622 S.W.3d 884
Tex.2021Background
- Lease: top lease covering ~30,450 acres in Ward County, Texas, with three areas (two "Producing Areas" and the remainder); six-year primary term beginning Aug. 4, 2000.
- Paragraph 7(b): lessee must spud the first continuous development well by the sixth anniversary, and thereafter no more than 120 days may elapse between completion/abandonment of one well and commencement of "drilling operations" on the next.
- Paragraph 18: defines "drilling operations" to include (1) drilling/testing/completing/equipping (including spud-in), (2) reworking (fracturing/acidizing), and (3) reconditioning/deepening/plugging back/repairing/testing a well; the definition applies "whenever" the term is used in the lease.
- Sundown spudded three development wells before the sixth anniversary and, from 2006–2015, conducted extensive activity (including 14 wells and ~$40 million in work) characterized as "drilling operations."
- HJSA sued (2016) seeking a declaration that the lease terminated as to non-producing tracts because Sundown failed to timely spud new wells within 120-day windows; trial court granted partial summary judgment for Sundown; the court of appeals reversed on contract-construction grounds.
- Texas Supreme Court held Paragraph 18’s definition controls "drilling operations" in Paragraph 7(b), concluded Sundown timely performed the defined drilling operations, reversed the court of appeals in part, rendered judgment for Sundown on the contract issue, and remanded.
Issues
| Issue | Plaintiff's Argument (HJSA) | Defendant's Argument (Sundown) | Held |
|---|---|---|---|
| Meaning of "drilling operations" in ¶7(b) | Means only spudding-in new wells (120-day spud requirement) | ¶18 expressly defines "drilling operations" broadly and applies "whenever" term is used | ¶18 applies; "drilling operations" includes activities beyond spudding-in |
| Whether ¶7(b) is a special limitation that terminates lease for missed spuds | ¶7(b) imposes a strict spud-every-120-days obligation that terminated non-producing tracts when missed | ¶7(b) delays reassignment if lessee engages in the defined "drilling operations," which Sundown did | No termination; Sundown’s timely defined drilling operations delayed reassignment |
| Whether Emerald Oil compels a different result | Emerald Oil should bar plugging ¶18 into ¶7(b) to impose broader duty | Emerald Oil is distinguishable—no conflicting definitions here; ¶18 controls | Emerald Oil is distinguishable and does not alter result |
Key Cases Cited
- Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W.3d 194 (Tex. 2011) (addressed limits on applying a general defined term when a development clause imposes a different duty)
- Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586 (Tex. 2018) (principles governing lease construction and review standards)
- URI, Inc. v. Kleberg County, 543 S.W.3d 755 (Tex. 2018) (review of contract-construction and ambiguity as questions of law)
- FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) (defined terms in contracts are given controlling force)
- Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132 (Tex. 1994) (primary principle: give effect to parties’ written intent)
- Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640 (Tex. 1996) (courts must enforce bargains and may not rewrite contracts)