On May 24, 2021, Governor Abbott signed SB 1259 into law, effective immediately. The bill was introduced by the state legislature in response to the Texas Supreme Court’s 2017 decision in ConocoPhillips v. Koopmann, in which the Court held that the Texas division order statute did not prevent a royalty owner from bringing a common law breach of contract claim against a lessee for failing to make timely payment of royalties owed under an oil and gas lease.
In Koopmann, the lessors asserted a breach of contract claim against the lessee for failure to pay royalties due under their lease. Lessee argued that the lessors were not entitled to make a claim for breach of contract under general common law rules; their only cause of action against lessee would be for failure to pay royalties as statutorily authorized under Chapter 91 of the Texas Natural Resources Code. Section 91.402(a) requires payment of proceeds from the sale of oil and gas to be made within 120 days after the end of the month of first sale of production from the well, while subsection (b) provides that a payor may withhold such payments without interest beyond the 120-day period if there is a dispute or reasonable doubt as to the payee’s title to the interest in proceeds. The lessee’s argument in Koopmann was based on the premise that the legislature intended the statutory remedy provided in Section 91.404(c) – which allows a payee to bring a cause of action for nonpayment under the statute – as a payee’s sole remedy against a payor for non-payment of royalties, to the exclusion of common law causes of action such as breach of contract.
The Court disagreed with the lessees, holding that the royalty owners’ breach of contract claim was permissible under the statute as written. The Court pointed out that, despite holdings where a statutory claim was allowed to override a common law claim, that determination applied to “a unique set of standards and procedures;” a vast number of the Texas Supreme Court’s decisions in fact instructed that “[a]brogating common-law claims is disfavored,” and required “clear repugnance” between common law and statutory causes to favor statutory claims. It was further noted that, in fact, the Court had recently held that another section specifically of the Natural Resources Code did not prevent a plaintiff from bringing a common law claim for the same harm.SB 1259 amends Section 91.402 to explicitly provide:
A payee does not have a common law cause of action for breach of contract against a payor for withholding payments under [Section 91.402(b)] unless, for a dispute concerning the title, the contract requiring payment specifies otherwise.
The new version of the statute counteracts Koopman by specifically stating that despite the Texas Supreme Court’s clear preference of allowing both statutory and common law claims for a common harm, common law claims – such as breach of contract – cannot be pursued in the event of a lessee’s noncompliance with Section 91.402.
SB 1259 is not retroactive; it applies only to actions filed on or after May 24, 2021.
Kuiper Law Firm, PLLC, specializes in oil and gas issues; if you have any questions about how the information in this article may apply to you or your operations, do not hesitate to contact us.