554 S.W.3d 607
Tex.2018Background
- XOG assigned ~1,625.8 acres to Chesapeake by a 2‑year term assignment that would revert at term end except for acreage “included within the proration or pooled unit of each well” producing or capable of producing in paying quantities. The assignment defined “proration unit” as the area “then established or prescribed by field rules or special order” or, absent those, a deemed 320‑acre square.
- Chesapeake drilled/completed 6 wells during the primary term; 5 were in the Allison‑Britt Field (which has Railroad Commission field rules prescribing a 320‑acre proration unit, with up to 10% tolerance) and 1 in the Stiles Ranch Field (no field rules).
- Chesapeake filed Form P‑15s assigning proration units for wells; XOG contended acreage retained by Chesapeake should be the acreage the operator assigned on P‑15s (totaling ~800 acres plus small additions), while Chesapeake argued it retained acreage “prescribed by field rules” (320 acres per well, plus 320 deemed acres for the field without rules, totaling 1,920 acres).
- Chesapeake refused to reassign any acreage; XOG sued for construction of the retained‑acreage clause. The trial court granted summary judgment for Chesapeake; the court of appeals affirmed. The Supreme Court granted review.
- The central contractual text equates acreage “included within the proration … unit” with the area “then … prescribed by field rules,” and provides a 320‑acre deemed unit in the absence of field rules.
Issues
| Issue | Plaintiff's Argument (XOG) | Defendant's Argument (Chesapeake) | Held |
|---|---|---|---|
| Whether retained acreage is measured by operator‑assigned proration units (P‑15s) or by proration units “prescribed by field rules” | XOG: Only an operator can “include” acreage within a proration unit by filing a P‑15/plat; the clause should be read to mean operator‑assigned acreage | Chesapeake: The assignment’s text ties retained acreage to acreage “prescribed by field rules,” and absent rules a 320‑acre unit is deemed; thus field rules control | Court: Field rules control; where rules prescribe 320‑acre units Chesapeake retained 320 acres per well and retained a deemed 320 acres where no rules applied |
| Effect of “included within” language on whether operator filings matter | XOG: “Included within” limits retention to acreage an operator actually included via P‑15s | Chesapeake: The provision equates “included within” with acreage “prescribed” by field rules and provides a deemed 320 acres absent rules, so operator filings are not required to fix retention | Court: The text equates the terms; “included within” refers to the acreage prescribed or deemed by the field rules, not only operator filings |
| Whether this case should be governed by the Court’s holding in Endeavor (operator assignment interpretation) | XOG: Endeavor supports operator‑assignment reading; identical practical effect should follow here | Chesapeake: Endeavor is distinguishable; that case involved proration language tied to a unit “assigned to a well” and the field rules there treated assignment differently | Court: Distinguishable—Endeavor did not involve field rules that “prescribe” a proration unit; here the rules prescribe a 320‑acre unit, so Endeavor does not control |
| Whether ambiguity in contract should be resolved against reading that reduces XOG’s interest | XOG: If the clause is ambiguous, it should be construed to limit Chesapeake’s retention | Chesapeake: Contract language is plain and ties retention to field rules and the deemed 320‑acre rule | Court: Language is plain; even if XOG’s reading were reasonable, special restriction on conveyance requires very clear language, which is lacking; reject XOG’s reading |
Key Cases Cited
- Jones v. Killingsworth, 403 S.W.2d 325 (Tex. 1965) (Railroad Commission may prescribe unit size while permitting operator assignments)
- Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002) (special limitations on conveyances require clear, precise, unequivocal language)
- Seagull Energy E & P, Inc. v. R.R. Comm’n, 226 S.W.3d 383 (Tex. 2007) (field rules and commission authority relevant to conservation and proration units)
- Philadelphia Indem. Ins. Co. v. White, 490 S.W.3d 468 (Tex. 2016) (parties are presumed to know the law when contracting)
- Greater Houston Transp. Co. v. Phillips, 801 S.W.2d 523 (Tex. 1990) (legal presumption that parties know the law)
- Mengden v. Peninsula Production Co., 544 S.W.2d 643 (Tex. 1976) (term assignment/farmout agreements explained)