concurring in part, dissenting in part. The trial judge in a comprehensive and detailed set of findings meticulously gave his reasons for his decision in this complicated lawsuit. The majority has reversed those findings in every respect.
This is an oil and gas case and essentially there were two kinds of leases in question. The leases were signed by Homer Hillard and his wife as landowners and Stephens Production Company as lessee. Homer Hillard died and his heirs pursued this lawsuit to interpret and enforce the leases according to the law.
The first set of leases in question contained a clause which read:
The lessee shall pay lessor as royalty for the gas equal one-eighth of the value of such gas calculated at the rate of prevailing market price at well per thousand cubic feet...” [Emphasis added.]
The threshold question concerning the interpretation of this italicized language, which is largely ignored by the majority, is whether the language is plain and unambiguous. The trial court found that it was and, therefore, did not consider the abundant testimony offered by the Hillards and Stephens as to what the parties actually meant; or what “prevailing market price at well” meant to the oil and gas business community in the Arkhoma Basin where the land is located. So, to the trial court, the issue was not what the parties may have actually intended but whether the parties should be bound by the plain and ordinary meaning of the language in the lease. The trial court found:
... This court is not convinced that these words should not be considered in their ordinary and commonly understood meaning.
Even though the witnesses who testified and who were handling the day-to-day business for Stephens Production Company may have had in mind that the amount which Arkansas Louisiana Gas Company was willing to pay for the gas at that time constituted the prevailing market price, it may have been an unfortunate selection of words which did not in reality express Stephens’ real intent.
The words ‘market price’ have a very common and ordinary meaning with which all of us are familiar. They are used in various transactions and simply refer to what the commodity will bring when placed on the market. And, of course, the word ‘prevailing’ refers to the conditions in existence at any given time and are changeable from day-to-day or at other given periods.
It is my view, therefore, that the testimony as to the intent of the parties was not necessary to arrive at an interpretation of the words used in the lease with reference to the rate of royalty payments and, even though the Court heard this testimony, it has not influenced this finding.
Why does the majority find that ‘‘prevailing market price at well” cannot have a commonly understood meaning? The majority simply does not satisfactorily answer that question but considers only what it determines to be the real intent of the parties. Necessarily this means that careful consideration should be given to all evidence presented to the trial court during this lengthy trial. That the majority has not done.
Stephens argued to the trial court, and on appeal, that the language is ambiguous and that it was actually meant to create a “proceeds” lease; that is, the Hillards were to be paid a royalty from the proceeds Stephens received from a long term sale agreement it had made with Arkansas Louisiana Gas Company. There was evidence that officers of Stephens knew what a “proceeds” lease was and they could have easily inserted that term but chose not to. Instead, Stephens prepared and signed the lease which contained the common phrase “market price.” I would submit Stephens knew exactly what it was doing. As the court stated in Lightcap v. Mobil Oil Corporation, 221 Kan. 448, 562 P.2d 1 (1977), when it considered similar leases: “There are two commonly recognized types of leases employed in the gas industry, ‘proceeds’ leases and ‘market value’ leases.” There is no doubt there were lengthy negotiations between Hillard and Stephens and there is evidence that unless Stephens had signed such a favorable lease agreement with Hillard, he would have gone to a competitor. In that regard, the court made this finding:
Both parties admit that Arkansas Louisiana Gas Company, Arkansas Western Gas Company, and Arkansas Oklahoma Gas Company were all three buying and transporting gas intrastate from or in the Arkhoma Basin during this period although not a highly competitive situation. And, yet, there was testimony that Arkansas Western Gas Company maintained a pipeline not more than one mile from some of the Hillard Wells. This clearly could have constituted a competitive situation for the purchase of the Hillard gas; and since Mr. Walker testified that the negotiations between Stephens and Arkla were arms length and resulted from lengthy and extended conferences, it is the Court’s opinion that Mr. Walker would not have hesitated to have gone to Arkansas Western had there been a substantial price differential.
Several states have considered the effect of similar language in natural gas leases. Generally Oklahoma and Louisiana have sided with the producers and the lessees in determining that the phrase “market value at well” actually means “proceeds.” Tara Petroleum Corporation v. Hughey, 630 P.2d 1269 (Okla. 1981); Henry v. Ballard & Cordell Corp., 401 So.2d 600 (La. Ct. Appeals, 1981). The leading authorities for the other position, and that adopted by the trial court, are the states of Texas, Montana, and Kansas. Texas Oil & Gas Corporation, 630 P.2d 1269 (Okla. 1981); Montana Power Company v. Kravik, 586 P.2d 298 (Mont. 1978); Lightcap v. Mobil Oil Corporation, supra.
Finding that the language of the lease should be given its ordinary meaning, the trial court proceeded to determine the market price. In doing so, the court, in my judgment, correctly rejected the exaggerated claims of both the lessors and the lessees, finding a reasonable middle ground. The lessors essentially wanted the trial court to consider interstate sales in determining the market value; the lessees wanted the court to make the lease over into a “procéeds” lease, or at least limit the market to Franklin County. The trial court recognized the peculiar matter of the market in the Arkhoma Basin, there being essentially no strong competition between buyers and, as the finder of fact, used the available evidence to determine a fair market value. In doing so, the trial court considered the "fair field price”, which is a price determined by the Arkansas Public Service Commission. Certainly, I would not agree that the fair field price would always be the controlling factor of the market value, but it was a factor to be considered and because of the peculiar nature of the market in that area, I cannot say the trial court was clearly wrong in its finding regarding the market value.
I agree with the majority that Act 222, Acts of Arkansas, 1929, [Ark. Stat. Ann. §§ 53-509 — 514] does not void the second types of leases. The Act is penal in nature and must be strictly construed. It only allows for three remedies: Forfeiture of rights, treble damages, or criminal sanctions. Ark. Stat. Ann. §§ 53-514 and 53-515. There are no provisions in the Act to revise the lease as the trial court did. Furthermore, the Act was obviously designed to penalize lessees that received kickbacks, or otherwise dealt improperly to deny a lessor his usual minimum royalty. There is no evidence at all Stephens acted in any way improperly. In fact, to the contrary, it appears the leases were entered into at arms length in every respect.