Thursday, July 24, 2008
Damages Inadequate Remedy for Failure to Close Oil Well—C.A.
By SHERRI M. OKAMOTO, Staff Writer
Specific performance was appropriate where the buyer of real property containing oil wells breached its contractual obligation to “plug” and “abandon” all idle or nonproductive wells within a certain time schedule, this district’s Court of Appeal ruled yesterday.
Upholding a determination by the Santa Barbara Superior Court that an award of damages was inadequate to an oil company which had bargained to avoid future liability as part of its sale of the property, Div. Six held that damages could not produce the same level of certainty as the environmental remediation required under the contract.
Oil-producer Greka Energy Corporation and its affiliates acquired various companies in 1999 which had purchased oil fields from the Union Oil Company of California, or Unocal.
The terms of the sale of the fields required buyers to follow a certain procedure to close all idle or nonproductive oil wells within designated time schedules to ensure the wells would not pose a hazard to safety or the environment. If a buyer failed to do so, Unocal retained the right to enter the fields and close the wells itself.
Greka took possession of the fields and began drilling operations, but failed to comply with the abandonment time schedule, so Unocal filed a breach of contract claim seeking injunctive relief and specific performance.
The trial court rejected Unocal’s request to enter Greka’s fields, but similarly rejected Greka’s contention that specific performance was not warranted because an award of damages would provide an adequate legal remedy, and ordered Greka to “plug and abandon” 47 oil wells over a five-year period.
The Court of Appeal affirmed, with Presiding Justice Arthur Gilbert explaining that a covenant to maintain property in a specified condition is entitled to a presumption that a breach of this promise cannot be adequately compensated by money damages.
Citing Ellison v. Ventura Port Dist. (1978) 80 Cal.App.3d 574—holding that this presumption extends to agreements containing covenants to maintain the property in a specified condition—Gilbert reasoned that a party entitled to specific performance of a continuing duty should receive specific performance as a remedy whenever practically feasible.
He noted that Unocal had lowered its sale price in reliance on the buyers’ agreement to follow the abandonment schedule in an effort to avoid potential future liability to regulatory agencies and landowners, and wrote that Greka’s breach not only caused Unocal to lose the benefit of its bargain, but also forced Unocal to monitor the noncompliance to protect its financial interest.
Concluding that forcing Greka to comply with its legal duties was “the most direct means to remedy the breach and protect the environment,” and also preferable to “the inadequate remedy of repetitive future damage actions” in light of the multiple breaches, Gilbert affirmed the trial court’s decision.
The jurist also concluded that Unocal’s action had been timely because the limitations period was tolled pending completion of settlement negotiations, and that Greka was estopped from asserting the statute of limitations as a defense because it had urged Unocal to suspend legal action.
Justices Paul H. Coffee and Steven Z. Perren joined Gilbert in his opinion.
The case is Union Oil Company of California v. Greka Energy Corporation, B186055.
Copyright 2008, Metropolitan News Company