JM Huber Corporation v. Denman

• Decision Date: 20 September 1966
• Docket Number: No. 22272.,22272.
• Citation: 367 F.2d 104
• Parties: J. M. HUBER CORPORATION, Appellant, v. William Harvey DENMAN and Jay Pumphrey, Trustees of the Estate of S. B. Burnett, Deceased, et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

367 F.2d 104 (1966)

J. M. HUBER CORPORATION, Appellant, v. William Harvey DENMAN and Jay Pumphrey, Trustees of the Estate of S. B. Burnett, Deceased, et al., Appellees.

No. 22272.

United States Court of Appeals Fifth Circuit.

September 20, 1966.

COPYRIGHT MATERIAL OMITTED

C. C. Small, Jr., Austin, Tex., Thomas O. Moxcey, Denver, Colo., William Tucker, Denver, Colo., Small, Small, & Craig, Austin, Tex., for appellant.

Cecil E. Munn, Cantey, Hanger, Gooch, Cravens & Scarborough, Fort Worth, Tex., for appellees.

Before RIVES, BROWN and MOORE,^* Circuit Judges.

JOHN R. BROWN, Circuit Judge.

As with another case this day decided,¹ this one, thought by the parties to be a private controversy, turns out to have transcendent public interest issues. In each, besides deciding the private law questions, we direct a reference to the Federal Power Commission for it to determine under the doctrine of primary jurisdiction the jurisdiction of the FPC over rates to be paid for gas royalty. Post argument consideration led the Court to the view that in the ultimate resolution of private law issues, there were problems of great public interest. The Court by memoranda to counsel in this and Weymouth (see note 1, supra) called for, and we have received, extensive helpful briefs.²

I. The Market Price Royalty Clause

The basic private legal question presented is whether under the terms of the oil and gas lease from Lessors to Lessee-Producer the amount payable as royalty is to be fixed by the stated percentage (¼th) of (a) the price received by the Lessee from its Pipeline Purchaser or (b) the market price for like gas in the field.³ This turns on the construction of the lease terms in the light of all pertinent factors.

It sharpens the relevance of facts and the significance of the trial Court's actions to bear in mind that the royalty clause in question prescribed (a) a fixed price for a ten-year period and thereafter for the period in controversy (b) the market price of such gas, but not less than the specified minimum.⁴ The Lessors contend that it is the market price⁵ without limitation to the actual proceeds while the Lessee-Producer urges that the value is fixed by the proceeds received by it from its Pipeline Purchaser.

It likewise steamlines our task to emphasize what the quarrel is not about. Contrary to the sometime colorful charges of the Lessor, the Lessee-Producer does not undertake to say that this clause (note 4, supra) is a "proceeds" rather than a "market price" standard. The Lessee-Producer gears royalty payments to the proceeds from the Pipeline-Purchaser, not because it is a "proceeds" clause, but, rather, because contemporaneous actions and other agreements limit "the market" to that afforded under the Northern Gas contract. The Lessee-Producer refuses, therefore, to get drawn into the academic debate pressed so hard by the Lessors that a market price clause is quite different from a proceeds clause.⁶ Indeed, rather than disputing this recognized distinction, the Lessee-Producer asserts that because of other circumstances later discussed the terms "market price" and "market value" were not intended consensually to be used in their usual and ordinary sense. That sense is stated to be the "price at which willing buyers at or about the time of deliveries of gas produced from the leases were agreeing to pay willing sellers for comparable gas." This contention is a paraphrase of issues No. 2 and 3 out of the four stipulated to be tried by the District Judge and which he answered adversely to Lessee-Producer.⁷

In attacking the findings that it is the "market price" in the traditional legal sense, not the equivalent of the proceeds received from the Pipeline-Purchaser, the Lessee-Producer capsulates it in three steps: (1) this gas has a specific market, i. e., the Northern contract; (2) the market price of such gas is the amount received for the gas delivered to this specific market; (3) the Lessors, because of affirmative participation in the commitment of the gas to this specific market cannot claim there is a market other than the Northern contract. Elaborating, the contention runs, this is not an argument as to the difference in legal concept of "market price" and "proceeds received" clauses. Rather, the question for decision is whether, under the particulars of this case, the Northern Contract market is the market from which the market price is to be taken.

The circumstances surrounding the affirmative participation of the Lessors in the commitment of the gas to this particular market as reflected by the stipulation record may be briefly summarized. In early 1936 Lessee-Producer was negotiating with the Lessors for a lease on approximately 6,120 acres of unleased land overlying the Panhandle Gas Field of Texas, some of the land being in the sweet gas area and some of the land in the sour gas area of that Field. During such negotiations, Lessee-Producer was advised by the Lessors that, as a condition precedent to the making of such lease and as a part of the consideration for such lease, Lessee-Producer must have a positive contract with a pipeline company to take the production from the unleased area after it might be developed.

In order to meet this condition precedent and to establish a positive contract with a pipeline company, Lessee-Producer, on April 21, 1936, entered into the Northern⁸ contract with Northern Gas, an interstate pipeline company, even though at that time Lessee-Producer had no lease and no binding agreement to obtain one from Lessors. On June 2, 1936, 42 days after the Northern Gas Contract was arranged, the Lessors delivered the "R-Lease to Lessee-Producer.

Two provisions of the R-Lease are particularly stressed, the first being the gas royalty clause (note 4, supra) and Sec. IX which referred to the preexisting Northern contract demanded as a condition precedent to the lease.⁹ Subsequent contractual agreements between these parties also referred specifically to the Northern contract.¹⁰

Considering the fixed royalty of 4¢ for the first 10-year period expiring June 2, 1946 (note 4, supra), it is significant that under the Northern contract Lessee-Producer was to receive only 3½¢ per MCF until December 26, 1945, and from December 27, 1945, 4¢ for the remainder of the term of the contract (defined to be life of the leases to which it applied). In 1961 the contract price was renegotiated to 11¢ MCF and after FPC approval, this price was received. During the first 10-year period, the fixed royalty of 4¢ was paid, and no dispute exists as to it. Thereafter until 1961 Lessee-Producer paid royalty at 4¢ and after the 1961 increase on the basis of 11¢.

Against this background, the Lessee-Producer contends that these affirmative contractual actions permanently channeling the gas into the Northern contract bound the Lessor to accept the Northern contract as the sole and exclusive market. As such, these actions constitute as a matter of law, first, an express adoption of the contract, second, a ratification of it, and third, an estoppel to assert that the gas has any other market as between the parties.

In passing upon the stipulated issues 2 and 3 (see note 7, supra), the trial Court made categorical findings of fact that the Lessors, in executing, and the Lessee-Producer in accepting the R-Lease (and two others) intended to use the terms "market price" and "market value" in their usual and ordinary sense and not as synonymous with or identical to proceeds received under the Northern contract.

When we bear in mind that in construing the contract, the Court is to put itself in the position of the parties¹¹ and that the construction put on the contract by responsible action of the parties is frequently the best revelation of its purpose, we think there were ample evidential facts to justify the Judge concluding that the literal terms, generally so well recognized in oil and gas law, should be given their literal meaning. There was, first, the fact that this lease was the product of extended negotiations conducted under the skilled eyes and hands of highly competent oil and gas lawyers. Realizing as they had to, that the earlier and rejected draft of February 19, 1936, had an express "net proceeds derived from the sale of gas" royalty clause which was in effect replaced by the "market price" clause (note 4, supra) the Lessee-Producer's reported declarations made through its general counsel — a voice not only of management, but with an articulate awareness of the significance of legal terms — clearly put its construction of a market, not a proceeds, basis on this royalty clause. There were similar representations made to the FPC that under its gas leases "it is obligated to pay royalty based on the market price at the wellhead."

We do not minimize the beguiling appeal of the Lessee-Producer's theory. Without a doubt, with the Lessors' full approval, this committed until the exhaustion of the reserves¹² all of the gas¹³ to this contract and hence to this "market." But the "market" as the descriptive of the buyer or the outlet for the sale is not synonymous with its larger meaning in fixing price or value. For in that situation the law looks not to the particular transaction but the theoretical one between the supposed free seller vis-a-vis the contemporary free buyer dealing freely at arm's length supposedly in relation to property which neither will ever own, buy or sell.¹⁴ It was not, as this theory would make it read, an agreement to pay ¼th of the price received from the market on which this gas is sold. Rather, it was to pay ¼th of the "market price" or "market value" as the case might be. The demand that the Lessee-Producer have a firm commitment for the sale of the gas if and when produced — standing alone or in conjunction with the Northern contract — was not inconsistent with the expectation that in the great unknown — the future down to exhaustion of the reserves — the...