In an attempt to mitigate risk, most commercial contracts contain a provision limiting monetary recovery. The most common provision is a waiver of consequential damages. Despite the parties’ best intentions, whether a category of damages are considered direct damages or consequential damages is often determined on a case-by-case basis.  Texas courts have provided the following general framework.

Direct damages are “the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong.”[1] Direct damages are intended to compensate the plaintiff for the loss incurred that was foreseeable by the defendant from his wrongful act.  Consequential damages, on the other hand, may “result naturally, but not necessarily, from the defendant’s wrongful acts.”[2]  Consequential damages must be foreseeable and must trace directly back to the wrongful act in order to be recoverable.

While a seemingly simple test, Texas courts have had varying outcomes depending the specific facts and circumstances. In Powell Electric Systems, Inc. v. Hewlett Packard Co.,[3] Powell and Hewlett Packard contracted for the installation, testing, and repair of a new transformer. During installation, Powell negligently connected a new transformer resulting in damages to Hewlett’s facilities. The court analyzed each of the damage items submitted by Hewlett and held that those specific items contemplated at the time of contract, such as repair costs, increased labor, facilities, and costs of materials, were all considered direct damages. However, the court ruled that a temporary transformer used in place of the defective transformer was not contemplated in the contract and, therefore, considered a consequential damage – waived under the contract’s damage limitation provisions.

In Cherokee Cty. Cogeneration Partners, L.P. v. Dynegy Mktg. & Trade,[4] the court held that the lost profits on the contract itself were direct damages, but the lost profits on other contracts for the sale of electricity produced by the facility were consequential damages.  The court opined that the parties’ contract contemplated the purchaser’s ability to profit from resales of the purchased gas as a higher price, so that those lost profits were considered direct damages.

In Continental Holdings, Ltd. v. Leahy,[5] the parties’ dispute centered on the wrongful termination of a contract for a vessel. The parties disagreed on whether Continental was entitled to the unrealized charter hire Western initially contracted. The court held that “lost profits damages may take the form of ‘direct’ damages or the form of ‘consequential’ damages.”[6] Those profits lost on the breached contract itself, such as the amount the non-breaching party would have received, less expenses saved, are considered direct damages. However, lost profits on other contracts or relationships resulting from the breach are indirect damages.

Thus, as we have seen through this sample of cases, while the Texas courts generally respect the parties’ contractual language classifying certain damages as direct or consequential, the courts will closely examine the circumstances giving rise to the claim. Depending on whether you are the breaching party or non-breaching party, we can assist you in determining what damages are recoverable.

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[1] Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997).

[2] Id.

[3] 356 S.W.3d 113, 117 (Tex. App.—Houston [1st Dist.] 2011, no pet. h.).

[4] 305 S.W.3d 309, 315 (Tex.App. —Houston [14th Dist.] 2009, no pet. h.)

[5] 132 S.W. 3d 471, 473 (Tex. App.—Eastland 2003, no pet. h.).

[6] Id. at 475.

This dispute stems from a disagreement within a blended family: Norman married Linda. They subsequently divorced. Norman then married Patricia, who had two children from a prior marriage (the “Butlers”). Patricia then died testate in 2006; Norman never submitted her will to probate. Norman later died testate in 2015.

Linda, as Executrix of Norman’s estate, filed Patricia’s will for probate outside of the four-year statutory limitation.[1] Patricia’s will devised her estate to Norman, thus disinheriting the Butlers who would have received her estate under Texas intestacy statutes. Litigation ensued.

The trial court considered the following question: did the four-year statute of limitations bar Linda from offering Patricia’s will to probate nine years after Patricia’s death? Answering in the affirmative following prior case law, the trial court rejected Linda’s argument that she was the applicant contemplated by the statute, and that Norman’s inaction should not be imputed to her. The appellate court confirmed.

The Texas Supreme Court reversed and remanded for further proceedings, using the case to overturn prior law. In its analysis, the Texas Supreme Court first examined Faris v. Faris,[2] which held that a devisee’s default under the statute is imputed to her devisee. Additional cases were also discussed.

In rejecting Faris, the Texas Supreme Court focused on the plain meaning of the statute: “the applicant for the probate of the will was not in default.” Refusing to change the meaning of the statute by adding additional words, the court held that Linda in her individual capacity as an interested party (devisee) could submit Patricia’s will to probate because only her conduct, and not Norman’s, was relevant to determining whether she was not in default. The Court, however, refused to allow Linda to admit the will in her capacity as Executrix of Norman’s estate, imputing Norman’s inaction to his estate.

The effect of this ruling on title examiners is severe as it introduces uncertainty to a previously settled question of law.

Title examiners routinely encounter unprobated wills that are generally attached to Affidavits of Heirship. Previously, an examiner would determine title to real property based on the four-year statute of limitations combined with the contents of an Affidavit of Heirship. However, under Ferreira as it relates to this specific fact pattern, reliance on the four-year statute of limitations is no longer available. As such, title examiners should be aware of the change in the law and adapt accordingly.

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[1] Estates Code §256.003(a): Except as provided by Section 501.001 with respect to a foreign will, a will may not be admitted to probate after the fourth anniversary of the testator’s death unless it is shown by proof that the applicant for the probate of the will was not in default in failing to present the will for probate on or before the fourth anniversary of the testator’s death

[2] Faris v. Faris, 138 S.W.2d 830 (Tex.Civ.App.-Dallas 1940, writ ref’d).

Commercial contracts involve a certain amount of risk allocation between the parties. Indemnity provisions are among the most aggressive risk shifting provisions because they can require a party to assume liability for the mistakes of another.  As a result, Texas courts require indemnity provisions to comply with the Fair Notice Doctrine in order to be enforceable in Texas.[1]  The Fair Notice Doctrine requires that indemnity provisions (1) be conspicuous and (2) expressly state the scope of the risk allocated in order to be enforceable.

Conspicuous:  This prong of the test is generally met by changing the visual appearance of the text that creates the obligations by using bolding, underlying, italics, all caps or other visual tools to draw attention to the indemnity provision “to attract the attention of a reasonable person when he looks at it.”[2]  Courts have also found that evidence of the defending party’s actual notice of the indemnity provision will satisfy this requirement, such as when the defending party made modifications of the indemnity provision in prior drafts of the contract.

Scope of the Risk:  The enforcing party must also show that the provision expressly states the scope of the risk shifted.  The court’s concern is that vague and/or broad language should not be used to seek indemnity for situations that were never envisioned by one or both parties.  Instead, “a party seeking indemnity from the consequences of that party’s own negligence must expressly state the intended scope within the four corners of the contract.”[3]  Indemnity provisions must expressly state what type of liability (e.g. negligence) that is covered and the scope of coverage.  For instance, will there be indemnity for a party’s sole negligence (100% fault) or is it limited to cases in which both parties share the fault (i.e. jointly or concurrently negligence)?  If the clause fails to expressly answer questions like these then it may not be enforceable in Texas.

Texas has developed the Fair Notice Doctrine to protect unsuspecting parties from taking on more liability than they anticipated. However, the Fair Notice Doctrine is not shared by every state. Therefore, contracts that are prepared outside of Texas sometimes fail to comply with the doctrine and are later found unenforceable in Texas.  Be sure to have your commercial contracts reviewed by a local attorney to ensure that you will be able to achieve the benefit of all you bargain for in your contracts.

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[1] Dresser Ind., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).

[2] Dresser Ind., Inc. v. Page Petroleum, Inc., 853 S.W.2d at (quoting Ling & Co. v. Trinity Sav. & Loan Ass’n, 482 S.W.2d 841, 843 (Tex. 1972).

[3] Enserch Corp. v. Parker, 794 S.W.2d 2, 8 (Tex.1990); Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex.1987).

By Jessica C. Engler, CIPP/US [1]

In the wake of sweeping privacy law reforms both in and outside of the United States, Texas has become the latest state of many to makes changes to its existing data privacy laws. This summer, Texas Governor Greg Abbott signed into law HB 4390, christened the Texas Privacy Protection Act, which amendments the Texas Identity Theft Enforcement and Protection Act (“TITEPA”), Tex. Bus. & Com. Code § 521.002, 521.053.[2] Though significantly rewritten since its introduction, HB 4390 amends the data breach notification statute and creates a privacy council to advise the Texas legislature regarding potential future privacy legislation.

New Breach Notification Requirements

HB 4390’s amendments of the data breach notification requirements are common to those found elsewhere in the United States, bringing Texas more in-line with other states’ requirements. These changes will go into effect on January 1, 2020.

First, HB 4390 adds a deadline for notification of the breach to individuals affected by the breach. Currently, the TITEPA requires that notifications be made “as quickly as possible.” The amendments will now require that the notification be made “without unreasonable delay” and in any case no later than 60 days from the date of discovery of the breach.

Second, once in effect in 2020, the TITEPA will require that notification of the breach also be made to the Attorney General of Texas if the breach affected 250 or more Texas residents. This notification must be made within the 60 day period for reporting to affected individuals, and must contain the following information:

  1. a detailed description of the nature and circumstances of the breach, or the use of sensitive personal information acquired as a result of the breach;
  2. the number of Texas residents affected by the breach at the time of notification;
  3. any measures taken by the reporting party as a result of the breach;
  4. any measure that the reporting party intends to take regarding the breach after notification; and
  5. information as to whether law enforcement is involved in investigation of the breach.

Both of these updates are similar to those found in other states. At least 17 other states currently require notification within a specific time frame, ranging from 30 to 90 days from discovery of the breach. Several states—including the neighboring states of Louisiana and New Mexico—similarly require notification to state authorities when notification is made to a threshold number of state residents.

CREATION OF THE TEXAS PRIVACY PROTECTION ADVISORY COUNCIL

As originally filed in the beginning of the 86th Texas Legislative Session, HB 4390 was a comprehensive consumer privacy bill. During the session, it was amended and diluted multiple times. Rather than pass comprehensive privacy legislation, the legislature passed the amended HB 4390 including the creation of the Texas Privacy Protection Advisory Council (“TPPAC”) to study data privacy laws in advance of the next legislative session. As a result of the study, the TPPAC will make recommendations to the Texas legislature on specific statutory changes regarding data privacy, including necessary further amendments to the TITEPA or to the Texas Penal Code.

The Council will be composed of 15 Texas residents who are appointed by the Speaker of the House, Lieutenant Governor, and Governor no later than November 1, 2019. Of those 15 members:

  • Three members will be members of the Texas House of Representatives;
  • Three members will be Texas senators;
  • Nine members will be industry representatives from several industries, including the medical profession, technology, internet, retail and electronic transactions, consumer banking, telecommunications, consumer data analytics, advertising, internet service providers, social media platforms, cloud data storage, virtual private networks, or retail electric; and
  • Two members comprising either: (i) a representative of a nonprofit organization that studies or evaluates data privacy laws from a consumer perspective; or (ii) a professor who teaches at a Texas law school or other higher education institution who has been published on the subject of data privacy.

The Council will meet on a regular basis until it reports its findings and makes recommendations to the Texas legislature no later than September 1, 2020. It is anticipated that the Council’s recommendations will form the basis for comprehensive consumer privacy legislation when the Texas Legislature reconvenes in January 2021.

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[1] Special thanks to Dara Mouhot, Tulane University Law School Class of 2021, for her assistance with this article.

[2] House Bill 4390 is available at https://capitol.texas.gov/tlodocs/86R/billtext/html/HB04390E.htm.

Many people complete their estate planning documents, place them in a safe/drawer, and never think about them again. It’s an understandable pattern, but estate planning requires maintenance just like your house, your car, and the rest of your valuable assets.  So when should you review and update your will or trust?

In a perfect world, people would review their estate planning documents annually but a more attainable goal is to review your documents every 3-5 years (regardless of life events), or earlier if there is a significant change in your circumstances.  The most apparent reasons to revisit your estate plan is when you change your mind about the gifts being made, the people receiving gifts, or the people you appointed to make decisions (e.g. power of attorney or trustee).  Some less obvious life changes that may warrant a review of your estate planning include:

    1. Marriage, remarriage or divorce: Marriage changes just about everything in your life. Your estate plan is no exception. Whether your marriage is beginning or ending, you should review your documents to ensure your existing plan still meets your goals.
    2. Birth or adoption: Like marriage, kids change our lives and often change our ideas about what is important. Even documents that plan forward for the possibility of future kids should be reviewed to confirm that a new addition to the family does not modify your ideas or plans.
    3. Empty nest: As our children grow and mature our ideas about what gifts we want to leave them or how we want to leave those gifts often change.
    4. Change in tax laws:Tax laws change over time. An estate plan that had proper tax planning in 2009 may be unduly complex and burdensome under 2019’s higher exemption amount, and may even result in worse tax treatment than if you had no tax planning.
    5. Living in a new state: On the bright side, most wills/trusts that are properly executed in one state will be honored when you move to a new state. Unfortunately, out-of-state documents rarely capitalize on the planning benefits available in your new state, and may result in unnecessary costs and delays after your passing. Worse still, private institutions in the new state may hesitate or even refuse to honor your financial power of attorney or medical power of attorney because they look different than what they are used to seeing.
    6. Buying land: Land ownership can have a major impact on your plan. A plan that is properly tailored when you only owned your home in The Woodlands may prove woefully inadequate after you purchase an out-of state vacation house.
    7. Significant changes in the value or complexity of your assets: Buying, selling or changing the structure of your business, making significant changes in your investment assets, and/or increased or decreased risk of legal liabilities are all issues that should be contemplated in your estate plan. Consequently, significant changes in those variables may warrant changes to your plan.

If your life has undergone a significant change since the last time you reviewed your estate planning documents then it’s time to dust them off and look them over. If your review raises questions about how your plan works or how one of these issues might impact your plan, then you should get in touch with your estate planning attorney to make sure your plan is properly suited to your life as it exists today.

Despite most people believing it’s important to have an estate plan, only about 40% of people actually get one.[1]  There are a number of reasons that someone may not have gotten an estate plan but the idea that you do not need one because you do not have kids should not be one of those reasons.  In fact, it could be argued that not having kids actually increases your need for a well-crafted estate plan.  If you do not chose who receives your property and who is in charge of managing your property, then the state of Texas will decide for you.  Without kids, Texas’ default rules often produce results that are dramatically different than you might think.

Decide Who Makes Decisions.

A complete estate plan should include powers of attorney allowing you to designate who will make financial and medical decisions while you are alive but incapable of making decisions for yourself (i.e. incapacitated).  Using a power of attorney for this purpose allows you to pick who will be making those decisions on your behalf, and allows your chosen agent to make those decisions without the need to open a guardianship proceeding with the court.  That is a two-fold benefit.  First, managing your affairs through a guardianship is costly and slow.  Second, you will have no control over who the court appoints as your guardian, and it may prove to be the last person you would have chosen.  Similarly, your will or trust can be used to decide who will control the process of distributing your property after your passing.

Settle who gets the property and how it is used.

Every state has default rules that determine where property goes if someone dies without a valid plan distributing their property. In many cases your spouse will receive all or the bulk of your property but not always.  In certain cases, a property interest will bypass your spouse and end up in the hands of a parent, sibling, niece or nephew that you had no plan to benefit.  By completing your estate plan complete you can take control of who gets your property and how it is used.  For instance, you may direct that the funds be held in trust to care for your parents, if they survive you, and then pass to your chosen family members or charities.  Texas also allows you to create a trust that is used to care for your pets during their life and then leave the funds to a person or charity after the pet passes.  If you do leave a gift to a charity your plan can include directions (or in some cases strict conditions) regarding how the funds may or may not be used.

With or without kids there are decisions to be made about your property when you are incapacitated or dead. A well-crafted estate plan can make sure that your wishes and desires are carried out by someone that you trust instead of a court appointee applying Texas’ default rules.

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[1] https://www.caring.com/caregivers/estate-planning/wills-survey/

The drafters of an Assignment of Overriding Royalty Interest in Burlington Resources Oil & Gas Company, L. P. v. Texas Crude Energy, LLC did not “say what they meant to say” and received an admonition from the Texas Supreme Court. In Burlington, the Court determined a royalty interest owned by Texas Crude was subject to post-production costs. Burlington reinforces the holding in Heritage Resources, Inc. v. NationsBank, that a royalty is valued where the agreement states it will be valued.

First, what are post-production costs and what effect do they have on a royalty interest? Post-production costs are the costs of processing, compression, transportation, and other costs expended to prepare raw oil or gas for sale at a downstream location. Generally, royalty interests are subject to post-production costs, however, parties may modify this rule by agreement.

The point at which parties agree to value oil and gas production from a well is called the “valuation point.” The valuation point determines what costs are attributable to the royalty interest absent clear provisions stating otherwise. For example, if the royalty is valued at the well but the sale takes place after the product has been processed and transported, the product sold is generally of greater value than the product in which the royalty owner has an interest, and therefore, the sales price must be adjusted to properly calculate the royalty payment. A way to calculate the royalty payment of a valuation point at the well is to subtract the post-production costs from the market price.

Conversely, if the parties agree that the valuation point is at the point of sale, the royalty interest owner would generally not be responsible for post-production costs since those costs would have already been expended prior to the sale. Naturally, a royalty owner would want a valuation free of all costs and an operator would want to share as much of these costs as possible with a royalty owner.

In Burlington, the Court determined the royalty owner, Texas Crude, was subject to post-production costs because the Assignment stated the royalty interest was to be “delivered to Assignee into the pipelines,” which the Court decided created an “at the well” valuation point because, in theory, production from a well goes directly into a pipeline to be transported to a point for processing or sale.

The Assignment also contained a clause that stated the value of the royalty is “the amount realized from such sale of such production,” which Texas Crude argued created a royalty interest free of post-production costs. The Court agreed with Texas Crude that “in isolation,” an amount realized valuation creates a royalty interest free of post-production costs. However, that is not the case when accompanied by an “at the well” valuation point, as was determined in this case.  Therefore, the Court held that Texas Crude’s royalty interest was subject to post-production costs.

Pro-Tip from the Texas Supreme Court: If you find yourself drafting an oil and gas contract, agreement, or assignment in Texas, by this case, you have free reign and are encouraged to clearly state the agreement between the parties, especially the valuation point and which costs can be deducted from a royalty interest. Accordingly, in Burlington, the Court said what it meant to say about the Assignment:

But the parties could have saved considerable time, money, and heartache if their cryptic language had truly been “delivered … into the … receptacle [ ].” It could then have been re-written to say exactly what the parties intend, without resort to industry jargon, outdated legalese, or tenuous assumptions about how judges will interpret industry jargon or outdated legalese. If you can’t understand what your contract means without asking the lawyer who wrote it, you should not be surprised later if judges—who can’t just take your lawyer’s word for it—also have trouble understanding what it means.

 

 

The Texas Supreme Court has ruled that Chapter 95, a statute that protects property owners from personal injury suits by employees of contractors and subcontractors, applies to claims against property owners for the negligent hiring of the contractor or subcontractor.

In certain circumstances, Chapter 95 of the Texas Civil Practice and Remedies Code protects property owners from liability for personal injury to the employee of a contractor or subcontractor who constructs, repairs, renovates, or modifies an improvement to real property when the claims arise from the condition or use of that improvement. Tex Civ. Prac. & Rem. Code §§ 95.002 – .003.

In Cuevas v. Endeavor Energy Res., L.P., 531 S.W.3d 375, 378 (Tex.App.–Eastland 2017, pet. granted), an employee of an independent contractor who was hired by the property owner to drill a well was killed while preparing the rig for drilling operations. The employee’s family sued the property owner, asserting various claims, including the owner’s negligent hiring, training, supervision and retention of the contractor. Id. The trial court granted the owner’s motion for summary judgment under Chapter 95 on all of the plaintiffs’ claims. Id. The appellate court reversed on the claim of negligent hiring, holding that Chapter 95 applies to contemporaneous negligent acts of the property owner, which it defined as acts that occur on the premises at the time the claimant is injured. Id. at 382. The appellate court held that negligent supervision and retention were such contemporaneous acts, but negligent hiring presented a claim for acts that occurred prior to injury, and thus were not covered by Chapter 95. Id.

In Endeavor v. Cuevas, ___ S.W.3d ___, 2019 WL 1966625, *3 (Tex. May 3, 2019), the Texas Supreme Court explained that a claim for negligent hiring arises from, and is caused by, a combination of two separate negligent acts, the negligent hiring and the negligence that causes the injury. The “plain language” of Chapter 95

requires only that the claim arise from the use of an improvement to the property, not that the property owner’s negligence involve the use of the improvement, or that the use of the improvement be the only cause of the injury. When one of the negligent acts involves the contemporaneous use of an improvement to real property, the claim arises from that act, regardless of when the other negligent act occurred or whether it involved the use of an improvement.

Id. (emphasis in the original).   Since the plaintiff’s claim of negligent hiring depended, in part, on proof that the contemporaneous use an improvement caused his injury, the claim arose from the use of an improvement, and Chapter 95 applied. Summary judgment for the property owner was rendered.

For more information, please contact Judith Meyer.

 

Texas law protects property owners from personal injury suits by the employees of independent contractors and subcontractors hired by the property owner to work on an improvement on their property. The Texas Supreme Court is considering whether this protection includes claims for the property owner’s negligent hiring of the contractor or subcontractor.

In certain circumstances, Chapter 95 of the Texas Civil Practice and Remedies Code Texas law protects property owners from liability for personal injury to the employee of a contractor or subcontractor who constructs, repairs, renovates, or modifies an improvement to real property when the claims arise from the condition or use of that improvement. Tex Civ. Prac. & Rem. Code §§ 95.002 – .003.  Currently before the Texas Supreme Court is the question of whether Chapter 95 covers the property owner’s negligent hiring of the contractor or subcontractor.

In Cuevas v. Endeavor Energy Res., L.P., 531 S.W.3d 375, 378 (Tex.App.–Eastland 2017, pet. granted), an employee of an independent contractor who was hired by the property owner to drill a well was killed while preparing the rig for drilling operations. The employee’s family sued the property owner, asserting a premises liability claim and adding claims for the owner’s negligent hiring, training, supervision and retention of the contractor. Id. The trial court granted the owner’s motion for summary judgment under Chapter 95 on all of the plaintiffs’ claims. Id. The appellate court reversed on the claim of negligent hiring. The court held that Chapter 95 applies to contemporaneous negligent acts of the property owner, which it defined as acts that occur on the premises at the time the claimant is injured. Id. at 382. The appellate court held that negligent supervision and retention were such contemporaneous acts, but negligent hiring presented a claim for acts that occurred prior to injury, and thus were not covered by Chapter 95. Id.

The appellate court cited the Texas Supreme Court decision in Abutahoun v. Dow Chemical, 463 S.W.3d 42 (Tex. 2015), as support for its decision. Abutahoun did use the word “contemporaneous” in holding that Chapter 95 covers two different types of claims, claims based on a premises defect, which “encompass[s] a nonfeasance theory based on the owner’s failure to take measures to make the property safe, and claims based on negligent activities, which “encompass[s] a malfeasance theory based on affirmative, contemporaneous conduct by the owner that caused the injury.” Abutahoun, 463 S.W.3d at 50 (citation omitted). The appellate court did not examine the “arising from” language of Chapter 95, which Abutahoun stated “captured causation,” 463 S.W.3d at 48, or how this affects the analysis of a negligent hiring claim.

The property owner appealed. The case has been briefed, and oral argument was heard by the Texas Supreme Court last month. This case presents the Supreme Court with the opportunity to decide an important issue—Can a plaintiff evade the protection provided by Chapter 95 by pleading the property owner’s negligent hiring?—and to provide further analysis of the language and intent of Chapter 95.   Watch this space for an update.

The modern day contract is a direct result of trial and error. Generally speaking, transactional lawyers try to negotiate “bulletproof” contracts providing exactly what their client wants or needs. Despite their best efforts, litigators in later disputes try their level best to find the “errors” in those contracts that could benefit their client. Then the pattern repeats. Take Seismic Wells, LLC v. Sinclair Oil and Gas Co., 2018 WL 43377234 (5th Cir. 9/13/2018), for example. In that dispute, the parties had included a “prevailing party” fee provision in their Joint Operating Agreement (JOA): “In the event any party is required to bring legal proceedings to enforce any financial obligation of a party hereunder, the prevailing party in such action shall be entitled to recover … a reasonable attorneys’ fees.” At first blush, this provision appears fairly standard and innocuous. But, with over $1 million at stake in attorneys’ fees, the meaning of every word in that provision is fair game.

The facts leading up to the dispute aren’t relevant here, other than Seismic sued Sinclair under various agreements when it was concerned that Sinclair would not be holding up their end of the bargain. Seismic’s amended complaint included 17 counts, including claims of fraud, breach of contract, conspiracy, tortious interference, defamation/libel, and business disparagement. At the end of Seismic’s case at trial, the court granted Sinclair’s motion for judgment as a matter of law. Sinclair then moved for over $1 million in attorneys’ fees incurred in defending itself, citing specifically to the prevailing party provision in the JOA. The district court denied the motion for three reasons: (1) failure to properly plead under RFCP 9(g) (failure to plead special damages); (2) the provision did not apply because Seismic’s suit was not a legal proceeding brought to enforce a “financial obligation under the JOA”; and (3) Sinclair did not adequately segregate its fee to isolate the work performed defending fee-eligible claims. The Fifth Circuit only addressed the second issue.

The Fifth Circuit agreed that Sinclair was obviously the “prevailing party,” a decision the Court had previously affirmed. The operative question though was whether Sinclair was the prevailing party in a lawsuit “to enforce any financial obligation of a party” under the JOA. The first issue was one of context. How was the dispute brought? The prevailing party provision applies when a party brings a legal proceeding to enforce a financial obligation. The Court noted that many of the claims Seismic brought against Sinclair alleged fraud that induced Seismic to sign the contracts; those claims sought to void the contracts, not enforce them. In other words, those claims sought to render the contract unenforceable and therefore would not satisfy the fee provision.

Two other claims though asserted breach of contract allegations; however, only one of those claims was grounded in the JOA, so the Court focused in there. Count 12 provided that Sinclair breached the JOA by refusing to assign Seismic a leaky well or operate that well on its terms. So, it appeared that this provision did seek to enforce the JOA. But, that was not enough because the legal proceeding must be brought to enforce a financial obligation under the JOA. The Fifth Circuit noted that “financial obligation” is synonymous with “monetary obligation,” and was not persuaded that Seismic’s claim seeking monetary damages made this claim a financial one. Rather, this claim was to turn over a leaky well, which the Court held was not a financial obligation. As such, the prevailing party fee provision was not triggered.

Seismic filed this lawsuit, lost, then got away without having to pay for Sinclair’s attorneys’ fees under a provision that Seismic probably would have sought to enforce itself if it had won at trial. Without knowing anything about the negotiations, including the term “financial obligation” in the JOA’s prevailing party provision narrowed the remedies available to either party in this dispute. Using the term “enforce” arguably did as well given Seismic’s attempts to invalidate the contract. Whereas, had the parties used the more boilerplate language awarding attorneys’ fees to the prevailing party in any legal proceeding brought by “any party arising under this Agreement,” Sinclair may have recovered. Well, assuming that was their original intent.

This case presents a good example of the interplay between the words used in the contract, and the words used in the complaint filed to enforce/or invalidate that same contract. Both transactional lawyers and litigators should take note.