Opinion ID: 151845
Heading Depth: 2
Heading Rank: 3

Heading: Apportionment of Recovery

Text: The district court found Tawes liable for all royalties owed to Barnes from Baker-Barnes Nos. 1 and 2 wells that accrued as of February 2002. Tawes contends that the court erred, because he can, at most, be held responsible only for an amount proportionate to his interest in the properties at that time. Tawes asks this court to reduce the judgment by the corresponding amount. Tawes cites contract language limiting each party's responsibility to its proportionate share. He relies on, inter alia, Article III.B of the JOA, which states that [u]nless changed by other provisions... the parties shall also own all production of oil and gas from the Contract Area subject to the payment of royalties to the extent of their interests. JOA Article I (Definitions) bolsters this language, according to Tawes. [6] The district court determined that the above-quoted JOA Royalty Provision modified the proportionate share language generally employed in the WIUA and JOA by expanding the liability of Consenting Parties to the payment of all royalty. The court noted that the Consenting Parties' allocation of costs was explicitly limited to each party's proportionate share whereas what we call the Royalty Provision of the JOA contained no such limitation. While the WIUA and JOA generally allocate responsibilities proportionately, Article III.B of the JOA, which generally sets out proportionate sharing of costs and production, begins by stating Unless changed by other provisions. The argument goes that such sophisticated parties demonstrated their ability to apportion when they wished and that they did not apportion in what we have called the JOA's Royalty Provision tends to suggest they did not intend apportionment there. The district court then distinguished costs from royalties: [T]he relationship between non-operators and operators involving royalty payments is distinct from the relationship between non-operators and operators involving development and operation costs. First, each non-operator independently chooses whether or not he will be specifically responsible for royalty payments. As lessees, the non-operators choose to specifically obligate themselves to their lessors for royalties under their respective oil, gas and mineral leases. Therefore, the share of royalties due by each non-operator under the WIUA and JOA corresponds to his individual liability under his respective lease, except in the case of non-consent operations. In the case of non-consent operations, the parties independently choose whether or not they wish to participate, and therefore have control over whether or not to specifically incur additional royalty obligations. Second, the operators in this case have no discretion over royalty payments. Operators may not choose who to pay royalties to, what percentage royalty to pay, or when to pay royalties. If royalties are for this purpose distinguishable from costs, then apportionment arguably may not be appropriate. Nonetheless, if the contractual interpretation under Texas law reveals the intent of the parties was to apportion, then that intent likely should be given effect. In sum, the language in the JOA, Consenting parties shall be responsible for the payment of ... all royalty, is arguably consistent with two interpretations. First, it could mean that each Consenting Party is responsible for all royalty. [7] Second, it could mean that Consenting Parties as a group are responsible for all royalty.