Palace Exploration v. Petroleum Development

• Decision Date: 02 July 2004
• Docket Number: No. 03-5141.,03-5141.
• Parties: PALACE EXPLORATION COMPANY, Plaintiff-Appellant, v. PETROLEUM DEVELOPMENT COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 951

374 F.3d 951

PALACE EXPLORATION COMPANY, Plaintiff-Appellant, v. PETROLEUM DEVELOPMENT COMPANY, Defendant-Appellee.

No. 03-5141.

United States Court of Appeals, Tenth Circuit.

July 2, 2004.

Fred M. Buxton of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, OK, for Plaintiff-Appellant.

Randall G. Vaughan (John L. Randolph Jr. with him on the brief) of Pray, Walker, Jackman, Williamson & Marlar, Tulsa, OK, for Defendant-Appellee.

Before MURPHY, McKAY, and TYMKOVICH, Circuit Judges.

McKAY, Circuit Judge.

This appeal involves the interpretation of an agreement between Plaintiff-Appellant Palace Exploration Company ("Palace"), an oil and gas investor, and Defendant-Appellee Petroleum Development Company ("PDC"), a petroleum company, related to the drilling of a well in Oklahoma. Appellant agreed to invest in one of Appellee's drilling prospects. The maps originally sent to Appellant prior to the agreement contained an inaccuracy.¹ Appellee moved the location of the well approximately 1600 feet because of the inaccuracy but did not inform Appellant of the move.

Appellant initially brought this action in New York state court seeking recision of the exploration agreement and the joint operating agreement that established its partnership in the subject well with Appellee. The case was removed to federal court and transferred to the Northern District of Oklahoma. The district court refused to allow a claim for breach of contract for gross negligence. On appeal, we reversed and remanded. Palace Exploration Co. v. Petroleum Dev. Co., 316 F.3d 1110 (10th Cir.2003).

On remand, the district court was ultimately left with the question of whether Appellant could prevail on a claim for breach of contract for gross negligence. Appellee filed for summary judgment. The district court granted the motion holding that there was no ambiguity in the written agreement and that the record did not support a finding of gross negligence. Appellant appeals this ruling. We review de novo the district court's grant of summary judgment applying the same legal standards as the district court. Steele v. Thiokol Corp., 241 F.3d 1248, 1252 (10th Cir.2001). A grant of "[s]ummary judgment is appropriate `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Id. (quoting Fed.R.Civ.P. 56(c)). In "applying this standard, we view the evidence and draw reasonable inferences therefrom in the light most favorable to the nonmoving party." Id. The relevant facts are set forth in detail in our previous opinion. See Palace Exploration, 316 F.3d at 1112-16.

Appellant first argues that the district court erred in deciding that the agreements were unambiguous. At issue are the exploration agreement ("EA") and the joint operating agreement ("JOA") which were prepared by PDC and executed by Palace. "The EA provided that the initial test well would be drilled `in the NW/4 of Section 8, Township 3 North, Range 16 East, Pittsburg County' and the JOA provided that the well would be drilled `in a legal location in the W/2 of Section 8-T3N-R16E, Pittsburg County.'" Id. at 1114 (quoting EA at 2, JOA at 4); Aplt.App. at 122, 132-33. Neither agreement provided for a more precise drilling location. See id. The parties do not dispute that the EA and JOA, construed together, do not create an ambiguity. Rather, the EA described a slightly more specific location than that described in the JOA. Both the JOA and the EA descriptions encompass the original incorrect well location and the new well location.

In order to create an ambiguity in the agreements, Appellant relies on the authority for expenditure cost estimate ("AFE") provided by PDC and attached to the EA. The EA provides that "[t]he estimated drill and test costs for the initial test well are listed in the Authorization for Expenditure (AFE) attached as Exhibit `B'" and further states that the AFE is "incorporated in and made a part hereof." Aplt.App. at 122, 124. Appellant argues that the AFE created an ambiguity as to the location of the well by supposedly indicating a more specific location within that described by the JOA and EA. The AFE indicates that the location of the well is the "SE Haileyville Prospect SEC. 8-T3N-R16E Pittsburg County, Oklahoma." Id. at 125. Appellant's argument is that the district court ignored the AFE's indication of a specific well location — "SE Haileyville Prospect." Appellant further argues that this specific location was an undefined term in the contract but it was defined by the incorrect maps sent by Appellee to Appellant prior to signing of the agreements.

Appellant's argument must fail. "The JOA [and EA are] contract[s] to be construed like any other agreement." Pitco Prod. Co. v. Chaparral Energy, Inc., 63 P.3d 541, 545 (Okla.2003). "Whether a contract is ambiguous so as to require extrinsic evidence to clarify the doubt is a question of law for the courts." Lewis v. Sac and Fox Tribe of Okla. Hous. Auth., 896 P.2d 503, 514 (Okla.1994). When "a contract is clear and free of ambiguity, the court is to interpret it as a matter of law." Id. "Where ... a contract is complete in itself and, when viewed as a totality, is unambiguous, its language is the only legitimate evidence of what the parties intended." Id. The parties'"intention cannot be determined from the surrounding circumstances, but must be gathered from a four-corners' examination of the instrument." Id.

As noted above, the two binding contracts executed by the parties, the EA and the JOA, are unambiguous. The EA and the JOA provide a specific legal description for the well location which does not provide for a staked surface location or impose upon Appellee an obligation to advise the working interest owners of the specific site chosen. The new location was within the outer bounds of the legal description provided by the agreements.

Because the EA and JOA were unambiguous, it was unnecessary for the district court to consider extrinsic evidence such as the AFE and maps. The purpose of the AFE was to provide a cost estimate for the drilling of the well. It did not purport to further define the well's location. The undefined term "SE Haileyville Prospect" does not change the legal description in the two binding contracts. We agree with the district court that "the contract provides for specific legal descriptions, and in fact the well was drilled within the four corners of those legal descriptions." Aplt.App. at 249.

Appellant next argues that the district court erred in its application of the exculpatory clause of the JOA.² The exculpatory clause shields Appellee from liability unless it acted with gross negligence or willful misconduct. Specifically, the JOA designated that PDC, as operator of the contract area, "shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful...