Face Challenges Confidently

037 Mandell v. Hamman Oil and Refining Co.

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 some significance to you.
Mandell v. Hamman Oil Refining Co., S.W.2d (Tex. Civ. App–Houston 1991, ), is another take-or-pay case in which the royalty owner Mandell sought to recover a portion of the $8,000,000 lump-sum settlement paid to lessee Hamman Oil by Tennessee Gas Pipeline Company. Hamman Oil allocated the lump-sum among its take-or-pay claims, pricing and drainage claims, and sale of leases to Tennessee (lease buy-out). Hamman Oil paid a royalty on the portion allocated to pricing and drainage claims, but refused to allow Mandell to participate in any other part of the lump-sum payment.
Held: Other than receiving a small increase in the royalty payable on the pricing and drainage claims (attributable to a shift in the allocations made), Mandell lost. The court held as a matter of law that take-or-pay is not a benefit that royalty owners receive via the royalty clause or the marketing covenant. Royalty is payable only upon gas actually produced, i.e., severed from the ground. Lease buy-out and take-or-pay payments are not attributable to production of gas. The jury found that the gas contract complied with Hamman Oil’s implied covenant (and express covenants in this particular lease) to market the gas. The court rejected the claim that Mandell was entitled to share in take-or-pay payments under the marketing covenant. The court held that the marketing covenant, like royalty, relates to gas actually produced.
The lease contained an option for Mandell to take gas in kind and a 30-day election period to either (i) approve lessee’s gas contract, or (ii) to take in kind and separately dispose of the royalty gas. Hamman Oil gave Mandell a copy of Tennessee’s gas contract, Mandell did nothing, and Tennessee took 8/8ths of the gas for seven years. Mandell then contended that Mandell was a party to the gas contract as to the royalty gas. The jury held for Hamman Oil, and the court said that Mandell’s right to take the gas in kind was an affirmative right which he never exercised and thus lost. The court also rejected Mandell’s claim that he was a third party beneficiary of the contract. Therefore, Mandell was not a party to the gas contract and had no claims against Tennessee.
The case is significant to gas pipelines because they have made many of these lump-sum settlements. Lessors are rarely parties to the gas contract, and this case strongly supports the position of the pipeline companies in resisting lessor claims. The case is significant to lessors because it clearly illustrates that royalty may be payable on portions of such lump-sum settlements, and lessee’s allocation of those settlements is subject to challenge. The case is most significant to lessees because it rejects the claim that lessors may share in take-or-pay under the implied duty to market. Other cases have rejected claims under the royalty clause, but rights and duties under the marketing covenant have been unresolved.