560 S.W.3d 105
Tex.2018Background
- Two essentially identical 2009 oil-and-gas leases for adjacent 302‑acre tracts included an "offset" clause triggered when an adjacent producing well is completed within 467 feet; lessee (Murphy) then must within 120 days either (1) commence drilling an offset well on the leased acreage to a depth testing the same formation, (2) pay compensatory royalties, or (3) release acreage.
- Comstock drilled the Lucas horizontal well in the Eagle Ford Shale 350 feet from the lease boundary, triggering the clause.
- Murphy drilled the Herbst horizontal well on the leased acreage within 120 days and tested the Eagle Ford formation, but its lateral and perforations were ~1,800–2,100 feet from the lease line/triggering well; Murphy paid royalties on production.
- Lessors/royalty owners (Herbst) sued for breach, arguing an offset well must be located close enough to protect against drainage; Murphy sought declaratory relief asserting compliance with the clause as written.
- Trial court granted Murphy summary judgment; the court of appeals reversed, holding Murphy failed to conclusively prove the well satisfied the commonly understood meaning of an "offset well." The Texas Supreme Court granted review.
- The Supreme Court (majority) reversed the court of appeals, holding the lease’s plain text required only drilling on the leased acreage to a depth adequate to test the same formation and, in the horizontal-shale context of these leases, no proximity/drainage requirement should be implied; judgment for Murphy reinstated (appellate fees removed). Justice Johnson dissented, arguing the term "offset well" retained its industry meaning (protection from drainage) and the clause is ambiguous.
Issues
| Issue | Plaintiff's Argument (Herbst) | Defendant's Argument (Murphy) | Held |
|---|---|---|---|
| Interpretation of "offset well" clause — does it require proximity/drainage protection? | "Offset well" means a well placed close to the lease line to protect against drainage; proximity implied. | Clause requires only commencement on leased acreage and drilling to a depth adequate to test the same formation; no proximity/drainage requirement. | Majority: The clause's plain language governs; in the horizontal shale context the lease does not impose a proximity/drainage requirement — Murphy complied. Dissent: "offset" retains industry meaning; clause is ambiguous. |
| Use of extrinsic evidence (horizontal drilling context) to interpret lease | Herbst: surrounding circumstances and industry usage support implying proximity/draintage meaning. | Murphy: lease language controls; but horizontal-drilling context shows minimal drainage risk, supporting plain-text reading. | Majority: Context (horizontal drilling) may inform meaning and supports plain-text interpretation. Dissent: Court improperly uses post‑execution technical materials and ignores lessors' deposition evidence; ambiguity remains. |
| Whether summary judgment was proper | Herbst: Ambiguity and factual dispute (did well protect against drainage?) make summary judgment improper. | Murphy: Unambiguous lease language; Murphy met its obligations, so summary judgment appropriate. | Majority: Summary judgment proper for Murphy. Dissent: Summary judgment improper because reasonable alternative interpretation exists — remand required. |
| Effect of clause on implied covenant to protect from drainage | Herbst: clause is a deemed‑drainage protection and should be read consistent with industry use and implied covenant principles. | Murphy: The express clause defines the duty and supersedes implied covenant elements; it need not require proximity. | Majority: The express terms control; they do not include a proximity requirement here. Dissent: Clause should be read consistent with traditional offset meaning that preserves protection against drainage. |
Key Cases Cited
- Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005) (standard of review for summary judgment)
- Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011) (contract interpretation begins with the instrument's language)
- URI, Inc. v. Kleberg County, 543 S.W.3d 755 (Tex. 2018) (surrounding circumstances may inform but not contradict unambiguous contract language)
- Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W.3d 194 (Tex. 2011) (will not impose more stringent obligation than expressly defined)
- Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1 (Tex. 2008) (discussion of drainage and remedies, including offset wells)
- Amoco Prod. Co. v. Alexander, 622 S.W.2d 563 (Tex. 1981) (implied covenant and protection against drainage)