Opinion ID: 3165692
Heading Depth: 2
Heading Rank: 1

Heading: Failure to Pay Royalties

Text: Walls first argues that Petrohawk's failure to pay royalties timely under the lease constituted a material breach, which would provide a basis for cancellation of the lease. Under Arkansas law, a breach is material where there is a failure to perform an essential term or condition that substantially defeats the purpose of the contract for the other party. Roberts Contracting Co. v. Valentine-Wooten Rd. Pub. Facility Bd., 320 S.W.3d 1, 7 (Ark. Ct. App. 2009) (citation omitted). Arkansas courts have generally not considered nonpayment of royalties a material breach. See, e.g., Schaffer v. Tenneco Oil Co., 647 S.W.2d 446 (Ark. 1983) (refusing to cancel lease even though lessee failed to make royalty payments for five years). In Schaffer, the Supreme Court of Arkansas noted that Louisiana is the only jurisdiction that has consistently been willing to decree cancellation for a lessee's unexcused failure to pay pursuant to an oil and gas lease. Id. at 447. Arkansas, on the other hand, has determined that [w]here there is no cessation of marketing of oil and gas for a substantial period but only the nonpayment of royalties, the lessors generally have a plain, speedy, and adequate remedy at law for damages. Id. (citation omitted). Applying Schaffer, Walls's remedy for nonpayment of royalties is legal not equitable. Unquestionably, Petrohawk failed to pay the royalties owed to Walls; however, that failure did not substantially defeat the purpose of the contract. Understandably, payment for the extracted minerals is important to Walls. But the payment is secondary to the extraction, development, and marketing of minerals on Walls's property. Throughout the period of the lease, Petrohawk continued to extract, develop, and market the minerals from Walls's land. Given that the Supreme Court of Arkansas did not consider five years of royalty nonpayments a material breach, see id., we decline to conclude that the instant facts constitute a material breach.2 2 Even were we to consider Petrohawk's breach material, Walls waived the breach by accepting the $200,000 payment from Petrohawk and continuing with the lease. Arkansas law considers it elemental that one party to a contract who, with knowledge of a breach by the other party, continues to accept benefits under the -5-