“Construction” of a Well Pad Requires More than a Survey

Gray Reed
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Gray Reed

In Evans Resources, L.P., et al. v. Diamondback E&P, LLC, two agreements left the terms “constructed” and “utilized” undefined. If the terms had been defined would the outcome have been different? Maybe. Should parties define every term in an agreement? No, if they are content to rely on the ordinary meaning of the words.

The agreements

Appellant Evans granted an oil and gas lease to Bluestem Energy on 651 acres in Midland County. The other appellants, surface owners, executed a surface agreement.  The lease was amended to allow Bluestem to pool the property and the surface agreement was amended to allow offset wells from four “Approved Horizontal Well Pads or AHWPs”. The parties agreed to the general location of the AHWPs and would agree later on the “exact configuration” of each.  For each AHWP constructed, Bluestem would pay the surface owners $500,000. Bluestem then decided to sell its rights to Diamondback.  The surface owners wanted to condition the sale on Diamondback’s payment upfront for two of the AHWPs. After Diamondback and Bluestem assured the surface owners that Diamondback would immediately start the process to drill the wells, the surface owners consented. Diamondback surveyed and staked out locations for the four AHWPs and signed a Configuration Agreement but did not construct any of the AHWPs and refused to pay for each AHWP.

The claims

Evans and the surface owners sued for a declaration that location damages for each AHWP were due, breach of contract, and judicial foreclosure of a contractual lien on Diamondback’s interest in the land. Diamondback’s motion for partial summary judgment claimed it didn’t owe location damages for any AHWP that hadn’t been constructed and therefore, the request for foreclosure failed as a matter of law. The trial court granted Diamondback’s motion for partial SJ, and severed the claim for failure to pay location damages.

The appeal

Evans et al argued – unsuccessfully – that Diamondback improperly construed the contract to contain a condition precedent, failed to harmonize all provisions of the contract, and improperly found a condition precedent when there was a reasonable interpretation that avoided a forfeiture.

The court reasoned that the “purpose requiring payment” of AHWP Location Damages was the ‘construction’ of an AHWP.  Since “constructed” was not defined in the surface agreement, the court looked to dictionary definitions of “construct” and concluded that Diamondback was not required to pay Location Damages until it had moved the necessary parts of the AHWP onto the land.  This created a condition precedent. Diamondback was not required to pay location damages until it utilized the land for the construction of the AHWP.

The court declined to find an issue of fact as to whether Diamondback utilized the land when it surveyed and marked the locations for the AHWPs, or whether it damaged the land because the designation of the exact configuration of the AHQPs reduced the land value. “Utilized” was not defined in the agreements, but in any event Diamondback’s survey did not constitute utilizing the land for construction of AHWPs. Neither the survey nor the stakes that marked the AHWPs were parts or elements of the AHWPs. Second, to conclude that the agreements required payment for any exact configuration required reading a provision into the contract that wasn’t there.

A musical interlude to broaden your horizons.

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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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