Case Name: Parnell, Inc. v. Giller
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1963-11-26
Citations: 237 Ark. 267
Docket Number: 5-3076
Parties: Parnell, Inc. v. Giller.
Judges: MeF addin, J., dissents.
Reporter: Arkansas Reports
Volume: 237
Pages: 267–272

Head Matter:
Parnell, Inc. v. Giller.
5-3076
372 S. W. 2d 627
Opinion delivered November 26, 1963.
JoeB. Hurley, Keith, Clegg and Eckert, for appellant.
Broivn, Compton & Preivett, Richard H. Mays, for appellee.

Opinion:
George Bose Smith, J.
This is a suit by the appellee Giller, the lessor, to require the appellant Parnell, the lessee, to account for royalties assertedly due under a rather unusual lease providing for the commercial production of salt water from the lessor's land. Parnell sells the brine to a chemical company, which extracts bromine from it. The contract between Parnell and the chemical company requires Parnell to deliver the raw salt water (by pipeline) to the purchaser's plant and to dispose of the spent brine (by returning it to the earth) after it has been processed.
The royalty payable to the lessor is computed upon the market value of the salt water at the well. The question in the case is whether the lessee, in calculating the market value, is entitled to deduct its expenses in piping the salt water to the chemical company and in disposing of the spent brine. The chancellor allowed the deduction of the pipeline expense but denied the deduction of the disposal expense. Both sides have appealed.
We have concluded that both deductions must he allowed under this provision in the'lease: "The royalty to be paid by Lessee is: On brine produced from said land and sold off the premises or .used off the premises in the manufacture of bromine or other product therefrom, the market value at the Avell of one-eighth (Vs) of the brine so sold or used; provided, that on brine sold at the Avells the royalty shall be one-eighth (%) of the amount realized from such sale."
This lease Avas evidently patterned after a common form of oil and gas lease. In construing a similar clause in a gas lease we .held, in Clear Creek Oil & Gas Co. v. Bushmaier, 165 Ark. 303, 264 S. W. 830, that AAdiere the gas was used off the premises the lessee was entitled to deduct its transportation and distribution expense in determining the market value of the gas at the Avell. In principle that case controls this one.
Here the parties agreed upon two different methods for computing the royalty, depending upon Avhether the brine Avas sold on or off the premises. The appellee is manifestly in error in contending that the lessee is entitled to no deductions whatever when the brine is sold off the premises, 'for if that view were accepted there would be no difference at all in the two methods of computation. We must give effect to the parties' purpose in distinguishing the two situations.
As a transportation cost the pipeline expense falls within the letter of the Bushmaier case. The expense of disposing of the used brine falls within its reasoning. Both services were demanded by the chemical company as a condition to its willingness to enter into the contract of purchase. It is not reasonable to suppose that the buyer would have agreed to pay as much as it did for the brine if the performance of these necessary steps had been its own responsibility. Hence, as in the Bushmaier case, these charges must be taken into account in fixing the market value at the well.
The appellee earnestly argues that it- ought not to be charged with either expense, because both charges are within the exclusive control of the lessee and are therefore subject to being unfairly or even fraudulently inflated. The parties, however, undoubtedly contemplated the lessee's control in the matter, for it is the lessee that has the power to arrange sales off the premises. There is no proof that any excessive charge has been made. Should that situation arise the law may be expected to provide a remedy.
Finally, it is contended that if these deductions are permitted the way will be open for the lessee to charge all sorts of ordinary overhead and business expenses in the computation of market value. The answer is that the two items in dispute are not general business expenses of the lessee. They are services that are essential to and peculiar to the marketing of the product itself. They are services that might equally well have been undertaken by the purchaser. They are services that were considered by the purchaser in its determination of what it was willing to pay for the product. In the circumstances it cannot be doubted that the cost of the services should be credited to the lessee in fixing the market value of the raw salt water at the well.
The decree is reversed on direct appeal and affirmed on cross appeal; the cause is remanded for further proceedings.
MeF addin, J., dissents.