Texas Supreme Court Deems Continuous Development Clause Ambiguous

Originally published by Charles Sartain.

Co-author Skyler Stuckey

In Endeavor Energy Resources, L.P. v. Energen Resources Corp. et al. the Supreme Court of Texas construed a continuous development clause in an oil and gas lease covering 11,300 acres in Howard County. After the primary term, lessee Endeavor could retain acreage by drilling a new well every 150 days. The clause gave Endeavor “ … the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the driling of a subsequent well.

After the primary term, Endeavor drilled 12 wells that extended the lease. Endeavor began drilling a 13th well 320 days after completing the preceding well. In the ensuing period Energen top-leased the supposedly non-retained parcels. Litigation ensued.

The dispute focused on how to calculate the number of “unused days”. Endeavor argued that it could carry forward unused days across multiple 150-day terms.  Energen argued that unused days in any given 150-day term could be carried forward only once, to the next term.

The lower courts sided with Energen. The Supreme Court reversed, finding that both parties’ reading of the provision was reasonable, rendering it ambiguous. The parties agreed that the accumulation provision was a special limitation, and the Court analyzed it accordingly. When all means of interpreting a lease leave it equally susceptible to multiple reasonable readings, it will be resolved against the imposition of a special limitation.  Thus, the Court rendered judgment for Endeavor on title to the undrilled parcels.

Analysis by the Court

Energen argued that Endeavor was required to begin drilling within 186 days after completion of its 12^th well (150 days + 36 unused days from the prior term).

Endeavor argued it had accumulated 377 days across multiple 150-day terms in which to drill its 13^th well, because many earlier wells had been drilled ahead of schedule.

In discerning the meaning of the accumulation provision the Court noted several guiding principles. See the attached longer summary of the opinion for these basic rules of contract construction.

Energen’s position was that “150-day term” meant that every term (whether “extended” or not) is 150 days for purposes of calculating unused days. The lessee may not “accumulate unused days” from a term after its 150^th day, nor may a lessee use “unused days” to extend anything other than a 150-day term.

The Court turned to the argument the lower courts found persuasive: the provision distinctly refers to “any … term” in the singular rather than plural with regard to the term in which days can be accumulated. This, said Energen, meant that unused days can only come from the one term immediately preceding the “next” term to be extended.  Endeavor countered that focusing on the “next” term begs the question of whether unused days carried over from one term become a substantive part of the latter term. If they do, there will always be a next term for them to carry over into.

The parties addressed the word “accumulate.” Endeavor argued that it indicated a right to stack up, gather, or compile days over multiple periods. The Court concluded that “accumulate” can also be used to describe general increases, regardless of their temporal nature, and outsized importance cannot be placed on a generally-used term.

With textual analysis producing a draw, the Court turned to the business objectives of the parties.  See, again, the attached summary for their points.  Neither side carried the day.  As an aside, the Court noted that the mere existence of model forms or templates the parties could have used should have any bearing on a contract interpretation.

Having exhausted the principles of textual construction and economic intent, the Court found both parties’ arguments to be reasonable, rendering the clause ambiguous as a matter of law.  So it’s back to the trial court for further proceedings, except for the judgment confirming Endeavor’s tite.

Advice to scriveners

The Court closed with a warning to those who draft contracts: “Because ‘[a]mbiguities [in continuous-development clauses] are frequent in concerning the times at which wells must be commenced,” “[g]reat care should be exercised in drafting to avoid question of whether the lessee has complied. Had greater care been taken in the drafting of this continuous-development clause, this litigation could have been avoided.”

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