Lead Opinion
MAJORITY OPINION
In this contract-interpretation case, we determine whether the trial court properly granted summary judgment in favor of the operator of an oil and gas lease based on language in two joint operating agreements pertaining to the parties’ notification of intent to participate in proposed drilling operations. A non-operator working-interest owner brought breach-of-contract claims against the operator under these two agreements, seeking specific performance as well as damages. The trial court granted summary judgment in favor of the operator. We must determine whether, under the agreements, a party who has received notice of a proposed
I. Factual and Procedural Background
At the times relevant to this appeal, appellee Smith Production Inc. (“Smith”) was an operator under two joint operating agreements (“JOAs”)
In May 2004, Chevron contracted to sell certain oil and gas properties to appellant XTO Energy Inc. (“XTO”), including Chevron’s working interest in the Lease. A Chevron vice-president, who was in charge of the assets being sold, directed Chevron employees to operate under “the guidelines of business as usual” with respect to any properties involved in the transfer. As part of her directive, the vice-president advised employees by email as follows:
The Asset Sale Agreement does not require that we need to obtain XTO’s consent for AFE’s [authorization for expenditures], purchases[,] or new drills; however, we should consult with XTO as a courtesy on any significant (over $100,000) matters considering that the effective date of the transaction is January 1, 2004 and all expenses will be deducted from the purchase price. We should not go non-consent on any AFE’s without prior consultation with XTO.
Under the JOAs, in May and June of 2004, Smith gave written notices to the Non-Operating Interest Owners of its proposal to drill four more wells on the Lease. Under the JOAs, the Non-Operating Interest Owners had thirty days after receipt of the notices within which to notify Smith whether they would elect to participate in the cost of the proposed operations. After analyzing geological data and other information, Chevron decided that it did not wish to participate in the costs of the four proposed wells. Without consulting with XTO and within the thirty-day period for responding, Chevron notified Smith that it elected not to participate in the cost of the four proposed wells.
When Chevron notified Smith of its elections on June 17, 2004, all the other Non-Operating Interest Owners already had notified Smith of their elections to participate in the cost of the four wells. Shortly after receiving Chevron’s notification, Smith advised the other Non-Operating Interest Owners of the total interest of the parties approving the operations. By June 22, 2004, the other Non-Operating Interest Owners all advised Smith that they agreed to carry their proportionate share of Chevron’s interests. On June 24, 2004, still within thirty days of Chevron’s receipt of Smith’s notices proposing the four wells, Chevron sent Smith a letter containing four signed AFEs. In this letter, Chevron stated that it elected to participate in the cost of the four proposed wells and that it
In a letter Smith responded by asserting that Chevron could not revoke its prior notifications and that Smith still considered Chevron’s June 17, 2004 elections to be effective. Because of this position, Smith treated Chevron as a “Non-Consenting Party” rather than a “Consenting Party” under the JOAs. Treating Chevron as a Non-Consenting Party would mean that, under a provision of the JOAs, upon commencement of operations for the drilling of the four wells in accordance with the JOAs, Chevron would be deemed to have relinquished to the other parties, and the other parties would own and be entitled to receive, in proportion to their respective interests, all of Chevron’s interest in the well and share of production therefrom until the proceeds of the sale of such share, calculated at the well, or market value thereof if such share is not sold, after various deductions, equals the total of the following: 400 percent of Chevron’s share of the costs and expenses of drilling, testing, and completing the new wells after certain deductions, 400 percent of Chevron’s share of the cost of newly acquired equipment in the wells, 100 percent of Chevron’s share of the costs of any newly acquired surface equipment, and 100 percent of Chevron’s share of the well operations costs from the first production until Chevron’s relinquished interests revert to it (“Non-Consent Provision”).
In August 2004, Chevron and XTO closed on the asset purchase agreement, and XTO became the successor in interest to Chevron’s working interest. The four wells at issue have been producing oil, and Smith has been applying the Non-Consent Provision to XTO’s interests. In December 2004, XTO filed suit for breach of contract and specific performance against Smith. XTO claimed that Smith breached the agreement by not accepting Chevron’s notifications purporting to change its elections. XTO asserts that Chevron had the ability to change its elections within thirty days of receiving Smith’s notices proposing the four wells, provided that the other parties had not materially changed their positions in reliance on the initial elections. Therefore, XTO asserts, its interest should not be subject to the Non-Consent Provision. Smith moved for summary judgment on the basis that the unambiguous language of the JOAs does not allow a party to change its election after it has notified the proposing party of its election. XTO submitted two affidavits from an expert in the oil and gas industry who purported to provide opinions as to the custom and trade usage within that industry. The trial court granted Smith’s motion and ordered that XTO take nothing on its claims against Smith. The trial court also struck the expert’s affidavits “to the extent such affidavits attempt to use custom and usage in the industry to establish ambiguity.”
II. Issues PResented
On appeal, XTO argues that the trial court erred in granting Smith’s motion for summary judgment and in striking its expert’s affidavits as to custom and trade usage.
III. STANDARDS OP REVIEW
In a traditional motion for summary judgment, if the movant’s motion and summary-judgment evidence facially establish its right to judgment as a matter of law, the burden shifts to the nonmovant to raise a genuine, material fact issue sufficient to defeat summary judgment. M.D. Anderson Hosp. & Tumor Inst. v. Willrich,
In construing the language of the JOAs, our primary concern is to ascertain and give effect to the intentions of the parties as expressed in the contracts. Kelley-Coppedge, Inc. v. Highlands Ins. Co.,
IV. Issues and Analysis
The language at issue is contained in both JOAs. Article VLB of the JOAs sets forth procedures the parties must follow when a new well is proposed:
*677 B. Subsequent Operations:
1. Proposed, Operations: Should any party hereto desire to drill any well on the Contract Area other than the [initial well], ... the party desiring to drill ... such a well shall give the other parties written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation and the estimated cost of the operation. The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation. If a drilling rig is on location, notice of a proposal to rework, plug back or drill deeper may be given by telephone and the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday, and legal holidays. Failure of a party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.
[[Image here]]
2. Operations by Less than All Parties: If any party receiving such notice as provided in Article VI.B.l .... elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, within ninety (90) days after the expiration of the notice period of thirty (30) days (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on locations, as the case may be) actually commence the proposed operation and complete it with due diligence.
If less than all parties approve any proposed operation, the proposing party immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest of the parties approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. Each Consenting Party, within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after receipt of such notice, shall advise the proposing party of its desire to (a) limit participation to such party’s interest as shown on Exhibit “A” or (b) carry its proportionate part of Non-Consenting Parties’ interests, and failure to advise the proposing party shall be deemed an election under (a).
If the Consenting Parties comply with the requirements of Article VI.B.2., then the interest of any Non-Consenting Party is subject to the Non-Consent Provision discussed above.
A. Is Smith’s construction of Article VI of the JOAs reasonable?
Under Smith’s construction of the JOAs, if, after proper notice of a proposal to drill an additional well under Article VI.B.l.,
There is no provision in the JOAs stating that the proposing party must wait thirty days before it examines elections of the other parties. Rather, under the JOAs, after receiving notice of a proposed operation, a party has thirty days to notify the proposing party whether the receiving party elects to participate in the cost of the proposed operation (“Notice Period”). Failure of the receiving party to give notice of its election within thirty days constitutes an election by that party not to participate. Once a receiving party timely gives notice of its election regarding the drilling operation by properly replying within the thirty days, the Notice Period has expired as to that party. Under the language of the JOAs, a receiving party does not have thirty days to give notice of an election and to give notice of a change in a prior election. Rather, a receiving party only has thirty days to notify of its election. Once all parties have communicated their elections regarding the proposed operation, the Notice Period has expired.
Construing Article VI to not allow changes in election by the receiving parties
B. Is there another reasonable construction of Article VI of the JOAs?
XTO asserts that a reasonable construction of Article VI is that, after receiving proper notice of a proposal to drill an additional well under Article VI.B.l., a party is entitled to change its election within thirty days after receipt of the notice, provided that the other parties have not materially changed their positions in reliance on the initial election. However, this construction is not grounded in the language of Article VI. Article VI contains no reference to whether the other parties have changed their positions in reliance on another party’s election or whether any such change is material. Likewise, the provision contains no reference to a party’s ability to change a prior election. Additionally, if a party could change its election if the other parties had not materially changed their positions in reliance on the initial election, it is not clear why the ability to exercise such a privilege would be limited to thirty days after receipt of the proposing party’s notice. If a party inadvertently sent notice of its election to participate 33 days after receiving notice and if no party had materially changed its position in reliance on the initial deemed election of non-participation, it is not clear why the passage of thirty days would stop a party from changing its election to one of participation.
This construction also conflicts with language indicating that, once all of the receiving parties have given notice of their respective elections, the Notice Period is over. For example, if all parties had elected to participate on the seventh day following receipt of notice, then the Notice Period would expire on the seventh day. However, if on the twenty-eighth day, one party decided to change its election to an election not to participate, then the proposing party would have the contractual obligation to notify the Consenting Parties of the Non-Consenting Party’s election “immediately after” the expiration of the Notice Period, which was on the seventh day.
In addition, in operations that are often time-sensitive, timely notification to the proposing party is important so that the proposing party can make financial arrangements, begin drilling within ninety days, and complete the well with due diligence. XTO’s construction replaces a bright-line contractual rule for promptly and clearly determining who is a Consenting Party and who is a Non-Consenting Party with an uncertain rule that requires a determination of whether the other parties materially changed their positions in reliance on the initial election. This construction would not be faithful to the language the parties chose and would introduce uncertainty as to whether each party is a Consenting Party or a Non-Consenting Party. This construction also creates uncertainty as to the respective share of the drilling costs to be paid by the Consenting Parties. XTO argues that, before allowing a receiving party to change its election, it is important to make sure that the other parties have not changed their positions in some material respect in reliance on the initial election; otherwise, as to quickly drilled wells, a party might change its election to avoid dry-hole costs that the party previously agreed to bear or to share in the rewards of a successful well when the party had not shared in the risks. However, adding this material-reli-
XTO asserts that Smith’s construction is unreasonable because it provides no means by which a receiving party can correct an erroneous notification of election. However, the parties to the JOAs are free not to allow changes in notifications of elections, perhaps to add clarity and expedition to the process of planning, paying for, and executing additional drilling operations. Likewise, the parties are free to provide for means of changing an erroneous election. This court must enforce the JOAs as written and cannot rewrite the agreements or add to their language under the guise of interpretation. See Schaefer,
For these reasons, we conclude that XTO’s construction is not reasonable and that Smith’s construction is the only reasonable construction of the language at issue.
Nonetheless, two cases provide some guidance. In Valence Operating Co. v. Dorsett, in addressing issues different than those in the instant case, the Supreme Court of Texas construed Article VI of the 1977 version of the Model Form used to create the JOAs. See
In addition, in concluding that the Non-Consent Provision in Valence was not an unenforceable liquidated damages provi-stón, the Valence court cited favorably the Nearburg case from New Mexico. See id. at 663-65 (citing Nearburg with approval); Nearburg,
Under the unambiguous language of the JOAs, if, after proper notice of a proposal to drill an additional well under Article VI.B.l., a party to the JOAs timely and properly gives notice to the proposing party as to whether it elects to participate in the cost of the proposed operation, then that party may not change its election, even if it seeks to do so within thirty days after receipt of the proposing party’s notice and regardless of whether the other parties have materially changed their positions in reliance on the initial election.
XTO submitted two affidavits from an expert purporting to address the custom and usage of the oil and gas industry. By this evidence, XTO did not purport to provide the meaning of any technical or specialized terms used in the JOAs. XTO tried to use this evidence to show that its interpretation of Article VI is reasonable and to assist in the construction of the JOAs. Presuming, without deciding, that it would be proper to use evidence of custom and usage in the oil and gas industry for these purposes, we conclude that XTO’s expert did not show that the alleged custom and usage to which he testified is so general and universal that the parties to the JOAs are charged with knowledge of its existence to such an extent to raise a presumption that they dealt with reference to it. See State Nat. Bank of Houston v. Woodfin,
V. Conclusion
Under the unambiguous language of each of the JOAs, if, after proper notice of a proposal to drill an additional well under Article VI.B.l., a party to the JOA timely and properly gives notice to the proposing party as to whether it elects to participate in the cost of the proposed operation, then that party may not change its election, even if it purports to do so within thirty days after receipt of the notice of the proposed operation and regardless of whether the other parties have materially changed their positions in reliance on the initial election. XTO did not prove the alleged custom and usage in the oil and gas industry. Therefore, any alleged custom and usage does not affect the construction of the JOAs. Because the trial court did not err in granting Smith’s motion for summary judgment, we overrule XTO’s issues and affirm the trial court’s judgment.
GUZMAN, J., dissenting.
Notes
. The joint operating agreements are both based on the American Association of Petroleum Landmen Model Form Operating Agreement 610-1982.
. This provision is often called a “non-consent penalty,” although one member of the Supreme Court of Texas has suggested that it would be more appropriate to call this provision a "liquidated bonus clause.” See Valence Operating Co. v. Dorsett,
. XTO also asserts that the trial court erred in denying its motion for partial summary judg
. This case involves the drilling of four additional wells. Therefore, we limit our analysis to the provisions of the JOAs dealing with additional operations for drilling additional wells.
. Our dissenting colleague asserts that, under the JOAs, the parties expressly provide that the Notice Period expires thirty days after the receiving party receives the notice. See post at pp. 685-86, 686, 687-88. This is incorrect. The parties expressly provide that each receiving party has thirty days after receipt of the notice within which to notify the proposing party whether that receiving party elects to participate in the cost of the proposed operation. This is not an express agreement that the Notice Period always lasts thirty days. It is an express agreement that the receiving parties have thirty days to give the proposing party notice of their respective elections. Under this agreement, the receiving parties may choose to take the entire thirty days, or they may give notice in less than thirty days. In the latter case, the Notice Period does not last thirty days.
. After stating that the receiving parties have thirty days after receipt of notice to reply to the proposing party, the parties agreed that failure of a receiving party to reply "within the period above fixed” constitutes an election by that party not to participate. Our dissenting colleague focuses on the word "fixed” and concludes that the parties expressly agreed that the Notice Period cannot expire in less than thirty days. See post at p. 685-86. However, this language simply refers back to the Notice Period established when the parties agreed that the receiving parties “have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation.” Therefore, the words emphasized by our dissenting colleague refer to an earlier sentence and do not aid in this court’s construction of that earlier sentence.
. Our dissenting colleague concludes that the JOAs are ambiguous and that this court should reverse and remand so that a jury may determine the parties’ mutual intent in agreeing to the language of this Model Form. See post at pp. 687-88. In reaching this conclusion, our dissenting colleague relies on Oxley v. General Atlantic Res., Inc. See
. XTO cites Lenape Res. Corp. v. Tenn. Gas Pipeline Co. See
Dissenting Opinion
dissenting.
The majority concludes that a receiving party cannot change its election within thirty days after receipt of the notice because the Notice Period expires upon the earlier of (a) thirty days after receipt of the Notice, or (b) the date on which the receiving party responds. Because I do not believe this interpretation is consistent with the contracts’ language, which is ambiguous at best, I respectfully dissent.
I. Applicable PRINCIPLES of Contract Construction
In determining whether the language of a contract is ambiguous, we look to the contract as a whole, in light of the circumstances present when the contract was executed. Sun Oil Co. (Del.) v. Madeley,
Ambiguity must be evident when the contract is read in context of surrounding circumstances, not after parol evidence of intent is admitted. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc.,
II. Language of the Joint OPERATING Agreements
The contract provisions at the heart of this dispute provide in relevant part as follows:
1. Proposed Operations: Should any party hereto desire to drill any well on the Contract Area other than the [initial well], ... the party desiring to drill ... such a well shall give the other parties written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation and the estimated cost of the operation. The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation.... Failure of a party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.
If all parties elect to participate in such a proposed operation, Operator shall, within ninety (90) days after expiration of the notice period of thirty (30) days (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be), actually commence the proposed operation and complete it with due diligence at the risk and expense of all parties hereto; provided, however, said commencement date may be extended upon written notice of same by Operator to the other parties, for a period of up to thirty (30) additional days if, in the sole opinion of Operator, such additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-way) or appropriate drilling equipment, or to complete title examination or curative matter required for title removal or acceptance. Notwithstanding the force majeure provisions of Article XI, if the actual operation has not been commenced within the time period provided (including any extension thereof as specifically permitted herein) and if any party hereto still desires to conduct said operation, written notice proposing same must be resubmitted to the other parties in accordance with the provisions hereof as if no prior proposal had been made.
2. Operations by Less than All Parties: If any party receiving such notice as provided in Article VI.B.1 .... elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, within ninety (90) days after the expiration of the notice period of thirty (30) days ... actually commence the proposed operation and complete it with due diligence.
If less than all parties approve any proposed operation, the proposing party immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest of the parties approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. Each Consenting Party, within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after receipt of such notice, shall advise the proposing party of its desire to (a) limit participation to such party’s interest as shown on Exhib*685 it “A” or (b) carry its proportionate part of Non-Consenting Parties’ interests, and failure to advise the proposing party shall be deemed an election under (a).... The proposing party, at its election, may withdraw such proposal if there is insufficient participation and shall promptly notify all parties of such decision.
The entire cost and risk of conducting such operations shall be borne by the Consenting Parties in the proportions they have elected to bear same under the terms of the preceding paragraph .... Upon commencement of operations ... of any such well by Consenting Parties in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all of such Non-Consenting Party’s interest in the well and share of production therefrom until the proceeds of the sale of such share ... shall equal the total of the following:....
Joint Operating Agreements, Art. VLB. (emphasis added). From this language, the majority draws dispositive inferences with which I disagree.
III. Contract Defines Notice Period’s Expiration Date
Under the majority’s interpretation, the Notice Period is subject to several different expiration dates. First, there is the thirty-day deadline described in the contract; this could be called the “Default Expiration Date.” In addition to the thirty-day period described in the contracts, however, the majority has discovered two other expiration dates. First, there is the date that could be considered the “Responder’s Expiration Date.” According to the majority, “[o]nce a receiving party timely gives notice of its election regarding the drilling operation by properly replying within the thirty days, the Notice Period has expired as to that patty.”
I have discovered no authority for the existence of a General or Responder’s Expiration Date in the language of the contracts. Although the Notice Period can expire for the various receiving parties on different days, the parties have unambiguously specified the method by which these dates are calculated. Under the terms of the joint operating agreements, the expiration date of the Notice Period is determined not by the date on which a party replies, but by the date on which the party received the notice of the proposed operations: “The parties receiving such a notice shall have thirty (SO) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation.” (emphasis added). This court cannot assert its contrary inferences as facts, as the majority has done, without rewriting the contract.
The contractual provisions at issue describe no circumstance under which the thirty-day Notice Period expires in less than thirty days; to the contrary, the parties have agreed that this is the period “fixed” for the receiving party to reply: “Failure of a party receiving such notice to reply within the period above fixed shall
The inferences drawn by the majority are inconsistent with other express terms of the parties’ agreements as well. Under Article VI.B.2., for example, if any receiving party elects not to participate in the proposed operations, then the parties who have chosen to participate “shall, within ninety (90) days after the expiration of the notice period of thirty (30) days ... actually commence the proposed operation .... ” (emphasis added). Because the phrase of thirty (30) days “can be given a definite or certain legal meaning,” it is unambiguous and thus, this court should afford the words their plain meaning. See Am. Mfrs. Mut. Ins. Co. v. Schaefer,
The majority’s rationale for rejecting XTO’s interpretation of the contract is equally flawed. The majority states that XTO’s suggested construction “conflicts with language indicating that, once all of the receiving parties have given notice of their respective elections, the Notice Period is over.”
The majority also reasons that,
[I]f a party could change its election if the other parties had not materially changed their positions in reliance on the initial election, it is not clear why the ability to exercise such a privilege would be limited to thirty days after receipt of the proposing party’s notice. If a party inadvertently sent notice of its election to participate 33 days after receiving notice and if no party had materially changed its position in reliance on the initial deemed election of non-participation, it is not clear why the passage of thirty days would stop a party from changing its election to one of participation.
Ante, at 679. This confusion arises only because the majority has disregarded the actual language of the contracts, which expresses the parties’ agreement on this point in unambiguous terms: “The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in
A. Case Law Follows Contractual Expiration Dates
Finally, the authorities on which the majority relies do not support its reasoning.
The same is true of Valence Operating Co. v. Dorsett.
Although the dispute addressed in Oxley v. General Atlantic Resources., Inc. is much closer to the issue presented in this case and requires much the same analysis, the majority dismisses it.
In sum, the majority has chosen to add some words to the contract rather than others. Although it is true that the contract provisions do not state that a receiving party has “thirty days to give notice of an election and to give notice of a change in a prior election,”
B. Contract is Ambiguous
As in Oxley, the issue here is whether a party can change its decision within the time limit fixed by the contracts for making the decision. The contracts here, like the contract in Oxley, do not expressly state the answer. Nevertheless, courts must interpret a contract by “ascertaining the true objective intentions of the parties, based on the contract language.” SAS Inst., Inc. v. Breitenfeld,
. “Consideration of the facts and circumstances surrounding the execution of a contract, however, is simply an aid in the construction of the contract's language. There are limits. For example, when interpreting an integrated writing, the parol evidence rule circumscribes the use of extrinsic evidence.”
Id.
. Ante, at 677-78.
. Ante, at 677-78.
. Although there are more recent editions of Black’s Law Dictionary, the sixth edition was released in 1990, the same year in which XTO's predecessor-in-interest signed the first joint operating agreement. The second joint operating agreement repeated the same language. This edition therefore is more likely to express the common understanding of the ordinary meaning of the words in light of the circumstances present when the contract was executed. See Sun Oil Co.,
. Ante, at 679.
. In light of the parol evidence rule, I also am not persuaded that it is appropriate to take notice of the existence or contents of other model form operating agreements.
.In addition, factual determinations were necessary to address the argument that a candidate operator relied to its detriment on the receiving party’s original vote. This argument was of secondary importance, because if the terms of the contract did not permit a party to change its vote, then the court would not reach the question of whether equitable grounds prevented a party from changing its vote in a particular case. See id. at 946-47.
. Ante, at 677.
. Like the majority, I would not reach the question of whether XTO’s interpretation is the only reasonable construction of the contractual language because, as the majority has explained, the ruling on XTO’s motion for partial summary judgment is not properly before this court for review. See ante, at 675-76, n. 3.