Affirmed and Majority and Dissenting =
Opinions=20
filed February 24, 2009.
In The
Fourteenth=20
Court of Appeals
____________
NO. 14-07-00069-CV
____________
XTO ENERGY=20
INC.,=20
Appellant
V.
SMITH=20
PRODUCTION INC., =
Appellee
On Appeal from the =
281st District Court
Harris County, =
Texas
Trial Court Cause =
No. 2004-68579
D I S S E=20
N T I N G O P I N I O N
The=20
majority concludes that a receiving party cannot change its =
election=20
within thirty days after receipt of the notice because the Notice =
Period=20
expires upon the earlier of (a) thirty days after receipt of =
the=20
Notice, or (b) the date on which the receiving party =
responds. =20
Because I do not believe this interpretation is consistent with =
the=20
contracts=3D =
language,=20
which is ambiguous at best, I respectfully dissent. =
I. =20
Applicable Principles of =
Contract=20
Construction
In=20
determining whether the language of a contract is ambiguous, we =
look to=20
the contract as a whole, in light of the circumstances present =
when the=20
contract was executed. Sun Oil Co. (Del.) v. =
Madeley,=20
626 S.W.2d 726, 731 (Tex. 1981);=20
see also Lenape Res. Corp. v. Tenn. Gas Pipeline Co., 925 =
S.W.2d=20
565, 574 (Tex. 1996) (op. on reh=3Dg).=20
(A[A] court=20
should construe a contract from a utilitarian standpoint, bearing =
in mind=20
the particular business activity sought to be served.@). =20
We first examine the words of the contract, and considering the =
business=20
activity to be served, determine whether both proffered =
interpretations=20
are reasonable. XCO Prod. Co. v. Jamison, 194 S.W.3d =
622, 628=20
(Tex. App.CHouston=20
[14th Dist.] 2006, pet. denied) (sub. op.). If both =
interpretations=20
are reasonable, then the contract is ambiguous and there is a =
genuine=20
issue of material fact regarding the parties=3D =
intent. J.M. Davidson, Inc. v. Webster, 128 S.W.3d =
223, 229=20
(Tex. 2003); Columbia Gas Transmission Corp. v. New Ulm Gas, =
Ltd.,=20
940 S.W.2d 587, 589 (Tex. 1996). This is so even if it =
appears that=20
one interpretation is more reasonable than another. See =
Heritage=20
Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996) =
(stating=20
that a contract is ambiguous if it is Areasonably=20
susceptible to more than one interpretation@);=20
Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); cf. In =
re D.=20
Wilson Constr. Co., 196 S.W.3d 774, 782 (Tex. 2006) (holding =
that=20
agreements were Anot=20
susceptible to more than one reasonable interpretation and are =
therefore=20
not ambiguous@).
Ambiguity=20
must be evident when the contract is read in context of =
surrounding=20
circumstances, not after parol evidence of intent is =
admitted. =20
Nat=3Dl Union=20
Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., =
Inc., 907=20
S.W.2d 517, 521 (Tex. 1995) (per curiam); Williams v. =
Williams, 246=20
S.W.3d 207, 211 (Tex. App.CHouston=20
[14th Dist.] 2007, no pet.). Stated differently, although =
parol=20
evidence of the parties=3D =
intent is=20
not admissible to create an ambiguity, see National Union, =
907=20
S.W.2d at 520, the contract may be read in light of the =
surrounding=20
circumstances to determine whether an ambiguity exists. =
Balandran=20
v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998) =
(citing=20
Columbia Gas, 940 S.W.2d at 589, and =
Nat=3Dl=20
Union, 907=20
S.W.2d at 520). Such circumstances include Athe=20
commonly understood meaning in the industry of a specialized term, =
which=20
may be proven by extrinsic evidence such as expert testimony or =
reference=20
material.@ =20
XCO Prod. Co., 194 S.W.3d at 627B28; see=20
also Floboots Corp. v. Teas, 110 S.W.2d 180, 183 (Tex. Civ.=20
App.CSan=20
Antonio 1937, writ dism=3Dd)=20
(holding trial court=3Ds finding=20
that slate, indurated shale, and quartzite are Ametamorphic=20
formations@ =
was=20
supported by properly-admitted expert testimony concerning the =
meaning of=20
those terms). However, we may not rewrite the contract =
Aor add to=20
its language under the guise of interpretation.@ =20
Helmerich & Payne Int=3Dl Drilling=20
Co. v. Swift Energy Co., 180=20
S.W.3d 635, 641 (Tex. App.CHouston=20
[14th Dist.] 2005, no pet.).
II. =20
Language of the Joint Operating Agreements
The=20
contract provisions at the heart of this dispute provide in =
relevant part=20
as follows:
1. =
Proposed=20
Operations: Should any party hereto desire to drill any =
well on=20
the Contract Area other than the [initial well], . . . the party =
desiring=20
to drill . . . such a well shall give the other parties written =
notice of=20
the proposed operation, specifying the work to be performed, the =
location,=20
proposed depth, objective formation and the estimated cost of the=20
operation. The parties receiving such a notice shall have =
thirty=20
(30) days after receipt of the notice within which to notify the =
party=20
wishing to do the work whether they elect to participate in the =
cost of=20
the proposed operation. . . . Failure of a =
party=20
receiving such notice to reply within the period above =
fixed shall=20
constitute an election by that party not to participate in the =
cost of the=20
proposed operation.
If all parties =
elect to=20
participate in such a proposed operation, Operator shall, within =
ninety=20
(90) days after expiration of the notice period of thirty (30) =
days (or as=20
promptly as possible after the expiration of the forty-eight (48) =
hour=20
period when a drilling rig is on location, as the case may be), =
actually=20
commence the proposed operation and complete it with due diligence =
at the=20
risk and expense of all parties hereto; provided, however, said=20
commencement date may be extended upon written notice of same by =
Operator=20
to the other parties, for a period of up to thirty (30) additional =
days=20
if, in the sole opinion of Operator, such additional time is =
reasonably=20
necessary to obtain permits from governmental authorities, surface =
rights=20
(including rights-of-way) or appropriate drilling equipment, or to =
complete title examination or curative matter required for title =
removal=20
or acceptance. Notwithstanding the force majeure provisions =
of=20
Article XI, if the actual operation has not been commenced within =
the time=20
period provided (including any extension thereof as specifically =
permitted=20
herein) and if any party hereto still desires to conduct said =
operation,=20
written notice proposing same must be resubmitted to the other =
parties in=20
accordance with the provisions hereof as if no prior proposal had =
been=20
made.
2. =
Operations by=20
Less than All Parties: If any party receiving such =
notice as=20
provided in Article VI.B.1. . . . elects not to participate in the =
proposed operation, then, in order to be entitled to the benefits =
of this=20
Article, the party or parties giving the notice and such other =
parties as=20
shall elect to participate in the operation shall, within ninety =
(90) days=20
after the expiration of the notice period of thirty (30)=20
days . . . actually commence the proposed=20
operation and complete it with due diligence.
If less than all =
parties=20
approve any proposed operation, the proposing party immediately =
after=20
the expiration of the applicable notice period, shall advise =
the=20
Consenting Parties of the total interest of the parties approving =
such=20
operation and its recommendation as to whether the Consenting =
Parties=20
should proceed with the operation as proposed. Each =
Consenting=20
Party, within forty-eight (48) hours (exclusive of Saturday, =
Sunday and=20
legal holidays) after receipt of such notice, shall advise the =
proposing=20
party of its desire to (a) limit participation to such =
party=3Ds interest as shown =
on=20
Exhibit AA@ or (b) carry its=20
proportionate part of Non-Consenting Parties=3D interests, and =
failure to=20
advise the proposing party shall be deemed an election under=20
(a). . . . The proposing party, at its =
election, may=20
withdraw such proposal if there is insufficient participation and =
shall=20
promptly notify all parties of such =
decision.
The entire cost and =
risk of=20
conducting such operations shall be borne by the Consenting =
Parties in the=20
proportions they have elected to bear same under the terms of the=20
preceding paragraph. . . . Upon =
commencement of=20
operations . . . of any such well by =
Consenting=20
Parties in accordance with the provisions of this Article, each =
Non-Consenting Party shall be deemed to have relinquished to =
Consenting=20
Parties, and the Consenting Parties shall own and be entitled =
to=20
receive, in proportion to their respective interests, all of =
such=20
Non-Consenting Party=3Ds interest in the =
well and=20
share of production therefrom until the proceeds =
of the=20
sale of such share . . . shall equal the total =
of the=20
following: . . . .
Joint=20
Operating Agreements, Art. VI.B. (emphasis added). From this =
language, the majority draws dispositive inferences with which I=20
disagree.
III. =20
Contract Defines Notice Period=3Ds=20
Expiration Date
Under the=20
majority=3Ds=20
interpretation, the Notice Period is subject to several different=20
expiration dates. First, there is the thirty-day deadline =
described=20
in the contract; this could be called the ADefault=20
Expiration Date.@ In=20
addition to the thirty-day period described in the contracts, =
however, the=20
majority has discovered two other expiration dates. First, =
there is=20
the date that could be considered the AResponder=3Ds=20
Expiration Date.@ =20
According to the majority, A[o]nce a=20
receiving party timely gives notice of its election regarding the =
drilling=20
operation by properly replying within the thirty days, the =
Notice=20
Period has expired as to that party.@ =20
Building on this inference, the majority next asserts that =
A[o]nce all=20
parties have communicated their election regarding the proposed =
operation,=20
the Notice Period has expired.@ =20
This could be considered a AGeneral=20
Expiration Date.@ =20
I have=20
discovered no authority for the existence of a General or=20
Responder=3Ds=20
Expiration Date in the language of the contracts. Although =
the=20
Notice Period can expire for the various receiving parties on =
different=20
days, the parties have unambiguously specified the method by which =
these=20
dates are calculated. Under the terms of the joint operating =
agreements, the expiration date of the Notice Period is determined =
not by=20
the date on which a party replies, but by the date on which the =
party=20
received the notice of the proposed operations: =
AThe=20
parties receiving such a notice shall have thirty (30) days =
after=20
receipt of the notice within which to notify the party wishing =
to do=20
the work whether they elect to participate in the cost of the =
proposed=20
operation.@ =
(emphasis=20
added). This court cannot assert its contrary inferences as =
facts,=20
as the majority has done, without rewriting the contract. =20
The=20
contractual provisions at issue describe no circumstance under =
which the=20
thirty-day Notice Period expires in less than thirty days; to the=20
contrary, the parties have agreed that this is the period =
Afixed@ =
for the=20
receiving party to reply: AFailure of=20
a party receiving such notice to reply within the period above=20
fixed shall constitute an election by that party not to =
participate in=20
the cost of the proposed operation.@ =
(emphasis=20
added). To fix means to A[a]djust=20
or regulate; determine; settle; make permanent. [The] [t]erm =
imports=20
finality; stability; certainty; definiteness.@ =20
Black=3Ds=20
Law Dictionary =
637 (6th=20
ed. 1990). =20
The majority=3Ds=20
interpretation, however, eliminates the certainty to which the =
parties=20
agreed.
The=20
inferences drawn by the majority are inconsistent with other =
express terms=20
of the parties=3D =
agreements as well. Under Article VI.B.2., for example, if =
any=20
receiving party elects not to participate in the proposed =
operations, then=20
the parties who have chosen to participate Ashall,=20
within ninety (90) days after the expiration of the notice period =
of=20
thirty (30) days . . . actually commence =
the=20
proposed operation . . . .@ =
(emphasis=20
added). Because the phrase of thirty (30) days =
Acan be=20
given a definite or certain legal meaning,@ =
it is=20
unambiguous and thus, this court should afford the words their =
plain=20
meaning. See Am. Mfrs. Mut. Ins. Co. v. =
Schaefer, 124=20
S.W.3d 154, 157 (Tex. 2003). Under the majority=3Ds=20
interpretation, however, the Notice Period expires in a week if =
all=20
receiving parties respond within seven days. See =
ante, at=20
8B9. =20
Thus, application of the majority=3Ds=20
interpretation would result in a direct conflict with the =
unambiguous=20
language of the contract.
The=20
majority=3Ds=20
rationale for rejecting XTO=3Ds=20
interpretation of the contract is equally flawed. The =
majority=20
states that XTO=3Ds=20
suggested construction Aconflicts=20
with language indicating that, once all of the receiving parties =
have=20
given notice of their respective elections, the Notice Period is=20
over.@ As=20
previously discussed, however, the language of the contracts =
expressly=20
provides that the Notice Period expires thirty days after the =
receiving=20
party receives the notice. In light of these unequivocal =
terms=20
fixing the end of the Notice Period, the contracts cannot be said =
to=20
support an inference that the Notice Period expires on the =
earlier=20
of thirty days or the date on which the receiving party makes =
an=20
election.
The=20
majority also reasons that,
[I]f a=20
party could change its election if the other parties had not =
materially=20
changed their positions in reliance on the initial election, it is =
not=20
clear why the ability to exercise such a privilege would be =
limited to=20
thirty days after receipt of the proposing party=3Ds=20
notice. If a party inadvertently sent notice of its election =
to=20
participate 33 days after receiving notice and if no party had =
materially=20
changed its position in reliance on the initial deemed election of =
non-participation, it is not clear why the passage of thirty days =
would=20
stop a party from changing its election to one of =
participation. =20
Ante, at=20
10. This confusion arises only because the majority has =
disregarded=20
the actual language of the contracts, which expresses the=20
parties=3D =
agreement=20
on this point in unambiguous terms: AThe=20
parties receiving such a notice shall have thirty (30) days =
after=20
receipt of the notice within which to notify the party wishing =
to do=20
the work whether they elect to participate in the cost of the =
proposed=20
operation.@ The=20
parties=3D =
repeated=20
statements that the Notice Period for each receiving party ends =
thirty=20
days after receipt of the noticeCnot=20
earlier, not laterCcould=20
hardly be clearer. The passage of thirty days would stop a =
party=20
from changing its election because the contract says it =
does.
A. =20
Case Law Follows Contractual Expiration Dates
Finally,=20
the authorities on which the majority relies do not support its=20
reasoning. =20
In Nearburg v. Yates Petroleum Corp., Nearburg notified =
Yates on=20
December 1, 1994 of his proposal to drill a well. =
1997-NMCA-069,=20
& 5,=20
123 N.M. 526, 943 P.2d 560. Yates did not respond within =
thirty days=20
but instead obtained his own drilling permit. =
Id. On=20
January 11, 1995, Yates wrote to Nearburg, proposing to drill the =
well=20
himself. Id. Nearburg sued for, inter =
alia,=20
Aan order=20
for specific performance requiring Yates to act as a =
non-consenting party=20
and to refrain from interfering with Nearburg=3Ds proposed=20
drilling . . . .@ =20
Id. at & 6. =20
Yates counterclaimed, seeking a declaratory judgment that Yates =
was the=20
operator of the proposed well and a consenting party under the =
operating=20
agreement. Id. According to Yates, he could =
change his=20
election any time before Nearburg began operations. =
Id.=20
at & 11. =20
The New Mexico Court of Appeals found in favor of Nearburg, =
stating,=20
AWe see no=20
indication that the parties to the operating agreement intended to =
allow a=20
change in election after the thirty day notice =
period.@ =20
Id. at & 24=20
(emphasis added). The court further explained that =
Yates=3Ds=20
Aanalysis=20
is inconsistent with express contract language, because it =
virtually=20
ignores the provision in Article VI(B)(1) requiring an election to =
be made=20
within thirty days.@ =20
Id. at & 12=20
(emphasis added) (citing Kirkpatrick v. Introspect Healthcare=20
Corp., 845 P.2d 800, 805 (N.M. 1992) (holding that the =
interpretation=20
of a contract cannot ignore the contract=3Ds express=20
provisions)). Thus, Nearburg undermines rather than =
supports=20
the majority=3Ds=20
analysis.
The same=20
is true of Valence Operating Co. v. Dorsett. 164 =
S.W.3d 656=20
(Tex. 2005). In Valence, the issue was whether the=20
parties=3D =
joint=20
operating agreement Arequire[d]=20
a thirty-day notice period to expire before the operator =
[could]=20
commence work on the proposed operations.@ =20
Id. at 658. (emphasis added). The court concluded =
that=20
Valence could begin operations less than thirty days after =
notifying the=20
parties of its proposed operations, but stated, Athe risk=20
of early commencement of such operations falls entirely on the =
operator=20
because if none of the working interest owners consent to =
participation=20
within thirty days, the operator bears the full cost of=20
operations.@ =20
Id. at 663. The court provided no exception for =
circumstances=20
in which the receiving parties=3D =
time for=20
electing to consent to participation in the operation is less than =
thirty=20
days.
Although=20
the dispute addressed in Oxley v. General Atlantic =
Resources.,=20
Inc. is much closer to the issue presented in this case and =
requires much the same analysis, the majority dismisses it. =
936 P.2d=20
943, 944B46 (Okla.=20
1997). In Oxley, a provision in the =
parties=3D =
joint=20
operating agreement provided that A[s]hould a=20
sale be made by Operator of its rights and interests, the other =
parties=20
shall have the right within sixty (60) days after the date of such =
sale,=20
by majority vote in interest, to select a new =
Operator.@ =
Id. at 944. The issue presented was whether a party =
could=20
change its vote for a successor operator within that sixty-day=20
period. Id. at 944B45. =20
The court concluded, AThe JOA=20
does not expressly address whether a party can change its vote for =
a=20
successor operator, which creates an ambiguity and requires=20
construction.@ =20
Id. at 945. Due primarily to contested facts =
regarding the=20
custom and usage in the industry,=20
the Oklahoma Supreme Court could not resolve the ambiguity, and it =
remanded the case. Id. at 946. Although =
Oxley is=20
not binding on this court, its reasoning is sound, and I similarly =
would=20
conclude that, at a minimum, a fact issue is present in this=20
case.
In sum,=20
the majority has chosen to add some words to the contract rather =
than=20
others. Although it is true that the contract provisions do not =
state that=20
a receiving party has Athirty=20
days to give notice of an election and to give notice of a change =
in a=20
prior election,@ =
it is=20
equally true that the contract states no circumstances under which =
the=20
thirty-day Notice Period expires in less than thirty =
days.
B. =20
Contract is Ambiguous
As in=20
Oxley, the issue here is whether a party can change its =
decision=20
within the time limit fixed by the contracts for making the=20
decision. The contracts here, like the contract in =
Oxley, do=20
not expressly state the answer. Nevertheless, courts must =
interpret=20
a contract by Aascertaining=20
the true objective intentions of the parties, based on the =
contract=20
language.@ =20
SAS Inst., Inc. v. Breitenfeld, 167 S.W.3d 840, 841 (Tex. =
2005)=20
(per curiam) (citing Coker, 650 S.W.2d at 393). The =
intent of=20
a contract is not changed simply because the circumstances do not=20
precisely match the anticipated scenarios. Id. =
Because=20
the interpretation urged by XTO is reasonable, the contracts are, =
at best,=20
ambiguous. Thus, I would reverse and remand the case for =
further=20
proceedings, and in light of that decision, I would not reach the =
question=20
of whether the trial court properly excluded or limited the =
purpose for=20
which the Barnhill affidavits were admitted.=20
/s/ =20
Eva M. Guzman
Justice
Judgment rendered =
and=20
Majority and Dissenting Opinions filed.
Panel=20
consists of Justices Frost, Seymore, and Guzman.
AConsideration of the facts and =
circumstances=20
surrounding the execution of a contract, however, is simply an aid =
in the=20
construction of the contract=3Ds language. There are =
limits. For=20
example, when interpreting an integrated writing, the parol =
evidence rule=20
circumscribes the use of extrinsic evidence.@ Id.
Although there are more recent =
editions of=20
Black=3Ds Law Dictionary, the sixth edition was =
released=20
in 1990, the same year in which XTO=3Ds predecessor-in-interest signed the =
first joint=20
operating agreement. The second joint operating agreement =
repeated=20
the same language. This edition therefore is more likely to =
express=20
the common understanding of the ordinary meaning of the words in =
light of=20
the circumstances present when the contract was executed. =
See Sun=20
Oil Co, 626 S.W.2d at 731.
In light of the parol evidence =
rule, I also=20
am not persuaded that it is appropriate to take notice of the =
existence or=20
contents of other model form operating =
agreements.
In addition, factual =
determinations were=20
necessary to address the argument that a candidate operator relied =
to its=20
detriment on the receiving party=3Ds original vote. This argument was =
of=20
secondary importance, because if the terms of the contract did not =
permit=20
a party to change its vote, then the court would not reach the =
question of=20
whether equitable grounds prevented a party from changing its vote =
in a=20
particular case. See id. at 946B47.
Like the majority, =
I would=20
not reach the question of whether XTO=3Ds interpretation is =
the only=20
reasonable construction of the contractual language because, as =
the=20
majority has explained, the ruling on XTO=3Ds motion for =
partial summary=20
judgment is not properly before this court for review. =
See=20
ante, at 5, n.3.=20
|