On May 22, 2014, the Texas Court of Appeals in Waco ruled on a breach of contract claim stemming from an oil and gas venture between two oil and gas companies. The appellant, Fleet Oil & Gas, and appellee, EOG Resources entered into a Lease Acquisition and Participation Agreement in May of 2007. The agreement contained two sections. The first section, the lease acquisition, is as follows: Fleet desires to sell and EOG wishes to purchase all of Fleet’s right, title and interest in 100% of certain oil and gas and mineral rights leases in Johnson County, Texas. EOG will pay $3,500 per net leasehold acre, resulting in an initial purchase price payment of $1,736,845.00. EOG currently owns 108.690 net acres out of the Hendricks Survey and Fleet owns 495.670 net acres out of the same survey.
The parties additionally executed a joint operating agreement (JOA) in conjunction with the second section, the participation agreement. This agreement outlined the terms for extracting oil and gas from the contract area and the interests of the parties in respect to the contract area. The agreement states that “Regardless of the record title ownership of the leases within the contract area, EOG shall own 75% working interest, and Fleet shall own 25% working interest.” The trial court interpreted this clause to mean that Fleet is entitled to 25% working interest to all of EOG’s leases within the contract area, including the 108.690 net acres EOG already owned. It is likely that EOG only meant to give Fleet 25% working interest on the 495.670 net acres conveyed by Fleet to EOG. However, the written agreement does not illustrate that intention. Therefore, according to the agreement, Fleet is entitled to 25% working interest in all of EOG’s leases in the Contract Area, being the entire 604.36 net acres. In addition to the participation of the working interest, EOG agreed to: (1) commence actual drilling operations on not fewer than 3 wells on the contract area before November 15, 2007, and “diligently prosecute the drilling, completion and sale of gas from such wells; and to drill, frac, equip, complete, and deliver gas to initial sales from at least 12 wells, and to commence actual drilling operations on at least 2 additional wells.” In the event that EOG fails to adhere to the drilling operations stated above, Fleet’s working interest shall increase from 25% to 30%, and EOG’s working interest shall be reduced from 75% to 70%.
On February 12, 2008, Fleet sent a letter to EOG claiming that EOG was in default under the drilling operations clause of the lease because EOG had failed to “diligently prosecute the drilling, completion and sale of gas” from the 3 initial wells they had drilled. Therefore, Fleet contended that they were entitled to a 5% increase in their working interest.
At trial, Fleet sought a declaratory judgment that EOG was required to diligently prosecute the drilling, completion, and sale of gas from the 3 initial wells and that its failure to do so resulted in an increase in Fleet's working interest from 25% to 30%. Additionally, Fleet sought declaratory judgment that it had a 25% working interest in all the EOG leases in the contract area, and EOG could only deduct the actual royalty burden from revenue attributable to Fleet’s working interest in EOG leases. Therefore, Fleet brought a claim for breach of contract resulting from EOG’s failure to pay them 25% working interest in the entirety of the Contract Area.
In response to Fleet’s arguments, EOG sought a declaratory judgment that under the agreement, they did in fact commence actual drilling operations on no fewer than 3 wells before November 15, 2007, and did diligently prosecute the drilling, completion, and sale of gas from these wells. Therefore, the two parties’ working interests remained the same and Fleet was not entitled to a 5% working interest increase. EOG also sought damages in the form of attorney’s fees.
The trial court submitted two issues, the “diligence issue” and the “working interest issue.” For the diligence issue, the jury ruled in favor of EOG, stating that EOG did not fail to diligently prosecute the completion and sale of gas from the initial 3 wells. On the working interest issue, the jury found for Fleet, finding that Fleet and EOG did agree that Fleet would own a 25% working interest, subject only to actual burdens, over the entire Contract Area. The trial court concluded that EOG was the “prevailing party” in the dispute, and were entitled to recover the cost of attorney’s fees from Fleet. Fleet was not awarded attorney fees, and appealed this ruling.
On appeal, Fleet argued that EOG was not entitled to attorney’s fees. The appellate court agreed with Fleet, and ruled that “to recover attorney’s fees in Texas, a party must (1) prevail on a cause of action for which attorney’s fees are recoverable, and (2) recover damages.” A party who defends against a plaintiff’s claim but presents no breach of contract claim themselves is not entitled to recover attorney’s fees. EOG did not “prevail on a cause of action” in this matter. Rather, they successfully defended against Fleet’s cause of action. Furthermore, EOG did not recover any damages in the litigation. Because EOG failed to satisfy either of the two elements listed above, the Court of Appeals ruled that that EOG was not entitled to an award of attorney’s fees from Fleet.
Fleet additionally claimed that they were entitled to the award of attorney’s fees which the trial court refused. Using the same elements listed above to qualify for attorney’s fees, the appellate court ruled that Fleet was entitled to attorney’s fees because Fleet “prevailed on a cause of action for which attorney’s fees are recoverable, Fleet’s breach of contract claim resulting from EOG’s failure to pay them 25% working interest in the Contract Area. Fleet also satisfied the second element since they “recovered damages” in the stipulated amount of money which EOG failed to pay them of the entire 25% working interest. Thus, the end result was a flip-flop of the attorney’s fee awards, resulting in an additional net loss to EOG of approximately $700,000.
Oil and Gas Law Blog
Brandon M. Barchus