## Facts

- Strata Production Company assembled the “Red Tank Prospect” in Lea County, New Mexico, involving three adjacent tracts, including the Lechuza tract.
- Strata obtained farmout agreements from multiple companies; the disputed agreement was a farmout from Mercury Exploration Company covering the Lechuza tract.
- Effective August 28, 1991, Mercury (through its vice president, who drafted the agreement) entered a farmout that stated Mercury “owned or controlled all of the lease” for the Lechuza tract.
- The agreement gave Strata the option to accept by commencing a test well within 120 days; if Strata timely commenced drilling to the specified depth, Mercury promised to assign Strata 100% of the working interest and a specified net revenue interest.
- Strata had no duty to drill and paid no separate consideration; acceptance was by performance.
- By November 10, 1991, Strata learned Mercury did not own 100% of the working interest as represented.
- On January 10, 1992, within the 120-day period, Strata commenced drilling on the Lechuza tract, satisfying the agreement’s condition for assignment.
- Mercury could not convey the full 100% working interest it had promised.
- Strata sued for breach of contract and negligent misrepresentation; the district court found Mercury liable and awarded damages including lost profits.
- Mercury appealed, challenging liability, contract interpretation, and the damages methodology.

## Issues

1. Whether the farmout was a unilateral contract and, if so, whether Mercury could revoke or modify its offer before Strata completed performance.
2. Whether the farmout agreement required Mercury to assign 100% of the working interest and the specified net revenue interest based on its representations.
3. Whether damages should be reduced because Strata later sold or shared interests with additional investors.
4. Whether lost-profits damages were an appropriate and sufficiently certain measure of Strata’s recovery.

## Decision

- The Supreme Court of New Mexico affirmed the judgment for Strata.
- The court held the farmout functioned as a unilateral contract offer that became binding and irrevocable once Strata began performance within the stated time.
- The court rejected Mercury’s claim that Strata’s knowledge of title defects or subsequent conduct effected a modification reducing Mercury’s promised assignment.
- The court construed the agreement’s language as plainly obligating Mercury to assign the full interest it represented it “owned or controlled,” and held Mercury liable for breach when it could not deliver.
- The court upheld the negligent-misrepresentation finding based on Mercury’s inaccurate ownership/control representation.
- The court held Strata’s later arrangements with investors did not reduce Mercury’s liability to Strata.
- The court sustained the lost-profits award as supported by substantial evidence and a permissible methodology.

## Legal Principles

- A farmout that allows acceptance only by drilling, without obligating drilling, may be treated as a unilateral contract offer.
- A unilateral offer inviting acceptance by performance becomes irrevocable once the offeree begins substantial performance within the time specified.
- Clear contractual representations of ownership or control, coupled with a promise to assign a stated interest upon performance, allocate the risk of title deficiency to the representor.
- An inaccurate ownership/control statement made without reasonable care can support negligent-misrepresentation liability.
- Lost profits may be recovered when they are the natural and foreseeable result of the breach and are proven with reasonable certainty.
- A nonbreaching party’s later sale or sharing of interests to finance or spread risk does not, by itself, reduce the breaching party’s liability for the promised performance.

## Conclusion

The court held that Mercury’s farmout offer became binding when Strata timely commenced drilling, that Mercury breached and negligently misrepresented its ability to assign the promised interest, and that Strata’s lost-profits damages were properly awarded without reduction for later investor participation.


Strata Prod. Co. v. Mercury Expl. Co., 121 N.M. 622, 916 P.2d 822 (N.M. 1996)