Foster v. Atlantic Refining Company

• Decision Date: 29 April 1964
• Docket Number: No. 20642.,20642.
• Parties: Zara FOSTER et al., Appellants, v. The ATLANTIC REFINING COMPANY, Appellee. The ATLANTIC REFINING COMPANY, Appellant, v. Zara FOSTER et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

329 F.2d 485 (1964)

Zara FOSTER et al., Appellants, v. The ATLANTIC REFINING COMPANY, Appellee.

The ATLANTIC REFINING COMPANY, Appellant, v. Zara FOSTER et al., Appellees.

No. 20642.

United States Court of Appeals Fifth Circuit.

March 26, 1964.

Rehearing Denied April 29, 1964.

COPYRIGHT MATERIAL OMITTED

Homer E. Dean, Jr., for Lloyd, Lloyd & Dean, Alice, Tex., Allen Wood, for Fischer, Wood, Burney & Nesbitt, Corpus Christi, Tex., J. G. Knight, Beeville, Tex., for appellants.

John G. Seaman, Corpus Christi, John W. Stayton, Black & Stayton, Austin, Tex., for appellee Atlantic Refining Co.

Before HUTCHESON, BREITENSTEIN,^* and BELL, Circuit Judges.

BREITENSTEIN, Circuit Judge.

We have here a complex controversy between lessors and lessee over their respective rights under a Texas oil and gas lease. The issues concern the failure to account for royalties due, to pay compensatory royalties, to produce and market, and to develop. The factual issues were presented to a jury which answered numerous special interrogatories. The trial court gave judgment in favor of the lessors and against the lessee in the sum of $154,931.29. Both sides have appealed.

In 1944 the Fosters, appellees and cross-appellants herein referred to as lessors or as Fosters, gave an oil and gas lease to The Atlantic Refining Company, appellant and cross-appellee herein referred to as lessee or as Atlantic. The lease covered 1,500 acres located in the Hagist Ranch Field, Duval County, Texas. The Hagist Ranch Field is a multi-reservoir field which produces both oil and gas. We shall discuss each appeal and issue separately.

I.

ATLANTIC APPEAL

(a) Failure to account for royalties.

The lessors contend that the lessee has not paid gas royalties to which they are entitled. The royalty clause reads in pertinent part:

"The conventional royalties to be paid by Lessee are: (a) On oil and gas, including all hydro-carbons, one-eighth (1/8th) of that produced and saved from said land, the same to be delivered to the credit of the Lessor into the pipe line and to be sold at the market price therefor prevailing for the field where produced when run; * * *."

In 1950, lessee made a 20-year gas sales contract with Texas Illinois Natural Gas Pipeline Company covering the Foster and other leases owned by Atlantic in the Hagist Ranch Field. The prices to be paid by the pipeline company per mcf were:

"7.0180 cents during the first five year period; 8.5531 cents during the next five year period; and 9.4304 cents during the third five year period.

"For the fourth five year period the price shall be the fair and reasonable value thereof as of the commencement of said period, taking into consideration the price then being paid for gas of similar quantity and quality sold for similar purposes in the general area of the Hagist Ranch Area, provided, however, that in no event shall such price be less than 10.0883 cents for each 1,000 cubic feet of gas."

The uncontroverted evidence is that the price prevailing for the field was 13 cents in 1957 and 14 cents for the period 1958-1962.¹ The Fosters claim that they are entitled to royalties based on these prices rather than on the prices fixed by the 1950 gas sales contract. The trial court agreed with the Fosters and, on this issue, gave them judgment for $75,012.51, the difference between what they were paid and what the court held they should have been paid.

The practicalities of the gas industry require that gas be sold under long-term contracts because the pipelines must have a committed source of supply sufficient to justify financing, construction, and operation.² The impact of this economic fact on the royalty clause of the Foster-Atlantic lease produces the problem presented here.

Undisputed testimony for Atlantic is that at the time it made the 1950 contract with Texas Illinois it received a higher initial price and an agreement for a substantially higher daily take of gas than could have been negotiated with the other two pipelines operating in the area.³ The 13-cent and 14-cent prices on which the Fosters rely were established by the testimony of an expert who directed particular attention to four long-term contracts made in 1949, 1952, and 1956, and are not controverted by Atlantic.

Atlantic says that compliance with the royalty provision of the lease as interpreted by the Fosters and the trial court is impossible. It argues that no pipeline or other purchaser will buy large quantities of gas on a day to day or other short-term basis. In this the jury agreed as it answered in favor of Atlantic interrogatories presenting the questions of the salability of the gas on a day to day, month to month, or year to year basis. As we see the case these factors are immaterial. The Fosters make no claims based on short-term fluctuations in price. Instead they say that the market price of gas in 1957 was 13 cents and in the period 1958-1962 was 14 cents. Atlantic offered no evidence of day to day, month to month, or year to year fluctuations in price. This court said in Phillips Petroleum Co. v. Bynum, 5 Cir., 155 F.2d 196, 198, that: "* * * When seeking market value of gas at the well we cannot require the application of rules of daily sales and daily quotations when there is no showing that such sales and quotations occur." The record conclusively establishes that the market price of the gas prevailing in the field when the gas was delivered to the pipeline was 13 cents in 1957 and 14 cents in the 1958-1962 period.

The impossibility argument is reduced to the question of the possibility of the inclusion in the 1950 contract of escalation provisions which would have assured the lessees the prevailing prices during the periods in question in this suit. Atlantic says, and the jury found, that such provisions could not have been incorporated in a contract having the initial price and delivery quantity agreements contained in the 1950 contract. The Fosters do not dispute this but say that such impossibility is no excuse.

The inability of Atlantic to make a gas sales contract with escalation provisions is beside the point. The obligation of Atlantic to pay royalties is fixed and unambiguous. It made the gas sales contract with full knowledge of this obligation and did nothing to protect itself against increases in price. The fact that its purchaser would not agree to pay the market price prevailing at the time of delivery does not destroy the lease obligation. The case falls within the rule thus stated in Ellwood v. Nutex Oil Co., Tex.Civ.App., 148 S.W.2d 862, 864:

"* * * One who unconditionally obligates himself to do a thing possible of performance, must be held to perform it (citing cases); and though performance, subsequent to the contract, may become difficult or even impossible, this does not relieve the promisor, and particularly where he might have foreseen the difficulty and impossibility (citing cases)."

When it made the gas sales contract, Atlantic took the calculated risk of that contract producing royalties satisfactory to the lease terms. The fact that increases in market prices have made the lease obligations financially burdensome is no defense.

Atlantic urges that the market price is the price at which the gas was sold in 1950. Developing this point it first says that the phrase "when run" applies to oil but not to gas on the theory that a "run" is a transfer of crude oil from stock tanks to a pipeline.⁴ We see no reason why the phrase may not apply to gas and mean the time of delivery of gas from the well to the pipeline. Indeed, a witness for Atlantic so testified.⁵

Atlantic also says that the gas was sold in 1950 for future delivery. The difficulty is that under a Texas decision, Martin v. Amis, Tex.Com.App., 288 S. W. 431, 433, the 1950 contract was an executory contract for the sale of gas with an executed sale of gas being effected when the gas came into possession of the pipeline.

Atlantic argues that it is only required to use reasonable diligence in selling the Foster royalty gas and that the 1950 contract was not improvident. These argubeg the question. The royalty provision is clear. Granting that the 1950 contract was provident when made, that fact does not change the royalty provisions.

Stripped of all the trimmings Atlantic's position is simply: We cannot comply. This is no answer. The lease calls for royalty based on the market price prevailing for the field where produced when run. The fact that the ascertainment of future market price may be troublesome or that the royalty provisions are improvident and result in a financial loss to Atlantic "is not a web of the Court's weaving."⁶ Atlantic cannot expect the court to rewrite the lease to Atlantic's satisfaction.

This brings us to the contention of Atlantic that the lessors ratified the 1950 contract by accepting the royalties payable thereunder and are now estopped to claim royalties based on a higher market price. Atlantic relies on the principle that ratification is established where a principal, though having no prior knowledge of the unauthorized acts of his agent, retains benefits after acquiring full knowledge of those acts.⁷

The accepted principles of agency and estoppel do not apply in the circumstances of this case. Atlantic had the right to make a sales contract for lessors' gas. That contract was valid and the lessors could do nothing about it. In that contract Atlantic warranted its title and agreed to pay royalties "in accordance with the terms of the respective leases." The facts and law establish the right of the Fosters to a royalty based on a higher price than that provided in the 1950 contract. This court has held that the acceptance by the lessors of less royalty than that to which they were entitled does not "extinguish the entire debt nor work an estoppel."⁸ By keeping less than was due them, and something to which they were entitled in any event, the Fosters have not ratified the act of Atlantic in...