Perils of “Other Provisions” in the Model Form JOA

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Scriveners, when you add those “Other Provisions” in Article XVI of your model from JOA’s, are you sure that the document remains internally consistent, that no “Other Provision” conflicts with the form?

… Are you mindful of which of two related contracts will govern if there is a conflict in provisions? Did you choose the correct one?

Purchasers under a Purchase and Sale Agreement, do you fully understand the effect of the prevailing-contract provision in the underlying agreements?

In XH LLC v. Cabot Oil & Gas Corp., a PSA and a joint operating agreement between the parties’ predecessors were executed at the same time, for the same purpose, and in the course of the same transaction. One can tell from the language quoted by the court that the JOA was an AAPL Model Form 610. The question was whether Cabot’s acquisition of an overriding royalty interest was governed by the AMI provisions in the JOA.

Under the PSA, any lease subsequently acquired by either party within any of five separately-designated AMI’s established in the JOA would be subject to the AMI provision of the JOA.

The JOA’s subsequently-created-interest provision said, in effect:

III.C: Any override (and other interests not important here) created after the date of the agreement would be deemed a Subsequently Created Interest and the burden would be borne by the creating party alone.

JOA Article XVI, Other Provisions, said, in effect:

XVI.A: The JOA will be subject to the terms of the Purchase Agreement. In the event of any conflict between the two, the Purchase Agreement shall prevail.

XVI.G: Subsequently Created Interests shall be subject to this Agreement to the effect that:

If any party were to create an overriding royalty interest (and other interests not important here) after the effective date, such Subsequently Created Interest would be specifically subject to the terms and provisions of the JOA. Three scenarios were described, under all of which the party creating the interest would be responsible for it alone.

XVI.H: Article XVI trumps any other term of the JOA.

XVI.N established the five AMI’s, and gave each non-acquiring party the right to acquire their proportionate interest in any override (and other interests not important here) acquired by any other party.

XH’s View

Article XVI.N obligated Cabot to offer XH the right to purchase a proportionate share of the override. The two provisions were harmonious. The override was not subject to the JOA when Cabot acquired it and as a result was subject to the AMI provisions of the JOA.

Cabot’s View

Jane, you ignorant slut, the Purchase Agreement AMI conflicted with the JOA AMI provision and the Purchase Agreement trumped.

The Result

Cabot wins. The two provisions could not be harmonized. The PSA AMI was limited in scope to subsequently acquired leases, whereas the JOA AMI was broader and included overrides and other interests. Nothing in either agreement said that the JOA was to supplement the PSA. Thus, the override was not governed by the JOA’s AMI.

Musical Analogue

In the case of a song, which should prevail, the original or the cover? Here, you can choose between West Baton Rouge Parish’s own Slim Harpo or The World’s Greatest Rock ‘n Roll Band. The original trumps.

 

Topics:  Contract Drafting, Energy, Oil & Gas, Purchase Agreement

Published In: General Business Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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