In Point Energy Partners Permian, LLC v. MRC Permian Company, — S.W.3d —, No. 21-0461, 2023 WL 3028100 (Tex. 2023), the Texas Supreme Court held that the lessee could not invoke a force majeure clause to save its oil and gas leases when it inadvertently scheduled its operations to begin after the requisite deadline.
The lessee, MRC Permian Company, received four identical oil and gas leases from certain lessors in 2014. The leases obligated MRC to spud a new well every 180 days after the spud date of the last well during the leases' secondary terms to avoid having the non-developed portions of the leases terminate. In compliance with that obligation, MRC created a drilling schedule listing June 2, 2017 as the spud date of a new well based on its belief that the deadline to spud that well was June 19, 2017. The actual deadline, however, was May 21, 2017.
MRC did not notice its error until approximately two weeks after May 21, 2017, at which point it had not yet spudded the new well. On June 13, 2017, MRC sent force majeure letters to the lessors claiming that it experienced a delay in the well's drilling around April 21, 2017. However, the delay was caused when a wellbore collapsed during its drilling of a separate well, and the drilling rig used to drill the separate well was the same rig scheduled to drill the well at issue. That drilling rig was also scheduled to drill two other wells before drilling the well at issue, but MRC could have forgone drilling the two other wells to drill the new well, in which case it would have met the May 21, 2017 deadline.
Point Energy Partners, LLC, received a top lease from the lessors on June 7, 2017, and responded to MRC's force majeure letters on June 15, 2017 claiming that it did not believe MRC's drilling schedule was sufficient to maintain the leases. MRC sued Point Energy seeking a declaratory judgment that the leases remained in full force and effect. Point Energy and the lessors (the "defendants") counterclaimed for breach of the leases, trespass to try title, and an accounting and a constructive trust, and they moved for a summary judgment against MRC claiming that the force majeure clause did not save the leases. The trial court granted the defendants' motion and declared the leases terminated.
MRC appealed to the Court of Appeals, and the Court of Appeals reversed. It reasoned that force majeure clauses did not require the force majeure event to occur on the leased premises or the force majeure event to cause MRC to miss a deadline—the force majeure event causing MRC a delay in operations was sufficient to properly invoke the force majeure clause. The defendants appealed the Court of Appeal's decision to the Texas Supreme Court.
The Court narrowed its discussion to whether MRC's operations were "delayed by" an event of force majeure. While MRC conceded that had no delay occurred, it would not have met the deadline to drill a new well, it argued that, regardless, the force majeure clause was properly invoked because it was only tied to delayed operations and not to compliance with the leases' deadlines. In other words, MRC argued that any delays in its operations, regardless of the delay's length and regardless of whether a deadline would have otherwise been missed, maintained the leases for a period that ended long after the May 21, 2017 deadline, and because MRC had that extension in which to perform its required drilling operations, it was irrelevant that it originally scheduled that operation to begin after May 21, 2017.
Consider the following hypothetical for further explanation: A lessee is required to commence operations on a new well by Day 60 or else the lease will terminate. The lessee, however, inadvertently schedules operations on the new well to begin on Day 90. The lessee is also engaged in operations on an old well that will not be completed until Day 50, and it cannot begin operations on the new well until operations on the old well are complete. On Day 29, the lessee experiences a force majeure event that delays its operations on the old well by 24 hours. The lease contains a force majeure clause that states that the lessee has 90 days after the resolution of the force majeure event to resume its operations, and that the lease will not terminate during that time period. The lessee concludes that it now has until Day 120 (Day 30 + 90 days) to resume operations, it completes operations on the old well on Day 51, and it commences operations on the new well on Day 91. On the one hand, the lessee would not have commenced operations on the new well by Day 60 had the force majeure event never happened. On the other hand, the lessee suffered an ironically fortuitous force majeure event in that the lessee purportedly received a 90-day extension to resume its operations despite only being delayed by 24 hours, which, in turn, gave the lessee the opportunity to timely commence operations on the new well. The question, therefore, becomes whether the force majeure clause should be construed to grant the lessee those extra days to commence operations on a well that it otherwise would not have timely commenced.
While the Court agreed that, when viewed in isolation, the force majeure clauses supported MRC's argument, it disagreed that such a construction was proper when construed with the leases' remaining provisions. The leases contained numerous provisions in which certain operations were required to be performed within a deadline to maintain the leases. Further, the force majeure clauses expressly stated that their purpose was to maintain the leases during a delay in MRC's operations and to provide MRC with a period of time to resume those operations. If the delay in operations would not have caused the leases to terminate, then there would have been no need for the force majeure clauses to contain those express remedies. As such, a fair, natural, and contextual construction of the leases necessitated construing the force majeure clauses as being tied to the leases' deadlines.
Additionally, the Court viewed MRC's proposed construction as resting on circular reasoning. The force majeure clause only applied to "Lessee's operations." "Lessee's operations" would only include MRC's operations if the leases had not terminated because, otherwise, MRC would no longer be a "Lessee"—the leases would have reverted to the lessors. Because the leases would have terminated for MRC's failure to spud a new well by May 21, 2017, any operations conducted on June 2, 2017 would not have been "Lessee's operations" unless a savings clause extended the deadline and saved the leases from terminating. With that background, MRC's circular reasoning was the following: the operations scheduled for June 2, 2017 would have been "Lessee's operations" because the force majeure clauses extended the deadline past June 2, 2017, and the force majeure clauses extended the deadline past June 2, 2017 because the operations scheduled for June 2, 2017 would have been "Lessee's operations."
Ultimately, the Court concluded that an ordinary person would not understand the force majeure clauses as applying to a brief delay of an operation that was, regardless, destined to be untimely. After all, force majeure clauses are meant to allocate risk when a lessee encounters an "irresistible force" beyond the lessee's control which would cause the lease to terminate. Here, the "irresistible force" would not have been the cause of the leases' termination—the cause would have been MRC's own scheduling error.
The Court's decision, however, does not purport to apply to all force majeure clauses. It noted that parties are always free to allocate risk however they see fit, including instances when parties inadvertently schedule an untimely operation. But when leases do not do so, and when the leases' context otherwise indicates that such a result would be improper, courts will, going forward, construe force majeure clauses as being tied to the deadlines contained in the leases.
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