Henry v. Ballard & Cordell Corp.
| Decision Date | 02 July 1982 |
| Docket Number | No. 81-C-2364,81-C-2364 |
| Court | Louisiana Supreme Court |
| Parties | W. F. HENRY, Jr., et al. v. The BALLARD & CORDELL CORPORATION, et al. Milford A. ROGERS v. Wiley P. BALLARD, Jr., et al. |
Jerry G. Jones, Jones, Jones & Alexander, Cameron, J. Michael Veron, Scofield, Bergstedt, Gerard, Hackett & Mount, Lake Charles, for plaintiffs-applicants.
Gene W. Lafitte, John M. Wilson, Lawrence P. Simon, Jr., and Joe B. Norman, Liskow & Lewis, Campbell C. Hutchinson, Anthony M. DiLeo and Jo Harriet Strickler, Stone, Pigman, Walter, Wittman & Hutchinson, New Orleans, William J. Guste, Jr., Atty. Gen., Ernest R. Eldred, Asst. Atty. Gen., Law Offices, Ernest R. Eldred, Baton Rouge, William C. Broadhurst, Broadhurst, Brook, Manghan, Hardy & Reed, Lafayette, Oliver P. Stockwell, Bernard H. McLaughlin, Jr., Stockwell, Sievert, Viccellio, Clements & Shaddock, Lake Charles, William J. Conrad, Frederick W. Veters, John M. McCollam, Andrew L. Gates, III, Gordon, Arata, McCollam & Stuart, New Orleans, Robert C. Smith, Karen Katz, Lake Charles, Arthur C. Watson, Watson, Murchison, Crews, Arthur & Cockern, Natchitoches, H. H. Hillyer, Jr., John C. Christian, Kennedy J. Gilly, Jr., Melanie Miller, Milling, Benson, Woodard, Hillyer, Pierson & Miller, New Orleans, C. Murphy Moss, Jr., Loretto M. Babst, Lemle, Kelleher, Kohlmeyer & Matthews, New Orleans, for amici curiae.
Plaintiff landowners seek to recover outstanding royalty payments allegedly due under several gas leases executed between plaintiffs as lessors and defendants as lessees. Where gas is produced and then sold off the leased premises, the leases provide for royalty payments to the lessors equal to a percentage or fraction of the market value of the gas sold. Definition of the term "market value" in the context of these gas leases is at the heart of this dispute. Defendants have paid royalties based upon the price received from an interstate purchaser pursuant to a long term sales contract executed in 1961. In essence, defendants maintain that the 1961 contract price is equal to the market value of the gas under the royalty provisions of the gas leases. Plaintiffs assert that royalties are to be calculated on the basis of the current market value of the gas, a value greatly in excess of the 1961 contract price.
The issue presented by this litigation was set out by the court of appeal:
Is the amount due the lessors as royalty under these leases to be based upon the prevailing market value at the time the gas was committed to the purchaser by the lessees under a long term gas sales contract, or is the royalty to be based instead upon the current market value determined on a daily basis the moment the gas is produced and/or delivered to the purchaser? Henry v. Ballard & Cordell, 401 So.2d 600 (3rd Cir. 1981), at p. 602.
As noted by the appellate court, this issue is res nova in Louisiana, although it has been the subject of considerable litigation in other jurisdictions. 1 The magnitude of interests affected by its resolution in Louisiana mandated our decision to grant writs in these consolidated cases.
The leases at issue affect property in the Cameron Pass Field in Calcasieu Parish. The royalty provisions of the respective leases read as follows:
Davis Lease No. 1, dated March 19, 1953:
Royalty Provision:
On gas, including casinghead gas or other gaseous substance and liquid hydrocarbon content thereof, 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 wells of one-eighth of the gas so sold or used; provided that on gas sold at the wells, the royalties shall be one-eighth of the amount realized from such sale; ...
Davis Lease No. 2, dated December 10, 1960:
Royalty Provision:
One-sixth ( 1/6) of the market value of the gas sold or used by Lessee in operations not connected with the land leased or any pooled unit containing a portion of said land; ...
Davis Lease No. 3, dated June 22, 1964:
Royalty Provision:
18.5% of the market value of the gas sold or used by Lessee in operations not connected with the land leased or any pooled unit containing a portion of said land; ...
Rogers Lease, dated September 7, 1962:
Royalty Provision:
On gas, including casinghead gas or other gaseous substance produced from said land and sold or used off of the premises, or used in the extraction of gasoline or other product therefrom by Lessee, the market value at the well of one-fourth ( 1/4) of the gas sold or used, provided that on gas sold at the well the royalties shall be one-fourth ( 1/4) of the amount realized from such sale; ...
The leases were found to be productive of natural gas in 1961. Pursuant to its contractual obligation to diligently market the production, 2 Ballard & Cordell executed a sale of the gas to American Louisiana Pipeline Company, an interstate purchaser of natural gas and the only available market for gas from the Cameron Pass Field in 1961.
Evidence at trial conclusively established that negotiations between Ballard & Cordell and American Louisiana were conducted in good faith and at arm's length and that the resulting sales contract was quite favorable from the standpoint of both defendants and plaintiffs-lessors. The price obtained in the sale was equal to or better than prices in comparable sales made at that time. The price escalation clause, which provided for price increases over the term of the contract, was among the best contained in any such sale. The sales contract extended for a term of 20 years, a customary term for such contracts in the natural gas industry in 1961. Long term sales contracts (extending for as long as the life of the lease) were universally insisted upon by pipeline purchasers to enable them to obtain requisite financing for the construction of capital intensive pipeline facilities. 3
Beginning with the first deliveries of gas to American Louisiana, defendants have made royalty payments to the plaintiffs landowners based on the proceeds actually received for the sale of gas production from the leases under the 1961 sales contract. In 1976, the sales contract price first became out of line with the current market value of natural gas. In 1978, as the disparity between the 1961 sale contract price and prices paid by purchasers in more recent contracts continued to increase, plaintiffs filed this suit for outstanding royalties, contending the leases provide that royalty payments must be calculated on the basis of the current market value of the natural gas.
Plaintiffs' argument relies heavily on the 1934 case of Wall v. Public Gas Service Co., 178 La. 908, 152 So. 561 (1934). In Wall, this Court was required to interpret a mineral lease royalty clause which provided for royalties based upon "the value of such gas calculated at the market price". The controversy in Wall centered on whether the royalties were to be calculated on the basis of the market price in the field, or the market price where the gas was sold (a point two miles from the field). In dicta, however, the Wall court adopted Webster's definition of market price as "the price actually given in current market dealings." (Emphasis supplied in Wall ).
The trial court held that the market value provisions of the royalty clauses at issue require that royalties be paid on the basis of current sales, including sales made in the higher-priced intrastate market, which remained unregulated until 1978. Accordingly, the court ordered defendants to account to plaintiffs from September 1976 through the date of judgment for the difference between proceeds actually received under the 1961 sales contract and the current market value of the gas attributable to the fractional share of plaintiffs.
In its opinion, the trial court adopted the following definition of market value:
"... the market value of a thing is the price which it might be expected to bring if offered for sale in the market."
On appeal, the Third Circuit reversed the trial court judgment. Acknowledging that the market value of a thing is the price which it might be expected to bring if offered for sale in the market, the court of appeal did not agree with the conclusion of the trial court that the term "market value", standing alone, clearly means current market value. Instead, the court of appeal found that the parties to these lease contracts "intended for the royalties to be governed by the market value of the natural gas which prevailed in 1961 when the gas was committed to the purchaser under the gas sales contract rather than by the current market value, to be determined on a daily basis as gas is produced and or delivered to the purchaser." 401 So.2d 600, at p. 604.
For the reasons hereinafter assigned, we affirm the decision of the court of appeal.
The ambiguity in the language of the royalty provisions arises from the failure of the parties to the lease to expressly state whether "market value" means current market value. We note that the same or similar contract language has often been interpreted by the courts of other jurisdictions, and that these cases may be clearly divided according to two distinct lines of legal reasoning.
Although the majority of jurisdictions have interpreted the ambiguity in the royalty provisions against the lessee, 4 they have done so by ignoring the practical realities of the oil and gas industry, and the obligations of the lessee to market the gas at the best possible price at the time the leases were made. These cases hold that the lessee is obligated to pay royalties based upon the current market value of the natural gas, and that this royalty obligation is unaffected by the contracts executed by the lessee for the sale of the gas.
The majority position has been most notably set forth by the Texas Supreme Court in Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866 (Tex.1968). 5 The...
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