KMI Continental Offshore Production Co. v. ACF Petroleum Co.

• Decision Date: 15 January 1987
• Docket Number: No. 01-86-0054-CV,01-86-0054-CV
• Citation: 746 S.W.2d 238
• Parties: KMI CONTINENTAL OFFSHORE PRODUCTION CO., et al., Appellants, v. ACF PETROLEUM CO., et al., Appellees. (1st Dist.)
• Court: Texas Court of Appeals

Page 238

746 S.W.2d 238

KMI CONTINENTAL OFFSHORE PRODUCTION CO., et al., Appellants, v. ACF PETROLEUM CO., et al., Appellees.

No. 01-86-0054-CV.

Court of Appeals of Texas Houston (1st Dist.).

Jan. 15, 1987.

Rehearing Overruled March 3, 1988.

Larry R. Veselka, Jane F. Warmack, Vinson & Elkins, Houston, for appellants.

Reinnette Morin Marek, Michael L. Grove, Charles E. Frost, Jr., Chamberlain, Hrdlicka, White, Johnson & Williams, K. Charles Peterson, Reynolds, Allen & Cook, Houston, for appellees.

Before DUGGAN, HOYT and LEVY, JJ.

OPINION

LEVY, Justice.

KMI Continental Offshore Production Co. ("KMI") and Florida Exploration Company ("Florida") appeal from a summary judgment entered against them. The dispute centers around an oil and gas exploration agreement the parties entered into and whether KMI and Florida timely exercised an option available to them by the agreement. We hold that KMI and Florida did not timely exercise their option, and affirm the judgment.

On January 1, 1976, Florida, ACF Petroleum Co. ("ACF"), and Chessie Resources, Inc. ("Chessie"), ¹ entered into an oil and gas exploration agreement called the Midland III Agreement. Florida was the agent for the venture and was responsible for acquiring and operating oil and gas prospects. ACF and Chessie were "non-operating participants" and primarily contributed their money to the venture, although they were involved in many of the decisions made by the venture. Each company held an interest in the properties purchased for the venture.

In addition to the initial interest it held in the prospects, Florida was given an option to acquire 20% of the nonoperating participants' interests in all wells drilled for the venture that were designated "Tested Prospects." The option was to run for "ninety (90) days from the date the parties have agreed in writing to be a Payout Date...." "Payout Date" was defined as the date on which certain expenses equaled certain revenues. The determination of Payout Date was necessary for defining the period within which Florida's option could be exercised.

The parties terminated the agreement on December 31, 1981, but agreed that the option would survive the termination. They did not attempt to divide certain of the jointly owned property upon termination either, but continued to hold undivided interests, among which were the Tested Prospects. Not until July, 1984, did any of the parties again communicate concerning the ownership of the properties in issue in this lawsuit. At that time, ACF requested from Florida records and assignments of interest on several Tested Prospects for which it had not received assignments of interest. No response was received to this request, so a second request was sent in August of 1984. On September 7, 1984, Florida notified ACF and Texas Gas (Chessie Resources' successor in interest) that payout had occurred for the Tested Prospects from the fifth calendar year of the Midland III Agreement. Florida requested that the parties get together to agree on the Payout Date.

ACF and Texas Gas agreed that payout had probably occurred in 1982. However, because nearly two years had passed since the estimated Payout Date, ACF and Texas Gas maintained that the contractual time period for exercising the option had expired. In fact, by June of 1983, ACF and Texas Gas had concluded, from records sent to them by Florida, that the Payout Date had occurred and, by late 1984, assumed that Florida's option had long since expired. They demanded that Florida send them their assignments of interest for the disputed properties. Florida eventually complied with their request, but assigned them only 80% of their interests, retaining the additional 20% interest it believed it could acquire under the option, in spite of its lengthy delay in reporting the passing of Payout Date.

When the parties could not reach an agreement concerning the additional 20% interest Florida claimed to own, ACF and Texas Gas filed suit and moved for summary judgment, alleging six bases for entry of the summary judgment: 1) the contract unambiguously requires Florida to exercise its option within 90 days from Payout Date, which Florida failed to do; 2) Florida was estopped from asserting its option; 3) Florida waived its right to exercise the option; 4) the option provision violates the Rule Against Perpetuities; 5) the option provision is legally deficient for lack of a time provision; and 6) Florida did not exercise the option within a reasonable time after Payout Date. Appellants claimed in a cross-motion for summary judgment that the contract unambiguously provides for the option to run, not from Payout Date but from the date the parties agreed in writing on the date Payout occurred and, therefore, that the option period had not yet begun because no agreement in writing had been reached. The trial court overruled appellants' motion for summary judgment and granted the motions of ACF and Texas Gas for summary judgment, without specifying its reasons for granting their motions.

Appellants raise seven points of error in this Court. They first claim that the trial court erred because the contract unambiguously provides for the option period to begin to run from the date upon which the parties agreed in writing that Payout occurred on a particular date. They next claim that even if the contract is found to be unambiguous, they raised a fact issue concerning what the parties intended the option provision to mean. In their third and fourth points of error, appellants claim that the trial court erred in granting the summary judgment because they did not waive their rights to exercise the option, nor were they estopped from exercising the option. In the fifth point of error, they claim that the provision does not violate the Rule Against Perpetuities, and in the sixth point of error they claim that the option provision was not legally deficient for lack of a time limitation. Finally, appellants claim that the trial court erred in denying their cross-motion for summary judgment.

We first consider appellants' claim that the contract is unambiguous and that the proper interpretation of the option provision is that it ran for 90 days from the date the parties reached a written agreement concerning the date payout occurred. Both parties argue that the contract is unambiguous, and we agree with their conclusions, as explained more fully below. Their disagreement is over the proper construction of the option provision. In an instance such as this, when the contract is unambiguous and the parties disagree on how to construe the contract, our adjudicative function is to determine which interpretation gives effect to the parties' intentions as expressed in the contract. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 727 (Tex.1982).

It is the general rule of law of contracts that where an unambiguous writing has been entered into between the parties, the courts will give effect to the intention of the parties as expressed or as is apparent in the writing. In the usual case, the instrument alone will be deemed to express the intention of the parties for it is objective, not subjective, intent that controls.

City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d. 515, 518 (Tex.1968).

[The intention of the parties] must be deduced not from specific provisions or fragmentary parts of the instrument, but from the entire agreement, because the intent is not evidenced by any part or provision of it, nor by the instrument without any part or provision of it, but by every part and term so construed as to be consistent with every other part and with the entire contract.... The actual intent of the parties when thus ascertained must prevail over the dry words, inept expressions, and careless recitations in the contract, unless that intention is directly contrary to the plain sense of the binding words of the agreement.

Witherspoon Oil Co. v. Randolph, 298 S.W. 520, 522 (Tex.Comm'n App.1927, judgm't adopted); see also Coker v. Coker, 650 S.W.2d 391, 393-394 (Tex.1983).

Those provisions that appear to be in conflict should be harmonized. McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957). Evidence of the circumstances surrounding the execution of the contract should be considered, but the circumstances are merely an aid in the construction of the contract's language. Moreover, the circumstances to be considered are not the parties' statements of what they intended the contract to mean, but circumstances known to the parties at the time they entered into the contract, such as what the industry considered to be the norm or reasonable and prudent. We also must factor into our consideration that we are construing a purchase option, which is to be construed in favor of the buyer, and so interpreted as to give the option effect rather than another interpretation that would render the option meaningless. Coker v. Coker, 650 S.W.2d at 394; Sinclair Refining Co. v. Allbritton, 147 Tex. 468, 218 S.W.2d 185, 188 (Tex.1949).

In examining the contract, we find that Florida was required as agent of the venture to direct and supervise the venture, to maintain offices, to obtain legal and independent geological, engineering, and other services, to recommend properties to consider for the venture, and "to maintain such records and accounts as are customary in the industry and as may be necessary to fulfill the requirements and obligations elsewhere set forth in this Agreement." Payout Date is determined from a formula based on the revenues and expenses of the Tested Prospects. Tested Prospects Expenditures, which comprise part of the formula, are defined in the following way:

At the end of the First calendar year, the Second calendar year, the Third calendar year and each subsequent actual calendar year, both during and after the term of this Agreement, a determination shall be made by Florida and each Non-Operating Participant of such Non-Operating...