United States: Examples Of Ambiguities In Spatially Limited Assignments

The August installment, Vertical Assignments, was a discussion of Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d (Okla. 2011) as an illustration of the various ways a Court could interpret an assignment once the Court concludes that the assignment was "ambiguous."

The take away? Try not to be ambiguous.

Assignments are contracts. As contracts, the accepted rule is that unless the terms are ambiguous, Courts will limit themselves to the "four corners" of the instrument to determine its meaning. However, if the Court concludes that the instrument is ambiguous, extrinsic evidence is allowed to determine the parties' intent and the result is seemingly anyone's guess.

There are very few cases interpreting spatially limited assignments from courts in states in the Marcellus/Utica or the Illinois Basin. It would, therefore, be presumptuous to posit hard and fast rules concerning such assignments or their interpretation in the event a court concludes that the assignment is to any extent ambiguous.

Nevertheless, the following are two cases that illustrate some of the ways in which an assignment could be considered ambiguous.

Inadequate description:

In Artex Oil Co. v. Wells, 170 Oil & Gas Rep. 404 (2006), the interest assigned was described as follows:

"an undivided 50% Working Interest***in, and to, the oil and gas lease described as follows:

 "Oil & Gas Lease from James R. Wells and Dorothy Wells, to James R. Wells, dated Dec 5, 1980, and recorded 1980, in Volume 88, Page 402, of the Guernsey County Records, leases 82 acres.

...The interest herein assigned relates only to the existing well on the subject premises and 40 acres surrounding same."

The Assignor argued that this assignment was of a working interest in an existing well on the property and only to the Clinton formation, which was the target formation of the existing well. The Assignee argued that the assignment was of a 50 percent working interest in the entire lease, as to the 40 acres, including the existing well. 

The Court concluded that the language describing the interest assigned was ambiguous because neither the assignment nor the referenced lease describes the referenced 40 acres. Based on the Court's conclusions regarding the parties' testimony, the Court found that the assignment was of a 50 percent interest in the well only, with 40 acres surrounding "as required by well spacing requirements of the State of Ohio" and only to the Clinton formation.

The lesson? If any acreage reference is made, describe the acreage as you would in a deed of the same.  

Inadequate description of the rights assigned:

In Cadle v. D'Amico, 2016-Ohio-4747, the interest assigned was the assignor's "interest in certain Oil & Gas Lease for the 'Sudimak #2 and #3 Well.' 10/28/08 Lease."

The Assignor argued that the assignment entitled the assignee only to royalties from the Sudimak #2 and #3 Wells, both shallow wells. The Assignee argued that the assignment entitled him to royalties from any other wells drilled on the lease, including two recently drilled deep wells.

This case is an interesting instance of the application, in order, of general rules of construction. The parties conceded that the description in the assignment, which the Assignor prepared, was ambiguous. The Assignee asked that it be construed against the drafter, which is one of the four "general" rules of construction. (Not a topic for discussion in this Article.) The court disagreed, stating, "Construing a contract against the drafter is a secondary rule of contract construction, and is applicable when the primary rules of contract construction, i.e. plain language of the document and extrinsic evidence, in that order, fail to clarify the meaning of the contract."

Based on extrinsic evidence, including testimony from both parties and the Assignor's retention of the minerals in all prior transactions, the Court ruled in favor of the Assignor.

The lesson? State in simple language what it is you are assigning or being assigned. In this case, if the Assignee had in fact expected to receive an interest in the entire lease, it should have stated as such.

In this era of multi-formational drilling, especially drilling into the Utica on leases that cover it and other formations, it is vital to avoid any chance of an ambiguous interpretation of the interest assigned or received.

In Artex, for example, the Court's interpretation left the assignee with a 50 percent interest in two shallow wells that had in fact ceased producing; in other words, the assignee was left with no interest at all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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