The Contract You Thought You Made: Forfeitures and Penalties

Read The Contract You Thought You Made: The Express Negligence Doctrine (Part 1)

INTRODUCTION

The petroleum industry has had its share of companies fall into cash flow problems or, worse, go bankrupt, especially in the 1980s after the oil price crash of 1985-86. Following these experiences, the remaining players in the industry drafted very tight and onerous (some may even say draconian) provisions to deal with a defaulting party under various agreements. It is now common to include various provisions dealing with the possibility of a party filing or being forced into bankruptcy. Because it now appears that we may be in for another round of cash flow problems and possibly even some additional companies filing for protection from their creditors, these issues could reappear in force.

When the drafting committee of the Association of International Petroleum Negotiators ("AIPN") first drafted the 1990 Model Form Joint operating Agreement and later the 1995 Model Form ("JOA"), many participants wanted to be as hard on a defaulting party as possible. Basically, they wanted to "punish" a defaulting party beyond the limits of reason. It almost became a contest to see who could put the most onerous default provision in its agreement to ensure it would be paid before another venture would be paid. The drafting committee decided to include in the JOA a "default" clause (Article 8) which provided, among other things, that a defaulting party would forfeit its participating interest under the JOA if it failed to pay its invoices in a timely manner. It should be noted that the process under the JOA is for the Operator to make cash calls either thirty days in advance or in arrears and the Non-Operators are obligated to pay the cash calls at that time without question. Any objections to the charges are to be made through the audit process sometime after the cash call is paid.

The contract drafter must balance his desire to write an overly onerous default clause against an equally important desire to have a court or arbitration panel enforce the agreement as written. The text of Article 8 – Default from the JOA is shown below:

ARTICLE VIII - DEFAULT
ARTICLE 8.1 Default and Notice

Any Party that fails to pay when due its Participating Interest share of Joint Account expenses, including cash advances and interest, shall be in default under this Agreement (a "Defaulting Party"). Operator, or any non-defaulting Party in the case Operator is the Defaulting Party, shall promptly give notice of such default to the Defaulting Party and each of the non-defaulting Parties (the "Default Notice"). The amount not paid by the Defaulting Party shall bear interest from the date due until paid in full at the Agreed Interest Rate.

ARTICLE 8.2 Operating Committee Meetings and Data

Beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not be entitled to attend Operating Committee or subcommittee meetings or to vote on any matter coming before the Operating Committee or any subcommittee until all of its defaults have been remedied (including payment of accrued interest). Unless agreed otherwise by the non-defaulting Parties, the voting interest of each non-defaulting Party during this period shall be its percentage of the total Participating Interests of the non-defaulting Parties. Any matters requiring a unanimous vote of the Parties shall not require the vote of the Defaulting Party. In addition, beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not have access to any data or information relating to Joint Operations. During this period, the non-defaulting Parties shall be entitled to trade data without such Defaulting Party's consent, and the Defaulting Party shall have no right to any data received in such a trade unless and until its default is remedied in full. The Defaulting Party shall be deemed to have elected not to participate in any Joint Operations or Exclusive Operations that are voted upon at least five (5) Business Days after the date of the Default Notice but before all of its defaults have been remedied to the extent such an election would be permitted by Article 5.13(B) of this Agreement. The Defaulting Party shall be deemed to have approved, and shall join with the non-defaulting Parties in taking, any other actions voted on during that period.

ARTICLE 8.3 Allocation of Defaulted Accounts

(A) The Party providing the Default Notice pursuant to Article 8.1 shall include in the Default Notice to each non-defaulting Party a statement of the sum of money that the non-defaulting Party is to pay as its portion (such portion being in the ratio that each non-defaulting Party's Participating Interest bears to the Participating Interests of all non-defaulting Parties) of the amount in default (excluding interest), subject to the terms of this Article 8.3. If the Defaulting Party remedies its default in full within five (5) Business Days from the date of the Default Notice, the notifying Party shall promptly notify each non-defaulting Party by telephone and facsimile, and the non-defaulting Parties shall be relieved of their obligation to pay a share of the amounts in default. Otherwise, each non-defaulting Party shall pay Operator, within five (5) Business Days after receipt of the Default Notice, its share of the amount which the Defaulting Party failed to pay. If any non-defaulting Party fails to pay its share of the amount in default as aforesaid, such Party shall thereupon be a Defaulting Party subject to the provisions of this Article VIII. The non-defaulting Parties which pay the amount owed by any Defaulting Party shall be entitled to receive their respective shares of the principal and interest payable by such Defaulting Party pursuant to this Article VIII.

(B) If Operator is a Defaulting Party, then all payments otherwise payable to Operator for Joint Account costs pursuant to this Agreement shall be made to the notifying Party instead until the default is cured or a successor Operator appointed. The notifying Party shall maintain such funds in a segregated account separate from its own funds and shall apply such funds to third party claims due and payable from the Joint Account of which it has notice, to the extent Operator would be authorized to make such payments under the terms of this Agreement. The notifying Party shall be entitled to bill or cash call the other Parties in accordance with the Accounting Procedure for proper third party charges that become due and payable during such period to the extent sufficient funds are not available. When Operator has cured its default or a successor Operator is appointed, the notifying Party shall turn over all remaining funds in the account to Operator and shall provide Operator and the other Parties with a detailed accounting of the funds received and expended during this period. The notifying Party shall not be liable for damages, losses, costs, expenses or liabilities arising as a result of its actions under this Article 8.3(B) except to the extent Operator would be liable under Article 4.6.

ARTICLE 8.4 Remedies

(A) During the continuance of a default, the Defaulting Party shall not have a right to its Entitlement, which shall vest in and be the property of the non-defaulting Parties. Operator (or the notifying Party if Operator is a Defaulting Party) shall be authorized to sell such Entitlement in an arm's-length sale on terms that are commercially reasonable under the circumstances and, after deducting all costs, charges and expenses incurred in connection with such sale, pay the net proceeds to the non-defaulting Parties in proportion to the amounts they are owed by the Defaulting Party hereunder (and apply such net proceeds toward the establishment of a reserve fund under Article 8.4(C), if applicable) until all such amounts are recovered and such reserve fund is established. Any surplus remaining shall be paid to the Defaulting Party, and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties. When making sales under this Article 8.4(A), the non-defaulting Parties shall have no obligation to share any existing market or obtain a price equal to the price at which their own production is sold.

(B) If Operator disposes of any Joint Property or any other credit or adjustment is made to the Joint Account while a Party is in default, Operator (or the notifying Party if Operator is a Defaulting Party) shall be entitled to apply the Defaulting Party's Participating Interest share of the proceeds of such disposal, credit or adjustment against all amounts owing by the Defaulting Party to the non-defaulting Parties hereunder (and toward the establishment of a reserve fund under Article 8.4(C), if applicable). Any surplus remaining shall be paid to the Defaulting Party, and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties.

(C) The non-defaulting Parties shall be entitled to apply proceeds received under Articles 8.4(A) and 8.4(B) toward the creation of a reserve fund in an amount equal to the Defaulting Party's Participating Interest share of (i) the estimated cost to abandon any wells and other property in which the Defaulting Party participated, (ii) the estimated cost of severance benefits for local employees upon cessation of operations and (iii) any other identifiable costs that the non-defaulting Parties anticipate will be incurred in connection with the cessation of operations.

Check one Alternative.

[ ] ALTERNATIVE NO. 1

(D) If a Defaulting Party fails to remedy its default by the sixtieth (60th) Day following the date of the Default Notice, then, without prejudice to any other rights available to the non-defaulting Parties to recover amounts owing to them under this Agreement,

Check one Alternative.

[ ] ALTERNATIVE NO. 1

each non-defaulting Party

[ ] ALTERNATIVE NO. 2

a majority in interest of the non-defaulting Parties (after excluding Affiliates of the Defaulting Party)

shall have the option, exercisable at anytime thereafter until the Defaulting Party has completely cured its defaults, to require that the Defaulting Party completely withdraw from this Agreement and the Contract. Such option shall be exercised by notice to the Defaulting Party and each non-defaulting Party. If such option is exercised, the Defaulting Party shall be deemed to have transferred, pursuant to Article 13.6, effective on the date of the non-defaulting Party's notice, all of its right, title and beneficial interest in and under this Agreement and the Contract to the non-defaulting Parties. The Defaulting Party shall, without delay following any request from the non-defaulting Parties, do any and all acts required to be done by applicable law or regulation in order to render such transfer legally valid, including, without limitation, obtaining all governmental consents and approvals, and shall execute any and all documents and take such other actions as may be necessary in order to effect a prompt and valid transfer of the interests described above. The Defaulting Party shall be obligated to promptly remove any liens and encumbrances which may exist on such transferred interests. For purposes of this Article 8.4(D), each Party constitutes and appoints each other Party its true and lawful attorney to execute such instruments and make such filings and applications as may be necessary to make such transfer legally effective and to obtain any necessary consents of the Government. Actions under this power of attorney may be taken by any Party individually without the joinder of the others. This power of attorney is irrevocable for the term of this Agreement and is coupled with an interest. If requested, each Party shall execute a form prescribed by the Operating Committee setting forth this power of attorney in more detail. In the event all Government approvals are not timely obtained, the Defaulting Party shall hold its Participating Interest in trust for the non-defaulting Parties who are entitled to receive the Defaulting Party's Participating Interest. Notwithstanding the terms of Article XIII, in the absence of an agreement among the non-defaulting Parties to the contrary, any transfer to the non-defaulting Parties following a withdrawal pursuant to this Article 8.4(D) shall be in proportion to the Participating Interests of the non-defaulting Parties. The acceptance by a non-defaulting Party of any portion of a Defaulting Party's Participating Interest shall not limit any rights or remedies that the non-defaulting Party has to recover all amounts (including interest) owing under this Agreement by the Defaulting Party.

[ ] ALTERNATIVE NO. 2

(D) Each Party grants to each of the other Parties, in pro rata shares based on their relative Participating Interests, a mortgage and security interest on its interest in and under this Agreement and the Contract, whether now owned or hereafter acquired, together with all products and proceeds derived from that interest (collectively, the "Collateral") as security for the payment of all amounts owing by such Party (including interest and costs of collection) under this Agreement. Each Party agrees to execute such memoranda, financing statements and other documents, and make such filings and registrations, as may be reasonably necessary to perfect, validate and provide notice of the mortgages and security interests granted by this Article 8.4(D). Should a Defaulting Party fail to remedy its default by the sixtieth (60th) Day following the date of the Default Notice, then, without prejudice to any other rights available to the non-defaulting Parties to recover amounts owing to them under this Agreement, each non-defaulting Party shall have the option, exercisable at anytime thereafter until the Defaulting Party has completely cured its defaults, to foreclose its mortgage and security interest against its pro rata share of the Collateral by any means permitted under applicable law and to sell all or any part of that Collateral in public or private sale after providing the Defaulting Party and other creditors with any notice required by applicable law, and subject to the provisions of Article XII. Except as may be prohibited by applicable law, the non-defaulting Party that forecloses its mortgage and security interest shall be entitled to become the purchaser of the Collateral sold and shall have the right to credit toward the purchase price the amount to which it is entitled under Article 8.3. Any deficiency in the amounts received by the foreclosing party shall remain a debt due by the Defaulting Party. The foreclosure of mortgages and security interests by one non-defaulting Party shall neither affect the amounts owed by the Defaulting Party to the other non-defaulting Parties nor in any way limit the rights or remedies available to them. Each Party agrees that, should it become a Defaulting Party, it waives the benefit of any appraisal, valuation, stay, extension or redemption law and any other debtor protection law that otherwise could be invoked to prevent or hinder the enforcement of the mortgage and security interest granted above.

(E) The non-defaulting Parties shall be entitled to recover from the Defaulting Party all reasonable attorneys' fees and all other reasonable costs sustained in the collection of amounts owing by the Defaulting Party.

(F) The rights and remedies granted to the non-defaulting Parties in this Agreement shall be cumulative, not exclusive, and shall be in addition to any other rights and remedies that may be available to the non-defaulting Parties, whether at law, in equity or otherwise. Each right and remedy available to the non-defaulting Parties may be exercised from time to time and so often and in such order as may be considered expedient by the non-defaulting Parties in their sole discretion.

[NOTE: Default remedies must be considered and modified in the context of the requirements of the Contract and applicable laws and regulations of the host country.]

ARTICLE 8.5 Survival

The obligations of the Defaulting Party and the rights of the non-defaulting Parties shall survive the surrender of the Contract, abandonment of Joint Operations and termination of this Agreement.

ARTICLE 8.6 No Right of Set Off

Each Party acknowledges and accepts that a fundamental principle of this Agreement is that each Party pays its Participating Interest share of all amounts due under this Agreement as and when required. Accordingly, any Party which becomes a Defaulting Party undertakes that, in respect of either any exercise by the non-defaulting Parties of any rights under or the application of any of the provisions of this Article VIII, such Party hereby waives any right to raise by way of set off or invoke as a defense, whether in law or equity, any failure by any other Party to pay amounts due and owing under this Agreement or any alleged claim that such Party may have against Operator or any Non-Operator, whether such claim arises under this Agreement or otherwise. Each Party further agrees that the nature and the amount of the remedies granted to the non-defaulting Parties hereunder are reasonable and appropriate in the circumstances.

"EQUITY ABHORS A FORFEITURE"

One of the classic legal maxims is "Equity abhors a forfeiture". Fairly strong (perhaps even emotionally charged) language to say the least. What does this phrase mean exactly and why the emphasis?

In a more modern sense, "Equity" is a body of jurisprudence or field of jurisdiction that is collateral to the common law. The object of "Equity" is to render justice more completely by affording relief to a party based on grounds fundamental fairness and justice where a court acting in law may not be able to furnish such relief if the law does not allow it to do so. Courts in Texas act both in law and in equity. In other jurisdictions, there are specific courts that dispense equity and are not constrained by the civil or common law. It is a method by which a court can reach a just, equitable, and fair result without the constraints of the common or civil law. The guiding principle in equity is that "No right should be without an adequate remedy". The principles of equity can be used to ensure justice where the common law has become outdated due to advances in civilization or changes in society.
"Abhors" means "to regard with extreme repugnance" and is synonymous with "loathe" and "hate". "Forfeiture" means the loss of a property right through the action or inaction of the party losing such a right.

Thus, "Equity abhors a forfeiture" means that the courts, using their jurisdiction to apply notions of fundamental fairness to the issues before them, do not want to take a property right away from a party unless it is unavoidable. It is a bit of an understatement to say that forfeitures are not favored in the law and are granted only in the most compelling circumstances. Thus, the party seeking to enforce the forfeiture has an uphill battle to have the forfeiture granted. Such a party must have drafted his contract very carefully and have taken the proper actions after the default to have the forfeiture enforced.

WHAT IS THE TEXAS LAW RE ENFORCING A FORFEITURE?

The Texas cases are mixed when it comes to enforcing a forfeiture of a property right. The courts seem to rely heavily on the facts of each case to determine whether a forfeiture of property rights will be enforced. Many of the Texas cases deal with rental properties, the Landlord-Tenant relationship, and installment contracts. None of the cases reviewed dealt with a forfeiture under a joint operating agreement. If the parties contract for a forfeiture in the event of a default by one of the parties, then the defaulting party attempting to resist the forfeiture must plead and prove such facts in order to justify a court's decision to ignore the written agreement.

Basically, a defaulting party (or the successor or assignee of such defaulting party) must show that, although the parties contracted for a forfeiture in case of a default, that the facts justify the continuation of the contract rather than a forfeiture of it. In one case, a purchaser under an installment sales contract for a motel made several late payments which were accepted by the seller over the course of several years. The purchaser eventually fell behind in its installment payments and entered into a sale-leaseback arrangement with a third party. The purchaser defaulted and the third party stepped in and brought the installment sales agreement up to date, including all interests and penalties. The seller refused to accept the late payments, even though it had accepted late payments in the past, and sought to forfeit the property back to itself. The Court held that equity required relief from the forfeiture provisions of the installment sales contract and that the third party was allowed to tender the late installments (plus interest and penalties) and that the installment sales contract would continue. (T-Anchor Corporation v. Travarillo Associates, 529 SW2D 622 (Civ. App. Amarillo – 1975).

The T-Anchor case could be analogous to a forfeiture of an interest in a producing property and the where a party fails to pay its share of joint interest costs. It would be unlikely that a court would forfeit a party's interest in a producing property for a default in the payment of a cash call. The court would more likely hold that the contract would continue and an offset be allowed against the debt owed and the proceeds of production. It is well settled in Texas that a court will not enforce a forfeiture if there can be shown reasonable grounds for an alternative relief. Likewise, a forfeiture will not be declared unless the language in the contract cannot be interpreted any other way – the clause must be clear and unambiguous. In other words, forfeiture clauses will be strictly construed against the party seeking the forfeiture. A court exercising its equitable powers will decline to enforce the forfeiture if the defaulting party can show that it would be equitable to continue the contract.

Several different fact situations can arise that would allow a court to reach various conclusions. Some of the more typical fact situations and how a court might hold are as follows:

Where a party defaults on cash calls under a JOA in an exploration block without any production, a court would be very likely to allow for the forfeiture, especially given the high risk nature of the oil and gas business and the timing of a default (eg. A defaulting party riding a well down to get well results before paying its share of costs and expenses).

Where a party defaults on cash calls under a JOA in the appraisal phase of a project before production has been established, a court would be more likely than not to allow for the forfeiture, especially given the fact that the extent of the discovery is still not determined and the entire project could still fail. This fact situation is less certain than the first one since there is now a discovery well on the block which would indicate that a substantial investment has been made and a great deal of value has been added to the block. Despite these factors, a court would still probably enforce the contractual forfeiture, especially given the high-risk nature of the oil and gas business and the timing of the a default (eg. Before production has been established). In this case, you might was to include in your agreements an alternative to forfeiture should the forfeiture be held to be unenforceable. Such alternatives could be a forced sale of the interest at its market value or a partial forfeiture (also known as a "withering interest") rather than a complete forfeiture.

Where a party defaults on cash calls under a JOA in development project before establishing any production on the block, a court would be less likely to allow for a forfeiture, especially given the high amount of money presumably already invested by the defaulting party in the project. If the property is worth many millions of dollars and the cash call is for $50,000, then the court might be more inclined to hold for a continuation of the contract, especially if there are additional extenuating circumstances. Without any extenuating circumstances, it becomes more likely that a court would grant the forfeiture.

Where a party defaults on a cash call and relies on other clauses under the JOA as an excuse to avoid payment, a court would be more likely than not to continue the contract without a forfeiture. For example, if a party refuses to pay a cash call because the cash call relates to expenses that are outside an approved work program and budget or they have been incurred under a contract that did not comply with the contract awards procedure in the JOA, then a court would probably not enforce the forfeiture.

Where a party defaults on cash calls under a JOA due to a material breach of the Operator or due to an arbitration proceeding being filed, then a court would be more likely than not to continue the contract rather than to allow for the forfeiture. This result would be the case even though the parties agreed otherwise in the contract. (The JOA provides that a party will pay its share of cash calls not matter what the circumstances and later audit the joint account to recover monies improperly charged to the parties).

Where a party has a history of defaulting on its cash calls under a JOA and later catching up on the late payments that are accepted by the Operator (with or without interest payments included in the late payment), an Operator would be hard pressed to then start enforcing the default clause and the forfeiture penalty, especially if a discovery has been made in the block in the interim. One case involved an Operator that overlooked a delinquent cash call for over 13 months and then tried to force a forfeiture. The defaulting party tendered the total sum of its share of the cash calls, but the Operator refused the tender. In arbitration, the three-arbitrator panel held that the Operator's delay in enforcement allowed the defaulting party to (in effect) reclaim its interest by paying its overdue cash calls. This holding will especially be true where there is a change in circumstances of the parties. It may also give rise to lawsuits between the Operator and the "Non-defaulting Non-Operators" for the Operator's delay in enforcement of the terms and conditions of the JOA.

HOW CAN A NON-DEFAULTING PARTY PROTECT ITSELF?

There are a few strategies that you can employ to ensure that your forfeiture clause will be enforceable. If possible, the forfeiture should be "self-executing" without having to go to court to obtain the transfer. Some ways to make your forfeiture self-executing would be to have all parties grant to each of the other parties a Power of Attorney for the exclusive right to complete the transfer in case of a default by the party. The default clause of the JOA (Article 8 quoted above) attempts to do just that in Article 8.4 (D) Alternative #2, where it states:
"For purposes of this Article 8.4(D), each Party constitutes and appoints each other Party its true and lawful attorney to execute such instruments and make such filings and applications as may be necessary to make such transfer legally effective and to obtain any necessary consents of the Government. Actions under this power of attorney may be taken by any Party individually without the joinder of the others. This power of attorney is irrevocable for the term of this Agreement and is coupled with an interest. If requested, each Party shall execute a form prescribed by the Operating Committee setting forth this power of attorney in more detail."

Alternative #3 takes a little different approach in that it established a mortgagor-mortgagee relationship between the Defaulting Party and the Non-defaulting party so that the Non-defaulting party can "foreclose" on the interest of the Defaulting Party. This "foreclosure under the mortgage is self-executing as well and would be more likely to be held enforceable by a court just because of its self-executing nature.

Similarly, if the parties agree that a forfeiture of a Defaulting Party's interest will be a "condition of continuing with the contract," then it is more likely that the forfeiture would be enforced. The alternative would be to terminate the contract and sue for damages. In some of these contracts (like the installment sales contracts), termination of the right to acquire the interest being sold would give the seller a desirable result. These types of contracts would generally be enforceable, unless extenuating circumstances are present. Unfortunately, this remedy of simply terminating the contract is not satisfactory to the Non-Defaulting Parties under an international joint operating agreement, since the defaulting party would continue to hold an interest in the property through the ownership of contractual rights under the host government contract. For the international joint ventures in the petroleum industry, the preferred method of ensuring that a forfeiture of interests would be enforceable is the self-executing power of attorney. One caution, however, is that any transfer requires the approval of the host government under the host government contract. Usually, this approval is discretionary on the part of the host government and can be difficult to obtain in some instances, especially if the Defaulting Party fights the transfer.

Australia is one jurisdiction in which the forfeiture may be difficult to obtain since the courts there are predisposed to deny the forfeiture under Australian law. Australian counsel has suggested that joint venturers forego the forfeiture of the entire interest and move to a "withering interest", a deemed "non-consent" of the operation, or a forced sale of the Defaulting Party's Participating Interest based on an objective market value approach rather than a losing of the interest for failure to pay a cash call (which could be very much less that the market value of the Participating Interest). The suggested fix for JOAs under Australian law would be to add a new Article 8.8 that would read:

8.8 No Relief From Forfeiture

Each Party acknowledges and agrees that the provisions of this Article 8, given the nature of petroleum exploration, appraisal, development, and production, do not constitute a penalty and are reasonable, fair, and equitable. To the extent that any provision in this Article 8 constitutes a forfeiture or penalty, each Party unconditionally waives any and all rights or remedies it may have at law, in equity, by statute (to the extent permitted by law), or otherwise to relief against a forfeiture or penalty if such provision is invoked or enforced"

CONCLUSION

Just because you write it into the contract does not necessarily make it so. Many different factors can determine whether the contract you thought you made is in fact the contract that the court or law will enforce. Indemnities and forfeiture were covered in Parts I and II of The Contract You Thought You Made. Basically, provisions that are susceptible to being held unenforceable can be given a better chance at being held enforceable with careful drafting and attention to the agreed applicable law under the contract.

Other factors not discussed here can easily render the contract unenforceable, such as a filing in Bankruptcy Court (where all bets are off as to enforceability). Even those provisions dealing with removal of Operator and certain other provisions that are agreed to take effect immediately upon the filing for relief from creditors will not be enforceable without the approval of a Bankruptcy Court. Operators have attempted to hide behind Article 4.6 of the JOA (which relieves an Operator of liability for everything but gross negligence and willful misconduct) if its acts/omissions were performed as part of its "functions and duties" as Operator) to excuse its behavior relating to contract awards and following the work program and budget procedures (virtually anything that falls within the category of the "functions and duties" of the Operator. Should the Operator be allowed to hide behind Article 4.6 in order to render unenforceable the remainder of the JOA that deals with its "functions and duties" as Operator?
Before we wrap up, we did have one additional "bonus" topic to cover.

The Contract You Never Thought You Made

This topic can best be illustrated by a Texas Supreme Court case, Vortt Exploration v. Chevron USA, 787 SW2d 942 (Tex. 1990).

Vortt tried from 1978 until 1983 to persuade Chevron to jointly explore some exploration acreage. At various times, Vortt asked for a farmout of the Chevron acreage and later a joint operating agreement to share the risks and costs in exploring the area. Chevron refused Vortt's repeated requests. At one point in the negotiations, Vortt showed to Chevron some seismic data that it had acquired with the hope that Chevron would get more technically interested in the area. Chevron reviewed the seismic data and later drilled a well based on this data without Vortt. No agreements were ever signed between Vortt and Chevron. Vortt did not even require Chevron to sign a confidentiality agreement before showing the data to them.

Needless to say, Vortt was very upset that Chevron took its data and drilled the well without them. Vortt sued Chevron under a theory of quantum meruit, seeking damages for the value of the data shown to Chevron. Quantum Meruit has four elements:

  1. valuable services or materials must be rendered to or furnished,
  2. to or for the person sought to be charged,
  3. such person must accept, use, and enjoy such services or materials, and
  4. reasonable notice must be given to the defendant that the plaintiff expected to be compensated for the services/materials so furnished.

In furnishing the seismic data (a valuable service/material) to Chevron (the defendant) and Chevron using the data to its own purpose, the first three elements of the quantum meruit theory were satisfied. The fourth element garnered all the discussion and debate. Had Vortt give Chevron a reasonable notice that Vortt expected to be compensated for the services/materials furnished? This case turns out to be highly controversial on this one point. Chevron claimed that Vortt wanted to be their partner and jointly explore their adjacent leases – nothing more than that. The Texas Supreme Court held that "compensation" is not always paid in a monetary form and that Vortt seeking a partner is enough "compensation" to meet the fourth element of the quantum meruit theory. The trial court awarded damages to Vortt and the Texas Supreme Court ultimately affirmed the ruling.

There were two other interesting notes to this case. The first one is that the measure of damages awarded was based on the value of the data to Chevron and not the cost of the data to Vortt. Vortt had paid around $18,000 for the data and was awarded $178,750 as the value of the data to Chevron. The second point comes from the dissent in the case written by Justice Hecht: "Was ever fainter hope more richly rewarded? For not refusing to look at Vortt's information, Chevron must now pay 10 times its cost. A frustrated negotiator should never overlook this tactic in attempting to induce agreement. The recipient of such charity, however, should beware."

While I find myself siding with the dissent on this case, a sage once said, "Where you stand on an issue depends on where you sit".