Opinion ID: 165825
Heading Depth: 5
Heading Rank: 1

Heading: Implied Duty to Market

Text: 58 New Mexico has long recognized an implied covenant on the part of the lessee (in the absence of any expressed on the subject as in [the] lease) that after production of oil and gas in paying quantities is obtained, he will thereafter continue the work of development for production of oil and gas with reasonable diligence as to the undeveloped portion of the leased land. Libby v. DeBaca, 51 N.M. 95, 179 P.2d 263, 265 (1947). In addition, the lessee must proceed with reasonable diligence, as viewed from the standpoint of a reasonably prudent operator, having in mind his own interest as well as that of the lessor, to market the product. Id. In Libby the court said that this duty to market included building a plant to convert the gas into dry ice because that was the only way the gas could be sold. Id. The New Mexico Supreme Court later characterized the implied duty to market as an implied covenant to make diligent efforts to market the production in order that the lessor may realize on this royalty interest. Darr v. Eldridge, 66 N.M. 260, 346 P.2d 1041, 1044 (1959) (quotation omitted). In Darr the court was faced with a situation where the lessee was holding onto the property without selling the minerals. Id. 59 Elliott argues that Appellees are obligated under this implied duty to market to pay royalties on the actual price received by Appellees for the gas and NGLs and that Appellees' conduct in taking excessive cost deductions and failing to pay royalties on the best price reasonably possible breached that duty. Elliott, however, is unable to demonstrate that such an implied duty exists in this case. Elliott's assertion that the 39% processing charge is not addressed in the royalty leases is unavailing. In a situation where, as here, the parties have reduced their agreement to writing in the form of an oil and gas lease or other royalty instrument, it is to that agreement that we must turn to decide whether any implied duty to market was intended by the parties or would contradict the express provisions of that agreement. Cont'l Potash, Inc., 858 P.2d at 80. Elliott, however, attempts to divorce its implied duty to market claim from its contractual relationship with Appellees and, in fact, explicitly disclaims reliance on the express provisions of the royalty agreements. This court cannot speculate as to what those various agreements contain or how to construe the scope of any implied covenant to market that may exist. 60 Even if we were to ignore Elliott's strategic choice to avoid reliance on the express contractual language, Elliott's implied duty to market claim would still fail. Elliott relies on this implied duty to supplement the royalty provisions and the at the well language, but under New Mexico law, covenants are not implied for subjects that are treated in express provisions. See id. at 80 ([I]mplied covenant[s] cannot co-exist with express covenants that specifically cover the same subject matter.). Moreover, Elliott has failed to suggest how, under New Mexico law, Appellees have breached the implied duty to market. Appellees were and are actively producing gas, processing the gas, and selling the refined natural gas and NGLs. Thus, Appellees have complied with the implied duty to market as articulated by the New Mexico courts. See Darr, 346 P.2d at 1044. Elliott contends that under the implied duty to market Appellees bear the burden of all costs incurred to put the gas in a marketable condition including the cost of removing the NGLs from the gas. Thus, Elliott argues any 39% processing fee should not be borne by the royalty owners. This conception of the implied duty to market finds no support within New Mexico case law. 19 Nor is the claim saved by Elliott's assertion that the 39% fee is a production cost that must be borne by Appellees because there is no market for the unprocessed gas at the wellhead. This duty imagined by Elliott is inconsistent with New Mexico law because the express terms of the royalty obligations direct the royalty to be paid on the value of the gas at the well. See Cont'l Potash, Inc., 858 P.2d at 80 (no implied covenants when subject matter addressed in contract); Creson, 10 P.3d at 856, 859 (marketability goes to issue of compliance with royalty obligations). 61 Elliott, therefore, has failed to present any analysis demonstrating that the implication of an unexpressed duty to market is necessary or appropriate. Thus, the district court correctly concluded that no genuine issue of material fact exists with respect to Elliott's claim of a breach of an implied duty to market. 62