Strata Production Co. v. Mercury Exploration Co.

Strata Production Company (Strata) (plaintiff) compiled a drilling prospect on three tracts of land, which were together known as the Red Tank Prospect. Strata signed farmout agreements with oil and gas lessees on each of the three tracts, including Mercury Exploration Company (Mercury) (defendant). Strata and Mercury entered into a farmout agreement on August 28, 1991. Mercury represented in the agreement that Mercury owned 100 percent of the working interest in its lease. The agreement provided that Mercury’s working interest would be assigned to Strata upon Strata’s drilling of a test well on the tract within 120 days. The agreement was at Strata’s option, as there would be no penalty if Strata did not drill the well. Strata paid no consideration for the option. On October 29, 1991, in furtherance of the Red Tank Prospect, Strata drilled a well on one of the other three tracts. On November 10, 1991, Strata discovered that Mercury did not own 100 percent of the working interest in the Mercury lease. On January 10, 1992, Strata began drilling a well on the Mercury tract, thus performing under the farmout agreement with Mercury. Strata brought suit against Mercury for breach of contract based on Mercury’s inability to assign 100 percent of the working interest. The trial court found in favor of Strata. Mercury appealed, arguing that the farmout agreement was a unilateral contract that Mercury was free to modify at any time. Mercury claimed that Strata’s discovery of the title discrepancy effectively modified the terms of the agreement.