Originally published by Charles Sartain.
Quick answer: It depends on what the lease says. Last week featured a tug-of-war between a producer and the community in which it operates; this week in HJSA No. 3 LP v. Sundown Energy LP it’s the producer and the lessor.
HJSA owns the mineral estate under 30,540 acres in Ward County, Texas. Sundown is the lessee. After six years the lease could be maintained only as to individual tracts from which there was production in paying quantities and as to other tracts only if Sundown was engaged in a “continuous drilling program”.
Dueling lease provisions (emphasis mine)
Paragraph 7B says:
The first such continuous development well shall be spudded in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and the commencement of drilling operations on the next ensuing well.
Paragraph 18 is a 90-day temporary cessation clause that defines drilling operations as:
“ … actual operations … (spud-in with equipment capable of drilling to Lessee’s objective depth); reworking operations, including fracturing and acidizing; and reconditioning, … “.
After Sundown drilled 14 development wells, HJSA claimed that the lease had terminated as to certain portions of the property because Sundown had on five separate occasions over 14 years allowed more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next well, thereby failing to maintain the lease as to areas not HBP. During those alleged lapses no new wells had been spudded, but reworking and reconditioning operations on existing wells had taken place. Litigation followed.
In resolving the dispute the court relied on several rules of construction:
- Courts abhor forfeitures, but a special limitation results not in a forfeiture but in termination of all or part of the lease under its own terms.
- A court will not find a special limitation unless the contract language is so clear, precise and unequivocal that the court could reasonably give it no other meaning.
- Technical words are to be interpreted as usually understood by persons in the business to which they relate unless there is evidence that the words were used in a different sense.
- The court will harmonize all provisions in a contract so that none are rendered meaningless.
Was Paragraph 7b a special limitation?
Sundown argued forfeiture and denied that 7B was a special limitation. The “for so long” language of the habendum clause fixed a natural limit to the lease and created a special limitation because it did not cut short the natural limit of the lease. That would be a forfeiture. Score a point for HJSA.
What was a “continuous drilling operation” under paragraph 7b?
Now, to summarize several pages of contract construction but keep us out of the weeds:
7B defined a continuous drilling program as requiring the spudding of a new well. 18 defined operations more broadly to include reworking and reconditioning, but in a different context. The court how the industry uses “spud-in”, went to the dictionary to define “such” and “ensuing”, and concluded that the paragraph 18 definition of an “operation” could not be grafted on to the paragraph 7b definition. A specific provision controls over the general. Paragraph 7B is a specific provision and the obligations of that paragraph required Sundown to engage in a continuous drilling program by spudding in a new well. The duties in that paragraph are more specific than those in paragraph 18. Paragraph 18 was not rendered meaningless because it contemplated the situation in which production ceases on an existing well and allows for reworking, etc. it had a purpose, just not the one suggested by Sundown.
In the end, Sundown was required to spud a well to comply with Paragraph 7.
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