Richland Plantation Co. v. Justiss-Mears Oil Co., Inc.

• Decision Date: 25 March 1982
• Docket Number: No. 81-1366,JUSTISS-MEARS,81-1366
• Citation: 671 F.2d 154
• Parties: RICHLAND PLANTATION COMPANY, Plaintiff-Appellee, v.OIL COMPANY, INC., Defendant-Appellant. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 154

671 F.2d 154

RICHLAND PLANTATION COMPANY, Plaintiff-Appellee, v. JUSTISS-MEARS OIL COMPANY, INC., Defendant-Appellant.

No. 81-1366

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

March 25, 1982.

John H. Minton, Jr., Tyler, Tex., R. Joseph Wilson, Jena, La., for defendant-appellant.

Jenkins & Gilchrist, John A. Gilliam, Charles A. Gall, Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GEE, GARZA and TATE, Circuit Judges.

TATE, Circuit Judge:

This Texas diversity suit involves the construction of an agreement to pay an additional (or overriding) royalty in the event of production, beyond that provided by a mineral lease entered into the same day between the parties. The defendant producer-lessee ("Justiss") appeals from the district court's ruling that additional royalty payments are due to the plaintiff landowner-lessor ("Richland") under the additional-royalty agreement. Justiss, the appellant defendant, principally contends that the district court erred in finding ambiguity in the additional-royalty agreement, if construed together with the simultaneously executed lease, and in thus admitting extrinsic evidence to prove the intent of the parties.

We affirm, finding (a) that the district court correctly held that the agreement was ambiguous and that extrinsic evidence was properly admissible to aid in its construction and (b) that the district court was not clearly erroneous in its finding that the parties intended that the additional royalty not be subject to the proportionate reduction clause of the lease that was applicable to royalties provided by the lease itself.

The Factual Context

On November 11, 1975, after preliminary negotiations as to the percentage of royalties payable, Richland and Justiss entered into a mineral lease covering 4,251 acres of Richland's land. At the same time they signed an unrecorded letter agreement providing for the payment of an additional (or overriding) royalty in the event of production. At the time, Richland owned only one-half of the mineral interests in the land in question.

The substantial issue in this appeal is whether a proportionate reduction clause in the lease itself, requiring proportionate reduction in the lease-provided royalty payments if the lessor owned less than the whole mineral rights, was also applicable to the additional royalty specified by the supplemental letter agreement to be payable in the event of production.

The Legal Principles Applicable

The principle contention raised by Justiss is that the district court erred in finding the two clauses of a single agreement (i.e., represented by the mineral lease and the unrecorded letter considered together) to be ambiguous, insofar as the application of the proportionate reduction clause to the overriding royalties (which per the unrecorded letter agreement were to be payable only in the event of production). The legal principles applicable to the ambiguity-or-not issue are essentially undisputed:

A contract is ambiguous when, after applying established rules of construction, it is reasonably susceptible to more than one meaning. Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 157 (1951).

Under Texas law, the determination of whether or not a contract is ambiguous in order to permit extrinsic evidence of intent is a question of law. Once the contract is found to be ambiguous, however, the determination of the parties' intent becomes a question of fact. Steuber Co., Inc. v. Hercules, Inc., 646 F.2d 1093, 1098 (5th Cir. 1981); In re Stratford of Texas, Inc., 635 F.2d 365, 368 (5th Cir. 1981).

When faced with a question relating to the construction of a contract, Texas courts will take the wording of the instrument, consider the same in the light of the surrounding circumstances, and apply the pertinent rules of construction thereto and thus settle the meaning of the contract. Harris v. Rowe, 593 S.W.2d 303, 306 (Tex.1979); City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 519 (Texas 1968). Hennigan v. Chargers Football Co., 431 F.2d 308, 314-15 (5th Cir. 1970). When several documents represent one agreement, all must be construed together in an attempt to discern the intent of the parties, reconciling apparently conflicting provisions and attempting to give effect to all of them, if possible. Modern American Mortgage Corp. v. Skyline Park, 614 F.2d 1009, 1012 (5th Cir. 1980); Republic Insurance Co. v. Hope, 557 S.W.2d 603, 607 (Tex.Civ.App.-1977, no writ). That does not necessarily require that every provision in each document applies equally to all other documents being considered. A. J. Robbins & Co. v. Roberts, 610 S.W.2d 854, 856-57 (Tex.Civ.App.-1980, writ ref. n. r. e.). See also Lawrence v. United States, 378 F.2d 452, 461-462 (5th Cir. 1967). "Each provision is to be given its reasonable, natural, and probable meaning when considered in relation to the whole." Hennigan, supra, 431 F.2d at 315. However, the court should avoid interpreting a contract so as to render any provision meaningless. R & P Enterprises v. LaGuarta, Gavrel & Kirk, 596 S.W.2d 517, 518-19 (Tex.1980); Universal C.I.T. Credit Corp. v. Daniel, supra, 243 S.W.2d at 157-58.

When the contract is found to be ambiguous (i.e., open to two reasonable interpretations), then the agreement will be construed more strictly against the party who drafted it (in this case Justiss). Chevron Oil Co. v. E. D. Walton Const. Co., Inc., 517 F.2d 1119, 1122 (5th Cir. 1975); Republic National Bank v. Northwest National Bank, 578 S.W.2d 109, 115 (Tex.1978).

The Clauses at Issue: Ambiguous?

By the lease executed November 11, 1975, the lessee Justiss agreed to pay the landowner-lessor Richland a 1/8th royalty on all oil and gas produced from the described land, but (applicable, since Richland owned only 1/2 of the mineral interest) the printed lease form also contained a "proportionate reduction" clause, which provided:

If Lessor owns a less interest in the above-described land than the entire and undivided fee simple estate therein, then the royalties and rentals herein provided shall be paid to Lessor only in the proportion which Lessor's interest bears to the whole and undivided fee. (Emphasis supplied.)

Simultaneously with execution of the lease, Justiss and Richland executed a letter agreement, as "an unrecorded supplement to said lease" (emphasis supplied), which provided:

In the event production is actually obtained from the subject tract or from adjacent property with which all or a portion of the subject tract has been pooled or unitized to create a producing unit, Justiss-Mears Oil Company, Inc. will assign to Richland Plantation Company an additional royalty of seven and one half percent (71/2%) of eight-eighths (8/8ths) of the oil, gas or minerals produced and sold from said well. The assignment shall be effective only as to that portion of the subject tract included within a producing unit. (Emphasis supplied.)

In the district court, both parties moved for summary judgment, on the contention that the two instruments construed as a single agreement unambiguously reflected their respective opposing contentions.

Richland, the landowner-lessor, points out that the reduction clause applied only to the royalties "herein provided" by the lease itself, i.e., to the 1/8th primary royalty. Richland argues that the additional-royalty letter agreement was supplemental to the lease and that it specifically provided with regard to this specific issue, itself not regulated by the lease, that the additional or overriding royalty would be "seven and one-half percent (71/2%) of eight-eighths (8/8ths)" of the mineral production-i.e., of the entire mineral production, not just of the one-half thereof attributable to Richland's one-half mineral interest.

On the other hand, the producer-lessee Justiss contends that the simultaneously executed letter agreement was specifically denoted as a "supplement to" the lease and that,...