Diamond Shamrock Corp. v. Harris, 84-83
| Decision Date | 17 December 1984 |
| Docket Number | No. 84-83,84-83 |
| Citation | 284 Ark. 270,681 S.W.2d 317 |
| Parties | DIAMOND SHAMROCK CORPORATION, Appellant, v. John HARRIS and Betsy Harris, Appellees and Cross Appellants, Arkla, Inc., Cross Appellee and Cross Appellant. |
| Court | Arkansas Supreme Court |
Warner & Smith, Fort Smith, for appellant.
McMath Law Firm, P.A., Little Rock, for Harris.
Daily, West, Core, Coffman & Canfield by Jerry Lee Canfield and Douglas M. Carson, Fort Smith, for Arkla.
RICHARD N. MOORE, Jr., Special Justice.
This case originated as a suit by John Harris and Betsy Harris, herein referred to as "Harris", against Diamond Shamrock Corporation and Arkansas Louisiana Gas Corporation, referred to as Arkla, Inc., and is before the Supreme Court of the State of Arkansas pursuant to Rule 29(1)(n). The subject of Appellee Harris' complaint was an oil and gas lease executed between Harris and Diamond Shamrock on July 1, 1977, involving certain acreage purchased in May of 1974 and owned by Harris. At the time the oil and gas lease between Diamond Shamrock and Harris was executed, there was in existence a long-term gas purchase contract between Appellant Diamond Shamrock and Arkla, Inc., that had been executed on December 7, 1971, and covered an area which included the Harris property. By the terms of the long-term gas purchase contract, Arkla agreed to purchase at a specified price the gas produced by Diamond Shamrock from wells in several counties, including the area in Pope County, Arkansas, where the Harris lands are located. When Harris purchased the property in May, 1974, an abstract of the property was prepared but did not include nor reveal the existing long-term gas purchase contract between Diamond Shamrock and Arkla, Inc. Harris later discovered that a recording supplement, evidencing the material terms of the long-term gas purchase contract, had been recorded in the records of the Circuit Clerk of Pope County on December 13, 1971, but appeared nowhere in his chain of title.
Subsequent to the purchase of the property involved herein, Harris executed an oil, gas, and mineral lease on July 1, 1977 with Diamond Shamrock. This lease included, along with other acreage, the thirty-four (34) mineral acres located in Section 10, Township 9 North, Range 20 West, in Pope County, Arkansas, belonging to Harris. Unknown to Harris at that time, this area was also included by the terms of Diamond Shamrock's 1971 gas purchase agreement with Arkla, Inc.
The gas lease contract between Harris and Diamond Shamrock was represented to Harris by Diamond Shamrock to be the same standard form that was used with other property owners in the area and contained the royalty clause, as follows:
"Lessee shall monthly pay lessor as royalty owned gas, including casing head gas, and other gaseous substance produced from said land and sold or used off the premises, or for the extraction of gasoline or other products therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells, the royalty shall be one-eighth of the amount realized from such sale."
It is this clause that sets the price that Appellant Diamond Shamrock has contracted to pay Harris under their lease for any gas produced from the Harris property. The Appellant asserts that the market value, referred to in the quoted royalty clause, was actually established prior to the time of the 1977 lease agreement between Diamond Shamrock and Harris by the terms of the 1971 gas purchase agreement between Diamond Shamrock and Arkla, Inc. The agreement set the price that Arkla, Inc. would pay to Diamond Shamrock for gas produced and supplied from the area that included the property owned by Harris.
Harris alleged in the trial court that the amount he receives from Diamond Shamrock for the gas attributable to his property should not be set by the gas purchase contract between Diamond Shamrock and Arkla, Inc. Harris asks that his compensation be set by the market value of one-eighth of the gas produced as stated in his lease agreement with Diamond Shamrock or, in the alternative, that the court grant a cancellation of the gas lease between Harris and Diamond Shamrock due to Harris' lack of notice of the 1971 gas purchase agreement at the time he entered into the lease agreement with Diamond Shamrock.
On November 14, 1983, the trial court held:
1. That the gas purchase contract between the Defendant Diamond Shamrock Corporation and Arkla, Inc., formerly Arkansas Louisiana Gas Company, executed on the 7th day of December, 1971, is not applicable to Plaintiff's oil and gas lease executed to Diamond Shamrock Corporation on the 1st day of July, 1977.
2. That the pleadings are amended to conform to the proof and the Court finds that the oil and gas lease between Defendant Diamond Shamrock Corporation and Plaintiffs Harris provides for Plaintiffs to be paid monthly, as royalty on gas, one-eighth ( 1/8) of the market value thereof.
3. The best evidence of the market value is the price paid other participants in the Lynch No. 1 Well, as shown in Plaintiffs' Exhibit No. 15, which stated that the other participants as of January 5, 1983, were being paid N.G.P.A. Section 102 3.249 cents/M.M.B.T.U.
4. Plaintiffs are not entitled to cancellation, but are entitled to performance of their oil and gas lease, just as if the gas purchase contract aforementioned did not bind them in any way.
5. Plaintiffs are entitled to an accounting for past due royalties at the market value, as determined by what the other participants were paid on the same well as set out in Plaintiffs' Exhibit No. 15, which indicates that they were being paid N.G.P.A Section 102 3.249 cents/M.M.B.T.U., as of the 5th day of January, 1983.
6. That Defendant Diamond Shamrock Corporation will pay Plaintiffs Harris future royalties at the same rate the aforementioned participants are being paid.
7. That Defendant Diamond Shamrock Corporation shall pay Plaintiffs Harris accrued interest at the rate of ten percent (10%) per annum on all past due royalties from the date they should have been paid.
8. That there is no contractual relationship between the Plaintiffs and the Defendant, Arkla, Inc., so that the Defendant, Arkla, Inc., is not responsible, nor is it obligated by any of the findings and orders made by this Court in favor of the Plaintiffs against the Defendant Diamond Shamrock.
9. The Plaintiffs shall have a lien on the oil and gas lease aforementioned and the gas produced therefrom to secure payments of past and future royalties, and said lien shall apply to both Defendants, Diamond Shamrock and Arkla, Inc.
10. This Court shall retain jurisdiction for accounting of the past due royalties and enforcement of this Order.
Diamond Shamrock contends on appeal that the trial court committed error when it found that Appellant's royalty obligation was the market value of one-eighth ( 1/8) of the...
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