Face Challenges Confidently

056 Hurd Enterprises, Ltd. v. Bruni

Thursday, September 3rd, 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.
Hurd Enterprises, Ltd. v. Bruni, 828 S.W.2d 101 (Tex. App. – San Antonio 1992, writ den.) is the second of two related cases addressing the issue of whether a royalty owner is entitled to participate in take-or-pay payments. In Killam Oil Co. v. Bruni, 806 S.W.2d 264 (Tex. App. – San Antonio 1991, writ den.), it was held that under the typical gas lease royalty clause applicable to gas produced, royalties were not payable on take-or-pay payments. [See The P.P.R.O.A. Pipeline, Vol. 62, No. 5 – 8/91] In Hurd Enterprises, the jury found that Hurd’s conduct in marketing the gas and agreeing to contract amendments did not breach the implied covenant to reasonably market the gas, but that a confidential relationship existed between Hurd and Bruni, and that Hurd did breach its duty of good faith and fair dealing by setting the contract claims as it did.  Judgment for Lessors.
Held: Reversed: There is no duty of good faith and fair dealing in commercial contracts, including the ordinary relationship between lessor and lessee. Lessee’s duty to market the gas will be judged only on the reasonably prudent operator standard, which is to “undertake such action in selling gas as a reasonably prudent operator would have done under the same or similar circumstances, having due regard for the interest of all interested parties and to obtain the highest price that was reasonably obtainable.”
The significance of the case is that it clearly holds that no covenant of good faith and fair dealing will be implied in the typical lessor/lessee relationship and gas marketing dispute. However, the case did not involve circumstances where payment of the take-or-pay settlement proceeds also included the release of a right to recoupment, which the court implied might affect the outcome. The court also made certain other fine distinctions which suggests there may yet be a Texas case where the lessors successfully invade the take-or-pay proceeds for their proportionate share.