Court Opinion

ID: 9776434
Source: CourtListenerOpinion
Date Created: 2023-08-29 19:35:42.519194+00
Date Added: 2024-06-11T07:32:38.845128
License: Public Domain

DISSENTING OPINION
HAMILTON, Justice.
I respectfully dissent.
I cannot agree with the Court’s holding that the “market price” mentioned in the royalty clause must be determined as of the date of delivery of the gas. While I agree with the Court’s holding that the price in the gas sales contracts is not necessarily controlling, it could very well be, depending on the circumstances under which the contract price was determined. The burden is on those suing for royalty deficiencies to show that such contract price is not equivalent to the “market price” called for in the lease royalty provision. That burden cannot be discharged by showing the average price for which gas is sold in other long-term gas contracts of sale, unless they are comparable in time (and otherwise) with the contracts under attack. Phillips Petroleum Company v. Bynum, 155 F.2d 196, 201 (5th Cir.1946).
In the oil and gas lease in question the lessees obligated themselves:
“To deliver to the credit of lessor, free of cost, in the pipe line to which lessee may connect its or his wells, the equal one-eighth part of all oil produced and saved from the leased premises.
“To pay to lessor, as royalty for gas from each well where gas only is found, while the same is being sold or used off of the premises one-eighth of the market price at the wells of the amount so sold or used, * * *
“To pay to lessor as royalty for gas produced from any oil well and used by lessee for the manufacture of gasoline, one-eighth of the market value of such gas. If such gas is sold by lessee, then lessee agrees to pay lessor, as royalty, one-eighth of the net proceeds derived from the sale of said casinghead gas at the wells.”
It is the second royalty provision we are primarily concerned with here. It will be noted by that provision royalty is to be paid for gas “while same is being sold or used off the premises,” as distinguished from gas used by the lessee on the premises for operational purposes, and gas used by the lessor for domestic purposes. For these uses the lease elsewhere provides no royalty is to be paid. The provision says, further, that such royalty shall be one-eighth the “market price” at the wells. No one contends that this means a “market price” established by daily sales at the wells. I quote from the Court of Civil Appeals, Texas Oil & Gas Corporation et al., v. Vela et al., Tex.Civ.App., 405 S.W.2d 68 (1966).
“The royalty to be paid for gas presents a most difficult problem because of the nature of the gas sales, and has been the subject of much litigation. The Courts have recognized, and the undisputed evidence in this case confirms, that the practicalities of the gas industry require that gas be sold under long-term contracts because the pipelines must have a committed source of supply sufficient to justify financing, construction and operation. Therefore, the rules of daily sales and daily quotations have no appli*879cation. Foster v. Atlantic Refining Co., 5 Cir., 329 F.2d 485, Phillips Pet. Co. v. Bynum, 5 Cir., 155 F.2d 196; Gex v. Texas Co., Tex.Civ.App., 377 S.W.2d 820, n. wr. hist.”
The phrase “market price at the well” means market price received by lessee less the necessary expense, if any, of processing and transporting the gas from the well to pipeline of purchaser. Le Cuno Oil Co. v. Smith, Tex.Civ.App., 306 S.W.2d 190, n. r. e.; Hemler v. Union Producing Co., D.C.La. 1941, 40 F.Supp. 824, affirmed in part and reversed on other grounds in part, 134 F.2d 436 (5th Cir.); Clear Creek Oil & Gas Co. v. Bushmaier, 165 Ark. 303, 264 S.W. 830.
Since it appears that the royalty provision fails to state as of what time the “market price” is to be determined, I think, we must look to common practices in the industry at the time the lease contract was made in 1933 to ascertain what was the intention of the parties with reference to this matter. All parties agree and this Court so .holds that at such time the only sales for gas from wells producing gas only were made on long-term contracts or for the life of the lease. The parties, when they entered into the lease contract, knew how such gas had to be marketed; it had to be marketed under a contract similar to the one before us. Consequently, when the parties entered into the lease contract they all knew that the term “market price” necessarily meant the price prevailing for gas on long-term contract as of the time the sale contract should be made. They knew it could only be sold at a price to be fixed in the contract for gas to be delivered in the future. If the gas contracts in question have provided for a price which at the time was below the prevailing “market price” for gas sold on lease life-time contracts then the lessors would have cause to complain. In the absence of such showing they have no cause for complaint.
This Court in holding that when gas is marketed under a long-term contract the sale is deemed to have been made at the time of delivery to the purchaser, refers to Martin v. Amis, Tex.Com.App. 288 S.W. 431, 433. In this case the lessee executed a written contract to sell raw gas to a gasoline plant in consideration of twenty-five percent of the proceeds of the gasoline manufactured therefrom, and one-half of the proceeds of the residue gas. Lessor contended that he was entitled to one-eighth of all the gasoline manufactured, and one-eighth of all the residue gas as royalty, because the lessor was still the owner of the gasoline and residue gas when sold — no sale ever having been made to the gasoline plant. The gasoline plant, he contended, was a mere servant of the lessor. The Court held that when the gas was delivered to the plant under the terms of the executory contract of sale, an executed sale was thereby effected. Thus, it appears the sale was complete when the gas was delivered, but it took both the contract of sale and its delivery to constitute the sale.
Likewise, in the instant case the mere delivery of gas does not constitute the sale; it takes both the contract of sale plus the delivery to constitute the sale.
The Court, also, relies on the case of Foster v. Atlantic Refining Company, (5th Cir.) 329 F.2d 485, in support of its holding. In that case the court said:
“Atlantic urges that the market price is the price at which the gas was sold in 1950. Developing this point it first says that the phrase ‘when run’ applies to oil but not to gas on the theory that a ‘run’ is a transfer of crude oil from stock tanks to a pipeline. We see no reason why the phrase may not apply to gas and mean the time of delivery of gas from the well to the pipeline. Indeed, a witness for Atlantic so testified.” (emphasis supplied)
It is noted that the court does not hold that the “market price” is to be determined as *880of the time of sale, which under long-term contract is deemed to be at the time of delivery, as held by this Court in the instant case. The Foster lease only had one royalty provision which covered both oil and gas, and the Court based it’s opinion solely on the provision in the royalty contract, which specifically said that the gas must be sold at the “market price” prevailing when the gas was run. The royalty provision is in part as follows:
“The conventional royalties to be paid by Lessee are: (a) on Oil and gas, including all hydro-carbons, one-eighth (⅛⅛) of that produced and saved from said land, the same to be delivered to the credit of the Lessor into the pipe line and to be sold at the market price therefor prevailing for the field where produced when run; * *
It will be noted under the royalty provision the lessee did not even have authority to sell lessor’s one-eighth (⅜⅛) interest in the gas until it had been delivered to the credit of the lessor in the pipeline. The parties in effect contracted against long-term gas sales contracts. We have no such limitation in the lease before us. Under the terms of the lease the lessee owns all the gas, and it was contemplated by the parties, that it would be sold in the usual and customary manner, that is, under long-term contracts.
It is obvious, therefore, that the Foster case should have no persuasive force in determining the question before us in the instant case. There is no intimation that the Sth Circuit would have reached the same result if the contract made by Atlantic had not contained the words “market price when run,” thus, clearly and unambiguously obligating it to pay royalties based on market price existing on the date the gas was run or delivered. In fact, it is submitted that there is a clear intimation expressed in the Court’s opinion that the “market price” specified in the sales contract (made in good faith, and at the best prices and terms available when the lessee-producer was compelled to “market” the gas) did establish the “market price” for royalty payment purposes if it were not for the peculiar royalty provision requiring a different conclusion.
Although, the lessee in the instant case put himself in no such bind as Atlantic did in its lease, this Court reasons that the lessee is in the same bind that Atlantic was, and has unnecessarily put itself into a strait jacket which it feels compels it to hold as the Sth Circuit felt it was compelled to hold in the Foster case. The problem before us is by no means the problem that the Sth Circuit had in the Foster case. In that case the lessee bound itself to pay the prevailing “market price” in the field when the gas was delivered. In the case before us the lessee bound itself to pay “market price” for gas sold (necessarily sold under long-term contracts). The lessee did not agree to pay the “market price” prevailing in the field at the time of delivery, but agreed to pay the “market price” of gas sold; that is, sold under long-term contract at a price determined as of the time the contract was made. If the parties understand that the price for which gas was to be sold under long-term contracts had to be determined as of time of making the contract, is it not reasonable to say that they understood that market-price was to be determined as of the same time?
Most of all of the legal commentators who have written on the subject before us favor the view presented here by this dissent. Siefkin, Rights of Lessor and Lessee With Respect to Sale of Gas and as to Gas Royalty Provisions, Fourth Annual Institute on Oil and Gas Law and Taxation, pp. 181, 188-91; Bounds, Division Orders, Fifth Annual Institute on Oil and Gas Law and Taxation, pp. 91, 116-17; Brown, The Law of Oil and Gas Leases, Section 6.09, p. 118 (1958); Gregg, Analysis of Usual Oil and Gas Lease Provisions, 5 South Texas Law Journal 1, 14; 43 Tex.Jur.2d 48, Sec. 389.
I would hold that the lessors recover nothing by virtue of their suit for ad*881ditional royalties. I concur in the Court’s holding on their suit for damages for non-development and its remand of the cause to the trial court.
GRIFFIN, SMITH and GREENHILL JJ., join in this dissent.