Texas Supreme Court Victory
June 10, 2011On June 10, 2011, the Texas Supreme Court finalized its decision in favor of our client on a significant question concerning the model form Joint Operating Agreement that is used nationwide in oilfield operations. The case, Tawes v. Barnes, was filed by a royalty owner who had not received royalty payments from a lessee that had gone into bankruptcy. The royalty owner sued several parties, including our client, who were parties to a model form Joint Operating Agreement that pooled the royalty owner’s lease with other leases—arguing that royalty owners are “third-party beneficiaries” of such joint operating agreements. On this theory, the royalty owner sought to recover the unpaid royalties from our client even though our client had never entered into any contract with the royalty owner.
The case was litigated in federal court, and the lower federal courts held our client liable for 100% of the unpaid royalties. Our client appealed to the United States Court of Appeals for the Fifth Circuit, which considered the issue sufficiently important and unsettled to certify it to the Texas Supreme Court. In a unanimous opinion issued on April 15, 2011, the Texas Supreme Court held that the royalty owner had no right to enforce the agreement as a third-party beneficiary or by privity of estate. The Court held that the model form Joint Operating Agreement, which is widely used in the oilfield, lacks clear and unequivocal language demonstrating an intent to directly benefit royalty owners or any other would-be beneficiary of the contract. Any benefit royalty owners derive by way of the model form Joint Operating Agreement is merely incidental and is not enough to entitle the royalty owner to the third-party beneficiary status.
The Texas Supreme Court briefs were authored by BRS appellate partner Russell Post, who divided the oral argument in the Supreme Court with his co-counsel, Barnet Skelton of Houston.