SUN OIL CO. (DELAWARE) v. MADELEY

GREENHILL, Chief Justice.

This case involves the construction of an oil and gas lease. It provides a 1/8th royalty, about which there is no problem. It is also not disputed that the lease reserves to lessors one-half the net profits from the 7/8ths working interest oil. The principal issue is whether lessors are entitled to one-half the proceeds from the 7/8ths working interest gas, casing head gas and condensate ("working interest gas").

Martha Foster Madeley and others, as lessors, brought suit against Sun Oil Company, as lessee, for declaratory judgment as to the proper interpretation of the lease and for recovery of damages. Both the lessors and Sun moved for summary judgment.

After severing lessors' claim for attorney's fees, the trial court granted lessors' motion for summary judgment. The trial court found that the lease obligated Sun to account to lessors "for one-half of the 7/8ths working interest oil, including condensate, and one-half of the 7/8ths working interest gas, including casinghead gas" and awarded damages. The court of civil appeals affirmed. 610 S.W.2d 798. On motion for rehearing one justice dissented. The dissent was of the view that the majority had impermissibly considered extrinsic evidence in arriving at the meaning of an admittedly unambiguous contract.

Although Sun and lessors cannot agree on the interpretation of the lease, they do agree that the lease is unambiguous. We also consider the lease unambiguous. Our interpretation of it is that the lease does not require that Sun pay lessors the proceeds from one-half the working interest gas, casinghead gas or condensate. Accordingly, the judgments of the courts below are reversed. We render judgment that lessors take nothing.

In December 1932, W. N. Foster and Keystone Mills Company, the two original lessors, executed the lease in controversy. The lease was very favorable to lessors because the property was near existing oil production and because Foster, an attorney knowledgeable in oil and gas matters, understood the value of lessors' property. From the commencement of production until 1977, the amount of gas produced was relatively small. Sun paid lessors the royalties, and one-half the working interest oil and one-half the working interest gas. In 1977, however Sun completed gas wells in a deeper zone capable of producing larger volumes of gas. Sun thereafter revoked the division orders under which it had previously paid lessors one-half of the working interest gas. It claimed that these payments were not required by the lease. Lessors responded by filing the present action seeking a declaratory judgment interpreting lessors' rights under the lease and for damages for payments wrongfully withheld by Sun.

As stated, Sun and lessors agree there is no ambiguity in the provision of the 1932 lease. The parties, however, construe the lease quite differently with respect to their rights to the proceeds from working interest gas. Lessors maintain that, from the four corners of the lease, the intention is plainly expressed that the parties are to share the entire working interest equally. This interpretation of the lease is confirmed, lessors submit, by Sun's conduct of accounting to them for one-half the entire working interest for over forty years. Sun contends, on the other hand, that lessors' right to the profits from production can be established only by express reservation in the lease, and that the lease reserves to lessors one-half of the working interest oil, but no part of the working interest gas. Since mere disagreement over the interpretation of the lease does not make it ambiguous, we must determine which party's interpretation is correct.

In construing this lease, it is our task to seek the intention of the parties as that intention is expressed in the lease. McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957). The courts will enforce an unambiguous instrument as written; and, in the ordinary case, the writing alone will be deemed to express the intention of the parties. Rutherford v. Randall, 593 S.W.2d 949 (Tex.1980); City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515 (Tex.1968); Smith v. Liddell, 367 S.W.2d 662 (Tex.1963); Woods v. Sims, 154 Tex. 59, 273 S.W.2d 617 (1955).

The lease provides for customary royalties. Each of the various substances expected to be produced from the premises is distinguished in Subdivision IV of the lease which provides in part:

Royalties to be paid by Lessee are:

From this Subdivision it is apparent the parties understood the difference between oil and gas and intended to treat each substance separately.1

Subdivision V is an unusual provision but there is no dispute regarding its effect. The parties agree that this Subdivision pertains solely to working interest oil. Subdivision V provides, in part:

Subdivision V then obligates Sun to purchase or sell lessors' share of working interest oil after deducting the charges provided in Subdivisions VIII and IX.

The parties' major point of disagreement is the proper construction of Subdivision VIII, which provides:

This provision requires Sun to bear the costs of drilling and completing the wells. The subdivision, however, also establishes a joint account against which the expenses of producing and lifting the oil, including a 6% overhead factor, is to be charged. Subdivision VIII goes on to provide that the joint account "shall also reflect all receipts and revenues for oil, gas and other minerals produced and saved hereunder."

Lessors emphasize this language. They conclude that it obligates Sun to credit them with one-half the proceeds from working interest gas. Lessors contend the joint account is to be divided equally after deducting the specified expenses. Since all oil and gas revenues are reflected in this joint account, lessors conclude one-half the proceeds from working interest gas is due them. Lessors submit Subdivision XVI also evidences the parties' intent that the entire working interest be divided equally.2 Subdivision XVI pertains to the payment of ad valorem taxes. According to lessors, the subdivision requires them to pay one-half the ad valorem taxes on the entire working interest. Since Subdivision XVI makes no distinction between working interest oil and working interest gas, lessors submit that none was intended elsewhere in the lease.

Lessors also contend the last paragraph of Subdivision IV, as amended in 1935, confirms their interpretation of the lease. The amended paragraph reads:3

In two places the amendment refers to "deliveries to lessors of one-half (½) of all the oil, gas and other minerals accruing to the seven-eighths (7/8ths) working interest..." and to "accounting for both royalty, and the working interest oil, gas and other minerals deliverable to lessors hereunder...." Lessors urge that this language confirms the contractual obligation of Sun to account to them for one-half the working interest gas proceeds.

Lessors further emphasize that by 1935, Sun had obtained production and submitted a division order to lessors. Although casing head gas was being produced at this time, Sun did not have separate division orders covering oil and gas. Sun simply accounted to the lessors for one-half the entire working interest. Lessors also point out that Sun's internal records from this period reflect that the working interest in casing head gas be divided equally between Sun and lessors. Lessors likewise point out subsequent division orders and Sun's practice, from first production until 1977, of accounting to lessors for the proceeds from one-half the working interest gas.

Sun responds that the lease is unambiguous and reserves absolutely no part of working interest gas to lessors. Sun submits that Subdivision VIII is simply a bookkeeping provision. Its main purpose is to divide the expense of producing the oil between Sun and lessors. The only mention of gas is the requirement that the joint account "reflect all receipts and revenues for oil, gas and other minerals." According to Sun, the bookkeeping requirements of Subdivision VIII and the reporting requirements of Subdivision IX operate together to provide lessors with full disclosure of all costs and revenues affecting their interests under the lease.

Sun observes that Subdivision VI is inconsistent with lessor's contention that the parties intended to divide both working interest oil and gas equally. Subdivision VI requires Sun to protect the leased premises against drainage.4 If an oil well is brought in on adjacent property, Sun must drill an offset well. By contrast, if a gas well is brought in on adjacent land, Sun has the option to pay lessors a royalty equal to one-sixteenth of the net revenue derived from the neighboring gas well in lieu of drilling an offset well. This contrast, Sun submits, supports its contention that the parties intended to treat oil production and gas production differently.

Sun argues that its previous practice of accounting to lessors for one-half of working interest gas was a mere gratuity which Sun withdrew upon obtaining production of larger volumes of gas in 1977. Sun also explains that the references to working interest gas in the 1935 amendment were simply the result of careless drafting. Sun points out that the amendment continues "... deliveries to lessors of one-half (½) of the oil, gas and other minerals accruing to the seven-eighths (7/8ths) working interest as more particularly provided hereafter...." [Emphasis ours.] Lessors' participation in the working interest oil provided Subdivision V is the only provision appearing thereafter in the lease which reserves to lessors any part of the working interest.

In addition to their difference of opinion on the proper interpretation of the contract, the parties also dispute the role of extrinsic evidence in construing an unambiguous contract. Sun argues the courts may only consider extrinsic evidence after the instrument itself is first found to be ambiguous. Lessors argue that when the construction of a contract is at issue, the court must first consult surrounding circumstances to determine whether or not the contract is ambiguous. The confusion concerning the proper rule is demonstrated by the fact that both parties rely on City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515 (Tex. 1968), to support their respective contentions.

In Pinehurst, we found the contract to be unambiguous and wrote:

Thereafter, in considering what the parties intended by the words used in the contract, we said:

Lessors state the proper rule. Evidence of surrounding circumstances may be consulted.5 If, in the light of surrounding circumstances, the language of the contract appears to be capable of only a single meaning, the court can then confine itself to the writing. Consideration of the facts and circumstances surrounding the execution of a contract, however, is simply an aid in the construction of the contract's language. There are limits. For example, when interpreting an integrated writing, the parol evidence rule circumscribes the use of extrinsic evidence. Hence, in Lewis v. East Texas Finance Company, 136 Tex. 149, 146 S.W.2d 977, 980 (1941), we said:

Although lessors urge that we examine the facts and circumstances surrounding the execution of the lease, this evidence does not aid their construction. The record demonstrates that lessors were in a strong bargaining position in 1932 because their property was adjacent to a proven oil field. W. N. Foster, who negotiated this lease for the landowners, was an attorney experienced in oil and gas. We may assume that he understood the difference in the terms oil, gas, casing head gas and condensate. The lease bears this out, since each substance is treated distinctly. Finally, in 1932, gas was of relatively little value and there was little gas production. These facts explain why the lease devotes great detail to the working interest oil while hardly mentioning the working interest gas.

Lessors argue that an internal memorandum from Sun's files, prepared during negotiations, supports their contention that the parties intended to divide the entire working interest equally. In outlining the terms of the lease, the memorandum recites:

The owners are to execute a lease to us on our general lease form modified so as to provide for the following:

In our view this memorandum supports Sun's contention that lessors bargained for only one-half the working interest oil.

The court of civil appeals, however, has adopted lessors' construction, holding that the lease obligates Sun to credit lessors with one-half the proceeds from working interest gas. In so holding, the court of civil appeals considered not only the wording of the lease and the circumstances surrounding its execution, but also Sun's conduct of accounting to lessors for one-half the proceeds from working interest gas over an extended period of time. The court's construction of the lease depends more upon Sun's subsequent conduct than it does upon the unambiguous language of the lease.

We think the court of civil appeals erred in considering this extrinsic evidence. Only where a contract is first found to be ambiguous may the courts consider the parties' interpretation. Superior Oil Co. v. Stanolind Oil & Gas Co., 150 Tex. 317, 240 S.W.2d 281 (1951); Lone Star Gas Co. v. X-Ray Gas Co., 139 Tex. 546, 164 S.W.2d 504 (1942). Where the meaning of the contract is plain and unambiguous, a party's construction is immaterial. Harriss v. Ritter, 154 Tex. 474, 279 S.W.2d 845 (1955); Richardson v. Hart, 143 Tex. 392, 185 S.W.2d 563 (Tex.1945).

Since we agree the lease is unambiguous, we shall confine our review to the lease and enforce it as written. The lease conveys a determinable fee estate in the oil, gas and minerals to the lessee, Sun. Texas Co. v. Davis, 113 Tex. 321, 254 S.W. 304 (1923); Stephens County v. Mid-Kansas Oil and Gas Co., 112 Tex. 160, 254 S.W. 290 (1923). From this conveyance, the lessors have reserved the customary royalties and have also carved out a share in the profits from working interest oil, subject to certain specific deductions. While Subdivision VIII clearly requires Sun to maintain books reflecting all receipts and revenues attributable to oil and gas production, it does not obligate Sun to pay any of those revenues to lessors. To find such an obligation it is necessary to look first to Subdivision IV, which sets forth the royalties to which lessors are entitled, and then to Subdivision V, which provides that Sun shall deliver one-half of the working interest oil to the credit of lessors. The lease does not reserve to lessors any share in working interest gas, nor does the lease obligate Sun to pay lessors any part of the proceeds from working interest gas. Since there is no language limiting the conveyance with respect to working interest gas, we will not assume the parties intended for lessors to participate in the proceeds from working interest gas. Fox v. Thoreson, 398 S.W.2d 88 (Tex. 1966).

We also reject lessors' construction of the 1935 amendment to the lease. This amendment was not intended to enlarge lessors; participation in working interest gas. Lessors' contention is that the amendment simply confirms Sun's obligation to account to them for working interest gas and does not in itself create lessors' right to working interest gas. The amendment cannot confirm an obligation which is not otherwise expressed in the lease.

In summary, the lease does not obligate Sun to account to lessors for any part of working interest gas. Since the lease is not ambiguous and does not require that Sun account to lessors for one-half the working interest gas, the court of civil appeals erred in resorting to extrinsic evidence to create such an obligation. Universal C.I.T. Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154 (1951); Remington Rand, Inc. v. Sugarland Industries, 137 Tex. 405, 153 S.W.2d 477 (1941); Lewis v. East Texas Finance Co., 136 Tex. 149, 146 S.W.2d 977 (1941).

In addition to their construction of the lease, lessors have urged several alternative grounds for recovery, including adverse possession,6 estoppel, waiver and ratification. While the trial court adopted lessors' construction of the lease, it also granted lessors' Motion for Partial Summary Judgment in all things, which would include these alternative grounds. The court of civil appeals overruled all of Sun's points of error including those directed at lessors' alternative theories. We must therefore consider these alternative theories.

Lessors' alternative theories are premised on the fact that Sun shared the proceeds from working interest gas with lessors for over 40 years. During this period Sun issued division orders reflecting lessors' entitlement to one-half the working interest gas proceeds. Also important to lessors is an internal memorandum of Sun's, dated December 26, 1962. In apparent response to some question that lessors were receiving too much under the current division orders, a member of Sun's legal department advised: "[W]e have concluded to continue as heretofore, based upon our consideration of the various aspects of the matter at this time...." It was not until 1977 that Sun revoked its division orders notifying lessors that they had been incorrectly credited with a share of working interest gas in the past.

Lessors argue that Sun questioned the proper construction of the lease in 1962 and that responsible officials of Sun decided to continue the previous practice of crediting lessors with a share of working interest gas. Lessors submit that this action had legal consequences which can be expressed in terms of estoppel, ratification or waiver. Lessors urge that the 1962 internal memorandum is a ratification of the parties' mutual construction of the lease or, alternatively, a waiver of Sun's rights under the lease. Likewise, Lessors argue, Sun's conduct creates an estoppel against Sun to assert, at this late date, a construction different from the mutual construction of the parties.

Since the lease does not require Sun to pay lessors any part of the working interest gas, lessors must view Sun's past conduct as a promise to continue paying them a share of the future proceeds from working interest gas. Estoppel, however, is a defensive theory. It does not create a contract right that does not otherwise exist. Wheeler v. White, 398 S.W.2d 93 (Tex. 1965); Southland Life Insurance Co. v. Vela, 147 Tex. 478, 217 S.W.2d 660 (1949). The damages recoverable by a party claiming estoppel are not measured by the profits that such party's reliance led him to expect, but instead are limited to the amount necessary to compensate that party for a loss already suffered. Wheeler v. White, cited just above; E. F. Hutton & Co., Inc. v. Fox, 518 S.W.2d 849 (Tex.Civ. App. Dallas 1974, writ ref'd n. r. e.). Sun's conduct in paying lessors something to which they were not entitled under their lease agreement does not create a right in lessors to continue receiving such payments in perpetuity.

The lessors' alternative theories of estoppel, ratification and waiver are an attempt to extend the estoppel effect of division orders recognized most recently by this Court in Exxon v. Middleton, 613 S.W.2d 240 (Tex.1981). In Middleton, we held that payments made and accepted pursuant to a division order are valid and binding until the division order is revoked, even though the division order modifies the express terms of the underlying lease. Exxon v. Middleton, supra at 250. Lessors' alternative theories require the conclusion that division orders permanently amend underlying lease provisions as a matter of law. This goes beyond our holding in Middleton.

The 1932 lease, as amended, does not reserve to lessors the right to participate in the proceeds from the 7/8ths working interest gas, casing head gas or condensate. Accordingly the judgments of courts below are reversed and judgment is rendered that lessors take nothing.