Buried in most JOAs lies a provision that many ignore, but history has shown that it can cost companies hundreds of thousands in damages. And, from my own experience, it can also serve as an unsuspecting tool in litigation strategy. The provision? The Maintenance of Uniform Interest (or MUI) clause. While many practitioners view the MUI clause as forgetful boilerplate when drafting, or an administrative afterthought in transactions, I've discovered it can sometimes offer unexpected strategic leverage in litigation. From potential collateral attacks on operatorship succession to defensive positions in some preferential rights disputes, the MUI provision may be more versatile than traditional treatment suggests. This frequently-ignored provision may offer sophisticated practitioners unexpected strategic leverage in complex disputes—or create unforeseen liabilities for the unwary.
The MUI Provision: A Quick Refresher
It's worth noting that the MUI provision has been part of the AAPL forms since 1956, and despite there apparently being repeated calls for its elimination, the drafting committees retained it. For instance, the 1982 revision committee reportedly “deliberated a great deal” over whether to remove or weaken the provision, and ultimately chose not to do so. Indeed, the 1989 and 2015 forms also retain an MUI provision. Perhaps there's a message in that history.
For those who haven't dusted off Article VIII.D of their JOA in a while, the MUI provision generally requires all parties to maintain their ownership uniformly across the entire Contract Area. According to the clause, parties cannot "sell, encumber, transfer or make other disposition" of their covered interests unless the disposition covers either their entire interest or "an equal undivided percent" across all leases, wells, equipment, and production in the contract area.
Walk into just about any old legacy JOA contract area and you’ll have a high chance of finding that the working interests have been carved up over the years through a series of creative dealmaking, elections, side letter agreements, and otherwise. Perhaps you’ll find depth severances, selective acreage assignments, or wellbore-only assignments, among other title features that can slice and dice the leasehold ownership.
In theory, some have described the MUI clause as simply prohibiting any efforts to assign away the good assets while leaving the other parties holding dogs. Several papers have argued that the MUI clause prohibits partitioning merely as a way to avoid costs of additional measuring equipment, or to avoid complications in marketing arrangements.
But are those occasional views accurate? Does the MUI truly prohibit any and all non-uniform assignment? Does the MUI really lack teeth, such that there are no damages for violating the clause beyond perhaps the cost of another meter? As we'll discuss in the Valence case below, those views are oversimplifications that ignore critical nuances, which the MUI clause could allow for certain types of partial transfers under the JOA. Moreover, the Valence case illustrates that damages for breach of the MUI clause can, in some cases, prove substantial.
The $834,299 Case Study: ExxonMobil v. Valence
Before going much further, let's address the case that proved MUI violations can carry real teeth. In ExxonMobil Corp. v. Valence Operating Co., 174 S.W.3d 303 (Tex. App.—Houston [1st Dist.] 2005), Valence walked away with $834,299 in damages plus attorney's fees for breach of the MUI provision.
ExxonMobil and Valence owned interests subject to an MUI. Down the road some time, ExxonMobil farmed out its interest in the Cotton Valley Sand formation while keeping its interest in the Cotton Valley Lime formation. No notice of the assignment was provided to Valence. The farmee later sent AFEs to Valence proposing the drilling of new wells, but Valence did not respond (apparently claiming they had no notice of the farmee’s alleged interest). The farmee drilled the well and treated Valence as a non-consenting party subject to penalties. Valence sued for, among other things, violation of the MUI clause.
Here's where it gets interesting. ExxonMobil’s counsel noticed a potential nuance in the MUI clause that they argued allowed partial transfers of certain rights. In essence, they argued that, when the MUI clause is interpreted precisely as written, its restrictions only apply to assignments that cover interests in the "wells, equipment and production." They argued that assignments that do not cover all three attributes do not trigger the MUI clause. Here, they argued that the farmout only transferred a naked leasehold interest, without any interest in the wells and equipment. They argued this did not trigger the MUI.
The appellate court ultimately rejected Exxon’s argument. But the precise rational is important. Some have incorrectly interpreted the court’s holding as rejecting Exxon’s interpretation of the MUI. However, more precisely, the appellate court rejected Exxon’s argument because it found that Exxon’s farmout agreement transferred so broad an interest that it did transfer interests in the wells, equipment, and production—not just naked leasehold interests. Game over.
This creates an intriguing possibility for the careful drafter. Could a more surgical transfer (one that truly conveys only interests in production without any rights to wells or equipment) potentially sidestep the MUI? Of course, any party considering such an argument should recognize the risks. Courts might view attempts to parse the MUI language this finely as elevating form over substance. But for those looking for every possible angle in a high-stakes dispute, understanding these nuances could prove valuable.
The damages in Valence also deserve attention. The court awarded Valence its share of the difference between what it cost to drill new wells ($719,354 each) versus what it would have cost to complete the Cotton Valley Sand formation through existing wellbores ($150,000 each). Three wells later, that was serious money, and a cautionary tale for operators contemplating creative transactions.
When the Sleeping Giant Awakens: Strategic Uses of MUI Claims
Beyond the direct enforcement scenario in Valence, MUI violations may provide ammunition in disputes that are not focused on uniformity of ownership. Consider these scenarios where MUI arguments could potentially shape strategy:
The Operatorship Challenge Play
Your client, a non-operator, watches as the operator sells its working interest to a buyer and simultaneously purports to assign operatorship to that same buyer—no vote, no discussion, just a fait accompli. Maybe your client wanted to throw its hat in the ring for operatorship and a shot at accumulating sufficient votes. Or maybe the voting would result in a deadlock (another common JOA issue), and your client is frustrated by apparent streamroll rather than negotiation. Or perhaps your client has a custom provision in the JOA that it believes gives it a right to succeed as operator.
Here's where the MUI might provide leverage (perhaps unexpectedly). If the operator's assignment violates the MUI provision—say, by transferring interests in only certain lands or certain depths—that violation could potentially give you an argument that might undermine the entire transaction. That is, an argument may be available that, if the underlying assignment violates the JOA’s MUI clause, then the purported assignment of operatorship rights should also be invalid. Perhaps you also underscore complexities that introduces in JOA administration, or perhaps renders It's a collateral attack that could force the parties back to the negotiating table or into a proper succession of operatorship process.
The Asset-Shielding Gambit
I recently handled a case where a non-operator owned interests in seven wells under an aging JOA but believed only two remained economically viable. When the operator and other non-operators refused to plug and abandon the five marginal producers, the non-operator assigned the two best producing wells to an affiliated entity and stopped paying joint interest billings on the five marginal wells. The strategy was transparent: shield the revenue from the profitable wells from the operator's right to offset unpaid JIBs.
The selective assignment of only two wells out of seven arguably violated the MUI provision, giving the operator leverage to argue the transaction was ineffective under the JOA. Rather than chasing collection from the non-operator while watching revenue flow to its affiliate, an operator could consider leveraging the MUI violation to unwind the asset-shielding transaction or gain more favorable room for damages methodologies. In the right case, the MUI provision doesn't just prevent dumping bad assets, it may also prevent bad actors from strategically repositioning good assets to avoid legitimate JOA obligations.
The AMI Complication
On the other hand, Slawson v. Vintage, illustrates another trap for the unwary. When Slawson sold its producing well but retained undeveloped acreage in alleged violation of the MUI, it created a mess that only surfaced years. Who had the right to participate in new acquisitions under the Area of Mutual Interest provision—the assignor who violated the MUI or the assignee who bought the well? The Tenth Circuit in that case ultimately looked to the assignment language rather than the MUI provision. But the case still demonstrates how a variety of JOA-related disputes can entangle MUI clauses.
The Defensive Counter-Punch
Conversely, suppose your client faces a pref rights claim (preferential right to purchase for the uninitiated). The holder exercises rights to certain properties but not others within the contract area. Could this selective exercise itself constitute an MUI violation? Such an argument might complicate the preferential rights holder's position, whether as to validity of the triggering assignment or validity of the purported assignment. How might arguments shift if the pref rights exerciser has been selective about MUI enforcement in the past?
MUI in the face of Non-Consent Penalty Avoidance Deals
With some effort, one could imagine a scenario where non-operators may desire to avoid participating in a proposed operation while also desiring to avoid the JOA’s non-consent penalties (hard to imagine, I know). This could be one motive underlying certain single wellbore transactions. Hypothetically, when a non-operator receives a well proposal that they do not wish to accept, they face the choice of either going non-consent and incurring a non-consent penalty, or participating and paying for an unplanned and undesirable operation.
Some non-operators have sought to address this issue by posting for a quick auction a wellbore-only interest in that one proposal. By doing so, the seller non-operator sells a wellbore-only interest to a buyer that will participate, rather that merely sit around and relinquish their interest (and related value) by non-consenting. If the selling party had simply gone non-consent, the other participants would have acquired their interest subject to the penalty provisions. By farming out or selling a wellbore-only interest, they potentially avoid the relinquishment and extract some value from their interest in the form of the purchase price.
In certain circumstances other JOA parties may argue these AFE deals undermine the balance of risk and reward contemplated by the JOA. For instance, it arguably deprives the other JOA parties of their rightful share of the non-consent penalty they would stand to gain when one of the other parties elects not to pay for their share of a proposed operation. These arguments will typically revolve heavily around the MUI provision.
The Enforcement Dilemma: Nuclear Options and Practical Realities
Here's another rub: where the MUI provision is breached, the remedies for the most ordinary damages remain relatively underexplored in Texas courts. For instance, if the only damages are the need for additional measuring equipment, that may be quite nominal. If the damages are increased accounting burden, that may also be minimal given modern computers have advanced related fields far beyond the day and age of IBM-compatible computers running MS-DOS.
Yet again, even if MUIs have historically been ignored under a given JOA, that factor can create both opportunity and risk.
Potential Arguments for the Aggressive Litigant:
- Perhaps non-uniform transfers are void or at least ineffective
- Perhaps non-consent penalties vanish if connected to an improperly transferred interest
- Perhaps damages arise based on disrupted operations or increased accounting costs
- Perhaps this would be a factor in operator removal
Potential Arguments for the Defensive Playbook:
- Potential waiver arguments based on historical tolerance of partial conveyances
- Potential estoppel defenses when parties have accepted benefits from non-uniform arrangements
- Lack of damages (or merely nominal damages) where operations and allocations continue smoothly despite theoretical or technical violations
- Perhaps the specific MUI can be read narrowly to allow the type of partial assignment at issue
Practical Considerations for the In-House Practitioner
Before wielding the MUI provision as sword or shield, consider these factors:
1. The Glass House. In some areas, few legacy JOAs have perfectly clean track records when it comes to MUI compliance. Before asserting violations, consider auditing your own transaction history, chain of title, and/or more broadly the history of transfers under the JOA as a whole. Does that strengthen or weaken your case?
2. Other Documents. Transaction documents sometimes contain waivers, amendments, risk allocation provisions, or other provisions directly or indirectly bearing on MUI issues. But, of course, those usually are only executed by the parties to the transaction, without agreement of the other JOA parties. On the other hand, prior breaches without objection may create waiver or estoppel defenses, potentially neutering the provision entirely. It is not uncommon for JOAs to include custom additional provisions addressing assignments and procedures by which the assignor may be relieved of any subsequent liabilities, and those procedures may arguably help establish waiver, estoppel, or other related defenses.
3. Damages. In the most routine cases, proving damages can be difficult or may only lead to nominal damages. Consider analyzing how or why the MUI provision may relate to a broader series of breaches or issues.
4. The Valence Loophole. As discussed above, Valence case raises an intriguing question – if an assignment only includes one or two out of "wells, equipment and production" but not all three, then the assignment arguably will not trigger the MUI.
The Bottom Line
The MUI provision represents both a trap for the unwary and a potential tool for the creative advocate. As the Valence case demonstrates, MUI violations can result in substantial damages—this isn't just theoretical risk. The clause could provide compelling arguments in the right case. And the right case may be one that you never imagined would focus on the MUI provision.
The key is recognizing that today's routine transaction could become tomorrow's litigation leverage. In the high-stakes world of oil and gas litigation, sometimes the most powerful provision might be the one gathering dust in Article VIII.