Texas Supreme Court to Review the Lessee’s Covenant to Protect Against Drainage

Co-author Brittany Blakey

First, a word for you scriveners: Preserve your reputation and the honor of your law school writing instructor by preparing clear and understandable contracts. Then your handiwork won’t be disparaged as “opaquely worded” “cryptic language”, suffering from “lack of accuracy and lack of clarity”, and “containing grammatical and logical errors”, as in the case of an oil and gas lease considered in Martin v. Rosetta Resources Operating, LP. The Texas Supreme Court has granted petition to review the decision.

The issue

Did the offset well clause impose a general duty on the lessee to protect against all drainage, even when the draining well itself did not trigger a duty?

The leases

The Martins entered into a series of leases, all of which had this provision:

“ ...  in the event a well is drilled on or in a unit containing part of this acreage or is drilled on acreage adjoining this Lease, the Lessor [sic], or its agent(s) shall protect the Lessee’s [sic] undrilled acreage from drainage and in the opinions of reasonable and prudent operations, drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred thirty (330) feet from the un-drilled acreage, the Lessee shall spud an offset well on said un-drilled acreage or on a unit containing said acreage within twelve (12) months from the date the drainage began or release the acreage which is un-drilled or is not a part of a unit which is held by production.”

Lessee Rosetta and other operators formed a pooled unit containing a portion of the Martin acreage and drilled the Martin Well. Those parties later drilled the Simmons well 1.5 miles away on a separate, nonadjacent unit. The Martins sued Rosetta and others alleging several theories, including breach of contract for failing to protect the undrilled leased acreage from drainage by the Simmons well.

The result

The theory argued by the Martins at the trial court was that by drilling the Martin well (not the Simmons, read the clause), Rosetta triggered a general duty to protect against drainage, including from the Simmons well. The trial court ruled for Rosetta, holding that the Simmons well did not trigger a contractual duty to protect against drainage because the Simmons well was not on acreage adjoining the Martin lease.

The court of appeals reversed and remanded. A general duty to protect the Martins’ undrilled acreage against all drainage was triggered when Rosetta drilled the Martin well. There was no dispute that there was drainage, prompting the court to require Rosetta to spud an offset well or else release the undrilled acreage.

In its petition to the Supreme Court, Rosetta argues that the general duty to protect against all drainage as found by the court of appeals defied the lease’s offset production clause and imposed an “onerous burden” on the lessee. The duty to protect was limited to drainage caused by the well triggering the duty.

It will be interesting to see how our Supreme Court addresses the odd and illogical lease language in light of its policy to interpret agreements according to the words the parties actually said, not on what the parties could have said.

Trial lawyers, read pp 4-5 discussing why the Martins’ new argument was not barred by res judicata.

Your musical interludes. RIP Michael Nesmith (Gotcha! You were thinking Monkees) … and some Christmas.

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