In Tier 1 Resources Partners et al. v. Delaware Basin Resources LLC, 08-20-00060-CV, the Court of Appeals for the Eighth District of Texas (El Paso) recently held oral argument on the proper construction of the word “and” used in a Delaware Basin oil and gas lease.  The meaning of the word is hotly contested, the death of a lease potentially worth millions of dollars largely depending on the interpretation of a single conjunction.

Oil and gas operator, Delaware Basin Resources LLC (DBR), entered into 13 leases with 13 mineral owners in February 2014, all of which were essentially the same.  In the leases, the mineral owners agreed to lease to DBR “the land covered hereby . . . described as follows: Section 6 . . . and Section 2.” (emphasis added).  Each of these noncontiguous sections consist of 640 acres but the leases describe the sections as follows: “said land shall be deemed to contain 1280 acres.”  The leases also required DBR to commence drilling operations within the primary term of three years.  Otherwise, the leases would terminate.  The Addendum attached to the leases, which expressly prevails over other inconsistent terms, states that “each of the separately designated tracts described shall be treated for all purposes as a separate and distinct Lease.  All of the provisions . . . shall be . . . construed as if a separate Lease agreement had been made and executed covering each such tract.”  (emphasis added).

When the primary term ended in February 2017, DBR had drilled on Section 6, but not on Section 2.  Believing the leases with DBR had terminated with respect to Section 2, the mineral owners signed leases with oil and gas producer Tier 1 Resources Partners (Tier 1) to develop Section 2.  DBR sued Tier 1 and the mineral owners in September 2017, asserting its right to develop Section 2.

 After considering the parties’ competing motions for summary judgment, the trial court sided with DBR.  Specifically, the trial court found that DBR still holds valid leases to both sections of land because its leases only required it to begin drilling operations on one section within the three-year period.  Tier 1 and the mineral owners appealed the trial court’s decision to the Eighth Court of Appeals, asking the Court to reverse the trial court’s decision.  The appeals panel includes Chief Justice Yvonne T. Rodriguez, Justice Roy Ferguson, and Justice Gina M. Palafox.

On appeal, Tier 1 and the mineral owners argued that the reference to “separately designated tracts” in the Addendum must be construed as the two sections, requiring DBR to begin drilling on each section before the primary term’s expiration.  Because of DBR’s failure to drill on Section 2 before the primary term’s expiration, the mineral owners asserted that, “pursuant to every applicable rule of contract construction,” the leases terminated with respect to Section 2 and, thus, they were free to lease Section 2 to Tier 1.

 In response DBR argued that the plain meaning of the leases is clear—the phrase, “the land covered hereby . . . : Section 6 . . . and Section 2,” indicates that the noncontiguous sections are conjoined by the conjunction “and” into a single tract.  Thus, the Addendum’s reference to “separately designated tracts” could not refer to the single tract comprising “Section 6 . . . and Section 2.”  DBR further argued that the leases’ reference to “said land . . . contain[ing] 1280 acres” is additional evidence that the lease treated the two sections as a single tract.

Justice Ferguson put DBR’s argument to the test.  “Can it be two parcels of land on different sides of the state?” he asked.  “It can be,” DBR’s counsel responded.  “That’s of course an extreme example.”

Tier 1 and the mineral owners countered by attacking what they called DBR’s “slender thread of an argument,” asserting that the lease and Addendum use the terms “Section” and “tract” synonymously, and, thus, the Addendum’s requirement that the “separately designated tracts” be treated as distinct leases applies to the two sections.  They further argued that the Addendum clearly showed the mineral owners’ intent to create distinct leases covering each section and DBR’s interpretation would render the Addendum meaningless.

Now that oral argument is concluded, the court of appeals must determine whether “separately designated tracts” refers to Section 6 and Section 2 as separate, distinct tracts or a single tract.  However, the court cannot make this determination without first deciding whether the conjunction “and” effectively conjoins “Section 6 . . . and Section 2” into a single tract comprising the two sections.  Thus, the entire case hinges on the power of the conjunction “and” to conjoin two noncontiguous sections into a single tract.  For more detail, the appellate briefs are located here.

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