Opinion
No. 05-08-00953-CV
Opinion issued August 14, 2009.
On Appeal from the 15th Judicial District Court Grayson County, Texas, Trial Court Cause No. 07-0250-15.
Before Justices WRIGHT, BRIDGES, and FRANCIS.
MEMORANDUM OPINION
HS Production, Inc. appeals the trial court's summary judgment awarding Dorchester Minerals, L.P. compensatory royalties and attorney's fees for breach of an oil and gas lease. In three issues, HS contends the trial court erred in rendering summary judgment because (1) the lease is unenforceable and ambiguous, (2) there was no admissible evidence of the amount of damages, and (3) there was no evidence of attorney's fees. We affirm the trial court's judgment as to liability. We reverse the judgment as to damages and attorney's fees and remand for proceedings consistent with this opinion.
Dorchester owned varying undivided mineral interests in property subject to an oil and gas lease dated December 17, 2003 between Dorchester as lessor and HS as lessee. The lease had a primary term of thirty-six months and contained a compensatory royalty clause. The clause, Paragraph 4.e., provided that if, during the term of the lease, oil or gas was produced and/or sold in paying quantities from a well situated within 1,000 feet of the leased property or any property pooled with it, or where drainage occurred from lands not owned by Dorchester (called "offset wells"), HS was required to either drill a well to protect against "such drainage" or pay compensatory royalties based on the production from the offset wells. HS had the option of electing whether to drill or pay, but if no election was made, the clause provided HS was deemed to have elected to pay.
It is undisputed that two producing wells, the Rich "A" #1 and the J.N. Brown #1, were completed on lands adjacent to and within 1,000 feet of the lease tract in July 2004 and October 2005, respectively. It is also undisputed that HS failed to either drill a well on the Dorchester site or pay Dorchester compensatory royalties. Dorchester demanded payment, which HS did not make. Dorchester sued HS for breach of contract for failing to pay the compensatory royalties due on the offset wells, and HS answered with a general denial.
Dorchester moved for summary judgment on its claim, asserting it was entitled to judgment as a matter of law. The motion sought recovery of $202,000 in compensatory royalties for the Rich "A" #1 well and $266,000 for the J.N. Brown #1 well and for attorney's fees. In support of its motion, Dorchester attached as evidence a copy of the lease, unauthenticated copies of the Texas Railroad Commission oil production reports of the offset wells, responses by HS to Request for Admissions, and a demand letter signed by Dorchester's counsel and addressed to HS. Although the motion referenced an affidavit on attorney's fees, no such affidavit was attached.
In response to the motion, HS asserted the lease automatically terminated on September 1, 2004 when HS failed to timely pay compensatory royalties on the first offset well, the Rich "A" #1, and while it "may owe" Dorchester compensatory royalty on production from that well, Dorchester had failed to provide evidence as to the value of any royalty due it prior to the lease's termination. HS asserted that the J.N. Brown #1 well was drilled and completed after the lease's automatic termination, and therefore no royalties were owing from that well's production.
Without further explanation or analysis, HS also asserted that "[i]f the Lease terms are ambiguous, there is a question for the jury to decide such that summary judgment would be improper" and that the compensatory royalty provision was "unenforceable because of the mutual mistake of the parties." Finally, HS asserted there was no evidence of attorney's fees.
The trial court conducted a hearing on the motion. At the hearing, HS argued, consistent with the only argument advanced in its response to the motion, that the parties' disagreement concerned when the lease terminated and specifically asserted HS was "not denying that we owe compensatory royalties for the period before the lease terminated." The trial court granted Dorchester's motion and awarded Dorchester $202,000 in compensatory royalties on the Rich "A" #1 well, $266,000 on the J.N. Brown #1 well, pre-and post-judgment interest, and more than $28,000 in attorney's fees and court costs. The day after the trial court signed the judgment, Dorchester filed its evidence of attorney's fees. This appeal ensued.
The standard of review for summary judgment is well established. See Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548 (Tex. 1985). To be entitled to summary judgment, a plaintiff must conclusively prove all elements of its cause of action. MMP, Ltd. v. Jones, 710 S.W.2d 59, 60 (Tex. 1986) (per curiam). We review a summary judgment de novo to determine whether a party's right to judgment was established as a matter of law. Dickey v. Club Corp., 12 S.W.3d 172, 175 (Tex. App.-Dallas 2002, pet. denied). Issues not expressly presented to the trial court by written motion, answer, or other response shall not be considered on appeal as grounds for reversal. Tex. R. Civ. P. 166a(c).
Because HS's second issue addresses its liability under the contract, we begin with that issue. HS argues summary judgment was improper because (1) the compensatory royalty clause is unenforceable because it is "so incomplete in its material terms that even applying rules of construction it cannot be given a single, definite meaning" and (2) the consequences of nonpayment are in "irreconcilable conflict."
With respect to the first argument, although HS characterizes this issue as one of ambiguity of the compensatory royalty clause, its actual argument is that it has no obligation to pay because the compensatory royalty provision is missing "essential terms" and is therefore unenforceable. In its response to the motion for summary judgment, HS asserted, without any explanation or analysis, the compensatory royalty provision was unenforceable because of mutual mistake; it did not argue the provision was missing essential terms that rendered it unenforceable. Indeed, at the hearing on the summary judgment motion, HS specifically asserted that it did not deny that it owed compensatory royalties. Given HS's complete failure to challenge its liability below on the ground raised on appeal, we conclude this issue is waived. See Tex. R. Civ. P. 166a(c).
HS next argues that if the compensatory royalty clause imposes an enforceable obligation, the lease contains conflicting, irreconcilable provisions regarding the consequences of nonpayment, rendering the contract ambiguous. Specifically, HS argues the contract provides for automatic termination when compensatory royalty payments are not timely made while Dorchester asserts it had one of three remedies available.
In construing a written contract, our primary focus is to ascertain and give effect to the intent of the parties as reflected in the agreement. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); Farmer Enters., Inc. v. Gulf States Ins. Co., 940 S.W.2d 103, 107 (Tex. App.-Dallas 1996, no writ). To achieve this objective, we examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. Id.
Whether a contract is ambiguous is a question of law for the court to decide by examining the contract as a whole in light of the circumstances present when the contract was executed. Id.
A contract is not ambiguous merely because the parties advance conflicting interpretations of the agreement. Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 465 (Tex. 1998). Rather, for an ambiguity to arise, both interpretations must be reasonable. See id. If provisions of a contract appear to be in conflict, we must, if possible, harmonize those provisions by using the applicable rules of construction. Ogden v. Dickinson State Bank, 662 S.W.2d 330, 332 (Tex. 1983). One such rule of construction is that when there is a conflict between two provisions, the specific provision controls over the general provision. U.S. Enters., Inc. v. Dauley, 535 S.W.2d 623, 630 (Tex. 1976); Maxus Exploration Co. v. Moran Bros., 773 S.W.2d 358, 363 (Tex. App.-Dallas 1989), aff'd, 817 S.W.2d 50 (Tex. 1991).
HS directs us to Paragraph 19 of the contract, which it contends contains conflicting provisions regarding the consequences of its failure to pay compensatory royalties due under Paragraph 4.e. Paragraph 19 provides, in relevant part, as follows:
19. Remedy for Breach. The parties hereto agree that in the event of Lessee's breach, default or non-performance (collectively herein called "Breach") of Paragraph 4.e., the Lessor may, at Lessor's sole option immediately (i) terminate this lease, (ii) terminate this Lease and collect from Lessee all monies due hereunder or (iii) collect from Lessee all monies due hereunder.
* * *
The parties hereto further agree that in the event of Lessee's Breach of Paragraphs 4.a., 4.b., 4.c., 4.d., 4.f., and 8. of the Lease, then the remedy for such Breach shall be the automatic termination of this Lease or such other remedy as is specified in each such paragraph.
HS argues these two provisions irreconcilably conflict because of the following highlighted language in Paragraph 4.f.(1):
(1) Production Royalties. Except as specifically provided above, all royalties due under the provisions of Paragraphs 4.a., 4.b., 4.c., 4.d., or 4.e. shall be paid to Lessor free and clear of all costs and expenses of making such oil, gas or gas products merchantable or otherwise treating or transporting the same at the address specified below: . . .
Lessee shall use Lessee's best efforts to cause all royalty payments due Lessor under the provisions of Paragraphs 4.a., 4.b., or 4.c. to be paid to Lessor directly by the purchaser of the oil, gas and products. Payment of the royalties shall be received by Lessor within 30 days of the end of the calendar month during which oil is sold and within 60 days of the end of the calendar month during which gas is sold. In the event the royalties are not timely paid as set forth in the preceding sentence, then this Lease shall automatically terminate as of 7:00 A.M. on the first day of the month following the end of the calendar month when such royalty should have been paid.
Having considered the language of Paragraph 19, as well as the language of Paragraph 4.f.(1), we cannot agree with HS that these provisions contain irreconcilable conflicts or that they are susceptible to more than one reasonable interpretation. The contract shows that the parties provided a specific remedy provision for the breach of the obligation to pay compensatory royalties. That provision, the first subparagraph of Paragraph 19, gave Dorchester the option to terminate the lease, terminate the lease and collect monies due, or collect the monies.
In contrast, subparagraph three of Paragraph 19 specifically addresses the breach of other contractual provisions and provides for automatic termination of the lease; it does not include Paragraph 4.e. Although it includes a clause, 4.f., that does mention 4.e., this portion of the lease provided that royalties were to be paid free and clear of costs and expenses. The provision later provides for automatic termination for failure to timely pay royalties in general. We conclude the provisions simply do not conflict. And even if they appeared to, the general language in Paragraph 4.f. is subordinate to the specific provision regarding remedies for violating the compensatory royalty clause.
As for HS's argument that such a reading allows Dorchester to keep the lease in force and continue to collect royalty payment beyond the three-year primary term, even Dorchester agrees that HS owes compensatory royalties only for the three-year primary term of the lease. Finally, to the extent HS argues the contract is ambiguous because of conflicts regarding the place of payment, such conflicts, if they exist, are simply not material here where HS does not dispute that it made no payment. We conclude the contract unambiguously provided Dorchester with one of the three remedies for the breach of the compensatory royalty clause as set out in subparagraph one of Paragraph 19. We overrule the second issue.
HS also relies on another subparagraph of Paragraph 19 that it claims also provides for automatic termination of the lease. To the contrary, the subparagraph relied upon provides Dorchester with the same remedies as provided for in subparagraph one.
In its first issue, HS argues the trial court erred in rendering summary judgment on the amount of compensatory damages because Dorchester failed to present competent evidence. In particular, HS argues Dorchester relied on unauthenticated copies of "what purport to be Texas Railroad Commission records" to show production from the two offset wells and offered no evidence to establish the pricing applied to the production from the wells. "A complete absence of authentication is a defect of substance that is not waived by a party failing to object and may be urged for the first time on appeal." Blanche v. First Nationwide Mfg. Corp., 74 S.W.3d 444, 451 (Tex. App.-Dallas 2002, no pet.). Although Dorchester attached copies of well production reports, the exhibit was not authenticated and thus is not competent proof of damages. Even if the production reports were proper proof, there is no evidence of the pricing of the production from these wells to arrive at the compensatory royalty amount. To the extent Dorchester urges this Court to consider a November 17, 2006 demand letter, addressed to HS and signed by Dorchester's counsel, as evidence of a lesser amount of compensatory royalties, that evidence suffers the same defect in that it also was not authenticated. Moreover, the amounts stated in the letter are unsupported conclusions and therefore not competent summary judgment proof. See Paragon Gen. Contractors, Inc. v. Larco Constr. Inc., 227 S.W.3d 876, 882 (Tex. App.-Dallas 2007, no pet.) ("An affidavit that is conclusory is substantively defective, and the failure to object or obtain a ruling on an objection does not waive the substantive defect."). Dorchester failed to conclusively establish the amount of damages. We sustain the second issue. Given that attorney's fees were awarded for a breach of contract, and because Dorchester failed to establish its damages, the award of attorney's fees must also be reversed.
Having concluded Dorchester failed to provide proof of damages, we must determine the proper disposition in this case. Neither party provided any briefing on the disposition in the event we overruled the issue related to liability but sustained the damages issue.
Texas Rule of Appellate Procedure 44.1(b) provides that a court may not order a separate trial solely on unliquidated damages if liability is uncontested. Tex. R. App. P. 44.1(b). Unliquidated damages are damages that cannot be determined by a fixed formula and must be established by a judge or jury. Black's Law Dictionary 419 (8th ed. 2004). Here, the contract provides the formula for determining the compensatory royalty; Dorchester failed to provide admissible evidence of the numbers to plug into that formula. Moreover, HS has raised no complaint about the formula. Under these circumstances, we conclude the amount of compensatory royalties due under the contract is not a claim for unliquidated damages. C.f. Ortiz Oil Co. v. Geyer, 138 Tex. 373, 159 S.W.2d 494, 497 (Tex. 1942) (concluding that demand of royalty owners could be calculated on undisputed factors, such as amount of oil produced and price of oil, and was liquidated demand) We affirm the trial court's judgment regarding liability on Dorchester's breach of contract claim. We reverse the trial court's judgment awarding damages and attorney's fees and remand for further proceedings on those issues only.