
Opinion issued March 20, 2003










In The
Court of Appeals
For The
First District of Texas




NO. 01-01-00195-CV




EL PASO PRODUCTION COMPANY, Appellant

V.

VALENCE OPERATING COMPANY, Appellee




On Appeal from the 270th District Court
Harris County, Texas
Trial Court Cause No. 99-25806




O P I N I O N
           El Paso Production Company, the successor in interest to Sonat Exploration Company
(together, Sonat), owned a working interest in the Holmes A-1 Well (the well) in Freestone
County, Texas.  Sonat sued appellee, Valence Operating Company (Valence), for breach of
a joint operating agreement (the JOA) under which Valence was the operator and Sonat was
one of the non-operators.  After a jury trial, the trial court entered a take-nothing judgment
against Sonat, and Sonat appealed.  We reverse and remand.
BACKGROUND
           Texas Oil & Gas Corporation and the owners of oil and gas leases and interests
entered into a JOA for the exploration and production of oil and gas from a 680-acre contract
area in Freestone County.  The well was drilled on that contract area under the JOA.  The
JOA provided that, if any party to the agreement desired to rework, deepen, or plug the well
that was drilled at the parties’ joint expense, 
[That party] shall give the other parties written notice of the proposed
operation, specifying the work to be performed, the location, proposed depth,
objective formation and the estimated cost of the operation.  The parties
receiving such a notice shall have thirty (30) days after receipt of the notice
within which to notify the parties wishing to do the work whether they elect
to participate in the cost of the proposed operation. 

The JOA further provided that the parties electing to participate in the proposed operation
(consenting parties) would receive, in proportion to their respective interest, the share of
production of any party not electing to participate (non-consenting parties) until the non-consenting parties’ share was equal to “400% of that portion of the costs and expenses of
drilling, reworking, deepening, or plugging back . . . which would have been chargeable to
such non-consenting party if it had participated therein.”  
           Regarding the sale of the oil and gas produced, the JOA granted each party the right
to take its proportionate share in kind.  In addition, the JOA provided,
Operator shall have the right, subject to the revocation at will by the
party owning it, but not the obligation, to purchase such oil and gas or sell it
to others at any time and from time to time, for the account of the non-taking
party at the best price obtainable . . . .  

The JOA also provided, under “Maintenance of Uniform Interest,” 
 
For the purpose of maintaining uniformity of ownership in the oil and
gas leasehold interests covered by this agreement, and notwithstanding any
other provisions to the contrary, no party shall sell, encumber, transfer or make
other disposition of its interest in the leases embraced within the Contract Area
and in wells, equipment and production unless such disposition covers either:
 
1.the entire interest of the party in all leases and equipment and
production; or 
 
2.an equal undivided interest in all leases and equipment and
production in the Contract Area.  
 
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement, and shall be made
without prejudice to the right of the other parties. 

           The JOA included a Gas Balancing Agreement, which provided for any period when
a party had no market for its share of gas, its purchaser was unable to take the gas, or the
party failed to take the gas.  In that event, the other parties were entitled to produce each
month 100% of the allowable gas production, and each of those parties was to receive its pro
rata share.  The party who was unable to take or market its share “shall be credited with gas
in storage equal to its share of the gas produced,” and the operator was to “maintain a current
account of the gas balance between the parties . . . .”  When the party began to take its share
of the gas, the party could take, in addition to its share, 25% of each “over-produced party’s
share of gas produced.”  If production permanently ceased before the accounts were
balanced, the accounts were to be balanced through a monetary settlement.  
           Valence succeeded to the rights of Texas Oil & Gas Corporation, which was the
operator under the JOA.  Sonat acquired a 17.58407% non-operating working interest in the
well.  Houston Lighting & Power Company (HL&P) was, and is, the owner of the surface
of the land.  
           In 1993, HL&P, needing to enlarge its ash disposal area, began negotiations with
Valence to acquire access rights to a tract of land within the unit.  The negotiations were
unsuccessful, and HL&P informed Valence that HL&P would pursue efforts to purchase
rights of the individual mineral interest owners and would also proceed with a condemnation
action. 
           HL&P offered Sonat $204,000 for the release of Sonat’s surface rights to a 91-acre
tract at the well site.  Sonat accepted the offer and, on November 14, 1994, executed the
following release: 
That the undersigned, who owns or claims a working interest or leasehold
estate in the mineral estate presently being produced in the Marcus Holmes
“A” Gas Unit . . . hereby: 1) releases Houston Lighting & Power Company
(“HL&P”) from any and all claims for compensation . . . directly or indirectly
resulting from the acquisition by HL&P of the right to utilize the surface of
that certain 91.217 acre tract of land . . . and 2) quitclaims to HL&P all of my
right, title and interest, if any, to directly or indirectly utilize or authorize the
utilization of any portion of the surface of the Tract for the exploration,
development or production of the underlying mineral estate. 
 
The undersigned further, to the extent possible under the terms of that
certain Operating Agreement dated October 11, 1979 between Texas Oil &
Gas Corporation, as Operator, and Seneca Resources, assign to HL&P the right
to cause or otherwise authorize the Holmes A#1 Gas Well, which is presently
being operated on the surface of the tract, to be plugged and abandoned,
provided that such well shall not be plugged and abandoned prior to December
31, 1995. 
 
This document transfers no interest whatsoever in the oil, gas or other
minerals underlying the Tract, or the right to lease same or participate in any
of the production of these minerals, whether by royalty or otherwise, all of
same being expressly excepted from this release. 
 
There is further excepted from this document the right and privilege of
developing and producing the minerals underlying the Tract by pooling,
unitization, directional drilling or similar means so long as HL&P’s use of the
surface of the Tract is not disturbed thereby. 
 
This document is subject to oil and gas leases currently in effect. 

           In a letter to Sonat dated August 12, 1996, Kenneth Cummings, a landman with
Valence, referenced the release and informed Sonat, 
Valence now considers you as no longer having an interest in
production from the well.  
 
Within the next two weeks, Valence plans to workover the Holmes A-1. 
Due to the terms of the “Release,” we can no longer consider you a working
interest owner. 
 
Note that this letter is intended merely as a courtesy notification of our
upcoming operation.  Please advise if you have any questions. 

On April 4, 1997, Mark Robinson made the following reply on behalf of Sonat: 
Your position in this regard was so absurd that I thought you must be
joking.  Sonat’s accounting personnel now tell me that it was no joke. 
 
Accordingly, please be advised that unless Valence agrees to credit
Sonat with its working interest in the Holmes A-1 within ten (10) days from
the date of this letter, Sonat is going to file suit to have its interest judicially
recognized, all without further notice to you.  Of course, Sonat is willing to
pay for its share of the costs and expenses associated with whatever work
Valence has done on the Holmes A-1 since Sonat last received an AFE from
Valence if you will send me a detailed listing of such costs and expenses. 

           Sonat sued Valence, asserting causes of action for conversion, breach of contract,
breach of fiduciary duty, money had and received, unjust enrichment, fraud, misapplication
of fiduciary property, and theft and, in addition, requested an accounting.  Valence asserted
a counterclaim for breach of contract, tortious interference, breach of fiduciary duty, unjust
enrichment, money had and received, and conspiracy to defraud and also requested an
accounting and declaratory relief. 
           The trial court granted a directed verdict in favor of Sonat on all of Valence’s claims
against Sonat, based on the expiration of the statute of limitations, except for Valence’s
request for declaratory relief.  The trial court also granted a directed verdict in favor of
Valence on all of Sonat’s claims against Valence except for Sonat’s breach-of-contract claim. 
The case was tried to a jury, which found that (1) Valence breached the agreement, (2) Sonat
repudiated the agreement and waived the right to enforce the agreement, (3) Valence was
excused from further performance under the agreement, and (4) Sonat failed to consent to
workover operations at the well.  The jury found that a negative $66,192 would compensate
Sonat for damages resulting from Valence’s breach and found $25,000 in reasonable and
necessary attorney’s fees for each party. 
           In its appeal, Sonat challenges the jury’s findings on repudiation, waiver, failure to
consent, and damages.  Sonat also complains of the directed verdict on Sonat’s claims for
conversion and breach of fiduciary duty, the trial court’s declaration that Sonat had a legal
duty to market its own gas, the court’s award of attorney’s fees to Valence, and the court’s
failure to award Sonat prejudgment interest and to order an accounting. 
DISCUSSION
1.        Repudiation
           In its first two issues, Sonat contends that the evidence is legally and factually
insufficient to support the jury’s answer to jury question number three, which asked, 
Do you find, by a preponderance of the evidence that Sonat repudiated
the Operating Agreement such that Valence did not need to seek Sonat’s
consent to the 1966 workover operations at the Holmes A-1 well? 
 
“Repudiation” is a positive and unconditional refusal to perform the
contract in the future, expressed either before performance is due or after
partial performance. 
 
Answer “Yes” or “No” 

The jury answered “Yes.” 
           To constitute a repudiation, a party to a contract must have absolutely and
unconditionally refused to perform the contract without just excuse.  Van Polen v. Wisch, 23
S.W.3d 510, 516 (Tex. App.—Houston [1st Dist.] 2000, pet. denied).  Upon a party’s
repudiation of a contract, the nonrepudiating party may treat the repudiation as a breach or
may continue to perform under the contract and await the time of the agreed-upon
performance.  Ingersoll-Rand Co. v. Valero Energy Corp., 997 S.W.2d 203, 211 (Tex. 1999). 
The non-repudiating party must either rescind the contract or continue to perform under it;
it cannot do both.  Bumb v. InterComp Technologies, L.L.C., 64 S.W.3d 123, 125 (Tex.
App.—Houston [14th Dist.] 2001, no pet.). 
           Valence asserted repudiation as an affirmative defense.  Therefore, Valence had the
burden of proving that Sonat unconditionally refused to perform the contract.  See Woods v.
William M. Mercer, Inc., 769 S.W.2d 515, 517 (Tex. 1988). 
           Valence argues that Sonat repudiated the JOA by executing the release because Sonat
“gave up all right it had to authorize Valence to rework” the well and “sold its right to
produce the ‘underlying minerals.’”  Valence further argues that “it was impossible for Sonat
to legally discharge its obligation under the JOA to contribute its proportionate share of costs
for any development or production out of Holmes A-1.”  Valence does not direct us to any
specific language in the JOA or the release to support its contention, nor does Valence cite
any authority to support its “legal impossibility” argument.  Valence also asserts that it did
not rescind the contract, as it was entitled to do in response to Sonat’s repudiation, but rather,
“continued to perform under the JOA.”  
           The release executed by Sonat released HL&P from claims for compensation resulting
from HL&P’s acquisition of rights to use the surface of the land and quitclaimed to HL&P
Sonat’s rights to use the surface for exploration, development, or production of the mineral
estate.  However, the assignment of the right to plug and abandon the well was made only
to the extent possible under the terms of the JOA.  The release explicitly transferred no
interest in the oil, gas, or other minerals underlying the tract or the right to participate in their
production.  The release also reserved to Sonat the right of developing and producing the
minerals by any means that did not interfere with HL&P’s use of the surface, and the release
was made subject to the current oil and gas leases on the tract. 
           The release did not convey Sonat’s interest in the mineral estate, nor did it transfer any
rights in the gas produced at the well.  Furthermore, the release did not in any way interfere
with Valence’s activities as operator.  In fact, by Valence’s own admission, Valence has
continued to produce gas from the well up to the time of trial.  We hold that the release was
no evidence that Sonat positively and unconditionally refused to perform its obligations
under the JOA.  We further hold that the execution of the release was not a repudiation of the
JOA by Sonat. 
           We sustain Sonat’s first issue (legal sufficiency) and, thus, need not reach its second
issue (factual sufficiency). 
2.        Waiver
           In its third and fourth issues, Sonat challenges the legal and factual sufficiency of the
evidence to support the jury’s answer to question number four, which asked,
Do you find that Sonat, by conveying the interest of HL&P evidenced
by the Release marked as Plaintiff’s Exhibit 37, waived its right to demand
compliance by Valence with the Joint Operating Agreement marked as
Plaintiff’s Exhibit 1?
 
“Waiver” is the intentional relinquishment of a known right or
intentional conduct inconsistent with claiming that right.  Waiver also occurs
when a person, who has full knowledge of material facts, acts or fails to act
upon rights which he or she legally holds, and such act or failure to act is
inconsistent with that right or intention to rely upon that right. 
Answer “Yes” or “No” 

The jury answered “Yes.” 
           Valence asserted waiver as an affirmative defense.  Therefore, Valence had the burden
of establishing all the elements of waiver.  See Woods, 769 S.W.2d at 517.  Waiver is the
intentional relinquishment of a known right or intentional conduct inconsistent with the intent
to claim that right.  Robinson v. Robinson, 961 S.W.2d 292, 300 (Tex. App.—Houston [1st
Dist.] 1997, no writ). 
           Valence asserts that Sonat’s execution of the release was a sale of Sonat’s right to
explore, develop, and produce gas from the well, and that Sonat therefore waived its right
to demand compliance with the JOA to the extent of any matter pertaining to exploration,
development, or production of the “released” tract.  We do not agree. 
           The release did not give up any right to participate in the oil and gas production of the
well.  The release stated that it was subject to the oil and gas leases currently in effect.  The
release quitclaimed to HL&P Sonat’s rights to the surface for exploration, development, or
production of the underlying mineral estate.  However, it explicitly did not transfer any
interest in that mineral estate.  Cummings testified that only the operator needed access to
the well.  We conclude that the release is no evidence that Sonat intentionally relinquished
its right to demand that Valence comply with the JOA. 
           We sustain Sonat’s third issue (legal sufficiency) and, thus, need not reach its fourth
issue (factual sufficiency). 
3.        Non-Consent
           In its fifth issue, Sonat contends that the trial court erred in submitting question
number six to the jury because Valence did not comply with the notice provision of the JOA
for the rework of the well and, therefore, that Sonat could not be a non-consenting party.  We
construe this issue as a challenge to the legal sufficiency of the evidence to support the jury’s
answer to question number 6, which asked, “Did Sonat fail to consent to the 1996 workover
operations at the Holmes A-1 well?”  The jury answered “Yes.”
           By the terms of the JOA, a party who wanted to rework the well at the joint expense
of all parties was required to give written notice of the proposed operation to the other
parties.  This notice was required to specify the work to be performed, the location, the
proposed depth, the objective formation, and the estimated cost.  A party who received such
notice had 30 days in which to give notice of its election to participate.  A party who did not
give notice of participation became a non-consenting party and was subject to a 400%
penalty if the reworked well produced in paying quantities.  There was no provision in the
JOA for the imposition of the penalty if the initial required notice was not given.  
           At trial, when Steve Manning, a vice-president of Valence, was asked whether
Valence had provided the required notice to Sonat, he replied, “Of course not.”  On appeal,
Valence contends that, because of Sonat’s actions, Sonat was “contractually precluded from
giving effective consent to walk up to Holmes A-1 for the purpose of any rework operation.” 
           Even if Valence’s contention is correct, Sonat’s failure to consent to the rework
operation cannot result in the imposition of any of the contractual penalties because the
obligation to give timely notice of consent is triggered only by the required notice of
proposed operations.  Because the evidence conclusively established that Valence did not
give such notice, it was error for the trial court to submit jury question number six.    
           We sustain Sonat’s fifth issue.
 
4.        Damages
           In its seventh and eighth issues, Sonat challenges the legal and factual sufficiency of
the evidence to support the jury’s answer to question number two, which was predicated on
the jury’s finding in question number one that Valence had breached the JOA.  Question
number two asked, 
What sum of money, if any, if now paid in cash, would fairly and
reasonably compensate Sonat Exploration Company for its damages, if any,
that resulted from such a breach? 
 
Do not increase or reduce the amount in one answer because of your
answer to any other question about damages.  Do not speculate about what any
party’s ultimate recovery may or may not be.  Any recovery will be determined
by the court when it applies the law to your answers at the time of judgment. 
Do not add any amount for interest on damages, if any.  
 
Answer in dollars and cents for damages, if any. 

The jury’s response shows the following calculations handwritten below the answer line: 
Gross Income  330,042
                      Expenses                  <129,234>    includes rework $89,000
                      Net Income                200,808
                      Rework Penalty       <267,000>
                      Answer                    <$66,192>

The answer is written as <$66,192>.
 
           James Shows, a certified public accountant who testified for Sonat, testified that he
calculated that, from August 1996 to the present time, Valence owed Sonat $200,808.13. 
Shows further testified that he and Walter Sherr, chief executive officer of Valence, came
to an agreement that Shows’s number was correct.  Valence did not dispute Shows’s
calculations at trial and does not dispute it on appeal.  We hold that there is no evidence to
support the jury’s answer to question number two.  
           We sustain Sonat’s seventh issue (legal sufficiency) and need not reach its eighth issue
(factual sufficiency).  
5.        Directed Verdict: Conversion
           In its tenth issue, Sonat contends that the trial court erred in granting Valence a
directed verdict on Sonat’s claim for conversion.  Sonat argues that it pleaded, presented
evidence of, and requested a jury question on its cause of action for conversion.  The trial
court granted Valence’s motion for directed verdict on the conversion cause of action without
explanation and denied Sonat’s requested jury submission on the issue.  
           To establish a claim for conversion, a plaintiff must show (1) title, (2) right to
possession, and (3) a demand for return of the property unless the possessor’s acts manifest
a clear repudiation of the plaintiff’s rights.  Schwartz v. Pinnacle Communications, 944
S.W.2d 427, 432 (Tex. App.—Houston [1st Dist.] 1997, no writ).  Sonat argues that it
established each of these elements. 
           Valence appears to contest the first element—title.  Although Valence admits that
Sonat had title to a percentage of the gas in the ground, it argues that Sonat no longer had an
interest in production out of the well.  Valence also asserts that, because of the JOA’s penalty
provision for Sonat’s non-consent status, “neither gas nor proceeds from the sale of gas have
been shown to exist.”  Thus, Valence argues that Sonat owned the gas, but had no interest
in the produced gas, and that Sonat’s interest belonged to the consenting parties until the
penalty was paid in full.  Valence also alludes, without elaboration, to the Gas Balancing
Agreement and the trial court’s determination that the JOA imposed no duty on Valence to
market Sonat’s gas.  
           We have determined, under Sonat’s first issue, that Sonat did not repudiate the JOA. 
Therefore, Sonat had an interest in the produced gas in the same proportion as its interest in
the gas in the ground.  We have also determined, in Sonat’s fifth issue, that Sonat was not
a non-consenting party.  Therefore, the penalty could not be imposed. 
           Sonat showed title and right to possession of the produced gas.  Sonat also showed
its demand for the proceeds of the produced gas in plaintiff’s exhibit 39, Sonat’s letter
demanding that Valence credit Sonat with its working interest in the well.  The trial court
erroneously granted Valence’s motion for directed verdict on Sonat’s conversion cause of
action.  
           We sustain Sonat’s tenth issue. 
6.        Directed Verdict: Fiduciary Duty
           In its eleventh issue, Sonat contends that the trial court erred in granting a directed
verdict for Valence on Sonat’s claims for breach of a fiduciary duty. 
           Although a joint operating agreement does not necessarily create a fiduciary
relationship, such a relationship may exist if a special relationship exists between the parties
in the form of a partnership, joint venture, or agency relationship.  Cone v. Fagadau Energy
Corp., 68 S.W.3d 147, 169 (Tex. App.—Eastland 2001, no pet.).  The existence of a
fiduciary duty is a question of law for the court.  Taylor v. GWR Operating Co., 820 S.W.2d
908, 911 (Tex. App.—Houston [1st Dist.] 1991, writ denied).  However, the determination
of factual issues underlying a fiduciary duty is a question of fact for the fact finder.  Id. 
           In this case, both parties pleaded a cause of action for breach of fiduciary relationship. 
Sonat produced some evidence, through the testimony of Manning, that Valence marketed
gas on behalf of Sonat from November 1994 through August 1996.  Thus, whether Valence
was acting as an agent for Sonat was a question of fact for the jury to determine.  The trial
court erroneously granted Valence’s motion for directed verdict on Sonat’s cause of action
for breach of fiduciary duty.  
           We sustain Sonat’s eleventh issue. 
7.        Legal Duty to Market the Gas
           In its fourteenth issue, Sonat contends that the trial court erred by rendering judgment
that Valence had “no legal duty to market Sonat’s gas.”  Sonat misstates the trial court’s
judgment.  The judgment provides, “IT IS FURTHER ORDERED, ADJUDGED,
JUDICIALLY DECLARED and DECREED that Sonat Exploration Company was legally
obligated to market its own gas . . . .”  Sonat has not challenged this declaration.  The reason,
as stated in the judgment, for this declaration was the conclusion that the JOA imposed no
legal duty upon Valence to market Sonat’s gas.  However, to the extent that Sonat challenges
the basis for the court’s declaration, we conclude that Valence did not have a duty under the
JOA to market Sonat’s gas. 
           There were two separate provisions in the JOA for the disposal of the produced gas. 
The JOA provided that a party could take its production in kind or could separately dispose
of its share, but that if it did not, “Operator shall have the right, subject to the revocation at
will by the party owning it, but not the obligation, to purchase such oil and gas or sell it to
others at any time and from time to time, for the account of the non-taking party.”  Exhibit
C to the JOA, the Gas Balancing Agreement, provided for a party’s ownership of its share
of the gas in the ground in the event that the party could not or “fail[ed] to” take its share of
gas.  If production were to permanently cease before the party had taken its share of gas, the
Gas Balancing Agreement provided for a money settlement.  Thus, the JOA did not create
a legal obligation on either the operator or the non-operators to market the gas.  
           We overrule Sonat’s fourteenth issue.  
8.        Accounting
           In its fifteenth issue, Sonat contends that the trial court erred in denying Sonat an
accounting.  However, Sonat does not specify the period of time the accounting should cover. 
There is evidence that Sonat and Valence agreed that the gross proceeds that would have
been paid by Valence for Sonat’s share of the produced gas from November 1994 through
August 1996 was $330,042; that Sonat’s share of the expenses, including expenses for
reworking the well, were $129,234; and that the net proceeds that Valence would have paid
Sonat was $200,808.
  Therefore, it appears that a further accounting through August 1996
was unnecessary.  We do not find, in the record, any request for an accounting of the
proceeds of production after August 1996.  In its motion for new trial, Sonat simply stated,
“The trial court erred by not including in the Final Judgment Plaintiff’s right to an accounting
from Valence Operating Company.”  This complaint was not sufficiently specific to make
the trial court aware of the relief requested.  See Tex. R. App. P. 33.1.  Thus, the issue is
waived.
           We overrule Sonat’s fifteenth issue.  
9.        Valence’s Issues
           Valence asserts three issues challenging the jury’s finding, in jury question number
one, that Valence breached the JOA.  Valence did not raise this objection to the trial court
and, thus, has waived these issues.  See Tex. R. App. P. 33.1. We overrule Valence’s three
issues.  
CONCLUSION
           We have sustained Sonat’s issues one, three, five, and seven challenging the jury
findings regarding repudiation, waiver, failure to consent, and damages.  We have also
sustained Sonat’s issues 10 and 11 complaining about the trial court’s directed verdict on
Sonat’s conversion and fiduciary-duty claims.  We have overruled Sonat’s fourteenth and
fifteenth issues complaining about the trial court’s determination of Sonat’s legal duty to
market its gas and the trial court’s failure to order an accounting.  Because the issues above
dispose of this appeal, we need not reach Sonat’s second, fourth, sixth, eighth, ninth, twelfth,
or thirteenth issues.  
           We reverse the judgment of the trial court and remand the cause to the court below
for proceedings consistent with this opinion.  
 
 
                                                                  Sam Nuchia
                                                                  Justice

Panel consists of Justices Nuchia, Jennings, and Duggan.

