If you've tried an oil and gas case, you've likely seen a form contract that the American Association of Professional Landmen wrote to "help landmen effectively do their jobs." And if your case dealt with a falling out over efforts to explore for, find, and produce oil and gas, the AAPL form you saw more often than not will have laid out the terms in one of the AAPL's Model Form Operating Agreements.
But a form can do only so much. Many times you'll see big parts of an MFOA with slashes across them, meaning those sections don't apply, or smaller changes by way of write-ins or type-ins. And, at the end, you'll probably find a section that says "OTHER CONDITIONS, IF ANY, ARE:" with either a blank space or the parties' other terms.
A case the Fifth Circuit decided this week concerned that last part of a joint operating agreement, this one on the AAPL's first model form for JOAs -- the 1956 version.
The JOA in question involved the pooling in 1971 of oil and gas leases that covered lands within 10 townships in Montana. The two parties to the JOA -- predecessors in interest to A. L. Ballard and Devon Energy Production Company -- agreed to work together under the JOA towards finding oil and gas within the 10 townships (almost 250,000 acres), which they deemed their "Area of Mutual Interest" in subparagraph F of paragraph 31, the "OTHER CONDITIONS" part of the JOA.
Ballard claimed that Devon breached the JOA by not giving him the chance to buy into leases that Devon acquired within the AMI decades after the predecessors of Ballard and Devon had entered into the JOA. His lawsuit turned on whether parts of the AMI provision in paragraph 31 lasted for only three years or whether they instead endured until the End of Time.
Can you see where this will come out?
The pieces that Ballard relied on in subparagraph 31F did oblige Devon to share any leases it got within the AMI. Another sentence, later in the subparagraph, dealt with losing rights to share if, for example, a party failed to maintain a lease. And just below that sentence, which the court called "a 'surrender' provision", appeared this:
The above subparagraph of 31F shall be effective from the date of the Farmout Agreement to which this Operating Agreement is attached and shall terminate and be of no further force and effect after three years from the date of this operating agreement.
Did the three-year term apply to all the parts of 31F or just the "surrender" sentence?
The Fifth Circuit panel held Ballard's view, while "plausible", would produce the "absurd" result that the AMI would bind the parties until Kingdom Come. And it therefore upheld summary judgment in favor of Devon. Ballard v. Devon Energy Production Co., L.P., No. 10-20497 (5th Cir. Apr. 19, 2012) (applying Montana law).
I believe the "surrender provision" should not have even made it "plausible" - Richard R. Rocha
Posted by: Richard R. Rocha | April 26, 2012 at 09:15 AM