Apache Corp. v. Apollo Expl.
| Decision Date | 28 April 2023 |
| Docket Number | 21-0587 |
| Parties | Apache Corporation, Petitioner, v. Apollo Exploration, LLC; Cogent Exploration, Ltd., Co.; and SellmoCo, LLC, Respondents |
| Court | Supreme Court of Texas |
Argued October 27, 2022
On Petition for Review from the Court of Appeals for the Eleventh District of Texas
Contracts regularly address time: when a contractual relationship begins or ends; by when a party must perform; after when it has become too late to do so. Such vital matters illustrate that contractual clarity is often every bit as important when talking about time as about anything else. Clarity comes from sound drafting, but sound drafting relies on confidence in the courts' ability and willingness to consistently interpret similar provisions. Since this Court's earliest days, we have confronted contracts that use the words "from" or "after" a specified date to measure a length of time. To enhance clarity, provide certainty, and prevent future disputes, our cases have long followed a default common-law rule in that circumstance, under which we must treat the time period as excluding the specified date (which we can call the "measuring date" for calculations). A period measured in years "from" or "after" a measuring date, therefore, ends on the anniversary of the measuring date, not on the day before the anniversary. See Home Ins. Co., N.Y. v. Rose, 255 S.W.2d 861, 862 (Tex. 1953). A year "from" or "after" June 30 ends on June 30 of the following year, not June 29.
This default rule is just a default. It does not even apply if time periods are not measured "from" or "after" a given date. Even when the rule does apply, parties may freely depart from it by demonstrating a clear contrary intent within their agreement, such as by expressly providing a different method for calculating time. They also can simply state the exact date on which a period ends. Texas courts will enforce any lawful agreement about how to measure or compute time.
In this case, however, the parties' agreement implicates the default rule without displacing it. We must therefore apply the default rule to the parties' dispute. Because the court of appeals did not do so-and because we also conclude that it incorrectly construed other contractual provisions at issue-we reverse its judgment on the issues presented for our review and remand the case to that court for further proceedings.
The facts and procedural history are complex, but at its core this case concerns whether petitioner, Apache Corporation breached its purchase-and-sale agreements, or "PSAs," with respondents (whom we collectively call the "Sellers").[1] In those PSAs, Sellers sold 75% of their working interests in 109 oil-and-gas leases to Apache. The parties ask us to resolve key questions of contract construction.
In 2007, respondent Cogent Exploration entered into an oil-and-gas lease for the Bivins Ranch in the Texas Panhandle. Respondents Apollo Exploration and SellmoCo also owned an interest in the lease, and so did Gunn Oil Company. Collectively, Sellers and Gunn owned 98% of the working interest in the Bivins Ranch lease and a number of other leases within what Apache, Gunn, and Sellers called the "Bivins Area," with Gunn having the largest interest at 50.17%.[2] The Bivins Ranch lease originally included 101,287.35 acres, but in 2008 it was amended to add another 14,731.72 acres.
The Bivins Ranch lease stated that its effective date was January 1, 2007, "from which date the anniversary dates of this Lease shall be computed." (Emphasis added.) The lease also provided that it would "be in force for a Primary Term of three years from the effective date of this Lease." (Emphasis added.)
The parties simultaneously executed and recorded a memorandum of lease. Parties often execute a memorandum of lease to provide record notice of the lease while keeping the lease details confidential. See, e.g., 2 Eugene Kuntz, A Treatise on the Law of Oil and Gas § 19.16 (Supp 2022); 5 Nancy Saint-Paul, Summers Oil and Gas § 56.2 (rev. 3d ed. 2018). For example, in this case, the lease stated that the memorandum was executed "to give record notice of this Lease" and barred the parties from recording the lease itself without the lessors' consent.
The memorandum summarized the lease: it named the parties, described the land, listed some of the lease's provisions, and stated that "Lessors do hereby demise, lease, and let unto Lessee the lands described above upon the terms and conditions of the Lease." However, the memorandum also made clear that the lease, not the memorandum, governed the parties' relationship. The memorandum stated that the lease was "upon the terms, for the consideration, and subject to the conditions in the Lease specified." Notably, the memorandum listed December 31, 2009, as the primary term's expiration date.
The end of the primary term did not necessarily mean the end of the lease. The Bivins Ranch lease allowed the lease to continue after the expiration of the primary term under certain conditions. Relevant here is the lease's continuous-drilling provision. To continue the lease under this provision, the lease required a producing well[3] to be located on the land before the primary term expired. If this prerequisite was met, the lessee then had to create three equally sized blocks and to "conduct[] continuous drilling operations on each designated block" by drilling 20,000 feet in each block each year.
Sellers and Gunn therefore could extend the lease. Before the primary term expired, they drilled a well and divided the lease into the required three blocks. (One of them-the North Block-turned out to be especially significant for this case.) That division did not initially play an important role because annual lease amendments for 2010 to 2014 permitted treating the three blocks as one. Specifically, the lease could-and for each of those years did-continue by drilling 60,000 feet in the aggregate.
During that period, in March 2011, Sellers and Gunn sold 75% of their working interest in the Bivins Area leases to Apache. This gave Apache a 73.5% working interest in those leases.[4] The four companies each executed substantively identical purchase-and-sale agreements with Apache, and two PSA provisions are particularly significant here.
First, § 2.5 allowed each Seller to "back in" for up to one-third of the interests it conveyed to Apache if the leases reached "Two Hundred Percent (200%) of Project Payout."
Second, § 4.1 required Apache to provide Sellers by November 1 of each year a "written budgeted drilling commitment" for the "upcoming calendar year." If this commitment contemplated or would result in the loss or release of any of the leases in the next year, Apache was required to offer "all of [its] interest in the affected Leases (or parts thereof) to Seller at no cost to Seller." If the seller company accepted, Apache was required to "transfer and assign the affected Leases (or parts thereof) to Seller." Apache had to make a good-faith effort to follow the commitment, but Apache was not liable if it was unable to fulfill the commitment's objectives despite those efforts.
Also significant is the PSAs' incorporation of a joint operating agreement (JOA) between Apache as operator and the four seller companies (Sellers and Gunn) as nonoperators for the Bivins Area leases.[5] In 2014, Apache bought out Gunn's interest in the leases, as well as Gunn's PSA rights.
This brings us to 2015. Until then, the annual amendments had allowed drilling 60,000 feet in the aggregate to extend the lease. But the Bivins family declined to again amend the lease, so the original 20,000-foot-per-block requirement went into effect for 2015. That requirement was not met for the North Block for that year. Apache and Sellers agree that the North Block expired. But-in what is the central question in this case-they disagree on the precise date it expired.
In Sellers' view, the North Block expired or was released on December 31, 2015 (or at some other unspecified time in 2015 when Apache ceased to comply with the continuous-drilling provision). Apache contends that the North Block expired one day later: January 1, 2016.
The unusual features of this case mean that this single-day discrepancy could entail a full-year consequence. As noted above, § 4.1 required Apache to offer back leases that its annual written budgeted drilling commitment anticipated losing or releasing in the next calendar year. For each calendar year, the deadline for submitting the written commitment was November 1 of the year before. Therefore, written commitments submitted November 1, 2014, covered leases anticipated to be lost or released between January 1, 2015, and December 31, 2015. Written commitments submitted November 1, 2015, covered leases anticipated to be lost or released between January 1, 2016, and December 31, 2016.
Sellers therefore argue that, if their expiration date of December 31, 2015, is correct, then § 4.1 of the PSAs required Apache to have offered the North Block back to Sellers on November 1, 2014-the deadline for Apache's 2015 written commitment. Apache argues that if its expiration date of January 1, 2016, is correct, then § 4.1 required Apache to have offered back the North Block on November 1, 2015-the deadline for Apache's 2016 written commitment.[6]
What difference does all this really make? Oil prices and land values plunged between 2014 and 2015, so the single-day dispute over the expiration turns out to matter a great deal. According to Apache, approximately $180 million of potential damages rides on the answer to whether the North Block portion of the lease expired on New Year's Eve or New Year's Day.
It is not as though...
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