Texas Oil and Gas Attorney Blog
Texas law strongly endorses the concept of freedom to contract and our courts have frequently emphasized this by enforcing the intent of the contracting parties. Indeed, intent of the parties is enforced even if the parties use words erroneously. An example of this comes from the case of Thompson v. Taeda Investments, LLC, 2018 WL 3196628 (Tex. Civ.App.-Tyler 2018, pet. filed).
In that case, a mineral estate management agreement used the words “overriding royalty interest.” The Court of Appeals held that, while those words have “a generally accepted meaning,” the context of the agreement demonstrated that the parties used those words erroneously and that they intended something different than what is generally meant by those words. Despite the erroneous use of the words, because of the context, the parties could have only intended one thing — and that was different than the generally accepted meaning of “overriding royalty interest”. As a result, the management agreement was held to be unambiguous. Furthermore, the lack of ambiguity defeated one party’s claim that there had been a mutual mistake of fact in the use of the word “overriding royalty interest.”
Interpreting Texas Contracts: Language From the Management Agreement
Thompson involved lands located in Shelby County, Texas. On September 10, 2008, the owner — a family trust — signed a property management agreement with Taeda Management, appointing it sole agent in connection with the management of its mineral interest. The term of the management agreement was four years. The clear intent was that Taeda would locate and enter into oil and gas leases with one or more production companies. In terms of payment, the management agreement said this:
“[OWNER] agrees to pay [Taeda] as consideration for efforts set forth hereunder ten percent (10%) of the following:
(a) the gross amount of any per acre bonus money received in exchange for the execution, extension, or renewal of any oil, gas, and mineral lease executed by [the OWNER] covering the Mineral Property; and
(b) and [sic] any money paid as damages for surface use in connection with any operations under any such oil, gas and mineral lease.
Additionally, upon the execution of any oil, gas and mineral lease by [OWNER] covering the Mineral Property, [OWNER] agrees to grant [Taeda] a 1/10 overriding royalty interest in the Mineral Property, which will entitle [Taeda] to 10% of [the OWNER’S] revenue gained from the production of oil and/or gas therefrom.”
Note that the management agreement did not define the the length of time over which Taeda was entitled to the various payments.
About two years into the management agreement, Taeda succeeded in locating a production company and a lease was entered into. The oil and gas lease gave the owners a 25% royalty and, thereafter, the owners paid Taeda 10% of that. However, at the end of the four-year term of the management agreement, the owners stopped paying Taeda. The owners claimed that they had never intended to give Taeda a perpetual forever right to receive 10% of the royalties. They argued that the words “overriding royalty interest” meant that the right to receive royalties would cease when the management agreement terminated (in 2012).
At trial, on traditional summary judgment cross-motions, the owners were denied recovery and Taeda was awarded breach of contract damages. Furthermore, the trial court ordered the owners to execute documents conveying to Taeda a 2.5% NPRI in the production until such time as the lease with the production company came to an end. The Court of Appeals affirmed.
In affirming the trial court, the Court of Appeals held that the words “overriding royalty interest” were used erroneously. “Overriding royalty interest” has a well-understood meaning under Texas law. It is an interest which is carved out of, and constitutes a part of, the working interest created by an oil and gas lease. Generally an overriding royalty interest terminates when the lease terminates. This is the reason that the owners argued that Taeda’s right to royalty payments terminated in 2012: the management agreement ended which, according to them, terminated the right of Taeda to receive “overriding royalty interest.”
However, the Court of Appeals held that, when used in a management agreement, the words “overriding royalty interest” could not have their generally understood meaning. A managing agent cannot have an “overriding royalty interest” since that can only be held by the owner of the property. Thus, the words were used “erroneously.”
The Court went on to hold that the remainder of the language used and the context of the management agreement unambiguously demonstrated that the parties intended to give Taeda a perpetual right to payments (as long as the underlying lease obtained by Taeda remained in effect). The Court looked to the negotiations surrounding the execution of the management agreement but did not find any of those facts helpful. The Court then looked to the language used in other parts of the agreement and discerned that various obligations were imposed on Taeda that extended beyond the four-year term of the agreement. The Court also noted that absence of any time limit and the language quoted above that “entitle Taeda to 10% of the owner’s “revenue gained from the production of oil and/or gas therefrom.” Finally, the Court noted that payments related to bonus money were due for any “extension or renewal.” From these textual contexts, the Court concluded that the parties intended Taeda to be paid beyond the four year term of the management agreement.
The owners argued that the use of words “overriding royalty agreement” created an ambiguity in the management agreement. However, the Court rejected that argument stating that the owner’s “…unilateral misinterpretation of the contract does not render it ambiguous.”
The owners also argued that there was a mutual mistake in fact by virtue of the erroneous use of the words “overriding royalty interest.” This too was rejected since, under Texas law, the doctrine of mistake in fact is not available unless the contract at issue is ambiguous. Since this contract was not, the owner’s argument was rejected.
A Petition for Review has been filed with the Supreme Court. It will be interesting to see what happens with this case on appeal.