Opinion ID: 1732153
Heading Depth: 1
Heading Rank: 2

Heading: sun oil company's division orders

Text: The leases between the Middletons, Whites and Jacksons (royalty owners) and Sun were executed during the years 1933 through 1941. Except for gas produced from the R. M. White lease, [7] the gas produced from the Sun leases was processed off the lease premises at Union Texas Petroleum's Winnie Plant. During the years 1973, 1974, and 1975, gas was delivered by Sun to Pan American Gas Company, a predecessor of Amoco Gas Company, at the tailgate of the Winnie Plant pursuant to a gas contract dated July 5, 1951, and amended July 22, 1965. The price paid by Pan American under the contract was 17.58¢. Sun calculated and paid royalties to the royalty owners on the contract price. The royalty owners contend the royalties were payable on the market value at the well of the gas. The gas royalty clause of these leases is identical and obligates Sun to pay: ... on gas, including casinghead gas or other gaseous substances, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalties shall be one-eighth of the amount realized from such sale.... (emphasis added). Because the gas is sold off the leased premises, Sun was obligated to pay one-eighth of the market value of the gas. Instead, Sun calculated and paid royalty to the lessors on the amount realized. The payment of royalties calculated on the amount realized was at all times during the period in question in conformity with certain documents, denominated division orders, executed by the royalty owners or their predecessors in 1952. These documents were directed to Sun as operator of the leases, and in effect, changed the basis of the royalty standards of the leases. The documents also provided for the monthly payment of royalties, and required Sun to make available charts and records at all reasonable times. Finally, the documents stated they were binding on all parties, their heirs, successors, and assigns, and would remain in force during the life of the respective leases. The documents did not refer to any specific gas contracts executed by Sun. The trial court found the division orders did not amend the leases to provide for royalties payable on proceeds. The trial court considered the division orders revocable, and found they were, in fact, revoked by the royalty owners on March 30, 1974, the date their petitions were served on Sun. The trial court concluded that the payments made by Sun and accepted by the royalty owners prior to March 30, 1974, were made pursuant to agreements supported by consideration and therefore, binding. However, the trial court also found that payments made and accepted after March 30, 1974, were not supported by consideration and therefore were not binding. Thus, the trial court held the royalty owners were entitled to judgment for the difference between the royalty paid and one-eighth of the market value of the gas produced from the leases only from and after March 30, 1974. The Court of Civil Appeals held the division orders were valid written agreements modifying the gas royalty clause, were supported by consideration before and after March 30, 1974, and were irrevocable. Sun argues the trial court correctly held, under well-settled law that these instruments were binding for the time the parties acted under them. We agree. After this Court's decision in Chicago Corporation v. Wall, 156 Tex. 217, 293 S.W.2d 844 (1956), the Texas law has been that payments made and accepted under an agreement such as these were effective until the agreement was revoked. See R. HEMINGWAY, THE LAW OF OIL & GAS § 7.5 (1971). Federal courts, have on a number of occasions, been required to apply Texas law in division order cases. Phillips Petroleum Company v. Williams, 158 F.2d 723 (5th Cir. 1946), is particularly applicable, wherein the Court held: As to contention one, the division and transfer orders, with their definite declaration that the market value of the gas at the mouth of the well is to be the measure of lessors' rights and lessee's obligations, and their clear and full provisions for precisely arriving at the value, we agree with defendant, that, until withdrawn or modified, they constitute the precise and definite basis for payments, and payments made in accordance with them are final and binding. The very existence of this and the other numerous other litigations which have arisen over the meaning and effect of market price or rate provisions and over what was the market price or value of the gas, and the fact that these agreements fix, as due, sums which may from time to time be more or less than the prevailing market price, give full support to and make binding payments and settlements thereunder. Binding as they are, however, in respect of payments made and accepted under them, these division or transfer orders did not rewrite or supplant the lease contract. They are binding only for the time and to the extent that they have been, or are being acted on and made the basis of settlements and payments and from the time that notice is given that settlements will not be made on the basis provided in them, they cease to be binding. In Pan American Petroleum Corporation v. Long, 340 F.2d 211 (5th Cir. 1964), the Court held that a division order, whether called a contract or not, until revoked, is binding on the parties. In J. M. Huber Corporation v. Denman, 367 F.2d 104 (5th Cir. 1966), the Court, referring to division orders similar to these, held they do, of course, constitute a precise and definite basis for payments so that payments made in accordance with them are final and binding, and cited this Court's opinion in Chicago Corp. v. Wall, supra , as one of its authorities for this holding.