Fixed Royalty or Floating Royalty: Depends on How the Courts Interpret It

3/8/2019

In June 2018, the Texas Supreme Court decided U.S. Shale Energy II, L.L.C. v. Laborde Props., L.P., 551 S.W.3d 148 (Tex. 2018), and once again was asked to decide whether a royalty interest was an unchanging fraction of total production (a “fixed” royalty) or a fraction of the royalty provided for under a mineral lease (a “floating” royalty). The reservation at issue reserved: “an undivided one-half (1/2) interest in and to the [Royalty]” and “the same being equal to one-sixteenth (1/16) of production.”

The majority found that the first phrase, read independently, was a floating royalty interest because there was no indication a lease was in existence at the time the reservation was made and that the second clause supported this interpretation because it clarified what the fraction would be using the then-standard 1/8 royalty that was commonly provided for in oil and gas leases. The dissent argued that the fraction in the first phrase could be either fixed or floating, citing Brown v. Havard, 593 S.W.2d 939 (Tex. 1980), and that the second phrase, read together with the first, supported that the intent was to be a fixed royalty.

Both the majority and the dissent followed the Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016), holistic approach to interpret the contract, which shows that courts could come to different conclusions when using the same approach to interpret a provision.

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