Court Opinion

ID: 9775151
Source: CourtListenerOpinion
Date Created: 2023-08-29 18:45:49.867965+00
Date Added: 2024-06-11T07:32:21.455624
License: Public Domain

Justice GONZALEZ,
joined by Justice ABBOTT,
dissenting.
The simple question presented in this case is whether Heritage can deduct transportation costs from the value of NationsBank’s royalties under these leases. The language at issue, which is common to each contract, reads as follows:
[T]here shall be no deductions from the value of Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.1
What could be more clear? This provision expresses the parties’ intent in plain English, and I am puzzled by the Court’s decision to ignore the unequivocal intent of sophisticated parties who negotiated contractual terms at arm’s length. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 92 S.Ct. 1907, 1914, 32 L.Ed.2d 513 (1972) (noting that, absent compelling reason, contracts “made in an arm’s-length negotiation by experienced *132and sophisticated businessmen ... should be honored by the parties and enforced by the courts”); accord Prudential Ins. Co. v. Jefferson Assoc., 896 S.W.2d 156, 161 (Tex.1995). In my opinion, both the trial court and the court of appeals correctly held that this language clearly forbids Heritage from deducting transportation costs to arrive at the market value of the gas on which the royalty payment is based.
Fundamental principles of Texas law hold that competent parties enjoy the utmost freedom of contract and that courts will enforce a contract freely and voluntarily made for a lawful purpose. Crutchfield v. Associates Inv. Co., 376 S.W.2d 957, 959 (Tex.Civ.App.—Dallas 1964, writ ref'd). Under basic rules of contract interpretation, this Court must give effect to the written expression of the parties’ intent. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex.1994). To do so involves reading all parts of the contract together, giving effect to each individual part. Id. In this ease, however, the Court unnecessarily looks to the trade meaning of the words used to conclude that the post-production clause is surplusage as a matter of law. 939 S.W.2d 118. Similarly, the concurrence needlessly considers other judicial constructions of “market value at the well,” including several non-Texas cases, without analyzing whether those contracts bear any similarity to the ones at issue here. Id. at 124 (Owen, J., concurring). Neither the majority nor the concurrence give proper legal effect to specific language in these contracts which clearly denotes the parties’ intent that “there shall be no deductions from the value of Lessor’s royalty by reason of any ... cost of ... transportation.” See Forbau, 876 S.W.2d at 133-34.
Heritage was free to bargain over whether NationsBank would have the right to participate in post-production business activities and receive royalties derived from those activities. The lease provision incorporates all four of the distinct business activities into which most gas production operations can be divided: production, gathering, marketing, and processing. It clearly excludes deductions for “any required processing, cost of dehydration, compression, transportation, or other matter to market such gas.” The drafters of this clause could have allowed for deductions of the cost of any of the distinct business activities that occur after the production of gas, but chose not to include language to that effect. The language in the lease provision is clear, and in the absence of fraud or misrepresentation, a party is charged with knowing the legal effect of a contract voluntarily made. Barfield v. Howard M. Smith Co., 426 S.W.2d 834, 838 (Tex.1968). Because the provision at issue is unambiguous, the Court errs by ignoring the clear intent of the parties.
The majority and the concurrence both state that they agree with the trial court and the court of appeals that the leases in question are unambiguous. 939 S.W.2d 118; id. at 124 (Owen, J., concurring). I find their agreement odd and amusing given that, interpreting the same contracts, both opinions reach a completely opposite result than the lower courts. By definition, if a contract is reasonably susceptible to more than one meaning, it is ambiguous. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983); Shelly Oil Co. v. Archer, 163 Tex. 336, 356 S.W.2d 774, 778 (1961). By supplying a meaning not found in the leases for “market value at the well,” both the majority and the concurrence create'an ambiguity where none exists.
When a contract contains an ambiguity, we consider the words used in the instrument, in light of the surrounding circumstances, and apply the appropriate rules of construction to settle their meaning. Harris v. Rowe, 593 S.W.2d 303, 306 (Tex.1979). Assuming for the sake of argument that these contracts are ambiguous, we must apply two of the most basic rules governing interpretation of oil and gas leases: (1) contracts are to be construed against the scrivener; and (2) leases are to be construed against the lessee. The “construe against the scrivener” canon flows from basic contract law. See Kramer, The Sisyphean Task of Interpreting Mineral Deeds and Leases: An Encyclopedia of Canons of Construction, 24 Tex.Tech L.Rev. 1, 103 (1993). This canon allocates the burden of uncertainty caused by the use of inappropriate or vague language in a written instrument. To the extent the court can identify the party who either drafted the instrument *133or provided the form used, the canon requires that the uncertainty be resolved against that party. The “construe against the lessee” canon functions similarly. When an oil and gas lease is subject to two or more equally reasonable constructions, “the one more favorable to the lessor will be allowed to prevail.” Zeppa v. Houston Oil Co., 113 S.W.2d 612, 615 (Tex.Civ.App.—Texarkana 1938, writ ref'd); see also Stanolind Oil & Gas Co. v. Newman Bros. Drilling Co., 157 Tex. 489, 305 S.W.2d 169,176 (1957). In the present case, Heritage indisputably wrote the lease contracts and occupied the position of lessee. Thus, even if the provision is ambiguous, application of the basic rules of interpreting oil and gas leases would result in a construction against Heritage and in favor of NationsBank.
I have one final concern about today’s decision. By attributing an unequivocal, precise meaning to “market value at the well” in oil and gas leases, the Court announces a new rule that should be applied only prospectively. See generally Carrolton-Farmers Branch Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist. 826 S.W.2d 489, 515-521 (Tex.1992) (discussing factors for deciding between retroactive and prospective operation). We have limited the effect of our decisions in this manner when considerations of fairness and policy preclude full retroactivity. See, e.g., Moser v. United States Steel Corp., 676 S.W.2d 99, 103 (Tex.1984) (limiting new rule concerning phrase “other minerals” in deeds to prospective application). This result is appropriate in the present case because, before now, the meaning of “market value at the well” was subject to specific negotiation by the parties. Indeed, as the concurring opinion notes, this Court has never decided previously whether ‘“market value at the well’ includes or excludes post-production costs,” 939 S.W.2d at 127 (Owen, J., concurring), and lower courts have not reached agreement on the issue. See id. at 126. Compare Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24, 28 (Tex.App.—Texarkana 1984) (concluding that “market value at the well” includes deduction for “the reasonable cost of transporting the gas to the market”), writ dism’d as moot, 760 S.W.2d 960 (Tex.1988) with Heritage Resources, Inc. v. Nationsbank, 895 S.W.2d 833, 836-37 (Tex.App.—El Paso 1995) (determining that market-value royalty clause did not allow deduction for transportation costs), rev’d, 939 S.W.2d 118 (Tex.1996). Today, the Court decides that question, but substitutes its own interpretation of the phrase for the meaning the parties intended. The Court blindsides Nations-Bank and other lessors by mandating that this decision apply retroactively.
This decision wrongfully denies parties such as NationsBank the right to collect royalty payments for which they clearly bargained. For the foregoing reasons, I dissent.

. The royalty clause in one lease differs slightly from the others. However, any differences are immaterial to resolving the issue presented.