Use of Tort and Statutory Duties to Enlarge Contract Obligations Under Lease and Operating Agreement

February 01, 1999

Introduction

In Texas, it is now common to find what have previously been thought of as strictly oil and gas contract claims pleaded as both tort and contract causes of action. In Morris v. Enron Oil & Gas Company, this trend was carried to its ultimate extreme by a royalty owner, who based his claim for unpaid royalties only on tort allegations, without asserting a contract cause of action. In this case, a royalty interest holder brought an action against Enron alleging negligence, gross negligence, conversion and fraud, arising out of Enron's alleged failure to properly make royalty payments under a division order. The petition sought both actual and exemplary damages. Enron filed a motion for summary judgment asserting a limitations defense. The royalty owner interposed the discovery rule as excusing his failure to file his suit within the appropriate limitations period. This case illustrates the two incentives in Texas for a plaintiff to cast what would otherwise be a contract claims as a tort claim, i.e., the availability of the discovery rule and exemplary damages. The Texas Supreme Court has indicated that the discovery rule is not applicable to a particular cause of action until it has explicitly adopted the discovery rule to a specific cause of action. The royalty owner in Morriss would have been unable to raise the discovery rule, in good faith, to avoid limitations on a contract claim, but apparently hoped the court would allow it on a negligent performance of contract claim. Exemplary damages would not have been available to the royalty owner on a breach of contract claim.

The inquiry then is under what circumstances in Texas may a plaintiff assert tort causes of actions arising out of or in connection with breach of an oil and gas lease or the operating agreement. The difficulty of this inquiry was summed up by Justice Gonzales in Southwestern Bell Telephone Co. v. DeLanney, as follows:

We have muddled the law of "contorts" and an all encompassing bright line demarcation of what constitutes a tort disinct from breach of contract has proven to be elusive.

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