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Oral Modifications to An Oil and Gas Agreement Not Barred By the Statute of Frauds

A Texarkana Court of Appeals case, Petrohawk Properties, L.P. v. Jones offers some insight into how changes to an oil and gas agreement are analyzed in terms of the statute of frauds. Material changes to the agreement require documentation in writing, but what constitutes a material change to the initial agreement will depend on the circumstances and the specific language used in the agreement. Contracting parties who are concerned about the impact that a modification to a contract can have should take precautions to ensure that the modification of the contract is well documented.

In this case, the Jones family owned some land in Harrison County in East Texas and the family was approached in 2008 by Petrohawk Properties about leasing the oil and gas mineral interests for their property. The parties entered into an agreement that if the Jones could deliver their interests to Petrohawk Properties free and clear of title defects by a closing date of August 15, 2008, the Jones family would be entitled to a leasing bonus of $23,500 per acre. The agreement also provided that Petrohawk would be released from the Agreement if the Jones’s were unable to provide free and clear title to enough acreage to warrant payment of ten million dollars worth of leasing bonuses, which Petrohawk was holding in escrow.

Due to unforeseen delays in preparing the title work, the parties agreed to delay the closing date of the Agreement to August 27, 2008, then to September 17, 2008, then to October 9, 2008, and then to November 6, 2008. Coincidentally, the fall of 2008 was also the time of the United States financial crisis, which prompted Petrohawk to refuse to pay bonus on any acreage supported by title work that was produced by the Jones family more than thirty days after an August 29th closing date on some of the Jones family properties, and terminated the contract. The Jones sued for breach of contract.

The issue in this case comes down to whether the modification to the contract to extend the closing date was a material alteration of the underlying contract that must be made in writing, since the underlying contract has to do with oil and gas leasing, which is one of the contract types expressly subject to the statute of frauds.

What is the Statute of Frauds?

Under Texas contract law, contracts generally have to be in writing to be enforceable under the statute of frauds, but there are exceptions. Specifically, there is an exception to the rule when it comes to modifications to the contract that are not material.

The Texarkana Court of Appeals held that “the oral modification to conduct multiple closings neither changed the obligations and rights of the parties under the Agreement nor substantially altered the Agreement itself. Therefore, the modification was not material, the modification was not required to be in writing, and enforcement of the modification is not barred by the statute of frauds”.  Petrohawk appealed this decision to the Texas Supreme Court, but the parties reached a settlement agreement before the case was heard.

This was obviously a good result for the Jones family. However, as any Texas oil and gas attorney will tell you, it’s always better to have any modifications to a contract in writing, so as to avoid a challenge based on the statute of frauds. Why leave the question of whether the changes were material, and thus unenforceable under the statute of frauds, to a court or jury?