Joe Smith v. David H. Arrington Oil & Gas

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 10-3423/11-1526
___________
Joe K. Smith; Jan G. Smith; *
Burke Smith, Executor of *
Irene Smith’s Estate, *
*
Appellees, *
*
v. *
*
Arrington Oil & Gas, Inc., *
*
Appellant. *
___________
Appeals from the United States
Nos. 10-3542/11-1519 District Court for the
___________ Eastern District of Arkansas.
Winston P. Foster, Jr.; *
Mary Ned Foster; *
Mary Frances Gaston, *
*
Appellees, *
*
v. *
*
Arrington Oil & Gas, Inc., *
*
Appellant. *
___________
Nos. 10-3785/11-1498
___________
Samuel P. Hall; Brenda Hall, *
*
Appellees, *
*
v. *
*
Arrington Oil & Gas, Inc., *
*
Appellant. *
___________
Submitted: September 22, 2011
Filed: January 5, 2012
___________
Before RILEY, Chief Judge, COLLOTON and GRUENDER, Circuit Judges.
___________
GRUENDER, Circuit Judge.
In this consolidated appeal, three sets of landowners assert claims against
Arrington Oil & Gas, Inc. for breach of contract, promissory estoppel, and unjust
enrichment relating to Arrington’s failure to pay cash bonuses under oil and gas
leases. The district court1 granted summary judgment to the landowners on the
1
The Honorable Brian S. Miller, United States District Judge for the Eastern
District of Arkansas.
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breach of contract claims and thereafter dismissed the landowners’ other claims with
prejudice on the landowners’ motions. For the reasons stated below, we affirm.
I. BACKGROUND
Arrington is an oil and gas production company headquartered in Midland,
Texas. Each landowner was a resident of Arkansas at the time the present actions
were filed.2 From January through July of 2006, Arrington’s landmen presented oil
and gas lease agreements to the landowners for certain properties in Phillips County,
Arkansas. The lease agreements were prepared by Arrington and are substantially
identical with the exception of the names of the property owners, execution dates, and
property descriptions.
Each lease agreement recites an exchange in which the landowner (as lessor)
grants to Arrington (as lessee) an exclusive right to explore and develop oil and gas
resources on specifically described property “for and in consideration of a cash bonus
in hand paid . . . and of the covenants and agreements hereinafter contained . . . .” In
addition to the recitation of a cash bonus, the amount of which is not stated, the lease
agreements recite in Paragraph 2 that as consideration for the lease, the lessee will
pay the lessor royalties in the amount of fifteen percent of sales of oil and gas derived
under the lease less certain costs of production. The lease agreements remain in force
for five years from the date of execution and grant the lessee the option of extending
the lease for an additional five-year term. Paragraph 13 specifically provides that the
lease agreements “shall be effective as to each Lessor on execution hereof as to his
or her interest.” Paragraph 15 provides that the lessor “warrants and agrees to defend
the title to the lands herein described.” Paragraph 16 grants Arrington the
2
Samuel P. Hall and Brenda Hall are the landowners in Case Nos. 10-3785 and
11-1498. Joe K. Smith, Jan G. Smith, and Irene N. Smith are the landowners in Case
Nos. 10-3423 and 11-1526. Winston P. Foster, Jr., Mary Ned Foster, and Mary
Frances Gaston are the landowners in Case Nos. 10-3542 and 11-1519.
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opportunity to cure any failure to perform any of its covenants under the lease after
notice of the breach by the landowner. The lease agreements provide a notarized
signature block for each landowner, but they do not contain a signature space for
Arrington.
In each transaction, Arrington’s landman delivered one or more bank drafts to
the landowners in exchange for receiving the signed lease agreement. Each draft
designates Arrington as the “Drawee,” the landman as the “Drawer,” and Western
National Bank in Midland, Texas, as the “Collecting Bank.” Each draft references
a corresponding lease agreement by execution date and property description. The
drafts were issued to pay the “cash bonus” referenced in the lease agreement and the
total payment amount for drafts corresponding to any particular lease agreement was
equal to $300 for each acre of property covered by the lease agreement.3 Each draft
also contains additional language providing that (emphasis added):
On approval of lease or mineral deed described hereon, and on approval
of title to same by drawee not later than [a stated number of] banking
days after arrival of this draft at Collecting bank, with the right to Re-
Draft.
PAY TO THE ORDER OF [landowner].
After disclosing the payee name and payment amount, each draft then contains
language regarding escrow of the draft, including the following exculpatory language:
[T]here shall be no liability whatsoever on the collecting bank for
refusal to return the [drafts] prior to [expiration of the escrow period
printed on the draft].
3
Arrington’s lease files also indicate that the amount of the cash bonus was
$300 per acre. Furthermore, the lease agreements themselves expressly declare in
Paragraph 21 that Arrington may renew the lease for a second five-year term by
paying an additional $300 per acre to the landowners.
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In the event this draft is not paid within said time, the collecting bank
shall return the same to forwarding bank and no liability for payment or
otherwise shall be attached to any of the parties hereto.
Each landowner subsequently deposited the drafts he or she received in
exchange for the lease agreement at a local bank. Arrington failed to make payment
on the drafts and never otherwise paid the cash bonuses discussed in the lease
agreements. As a result, the landowners filed the present actions. During discovery,
Arrington admitted that it had no record of title disapproval for any of the lease
agreements at issue. Arrington also admitted in a separate case that it decided to
abandon its oil and gas leases in Phillips County on July 26, 2006, because it drilled
an unproductive well there. The district court granted summary judgment for the
landowners on the breach of contract claims, finding that the lease agreements were
enforceable contracts subject only to Arrington’s good faith disapproval of title and
that there was no genuine question that Arrington decided not to pay the drafts for
reasons that were unrelated to title. The landowners subsequently moved for costs
and attorneys’ fees pursuant to Arkansas law, and the court granted those motions as
well. Arrington timely appeals.
II. DISCUSSION
We review the district court’s grant of summary judgment de novo. Taylor v.
St. Louis Cnty. Bd. of Election Comm’rs, 625 F.3d 1025, 1026 (8th Cir. 2010) (per
curiam). Summary judgment is appropriate when, viewing the record in the light
most favorable to the nonmoving party, there are no genuine issues of material fact
and the moving party is entitled to judgment as a matter of law. Id.
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Arrington contends that the lease agreements were not enforceable contracts
because (1) the drafts’ no-liability clause negated mutuality of obligation in the lease
agreements, (2) Arrington never “approved” the leases in accordance with the
condition stated on the bank drafts, and (3) Arrington never approved title in
accordance with the condition stated on the bank drafts. The landowners counter that
the lease agreements they executed before receiving the bank drafts control the
agreement. They argue that the bank drafts are merely the method of payment of the
cash bonuses referenced in the lease agreements and that Arrington is obligated to
pay the cash bonuses under the lease agreements regardless of any terms to the
contrary recited on the drafts. Thus, we must determine whether the drafts’ no-
liability, lease approval, or title approval clauses absolved Arrington of a legally
enforceable duty to pay the cash bonuses recited in the lease agreements.
We review de novo the district court’s “interpretation and construction of a
contract, as well as a district court’s interpretation of state law.” Am. Prairie Constr.
Co. v. Hoich, 594 F.3d 1015, 1023 (8th Cir. 2010). Our jurisdiction in these cases is
based on diversity of citizenship, and the parties agree that we are to apply Arkansas
law. See Kaufmann v. Siemens Med. Solutions USA, Inc., 638 F.3d 840, 843 (8th Cir.
2011). Thus, we “must attempt to predict what [the Arkansas Supreme Court] would
decide if it were to address the issue.” Raines v. Safeco Ins. Co. of Am., 637 F.3d
872, 875 (8th Cir. 2011). In so doing, “we apply three well-established principles of
contract law.” First Nat’l Bank of Crossett v. Griffin, 832 S.W.2d 816, 819 (Ark.
1992). “[T]he primary rule in the construction of instruments is that the court must,
if possible, ascertain and give effect to the intention of the parties.” Harris v.
Stephens Prod. Co., 832 S.W.2d 837, 840 (Ark. 1992). Arkansas law requires courts
to “look to the contract as a whole and the circumstances surrounding its execution
to determine the intention of the parties.” Griffin, 832 S.W.2d at 820. Second, in
construing any contract, Arkansas courts “must consider the sense and meaning of the
words used by the parties as they are taken and understood in their plain, ordinary
meaning.” Id. at 819 (quoting Farm Bureau Mut. Ins. Co. of Ark. v. Milburn, 607
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S.W.2d 841, 842 (Ark. 1980)). Third, “different clauses of a contract must be read
together and the contract construed so that all of its parts harmonize, if that is at all
possible.” Id. (quoting Cont’l Cas. Co. v. Davidson, 463 S.W.2d 652, 655 (Ark.
1971). “A construction that neutralizes any provision of a contract should never be
adopted if the contract can be construed to give effect to all provisions.” Tyson
Foods, Inc. v. Archer, 147 S.W.3d 681, 686 (Ark. 2004). Applying these principles,
we hold that the lease agreements required Arrington to pay the cash bonuses unless
Arrington disapproved of title in good faith within the time prescribed on the face of
each bank draft.
We begin by rejecting the landowners’ assertion that the lease agreements can
be construed without considering the language of the bank drafts. Under Arkansas
contract law, multiple documents executed as part of a single transaction generally
will be construed together as a single contract. W.T. Rawleigh Co. v. Wilkes, 121
S.W.2d 886, 888 (Ark. 1938). The drafts here were executed as part of the same
transaction as the lease agreements and the drafts were executed at substantially the
same time. Furthermore, each draft specifically references a corresponding lease
agreement and only the drafts, not the lease agreements, were signed by Arrington’s
agents. Under these circumstances, each lease agreement and its corresponding drafts
must be construed together as a single contract. Therefore, we must now turn to
Arrington’s arguments that the no-liability clause, lease approval clause, and title
approval clause each excuse its failure to pay the cash bonuses.
A. The No-Liability Clause
Arrington contends that the district court erred in holding that the parties
formed enforceable agreements because the contracts fail for lack of mutuality of
obligation. See City of Dardanelle v. City of Russellville, 277 S.W.3d 562, 565-66
(Ark. 2008) (holding that mutuality of obligation is one of five “essential elements
of a contract”). Arrington argues that the bank drafts’ no-liability clause, which states
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that “no liability for payment or otherwise shall be attached to any of the parties
hereto” if the drafts are not paid during the escrow period, precludes contract
formation under the lease agreements unless and until Arrington pays on the drafts.
It contends that the lease agreements signed by the landowners were merely offers to
lease and therefore that both parties were free to “walk away” for any reason prior to
Arrington paying on the drafts. This court must predict how the Arkansas Supreme
Court would decide this issue. See Raines, 637 F.3d at 875. Because Arkansas law
requires us to look to “the contract as a whole and the circumstances surrounding its
execution,” Griffin, 832 S.W.2d at 820, we conclude that the Arkansas Supreme
Court would hold that the no-liability clause does not negate the mutuality of
obligation in the underlying lease agreements when construed in harmony with the
terms of the lease agreements.
Arrington’s position that either party was free from obligation under the lease
agreements unless and until Arrington paid the drafts is belied by various terms in the
lease agreements. For example, the lease agreements recite an immediate exchange
of the lease “for and in consideration of a cash bonus in hand paid, the receipt of
which is hereby acknowledged.” Furthermore, the duration of the lease and the
renewal periods, recited respectively in Paragraphs 1 and 21, begin to run on the date
of execution. The lease agreements affirmatively declare in Paragraph 13 that “[t]his
lease shall be effective as to each Lessor on execution hereof as to his or her interest
and shall be binding on those signing.” The lessors’ obligations upon signing
included the duty in Paragraph 15 to warrant and defend the title to the property and
the duty in Paragraph 16 to give Arrington “a reasonable period of time within which
to comply with [any] covenant, condition, obligation, or requirement” of the lease
before terminating the lease. Viewing the contract as a whole, these provisions
indicate that a contract was formed when the landmen accepted the lease agreements
in exchange for the bank drafts.
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While Arrington’s reading of the no-liability clause would impermissibly
negate all of these contractual provisions, there is another reading of the no-liability
clause by which “the contract can be construed to give effect to all provisions.”
Tyson Foods, 147 S.W.3d at 686. The subject of the no-liability clause is “this
draft”—that is, the draft, a particular instrument of payment, rather than the
underlying contractual payment obligations. In other words, the exculpating power
of the no-liability clause most naturally applies only to eliminating any potential
liability created by return of the draft, something analogous to “returned check”
liability. This interpretation of the no-liability clause is consistent with the sentence
immediately preceding the clause, in which the collecting bank is exempted from
liability for refusing to return the draft during the escrow period. This interpretation
also is consistent with the position of the no-liability clause in the section of the draft
language dealing with the terms of the escrow of the draft. The no-liability clause,
like each of the other terms following the payment amount, relates to the negotiability
of this particular instrument—the draft—and does not purport to negate underlying
liabilities arising from the lease agreement. In short, construing the no-liability clause
to exculpate only liability arising out of the return of the draft harmonizes the clause
with the obligations and terms provided for in the lease agreement, as required by
Arkansas rules of contract interpretation. See id.
Arrington argues that Spellman v. Lyons Petroleum, Inc., 709 S.W.2d 295
(Tex. Ct. App. 1986), suggests a different result. In Spellman, the Court of Appeals
of Texas interpreted an identical no-liability clause on a bank draft and held that it
voided any contract liability arising under the bank draft because there was “no
requirement that the plaintiff make a reasonable effort to perform.” Id. at 297.
Arrington contends that Arkansas courts likely would adopt Spellman because
Arkansas similarly requires mutuality of obligation. See Dardanelle, 277 S.W.3d at
565-66. Nevertheless, a close reading of Spellman demonstrates that its holding was
limited to liability arising solely under the bank draft, not the transaction as a whole.
See Spellman, 709 S.W.2d at 296-98. Because the lessors canceled the lease
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agreement before they tendered it (effectively revoking their “offer” before the lease
agreement ever took effect) and because the no-liability clause prevented liability
from arising from the draft alone, there was no mutuality of obligation. See id. at 298.
If the no-liability clause on the draft had been sufficient to void the related lease
agreement, then the court in Spellman would have had no need to discuss whether the
lessors canceled the lease prior to tendering the lease. Thus, the holding in Spellman
must have been limited to liabilities arising solely from the draft itself. Here, in
contrast, there is no evidence that either party canceled the lease agreements before
the landowners tendered them. Thus, we are unpersuaded that the Arkansas Supreme
Court would adopt Spellman in these cases where the lease agreements were not
canceled before they were tendered, especially where the no-liability clause is
rendered ambiguous when read in conjunction with the lease agreement.4
Because Arrington’s interpretation would impermissibly nullify the provisions
of the lease agreements cited above when the no-liability clause can be read to
“harmonize” with those same provisions, Griffin, 832 S.W.2d at 820, we conclude
that the drafts’ no-liability clause does not prevent enforcement of the lease
agreements. Having concluded that Arrington entered into a binding contract with
each respective landowner despite the drafts’ no-liability clause, we next consider the
effect of conditions precedent on the breach claims.
4
The no-liability clause is ambiguous because it is susceptible to more than one
reasonable interpretation. Ambiguous language “is to be construed most strongly
against the party that prepared it,” Harris, 832 S.W.2d at 840, and “[a]mbiguities in
an oil and gas lease should be construed in favor of the lessor and against the lessee.”
Hanna Oil & Gas Co. v. Taylor, 759 S.W.2d 563, 565 (Ark. 1988). Arrington, as the
lessor and preparer of the lease agreements and drafts, loses on both counts. As the
Court of Appeals of Texas recognized in Spellman, it is “appropriate that the
language [of the no-liability clause] be construed against the one who selected its
use.” Spellman, 709 S.W.2d at 298.
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B. The Lease Approval Clause
Arrington contends that even if the no-liability clause did not prevent
formation of the contracts, no payment obligations arose because Arrington never
“approved” the leases. The drafts authorize payment “[o]n approval of lease or
mineral deed described hereon.” Arrington argues that this language made payment
obligations conditional on Arrington affirmatively approving the leases through the
act of paying the drafts and that any other interpretation of the clause would
impermissibly render the lease approval clause a nullity. Arrington relies on another
Texas case interpreting an approval requirement on the face of a bank draft. In
Encina P’ship v. Corenergy, L.L.C., 50 S.W.3d 66 (Tex. Ct. App. 2001), a landman
working on behalf of an oil and gas company issued a draft to a rancher in exchange
for a permit to conduct seismic testing for oil and gas deposits on the ranch. The draft
stated the condition “on approval of seismic permit or lease described hereon.” Id.
at 69. The oil and gas company dishonored the draft, and the rancher sued for breach
of contract. Id. The Encina court held that because the lessee “disapproved of the
permit, it was protected from paying for the permit to conduct testing on the Encina
ranch.” Id. Arrington argues that, as in Encina, the draft notation “[o]n approval of
lease or mineral deed described hereon” is a condition precedent that gave it broad
discretion to disapprove of the transaction brokered by its landman. However, we are
not convinced that Arkansas courts would follow the Encina court’s reasoning in
light of the undisputed facts of this case.
As an initial matter, the very acceptance of the executed lease agreements by
Arrington’s agents satisfies the “on approval” requirement of the draft.5 See
5
Arrington’s landmen signed the drafts and accepted the executed lease
agreements in exchange for those drafts. Although Arrington characterized the
landmen as independent contractors in its briefs, it accepted at oral argument that they
were Arrington’s agents. Oral Arg. Recording at 16:06; see Langel v. United States,
451 F.2d 957, 963 (8th Cir. 1971) (declining to consider contentions abandoned at
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Merriam-Webster Collegiate Dictionary 61 (11th ed. 2003) (defining “on approval”
as “subject to a prospective buyer’s acceptance or refusal”). Moreover, in construing
the lease approval clause, Arkansas law also dictates that we look to the
circumstances surrounding the parties’ transaction to determine the parties’ intent.
See Griffin, 832 S.W.2d at 820. Here, the lease agreements were prepared entirely
by Arrington and were presented to the landowners by Arrington’s authorized agents.
These lease agreements purported to bind the lessors on the date of execution. See
supra Part II.A. Because the drafts were given to the landowners at the same time
that Arrington’s agents accepted the executed lease agreements, the circumstances
support a reasonable understanding that the exchange itself was the “approval”
described on the drafts. Finally, the lease approval language is not a nullity under this
reading, as it allows a misdirected draft to be dishonored by Arrington in a case where
an executed lease agreement was not accepted by its agents.
Arrington’s reading of the lease approval clause, while reasonable, is no more
consistent with the plain language of the lease agreements than the landowners’
contention that Arrington approved the leases when its agents accepted the executed
lease agreements in exchange for the bank drafts. To the extent that both
interpretations of the “lease approval” language are plausible, any ambiguity must be
resolved in the landowners’ favor. See Harris, 832 S.W.2d at 840; Hanna Oil, 759
S.W.2d at 565. Thus, the lease approval language of the drafts was satisfied by
Arrington’s acceptance of the lease agreements in exchange for the signed bank
drafts, and as such it does not bar enforcement of the contracts.
oral argument).
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C. The Title Approval Clause
The drafts expressly provided Arrington as drawee with a stated number of
banking days in which to approve the titles to lessors’ properties. The only plausible
reading of the title approval condition is that it is a condition precedent of the
contract. For example, a Texas court, interpreting an almost identical provision,
acknowledged the parties’ agreement that the time period stated on the draft existed
primarily to provide time in which to review the condition of title. Broughton Assocs.
Joint Venture v. Boudreaux, 70 S.W.3d 324, 328 (Tex. Ct. App. 2002). Thus, the
district court correctly concluded that Arrington’s payment obligations were subject
to its right to disapprove of titles in good faith during the times stated on the drafts.
Relying on this condition precedent, Arrington contends that no payment obligations
arose because it never approved the landowners’ titles.
Under Arkansas law, however, parties to a contract have an affirmative duty
to exercise good faith and fair dealing in the fulfillment of conditions precedent in a
contract. Cantrell-Waind & Assocs., Inc. v. Guillaume Motorsports, Inc., 968 S.W.2d
72, 75 (Ark. Ct. App. 1998) (citing Restatement (Second) of Contracts § 205 (1981)).
In particular, if a condition in the contract permits a party to make a discretionary
decision, that decision must be made in good faith and for valid reasons. Hendrix v.
Sidney M. Thom & Co., 609 S.W.2d 98, 101 (Ark. 1980) (holding that a discretionary
site-approval condition did not make a contract unenforceable because the party with
discretion could not invoke the condition to avoid obligations under the contract
except in good faith and for valid reasons). Thus, Arrington could only reject the
transaction under the title approval clause in good faith and for reasons related to
title. Arrington admits that it “decided to decline lease offers and not to pay drafts
in Phillips County for business reasons.” Arrington also admits that it has no record
of title disapproval for the landowners’ lease agreements. Arrington contends,
however, that these admissions do not provide sufficient evidence for the court to
enter judgment as a matter of law.
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Arrington first argues that its decision under the title approval clause should
only be suspect if it was “arbitrary or capricious.” See Leroy v. Harwood, 178 S.W.
427, 431 (Ark. 1915). Arrington contends that it was reasonable, and therefore not
arbitrary or capricious, to refuse payment on the drafts based on business
considerations unrelated to title. However, longstanding Arkansas case law requires
more than that a party’s discretion be based on reasonable considerations; it also
requires that such considerations be relevant to the condition recited in the agreement.
See id. at 430-31 (holding that buyer’s payment obligations under real estate sale
contract were excused by title approval condition because the buyer “in good faith
passed upon the title and declared the same unsatisfactory” and because buyer’s
decision was not arbitrary or capricious). Arrington’s admitted renunciation of the
lease agreement for reasons unrelated to title precludes this defense to the
enforceability of its contracts.
Arrington next argues that the district court improperly shifted the burden of
proof to Arrington by equating a “lack of proof of a decision on title” with “a lack of
good faith, which was assumed to be the equivalent of bad faith.” Contrary to
Arrington’s assertions, the district court did not hold that Arrington’s failure to prove
that it had conducted a title search established bad faith. Instead, Arrington’s
admission that it relied on business considerations unrelated to title concerns
provided sufficient evidence that Arrington’s decision to dishonor the drafts was
unrelated to title and that Arrington thus could not invoke the title approval clause to
excuse its payment obligations. To be sure, Arrington’s general admission that it
decided to deny all drafts in Phillips County because of business and financial
considerations does not preclude Arrington from offering evidence that it also
declined to pay some drafts based on a good-faith disapproval of title. The drafts at
issue here are encompassed by that general admission because they were denied after
July 26, 2006, and were issued for properties located in Phillips County. Absent
some evidence that these specific drafts were in fact rejected based on title
considerations, however, Arrington’s admission that it decided to dishonor all lease
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agreements in Phillips County for unrelated business reasons entitled the landowners
to summary judgment.
Finally, Arrington argues that it did present evidence that it denied the drafts
at issue at least in part due to its good-faith disapproval of title even if it also decided
to dishonor the drafts based on business considerations.6 Arrington offered affidavits
stating that the Halls had previously received a bank draft in March 2006, and that
this previous draft was returned unpaid on July 11, 2006, and marked with the
handwritten notation, “Do Not pay[,] title not complete.” Arrington also submitted
copies of drafts for properties in Phillips County that are not related to this litigation.
These latter drafts were returned unpaid after July 26, 2006, and were marked with
the handwritten notation, “Do not pay[,] title failed and/or not complete” or, “Do not
pay[,] title not complete.” Arrington contends that, based on this evidence, a
reasonable jury could conclude that the drafts at issue were dishonored based on title
considerations after July 26, 2006.
We disagree. Arrington’s failure to complete a title search (“title not
complete”) is very different from completing a title search and disapproving of the
title (“title failed”). Because only a good faith disapproval of title would justify
invocation of the condition precedent and because none of the returned drafts
advanced by Arrington indicate which of the two alternatives Arrington invoked in
denying the drafts, these notations do not demonstrate that Arrington “in good faith
passed upon the title[s] and declared the same unsatisfactory.” Leroy, 178 S.W. at
430-31. In the face of Arrington’s admission that it decided on July 26, 2006, to
dishonor all bank drafts for properties in Phillips County based on purely business
6
Arrington argues in the alternative that, “[w]hile Arrington did not rely on title
in declining to pay the draft, it never foreclosed its right to do so.” Arrington
produced an affidavit by a title agent stating that Arrington would not approve the
titles at issue based on the title searches he conducted in 2010. The issue here,
however, is not the condition of titles in 2010 or even in 2006, but whether Arrington
disapproved of the titles in good faith before the times stated on the drafts expired.
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considerations that were unrelated to title, inconclusive notations indicating that
Arrington may or may not have completed a review of the titles for drafts in similar
transactions do not create a genuine issue of material fact as to whether Arrington
disapproved of the landowners’ titles in good faith in the instant cases. With no
evidence in the record to generate a dispute on this issue, the district court did not err
in granting summary judgment on the breach of contract claims.7
III. CONCLUSION
For the foregoing reasons, we affirm.
COLLOTON, Circuit Judge, concurring in the judgment.
Arrington Oil & Gas, Inc., presents a substantial argument that the decision in
Spellman v. Lyons Petroleum, Inc., 709 S.W.2d 295 (Tex. App. 1986), supports its
position that the “no-liability clause” in the drafts that Arrington delivered to the
plaintiffs in these cases caused the putative lease agreements to fail for lack of
mutuality. The “dispositive issue” in Spellman was whether a “lease and
accompanying draft created an irrevocable and binding agreement” between a lessor
and lessee. Id. at 296. The draft in Spellman contained language identical to the
drafts in these cases: “In the event this draft is not paid within said time, the
collecting bank shall return the same to forwarding bank and no liability for payment
or otherwise shall be attached to any of the parties hereto.” Id. at 297.
The lessee in Spellman argued that the “lease and draft constitute a legally
binding instrument,” while his opponent urged that the “no liability” language of the
7
Arrington asks that the district court’s orders awarding interest, costs, and
attorneys’ fees be reversed if this court reverses the summary judgment orders on the
breach of contract claims but did not dispute the amounts of these awards on appeal.
Because we affirm the orders of summary judgment on the breach of contract claims,
we also affirm the orders awarding interest, costs, and fees.
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draft “causes the contract to fail for want of mutuality.” Id. The Texas Court of
Appeals held that the lease and draft did not constitute a legally binding agreement,
because the “no liability” clause in the draft caused “the contract” to fail for lack of
mutuality. Id. at 298. The “contract” at issue was an oil and gas lease, not merely a
draft. The whole case was about “which of two different oil and gas leases” was
valid. Id. at 296. That the court proceeded to reject an alternative argument of the
lessee as to why his lease became binding does not vitiate the court’s analysis of the
no-liability clause and lack of mutuality in the lease agreement.
If the facts in these cases were identical to those reported in Spellman, then
there would be good reason to believe that the Arkansas courts would follow the
Texas rule, given the Arkansas law on mutuality, see City of Dardanelle v. City of
Russellville, 277 S.W.3d 562, 566 (Ark. 2008), and the settled expectations of the
industry in a neighboring State. Two factors, however, lead me to conclude that
Spellman is distinguishable.
First, Arrington’s interpretation of the drafts is in tension with certain
provisions of the particular leases at issue in these cases, as set forth in Part II.A of
the court’s opinion. Ante, at 8. The difficulty in harmonizing the terms of these
particular leases with Arrington’s interpretation of the drafts results in ambiguity:
The no-liability clause in these cases might apply only to the drafts, not to the leases.
Ante, at 9. Second, the Supreme Court of Arkansas has held that “[a]mbiguities in an
oil and gas lease should be construed in favor of the lessor and against the lessee.”
Hanna Oil & Gas Co. v. Taylor, 759 S.W.2d 563, 565 (Ark. 1988). It is difficult to
see why the Arkansas court would apply a different rule to ambiguities in a draft, a
payment instrument directly associated with an oil and gas lease. Thus, the
combination of ambiguity arising from the terms of these particular documents and
the Arkansas rule on construction of ambiguous instruments suggests that the
Arkansas courts would adopt the construction most favorable to the lessors.
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For these reasons, and substantially for those set forth in Parts II.B and II.C of
the opinion of the court, I concur in the judgment.
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