessor, Energen drilled a producing well, and Dalbosco backed in to a working interest at payout. No written operating agreement was ever executed. When the well stopped producing, Energen plugged and abandoned without notice to Dalbosco.
In the first trial, a summary judgment for Energen was affirmed on all claims, except as to whether there was a contractual duty based on custom and usage in the oil and gas industry, which was remanded to the trial court as an issue of fact. At the second trial, Dalbosco was successful in obtaining favorable jury findings as to the existence of the duty to give notice based on custom and usage, and he recovered actual damages and attorney’s fees. The jury issue presented at the second trial read as follows:
Did the custom and usage in the oil and gas industry in 1981 impose a contractual duty on Defendant to provide notice to Don Dalbosco of its intent to abandon and plug the McDuffie No. 1 well before the expiration of the McDuffie lease?
The court relied heavily upon the Texas Supreme Court opinion in Barreda v. Milmo Nat’l Bank, which held that “the general rule regarding custom and usage, in the case of contract, is that the custom and usage must be so general that both parties are presumed to be aware of the custom or usage, or that the parties have actual knowledge of the custom or usage, and the parties are charged with having contracted with reference to the custom or usage.”
There were at least three witnesses who presented some evidence which tended to support Dalbosco’s position as to the custom and usage in the industry. The witnesses included Energen’s former attorney who testified that form operating agreements entered into over the years by Energen had notice provisions triggered by the plugging and abandonment of a well. On appeal, there was a “no evidence” point, but there was no issue challenging the sufficiency of the evidence. The court did not have any difficulty in finding some evidence of custom and usage, and therefore it overruled the “no evidence” point.
Energen sought to avoid the effect of the jury’s finding by contending that there was no express jury finding that Energen knew of the existence of the custom or that Energen contracted with reference to that custom. The court found that it was not Dalbosco’s burden to prove that Energen knew of the custom or contracted with reference to it, but rather it was Energen’s burden to rebut the presumption that the parties specifically contracted with reference to the custom.
Energen also raised as a defense the exculpatory clause in its farmout agreement, which provided:

A.  Compliance with Laws and Lease Obligations: Farmee agrees to use its best efforts to observe, perform and comply with all of the conditions and covenants, expressed and implied, of the oil and gas leases, and instruments to which such leases are subject, covering the drillsite of any well, and all laws, rules, regulations and orders, both State and Federal, relating to the ownership and enjoyment and the development and operations of the acreage covered by such leases, and Farmee will use its best efforts to maintain all rights in the acreage, but Farmee shall incur no liability to Farmor as a result of its failure to maintain the interest of both Farmor and Farmee hereunder, all or any of their rights in said acreage, or any part thereof. [emphasis added].

The court rejected this defense and held that Dalbosco was not suing “for loss of any rights in the acreage . . .,” but “for breach of a contractual duty to give notice imposed by custom and usage.” There is no further explanation of the court’s reasoning, but presumably the greater part of Dalbosco’s damages would be measured “by the loss of any rights in the acreage.” The damages for failure to give notice, other than the damages for “the loss of rights in the acreage,” would probably be negligible. Perhaps the court was referring to the salvage value of the personal property associated with the well, but the salvage value of a typical well would not equal 10% of the damages awarded in this case.
The value of the case as a precedent is further reduced by the fact that there was some evidence that Dalbosco and Energen’s landman actually discussed and reached an express agreement on Dalbosco’s right to take over the well.  Thus, the holding is limited by the court’s opinion that:

The presumption that the parties dealt with reference to the custom was not rebutted. To the contrary, a reasonable inference could be drawn from the “handshake deal” between Dalbosco and a representative of Energen’s predecessor that the parties specifically contracted with reference to the custom.

The case is unusual because there was no written operating agreement, there was no challenge to the qualifications of Dalbosco’s experts or to the factual sufficiency of their opinions, and there may have been an express agreement on the right to take over operations. Nevertheless, the case is now some authority that the operator who plugs and abandons a well without notice to the non-operators is assuming a significant risk, unless there is some very clear contractual agreement that the operator is under no duty to give notice or to permit a non-operator to take over the well.