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Anderson v. Dominion – JOA AMI, Pref Right, Contract Area and Term

In Anderson Energy Corp. v. Dominion Oklahoma Texas Exploration & Prod., Inc., [1] 04-14-00170-CV, 2015 WL 3956212 (Tex. App.—San Antonio June 30, 2015, no. pet. h.) the San Antonio Court of Appeals answered the following questions involving a 1977 AAPL JOA, with a printed Pref Right, and a typewritten AMI:

  1. Whether the  AMI and Pref Right clauses covered interests acquired after execution of the JOA, based largely on the extent of the “Contract Area;”
  2. The Term of the JOA where the parties failed to select one of the printed options;
  3. Whether the above claims were precluded by the Statute of Frauds; and
  4. Whether the affirmative defenses of waiver or laches precluded the plaintiff’s claims described above.

Click here for Case Digest at a Glance™

Factual Background

In 1980, a letter agreement was entered into between Perlman and Sun Gas , under which Perlman assigned to Sun Gas an undivided 50% interest in interests within several counties and 37 wellsm and the parties entered into a drilling program as to surrounding lands as to which Sun Gas could earn additional interests by participating in additional drilling. The parties also agreed to enter into a JOA to cover all operations under the letter agreement. The JOA included a preprinted Pref Right and a typewritten AMI.

A critical issue in this case is determining the scope of interests falling under the JOA.   Exhibit A to the JOA identified the lands and leases subject to the JOA as “all interest of parties in the land located within the areas outlined on the attached plats.” Each plat depicted several tracts of land, contained an outline of certain tracts of land, and also had the inscription “AMI.”

Another critical aspect of the dispute is that the parties failed to select either of the two preprinted options designating the term of the JOA.

The Dispute

Anderson became the successor in interest to Sun Gas’s interest while Dominion became the successor in interest to Perlman’s interest. Dominion drilled more than 100 gas wells within the area described in the AMI. Dominion then sold its interest to HighMount, and did not present the offer to Anderson under the Pref Right. HighMount then acquired numerous interests in the area without offering Anderson any right to participate.

Anderson asserted that the AMI was violated because Dominion and Highmount acquired numerous interests in the Contract Area and drilled more than 100 wells in the AMI without providing Anderson notice or opportunity to participate. Additionally, the Pref Right was violated when HighMount acquired the properties without Anderson being given the option to acquire the interests.

HighMount asserted the following defenses: (1) the JOA only covered those interests owned by the parties upon execution of the JOA, and therefore the AMI and Pref Right could not be breached in relation to the after-acquired properties involved in this dispute, (2) the JOA has already terminated, or (3) the claims are precluded by waiver or laches, since Anderson failed to honor or assert rights under the JOA for the preceding 12 years.

Holding One: Subsequently Acquired Interests are Subject to JOA

The court reviewed numerous portions of the JOA discussing or referencing the Contract Area, the lands, and/or the leases, including the body of the preprinted JOA, the Exhibit “A” identifying the Contract Area, several plats attached to Exhibit A, and the AMI provision.  The court noted that these provisions must be read together under the “four corners” rule and harmonized if possible.

HighMount emphasized that numerous portions of the JOA referred to the interests covered in the present tense, and therefore the JOA must be read as including only the interests owned by the parties when they executed the JOA.

However, the court disagreed, reasoning that various clauses within the 1977 AAPL JOA suggest that the Contract Area includes oil and gas leases as well as “lands.”  Similarly, the JOA indicates that Exhibit A identifies the “Contract Area,” which is defined as being the “Land and Leases” and “Initial Wells” to be developed and operated under the JOA.  The court reasoned that the inclusion of “land” in addition to “leases” indicates that the Contract Area was intended to cover the initial leases and initial wells in addition to the unleased lands described in Exhibit A.

The court indicated that the Exhibit A was “key” to understanding the Contract Area, which included all of the parties’ interest in “the land located within the areas outlined on the attached maps of the area marked Exhibits A–1 through A–8.”   The picture below is one such map:

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Additionally, the court held that the Contract Area must include subsequently acquired interests so as to give effect to the AMI.  Furthermore, the court noted that AMI’s, by definition, are intended to cover future acquisitions.

The court held that the parties to the JOA intended that interests acquired in the future by them, or by their successors, within the lands within the Contract Area are subject to the JOA.

Holding Two:  JOA Duration is “reasonable term”

The 1977 JOA Form remains in force during the continuation of any lease or production, depending on the option selected by the parties.  However, the parties in this case failed to select either option.

The court held that the JOA cannot be terminable at will, because the JOA contains an AMI and a Pref Right which cannot be unilaterally terminated by one party. Further, an at will duration is not practical, fair, or customary due to the millions of dollars expended under JOAs.

The court held that a “reasonable time” was necessary and appropriate in order to effectuate the purposes of the AMI and the Pref Right, and because there had been substantial expenditures.

HighMount argued that a “Reasonable Time” as already expired. The court disagreed, holding that the period of time that is a “reasonable time” for is a question of fact, to be determined by the fact-finder under the circumstances of the parties and the subject matter of the contract.

Holding Three: JOA Passes Statue of Frauds

As the court explained, the Statute of Frauds (“SoF”) requires that contracts for the sale of real property furnish within itself, or by reference to some other existing writing, the means or data by which the property to be conveyed may be identified with reasonable certainty.  If the SoF is not met, the conveyance is void and will not support an action for specific performance or breach of contract.

The court then went through an extensive list of descriptive details included within the JOA, the Exhibits, and the Letter Agreement.  Additionally, the court reviewed an affidavit by the geologist that prepared the maps in 1980.  This geologist testified as to how the maps were created, what the lines meant, and other information as to the reliability, certainty, and industry standard nature of the maps.

HighMount argued that the affidavit was improper extrinsic evidence, and because it were necessary to supply the descriptive information missing from the maps themselves, the maps were insufficient for SoF purposes.

The court stated that the affidavit was not improper extrinsic evidence, because it “is not being used to supply missing information but, rather, to explain the geographic maps used to form the ‘nucleus’ of the property description and to identify the land on the ground with reasonable certainty.” Further, “the court may properly consider extrinsic evidence in determining whether a person familiar with the area could locate the property with reasonable certainty.”

The court then listed numerous descriptive items provided in the JOA, Exhibit, and Letter Agreement. Then the court held that, when all these are viewed together, “the JOA contains enough information to provide at least a nucleus description of the Contract Area with respect to its physical location and its size, shape, and boundaries.”

Holding Four: No Waiver or Laches Defense

Waiver Defense

HighMount argued that Anderson waived its right to enforce the AMI and the Pref Right, by engaging in numerous transactions without notifying HighMount, or its predecessors. However, Anderson argued that in each case the notices either were given or they were not subject to the notice requirement. The court held that, because there was conflicting evidence, HighMount was not entitled to summary judgment on its waiver defense.

Laches Defense

HighMount asserted that Anderson knew of another assignment in 1993 but took no action for 14 years, after millions of dollars were spent by HighMount and its predecessors developing the acreage.

The Court noted that, because Anderson was still within the Statute of Limitations, and there were no exceptional circumstances in this case, laches did not preclude Anderson’s claim.

Conclusion – Case Digest at a Glance

A generalized summary of the holdings of this case are as follows:

  1. Contract Area: This 1977 AAPL JOA, specifically its printed Pref Right and typewritten AMI, covered interests owned by the parties within the Contract Area at the time of execution, but also covered interests acquired subsequent to execution of the JOA. The court was persuaded by a “four corners” harmonizing of all the language within the printed 1977 AAPL JOA, as well as the typewritten Exhibit A (including maps of the land), and the letter agreement.
  2. Duration: This JOA, under these circumstances, with no term specified, was held to have a term for a “reasonable time.” The case was remanded to determine what constitutes a “reasonable time” under the circumstances.
  3. Waiver: Summary judgment was not appropriate as to the wavier claim, because conflicting evidence did not establish the defense as a matter of law.
  4. Laches: Laches was not an appropriate defense, because there are no exceptional circumstances justifying barring a claim after a shorter period than the applicable statute of limitations.
Austin Brister
Austin represents oil and gas exploration and production companies and landowners in a wide variety of complex commercial litigation matters, including contract and property disputes, royalty disputes, breach of lease cases, lease termination/perpetuation disputes, and an array of other issues in the upstream oil and gas sector. Austin has prosecuted and defended claims in state courts and federal courts. Austin strives to find practical business solutions to complex issues, but if necessary, he works hard to implement effective strategies in the courthouse.
Austin Brister

Footnotes   [ + ]

© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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