Escondido and Justapor. Next up on Tiny Desk Concert? Good
guess, but no. They are the parties in Escondido v. Justapor,
a Texas case presenting the perils of lease termination clauses and
vaguely-drawn contracts.
The agreements
Justapor as lessor and Escondido as lessee entered into an oil and
gas lease in 2008 on the 803-acre Justapor Ranch in Webb
County. Among other provisions,
Escondido must pay royalties within 60 days.
Annual “true-up” of royalty underpayments.
Termination if Escondido doesn’t pay the correct royalty.
In 2011, the parties entered into a separate agreement under which
Escondido would convey certain interests it acquired in the Ranch
to an entity designated by Justapor.
The lawsuit
Justapor sued in 2013, alleging intentional failure to make
up underpayments in 2012 and 2013, breach of contract, bad-faith
trespass, trespass to try title, and declaratory judgment on lease
termination and the parties’ rights relating to a 42-acre “vacancy
tract” Escondido was to convey per the 2011 agreement.
Everybody moved for summary judgment on lease and vacancy
tract issues. The (home town) trial court granted a final summary
judgment for Justapor and denied Escondido’s cross-
motion. Escondido appealed.
The court of appeals speaks
The lease did not terminate due to Escondido’s breach of
the true-up provision. The court parsed the lengthy and
complicated termination clause and said it could not be
applied without rendering the true-up provision superfluous or
giving Escondido conflicting deadlines to make payments.
Judgment rendered for Escondido on Justapor’s remaining
claims.
Because the trial court said the lease terminated in 2012,
Justapor’s claim for breach of the true-up provision in 2013
was never addressed. That claim was remanded so that the
trial court could address a typo and determine if Escondido
breached the true-up provision in 2013.
Judgment on the vacancy tract reversed. Justapor never
designated an entity for Escondido to convey interests to.
Justapor, therefore, could not establish a breach of contract
claim.
Lawyers, pay attention
Escondido waived its defenses to Justapor’s breach of contract
claim by failing to expressly present the defenses in its summary
judgment response. A “mere reference” to facts supporting
affirmative defenses was not enough. Summary judgment for
Justapor affirmed for Escondido’s breach of the lease.
Takeaways
Lessees: Faced with a termination clause? Don’t agree to this
Sword of Damocles! At best, it produces sleepless nights. At
worst, it could mean an ugly end to your investment.
Drafters: Avoid using confusing language that leads
to an unanticipated result.
Plaintiffs: Make sure you have performed your own obligations
before seeking specific performance.
Defendants: Never make Her Honor have to guess about your
defenses.
