Drilling and maintenance of gas and oil wells are often undertaken through contracts.  Since such operations require a large amount of specialized equipment and technically trained personnel these contracts are generally entered with all the specialists.  A contract entered into for drilling an oil well is called a turnkey contract.

In a turnkey contract, a driller agrees and undertakes to furnish all materials required:

• for drilling an oil well;
• for performing all the work needed to complete a well;
• for placing an oil well in production; and
• for presenting an oil well to the other party to a contract, in a condition that oil starts to run into the well when a key is turned on.

In a turnkey contract, the risk of rising costs, costs of well trouble, loss of tools and delays is upon a contracting driller[i].

A contractor who enters into a contract to drill, maintain, or improve a gas well or oil well must perform his/her undertaking in a considerable manner.  Sometimes a driller who has contracted to drill a gas or oil well need not perform their job if a contractor fails to give possession of a leasehold property at the time fixed.  Similarly a driller need not perform a contract, if the other party to a contract has refused to perform a material condition precedent to delivery of property.  However, a contracted driller can waive the default on the part of other party to a contract and can proceed with a contract.

While interpreting a drilling contract intention of the parties to a contract is given primary consideration.  Intention of the parties is generally derived from the language of a contract.  While interpreting a drilling contract clause, the words, terms, and sentences of an entire agreement is examined in the light of the expressed objective and purposes of the parties to find out the actual meaning[ii].

A written drilling and maintenance contract will be strictly construed against its drafter.  If a contract language is clear and unambiguous, the court interprets a document as a matter of law without looking to extrinsic evidence.  If a contract language is ambiguous, the trier of fact must examine relevant extrinsic evidence in order to ascertain parties’ intention[iii].  Sometimes to find out the true intention of the parties to a contract the court will consider the circumstances surrounding the execution of an agreement[iv].  Apart from the surrounding circumstances the court will also look into the object, nature, subject matter of an agreement and the preliminary negotiations between the parties.  Upon interpretation the court will place the parties in the same position in which the parties found themselves at the time of contracting[v].

However, a turnkey contract will not be construed in such a manner as to put a driller in a position of guaranteeing a producing well, unless there is anything contrary in a contract.  But a driller cannot escape from a contract by taking the defense of doctrine of commercial frustration when there has been no supervening, unforeseeable event and where all the material facts affecting plaintiff’s duty of performance were known to a driller at the time when a contract was made[vi].

The rights and duties of the parties of a drilling contract with respect to an issue in contract are decided on the basis of the local law of the state.  The elements that are taken into consideration by the court in case of a conflict with regard to contract includes:

• the place of contracting;
• the place of negotiation of a contract;
• the place of performance;
• the location of subject matter of a contract; and
• the domicile, residence, nationality, place of incorporation and place of business of the parties[vii].

A contractor who negligently and carelessly shoots a well with an intention to destroy the well will be held liable for its value.  A contractor who commits a breach of an obligation arising under a contract will be liable to pay damages that are equivalent to an amount that will compensate the party aggrieved for all the damage proximately caused thereby[viii].

Similarly a lessee cannot be held responsible for the cost of a well that s/he has not ordered to be drilled.

[i] Humphrey v. Placid Oil Co., 142 F. Supp. 246 (E.D. Tex. 1956).

[ii] Cherokee Water Co. v. Freeman, 33 S.W.3d 349 (Tex. App. Texarkana 2000).

[iii] BKCap, LLC v. Captec Franchise Trust 2000-I, 572 F.3d 353 (7th Cir. Ind. 2009).

[iv] Lemm v. Stillwater Land & Cattle Co., 217 Cal. 474 (Cal. 1933).

[v] Cedars-Sinai Medical Ctr. v. State Bd. of Equalization, 162 Cal. App. 3d 1182 (Cal. App. 2d Dist. 1984).

[vi] Peoplesoft U.S.A., Inc. v. Softeck, Inc., 227 F. Supp. 2d 1116 (N.D. Cal. 2002).

[vii] Clark Equip. Co. v. Liberty Mut. Ins. Co., 1994 Del. Super. LEXIS 338 (Del. Super. Ct. Aug. 1, 1994).

[viii] Respini v. Porta, 89 Cal. 464 (Cal. 1891).