Recently the Texas Supreme Court heard oral arguments in a case titled Point Energy Partners Permian, LLC, et al., v. MRC Permian Company, which is a review of an El Paso Court of Appeals’ decision regarding the interpretation of the force majeure clause contained in the litigants’ lease. The underlying facts are as follows:
MRC held a lease that automatically terminated after a three year primary term as to lands not included in a production unit containing a commercial well. The lease allowed that this automatic termination could be suspended if MRC engaged in a continuous drilling program, allowing no more than 180 days to elapse between commencement of new wells. The lease also contained a “force majeure” clause, which provided that:
MRC’s relevant spud deadline, under the continuous drilling program, was May 21, 2017. However, due to an administrative error, the spud date of the next well (the Toot #211) was scheduled to begin one month too late (in June 2017). On April 21, 2017—before both the spud deadline and the discovery of the calendaring error—the rig MRC intended to use to drill the Toot #211 experienced unexpected wellbore instability when drilling another well off-lease, resulting in a 30-hour delay. On June 13, 2017, MRC gave notice to the lessors that an event of force majeure occurred 53 days prior to the date of the notice, and thus MRC was entitled to a suspension of the termination of the lease until 90 days after the removal of the force majeure (i.e. until July 21, 2017). MRC also stated that the rig would soon be arriving on the lands to drill the Toot #211. Point Energy Partners Permian, LLC, who entered into leases with the Lessors in June of 2017 (collectively with Lessors referred to herein as “Point Energy”), responded to MRC’s letter, claiming that the primary term had expired and demanding that MRC release all lands outside of existing production units. In response, MRC filed suit, asking the court to determine whether MRC’s invocation of the force majeure clause extended its drilling deadline. The trial court ruled “that the leases automatically terminated as to all lands not included in a production unit.” MRC appealed the trial court’s ruling to the El Paso Court of Appeals. The Court of Appeals acknowledged that Texas courts must examine “the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.” Furthermore, as to oil and gas leases, the Court of Appeals stated that it was guided by the Texas Supreme Court’s prior holding that “where the lease ‘expressly defines the duty, [a court] will not impose a more stringent obligation unless it is clear that the parties intended to [do so].’” The Court of Appeals referred to a typical oil and gas lease which contains a primary term and a secondary term that usually extends the lease for as long as oil or gas is produced. “If the production of oil and gas ceases during the secondary term, the lease will terminate automatically.” However, they noted, the secondary term may continue even without production if the lease contains certain provisions. The examples pointed to were a continuous drilling program and force majeure clause. The Court of Appeals pointed out that “‘[t]he scope and effect of a ‘force majeure’ clause depends on the specific contract language, and not on any traditional definition of the term.’ Thus, we strictly construe a force majeure clause according to its terms.” Point Energy argued that the off-lease wellbore instability issue with the rig did not constitute an event of force majeure under the lease terms and was not the cause of MRC’s missed deadline. More specifically, they claimed that “the force majeure clause requires the qualifying event to be an on-lease, unforeseeable event that is a substantial factor in the lessee’s failure to meet its deadline under the lease.” While the trial court agreed with Point Energy, MRC argued to the Court of Appeals that “the trial court erred by adding language and limitations the parties did not include in the lease terms, specifically that the off-lease nature of the triggering event precluded MRC from being able to invoke the force majeure clause.” The Court of Appeals determined that the “Supreme Court of Texas held that courts cannot read into a contract a stipulation to which the parties did not agree.” Thus, the Court of Appeals analyzed the express language in the lease. They noted that the force majeure clause had specific requirements, including requiring that “the event of force majeure to be ‘non-economic’ and ‘beyond [the] Lessee’s control.’ It requires MRC to notify the Lessors within 60 days of the triggering event’s occurrence and provide a ‘reasonable written description of the problem encountered . . . .’ It gives MRC 90 days after the removal of the force majeure to resume operations. And it contemplates a maximum allowance of 180 days for any period of force majeure delay.” The Court of Appeals noted that “if the parties had intended the force majeure clause to only cover on-lease delays, the provision would presumably have included requirements regarding where the location of the triggering event must occur.” Since the parties did not include any such requirement, the Court of Appeals declined to “‘interpolate constraints not found in the contract’s unambiguous language’ now and reject[ed Lessors’ and Point Energy’s] argument on this ground.” Point Energy next argued that the off-lease wellbore instability was not the cause of the missed drilling deadline. MRC claimed that the force majeure clause “require[d] only a delay in its operations that need not have a direct link to its missed deadline with the Lessors.” Since MRC did experience a delay, it argued, it was entitled to invoke the force majeure clause and be allowed 90 days from the removal (or end) of such delay to spud the next well on the leased lands at issue. Point Energy countered that “MRC’s construction is too expansive because it grants lessee the sole discretion to postpone the termination date of a lease for any inconvenience it experiences—regardless of whether such delay in fact caused its failure to commence drilling by May 21.” Despite Point Energy’s arguments, the Court of Appeals once again held that it was “bound by the lease language to which the parties agreed” and could “not add conditions based on what the parties now argue they intended for the lease but failed to include in its terms.” The Court of Appeals found that “all that was required is that MRC’s operations be delayed by a non-economic event beyond its control.” Nowhere in the agreement did the parties require that “the delay had to cause MRC’s failure to meet its deadline. […] Consequently, the Lessors bargained for deadlines that could be extended by events of force majeure, ‘and [they] got just that.’” Based on the above, and outstanding fact issues, the Court of Appeals reversed and remanded the case to the trial court. However, Point Energy has now appealed the Court of Appeals’ ruling to the Texas Supreme Court. As noted above, the Texas Supreme Court granted the Petition for Review and heard oral argument in late October 2022. As a result, the Supreme Court’s forthcoming decision will likely provide our industry with more clarity on how Texas courts should interpret force majeure clauses in the future, as well as guidance for how best lessors and lessees should construct their force majeure clauses.[W]hen Lessee’s operations are delayed by an event of force majeure, being a non-economic event beyond Lessee’s control, if Lessee shall furnish Lessor a reasonable written description of the problem encountered within 60 days after its commencement, and Lessee shall thereafter use its best efforts to overcome the problem, this lease shall remain in force during the continuance of such delay, and Lessee shall have 90 days after the reasonable removal of such force majeure within which to resume operations […]