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Syrian American Oil Corporation, S.A. v. Pecten Orient Co.

Court of Appeals of Texas, First District

May 11, 2017

SYRIAN AMERICAN OIL CORPORATION, S.A., Appellant
v.
PECTEN ORIENT COMPANY F/K/A PECTEN ASH SHAM F/K/A PECTEN SYRIA PETROLEUM COMPANY, Appellee and PECTEN ORIENT COMPANY F/K/A PECTEN ASH SHAM F/K/A PECTEN SYRIA PETROLEUM COMPANY, Cross-Appellant
v.
SYRIAN AMERICAN OIL CORPORATION, S.A., Cross-Appellee

         Appeal from the 190th District Court Harris County, Texas Trial Court Case No. 2007-67830

          Panel consists of Justices Bland, Massengale, and Lloyd.

          OPINION

          Jane Bland Justice

          This case arises out of a settlement agreement reached between a royalty interest owner and an operator of Syrian oil and gas properties. In that settlement agreement, the parties released each other from any and all claims against one another, known or unknown, as of the time it was made.

         Seventeen years later, the royalty owner brought this suit against the operator for fraud, claiming that the operator had fraudulently induced the owner into the settlement. The operator counterclaimed against the owner for breach of the settlement agreement, seeking its attorney's fees as damages for that breach.

         A jury found that the owner should have discovered any fraud in 1989, as of the date that the parties reached their settlement. As to the operator's counterclaim for breach of the settlement agreement, the jury found that the owner had breached the settlement agreement by bringing this suit. But the jury also found that the operator had fraudulently induced the owner into entering the settlement agreement, and declined to award damages to the operator. The trial court entered a take-nothing judgment against both parties' claims.

         In its appeal, Syrian-American Oil Corporation, N.A., the royalty owner, challenges the evidentiary support for the jury's limitations finding against its claim for fraudulent inducement. SAMOCO contends that conclusive evidence establishes that it did not discover any fraudulent inducement until 2006. It further contends that it is entitled to judgment on its fraudulent inducement claim because sufficient evidence exists to support the jury's finding of fraud. Finally, SAMOCO contends that the trial court erred in granting partial summary judgment on part of an additional claim for breach of contract based on post-settlement events.

         In a cross-appeal, Pecten Orient Company, the operator, contends that the evidence supports the jury's finding that SAMOCO breached the settlement agreement, but that no evidence supports the jury's finding that Pecten fraudulently induced SAMOCO into entering that agreement. Pecten further contends that it proffered uncontroverted evidence of the attorney's fees that it has expended in defending this case and thus the jury's verdict of $0 in damages for SAMOCO's breach of the settlement agreement is against the weight of the evidence.

         In response to Pecten's appeal, SAMOCO replies that Pecten's counterclaim for breach of the settlement agreement is time-barred and the evidence supports the jury's award of $0 in damages on Pecten's counterclaim.

         We conclude that the trial court properly rendered judgment against SAMOCO's claims as time-barred by the applicable statute of limitations. We further conclude that the trial court properly granted the partial summary judgment that is challenged on appeal. Finally, we conclude that Pecten's counterclaim for breach of the settlement agreement was not time-barred and is not excused by the jury's fraud finding, because the fraud the jury found was related to a pre-suit misrepresentation and not made in contemplation of the settlement of a claim identified in a yet-to-be-filed lawsuit.

         Having found that SAMOCO breached the settlement agreement, the jury's award of $0 in damages for attorney's fees incurred in enforcing the agreement is not supported by the attorney's fee evidence, which was uncontroverted at trial. We therefore affirm the judgment that SAMOCO take nothing and reverse and remand Pecten's claim for attorney's fees for breach of the settlement agreement for a new trial.

         BACKGROUND

         The parties have a decades-long history relating to oil and gas concessions granted by the Syrian government for development of oil and gas fields located in Syria.

         A. Syria grants a service contract for exploration and production.

         In 1977, SAMOCO's predecessor-in-interest, the Syrian American Oil Corporation, executed a service contract with the Syrian government. A service contract is an agreement between an oil company and a foreign government in which the foreign government confers the exclusive right to explore and produce oil reserves in a specified geographic area. For a share of the production from these government-owned reserves, the oil company agrees to bear the costs of exploration, development, and production. The 1977 service contract provided for a total exploration period of eight years, and it expired in October 1985.

         The contract specified that, if development led to a commercially producing oil and gas well, a notice of a "Commercial Discovery" would convert the exploration area capable of production into a "Development Lease Area." Once a DLA was established, the contractor had the exclusive right to produce oil and gas from it for 25 years after production began, with the possibility of an additional 10-year extension.

         The service contract also required the developer to select and relinquish acreage within the area that had not become part of a DLA during the exploration period: 25% of the acreage after four years of exploration and an additional 25% after six years. These partial relinquishments were scheduled for 1981 and 1983. In October 1985, at the end of the service contract's eight-year term, SAMOCO was required to relinquish any remaining portion of the original exploration area that had not been converted to a DLA.

         B. SAMOCO assigns its rights to Pecten but retains an interest.

         Shortly after executing the service contract, SAMOCO assigned 60% of its interest in the contract to the Coastal Oil and Gas Corporation. In August 1982, SAMOCO and Coastal assigned their interests in the service contract to Pecten and its affiliate, Syria Shell Petroleum Development B.V. The assignment agreement provided in section 6 that SAMOCO and Coastal would retain a combined 6% share-known as an overriding royalty interest-of Pecten and Shell Syria's combined 62% share of the value of the production: SAMOCO retained 4% and Coastal retained 2%. The assignment agreement granted SAMOCO and Coastal the right to monitor these section 6 payments.

         In 1983, Pecten and Shell Syria relinquished 25% of the exploration area not yet converted to a DLA, as required under the service contract.

         C. Pecten makes agreements with the Syrian government to continue exploration beyond the initial concession period without notifying SAMOCO.

         In the summer of 1984, the parties drilled a well on the DLA known as the Deir Ez Zor block. The successful well, known as the Thayyem well, resulted in a series of "annexes" to the original service contract with the Syrian government. The first annex, executed in 1984, extended Pecten's exploration rights for a year beyond the service contract's 1985 original expiration date. After a nonsubstantive second annex, Pecten procured a third annex, which extended the exploration period for an additional year. These annexes did not change the fiscal terms of the original service contract.

         In October 1987, Pecten, Shell Syria, and the Syrian government entered into a fourth annex. The fourth annex occurred after the government had obtained a competitive bid from an unrelated third party to re-lease the fields. Like the previous three annexes, the fourth annex extended the exploration period. The fourth annex also adopted financial terms different from the original service contract for both the payment of royalties to the Syrian government and the production sharing between the parties to the service contract. The fourth annex also granted conditional exploration rights to a new area in Deir Ez Zor through October 25, 1988.

         Pecten inserted language in two places in the fourth annex indicating that it was independent from the original service contract:

The obligations and rights subject of this Annex shall be considered independent from the Original Service Contract.
* * *
It is understood that the petroleum produced and saved from the New Area and all the documents and records related to the execution of Petroleum Operations under this Annex shall be treated independently and separately from those under the Original Service Contract.

         Pecten did not disclose to SAMOCO that it had entered into these annex agreements with the Syrian government at the time they were executed.

         The fourth annex became a major source of conflict between SAMOCO and Pecten.

         During 1986 and 1987, Pecten attempted to buy SAMOCO's royalty interest, but SAMOCO refused to sell. In May 1988, Pecten sent its corporate representative, Gary Cameron, to meet with SAMOCO's representative, Houssam Bahri, to make another buyout proposal. During this meeting, SAMOCO learned that Pecten had participated in the annexes to the original service contract. SAMOCO learned that Pecten's position was that SAMOCO's royalty interest applied to discoveries made before October 1985-under the original service contract-and did not apply to discoveries after that date was extended by the annexes.

         D. SAMOCO sues Pecten for failing to pay royalties based on the annex agreements, culminating in a settlement.

         SAMOCO and Coastal sued Pecten and Shell Syria in Harris County on July 12, 1988 for a declaratory judgment and breach contract. In the lawsuit, SAMOCO alleged that the annexes with the Syrian government entitled SAMOCO to royalty payments under the original service contract. SAMOCO and Coastal alleged that Shell Syria and Pecten had: (1) failed to disclose to SAMOCO that they had obtained annexes to the service contract that extended the exploration period; (2) withheld royalty payments due to SAMOCO and Coastal under the 1982 assignment and the first, third, and fourth annex agreements, and (3) failed to provide the reports and information required by the 1982 assignment agreement. SAMOCO's original petition stated SAMOCO's understanding that Pecten took the position that Pecten did not owe royalties to SAMOCO under the annexes, and further stated that SAMOCO disagreed with Pecten's position:

[Pecten and Shell Syria], for the first time, made the claim that [SAMOCO and Coastal] were only entitled to Section 6 revenue on Production Sharing Crude Oil attributable to those fields discovered prior to October 25, 1985, the original termination date of the exploration period specified in the SERVICE CONTRACT.

         SAMOCO identified that Pecten had extended the service contract by annex or amendment and had "until recently, kept secret the existence of that Annex or Amendment and have, through the date of filing this petition, refused and failed to disclose the contents thereof to [SAMOCO and Coastal]." SAMOCO alleged that "the SERVICE CONTRACT has been amended to extend the Exploration Period for a number of years and allege that the termination date thereof is well in the future."

         SAMOCO served Pecten with discovery requests. After Pecten had interposed objections to those discovery requests, but before it had produced any documents, the parties discussed settlement. In furtherance of those discussions, Pecten produced copies of the first, third, and fourth annexes to SAMOCO and Coastal.

         The parties reached an accord and executed a settlement agreement on September 15, 1989. The settlement agreement acknowledged that the parties' dispute centered on whether the SAMOCO was entitled to payments based the annexes to the agreement with the Syrian government, including the fourth annex:

WHEREAS, subsequent to entry of the Assignment Agreement by the parties thereto, the following agreements regarding or referencing the Service Contract were entered into among [the Syrian Government, the Syrian Petroleum Company], Pecten, Shell, and Deminex Deutsche Erdoversogungsgesellschit aft mbH or its affiliates:
(a) Annex signed on December 4, 1984, and ratified by [the Syrian Government] Law No. 1 on January 10, 1985 ("First Annex");
(b) Second Annex signed on May 30, 1985, and ratified by [the Syrian Government] Law No. 12 on August 12, 1985 ("Second Annex");
(c) Third Annex signed on August 4, 1986, and ratified by [the Syrian Government] Law No. 33 on November 5, 1986 ("Third Annex");
(d) Fourth Annex signed on October 24, 1987, and ratified by [Syrian Government] Law No. 28 on October 28, 1987 ("Fourth Annex");
WHEREAS, the First, Third, and Fourth Annexes provided for further exploration periods by Pecten/Shell/Deminex within portions of the geographical area within the Syrian Arab Republic originally delineated in . . . the Service Contract (the "Deir Ex Zor Area") following the original ...

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