Course-of-Performance Evidence Inadmissible to Construe Unambiguous Oil and Gas Farmout Agreement
Read the Court's Opinion (PDF)
Judge Stacy Sharp
In May v. INEOS USA Oil & Gas, the Business Court of Texas struck post-execution course-of-performance evidence offered by mineral-interest plaintiffs seeking to prove a well-by-well payout calculation under a farmout agreement, holding that extrinsic evidence is inadmissible when contract language is susceptible to only one reasonable meaning. The ruling follows the court's earlier determination that the contractually defined 'Payout' is triggered only by an Earning Well and calculated based on aggregated cost recovery, not on a well-by-well basis.
Court Staff Summary
Granting a motion to strike the plaintiffs' summary-judgment extrinsic evidence of a course of performance because the contract is susceptible to only one meaning.
Background: Multi-Party Farmout Dispute Over Reversionary Interests
This memorandum opinion addresses evidentiary objections in a complex oil and gas dispute involving more than two dozen mineral-interest holders as plaintiffs and multiple operators as defendants. The case centers on interpretation of a farmout agreement governing plaintiffs' reversionary back-in interest. In an earlier partial summary judgment ruling issued March 27, 2026, the court rejected plaintiffs' contention that their reversionary interest is triggered on a "well by well" basis, holding instead that the contractually defined "Payout" is triggered only by an Earning Well and calculated based on aggregated cost recovery for the Earning Well together with all wells on its corresponding acreage. May v. INEOS USA Oil & Gas LLC, 2026 Tex. Bus. 14.
The Evidentiary Dispute
Plaintiffs filed a cross-motion for summary judgment seeking a contrary ruling that payout is calculated on a well-by-well basis. To support their interpretation, plaintiffs attached evidence comprising defendants' reports, records, and emails purporting to show "how [the Agreement]'s provisions were implemented in practice." Plaintiffs' counsel conceded these exhibits constitute "post-Farmout Agreement records, communications, documents"—classic course-of-performance evidence. Defendants moved to strike the exhibits as inadmissible extrinsic evidence offered to construe an unambiguous contract.
The Court's Ruling: Extrinsic Evidence Struck
The court sustained defendants' objections and struck all challenged exhibits. The court noted that plaintiffs' legal support rested entirely on a single footnote citing six cases, but found that "not one of those cases allowed course-of-performance or other post-execution evidence to construe an unambiguous contract." The court observed that two of the cited cases considered only pre-execution negotiation evidence, while the remaining four actually reversed lower courts for improperly relying on extrinsic evidence.
The court further noted that plaintiffs had "repeatedly stated that the Farmout Agreement is unambiguous" in earlier proceedings but now urged that defendants' construction "is not the only reasonable construction." The court concluded that because the plain language concerning plaintiffs' reversionary back-in interest is "reasonably susceptible to only one meaning," it could not consider plaintiffs' extrinsic evidence. The opinion emphasized that extrinsic evidence is inadmissible when contract language is susceptible to only one reasonable meaning after applying established contract-construction rules to the agreement.