The Eastland Court of Appeals has ruled that the proper measure of damages for an operator’s breach of a right of first refusal pertaining to the location of saltwater disposal wells is lost disposal fees and skim oil revenue.
SM Energy Company v. Buzzard Roost Farms, Inc. and C&L Solutions, Inc. No 11-23-00222-CV; December 1, 2025) arose from a dispute over the interpretation and application of a right of first refusal provision in a Surface Use and Compensation Agreement. The agreement required the operator (SM) to give the surface owner (Buzzard) a right of first refusal to have any saltwater disposal well drilled within 5 miles of the owner’s surface land placed on the surface land or other adjacent lands owned by Buzzard. SM drilled two wells within the 5-mile radius, the Hydra and the Delphin, on land it purchased from other owners, thereby circumventing the payment of disposal fees and other costs and, it thought, avoiding Buzzard’s right of first refusal. While conceding that the right of first refusal was enforceable and that it did not comply with the agreement, SM nevertheless argued that Buzzard suffered no damages because they would have rejected SM’s offer to buy Buzzard’s land for placement of the wells. SM Energy filed suit in Howard County district court after receiving Buzzard’s demand letter requesting damages. SM sought a declaration that either the agreement was invalid and unenforceable or that it was ambiguous. Buzzard counterclaimed for breach of contract, seeking damages.
In response to competing motions for summary judgment, the trial court found that the agreement was enforceable and that fact issues existed as to whether SM breached the agreement. After another round of competing motions, the trial court determined that the agreement was triggered by the decision to drill a SWD well within 5 miles of Buzzard’s surface land. SM filed a third motion for partial summary judgment arguing that it had fulfilled its contractual obligations by extending an offer to Buzzard to purchase the surface lands for $5,500 an acre, the same terms it had offered to third parties, an offer Buzzard refused.The trial court ruled that SM’s transactions with third parties were beside the point and instead focused on the right of first refusal provided by the agreement. Lastly, both parties filed Rule 248 motions seeking the disposal of pending questions of law related to the contractual obligations and whether the agreement was satisfied by an offer identical to the one received by the third party. The trial court denied both motions, determining that the right to refusal provision was ambiguous.
The case went to a jury trial. The trial court submitted seven questions. The first two concerned the parties’ intent as to the right of first refusal, to which the jury answered that the parties intended to for the operator to make the requisite offer to Buzzard to have the SWD wells drilled on their land or adjacent land, and that the parties did not intend for Buzzard to base the offer on the terms and conditions accepted by a third party. The jury replied in the affirmative that SM did not comply with the right of first refusal agreement, and that Buzzard was “ready, willing, and able” to accept the placement of the Hydra and Delphin Wells on their land. Next, the jury was asked to determine the damages, which it assigned as follows; $4,982,043.68 for the value of two SWD wells, $2,898,358.50 for disposal fees, and $1,449,179.00 for skim oil revenue. The jury didn’t answer the question of whether Buzzard was ready, willing, and able to accept the same terms and conditions offered to the third party, or the charge asking the jury to ascertain the amount of money in damages necessary to put Buzzard in the same economic condition it would have been had SM complied with the agreement.
At the charge conference, Buzzard objected to Questions 1 and 2 because the right of first refusal provision was unambiguous and therefore should have been interpreted as a matter of law by the trial court. Additionally, the submission of question No. 3 was improper because SM’s noncompliance with the agreement should have been determined as a matter of law. SM filed its own objections to Questions 1, 4, and 6, arguing that they invited the jury to find “an unenforceable agreement to agree” existed, and that they overstepped the legal definition of a right of first refusal. The trial court overruled all of these objections and awarded Buzzard $1,352,971.48 in attorney’s fees and $2,770,000 in prejudgment interest. SM Energy filed a motion for judgment notwithstanding the verdict and a motion to disregard the jury’s findings, both of which were denied. SM appealed.
In an opinion by Justice Trotter, the court of appeals affirmed in part and reversed in part. In its first issue, SM Energy contended that the trial court erred in finding the right of first refusal provision was ambiguous, causing the submission of improper questions to the jury. It further contended that sufficient evidence existed that the Surface Owners would have rejected SM Energy’s offer, had one been made, and made a legal insufficiency argument as well. SM did not contest, however, the trial court’s order that the provision was an enforceable right of first refusal. The issue boiled down to what terms and conditions the agreement required to offer Buzzard and “whether, to exercise that right, the Surface Owners were required to unconditionally accep such terms and conditions….” Observing that “[g]enerally, a right of first refusal requires that the grantor notify the holder of this right of his intent to sell the property and then to first offer the property to the holder based on the same terms and conditions that were offered by or to a third party” (citations omitted), the court noted that in this case “the right of first refusal concerns something other than an option to purchase real property.” In any event, the grantor must communicate the terms of a third party’s offer to the rightholder and “commits a contractual breach if he sells the burdened property without first offering to sell it to the rightholder on the same terms as the third-party offer.” Here the agreement obligated SM to offer to place the wells on the Buzzard’s surface lands, and, as the trial court determined, that obligation was triggered by SM’s “decision to drill a Saltwater Disposal Well within 5 miles of [those lands].”
The issue then became, as a matter of contract construction, what terms and conditions SM “should have offered” Buzzard. The court determined that the agreement precluded SM’s “‘self-development’ strategy of purchasing real property from third parties for the purpose of drilling and placing SWD wells on land that SM Energy owns.” Instead, SM’s decision to put the wells within 5 miles of Buzzard’s surface lands triggered the right of first refusal. Beyond that, “Texas courts have held that the rightholder is not obligated to accept the terms and conditions of a third-party offer that are beyond the scope of the right of first refusal contractual provision” (citations omitted). The agreement thus required SM to offer to drill an SWD well (within the 5 mile radius) on the surface lands or other lands Buzzard owned and that its “business decision” not to do so was beyond the scope of the right. Buzzard, moreover, was not required to accept that offer.
Next, the court addressed SM’s contention that the trial court erroneously charged the jury. Because the court held that the right of first refusal agreement was unambiguous, it should not have been submitted to the jury. This error was harmless, however, because the jury correctly answered it. Likewise, the jury’s finding that SM did not extend any offer to Buzzard was correct as a matter of law. Turning to the damages charge, SM argued that the trial court erred by submitting three separate damage elements because awarding damages for the value of the SWD wells was an impermissible double recovery and that the jury’s made its award based on legally and factually insufficient evidence. Consequently, SM argued, the only award that could withstand scrutiny was the $2.9 million for disposal fees. The Court was partially persuaded. It first held that legally and factually sufficient evidence supported the damage awards for disposal fees and skim oil, based on Buzzard’s expert witness and Buzzard’s damages model’s use of actual water volumes injected and disposed of in the two SWD wells. As to the value of the wells, however, the court agreed with SM that this element of damages was improper. Buzzard offered no evidence regarding how the value of its land would increase had the wells been located on it, and, as SCOTX has held, the cost of drilling (which Buzzard tried to argue) does not constitute a proper measure of damages. Instead, the court stated, “we typically measure damages for breach of [performance of a right of first refusal] by the value of the royalty rather than the cost to drill a well” (citations omitted).
As to SM’s objection to the award of Buzzard’s attorney’s fees, the court agreed that the amount of fees had to be remanded because the court reduced the trial court’s judgment. The The court rendered a take nothing favoring SM on the nearly $5 million award for the value of the wells. It further reversed and remanded the awards of attorney’s fees and prejudgment interest. Still, Buzzard and the other surface owners will reap nearly $5 million in lost disposal fees and skim oil revenue, as well as somewhat reduced attorney’s fees and prejudgment interest. Not a bad day at the office for all the effort.
TCJL Intern Satchel Williams researched and prepared the first draft of this article.
