Offer to Acquire Leases Could Not be Conditioned on a JOA

Originally published by Charles Sartain.

Let’s begin with a quiz:

What is a “Labor” and how big is it?*

From Great Western. Drilling, Ltd. v. Pathfinder Oil & Gas, Inc. we learn that if you want one agreement to be conditioned on execution of another one, you’d better say so … in writing … in the first one. Texas courts look for ways to avoid conditions precedent.

Pathfinder and Great Western were parties to a 2003 JOA with an area of mutual interest. Great Western drilled a well within the AMI, but within 476 feet of an adjacent property in which Great Western had acquired leases, Labors 1 and 10. In a June 1, 2004, letter Great Western offered Pathfinder the opportunity to acquire 25 percent of new leases in Labors 1 and 10. Pathfinder returned its election to acquire the interest on June 2. The well was completed as a producer later in June.

In September Great Western proposed a JOA and reported lease acquisition costs to be just short of $10k. The proposed JOA restricted Pathfinder’s right to assign interests in the new leases and on the price that it could receive under certain conditions. Pathfinder rejected that provision and thus, the JOA.

Great Western withdrew its offer. Thirty minutes later, Pathfinder mailed signed copies of the JOA and a check. Great Western later drilled and completed another well as a producer on Labor 1.  Pathfinder  claimed a 25% interest in the well and leases.

Great Western sued for declarations of the parties’ rights in Labors 1 and 10 and the 25 percent working interest. Pathfinder counterclaimed for specific performance, breach of contract, fraud, and fraudulent inducement.

The parties agreed during trial that Pathfinder’s only available remedy was specific performance.

The jury found: the June 2004 letter was an enforceable agreement, in signing the JOA and sending the check Pathfinder complied with the agreement, and Great Western failed to comply with the agreement.

The trial court entered judgment for specific performance (Great Western was ordered to convey a 25% interest in the leases), $3MM in net proceeds from Pathfinder’s 25 percent interest in the well, prejudgment interest, and attorneys’ fees.

The appeal

According to Great Western, it revoked its offer before a condition precedent was accepted. The court disagreed. Great Western’s offer did not specifically condition Pathfinder’s election to acquire the 25 percent on execution of the new JOA. The evidence showed that the parties intended to be bound by the June 1 agreement.  The proposed JOA was premised on the existence of a binding agreement as to the ownership of the new leases and was to govern the parties’ conduct under that agreement. Execution of the JOA was not a condition precedent to the formation of a contract back in June. Besides, when given a chance, a court will find a covenant promising future performance rather than a condition precedent to the formation of the contract.

Pathfinder recovered its share or well proceeds, not as a measure of damages, which it waived, but on payment of expenses to the plaintiff because of the defendant’s delay. I expect that was a surprise to great Western.

*A West Texas measure of an area of land 177.1 acres in size.

Special thanks to Gray Reed partner Skyler Stuckey for the hat.

Richard Penniman RIP

 

 

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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