917 F.3d 807
4th Cir.2019Background
- Pine Resources sold Marcellus mineral rights on the 565-acre Langley tract to PetroEdge in a 2008 Purchase and Sale Agreement (PSA), retaining an 18% overriding royalty on hydrocarbons “produced from or attributable to” the sold minerals.
- The PSA obliged the purchaser to obtain a meter tap and to “spud” three wells: one within one year after the meter tap and three within five years; "spud" was not defined; Pine allowed horizontal wells that merely traverse the tract to satisfy the obligation.
- PetroEdge obtained extensions of the spud deadlines in exchange for consideration; it began drilling the first well (Bumgardner 5-2H) which penetrated the Langley tract but was never completed or produced hydrocarbons.
- PetroEdge sold its interest to Statoil (later Equinor), which assumed contractual obligations; Statoil thereafter refused to complete the first well or drill the remaining wells and sold its interest in 2015.
- Pine Resources sued for breach of the spudding obligation; the district court found the PSA ambiguous on whether “spud” required production, admitted extrinsic evidence, concluded no production obligation existed, and awarded no damages for lack of proof. This Court affirms.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the PSA’s requirement to “spud” three wells require completion to production or only commencement of drilling? | Pine: "spud" should be read in context of the PSA (royalty, abandonment, cooperation provisions) to require completion and production. | Statoil: "spud" has its plain industry meaning (begin drilling); PSA contains no production requirement; obligations extended only to purchaser (earlier summary-judgment argument). | The term “spud” is ambiguous in context, but extrinsic evidence supports the conclusion that it means commencing drilling, not a production/completion obligation. |
| Whether extrinsic evidence (negotiations, deadline extensions, correspondence, testimony) shows parties intended a production requirement | Pine: Deadline extensions, Pine’s testimony, and letters show parties intended wells to be completed and produce. | Statoil: Extrinsic evidence (PetroEdge’s own statements, purchase schedule, expert testimony) shows parties treated spud as satisfied by beginning drilling. | District court credibility findings and record support that parties did not require production; this Court defers to those findings. |
| Whether Pine proved damages resulting from Statoil’s breach (failure to spud remaining wells) | Pine: Lost future royalties from wells would be damages from breach. | Statoil: Pine presented no evidence of damages caused solely by failure to begin drilling the remaining wells; damages alleged tied to production which was not required. | Pine failed to prove recoverable damages with reasonable certainty; no damages awarded. |
| Standard of review for contract interpretation and factual findings | Pine: (implicit) court should find for plaintiff on ambiguous language and weigh extrinsic evidence in their favor. | Statoil: (implicit) de novo review of contract law, defer to factual findings on credibility. | Contract interpretation reviewed de novo; factual findings and credibility reviewed for clear error—district court’s mixed findings affirmed. |
Key Cases Cited
- Dan Ryan Builders, Inc. v. Crystal Ridge Dev., Inc., 783 F.3d 976 (4th Cir. 2015) (standards for reviewing bench-trial judgments: factual findings for clear error, legal conclusions de novo)
- Anderson v. City of Bessemer City, 470 U.S. 564 (U.S. 1985) (appellate deference to district court’s factual findings where plausible)
- U.S. Gypsum Co. v. United States, 333 U.S. 364 (U.S. 1948) (appellate reversal of factual findings only when clearly erroneous)
- Zimmerer v. Romano, 679 S.E.2d 601 (W. Va. 2009) (court’s duty to ascertain parties’ intent from contract language)
- Dunbar Fraternal Order of Police, Lodge No. 119 v. City of Dunbar, 624 S.E.2d 586 (W. Va. 2005) (contract clauses should not be treated as meaningless; read contract as a whole)
- Faith United Methodist Church & Cemetery of Terra Alta v. Morgan, 745 S.E.2d 461 (W. Va. 2013) (extrinsic evidence not admitted to vary unambiguous contract terms)
- Payne v. Weston, 466 S.E.2d 161 (W. Va. 1995) (language is ambiguous when reasonably susceptible to two meanings)
- Caltex Oil Venture v. Commissioner of Internal Revenue, 138 T.C. 18 (T.C. 2012) (defining industry usage of “spud” as beginning drilling)