Unreported / Non-Citable
Background
The parties’ relationship was governed by two substantively identical oil-and-gas leases. A form royalty clause allowed the lessees either to deliver one-fifth of the oil produced or to pay the average posted market price for that share. An addendum gave the lessors the right to elect an in-kind royalty upon 30 days’ written notice and stated that, “pending such notice,” the lessees would purchase or market the lessors’ oil at a cash price equal to its market value on the day of sale.
The lessors argued that the addendum’s market-value measure superseded the form clause from the outset, even though they had not elected an in-kind royalty. The trial court adopted that interpretation on summary judgment, and the jury calculated damages using market value. After the court of appeals reversed and remanded in its February 26, 2026 opinion, both sides sought rehearing.
The Court’s Holding
The court denied all rehearing motions and issued a supplemental opinion clarifying the proper valuation method without changing its earlier opinion or judgment. Reading “pending” to mean “during,” the court held that market value on the day of sale applies only during the 30-day period after the lessors give written notice electing an in-kind royalty.
Before such notice, the form royalty clause remains operative, permitting payment based on the average posted market price or delivery in kind. The lessors’ competing interpretation would leave the form clause with no effect from the moment the leases were signed, contrary to Texas rules requiring courts to harmonize contractual provisions when reasonably possible. Because the jury was instructed to calculate damages using market value rather than average posted market price, the charge misstated the law and probably caused an improper verdict, requiring reversal and remand.
Key Takeaways
- An addendum supersedes a form lease provision only when the provisions irreconcilably conflict; courts must harmonize them when a reasonable reading gives effect to both.
- The phrase “pending such notice” meant during the 30-day notice period following an election to take royalties in kind, not the entire period before notice was given.
- A damages verdict based on the wrong contractual royalty measure was harmful jury-charge error and could not stand.
Why It Matters
The decision illustrates that an addendum’s general priority language does not automatically erase a form royalty provision. In construing oil-and-gas leases, Texas courts will seek a reading that preserves the operation of both provisions before finding an irreconcilable conflict.
The supplemental opinion also clarifies the economic sequence established by these leases: average posted market price or in-kind delivery before an election, market value during the 30-day transition period, and in-kind delivery afterward. The court’s original judgment reversing and remanding the case remained unchanged.