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Click here for the full text of this decision FACTS:Working-interest owner Elmagene Dorsett sued Valence Operating Co. in a dispute arising from a joint operating agreement. The trial court granted partial summary judgment against Dorsett on her breach of contract claims, finding that Dorsett failed to consent to participate in the wells at issue, and that a contractual non-consent penalty for that failure was enforceable against her. The court of appeals reversed and rendered judgment in favor of Dorsett, holding that Valence breached contract provisions that required Valence to give notice to Dorsett before commencing drilling operations. HOLDING:The court reverses the court of appeals and renders judgment in favor of Valence. The determinative issue is whether the agreement requires a 30-day notice period to expire before the operator can commence work on the proposed operations. The court agrees with Valence that the model form agreement places no temporal limitation on Valence’s ability to commence work on the proposed projects. The 30-day notice period sets a deadline for Dorsett to decide whether to participate in proposed operations. Nothing in the language of the agreement forbids the operator from commencing work before the end of the notice period. However, there is a temporal limit in the agreement on Valence that sets a deadline, not a required start date, on Valence’s commencement of work. The agreement requires the operator to commence work no later than sixty days after the expiration of the 30-day notice period. A.A.P.L. Form 610-1977, art. VI.B.2. (1977). The distinction between the two notice periods in the agreement retains the working interest owner’s right to thirty days notice before being required to make a decision, while also requiring the operator to commence work no later than ninety days after formally proposing the operation to the interest owners. This interpretation effectuates the written agreement of the parties. The court recognizes that this interpretation allows an operator to commence a new operation before the 30-day notice period has expired; however, potential benefits may accrue to the owners for an operator’s “early” commencement. For example, an early start may avoid detrimental occurrences such as the draining of an oil field by a neighboring operator or the expiration of an oil and gas lease. Moreover, the risk of early commencement of such operations falls entirely on the operator because if none of the working interest owners consent to participation within thirty days, the operator bears the full cost of operations. The parties do not identify any negative consequences to the working interest owners that arise from commencement of operations within the 30-day notice period. Dorsett received notice of each of the proposed subsequent operations. She acknowledges that she did not consent to any of the proposed operations within thirty days of receiving notice. She therefore is a non-consenting party under Article VI.B.1. of the Model Form Agreement, and the non-consent penalty applies to her, the court concludes. Dorsett contends that the non-consent penalty is an unenforceable liquidated damages provision. One Texas court of appeals, in its consideration of whether a non-consent penalty was enforceable, characterized the penalty as a liquidated damages clause and decided that it was enforceable against the non-consenting working interest owner. Hamilton v. Tex. Oil & Gas Corp., 648 S.W.2d 316 (Tex. App. – El Paso 1982, writ ref’d n.r.e.). While Hamilton reached the correct result, the court disapproves of its treatment of the non-consent penalty as a liquidated damages provision. To interpret the provision as Dorsett suggests would not only contradict its plain language, but would vanquish the incentive for parties to consent and incur costs and liabilities for new projects. If all working interest owners shared equally in production revenues from subsequent projects, whether they consented or not, none would consent because there would be no incentive to do so. In fact, the incentives would strongly favor not consenting because, under Dorsett’s approach, a non-consenting party would be able to reap the rewards of new operations without incurring any expense. The non-consent penalty is designed to allow reasonable compensation for working interest owners who undertake the risk of developing new wells. Terms sometimes used to describe the non-consent penalty � “sole risk clause” and “risk charges” � more accurately convey this rationale, the court states. OPINION:Wainwright, J., delivered the court’s opinion. Johnson, J., did not participate in the decision. CONCURRENCE:Brister, J. “I recognize that in some situations receiving less is the economic equivalent of paying more. But bonuses for a star athlete or salesman are not intended to penalize their employers, but to increase returns for all concerned. Unless an oilfield can be completely emptied from existing wells, further development is not a zero-sum game. “Those in the oil industry widely use and rely on clauses like the one here, and certainly consider them enforceable. See John R. Reeves & J. Matthew Thompson, The Development of the Model Form Operating Agreement: An Interpretive Accounting, 54 Okla. L.R. 211, 254-55 (2001). Dorsett provides precedent in neither law nor logic suggesting that liquidated bonus clauses should be unenforceable, nor why she should get a bonus for a risk she never took. Accordingly, this is not a ‘non-consent penalty.’”

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