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Land Descriptions Ambiguities Can Create Serious Problems in Oil and Gas Options

When preparing and executing any type of contract, it is important to be clear on all important terms in the contract. Ambiguities lead to uncertainty, and uncertainty can turn into disputes down the road. Even so, there are times when an oil company has been known to claim an ambiguity, and create a dispute, where none exists. Recently the Texas Supreme Court  considered such a case and had occasion to emphasize that interpretation of contract language should always be reasonable. When the plain language of the contract expressly excludes a portion of land, then that portion of land is not subject to the contract.

In North Shore Energy v. John James Harkins, et al., the Court applied this principle to a gas option contract. In North Shore, the Harkins family signed an option contract with North Shore Energy.   A lease was attached to the contract. North Shore got to choose from among several tracts within a designated tract of land in Goliad County, Texas. The contract had an exhibit that described the land subject to the option as being the land identified in an earlier lease. The land in the earlier lease did not exclude what the parties called the 400.15 acre Hamman lease land. However, the option itself specifically excluded the Hamman lease land.

When North Shore Energy sought to exercise its option contract, it chose a 169.9 acre tract on which to drill. The tract selected by North Shore Energy contained a large portion of the Hamman lease land. A third party, Dynamic Productions Inc., approached the Harkins and requested to lease the Hamman lease land, which included a North Shore Energy well that had been drilled into that Hamman lease land, and the Harkins family obliged and executed a lease for the 400 acre Hamman lease land to Dynamic.

North Shore Energy sued both Dynamic and the Harkins alleging that its oil and gas lease option with the Harkins included a land description in the exhibit that included the 400 acre Hamman lease land, and that the leasing of the Hamman lease land to Dynamic from the Harkins was tortious interference with the Harkins-North Shore Energy oil and gas lease option. North Shore Energy sought specific performance on its oil and gas option contract with the Harkins family.  The trial court sided with North Shore Energy, but the Appeals Court reversed.

The Texas Supreme Court noted that ambiguities in contracts arise when there are two interpretations and both interpretations are reasonable. But here the Court was not convinced that there was an ambiguity at all concerning the land description in the option contract that North Shore Energy had with the Harkins. The words “save and except” in the option contract are certain and definite, meaning that the 400.15 acre tract was excluded from the scope of the North Shore Energy oil and gas option contract.