Sun Operating Ltd. Partnership v. Holt
1998 WL 758433, 984 S.W.2d 277 (1999)
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Rule of Law:
The enforceability and scope of an oil and gas lease's force majeure clause and cessation of production clause are primarily governed by the express terms of the contract, which override common law rules or implied duties not explicitly stated, and leases are generally considered indivisible unless the contract explicitly provides for divisibility of specific covenants.
Facts:
- In December 1947, two oil and gas leases were executed, with the Holts succeeding to the lessors' interests and the Sun Parties to the lessees' interests.
- The leases included a habendum clause providing for a 10-year primary term and "as long thereafter as oil, gas or other mineral is produced," or "as long thereafter as Lessee shall conduct drilling or re-working operations thereon with no cessation of more than sixty consecutive days until production results."
- The leases also contained a force majeure clause, specifying events like "failure of carriers to transport or furnish facilities for transportation, or as the result of any cause whatsoever beyond the control of the Lessee," which would delay or interrupt drilling or other operations without counting against the lessee.
- Lessees drilled wells and extracted gas in paying quantities until April 11, 1983.
- On April 11, 1983, Panhandle Eastern Pipeline Company began major repairs on its transmission line 200, the sole connection for gas transportation from the leased wells, causing production to cease.
- Production from the wells ceased for more than 60 consecutive days, specifically until September 23, 1983, although the wells were capable of producing throughout this period.
- Separately, Vantage Point Energy, Inc., through an assignment from Oakwood Resources, Inc., acquired the sole well on Section 156 of one of the leases (Holt #1-156).
- During the period of non-production, Oakwood Resources, Inc. paid $50 as a shut-in royalty to the Holts for the Holt #1-156 well.
Procedural Posture:
- The Holts sued Sun Operating Limited Partnership and others (Sun Parties) in the trial court (court of first instance) for a judgment declaring that two oil and gas leases had terminated and for damages.
- The trial court conducted a bifurcated trial by jury.
- During the liability phase, the trial court submitted a single question to the jury regarding whether the failure to produce was solely caused by "force majeure," accompanied by an instruction that the well operators "must have exercised due diligence and taken all reasonable steps to avoid, remove and overcome the effects of 'force majeure'."
- The jury answered "no" to the force majeure question.
- Based on the jury's finding, the trial court entered judgment declaring that the leases were terminated and subsequently awarded damages to Elizabeth and Robert Holt.
- The trial court granted an instructed verdict in favor of Vantage Point Energy, Inc., a sub-assignee, determining that Oakwood's $50 shut-in royalty payment for the Holt #1-156 well maintained that portion of the lease.
- Both the Sun Parties and the Holts appealed the final judgment to the Court of Appeals of Texas, Amarillo. The Sun Parties, as appellants, alleged errors regarding the temporary cessation rule and the force majeure instruction, among others. The Holts, as appellants, challenged the instructed verdict regarding shut-in royalties and estoppel.
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Issue:
1. Does the common law rule of temporary cessation of production apply to prevent an oil and gas lease from terminating when the lease contains a specific cessation of production (CPL) clause that outlines a time limit for resuming drilling or reworking operations? 2. Is it proper for a court to instruct a jury that a lessee must exercise due diligence to avoid, remove, and overcome the effects of a force majeure event if the force majeure clause in the lease does not expressly impose such a duty? 3. When a force majeure clause lists specific events and concludes with a catch-all phrase "or as the result of any cause whatsoever beyond the control of the Lessee," does the "beyond the control" requirement apply to all the preceding enumerated events? 4. Can an assignee of a segregated portion of an oil and gas lease maintain their interest by making a partial shut-in royalty payment for only the wells on their assigned tract, when the lease consistently treats the entire acreage as a unit for royalty purposes and does not specify divisibility for shut-in royalty obligations?
Opinions:
Majority - Quinn, Justice
No, the common law rule of temporary cessation of production does not apply when the lease contains a specific cessation of production (CPL) clause. The court reasoned that a CPL clause expressly states the conditions for maintaining a lease once production stops (e.g., initiating drilling or reworking within 60 days), and the parties are bound by this contractual agreement, regardless of the reason for cessation, even if the wells are capable of producing. The court declined to create an exception to Samano v. Sun Oil Co. (621 S.W.2d 580) for cessations not caused by depletion or mechanical problems, emphasizing that parties should explicitly include such exceptions if desired. No, it is improper to instruct a jury that a lessee must exercise due diligence to avoid, remove, and overcome the effects of a force majeure event if the lease's force majeure clause does not expressly impose such a duty. The court stressed that the scope and application of force majeure are "utterly dependent upon the terms of the contract" (Hydrocarbon Management, Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427). Introducing an unstated duty would rewrite the contract, which courts are not at liberty to do, especially if it would lead to a forfeiture. The court noted that concerns about lessee inaction are addressed by implied duties of an oil and gas lessee (e.g., to develop, protect, manage, and market the leasehold). The erroneous instruction was deemed harmful as it likely led to an improper judgment. Yes, when a force majeure clause lists specific events (like failure of carriers to transport) and concludes with a catch-all phrase "or as the result of any cause whatsoever beyond the control of the Lessee," the "beyond the control" requirement applies to all the preceding enumerated force majeure events. The court adopted this interpretation based on grammatical construction, finding that the juxtaposition of the general control language at the end modifies the preceding specific events (PPG Industries, Inc. v. Shell Oil Co., 727 F.Supp. 285; Hydrocarbon Management, Inc.). Therefore, for the failure of Panhandle to transport gas to qualify as a force majeure event, the Sun Parties needed to demonstrate it was beyond their reasonable control. Yes, the phrase "other operations" in the force majeure clause encompasses the production of minerals. The court interpreted "operation" using its plain, ordinary meaning as an overall process to achieve a particular end, which, in an oil and gas lease, includes developing, obtaining production, and marketing. The court reasoned that including "failure of carriers to transport" as a force majeure event logically implies that "other operations" must include production, as transportation only occurs after production. No, a shut-in royalty clause does not supersede a force majeure clause, especially when the force majeure clause contains the phrase "anything in this lease to the contrary notwithstanding." This phrase demonstrates the parties' intent to allow reliance on the force majeure clause regardless of other lease provisions, including the availability of alternative means to maintain the lease like shut-in royalty payments (Skelly Oil Co. v. Harris, 352 S.W.2d 950). No, the partial payment of a shut-in royalty by an assignee for only the wells on their assigned tract cannot maintain their segregated interest when the lease treats the entire acreage as a unit. The court found that the lease consistently referred to the property as "said land" and that the habendum clause is generally indivisible unless the lease specifies otherwise. Since the lease only provided for divisibility concerning delay rentals, and not shut-in royalties, the $50 "per well" payment meant $50 for each well on the entire unit of land described in the lease, not just wells on the assignee's segregated portion. No, the Holts' acceptance of the $50 payment from Oakwood did not, as a matter of law, estop them from claiming the lease expired. For estoppel to apply, the recipient must have accepted the benefit with knowledge of all material facts. Vantage failed to prove that the Holts knew of Vantage's specific claim that the payment would modify the lease to create distinct parcels.
Analysis:
This case significantly reinforces the principle of strict contractual interpretation in Texas oil and gas law, particularly regarding habendum and force majeure clauses. It underscores that parties' express agreements supersede common law or implied duties when the contract provides specific terms, cautioning against judicial rewriting of contracts. The ruling clarifies the scope of "other operations" to include production and establishes how catch-all "beyond control" language in force majeure clauses modifies preceding enumerated events. Furthermore, it affirms the indivisibility of oil and gas leases for shut-in royalty purposes unless explicitly stated otherwise, providing crucial guidance for lessees and lessors on the precise requirements for maintaining leases, especially after assignments.
