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Williams v. Sohio Petroleum Co.

APRIL 22, 1958.




Appeal from the Circuit Court of Saline county; the Hon. C.E. WRIGHT, Judge, presiding. Decree reversed.


Rehearing denied May 26, 1958.

This case involves the construction and effect of an oil and gas lease, in which the lessors reserved 1/32 of 7/8 of all oil and gas produced under the lease, as an "overriding" royalty, in addition to the owner's customary 1/8 royalty. The lease is the standard Producers 88 form, with typed addition concerning the override.

The plaintiffs were the owners and operators of a farm, and leased 125 acres to C.E. Brehm (not a party to the suit) for oil and gas purposes. It is undisputed that they owned the tract of land, but only 1/4th of the mineral rights. The land is described in the document with the usual provision for 1/8th royalty on all oil and gas produced and saved, also the usual "lesser interest" provision, the effect of which is that, if lessors own less than all the mineral rights, their royalties would be proportionate to their fractional interest. There was a provision for pooling this land with other land, and, at the bottom of the document, the following was typed in:

"In addition to the royalties provided for above, the Lessors hereby reserve an overriding royalty of 1/32nd of 7/8ths of all oil and gas produced and saved under and by virtue of this oil and gas lease."

At the date of the lease, this was "wildcat" territory, but it has since been developed and there are now producing wells on the premises, and others on pooled land. The defendant is the purchaser of the oil from the operators. It has tendered to plaintiffs distribution agreements which contemplate paying for 1/4th of the 1/8th owner's royalty, and likewise 1/4th of 1/32nd of 7/8ths of oil from the premises, and like fractions of the proportion of oil produced under the pool arrangement. Plaintiffs do not question the 1/4th of 1/8th royalty, but claim that the overriding royalty applies to all oil from the premises, and in proportion from pooled property, instead of basing it on their 1/4th of the mineral rights; and this suit ensued.

On the hearing, the trial court admitted parol testimony of the negotiations leading up to the execution of the lease, and overruled defendant's objections that this violated the Parol Evidence Rule. A man named York testified that he had been employed to obtain oil leases in this territory for C.E. Brehm, that he had negotiated with one of the lessors, and was told they owned all of the surface and 1/4th of the mineral rights. He offered them a cash bonus of $10 per acre for a lease on customary terms. This offer was rejected, and he was told the owners did not want cash, they wanted an override of 1/32nd of 7/8ths of all the oil and gas. After several unsuccessful efforts to obtain other terms, York says he went to his superior and obtained authority to meet the proposal. He so informed the lessors, and he prepared the form of lease above mentioned. As they were about to sign, he was again asked if this had the effect of giving them 1/32nd of 7/8ths of "all the gas and oil," and he answered "Yes." Then the signing was completed.

The lessors' testimony as to the negotiations was to the same effect. The trial court recognized that, under precedents in other states, the words in the written instrument would produce an overriding royalty as to the 1/4th of the mineral rights owned by plaintiffs, rather than as to the total acreage. However, the court ruled that the plaintiffs had been induced to sign by the representations of Brehm, through his agent York, and that those representations should be given effect. Accordingly, the defendant was ordered to account to plaintiffs on the basis of oil produced from the "premises," as prayed in the complaint.

On this appeal the defendant contends that the authority of York was not proved, because, when a question of agency is involved, authority cannot be based solely on the statements of the purported agent; that the lesser interest clause in the lease applies to all royalties in the lease including an overriding royalty; that the court erred in admitting parol testimony to vary the written agreement; and that the court had undertaken, in effect, to reform the lease, although one of the parties to it was not a party to the suit.

As to the first point, we agree with a statement by the trial judge, that there is no issue of agency in the case. The complaint was based upon a lease to Brehm, which the answer admitted, and the defendant later introduced in evidence the original lease signed by Brehm. The authority of York was not questioned by pleadings or objections at the trial. Hence, the rule applied when agency is directly involved cannot be invoked here.

We agree that the wording of the whole lease is properly considered when the court is called upon to construe its legal effect. But much of the argument about the lesser interest clause is beside the point, and we do not propose to hold that any overriding royalty reserved in the lease, regardless of wording, is automatically reduced by that clause.

Where the minerals are owned by several parties, it is natural that the customary 1/8th owner's royalty should be divided according to the fractional interests. If this entire royalty were paid to one fractional owner, the lessee would still be liable to the others. To protect the lessee from such double liability, the lesser interest provision is inserted, and it is in the nature of a covenant of title. Griffin v. Stanolind Oil & Gas Co., 133 Tex. 45, 125 S.W.2d 545.

The share of the lessee, usually 7/8ths, is commonly called the "working interest." An overriding royalty is normally a charge on that working interest as distinguished from the owners' interest. Kingwood Oil Co. v. Bell, 136 F. Supp. 229; Wright v. Brush, 115 F.2d 265; Halbert v. Hendrix, 121 Ind. App. 43, 95 N.E.2d 221. Obviously, nobody acquires such an overriding interest merely by virtue of ownership of mineral rights. It is acquired only by contract, and is payable in the amount and to the person designated by the contract, and no one else. No question of double liability to other owners can arise therefrom, hence, the reason for a lesser interest clause does not apply.

This digression is included only because much of the argument in the briefs concerns the lesser interest clause, and defendant cites a Texas case, hereafter mentioned, which did refer to the lesser interest clause. However, the extent of the overriding royalty may be, and often is, limited by the extent of the mineral interest of the owner. It depends upon the wording of the reservation. The majority of the decisions hold this wording controls, without reference to a lesser interest clause, and the ...

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