Co-author Julia Edwards
This “most-favored-nations” clause in three oil and gas leases on land in LaSalle County, Texas, was at issue in EP Energy E&P Co., L.P. v. Storey Minerals, Ltd.:
If … the lessee … acquires an Oil and Gas Lease [on certain lands] on such terms that the … bonus … [is] greater than th[at] provided to be paid to lessor hereunder, lessee … agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) … bonus … as any subsequent lessor of the leased premises to the extent that such … bonus … [is] greater than those provided to be paid herein. … “
In the end, as a result of lessee EP’s subsequent leases lessors (MSP) were entitled to increased bonuses on leases from the time prior to execution of the triggering lease. Once again, a court applied the plain, ordinary, and generally accepted meaning of the contract.
In 2009, the parties entered into three identical leases. EP paid bonuses of $500 per net mineral acre.
In 2018, amidst the Eagle Ford Shale leasing frenzy, EP acquired the “First Presbyterian” lease and the “Donaldson Brown” lease, both effective back to 2013. The Donaldson Brown lease bonus was $5,200 per net mineral acre.
The question for the Court: What did the highlighted phrase mean? The parties agreed on the amount per acre but disagreed on the period of time to which the bonuses should be applied.
EP: It would pay only for acreage on which it paid bonuses after the effective date of the Donaldson Brown lease—September 25, 2013., but not before.
MSB: It was entitled to the increased bonus for all acreage, including acreage leased prior to execution of the Donaldson Brown lease.
The trial court agreed with MSB and awarded bonuses in excess of $41MM, reflecting an increase of $4,700 per mineral acre for all the bonuses.
EP’s unsuccessful arguments on appeal
First: “effective” and “thereafter” demanded a prospective construction of the MFN clause. The amendment would be “effective as of the date of the third-party lease.” The Court concluded that “effective” simply meant “the executed amendment is operate ‘as of the date of the third party lease,’” not that it only applied to bonuses after such date.
Second: “Thereafter” meant that if the parties intended the obligation to be retroactive they would have used the term “theretofore.” The Court concluded that this reasoning would result in the “the opposite” of what was drafted and that the plain language required neither a prospective nor retroactive construction. Instead, “thereafter” merely addressed when the payment would be made: After the parties executed an amendment.
Third: Surrounding circumstances indicated that EP was only required to “pay bonuses on acreage on which it paid bonuses from that point forward.” Specifically, EP looked to the addendum, which reflected deferred bonus payments as a result of pending title issues. The Court saw such circumstance as an impermissible addition/alteration to the MFN clauses’ “unambiguous language.”
Justice Valenzuela’s dissent concluded that the words “effective” and “thereafter” required EP to only pay higher bonus payments prospectively, or for bonuses after the effective date of the amendment (i.e. the date of the third party lease).
Your musical interlude, for Mama.