GREENE v. CARTER OIL COMPANY No. 9907.
152 So.2d 611 (1963)
Hardy N. GREENE, Plaintiff-Appellee, v. The CARTER OIL COMPANY et al., Defendants-Appellants.
Court of Appeal of Louisiana, Second Circuit.
Certiorari Refused June 4, 1963.
Robinson & Atkins, Homer, for appellee.
Before HARDY, GLADNEY and BOLIN, JJ.
This suit for the cancellation of an oil and gas lease affecting certain land situated in Claiborne Parish, Louisiana, was brought by Hardy N. Greene, as lessor, against The Carter Oil Company, Cheyenne Oil Corporation of Delaware, Milton Crow, Inc., and Oil & Gas Ventures, Inc., lessees, and Placid Oil Company, the purchaser of all oil produced from the leased premises. Plaintiff's demands against Placid Oil Company have been dismissed as against an unnecessary party and that company is not now before this court. The case was submitted to the trial court upon a stipulation of facts and admissions, after which judgment was rendered in behalf of plaintiff and against the named lessees, decreeing a cancellation of the lease and reserving plaintiff's rights, and the rights of his attorney to recover attorney's fees until such time as the judgment of the court becomes definitive. The defendants have appealed.
Pertinent to consideration of the issues presented herein are certain facts undisputed and admitted by the parties as set forth below:
Also germane to the issues are the following extracts taken from the amended mineral lease, which constitutes the contract between the parties:
(THIS IS A PAID-UP LEASE. THE PAYMENT
"6. The royalties to be paid by Lessee are:
"(a) On Oil * * * produced at the well * * * 1/8 of that produced * * *"
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Considerate counsel, after stipulating all essential facts relevant to the proper resolution of the case, have expressed their separate contentions upon which rest their arguments. Plaintiff's counsel contends:
Defendants' counsel contend:
It may well be that since the remedy sought by plaintiff is simply for cancellation of the lease, this appeal could be disposed of solely upon the question of whether there is a bona fide dispute between lessor and lessee as to the manner in which the production royalty shall be computed under the terms of the lease. See: Brewer v. Forest Gravel Co., Inc., 172 La. 828, 135 So. 372 (1931); Brown et al. v. Sugar Creek Syndicate, et al., 195 La. 865, 197 So. 583 (1940); Tyson, et al., v. Surf Oil Co., et al., 195 La. 248, 196 So. 336 (1940); Risinger, et al., v. Arkansas-Louisiana Gas Co., et al., 198 La. 101, 3 So.2d 289 (1941); Rudnick et al., v. Union Producing Co., et al., 209 La. 943, 25 So.2d 906 (1946); Touchet v. Humble Oil & Refining Company, D.C., La.,
Upon reflection, however, we have determined that it would be to the best interests of the litigating parties to have a decision
We are of the opinion that the trial court did not commit error in overruling the exception of no cause and no right of action as hereinabove pointed out. The dispute actually does involve the manner in which royalty from production shall be computed and, therefore, we find that plaintiff has stated a cause of action.
All issues presented in this suit depend for their proper resolution upon the interpretation to be accorded the words (extracted from Article 1 of the lease): "* * * which tract of land, for the computation of rentals and royalties based upon acreage, shall be deemed to comprise exactly 82.5 acres, whether there actually be more or less." The heart of the dispute is that the lessor claims from the production from the two drilling units royalties based on the 82.5 acres, as estimated, rather than on his actually owned acreage of 70.24 acres. Defendants argue that "royalties based on acreage" has limited application in the lease and applies only to certain royalties paid on a per acre basis.
Harriet S. Daggett in Mineral Rights in Louisiana, (1939 Ed., p. 173) sets forth the following concept of royalty:
Royalty is defined in 58 C.J.S. Mines and Minerals § 213, p. 537, to be: "* * * a share of the product or profit reserved by the owner for permitting another to use the property * * * the compensation provided for the privilege of drilling for oil and gas, consisting of a share in the oil and gas produced under existing leases * * *." See also Vincent, et al. v. Bullock, et al., 192 La. 1, 187 So. 35, 39 (1939).
The meaning and implications of the term "royalty" are affected and to a large extent controlled by its use in the contract between the parties. Such contracts as oil and gas leases have the effect of law upon those who form them, and none except the parties can abrogate or modify them. LSA-C.C. Art. 1945. Apposite here are certain principles of interpretation provided by the Civil Code, succinctly stated in Vincent, et al. v. Bullock, et al., supra, page 39, 187 So. page 39:
It was observed in Coyle, et al. v. North American Oil Consolidated, et al., 201 La. 99, 9 So.2d 473, 478, (1942) that:
The words "bonus", "rental" and "royalty" which frequently appear in and are used in connection with oil and gas leases are to be understood in the ordinary and popular sense. In common usage "bonus" has been held to mean the consideration paid or agreed to be paid for the execution of the lease; "rental" to mean the consideration for the privilege of delaying drilling operations; and "royalty" a share of the production or the proceeds therefrom reserved to the owner for permitting another to use the property. Words & Phrases, Per. Ed., Vol. 5, p. 672; Vol. 37A, p. 600. The above reference appears in Texas Co. v. Fontenot, 200 La. 753, 8 So.2d 689 (1942).
The lease involved in this controversy provides as to royalties based on acreage that the lessor or land owner shall be paid at a fixed amount of one or two dollars per acre, as the case might be, where under certain conditions production is shut in, or he shall receive his share of, or the value thereof, of the production. Royalty payable on a per acre basis is sometimes referred to simply as acreage based royalty, whereas royalty payable from production is called production royalty. Royalty payments based only on the number of acres, or accounted for by a fixed sum, is in the nature of a payment in lieu of production as it accrues by reason of the fact that the well is not on production, or shut in. As indicated in Article 6 of the lease, provision is made for the lessor's share of royalty from production, 6(a); and for royalties payable on a per acre basis in Articles 6(e), 7, and 11(d). These payments are referred to as acreage based royalties in Articles 7 and 13.
By virtue of the language employed in the lease, it is clear to us that royalty based upon acreage and acreage based royalty are synonymous and mean one and the same thing. As heretofore noted, payment of these royalties is based solely on the number of acres assigned to the leased premises, whereas the payment of production royalties is influenced by many other factors, especially those affecting the volume of production. Where production is from a well situated on a drilling unit created through declaration or contract, as in the instant case, or by order of the regulatory authority, royalties paid from production must conform to a standard rule of computation that will insure equitable and fair accounting to the several interests involved. The use of estimated acreage as a factor in determining production royalties could thus create undesirable and unfair results.
A question arises as to whether under the shut in gas provisions of Article 6(e) or Force Majuere clause of Article 11(d), payments made to the land owner are actually royalty payments, or whether in fact, they are rental payments. Risinger v. Arkansas-Louisiana Gas Co., et al., 198 La. 101, 3 So.2d 289 (1941), regarded such payments as royalty. It is pointed out by Leslie Moses in "Problems in Connection with Shut-In Royalty Provisions in Oil and Gas Leases", 23 T.L.R. 374, 377, that the fact that the clause labels the payment royalty does not necessarily make it a royalty payment, but it is indicative of the intent of the parties to the lease to consider such payments royalty.
Where, as in this instance, the acreage of the leased premises is estimated, the purpose is to foreclose uncertainty as to
The primary question under consideration, however, is whether royalties based upon estimated acreage as used in Article 1 of the lease are inclusive of royalties from production. Our answer must be in the negative. "Acreage based royalty" of "royalty based on acreage" as used in the lease has a distinct and special status and application, and refers to per acre payments as provided. The royalties payable from production may not be computed in such a manner.
If, arguendo, we should hold that payment of production royalty from a unit should be computed upon estimated acreage, then plaintiff would receive royalty in excess of his actual interest in the drilling unit. As previously pointed out such an agreement as between the parties bound by the contract is lawful, but of necessity such a payment could not be allowed to infringe upon the rightful shares of other royalty owners of the mineral production. Such a complication furnishes a further reason why royalties based upon acreage have a significant meaning and require different means of satisfaction. After reading Article 13 of the lease, we hold that computation of the royalty payments to plaintiff from production must conform to the manner therein provided, viz.:
Lessor's mineral interest in the production from the wells on the two separate 160 acre units must be in the proportion of plaintiff's actual acreage in the unit to the full undivided mineral interest in the unit, or in the ratio of 51.57 to 160 and 18.67 to 160, respectively.
In concluding that production royalties from established drilling units should be based upon actual acreage, we are in disagreement with the judgment which has been appealed to this court, and, therefore, it will be reversed.
It is ordered, adjudged and decreed that the judgment from which appealed be annulled, set aside and reversed, and it is now ordered that there be judgment in favor of the defendants, Humble Oil and Refining Company, Cheyenne Oil Corporation of Delaware, Milton Crow, Inc., and Oil and Gas Ventures, Inc., and against Hardy N. Greene, plaintiff, rejecting plaintiff's demands; that there be recognition of the validity of that certain oil and gas lease dated March 23, 1955, filed under Register 204, 621, Book 213, page 105, Claiborne Parish Conveyance Records, covering:
and that the above described tract of land shall be considered as containing 70.24 acres, as shown by actual survey of Danny Moore, for the purpose of computing plaintiff's production royalty from the drilling units formed in pursuance to declarations of pooling:
(1) dated October 15, 1958, establishing a drilling and production unit composed of the East 160 acres of Section 6, Township 23 North, Range 7 West, including 51.7 acres of plaintiff's property described above; and
(2) dated May 15, 1959, establishing a drilling and production unit composed of
Plaintiff-appellee is cast for all costs.
BOLIN, J., concurs in part and dissents in part, giving written reasons.
BOLIN, Judge (concurring in part and dissenting in part).
I think this Court's refusal to cancel the oil and gas lease in question based on a finding that a bona fide dispute existed as to the amount of royalties due plaintiff is sound. See Rudnick et al. v. Union Producing Co., et al., 209 La. 943, 25 So.2d 906 (1946) and Bailey et al. v. Meadows et al. (La.App., 2 Cir., 1961)
As the only issue tendered is plaintiff's right to cancellation, I seriously doubt our wisdom in going further and making any judicial pronouncements as to the meaning of the disputed acreage provision of the lease. While our zeal in going beyond our required duties is to be commended if it results in a real service to the litigants, such effort might well be characterized as our voluntary assumption of the risk of making two mistakes when we should have limited ourselves to the possibility of making only one.
I have serious doubts as to the true intent of the parties as related to the disputed provision of the lease. It is because of such doubts that I think defendants were justified in withholding royalty payments. In any event, if plaintiff sees fit subsequently to initiate different proceedings in order to determine what rights flow to him under such provision, I think he should be allowed to do so without being prejudiced by our enunciations in the instant case. The issues might be presented in an entirely different light if the relief sought had not been the harsh remedy of cancellation.
I, therefore, respectfully dissent from that portion of our opinion enunciating any views beyond rejecting plaintiff's demand for a cancellation of the oil and gas lease because of a bona fide dispute as to the amount of royalties due.
Rehearing denied; BOLIN, J., dissents.
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