The course of dealings between the parties over a period of time can lead to modifications and waivers of provisions within an oil and gas lease and related contracts. A recent Dallas Court of Appeals case, Tollett v. MPI Surface, LLC, Case No. 05-17-00435-CV (Tex.Civ.App.- Dallas, no writ), illustrates that point.
In 2012, Cecelia Tollett entered into a groundwater sales agreement that allowed MPI Surface, LLC (“MPI”) to extract groundwater from Tollett’s land to sell to others for various uses in the oil and gas industry. Among other provisions, the agreement provided that Tollett was to be paid a 25% royalty of the gross sale proceeds with said royalties to be “… due on the same day of each month in which sale proceeds are collected by MPI.” Furthermore, the agreement provided that failing to timely and fully pay the royalties “shall be considered a material breach” allowing Tollett to terminate the agreement. Further, the agreement required MPI to establish and maintain a point of sale meter to record sales. Under the agreement, Tollett could install her own meters if MPI failed to install meters. The agreement also provided that “… MPI’s failure to timely and fully meter the water sales and disposal water shall be considered a material breach” of the agreement allowing Tollett to terminate.
MPI drilled four wells and began making royalty payments. However, MPI never installed any sort of point-of-sale metering system. Tollett did not complain and did not install her own meters. Over the course of the next four years, royalties were paid monthly but not on the same day on which payments were collected from the third-party buyers. MPI intended to pay the royalties on the 20th of each month, but generally was either a couple of days early or a couple of days late. The agreement contained a 60-day grace period. Over the first four years of the agreement, Tollett never complained about the monthly royalty payments and never complained about whether the payments actually fell on the 20th or a few days later.
In late 2015 and early 2016, a dispute arose. Tollett claimed that MPI was in material breach of the agreement by not making same-day payments and by not complying with the metering provisions. Tollett terminated the agreement and litigation ensued. Tollett sued for unpaid royalties from late 2015 and early 2016. MPI defended by arguing, among other matters, waiver by course-of-dealing. MPI also counterclaimed for breach of contract.
At the trial level, Tollett lost. The trial court found that Tollett waived her right to declare breach of royalty payments and metering provisions by virtue of the course of dealings between the parties. The court found that Tollett failed to meet her burden of proving that MPI committed a “material breach.” Furthermore, the court found that MPI was not in breach of the agreement at the time of termination. Thus, the trial court awarded MPI breach of contract damages and attorney’s fees. The trial court judgment was affirmed on appeal.
In affirming the trial court, the Court of Appeals held that the royalty payment provision of the agreement was ambiguous. Ambiguity exists when two or more legitimate meanings can be discerned from the contract language. The agreement stated:
“Landowner shall be entitled to royalties due on the same day of each month in which sale proceeds are collected by MPI.”
A plain reading of those words leads to two legitimate meanings – payments are due on the same day of each month or payments are due on the same day that the payments are collected by MPI. The ambiguity is created by the word “each.” At trial and on appeal, MPI argued in favor of the former meaning and Tollett argued for the latter. Because of the ambiguity, the Court looked to other provisions in the contract and to evidence outside of the contract. The Court noted that it was undisputed that, from the start, MPI made monthly payments and never once paid Tollett on the same day it collected sale proceeds from its customers. The evidence also showed that Tollett never complained about the monthly payment schedule. Based on those facts, the Court upheld the trial court’s determination that MPI’s interpretation was correct — monthly payments were due, but not necessarily same-day payments.
The Court of Appeals went further, however, and held that even if same-day payments were due, Tollett waived her right to demand same-day payments by her course of conduct. With respect to metering, everyone agreed that the metering provision was clear and unambiguous. Everyone also agreed that MPI never complied with the metering provision. The Court of Appeals agreed with the trial court that “… MPI breached the Agreement regarding metering.” However, the Court upheld the finding that Tollett waived her right to claim this as a material breach by her course of conduct over four years. She never complained about the lack of metering, never challenged MPI’s monthly statements, and did not install her own meters as allowed by the agreement. Under Texas law, waiver “… can be established by a party’s express renunciation of a known right, or by silence or inaction for so long a period as to show an intention to yield the known right.” Tollett’s behavior fit this definition.
More careful attention to the language of the contract, as well as possibly an “anti-waiver” paragraph in the contract, might have avoided this no doubt costly dispute.