TXO Production Corp. v. Page Farms, Inc.

• Decision Date: 12 November 1985
• Docket Number: No. 85-224,85-224
• Citation: 287 Ark. 304,698 S.W.2d 791
• Parties: TXO PRODUCTION CORP., Appellant, v. PAGE FARMS, INC., et al., Appellees.
• Court: Arkansas Supreme Court

Page 791

698 S.W.2d 791

287 Ark. 304

TXO PRODUCTION CORP., Appellant, v.PAGE FARMS, INC., et al., Appellees.

No. 85-224.

Supreme Court of Arkansas.

Nov. 12, 1985.

Hardin, Jesson & Dawson by Rex M. Terry, Fort Smith, for appellant.

Gardner, Gardner & Hardin by Stephen C. Gardner, Russellville, for appellees.

GEORGE ROSE SMITH, Justice.

This action was brought by the principal plaintiff, Page Farms, Inc., under Act 269 of 1981, to recover unpaid royalties due upon gas being produced from a gas well drilled and being operated by the defendantTXO ProductionCorp. Ark.Stat.Ann. § 53-525 (Supp.1985).The well was drilled on a unitized tract in which Page Farms's predecessors in title had leased their interest.The trial judge, sitting without a jury, found for the plaintiff and entered a judgment for $5,917.20, plus the statutory penalty, interest, and attorney's fee.The Court of Appeals transferred the case to us, as coming within Rule 29(1)(n).We affirm.

The facts are not materially in dispute, the issues being essentially questions of law.Tate C. and Wanda Page executed an oil and gas lease on their property in 1964.They later conveyed their interest to a family corporation, Page Farms, Inc.The leasehold interest was eventually transferred to TXO, which completed a gas well in February, 1982.Under Section 53-525, supra, the payment of royalties should have begun not later than six months after TXO's first sale of gas.That did not occur.In September, 1982, TXO received a title opinion from its attorney, finding that Page Farms was the true owner of its tract within the unitized area.In March, 1983, TXO sent a division order to Page Farms which correctly recited its interest.Page Farms, however, did not promptly sign and return the division order.Apparently in part for that reason, TXO still did not begin paying royalties to Page Farms, which filed this action in July, 1983.Judgment, as we have said, was in favor of Page Farms.

TXO lists and argues four points for reversal or modification of the judgment, but there are so many subordinate supporting reasons presented that we can hardly discuss them all.We confine our opinion to what we regard as the controlling questions.

First, it is argued that TXO was entitled to delay payment because Page Farms's title was not marketable.The marketability of a title is to be determined by the public record.There is no indication that Page Farms did not have a clear record title while TXO was delaying its payments.In fact, TXO's own examining attorney had approved the title.TXO argues, however, that this action was filed not only by Page Farms, Inc., but also by Page Farms, a limited partnership, and TXO did not know which one to pay.The title, however, was in the corporation during nearly all the critical time.Apparently a deed from the corporation to the partnership was executed for tax purposes and recorded a few weeks before the trial, but TXO's own house counsel testified, quite correctly, that the land description in that instrument was void on its face.Payment to Page Farms, Inc., would have been justified.

TXO also argues that the title was somehow rendered unmarketable by Page Farms's failure to sign the requested division order.To begin with, the oil and gas lease did not require the lessors to sign such an order.TXO submitted testimony that division orders are recognized by custom and usage as being required in the oil and gas industry, but there is no proof that Mr. and Mrs. Page were so familiar with the oil and gas business that their knowledge and acceptance of the particular usage must be presumed.Absent such proof, they were not bound by any such custom or usage.Sharpensteen v. Pearce, 219 Ark. 916, 245 S.W.2d 385(1952);Ben F. Levis, Inc. v. Collins, 215 Ark. 172, 219 S.W.2d 762(1949).Additionally, the proposed division order contained provisions unfavorable to the lessors, that were not authorized by the lease.Page Farms was not at fault in failing to sign the division order, nor is its title shown to be unmarketable.

Second, the lease contained a provision commonly inserted in such leases, reciting that no change in ownership of the leased premises would be binding upon the lessee until 30 days after evidence of the change had been furnished to the lessee.This lease was executed by the Pages in 1964, but no notice of changed ownership was given to the lessee when the Pages conveyed the property to Page Farms, Inc., in 1975.That was some seven years before TXO drilled the well and TXO's attorney informed TXO that Page Farms owned its fractional interest as a lessor.

It is now argued that the lessor's failure to notify TXO of the change in ownership prevents Page Farms from recovering the penalty, costs, and attorney's fee under the statute penalizing the late payment of royalties.

This argument arises from a situation of frequent occurrence, in which a plaintiff sues for breach of contract and the defendant asserts as a defense an earlier breach by the plaintiff.If the plaintiff's breach is material and sufficiently serious, the defendant's obligation to perform may be discharged.Restatement, Contracts, § 397(1932).Not so, however, if the plaintiff's breach is comparatively minor.Corbin states the basic rule: "If one party to a bilateral contract commits a partial breach of his duty, one that is not so material as to discharge the other party's duty of performance, the latter's only remedy is damages for the partial breach."Corbin, Contracts, § 1253(1962).

We have applied the rule in situations too numerous to mention.For example, in Henslee v. Mobley, 148 Ark. 181, 230 S.W. 17(1921), a subcontractor sued the contractor for the agreed contract price of the subcontractor's work.The contractor contended that he owed nothing, because the work was not properly done.It was found that the subcontractor had substantially performed the work, though there were minor defects.We held that the contractor had a right to insist on the correction of the defects, but "he could not rightfully demand anything more, and...