Trans-Western Petroleum, Inc. v. U.S. Gypsum Co.

• Decision Date: 16 June 2016
• Docket Number: No. 20140453,20140453
• Citation: 379 P.3d 1200,2016 UT 27
• Parties: Trans–Western Petroleum, Inc., Appellant, v. United States Gypsum Company, Appellee.
• Court: Utah Supreme Court

379 P.3d 1200

2016 UT 27

Trans–Western Petroleum, Inc., Appellant,

v.United States Gypsum Company, Appellee.

No. 20140453

Supreme Court of Utah.

Filed June 16, 2016

Thomas W. Clawson, Stephen K. Christiansen, Salt Lake City, for appellant.

Patricia W. Christensen, Matthew J. Ball, Salt Lake City, for appellee.

Justice Himonas authored the opinion of the Court, in which Chief Justice Durrant, Associate Chief Justice Lee, and Judge Orme joined.

Having been recused, Justice Durham did not participate herein: Court of Appeals Judge Gregory K. Orme sat.

Justice John A. Pearce became a member of the Court on December 17, 2015, after oral argument in this matter, and accordingly did not participate.

Justice Himonas, opinion of the Court:

INTRODUCTION

¶ 1 The following question is before us upon certification from the United States Court of Appeals for the Tenth Circuit: “How should expectation damages be measured for the breach of an oil and gas lease?” For reasons detailed below, we hold that expectation damages for the breach of an oil and gas lease are measured in much the same way as expectation damages for the breach of any other contract. Such damages may include general (or direct) and consequential (or special) damages. “[G]eneral damages are those that flow naturally from the breach....” McCleve Props., LLC v. D. Ray Hult Family Ltd. P'ship , 2013 UT App 185, ¶ 17, 307 P.3d 650 (citation omitted). Within the context of this case, we measure general damages as the difference between the contract price of the lease and the market value of the lease at the time of the breach. Consequential damages, on the other hand, are those that are “reasonably within the contemplation of, or reasonably foreseeable by, the parties at the time the contract was made.” Id. (citation omitted). And we measure consequential damages “not by the value of the promised performance alone but by the gains such performance could produce for collateral reasons, or the loss that is produced by the absence of such performance.” DAN B. DOBBS, LAW OF REMEDIES § 12.1(1) (2d ed. 1993). We further hold that trial courts may, in their discretion, allow the use of post-breach evidence to help establish and measure expectation damages.

BACKGROUND

¶ 2 The Tenth Circuit case at issue concerns Trans–Western Petroleum, Inc. (Trans–Western), a Colorado corporation involved in the buying and selling of oil and gas leases, and United States Gypsum Company (U.S. Gypsum), a Delaware corporation that owns the oil and gas beneath 1,720 acres in Sevier County, Utah. In August 2004, Trans–Western contacted U.S. Gypsum and expressed interest in an oil and gas lease for a section of its acreage in Sevier County. At the time, the oil and gas interest for that section of land had been leased to other parties, who had assigned their leasehold interest to an entity known as Wolverine. This preexisting lease, known as the “Wolverine lease,” was due to expire on August 17, 2004. U.S. Gypsum agreed to lease that oil and gas interest to Trans–Western for a term of five years starting on August 17, 2004, and executed the lease on September 15, 2004.

¶ 3 But within weeks of the execution of the lease, U.S. Gypsum breached the Trans–Western lease because of Wolverine's assertion that the Wolverine lease was still in force. The underlying events are not in dispute. On October 1, 2004, Wolverine informed Trans–Western by letter that Wolverine believed its lease was still in force and that it did not recognize Trans–Western's interest in the property. Wolverine also sent U.S. Gypsum a copy of the letter. Upon receiving the letter from Wolverine, U.S. Gypsum sent a letter dated October 7, 2004, to Trans–Western purporting to rescind the lease between the parties “on the basis of a mistake of fact with respect to the status of the Wolverine [l]ease.”

¶ 4 After this attempted unilateral rescission by U.S. Gypsum, Trans–Western filed suit in September 2006 for declaratory judgment and damages against Wolverine, U.S. Gypsum, and another party¹ in federal district court. The parties agreed that the court would first address the validity of the Wolverine lease, and U.S. Gypsum did not participate in the briefing on that issue. The federal district court determined that the Wolverine lease ended in August 2004. On appeal, this determination was upheld by the Court of Appeals for the Tenth Circuit. After settlement of the issue regarding when the Wolverine lease ended, Trans–Western pursued an amended complaint in the federal district court asserting claims against U.S. Gypsum for breach of contract and breach of the covenant of quiet enjoyment.

¶ 5 The district court issued its findings of fact and conclusions of law on November 29, 2012, and a final judgment on December 27, 2012. The court found that the Trans–Western lease was valid as of August 17, 2004, that U.S. Gypsum had wrongfully rescinded the lease, and that the rescission constituted a breach of contract and a breach of the covenant of quiet enjoyment. The court also established that the value of the Trans–Western lease did not change between the execution of the lease on September 15, 2004, and the breach of the lease on October 7, 2004. In light of these findings, the district court awarded nominal damages of one dollar to Trans–Western for its claim for breach of contract. After the parties appealed to the Court of Appeals for the Tenth Circuit, the Court of Appeals certified to us the question of how to measure expectation damages for the breach of an oil and gas lease.

STANDARDS OF REVIEW

¶ 6 “On a certified question, we are not presented with a decision to affirm or reverse, and traditional standards of review do not apply. Therefore, [o]n certification, we answer the legal questions presented without resolving the underlying dispute.” Garza v. Burnett , 2013 UT 66, ¶ 9, 321 P.3d 1104 (alteration in original) (citation omitted).

ANALYSIS

¶ 7 U.S. Gypsum asserts that the appropriate measure of damages for its breach of the oil and gas lease should be based on the value of the lease at the time of the breach. The measure U.S. Gypsum urges us to adopt is essentially the same as the one used for measuring general damages for the breach of a contract to sell real estate, “with appropriate adjustments in the form of words used”: general damages for the breach of such a contract are measured as the difference between the price paid for the lease and the market value of the lease at the time of breach. DAN B. DOBBS, LAW OF REMEDIES § 12.15(2) (2d ed. 1993). Trans–Western claims that this measure of damages would fail to place it, as the nonbreaching party, “in as good a position as if the contract had been performed.” Instead, Trans–Western argues that the measure of damages should be based on an amount that it could have sold the lease for during the period of the lease. Trans–Western further argues that, in applying this measure, courts should allow “consideration of the best evidence available, including post-breach evidence.”

¶ 8 We hold that the appropriate measure of expectation damages for the breach of an oil and gas lease is much the same as the measure of expectation damages for a breach of contract and may include both general and consequential damages. We measure general damages in the context of this case as the difference between the contract price of the lease and the market value of the lease at the time of breach.² And we measure consequential damages “not by the value of the promised performance alone but by the gains such performance could produce for collateral reasons, or the loss that is produced by the absence of such performance.” DOBBS, LAW OF REMEDIES § 12.1(1). We also hold that courts have discretion to permit parties to introduce post-breach evidence to establish and measure their expectation damages.

I. EXPECTATION DAMAGES FOR THE BREACH OF AN OIL AND GAS LEASE ARE MEASURED THE SAME WAY AS EXPECTATION DAMAGES FOR A BREACH OF CONTRACT

¶ 9 It is well established under Utah law that, generally speaking, leases are treated the same way as other contracts. See Richard Barton Enters., Inc. v. Tsern , 928 P.2d 368, 376 (Utah 1996) (“[P]rinciples of contract law rather than property law govern[ ] the law of damages in computing a lessee's liability for damages for breach of a lease.”); Reid v. Mut. of Omaha Ins. Co. , 776 P.2d 896, 904 (Utah 1989) (recognizing the “modern view that leases are essentially commercial transactions, contractual in nature”); Hall v. Warren , 632 P.2d 848, 850 (Utah 1981) (“This obligation is in accord with the contemporary approach toward leased habitations which emphasizes the contractual nature of the relationship between the landlord and tenant instead of viewing a lease simply as [a] demise of real estate.”). Accordingly, if an oil and gas lease is just a lease, under our precedent we treat an oil and gas lease as any other contract, barring some persuasive reason to do otherwise.

¶ 10 The strictest view among authorities is that “the oil and gas lease is not really a lease anywhere,” Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 414 (2015) (citation omitted)—that because “an oil and gas lease is not a ‘lease,’ ... an analogy between an oil and gas lease and an ordinary lease ... cannot represent the law,” A. W. Walker, Jr., The Nature of the Property Interests Created by an Oil and Gas Lease in Texas , 7 TEX. L. REV. 539, 559 & n.83 (1929). A somewhat softer view that does not reject all similarities to a normal lease sees an oil and gas lease as more similar to a real-estate deed than “an ordinary real-property lease.” JOHN S. LOWE ET AL., OIL AND GAS LAW 181 (6th ed. 2013).³

¶ 11 Since an oil and gas lease is either not a lease or at most a quasi-lease, authorities have warned that oil and gas interests “should not be handled within the straitjacket of common law concepts.” Williams & Meyers, Oil and Gas Law § 213 (2015).⁴ Instead, some have urged courts to flesh...