Westland Oil Development Corp. v. Gulf Oil Corp.

Mobil Oil Corporation (Mobil) owned oil and gas leases on several sections of the Rojo Caballos Field. Mobil signed a farmout agreement with Westland Oil Development Corporation (Westland) (plaintiff). In a subsequent letter agreement, Westland assigned its obligations under the farmout agreement to Chambers & Kennedy (C & K). The letter agreement between Westland and C & K contained an area of mutual interest agreement, under which the parties agreed that they and their assigns would share any leases either party acquired on “any of the lands covered by said farmout agreement.” Pursuant to the farmout agreement, C & K drilled a producing well and Mobil assigned to C & K part of Mobil’s interests in the leasehold. The Mobile-to-C & K assignment stated that it would be subject to an operating agreement the parties had signed seven days earlier. The operating agreement stated that in the event of any conflict between it and the original farmout agreement between Mobil and Westland or the letter agreement between Westland and C & K, those prior agreements would prevail. Subsequently, Mobil entered into a separate farmout agreement with Bernard Hanson which included the land at issue. This farmout agreement stated that some of the land and leases included in the agreement were subject to the operating agreement between Mobil and C & K, meaning that any interest Hanson earned from Mobil would be subject to that operating agreement. Hanson assigned the farmout agreement to Gulf Oil Corporation (Gulf) (defendant). Gulf drilled a producing well and was assigned certain interests from Mobil as a result. At this point, Westland brought suit against Gulf, seeking a declaratory judgment that the letter agreement—and area of mutual interest agreement therein—was valid and applied to these assignments from Mobil to Gulf. Gulf argued that it did not have notice of the letter agreement. The trial court granted Westland summary judgment. The court of appeals reversed. Westland appealed.