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Permian Power Tong, Inc. v. Diamondback E&P, LLC

Court of Appeals of Texas, Twelfth District, Tyler

May 31, 2017



          Panel consisted of Worthen, C.J., Hoyle, J., and Neeley, J.

          OPINION [1]


Permian Power Tong, Inc., appeals the trial court's judgment in favor of Diamondback E&P, LLC. Permian raises five issues on appeal. We affirm in part, reverse and remand in part, and suggest a remittitur of a portion of the damages awarded in the judgment.


         Permian and Diamondback, through its predecessor Windsor Permian LLC, executed a Master Services Agreement (MSA), wherein Permian agreed to install pipe casing on several Diamondback wells in the Permian Basin area of Midland County, Texas.

         One of the wells governed by the MSA, the Barron SW 14-11 well, is the subject of this suit.[2] After Diamondback's crew initially drilled the well to 355 feet, it requested that Permian install the pipe casing on the well. Permian agreed and installed the surface casing.

         Diamondback's drilling crew then drilled to a total depth of 5, 347 feet. On May 25, 2013, and continuing until the early morning hours of May 26, 2013, Permian's four man drilling crew installed the 8 and 5/8 inch intermediate pipe casing in rainy conditions. Upon completion of the work, O-Tex Plumbing, LLC, tested the well by performing a pressure test, concluded that it did not leak, and cemented the casing in place.

         Later that afternoon, Diamondback attempted to enter the 8 and 5/8 inch intermediate casing with a 7 and 7/8 inch drilling assembly, but was unable to pass through the pipe joints. Diamondback attempted different methods to pass through the casing, including the use of a smaller motor and drilling assembly, as well as various bits and apparatuses to mill the obstructions. During this process, Diamondback hired Express Energy Services to run a "caliper log, " which is a device with fifty-six finger-like calipers that measures changes in the internal diameter of the pipe casing. The caliper log showed no obstructions from the bottom of the hole until a depth of approximately 2, 700 feet. From that depth to the surface, the caliper log revealed that the pipe had been pinched, resulting in deformed egg-shaped pipe at roughly forty-five feet intervals. Diamondback made further attempts to salvage the well, but ultimately decided that the only safe, efficient, and economical option was to plug and abandon the well. Therefore, on May 29, 2013, Diamondback plugged and abandoned the well.

         The parties agree that the casing is deformed, but disagree as to who and what caused the defect. Unsatisfied with Permian's work, Diamondback filed suit in November 2013, asserting claims for negligence and breach of the MSA against Permian. In October 2015, the case proceeded to a jury trial. Diamondback ultimately nonsuited its negligence claim and the court submitted the case to the jury only on Diamondback's breach of contract claim. The jury found in Diamondback's favor, finding that Permian failed to comply with the MSA. The jury awarded $236, 961.00 in remedial damages to compensate Diamondback for its reasonable and necessary costs to identify, repair, plug, and abandon the Barron SW 14-11 well. It also awarded $587, 176.97 in replacement damages, which represents Diamondback's reasonable and necessary costs to drill the Barron SW 14-14 replacement well to the point where it could successfully run the drilling assembly through the well after installing the intermediate casing.[3]

         The parties agreed to submit the attorneys' fees issue to the trial court. Diamondback, as the prevailing party, filed Bill B. Caraway's affidavit and invoices in support of its fee request of $319, 761.50 and for conditional appellate attorneys' fees. Permian objected to the affidavit, arguing that the redacted and block-billed attorney invoices attached to the affidavit were insufficient. Diamondback filed Caraway's supplemental affidavit, along with unredacted copies of the billing statements reflecting the work performed in connection with the case. Permian filed further objections, urging the trial court to refrain from considering Caraway's late billing invoices, and furthermore that it should not award fees for unrelated work, block-billed entries, or duplicative work.

         In its judgment, the trial court awarded Diamondback (1) $824, 137.97 in actual damages based on the jury's findings, (2) $319, 761.50 in attorneys' fees incurred at trial, (3) $150, 000.00 in conditional appellate attorneys' fees for representation in the intermediate court of appeals, (4) $75, 000.00 in total conditional appellate attorneys' fees for representation in the Texas Supreme Court, and (5) $3, 512.90 in court costs.[4] At the request of the parties, the trial court issued its findings of fact and conclusions of law in support of its attorneys' fees award.[5] Permian filed various postjudgment motions, which the trial court denied. This appeal followed.

         Compliance with the Master Services Agreement

         In Permian's first and second issues, it challenges the legal and factual sufficiency of the evidence to support the jury's findings that it breached the MSA and caused Diamondback's damages. As part of its second issue, Permian argues that Diamondback caused or exacerbated its own damages, and failed to mitigate its damages. Since these issues relate to the sufficiency of the evidence, we address them together.

         Standard of Review

         In considering a legal sufficiency challenge, we review all the evidence in the light most favorable to the trial court's judgment and indulge every reasonable inference in its favor. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We credit any favorable evidence if a reasonable factfinder could and disregard any contrary evidence unless a reasonable factfinder could not. Id. at 821-22, 827. We may only sustain a legal sufficiency challenge when (1) the record discloses a complete absence of a vital fact, (2) the court is barred by rules of law or evidence from giving weight to the sole evidence offered to prove a vital fact, (3) the sole evidence offered to prove a vital fact is no more than a mere scintilla, or (4) the evidence conclusively establishes the opposite of a vital fact. Id. at 810.

         More than a scintilla of evidence exists when the evidence rises to a level that would enable reasonable and fair minded jurors to differ in their conclusions. Wal-Mart Stores, Inc. v. Spates, 186 S.W.3d 566, 568 (Tex. 2006) (per curiam); Forbes Inc. v. Granada Biosciences, Inc., 124 S.W.3d 167, 172 (Tex. 2003). Any ultimate fact may be proved by circumstantial evidence. Russell v. Russell, 865 S.W.2d 929, 933 (Tex. 1993). A fact is established by circumstantial evidence when the fact may be fairly and reasonably inferred from other facts proved in the case. Id. Evidence that is so slight as to make any inference a guess is in legal effect no evidence. Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex. 2004). Moreover, under the equal inference rule, a jury may not reasonably infer an ultimate fact from meager circumstantial evidence which could give rise to any number of inferences, none more probable than another. Hancock v. Variyam, 400 S.W.3d 59, 70-71 (Tex. 2013).

         In reviewing a factual sufficiency challenge, we consider all of the evidence and uphold the finding unless it is so against the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam). But factfinders are the sole judges of the credibility of the witnesses and the weight to give their testimony. Wilson, 168 S.W.3d at 819. They may choose to believe one witness and disbelieve another. Id. If the evidence at trial would enable reasonable minds to differ in their conclusions, we will not substitute our judgment, so long as the evidence falls within the zone of reasonable disagreement. Id. at 822.

         Applicable Law

         The essential elements of a breach of contract claim are (1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained as a result of the breach. See Caprock Inv. Corp. v. Montgomery, 321 S.W.3d 91, 99 (Tex. App.-Eastland 2010, pet. denied). A breach of contract occurs when a party to the contract fails or refuses to do something that it has promised to do. B & W Supply, Inc. v. Beckman, 305 S.W.3d 10, 16 (Tex. App.-Houston [1st Dist.] 2009, pet. denied). The last element encompasses a causation requirement. Velvet Snout, LLC v. Sharp, 441 S.W.3d 448, 451 (Tex. App.-El Paso 2014, no pet.). A loss results from a breach of contract if the loss is the natural, probable, and foreseeable consequence of the breach. Mead v. Johnson Grp., Inc., 615 S.W.2d 685, 687 (Tex. 1981). The absence of this causal connection between the alleged breach and the alleged damages will preclude recovery. Prudential Sec., Inc. v. Haugland, 973 S.W.2d 394, 397 (Tex. App.-El Paso 1998, pet. denied).

         The mitigation of damages rule prevents a party from recovering damages that result from a breach of contract that the non-breaching party could avoid by reasonable efforts. Turner v. NJN Cotton Co., 485 S.W.3d 513, 523 (Tex. App.-Eastland 2015, pet. denied). These reasonable efforts are those that a plaintiff can avoid at a trifling expense or with reasonable exertions. Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1, 908 S.W.2d 415, 426 (Tex. 1995). The defendant bears the burden to prove that the plaintiff failed to mitigate its damages, and it must prove lack of diligence as well as the amount by which the damages were increased as a result of the failure to mitigate. Turner, 485 S.W.3d at 523.

         Breach of the MSA and Causation

         The court's charge asked the jury to decide whether Permian failed to comply with the MSA on any one of three grounds. The charge, submitted in broad form, required only a single answer for all three theories. The first ground asked the jury whether Permian failed to comply with its obligation in the MSA "that all [w]ork shall be done with the utmost skill, care and diligence, in a good and workmanlike manner, in accordance with the terms hereof and good industry standards of performance and in a timely manner . . . ." The jury charge defined "good and workmanlike manner" as "that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work." The charge defined "utmost skill, care and diligence" as "such a degree of care as would be exercised by a very careful, prudent, and competent person under the same or similar circumstances."

         The second ground asked whether Permian failed to comply with its obligation in the MSA "that all [g]oods and [Permian's] tools, machinery and equipment shall be the best quality for their purposes, maintained to be free from defect, meet all engineering standards and specifications provided by [Diamondback] and have been prepared, tested and shipped in accordance with the provisions hereof and in all applicable orders." The final ground for liability asked whether Permian failed to comply with its obligation that "its subcontractors and their employees are sufficiently experienced and suitably trained to perform the work." The jury answered "yes" to the single broad form question.

         Permian argues that, with the exception of the "company man, " none of Diamondback's employees were present during the intermediate casing installation process, and therefore they had no personal knowledge or direct evidence as to whether Permian failed to comply with the MSA, and their testimony to the contrary is mere speculation. Additionally, Permian contends that Jesus Villasana, the company man, was only briefly present at the beginning and end of the installation process and saw nothing out of the ordinary.[6] Permian also argues that the remaining evidence is purely circumstantial, and that Diamondback's case relied largely upon the testimony of its expert Ronald Britton, whose opinions are based upon assumptions and speculation. Consequently, Permian's argument continues, the jury could not have reasonably inferred from such meager circumstantial evidence that it breached the MSA or caused the pipe damage, and that the evidence could give rise to any number of inferences as to what damaged the pipe casing, none more probable than another. See, e.g., Marathon Corp. v. Pitzner, 106 S.W.3d 724, 729 (Tex. 2003) (holding expert opinion was insufficient evidence when based on assumptions, inference stacking, and slight circumstantial evidence that worker's injuries from fall resulted from electrical shock after contacting high voltage wire in air conditioning unit, causing him to step back and stumble over gas pipeline, which then led to fall from roof).

         Mike Hollis, Diamondback's Vice President and Chief Operating Officer, described the drilling and intermediate pipe casing process at trial. He explained that the pipe manufacturing company certified that the pipe was free of any defects. He also testified that the manufacturer used x-ray defraction testing, and verified that the pipe was the correct type and met the proper specifications prior to shipment. The trial court admitted Chung Hung Steel Corporation's "Mill Test Report, " which is a document from the manufacturer certifying that the pipe used at the Barron SW 14-11 Well met proper specifications and was defect-free.

         Once delivered to the drilling site, the casing was laid on racks next to the rig. J&W Casing Inspection, a third party contractor, inspected the threads on the pipe and cleaned them with a light surfactant. J&W used a feeler gauge to make certain that every pipe joint was the appropriate long thread coupling (LTC) pipe.[7] Then, J&W visually inspected the pipe for any defects. Next, J&W conducted a "drift test, " which involves physically passing an apparatus through the casing that is the same size as the drill bit assembly, ensuring that the drilling assembly may pass through the pipe interior during drilling operations. Hollis explained that J&W conducted the drift test on every section of pipe casing. J&W's drift report was admitted into evidence certifying that the internal diameter of the pipe would accommodate the drilling assembly and that it was not deformed immediately prior to Permian's installation of the pipe casing. Hollis further explained that if any section of the pipe casing failed the drift test, it would have been removed from the rack, set aside, and replaced by the manufacturer.

         Villasana confirmed this process and testified that he personally observed a portion of the drift test. He stated that his trailer is located next to the rig where the pipe is stored and that he could watch the inspection through his window. He explained that if the drift test fails on a particular pipe joint, the inspector would inform him and they would have removed that pipe from the rack and replaced it with another one.

         Villasana and the pipe installation crew conducted a meeting prior to installation of the intermediate casing, where they discussed safety protocol and reviewed the parameters of the job, including the type of pipe used and power tong torque settings. Permian's installation crew consisted of four people: a crew hauler (Aaron Caine), a "stabber" (Aaron Mills), a lead floor hand (Bill Key), and a floor hand (David Holman).[8] The floor hand holds the lower section of pipe protruding from the wellbore in place, while the stabber, who stands on a platform approximately forty-five feet in the air, holds the top section of pipe in place. The lead floor hand attaches the slip and the tongs. There are manual hand-operated slips, as well as a large slip known as a "spider." They are used to grab the lower piece of pipe and impart lateral force, holding the pipe in place so that the connection between the pipe joints can be made. The slip also prevents the pipe from falling into the wellbore hole. The slips have dies, which are sharp teethlike pieces of metal that grasp the casing. The power tongs are large tongs that apply a preset amount of torque to physically turn the pipe. The crew hauler, the supervisor of the crew who operates the power tongs, screws the upper piece of pipe onto the threads of the lower piece of pipe with the power tongs. Once the connection is complete, the two connected pieces of pipe casing are lowered into the hole. This process continues until the crew reaches the required depth, in this case approximately 5, 300 feet. After the pressure test confirmed the integrity of the connections throughout the well, the pipe casing was cemented into place.

         Although the parties did not extricate the pipe to physically inspect it, the caliper log showed the nature of the deformities. The log revealed that the pipe was pinched at similar points at each joint from approximately 2, 700 feet to the surface. Hollis and Britton initially thought that the pipe was overtorqued. However, Britton testified that each piece of casing was damaged where the slip grabbed the pipe. Robert Grace, Permian's expert, initially believed that the slip likely caused the deformity, although he ultimately offered a different theory. Curtis Lemons, Permian's owner, testified that any deformities of the magnitude discovered on the caliper log would have been visually detectable to the naked eye. Diamondback's attorney asked Grace whether the 3-D images of the pipe deformity would have been detectable by the naked eye. Although he vacillated in answering the question, Grace testified that he was "puzzled as to why somebody didn't see [the deformity]." Caine, Permian's crew hauler, testified that nothing appeared to be wrong with the pipe casing during the installation process.

         Britton testified that only an external force could have caused the damage to the pipe casing. He also testified the damage occurred at consistent intervals on each piece of casing in the area where the slip grabbed the pipe, and that once the slip grabbed the pipe, the casing crew could no longer see that portion of the pipe. Britton acknowledged that there was a few feet of variance where the damage occurred on each portion of casing, but he explained that since this is a manual process, the lead floor hand does not always attach the slip at precisely the same place on each piece of casing.

         Permian also points out that not every deformity is the same length, and that some of them are up to seven feet long. But Britton stated that the slip or spider was the only object that touched those areas of the pipe, and that there must have been a problem with the slip or spider, such as a slip that was too small for the pipe casing, missing or defective dies, or that the slip or spider was broken or misaligned. He explained that those defects could have resulted in the different lengths of deformities. Caine testified that a slip that was too small would not close, and that the slips were color coated to match the correct pipe. Britton acknowledged that he did not know exactly what was wrong with the slip, but he faulted Permian in this regard because it failed to keep logs identifying and tracking the maintenance history on the tongs, slips, and other equipment used, which made it impossible to examine the equipment. Britton testified that this was a deviation of the industry standard. Britton was adamant, through the scientific process of elimination, that an external force must have caused the damage, the caliper logs showed damage that occurred at relatively consistent locations on each piece of pipe, the slip was the only thing that touched that area of the pipe, and that nothing could render this type of mark with this consistency in that area of the pipe except the slip or spider.

         Permian also argues that Diamondback's elevator operator could have caused the damage. However, Britton testified that the elevator did not grab the pipe anywhere near where the damage occurred, and that it could not have caused the damage. Rather, he stated that the damage occurred where Permian's slip grabbed the pipe, and that the damage consistently occurred on each pipe joint from 2, 700 feet to the surface.

         Grace acknowledged that it appeared at first glance that the slips caused the damage. However, he proffered another theory, that the "bucking machines" that attach the pipe collars during the manufacturing process caused the damage prior to its arrival at the drilling site. As we have stated, the parties generally agree that deformations of this nature would have been visually detectable. Moreover, J&W did not discover any of these deformities during its inspection of each piece of pipe. Finally, the jury, as the factfinder, could have reasonably credited Britton's testimony and discredited Grace's testimony. See Wilson, 168 S.W.3d at 816.

         When viewing the evidence in the light most favorable to the verdict, the jury could have reasonably concluded, without violating the equal inference rule, that (1) the pipe was free of any defect from the manufacturer; (2) J&W inspected the pipe casing onsite, conducted a proper drift test, cleaned the threads, and determined that it was the correct pipe and defect-free; and (3) that the pipe was free of any defects prior to Permian's installation of the casing. Moreover, the jury could have reasonably relied on the evidence from the caliper log showing damage to the pipe at approximately the same location of each piece of casing up to approximately 2, 700 feet. The jury could have reasonably believed Britton's testimony and concluded that the damage was caused by Permian's slips, and that the slips were defective, the incorrect size, or were improperly operated by Permian's crew. The jury could have also reasonably concluded that Permian's failure to comply with the MSA resulted in the deformity in the pipe casing and Diamondback's inability to use it, and that the deformities in the pipe were a probable, logical, and foreseeable result of the breach. See Mead, 615 S.W.2d at 687. Furthermore, in reviewing all the evidence in a neutral light, we cannot conclude that the jury's findings are so against the overwhelming weight of the evidence as to be clearly wrong or manifestly unjust. See Cain, 709 S.W.2d at 176.

         We therefore hold that the evidence is legally and factually sufficient to support the jury's finding that Permian failed to perform the work in a good and workmanlike manner as required by the MSA. Similarly, we hold that the evidence is legally and factually sufficient to support the finding that Permian failed to ensure that all tools, machinery, and equipment were maintained to be defect-free, that they met all engineering standards and specifications provided by Diamondback, and were prepared, tested, and shipped in accordance with the MSA. Consequently, we need not address Permian's remaining contention that the evidence is legally and factually insufficient to support a finding that it failed to adequately ensure that its employees are sufficiently experienced and suitably trained to perform the work.[9] See Tex. R. App. P. 47.1.

         Mitigation of Damages

         Permian argues that Diamondback caused its own damages by milling the pipe casing, and that even if Permian caused some of the damage to the casing, Diamondback failed to reasonably mitigate its damages prior to plugging and abandoning the well. Specifically, it contends that the well could have been salvaged by attempting less aggressive methods prior to reaming the pipe casing interior metal with the milling assembly.

         After the pipe was cemented in place, Diamondback attempted to enter the 8 and 5/8 inch intermediate casing with a 7 and 7/8 inch drilling assembly, but was unable to pass through the first pipe joint. Diamondback used a "tricone bit" to shear through the initial obstruction, but encountered another obstruction at the second pipe joint. Diamondback tried to send a smaller 6 1/8 inch drilling assembly through the pipe but encountered further obstructions. Diamondback then used a smaller motor, which was also met with obstructions at approximately forty-five feet intervals. Diamondback next decided to send a "watermelon mill" through the casing to mill out the obstructions.[10] However, it continued to encounter obstructions in the pipe casing. Consequently, it ran the caliper log. Grace commended Diamondback's decision to run the caliper log. Diamondback ultimately reached 900 feet with the watermelon mill, but the mill became stuck as they attempted to remove it. Moreover, the caliper log showed that a portion of the pipe had exceeded its maximum diameter, indicating that the pipe may no longer be intact.

         Diamondback decided that the only safe, efficient, and economical option was to plug and abandon the well. Diamondback considered other options such as extricating the pipe and replacing it with new pipe. However, the well was located in a residential neighborhood, and Diamondback was concerned that such efforts could contaminate the groundwater. Moreover, Diamondback was also concerned that the geology of the area made it difficult to extract the pipe, especially in its already brittle condition. Hollis and Britton explained that portions of the casing were located in a "redbed" geological formation, which requires tremendous force to extricate pipe. Diamondback believed that had it moved forward with that procedure, further damage to the pipe may have made it impossible to safely plug and abandoned the well.

         Permian argues that Diamondback should have used a smaller drilling assembly. The record supports the conclusion that Diamondback used a smaller drilling assembly, but was unsuccessful. Permian also argues that Diamondback should have used swages or rolled the casing. Hollis testified that those procedures are employed when there are only a few sections of pipe to repair, not several thousand feet. Britton testified that he had seen approximately two dozen attempts to use rollers on deformed casing, and none have been successful.

         Permian also argued that Diamondback should have allowed it the opportunity to extricate the deformed sections of pipe and replace them with new pipe casing. An e-mail from Hollis to Diamondback employees and Dustin Bownds, Permian's Operations Manager, shows that they considered that as an option but decided against it. Britton testified that it would be unreasonable to allow the same company that caused the deformation in the pipe the opportunity to repair it. As we have stated, this procedure could have caused some of the pipe to disintegrate, which could cause environmental issues such as contamination of the groundwater. Britton stated that with enough money, it was possible to pull and replace the pipe. He testified that the casing patch procedure would only have approximately a ten percent chance of success if Diamondback spent approximately $500, 000.00, and up to a forty or fifty percent chance of success if it spent approximately $1, 500, 000.00.

         Lemons testified that Permian has experience pulling and replacing casing, and that he has done so on his own jobs and for other companies. Lemons stated that he could have replaced the deformed pipe with success, although the milling process implemented by Diamondback made that more difficult, because the pipe could break into pieces. He said he can pull the pipe in redbed and salt formations, but acknowledged that environmental issues are a legitimate concern. Grace estimated that the effort to pull and replace the pipe would cost approximately $140, 000.00 for the work, plus approximately $197, 000.00 for the cost of the new pipe casing, with a total range of $300, 000.00 to $350, 000.00 to complete the work. Grace believed that the milling operation was approximately $200, 000.00 to $300, 000.00, which was the same or less than the pull and replace option.

         Finally, Permian argues that Diamondback's actions in milling the pipe caused damage because it removed metal from the pipe. However, the pipe was not suitable for its intended use prior to the milling procedure, and the evidence reasonably supports the conclusion that the casing was unsuitable due to Permian's actions and that Diamondback took reasonable steps to mitigate its damages, including some of the very efforts that Permian ...

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