DENNIS, Circuit Judge:
This case involves a contractual interpretation dispute over whether overriding royalties are payable out of the initial oil and gas production from a tract of land on the outer continental shelf adjacent to Louisiana. In 1998, pursuant to the Outer Continental Shelf Lands Act ("OCSLA"),
When production under the lease was obtained in 2009, three oil companies owned the lessees' working interests: Chevron USA, Inc. ("Chevron") (58% share), Total E & P USA, Inc. ("Total") (17% share), and Statoil Gulf of Mexico, L.L.C. ("Statoil") (25% share). Chevron immediately began paying overriding royalties out of its share of the production to the Belcher Group and Kerr-McGee. Total and Statoil, however, took the position that they were not obliged to immediately begin paying overriding royalties out of their shares of production. They claimed that no overriding royalties were due because the ORRI assignment contracts contained "calculate and pay" clauses stating that: "The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease."
It is undisputed that, upon the commencement of production under the lease in 2009, the payment of the government's 12½% landowner royalties was determined to be suspended until 87.5 million barrels of oil equivalent had been produced, pursuant
The district court granted a motion for summary judgment by Total and Statoil, declaring that the "calculate and pay" clauses in the 1999 and 2001 ORRI assignments clearly and explicitly require that the payment of overriding royalties shall be suspended during the suspension of the U.S. 12½% landowner's royalty under the DWRRA. The district court expressly refused to engage in further interpretation of the assignment contracts in search of the parties' intent or to consider any evidence on that issue.
The Belcher Group and Kerr-McGee appealed. The issue on appeal comes down to whether the language in the "calculate and pay" clauses providing that the overriding royalties "shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the lease" clearly, explicitly, and unambiguously was intended to suspend the payment of overriding royalties if, upon production, the DWRRA were to result in a threshold suspension of the payment of landowner royalties to the United States.
We conclude, under the applicable Louisiana law, that the "calculate and pay" clauses in the ORRI assignment contracts do not clearly and explicitly express the intent that overriding royalty payments shall be suspended whenever the U.S. landowner royalties are suspended under the DWRRA; and that the "calculate and pay" clauses must be interpreted further in search of the common intent of the parties to the assignment contracts. Assuming without deciding that the "calculate and pay" clauses may reasonably be interpreted as Total and Statoil contend, the clauses are at least ambiguous because a reasonable inference also may be drawn that the "calculate and pay" clauses merely refer to the lease terms and conditions for the method of calculating overriding royalties and that they do not intend for the lessees' obligation to pay overriding royalties out of production to be suspended altogether under any circumstances. Because of this ambiguity and permissible inference, there is a genuine dispute as to a material issue of fact, viz., the assignment contract parties' intentions regarding the "calculate and pay" clauses. Therefore, because, in reviewing the summary judgment de novo, we must resolve all ambiguities, permissible inferences, and material issues of fact in favor of the non-moving parties, the Belcher Group and Kerr-McGee, we conclude that Total and Statoil are not entitled to a judgment as a
To understand the legal context within which the ORRI assignment contracts must be interpreted, it is helpful to have a general understanding of the governing federal statutes and regulations, as they have been interpreted by this court.
"[OCSLA] authorizes the Secretary of the [Interior] to grant and manage leases for recovery of oil, gas, and other minerals from submerged lands located on the Outer Continental Shelf." Mesa Operating Ltd. P'ship v. U.S. Dep't of Interior, 931 F.2d 318, 319 (5th Cir.1991). "OCSLA thus vests the federal government with a proprietary interest in the [outer continental shelf] and establishes a regulatory scheme governing leasing and operations there." EP Operating Ltd. P'ship v. Placid Oil Co., 26 F.3d 563, 566 (5th Cir.1994). "OCSLA provides that the [Department of the Interior (`DOI')] obtains royalties from lessees based on the `amount or value of the production saved, removed, or sold.'" Mesa Operating Ltd., 931 F.2d at 319-20 (quoting 43 U.S.C. § 1337(a)(1)).
"OCSLA also vests in the Secretary the sole authority and responsibility to `prescribe such rules and regulations as may be necessary to carry out such [leasing] provisions [of OCSLA].'" Id. at 319 (alterations in original) (quoting 43 U.S.C. § 1334(a)). Pursuant to this authority, the DOI has several times issued regulations governing how royalties on production from OCSLA leases are to be computed and how lessees are to record and report production information relevant to those calculations. The regulations in effect when the lease here was issued in June 1998 were promulgated by the DOI agency then known as the Mineral and Mining Service ("MMS"). Those regulations provided, inter alia, that "[a]ll oil (except oil unavoidably lost or used on, or for the benefit of, the lease, including that oil used off-lease for the benefit of the lease when such off-lease use is permitted by the [agency], as appropriate) produced from a Federal ... lease ... is subject to royalty," 30 C.F.R. § 202.100(b)(1) (1997); and that "[w]hen paid in value, the royalty due shall be the value, for royalty purposes, [under the regulations] multiplied by the royalty rate in the lease," id. § 202.100(a)(1).
The DWRRA, enacted in 1995 to stimulate deepwater mineral exploration,
In Kerr-McGee, an oil company challenged the DOI's order to pay such royalties, and this court concluded that the agency did not have the authority to impose price thresholds requiring the payment of royalties to the government on volumes less than the volume thresholds set by Congress in the DWRRA. Id. at 1086-87. The court looked to its 2004 decision in Santa Fe Snyder Corp., which had held that DWRRA § 304 extends royalty relief to each new lease at statutorily-specified locations and water-depths and that the DOI did not have the authority to limit this royalty relief to new leases that first resulted in production from a field. See Kerr-McGee, 554 F.3d at 1085-86. Consequently, until this court's 2004 and 2009 decisions interpreting and clarifying the meaning and application of § 304, it could not be predicted with certainty whether production from a particular new oil and gas well would definitely qualify for a suspension of the U.S. landowner's royalty under the DWRRA.
MMS issued Lease OCS-G 20082, to Mariner Energy, Inc., and Westport Oil and Gas Company, Inc. ("Westport") pursuant to 43 U.S.C. § 1337 and effective June 1, 1998. The form lease describes the leased property as "[a]ll of Block 640, Green Canyon, OCS Official Protraction Diagram, NG 15-3." The property is located
On November 3, 1999, Westport executed an assignment conveying to six of the seven of the Belcher Group appellees ORRIs "payable out of all oil, gas, and casing head gas and associated substances produced, saved, and marketed from the lease" (emphasis added) in the following percentages: Wayne G. Zeornes 0.125%; Gary Al Hummel 0.125%; Kevin A. Small 0.125%; C. Dan Bump 0.025%; Allan D. Keel 0.025%; Lynn S. Belcher 0.0625%. These individuals were Westport geoscientists and landmen whom the company chose to reward with extra compensation by carving overrides for them out of its working interest. The six Westport geoscientists and landmen held on to their overrides, except for Zeornes, who split his override with his ex-wife, Cathy Zeornes Guy. Kerr-McGee received a 3.7373% ORRI in 2001 pursuant to an assignment containing a "calculate and pay" provision substantively identical to that in the Belcher Group assignment, which stated that "[t]he overriding royalties described herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease."
Production under the lease began in May 2009. Chevron then began paying the ORRI owners their designated overriding royalty shares from its working interest production and has continued to do so ever since. Total began approving and issuing payments to the override owners but stopped after paying the Belcher Group about $54,000 in royalties. Statoil made no payments to the overriding royalty owners. These refusals to pay overriding royalties were premised on Statoil and Total adopting the position that they were not obligated to make any payments to appellants until the lease produced 87.5 million barrels of oil equivalent, on the theory that the "calculate and pay" provisions subjected appellants' ORRIs to suspension along with the U.S. landowner's royalty under the DWRRA.
On October 2, 2009, Total filed suit against the ORRI owners, the Belcher Group and Kerr-McGee, in the U.S. District for the Eastern District of Louisiana seeking a declaratory judgment embracing Total's interpretation of the ORRI assignments. In January 2010, the Belcher Group filed suit against Statoil seeking declaratory judgment that the lessees were obliged to pay overriding royalties to the ORRI owners from first and all production. The district court consolidated the cases. Through interventions, third-party claims, and counterclaims, Total and Statoil became aligned against the Belcher Group and Kerr-McGee.
In opposition to appellees' motion for summary judgment, appellants submitted affidavits by the individual members of the Belcher Group and by the Westport official who approved both of the original ORRI assignments, attesting that the parties to those assignments intended by the "calculate and pay" clauses to refer to the lease for the purpose of measuring and computing overriding royalties and not for the purpose of suspending overriding royalties during the suspension of the U.S. landowner's royalty under the DWRRA. Also, the appellants submitted an expert witness' survey of representatives of other oil companies operating in the Gulf of Mexico. This survey purportedly identified at least eighty other overriding royalty instruments containing "calculate and pay" provisions like that at issue here and determined that no other company party to such an instrument interpreted these provisions to subject overriding royalty interests to "royalty suspension" under the DWRRA. Appellants also submitted other affidavits and sworn statements from individuals familiar with the Gulf of Mexico oil industry supporting their reading of the "calculate and pay" provision. Appellants did not cross-move for summary judgment.
On December 14, 2010, the district court granted summary judgment for the appellees, concluding that the "calculate and pay" provisions clearly and explicitly express the common intent of the assignment contract parties that the payment of overriding royalties shall be suspended whenever the payment of the government's 12½% landowner's royalty is suspended under the DWRRA.
Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp., Nos. 09-CV-6644 & 10-CV-106,
The district court refused to consider the opposing affidavits served and filed by appellants as extrinsic evidence tending to show the original assignment parties' intent that the "calculate and pay" clauses refer to the terms and conditions of the lease for the purpose of measuring and computing the overriding royalties and not for the purpose of defeating or deferring overriding royalties while the government's 12½% landowner's royalty is suspended under the DWRRA. The district court concluded that the provision regarding words of art and technical terms set forth in Louisiana Civil Code article 2047
Id. at *5 (alteration in original) (citations omitted) (quoting Kenner Indus., Inc. v. Sewell Plastics, Inc., 451 So.2d 557, 560 (La.1984)).
The Belcher Group and Kerr-McGee timely appealed.
We review the district court's grant of summary judgment de novo, affirming only if the moving party has demonstrated that there is no genuine issue as to any material fact and that judgment as a matter of law is warranted. McMurray v. ProCollect, Inc., 687 F.3d 665, 669 (5th Cir.2012); see Fed.R.Civ.P. 56(c). In determining whether a case presents triable issues of fact, we, like the district court, may not make credibility determinations or weigh the evidence and we must resolve all ambiguities and draw all permissible inferences in favor of the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1263 (5th Cir. 1991).
"Under the OCSLA, the law to be applied to the [outer continental shelf] is exclusively federal, albeit the law of the adjacent state is adopted as surrogate federal law to the extent that such law is applicable and not inconsistent with federal law." EP Operating Ltd. P'ship, 26 F.3d at 566. Here, the parties agree that Louisiana contract law governs the interpretation
"In order to determine state law, federal courts look to final decisions of the highest court of the state. When there is no ruling by the state's highest court, it is the duty of the federal court to determine as best it can, what the highest court of the state would decide." Transcont'l Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir.1992) (citing, inter alia, Comm'r of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967)).
Under Louisiana law, the essential quality of an overriding oil and gas royalty is that of a real right to receive and collect a fraction or a percentage of the production of minerals, carved out of the mineral lessee's or the servitude owner's working interest in production, free of drilling and production costs. The Louisiana Supreme Court has explained that "[t]he lessor's royalty is distinguished from the mineral royalty and the overriding royalty. The former is the right to participate in the production of mineral from land or a servitude belonging to another, La.Rev.Stat. § 31:80, while the latter is carved out of the lessee's working interest in the lease." Frey v. Amoco Prod. Co., 603 So.2d 166, 171 n. 8 (La.1992); see Plaquemines Parish Comm'n Council v. Delta Dev. Co., Inc., 486 So.2d 129, 134 (La.Ct.App.1986) ("The overriding mineral royalty is a passive, non-cost bearing mineral interest carved out of the lessee's working interest and is dependent upon the continued existence of the mineral lease." (citing, inter alia, Fontenot v. Sun Oil Co., 257 La. 642, 243 So.2d 783 (1971)), rev'd on other grounds, 502 So.2d 1034 (La.1987)); Williams & Meyers, Manual of Oil & Gas Terms (2009) (defining an "overriding royalty" as "[a]n interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner's royalty reserved to the lessor in an oil and gas lease").
The Louisiana Supreme Court has consistently applied the Louisiana Civil Code articles on the interpretation of contracts, along with other applicable provisions of state law, in deciding cases involving oil and gas lease and royalty questions. See, e.g., Frey, 603 So.2d at 172. The court has summarized the relevant principles as follows:
Frey, 603 So.2d at 172.
In Louisiana, "[p]arol or extrinsic evidence is generally inadmissible to vary the terms of a written contract unless there is ambiguity in the written expression of the parties' common intent." Blanchard v. Pan-OK Prod. Co., Inc., 755 So.2d 376, 381 (La.Ct.App.2000). "A contract is considered ambiguous on the issue of intent when it lacks a provision bearing on that issue or when the language used in the contract is uncertain or is fairly susceptible to more than one interpretation." Id.; accord CLK Co., LLC v. CXY Energy, Inc., 972 So.2d 1280, 1287 (La.Ct.App. 2007); see Dixie Campers, Inc. v. Vesely Co., 398 So.2d 1087, 1089 (La.1981) ("[W]e conclude that the contract in this case is susceptible to more than one reasonable interpretation rendering it ambiguous and uncertain as to the intention of the parties."). "These rules are applicable even to contracts involving rights in immovable property, such as mineral rights." Blanchard, 755 So.2d at 381.
Accordingly, when a contract provision relating to mineral rights is ambiguous on a pivotal issue, the Louisiana Supreme Court and Courts of Appeal have interpreted the provision as having the meaning that best conforms to the object of the contract, in light of the nature of the contract, equity, and usages, including extrinsic evidence as to custom and practices in the oil and gas industry. See, e.g., Musser Davis Land Co. v. Union Pac. Res., 201 F.3d 561, 565-67 (5th Cir.2000); Henry v. Ballard & Cordell Corp., 418 So.2d 1334, 1339-40 (La.1982).
Applying the foregoing principles, we conclude that the "calculate and pay" clauses do not clearly and explicitly show that the parties to the assignment contracts intended that the lessees' obligation to pay overriding royalties out of production would ever be suspended under any circumstances. There is no reference whatsoever to "royalty suspension" or "overriding royalty suspension" in the assignment contracts. The "calculate and pay" clauses clearly and explicitly provide only that overriding royalties "shall be calculated and paid in the same manner and subject to the same terms and conditions
Our conclusion is further supported by the well-recognized distinction between overriding royalty interests and a lessor's royalty. Unlike the government's royalty reserved under OCSLA, "[a]n overriding royalty [interest] is a fractional interest in the gross production of oil and gas under a lease, in addition to the usual royalties paid to the lessor." Meeker v. Ambassador Oil Co., 308 F.2d 875, 882 (10th Cir.1962) (emphasis added), rev'd on other grounds, 375 U.S. 160, 84 S.Ct. 273, 11 L.Ed.2d 261 (1963). Thus, an overriding royalty interest "is an interest carved out of the lessee's share of the oil and gas, ordinarily called the working interest, as distinguished from the owner's reserved royalty interest." Id. (emphasis added); see also Frey, 603 So.2d at 171 n. 8 (explaining that "[t]he lessor's royalty is distinguished from the ... overriding royalty" interest, which "is carved out of the lessee's working interest in the lease"). Particularly in light of this longstanding distinction drawn between overriding royalty interests and the royalties reserved by the landowner, we disagree with the district court's reasoning that the contracting parties were obligated to expressly state that royalty suspension would not apply to appellants' overriding royalty interests. See Total, 2010 WL 5207591, at *5. Rather, the absence of any clear indication anywhere in the assignment contracts, lease, or relevant statutory scheme that statutory suspension of government royalties was also, counterintuitively, intended to apply to the overriding royalty interests renders the contracts at least ambiguous on this issue.
Moreover, the syntax of the ORRI assignments and lease provisions, without further interpretation or evidence, do not clearly or explicitly require the reading of them argued for by Total and Statoil. The ORRI assignment contracts state that the overriding royalty percentages shall be "payable out of all oil, gas, and casing head gas and associated substances produced, saved, and marketed from the lease" (emphasis added); and it is undisputed that the lessees' share of production begins with and is payable throughout production from the lease. This reasonably can be read to signify that the overriding royalty shall be payable from the lessees' share of production over its entirety, and not only during periods in which the landowner is entitled to a royalty share of production. Likewise, the simple affirmative declaration that the overriding royalty shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty is calculated and paid under the lease does not indicate that the overriding royalties paid out of the lessees' share of production shall ever be suspended during that production. To require a suspension of overriding royalties payable from the lessees' production before the lessees actually cease to receive production from the lease would add an exception or condition to the
Furthermore, Total and Statoil tacitly concede that they cannot completely and finally rely on what they contend to be the clear and explicit words of the "calculate and pay" clauses. They ultimately contend that reading these clauses of the assignment contracts together with a footnote in the underlying lease shows that the assignment parties intended to suspend the override obligation during any suspension of the United States' right to collect landowner's royalty. This alternative argument's reading together of three different contracts, one to which none of the ORRI owners was a party, however, does not produce clear and explicit words showing an intent by the original lessees and the ORRI owners to suspend the lessees' obligation to pay them overriding royalties out of the lessees' share of production. It simply adds an indefinite, unclear, and ambiguous footnote from the lease to the interpretative problem facing the courts in this case.
The footnote that Total and Statoil seek to rely upon in the underlying lease between the United States, as lessor, and Mariner Energy and Westport, as lessees, states: "This lease may be eligible for royalty suspension pursuant to PL 104-58. If eligible, Sections 5 and 6 of the lease instrument will be superseded by 30 CFR, Part 26, published to the Federal Register on January 16, 1998 (63 FR 2626)." The footnote does not clearly and explicitly express an intention by the lessor and lessees that the lease "shall be eligible" for royalty relief under the DWRRA. Therefore, royalty suspension was not clearly and explicitly made a term or condition of the lease that was binding on the lease parties or third parties. For these reasons, and also because the Belcher Group and Kerr-McGee were not parties to the lease, the footnote expresses no clear and explicit agreement or intent by the overriding royalty owners to forfeit or defer any of their rights to overriding royalties payable by the lessees out of any future production under the lease.
Accordingly, we disagree with the district court, which reached the opposite result based on the following reasoning:
Of course, the district court is correct that it is now undisputed that the DWRRA landowner's royalty relief applies to the subject lease. But as we have pointed out, that was not so when the subject lease was issued in 1998 or when the ORRI assignment contracts were entered in 1999 and 2001. Prior to the litigation that culminated in our decisions in Santa Fe Snyder Corp. in 2004 and Kerr-McGee in 2009, it was at most speculative whether the lessees under the subject lease would receive the benefit of DWRRA landowner's royalty relief if and when production were obtained. That is likely why the footnote in the lease is indefinite and says only that the lessees "may" be eligible for landowner royalty relief.
Furthermore, simply because a lessee is entitled to DWRRA relief from paying the government landowner royalties until a specified quantity of production has occurred does not relieve the lessee from the obligation of measuring, calculating, and accounting for its production of oil and gas from the leased property. OCSLA and applicable DOI regulations continue to specify how that production is measured, calculated, and accounted for. See, e.g., 43 U.S.C. § 1337(a)(1)(C) (limiting government royalty relief to specific production volumes); 30 C.F.R. §§ 250.1201-03 (setting forth and incorporating by reference requirements for measuring oil and gas production from OCSLA leases); 30 C.F.R. §§ 1206.100-60 ("explain[ing] how [OCS] lessee[s] must calculate the value of production for royalty purposes consistent with the mineral leasing laws, other applicable laws, and lease terms"); cf. Abraham v. BP Am. Prod. Co., 685 F.3d 1196, 1199-1203 (10th Cir.2012) (noting that there are "specific and comprehensive federal regulations" setting forth "federal royalty calculation requirements").
In other words, the "calculate and pay" clauses reasonably may be interpreted to mean that the overriding royalty payments shall be calculated and paid by using the same methods prescribed for the measurement and computation of the landowner's royalty under the terms and conditions of the lease, which is specifically subject to the federal regulations' provisions for measuring, calculating, and accounting for production, instead of meaning that the payment of overriding royalties shall be suspended if the landowner's royalty were to be suspended under the DWRRA. Although we have assumed that Total and Statoil's contrary interpretation is equally as reasonable for purposes of their summary judgment motion, we conclude that the clauses are ambiguous and require further interpretation in search of the parties' intent.
The district court, on the other hand, did not specifically address the ORRI owners' reasonable interpretation of the clauses, despite the ORRI owners' extensive arguments for it in their opposition to summary judgment. Consequently, the district court erroneously concluded that the clauses are not ambiguous but that they clearly and explicitly are meant to suspend overriding royalties during any suspension of the landowner's royalty, as well as, or, instead of, to prescribe the methods for their calculation. The district court stated that it had examined the assignment contracts, and each of their provisions together with the others, and had found "that the subject `Calculate and Pay' clauses are not ambiguous because they clearly provide that the overriding royalties `shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's [federal government's] royalty under the Lease.'" Total, 2010 WL 5207591, at *4 (alteration in original). We do not find the district court's reasoning persuasive because the words of the "calculate and pay" clauses are not clear, explicit, and unambiguous, and the district court did not offer any other reason for finding these provisions unambiguous.
Because the ORRI owners, the Belcher Group and Kerr-McGee, did not file a cross motion for summary judgment or ask for any relief here other than a reversal of the district court's judgment, we do not reach the parties' other arguments or consider the affidavits submitted in opposition to summary judgment below. Under Louisiana law, interpretation of a contract is the determination of the common intent of the parties, La. Civ.Code art. 2045, and when the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent, id. art. 2046. However, the inverse of Article 2046 is also true: when the words of the contract are not clear and explicit, but are ambiguous, a court should engage in further interpretation in search of the parties' intent by applying the Louisiana Civil Code articles on contractual interpretation and pertinent Louisiana cases. See, e.g., Henry, 418 So.2d at 1339-40 ("In ascertaining th[e] [contracting parties'] intention (where it cannot be adequately discerned from the contract or agreement as a whole) the circumstances surrounding the parties at the time of contracting are a relevant subject of inquiry.... The custom of the industry may also be considered in determining the true intent of the parties as to ambiguous contract provisions."); Russell v. City of New Orleans, Dep't of Prop. Mgmt., 732 So.2d 66, 70 (La.Ct.App. 1999) ("The words of the contract are not clear and explicit ..., so further interpretation may be made in search of the common
For these reasons, the district court's judgment is reversed and the case is remanded to it for further proceedings consistent with this opinion.
HIGGINSON, Circuit Judge, concurring:
I agree with Judge Dennis' reasoning and outcome, but write to explain in further detail why I believe the contracts' language is ambiguous.
The overriding royalty interest ("ORRI") assignment contracts contain "calculate and pay" clauses stating: "The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease." Like many complex sentences, ambiguity exists in this one's structure. ORRI is the subject, and one predicate is the "calculate[] and pay" verb phrase.
Appellants imply that the prepositional phrase and subordinate clause that follow — i.e., "in the same manner and subject to the same terms and conditions" — modify that verb phrase, cf. Int'l Primate Prot. League v. Adm'rs of Tulane Educ. Fund, 500 U.S. 72, 79-80, 111 S.Ct. 1700, 114 L.Ed.2d 134 (1991), and because the verb phrase "calculate[] and pay" is affirmative, it logically does not imply its opposite, nonpayment or suspension. Manners and terms and conditions all contemplate payment in the first place. In simpler terms, this reading would be less ambiguous if written as follows: "The ORRI shall be calculated and paid in the same manner as the landowner's royalty under the Lease," persuasively, therefore, not contemplating suspension altogether, but just regulating payment.
Contrastingly, Appellees' argument points to meaning from a different grammatical arrangement, where ORRI itself is modified by the final clause "subject to the same terms and conditions as the landowner's royalty," hence, plausibly, subject even to nonpayment or suspension altogether. In simpler, less ambiguous terms: "The ORRI shall be subject to the same terms and conditions as the landowner's royalty under the Lease," even if that condition is suspension altogether. Indeed, had the sentence separated that dependent clause by commas — thus: ", and subject to the same terms and conditions," — Appellees would have a stronger argument as to clarity of meaning.
Given the language of the contracts, however, I cannot say that, for the reasons above, the sentence is free of ambiguity.
EMILIO M. GARZA, Circuit Judge, dissenting:
Because royalty suspension is a term or condition of royalty payment under the lease and the "calculate and pay" clauses of the assignment contracts make the overriding royalty interests subject to the same terms and conditions as the landowner's royalty under the lease, I respectfully dissent from the majority's conclusion that the assignment contracts are ambiguous.
Royalty suspension is unambiguously a term or condition of the landowner's royalty under the lease. The first footnote of the lease states, "This lease may be eligible for royalty suspension pursuant to PL
The majority, however, finds it ambiguous whether the footnote is a term or condition of the lease because the footnote states the lease "may be eligible" rather than "shall be eligible." The majority might be correct if the footnote did not also state, "If eligible, Sections 5 and 6 of this lease instrument will be superseded by 30 CFR Part 26...." (emphasis added). Black's Law Dictionary defines a "term" as a "contractual stipulation," BLACK'S LAW DICTIONARY 1608 (9th ed. 2009), and a "condition" as "a future and uncertain event on which the existence or extent of an obligation or liability depends; an uncertain act or event that triggers or negates a duty to render a promised performance." Id. at 333. The footnote clearly stipulates that the lease's provisions for payment of royalties are superseded by the DWRRA if the lease is eligible for royalty suspension, thus qualifying the lessee's contractual duty to make royalty payments to the United States. Where the lease is eligible for royalty suspension, the footnote negates the lessee's duty to make royalty payments. As such, royalty suspension is a term or condition of the landowner's royalty under the lease.
The "calculate and pay" clauses in the assignment contracts unambiguously make the overriding royalty interests subject to the same terms and conditions as the landowner's royalty under the lease. The "calculate and pay" clauses of the Westport Assignment to the Belcher Group state, "The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease." The "calculate and pay" clause in the Westport to Chevron Assignment contains nearly identical language. The majority holds "the `calculate and pay' clauses in the ORRI assignment contracts do not clearly and explicitly express the intent that overriding royalty payments shall be suspended whenever the U.S. landowner royalties are suspended under the DWRRA." Ante, at 482. The majority thus finds it ambiguous whether the assignment contracts apply royalty suspension to overriding royalty interests. The plain language of the "calculate and pay" clauses state, however, that payment
The majority, emphasizing the longstanding distinction between overriding royalty interests and royalties reserved by the landowner, holds it is ambiguous whether the "calculate and pay" clauses require application of royalty suspension to the overriding royalty interests. Ante at 491. The majority holds the assignment contracts lack "any clear indication" that royalty suspension was intended to apply to the overriding royalty interests. Id. The majority is correct that overriding royalty interests are generally paid in addition to the usual landowner's royalty reserved to the lessor. 38 AM.JUR.2D GAS AND OIL § 201. As such, the parties to overriding royalty interest assignment contracts are free to set terms for the calculation and payment of such interests that are distinct from the terms of payment of the landowner's royalty. See id. Here, however, the assignment contracts contain a clear directive that the overriding royalty interests "shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease." If the parties did not intend the clear import of the contracts' language, they may seek to reform the contract. Agurs v. Holt, 232 La. 1026, 95 So.2d 644, 645 (1957). Where, however, the language of a contract is clear and unambiguous, we lack the authority to look beyond the four corners of the document in search of the parties' intent. LA. CIV.CODE ANN. art.2046; Taita Chem. Co., v. Westlake Styrene Corp., 246 F.3d 377, 386 (5th Cir.2001).
The majority relies on the fact that it was not certain the lease would qualify for suspension of the United States' landowner royalty under the DWRRA at the time the lease at issue in this case was signed as a core source of ambiguity in the "calculate and pay" clauses. The majority correctly notes that prior to our decisions in Santa Fe Snyder Corp. v. Norton, 385 F.3d 884 (5th Cir.2004), and Kerr-McGee Oil & Gas Corp. v. U.S. Dep't of Interior, 554 F.3d 1082 (5th Cir.2009), there was some uncertainty surrounding whether a particular lease would qualify for royalty suspension.
The majority also concludes the "granting" clauses of the assignment contracts make the meaning of the "calculate and pay" clauses ambiguous. The granting clause in the Westport Assignment to the Belcher Group states, "The undersigned... does hereby CONVEY, TRANSFER, ASSIGN, AND SET OVER unto the following parties ... the interest set out opposite their names, as an overriding royalty interest payable out of all oil, gas, casinghead gas and associated substances produced, saved and marketed from the lease." (emphasis added). The granting clause in the Westport to Chevron Assignment states, "The interest assigned herein is subject to ... an overriding royalty interest totaling one percent (1%) of 8/8ths... of oil and gas production saved, removed, or sold from the Lease." (emphasis added). The majority implies that if the parties intended to require the overriding royalty owners to wait until the lease produced 87.5 million barrels of oil before receiving royalty payments, the phrasing of the granting clauses would not have explicitly granted the overriding royalty owners an interest in all or 8/8ths of production. This is unconvincing. Even within the four corners of the assignment contract to the Belcher group, the "granting" clause was clearly never meant to be unqualified. In the ORRI assignment to the Belcher group, exceptions to royalty due on production are listed explicitly in the assignment contract. For example, the assignment contract states,
Moreover, the clear language of the "calculate and pay" clauses in both of the assignment contracts qualify the granting clauses by stating that the overriding royalty interests are to be calculated and paid "subject to the same terms and conditions as the landowner's royalty under the lease." (emphasis added).
The majority also finds the assignment contracts ambiguous because there is no reference to royalty suspension in the assignment contracts. The lack of the explicit reference to royalty suspension in the assignment contracts proves nothing. The "calculate and pay" clauses incorporate the terms and conditions of the landowner's royalty under the lease. Even under the proposed interpretation of the "calculate and pay" clauses that the majority urges, the terms and conditions the "calculate and pay" clauses allegedly refer to, the so-called "mechanics" of payment, are not explicitly stated in the assignment contracts. The fact that the assignment contracts do not both incorporate the royalty suspension provision by reference to the terms and conditions of the landowner's royalty under the lease and mention the royalty suspension provision by name does not an ambiguity make. Where a term is incorporated by reference to an extrinsic agreement, the contract need not
The majority also finds support for concluding the "calculate and pay" clauses are ambiguous in the fact that the overriding royalty interest owners were not a party to the lease. This is puzzling. It is well-established that when a contract incorporates terms of an extrinsic agreement by reference, the parties to the contract may not rely on the fact that they are not parties to the extrinsic agreement as a source of ambiguity. See JS & H Constr. Co. v. Richmond Cnty. Hosp. Auth., 473 F.2d 212, 216 (5th Cir.1973) (holding subcontractor bound by arbitration provision incorporated by reference from the general conditions of contract between primary contractor and principal).
Finally, Judge Higginson's concurring opinion contends the grammatical structure of the "calculate and pay" clauses support a finding of ambiguity. Although I agree with Judge Higginson that grammatically the clauses are susceptible to two different interpretations, under either reading the "calculate and pay" clauses unambiguously require application of royalty suspension to the overriding royalty interests. Admittedly, the prepositional phrase and subordinated clause "in the same manner and subject to the same terms and conditions" may modify the "calculate and pay" verb phrase, as Appellants imply, or may modify the subject of the sentence, "The overriding royalty interest," as Total and Statoil urge. Judge Higginson thus asserts it is ambiguous whether the "calculate and pay" clauses answer the question of whether the overriding royalty owners are entitled to a royalty payment, or merely provide instructions for the how to calculate and pay the royalty payments that are due under the assignment contract. Regardless of whether the lease is eligible for royalty suspension and the payment due is zero or the lease is ineligible for royalty suspension and a monetary payment is due, however, royalty suspension is inextricably linked to the calculation of the amount of payment due to the landowner under the lease. Thus, even if "terms and conditions" modifies "calculated and paid," "terms and conditions" modifies entitlement to the royalties vel non.
Appellants also claim that in the event we reject their interpretation of the "calculate and pay" clauses as unreasonable, the original parties to the assignment contracts made a mutual mistake in drafting the "calculate and pay" clauses. The district court cited two reasons for denying Appellants' claim for reformation. First, the district court held Appellants were attempting "to make an end-run around the parole-evidence rule by framing [their] argument as a request for reformation." The district court held that because the assignment contracts were unambiguous, parole evidence is not admissible to create ambiguity. Second, the district court held that because Total and Statoil, as non-parties to the original contracts, were entitled to rely on the integrity of the assignment contracts, reformation would impermissibly prejudice Total and Statoil. The district court misconstrued Louisiana's reformation law on both points.
The district court erred by failing to admit Appellants' extrinsic evidence of mutual mistake. When making a claim for reformation the claimant may offer parole evidence, not to vary the terms of the written instrument, but to show the "writing does not express the true intent or agreement of the parties." First State Bank & Trust Co. of E. Baton Rouge Parish v. Seven Gables, Inc., 501 So.2d 280, 289 (La.Ct.App.1986) (citing Valhi, Inc. v. Zapata Corp., 365 So.2d 867, 870 (La.Ct.App.1978)). "Even if the language utilized is clear and unambiguous, parol evidence is admissible to establish that the language does not embody the essence of the agreement to which there was mutual assent." Valhi, Inc., 365 So.2d at 870. The district court thus erred by refusing to admit extrinsic evidence of mutual mistake simply because the contract is unambiguous.
The district court also erred by denying Appellants' reformation claim on the grounds that Total and Statoil, as third parties, were entitled to rely on the integrity
Accordingly, I would affirm the district court's holding that the assignment contracts unambiguously apply the royalty suspension provision of the DWRRA to the overriding royalty interest owners. I would reverse the district court's grant of summary judgment on Appellants' claim for reformation, but only on the grounds specifically stated by the district court.
Respectfully, I dissent.
