Law School Case Brief
Tana Oil & Gas Corp. v. Cernosek - 188 S.W.3d 354 (Tex. App. 2006)
An oil and gas lease is a contract, and its terms are interpreted as such. Construing an unambiguous lease is a question of law for the court. Accordingly, the appellate court reviews lease-construction questions de novo. In construing an unambiguous lease, the court's primary duty is to ascertain the parties' intent as expressed within the lease's four corners. The court gives the language its plain, grammatical meaning unless doing so would clearly defeat the parties' intentions. The court examines the entire lease and attempts to harmonize all its parts, even if different parts appear contradictory or inconsistent, because the court presumes that the parties intended every clause to have effect. However, the court will not hold the lease's language to impose a special limitation unless the language is so clear, precise, and unequivocal that the court can reasonably give it no other meaning.
In March 1992, Tana entered into a field-wide gas purchase and processing contract with Clajon Gas Company, L.P. Tana agreed to sell Clajon all gas produced from the Class's combined leases and the right to process it. In exchange, Clajon agreed to pay Tana: (i) 84% of the combined monthly sales prices of the component-plant products extracted from the raw gas; and (ii) 84% of the alternate market resale price for all residue gas remaining after treatment. A class of mineral-interest owners (Class) brought an action against Tana for allegedly breaching its contract due to deducting post-production costs from the class’ royalty payments. The trial court ruled in favor of the Class and held that Tana breached the terms of its oil and gas lease agreements with the mineral interest owners. Tana challenged the trial court’s judgment.
Did Tana breach the terms of its oil and gas lease agreements with the mineral interest owners?
The Court held that Tana did not breach the terms of its oil and gas lease agreements with the mineral interest owners. According to the Court, the unambiguous language of the royalty provisions demonstrated that Tana was required to pay royalties on all amounts it actually received from its sale of the raw, unprocessed gas at the well. The Court averred that by paying the owners royalties based on 100 percent of the money it actually received, the company did pay royalties on 100 percent of the total volume of raw gas that it sold at the well. Thus, the Court concluded that Tana did not breach the agreements.
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