Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Seagull Energy E&P, Inc. is a lessee and operator of two offshore oil and gas leases in the Gulf of Mexico near the Texas coast � Blocks 828 and 831, Mustang Island Area. In 1994, Eland Energy, Inc. purchased an interest in both leases, acquiring a 1.09375 percent interest in Block 828 from General Atlantic Resources, Inc. and a 9.41719 percent interest in Block 831 from UMC Petroleum Corporation. As the new owner, Eland expressly assumed certain rights and responsibilities under two offshore operating agreements, each applicable to its respective block. Both agreements designated Seagull as the operator and were essentially the same. They provided that Eland and the other lessees were to share the cost of operations in proportion to their respective interests, and that Seagull, as operator, was to exploit the minerals and collect the operating costs from the other lessees. In July 1996, Eland sold its interest in these leases to Nor-Tex Gas Corp., also assigning to Nor-Tex its rights and obligations under the operating agreements. Not long thereafter, Nor-Tex failed to reimburse Seagull for its share of operating costs, and Seagull sought these costs from Eland as an interest owner. Eland, however, refused to pay because it no longer owned an interest in the leases. Seagull then sued Eland and Nor-Tex for breach of the operating agreement. Both Seagull and Eland moved for summary judgment. The trial court denied Eland’s motion but granted a partial summary judgment in Seagull’s favor. In its summary judgment, the court concluded that Nor-Tex had breached the operating agreement by failing to pay its share of the operating expenses and that Eland also remained liable for these expenses which it incurred under the operating agreement. Damages were tried to the court which found Eland and Nor-Tex jointly and severally liable to Seagull in the amount of $268,418.90, plus interest and attorney’s fees. Eland appealed. The court of appeals reversed the trial court’s judgment to the extent it awarded damages against Eland. The court concluded that Eland had no continuing liability under the operating agreements after the assignment of its working interest, because the agreements did not expressly provide for such a continuing obligation. HOLDING:Reversed and rendered. The Supreme Court concludes that, despite selling its working interest, the seller remains liable under the operating agreement, unless released by the operator or the terms of the agreement. Here, because neither the operating agreement nor the operator expressly released the seller from its obligations under that agreement, the court reversed the court of appeals’ judgment and rendered judgment for the operator. The dispute turns on whether the parties to the operating agreement expressly agreed upon the consequences that should follow an assignment of one’s interest to a third party. Neither the parties nor the lower courts have found this operating agreement ambiguous, and the Supreme Court agrees that it is not. Its meaning is therefore a question of law. The operating agreement simply does not explain the consequences of an assignment of a working interest to a third party. Generally speaking, a party cannot escape its obligations under a contract merely by assigning the contract to a third party. Thus, as a general rule, a party who assigns its contractual rights and duties to a third party remains liable unless expressly or impliedly released by the other party to the contract. Even when the contract does not expressly provide for the consequences resulting from the assignment of one’s interest, the contract’s subject or other circumstances may indicate that obligations were not intended to survive assignment. Eland does not argue that this contract’s subject or circumstances imply that it should be released of its obligations after assignment. Even if it were to argue this, it is not apparent why Eland would not have been able to fulfill its obligations under the operating agreement even after the transfer of its interest in the underlying lease. Because the operating agreement did not expressly provide that Eland’s obligations under the operating agreement should terminate upon assignment and Seagull did not expressly release Eland following the assignment of its working interest, the Supreme Court reverses the court of appeals’ judgment and renders judgment for Seagull as the trial court did. OPINION:Medina, J., delivered the opinion of the court. O’Neill and Brister, J.J., not sitting.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.