219 Migl v. Dominion Okla. Tex. Exploration & Prods.

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Migl v. Dominion Oklahoma Texas Exploration & Production, Inc., No. 13-05-589-CV, 2007 WL 475318 (Tex. App.—Corpus Christi Feb. 15, 2007, no pet.) examines royalty requirements under implied and express covenants of a gas lease and a long-term gas purchase contract. Lessor filed suit against lessee for underpayment of royalties. The principal claims were for (1) breach of the express covenant in the royalty clause requiring lessee to account for gas sold off the lease at market value and (2) breach of the duty obligating lessee to obtain the best price reasonably possible under the implied covenant to manage and administer the lease (duty to market).   The appeals court affirmed summary judgment for lessee.
The lease royalty clause provided:
On gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or for the extraction of gasoline or other product therefrom, the market value at the well or one-eighth of the gas so sold or used, provided that the gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale.
The uncontroverted evidence showed that all gas was sold at a meter on the lease, which is a sale “at the wells,” and lessee paid royalties based on proceeds. Because the royalty provision required only an amount realized or proceeds-based calculation for at-the-well sales, the court held that lessee did not breach the express lease covenant to pay royalty.
The court identified the specific implied lease covenant at issue as an alleged breach of the duty to reasonably market, which is included within the broader duty expressed as the implied covenant to manage and administer the lease. The duty is applicable to amount-realized (or proceeds) based royalty clauses, but not to market value royalty clauses. The royalty clause at issue here was determined to be the proceeds clause, and lessor’s evidence showed only that the contract price was below the current market. Citing the Texas Supreme Court’s holding in Yzaguirre v. KCS Res., Inc. that the amount realized from sale proceeds may be unrelated to market value, the court held that lessee did not breach the reasonably prudent operator standard because evidence of current market value was not evidence that lessee failed to act as a reasonably prudent operator. “An action based on the implied covenant to reasonably market focuses on the behavior of the lessee rather than on evidence of other sales, and asks whether the lessee acted as a reasonably prudent operator under the same or similar facts and circumstances.
The summary judgment was affirmed because there was no evidence of negligence or self-dealing. The only evidence was that the current market price was higher than the contract price. The significance of the case is that Migl complements Yzaguirre, a case in which the current market price was lower than the contract price, in confirming the principle that evidence of current market value will not be conclusive, and may not even be relevant, in determining whether a lessee did or did not breach the implied covenant to reasonably market under a proceeds lease royalty clause.