Contract Drafting and the “Most Favored Nations” Clause
Posted on: October 8th, 2013

A recent San Antonio Court of Appeals decision highlighted the intricacies of contract drafting and interpretation, and the “most favored nations” clause in oil and gas leases. In BP America Production Company v. Zaffirini, BP entered into separate oil and gas leases with a minority mineral interest owner and the majority mineral interest owners. The contracts contained a most favored nations clause. Most favored nations clauses can be found in a variety of contracts, including oil and gas leases. A clause of this type in the oil and gas context usually provides that if the lessee of a mineral estate enters into a new lease with more favorable terms than what it provided in leases entered into prior, then the lessee will grant the prior lessors the same terms.  These prior leases are limited to a certain timeframe and geography, but it helps to equalize the terms mineral interest owners grant leases under.

In the Zaffirini case, BP entered into an oil and gas lease with the minority shareholder of the mineral interest, providing a $1300 per acre bonus. BP then negotiated with the majority shareholders for a lease by offering the same $1300 bonus payment. The majority shareholders countered that they wanted a “consent-to-assignment” fee and the parties reached a deal to pay $1750 per acre. In accordance with the most favored nations clause, BP proceeded to pay the minority shareholder an additional $450 per acre bonus to equalize the two leases. The majority shareholders argued that they should also receive an additional $450 bonus under the most favored nations clause. Their reasoning was that of the $1750 received only $1300 was a bonus, and the $450 above that was an assignment fee.

The appeals court reviewed the contract and negotiations, and found that the plain language of the contract called for an unallocated $1750 per acre bonus to the majority shareholders, as BP had done. The court further stated that it considered the negotiations only to the extent that they informed and confirmed the lease terms, and that the negotiations did not vary from or contradict the lease provisions.

What we can learn from the Zaffirini case is that carefully defining the expectations of parties in a contract is as important as ever. It also shines light on a form of contract clause lessors may see in their leases. If you are negotiating a contract and want to confirm that your expectations are protected, or if you would like help interpreting a contract, the experienced attorneys at the McCleskey law firm will be glad to assist you.

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