Antero Res. Corp. v. Directional One Servs. Inc. USA

• Citation: 873 S.E.2d 832
• Decision Date: 08 April 2022
• Docket Number: 20-0965
• Parties: ANTERO RESOURCES CORPORATION, Defendant below, Petitioner, v. DIRECTIONAL ONE SERVICES INC. USA, Plaintiff below, Respondent.
• Court: Supreme Court of West Virginia

873 S.E.2d 832

ANTERO RESOURCES CORPORATION, Defendant below, Petitioner,

v.DIRECTIONAL ONE SERVICES INC. USA, Plaintiff below, Respondent.

No. 20-0965

Supreme Court of Appeals of West Virginia.

Submitted: February 16, 2022

Filed: April 8, 2022

Ancil G. Ramey, Esq., Steptoe & Johnson PLLC, Huntington, West Virginia, W. Henry Lawrence, Esq., John D. Pizzo, Esq., Steptoe & Johnson PLLC, Bridgeport, West Virginia, Counsel for Petitioner Antero Resources Corporation.

Lonnie C. Simmons, Esq., DiPiero Simmons McGinley & Bastress, PLLC, Charleston, West Virginia, Christopher Kamper, Esq., Carver Schwarz McNab Kamper & Forbes, LLC, Denver, Colorado, Counsel for Respondent Directional One Services Inc. USA.

HUTCHISON, Chief Justice:

In this appeal from the Business Court Division of the Circuit Court of Tyler County, we consider the circuit court's ruling that because two separate documents involved the same parties, the same subject, and the documents were clearly related, then they should be construed together as the terms of one contract between the parties. Moreover, we examine the circuit court's efforts to harmonize the two documents and give every word, phrase and clause meaning, particularly in light of how the parties interpreted and applied the two documents over a three-year period. As we discuss below, we find no error in the circuit court's rulings.

I. Factual and Procedural Background

The underlying facts in this case are undisputed. Further, the parties agree that they have a binding contract; however, the terms of that contract are in dispute. Essentially, the parties dispute who bears the cost for natural gas drilling equipment that is "lost in hole" or "LIH," that is, when tools and equipment used for drilling get stuck down a drill hole and must be abandoned.

Defendant Antero Resources Corporation ("Antero") produces natural gas and related products in the shale formations of the Appalachian Basin. Natural gas fields are brought into production by either Antero, or an agent supervised by Antero, drilling a well.

Plaintiff Directional One Services Inc., USA ("Directional One") is a "directional" drilling equipment supplier. Directional One supplies Antero or the Antero agents who drill the natural gas wells with the "bottom hole assembly," the assemblage of tools and equipment that steers the lower portion of a drill string deep into the earth and thousands of feet horizontally through gas-rich shale deposits. Antero and/or its agents attach Directional One's tools and equipment to other drilling equipment controlled by Antero or its agents. Directional One also supplies people who repair the tools and equipment, monitor the drilling, and advise the driller on how to steer the bottom hole assembly. Directional One claims its equipment uses a process of drilling shale "on air" that is faster and more efficient than conventional drilling, thereby saving Antero significant sums of money, but the process subjects the equipment on the bottom hole assembly to a more violent and destructive environment.

At Antero's request, on August 25, 2014, Directional One submitted a "directional drilling proposal" to Antero's director of drilling operations. This written proposal, what the parties refer to as a "rate sheet," says on the first page that "all work quoted within will be performed under our ... Terms and Conditions." The document laid out Directional One's daily fees for supplying various types of directional tools and equipment. Importantly, the rate sheet also contained a separate list of "Replacement / Lost in Hole Prices," and a statement that if any Directional One equipment was "lost, damaged, [or] destroyed" below ground in the drilling borehole then Antero would reimburse Directional One those amounts. Moreover, the rate sheet contained a section of "General Terms and Conditions," including a provision permitting Antero (or its agents) to either "fish" out equipment lost in the drilling hole or to pay the replacement cost:

In the event any of Directional ONE[’s] ... down-hole equipment is damaged or lost in the well, [Antero] shall either recover same without cost to Directional ONE ... or pay for any damage to or loss of such equipment.

Finally, the rate sheet contained a "Lost In Hole Liability Reduction" provision whereby Antero could elect to pay a higher daily rate for equipment for each well and, if Directional One's equipment was later lost in the drilling hole, then Antero would pay "50% only of published ‘Lost in Hole’ charges."¹

Antero's director of drilling operations later testified that he reviewed Directional One's lost-in-hole rates and found them reasonable and typical for the industry and for Antero's other drilling contractors. On September 19, 2014, Antero's director of drilling operations signed and accepted "the terms and conditions" in Directional One's proposed rate sheet.

The parties executed a second document on September 19, 2014, a contract drafted by Antero and titled "Master Services Agreement" or "MSA." The 2014 MSA, which the parties made effective "as of August 29, 2014," is an 18-page document outlining the relationship between the parties. The parties subsequently executed a new MSA a year later, effective September 30, 2015, that the parties agree is identical in all relevant aspects to the 2014 MSA.

The two MSAs state that "the Parties are entering into this Agreement because [Antero] may, from time to time, request Work to be performed by [Directional One]." The MSA does not specifically define what "work" Directional One would be doing for Antero, but it does provide this general definition of the term:

"Work " shall mean any and all services, labor, experience, expertise, vehicles, equipment , supplies, tools , manufactured articles, materials, facilities, and/or goods (in whole and/or in part) to be provided by [Directional One] to [Antero] pursuant to this Agreement and/or any Order.

(Italics added). The MSA does, however, provide that Antero would pay for any "work" according to Directional One's "published schedule of rates and/or prices":

[Antero] will pay [Directional One] for Work that is satisfactorily rendered and in accordance with this Agreement ... in accordance with [Directional One]’s published schedule of rates and/or prices, as such rates and/or prices are in effect on the date of the Order[.]

Neither the 2014 nor the 2015 MSA contains any schedule of rates or prices by which Directional One would be paid for its services, nor do the MSAs outline the services, expertise, tools, or equipment that Directional One would provide.

After producing its initial proposed rate sheet in 2014, Directional One periodically issued new rate sheets that reflected fluctuations or discounts in prices for equipment and services it supplied to Antero. By their terms, rate sheets could be updated on 30 days’ notice. Antero never signed any of these subsequent rate sheets, but it also never objected to any rate sheet or, more importantly, objected to any of the terms and conditions in any rate sheet.

Over the following three years, Antero regularly paid Directional One's invoices formed on the basis of the then-current rate sheet. Antero paid for repairs to equipment and tools that were damaged in the drilling process. More importantly, the record reflects that on at least four occasions Antero paid invoices for Directional One equipment and tools that were lost in hole.² Three of these invoices involved equipment lost under the 2014 MSA and before the execution of the 2015 MSA, but despite Directional One seeking reimbursement for lost-in-hole equipment and Antero's full payment of those invoices, neither party requested any consequential change to the MSA.

Between 2014 and 2017, the parties worked together and drilled more than 250 wells. Antero routinely elected and paid extra fees under the "Lost In Hole Liability Reduction" provision in Directional One's rate sheets, a payment that reduced its later expense for equipment lost in a drilling hole. However, Antero's director of drilling operations testified that, in late 2017, Antero elected to stop paying the liability-reduction fee as "a pure economic decision" based on "the performance demonstrated" after "nearly three years of development of a new drilling technique."

While one Antero employee thought the move reflected Antero's "appetite of risk," another testified that "[j]ust because ... you haven't wrecked your car, doesn't mean you drop your car insurance."

On December 20, 2017, Antero began drilling the Jameson Unit 1H well in Tyler County, West Virginia, and used equipment and expertise supplied by Directional One. Antero did not elect or pay for the protection offered by the "Lost In Hole Liability Reduction" provision of the rate sheet. On December 29th, an Antero agent operating the drill string allegedly failed to follow a recommendation from a Directional One employee and the drill string became stuck in the well. Antero attempted to fish the equipment out of the well but was unsuccessful. Antero then plugged the wellbore with cement, preventing Directional One from retrieving its equipment, on January 3, 2018.

Directional One submitted an invoice to Antero for $762,425.30 for the Jameson Unit 1H equipment according to the lost-in-hole fees on its rate sheet. Antero refused to pay the invoice and demanded further information. When Directional One resisted producing information and insisted Antero pay, Antero threatened to audit all of Directional One's past invoices. When Directional One threatened to walk off the drilling job, Antero apparently threatened legal action.

Then, on February 23, 2018, Antero was drilling a different well, the Jack Unit 2H, using Directional One's equipment. Again, Antero neither elected nor paid for the liability-reduction provision. Again, Directional One's equipment became lodged in the bore hole. Antero could not fish the lost-in-hole equipment out and the wellbore was cemented over....