VALENCE OPERATING COMPANY v. ELMAGENE W. DORSETT (Majority)

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No. 03-0836

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Valence Operating Company, Petitioner,

v.

Elmagene W. Dorsett, Respondent

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On Petition for Review from the

Court of Appeals for the Sixth District of Texas

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Argued September 29, 2004

Justice Brister, concurring.

Casual readers may not understand how a court could possibly hold that a non-consent penalty is not a penalty. Although fully joining the Court s opinion and judgment, I write briefly to explain.

The Court discloses in a footnote that non-consent penalty is industry vernacular. ___ S.W.3d at ___ n.2. The term does not appear in the Operating Agreement, and interpretation of that contract is a question of law for the Court. Lee Lewis Const., Inc. v. Harrison, 70 S.W.3d 778, 783 (Tex. 2001). What the parties call a clause is parol evidence, and thus inadmissible unless a contract is ambiguous. Friendswood Development Co. v. McDade + Co., 926 S.W.2d 280, 283 (Tex. 1996) (per curiam). This one is not.

Generally, a liquidated damages provision providing for a multiple of actual damages is an unenforceable penalty. Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991). But while the clause here is certainly liquidated,[1] it is not a liquidated damages clause.[2]

The parties contract provides unambiguously that Dorsett is not required to contribute to subsequent operations. Thus, there is no breach of contract if she opts out.

The contract also provides unambiguously that those who do not consent nevertheless get additional revenues (after recoupment by those who do), for which they pay nothing. This is not a penalty but a bonus.[3]

The contract also provides unambiguously that those who do consent get 300% recoupment of certain costs, for which nonconsenting parties again pay nothing. These are not damages.[4]

I recognize that in some situations receiving less is the economic equivalent of paying more. But bonuses for a star athlete or salesman are not intended to penalize their employers, but to increase returns for all concerned. Unless an oilfield can be completely emptied from existing wells, further development is not a zero-sum game.

Those in the oil industry widely use and rely on clauses like the one here, and certainly consider them enforceable. See John R. Reeves & J. Matthew Thompson, The Development of the Model Form Operating Agreement: An Interpretive Accounting, 54 Okla. L.R. 211, 254-55 (2001). Dorsett provides precedent in neither law nor logic suggesting that liquidated bonus clauses should be unenforceable, nor why she should get a bonus for a risk she never took. Accordingly, this is not a non-consent penalty.

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Scott Brister

Justice

OPINION DELIVERED: May 20, 2005

[1] See Black s Law Dictionary 494 (8th ed. 2004) ( liquidated, adj. 1. (Of an amount or debt) settled or determined, esp. by agreement. ).

[2] See id. ( liquidated damages clause. A contractual provision that determines in advance the measure of damages if a party breaches the agreement. ).

[3] See id. at 134 ( bonus. 1. A premium paid in addition to what is due or expected . ).

[4] See id. at 416 ( damages, n. pl. Money claimed by, or ordered to be paid to, a person as compensation for loss or injury . ).