Zenergy, Incorporated v. Performance Drilling Co.

Case: 14-60152 Document: 00512971520 Page: 1 Date Filed: 03/17/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 14-60152 United States Court of Appeals
Fifth Circuit
FILED
ZENERGY, INCORPORATED, March 17, 2015
Lyle W. Cayce
Plaintiff - Appellant Clerk
v.
PERFORMANCE DRILLING COMPANY, L.L.C.,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Mississippi
USDC No. 3:10-CV-483
Before KING, DAVIS, and OWEN, Circuit Judges.
PER CURIAM:*
Plaintiff-Appellant Zenergy, Inc., appeals the district court’s grant of a
directed verdict in favor of Defendant-Appellee Performance Drilling
Company, L.L.C., in this action for breach of a daywork oil and gas drilling
contract. For the following reasons, we AFFIRM the judgment of the district
court.
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
*
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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I.
Zenergy, Inc., hired Performance Drilling Company, L.L.C., to drill an
oil well in Calcasieu Parish, Louisiana. The well was intended to be a vertical
well with a bottom hole depth of 11,800 feet. The contract Zenergy and
Performance entered into was an International Association of Drilling
Contractors (“IADC”) form onshore daywork drilling contract (the “Contract”).
Zenergy was the operator 1 under the Contract and Performance was the
drilling contractor. 2
Prior to beginning work on the well, Zenergy gave Performance a copy of
the drilling procedure, which indicated that the well was to be drilled
vertically. 3 Under the terms of the Contract, Performance was to provide a
conventional drift indicator, which is a tool used to measure the deviation of
the wellbore. The conventional drift indicator that Performance provided was
called a “Sure Shot.”
Performance began drilling in December 2008. In addition to
Performance’s drilling crew, Zenergy had a company representative, Dean
Dick, present at the drilling site. Per Zenergy’s instructions, Performance
conducted deviation surveys every 1,000 feet. The results of those deviation
surveys, along with other information about the progress of the well, were
logged on API-IADC form daily drilling reports (which were given to Zenergy).
For the first few weeks of drilling, the Sure Shot surveys showed a deviation
1 In the context of the oil and gas business, an operator is “[t]he company that serves
as the overall manager and decision-maker of a drilling project.” Entry for Operator in The
Oilfield Glossary, Schlumberger, http://glossary.oilfield.slb.com/en/Terms/o/operator.aspx.
2 A contractor is “[t]he company that owns and operates a drilling rig.” Entry for
Drilling Contractor in The Oilfield Glossary, Schlumberger, http://glossary.oilfield.slb.com/
en/Terms/d/drilling_contractor.aspx.
3 The parties apparently agree that, for purposes of this case, a well with a deviation
of less than five degrees from true vertical would be considered a vertical well.
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of less than one degree. 4 Then, on January 2, 2009, a Sure Shot survey ran at
9,504 feet reported a deviation of seven degrees or greater. 5 Performance
called out a technician who examined—and ultimately replaced—the Sure
Shot tool. On the field ticket for replacing the Sure Shot, the technician wrote
“pendulum bent.” Meanwhile, Zenergy called in a third-party contractor,
Multi-Shot, to perform a more-accurate gyroscopic deviation survey. Because
the Multi-Shot technician mistakenly downloaded data from a different
deviation survey, the Multi-Shot survey reported a deviation of only two
degrees. Their concerns settled, Zenergy instructed Performance to resume
drilling.
The surveys on the new Sure Shot continued to report a deviation of two
and one quarter degrees or less, and the well was drilled to a depth of 11,060
feet. Zenergy then called out Schlumberger, another third-party contractor, to
“log” the well. Schlumberger informed Zenergy that its hole was severely
deviated. Incredulous, Zenergy called Multi-Shot back out to perform another
gyroscopic deviation survey. This time, the correct data was downloaded, and
the Multi-Shot survey showed that Zenergy had a wellbore that was deviated
by twenty degrees and horizontally displaced by 1,145 feet. Zenergy then had
the drill backed up to a point where the wellbore was still vertical, had the
deviated portion of the wellbore cemented in, and had the hole redrilled as a
vertical well.
4 What the Sure Shot tool actually reported was hotly contested at trial, but, given the
posture of this case, we view the evidence in the light most favorable to Zenergy. See Hagan
v. Echostar Satellite, L.L.C., 529 F.3d 617, 622 (5th Cir. 2008) (reciting that in reviewing a
Rule 50(a) motion for judgment as a matter of law “we view all of the evidence in the light
and with all reasonable inferences most favorable to the party opposed to the motion”
(internal quotation marks omitted)).
5 The Sure Shot tool used in this case could only record a deviation of up to seven
degrees. As such, the deviation may have been—and in fact was later shown to have been—
greater than seven degrees.
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After the well was completed, Zenergy paid Performance for only the
days during which the wellbore was deviated by less than five degrees. The
parties met in Houston to attempt to resolve their dispute but were ultimately
unsuccessful.
Zenergy sued Performance in Louisiana state court seeking a declaratory
judgment stating that it owed no further money to Performance under the
Contract. Performance counterclaimed alleging breach of contract and seeking
payment for the twenty-three days of drilling for which Zenergy has not paid.
Performance removed the action to federal court and it was transferred to the
Southern District of Mississippi. Before the district court, Zenergy argued that
it owed Performance no further payment because Performance breached the
Contract by drilling a deviated well, failing to provide a working conventional
drift indicator, failing to provide accurate reports, violating the covenant
requiring compliance with Louisiana law, and failing to perform in a good and
workmanlike manner. After a six-day jury trial, the district court granted
Performance’s motion for a directed verdict, holding that under the Contract
Zenergy bore all of the risk of a deviated wellbore. Nevertheless, the district
court concluded that Performance could still be held liable for fraudulent acts
notwithstanding the Contract, and therefore the district court instructed the
jury only on an intentional misrepresentation cause of action that neither
party had pleaded. The jury returned a special verdict finding Performance
not liable. 6 Zenergy timely appealed.
6 Zenergy argues that the district court erred in instructing the jury on an intentional
misrepresentation theory of recovery on the basis of implied consent under Federal Rule of
Civil Procedure 15(b)(2). Rule 15(b)(2) states that “[w]hen an issue not raised by the
pleadings is tried by the parties’ express or implied consent, it must be treated in all respects
as if raised in the pleadings.” Fed. R. Civ. P. 15(b)(2). Assuming arguendo the district court
erred in so doing, we find that such error is harmless. See Fed. R. Civ. P. 61 (“At every stage
of the proceeding, the court must disregard all errors and defects that do not affect any party’s
substantial rights.”). Zenergy argues that it was prejudiced by the district court sending the
4
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II.
This court reviews a district court’s ruling on a Rule 50 motion for
judgment as a matter of law de novo, applying the same standard as the district
court. Flowers v. S. Reg’l Physician Servs., 247 F.3d 229, 235 (5th Cir. 2001).
Judgment as a matter of law may be granted “[i]f a party has been fully heard
on an issue during a jury trial and the court finds that a reasonable jury would
not have a legally sufficient evidentiary basis to find for the party on that
issue.” Fed. R. Civ. P. 50(a)(1). In deciding a motion for judgment as a matter
of law, we view the evidence in the light most favorable to the non-moving
party. Hagan, 529 F.3d at 622.
“Interpretation of a contract is the determination of the common intent
of the parties.” La. Civ. Code art. 2045; see also Sovereign Ins. Co. v. Tex. Pipe
Line Co., 488 So. 2d 982, 984 (La. 1986). “When the words of a contract are
clear and explicit and lead to no absurd consequences, no further
interpretation may be made in search of the parties’ intent.” La Civ. Code art.
2046; see also Sims v. Mulhearn Funeral Home, Inc., 956 So. 2d 583, 589 (La.
2007). In interpreting the words of a contract, the words “must be given their
generally prevailing meaning;” however, “[w]ords of art and technical terms
must be given their technical meaning when the contract involves a technical
matter.” La. Civ. Code art. 2047. When the words of the contract are
ambiguous, they “must be interpreted as having the meaning that best
conforms to the object of the contract.” La. Civ. Code art. 2048. When the
intentional misrepresentation claim to the jury because, as it never pleaded or argued for
such a claim, Zenergy had no opportunity to put on evidence to prove such a claim. Yet we
fail to see how, in this particular situation, Zenergy was prejudiced by being unable to put on
evidence of a claim it never intended to bring in the first place. As the jury returned a verdict
finding Performance not liable for intentional misrepresentation, Zenergy is in exactly the
same position it would have been in had the district court not instructed the jury as to an
intentional misrepresentation claim.
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parties to a contract have “made no provision for a particular situation, it must
be assumed that they intended to bind themselves not only to the express
provisions of the contract, but also to whatever the law, equity, or usage
regards as implied in a contract of that kind or necessary for the contract to
achieve its purpose.” La. Civ. Code art. 2054. Equity “is based on the
principles that no one is allowed to take unfair advantage of another and that
no one is allowed to enrich himself unjustly at the expense of another,” whereas
usage “is a practice regularly observed in affairs of a nature identical or similar
to the object of a contract subject to interpretation.” La. Civ. Code art. 2055.
There are, broadly speaking, three types of contracts for the drilling of
an onshore oil and gas well: the daywork contract, the footage contract, and
the turnkey contract. Owen L. Anderson, The Anatomy of an Oil and Gas
Drilling Contract, 25 Tulsa L.J. 359, 374 (1990). Generally speaking, in a
daywork contract, the operator pays the contractor a fixed price per day to drill
the well and assumes all of the risks of the drilling operation except for those
expressly assigned to the contractor. See id. At the other end of the spectrum
is the turnkey contract, in which the operator pays the contractor a fixed price
for drilling the well to a specific depth or formation and the contractor assumes
considerably more risk due to his general control over the drilling operation.
Id. at 378. 7 A footage contract falls between the two, with the contractor being
paid a fixed price per foot of well drilled and assuming greater risk than under
a daywork contract but less risk than under a turnkey contract. Id. at 376–77.
The hallmark of each type of contract is the amount of control the operator has
over the drilling operation. See id. at 375 (“Under the traditional daywork
contract, the operator is in charge of directing the drilling operation. In other
7 It is called a turnkey contract because, “[u]nder a ‘pure’ turnkey contract, in the
event a commercial quantity of oil or gas is discovered, the contractor completes the well so
that the operator may simply ‘turn the key’ to commence production.” Id.
6
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words, a daywork contract is similar to the contractor’s lease of a rig, related
equipment, and crew to the operator.”); id. at 377 (“The IADC footage contract
specifies that the operator is an independent contractor, and that the
‘Contractor shall direct, supervise and control drilling operations and assumes
certain liabilities to the extent specifically provided for herein.’ Accordingly,
at the outset the contractor more clearly assumes the general risk associated
with drilling under a footage contract rather than a daywork contract.”); id. at
378 (“In general, a drilling contractor assumes more risk under the turnkey
contract than under the other types of contracts because the contractor has
general control of all drilling operations.”). As under a daywork contract the
contractor has less control over the drilling operation than under a turnkey
contract, the contractor assumes only “specified risks, while the general risk of
delay and the risk of liabilities not assumed by the contractor are on the
operator.” Id. at 375.
The Contract signed by Zenergy and Performance is a form IADC
daywork drilling contract. Zenergy argues that Performance breached the
Contract by (a) failing to drill a vertical well in accordance with Zenergy’s
instructions, though no provision of the Contract expressly required that the
well be vertical; (b) failing to comply with Louisiana law, in breach of
paragraph 8.3 of the Contract (“Each party hereto agrees to comply with all
laws, rules, and regulations of any federal, state or local governmental
authority which are now or may become applicable to that party’s operations
covered by or arising out of the performance of this Contract.”); failing to
provide accurate reports of the work performed, in violation of paragraph 8.4
of the Contract (“Contractor shall keep and furnish to Operator an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report Form or other form acceptable to Operator.”); failing to furnish
a working conventional drift indicator, in violation of exhibit A, paragraph 4.4
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of the Contract (indicating that a “Conventional drift indicator” “shall be
provided at the well location at the expense of Contractor”); and failing to
perform its obligations under the Contract in a good and workmanlike manner,
in violation of an obligation to do so implied in the Contract by Louisiana law.
Yet none of the provisions of the Contract cited by Zenergy speaks to the
allocation of the risk of a deviated wellbore. See La. Civ. Code art. 2054 (“When
the parties made no provision for a particular situation, it must be assumed
that they intended to bind themselves not only to the express provisions of the
contract, but also to whatever the law, equity, or usage regards as implied in a
contract of that kind or necessary for the contract to achieve its purpose.”); La.
Civ. Code art. 2045 (“Interpretation of a contract is the determination of the
common intent of the parties.”).
The Contract does, however, begin by stating that Performance was to
“furnish equipment, labor, and perform services . . . for a specified sum per day
under the direction, supervision and control of [Zenergy].” Given this
allocation of control over the drilling operation, the Contract states that
Performance “assumes only the obligations and liabilities stated herein” and
that “[e]xcept for such obligations and liabilities specifically assumed by
[Performance], [Zenergy] shall be solely responsible and assumes liability for
all consequences of operations by both parties while on a Daywork Basis,
including results and all other risks or liabilities incurred in or incident to such
operations.” Zenergy claims that it owes Performance no further payment
under the Contract because, by breaching the above-referenced provisions of
the Contract, Performance caused the wellbore to be drilled as a deviated well
and not as a vertical well. But Zenergy’s argument would subvert the plain
language of the Contract and the intent of the parties by morphing
Performance’s obligation to “furnish equipment, labor, and perform services”
into a guarantee of the final product of those services. Further, we are
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unpersuaded that Performance would have been willing to accept the risk of
liability for a deviated wellbore under the Contract given Zenergy’s ultimate
control over the drilling process. That control is evidenced in this case by the
fact that Zenergy—not Performance—selected the bottom hole assembly used
to drill the well. It is also evidenced by the fact that it was Zenergy who called
out Multi-Shot to perform the ill-fated first gyroscopic deviation survey. It is
also the general commercial expectation in the drilling industry that it is the
operator in a daywork contract who bears the risk of a deviated wellbore. See
Anderson, supra, at 386 (“In a daywork contract, the drilling contractor may
agree to exercise due diligence and care to maintain a straight hole; however,
the risk and expense of maintaining a straight hole is on the operator.”); id. at
386 n.148 (“In the IADC daywork form, the contractor makes no
representations concerning the drilling of a straight hole.”); id. at 415 (“The
drilling contractor agrees to drill a straight hole, unless a directional well is
specified, and also agrees to make all deviation surveys specified in the
contract. . . . However, under a typical daywork contract, the risk of a deviated
hole is generally borne by the operator because the operator has more control
over drilling operations.”); id. at 447–48 (“[T]he operator under a contract
containing daywork provisions . . . may obtain insurance covering the risk of
redrilling the well should problems arise. . . . Potential problems include
deviation from the straight hole specifications . . . . Generally, the model
drilling contract forms place all liability for the costs of redrilling on the
operator if operations are being conducted on a daywork basis.”); American
Petroleum Institute, Drilling Contract § 8.5 (“While operations are being
performed on a daywork basis, Contractor agrees to exercise due diligence and
care to maintain the straight hole specifications, if any, set forth in the Drilling
Order, but all risk and expense of maintaining such specifications or restoring
the hole to a condition suitable to Operator shall be assumed by Operator.”),
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reprinted in Anderson, supra, 480 app. B. The parties’ intentions at the time
of contracting are also clarified by looking to the other contracts that they had
available to them had they wanted to allocate risk differently. The IADC
footage contract expressly assigns the risk of the wellbore becoming deviated
to the contractor. IADC, Drilling Bid Proposal & Footage Drilling Contract—
U.S. § 9.4 (“Should the hole at any depth during the time Contractor is
performing work on a Footage Basis, have either a deviation from vertical or a
change of inclination in excess of the limits prescribed in Exhibit ‘A’,
Contractor agrees to restore the hole to a condition suitable to Operator either
by conventional methods and procedures while drilling ahead or by cementing
off and redrilling.”), reprinted in 7A West’s Texas Forms—Minerals, Oil & Gas
§ 16:1 (4th ed. 2014). Tellingly, under the IADC footage contract, when the
work is being performed on a daywork basis rather than on a footage basis,
“Contractor agrees to exercise due diligence and care to maintain the straight
hole specifications, if any, set forth in Paragraph 3 of Exhibit ‘A’ but all risk
and expense of maintaining such specifications or restoring the hole to a
condition suitable to Operator shall be assumed by Operator.” Id. The IADC
turnkey contract also assigns the risk of a deviated wellbore to the Contractor.
IADC, Model Turnkey Contract § 9.5 (“Should the hole, at any depth during
the time Contractor is performing work on a Turnkey Basis, have either a
deviation from vertical or a change in overall angle in excess of the limits
prescribed in Exhibit ‘A’, Paragraph 4, Contractor agrees to restore the hole to
a condition suitable to Operator either by conventional methods and
procedures while drilling ahead or by cementing off and redrilling.”), reprinted
in 7A West’s Texas Forms—Minerals, Oil & Gas § 16:3 (4th ed. 2014). As with
the IADC footage contract, in the IADC turnkey contract, when the work is
being performed on a daywork basis, “Contractor agrees to exercise due
diligence and shall maintain the straight hole specifications, if any, set forth
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in Paragraph 4 of Exhibit ‘A’ but all risk and expense of maintaining such
specifications or restoring the hole to a condition suitable to Operator shall be
assumed by Operator.” Id. Given the alternative contracts available to
Zenergy and Performance—the daywork provisions in both of which assigned
responsibility for a deviated wellbore to the operator—their selection of the
daywork contract elucidates their intentions with respect to the allocation of
this risk. Further evidence is provided by the testimony of Robert “Skip”
Graham, the president of Zenergy’s engineering division, about Zenergy’s
reasons for selecting a daywork contract for the well when they had used a
turnkey contract for their earlier well on the same drilling unit. Graham
testified:
[G]enerally, in a turnkey contract . . . there is . . . a 30 or 40 percent
premium built into that so that the contractor can make a profit.
There were no difficulties encountered in drilling that first well
down to the depths that we were intending to drill the second well.
And as a result, we decided to drill it on a daywork basis because
you can do it, theoretically, cheaper that way.
That thirty to forty percent premium is no doubt responsive, at least in part,
to the greater risk allocated to the contractor in a turnkey contract as opposed
to a daywork contract. Reallocating that risk after the fact—and without the
thirty to forty percent premium—would give Zenergy more than it bargained
for. We decline to hold Performance to the risk allocation of a turnkey contract
without the attendant risk premium. As such, we conclude that the district
court did not err in granting Performance’s motion for a directed verdict. 8
8 Performance also argues that the deviation from straight hole specifications
constitutes loss of or damage to the hole, a risk assigned to the operator under paragraph
14.5 of the Contract. Paragraph 14.5 reads: “The Hole: In the event the hole should be lost
or damaged, Operator shall be solely responsible for such damage to or loss of the hole,
including the casing therein.” There was conflicting testimony at trial as to whether a
deviated hole constitutes a lost or damaged hole. Given our conclusion that the risk of the
deviated wellbore is borne by the operator, we need not resolve that conflict here.
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III.
Zenergy also contends that the district court erred in denying its motion
to alter or amend the judgment to reduce the judgment by $9,000, which
represents a $500 per day surcharge for the days during which the hole was
bring drilled at an angle of greater than seven and a half degrees under
sections 4.4 and 27.15 of the Contract. Section 27.15 states: “If directional or
uncontrolled hole exceeds 7 1/2 degree deviation that will be an additional
charge of $500.00 per day.” Section 4.4 states, inter alia, that “[d]irectional or
uncontrolled deviated hole will be deemed to exist when deviation exceeds 7
1/2 degrees or when the change of angle exceeds 2 1/2 degrees per one hundred
feet.” We review a district court’s denial of a motion to alter or amend the
judgment for abuse of discretion. Martinez v. Johnson, 104 F.3d 769, 771 (5th
Cir. 1997); Jones v. Cent. Bank, 161 F.3d 311, 312 (5th Cir. 1998). “A district
court abuses its discretion if it bases its decision on an erroneous view of the
law or on a clearly erroneous assessment of the evidence.” Perez v. Stephens,
745 F.3d 174, 177 (5th Cir. 2014). Zenergy’s first argument, that the district
court erred because Zenergy never instructed Performance to drill a deviated
wellbore, is waived for failure to raise it in the motion to alter or amend the
judgment before the district court. See Crawford Prof’l Drugs, Inc. v. CVS
Caremark Corp., 748 F.3d 249, 267 (5th Cir. 2014) (“The general rule of this
court is that arguments not raised before the district court are waived and will
not be considered on appeal” (internal quotation marks omitted)); Nasti v.
CIBA Specialty Chem. Corp., 492 F.3d 589, 595 (5th Cir. 2007) (“If an argument
is not raised to such a degree that the district court has an opportunity to rule
on it, we will not address it on appeal.” (internal quotation marks omitted)).
Zenergy’s second argument, that Performance is not entitled to the $500 per
day surcharge because it never sent Zenergy an invoice, also fails. Paragraph
5.1 of the Contract states that “[p]ayment for mobilization, drilling and other
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work performed at applicable rates, and all other applicable charges shall be
due, upon presentation of invoice therefor, upon completion of mobilization,
demobilization, rig release or at the end of the month in which such work was
performed or other charges are incurred, whichever shall first occur.” The
district court denied Zenergy’s motion based on its finding that Performance
“only discovered details surrounding the extent and duration of the deviation
during discovery, since plaintiff elected not to share its deviation information
with Performance in a method that would have timely allowed Performance to
submit an invoice for the deviation charge.” That finding is supported by the
testimony of David “Grumpy” Farmer, the president of Performance, that
Performance did not receive the deviation information from the Multi-Shot
survey that Zenergy ordered and therefore did not have information that
showed that Perfomance had been drilling at an angle greater than seven and
a half degrees. To the extent other evidence in the record undermines that
testimony, we cannot say that the district court’s resolution of the conflict was
a clearly erroneous assessment of the evidence. See United States v. Trujillo,
502 F.3d 353, 356 (5th Cir. 2007) (“Giving due regard to the opportunity of the
district court to judge the credibility of the witnesses, we will deem the district
court’s factual findings clearly erroneous only if, based on the entire evidence,
we are left with the definite and firm conviction that a mistake has been
committed.” (internal quotation marks omitted)); In re Bradley, 501 F.3d 421,
434 (5th Cir. 2007) (“However, his arguments simply boil down to questions of
witness credibility and the bankruptcy court’s weighing of the evidence. We
are particularly mindful of the opportunity of the bankruptcy court to judge
the credibility of the witnesses.” (internal quotation marks omitted)). As such,
we hold that the district court did not abuse its discretion in determining that
paragraph 5.1 of the Contract does not preclude payment of an amount due
under the Contract where the party’s ability to submit an invoice was inhibited
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by the other party to the Contract. Cf. Restatement (Second) of Contracts §
271 (“Impracticability excuses the non-occurrence of a condition if the
occurrence of the condition is not a material part of the agreed exchange and
forfeiture would otherwise result.”); Restatement (Second) of Contracts § 271
cmt. b; Restatement (Second) of Contracts § 205 illus. 7.
IV.
For the foregoing reasons, we AFFIRM the judgment of the district court.
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