Caselaw Update: Royalty Checks and Implied Ratification

Caselaw Update: Royalty Checks and Implied Ratification

Under contract law generally, a party who has not expressly accepted an agreement can nevertheless be deemed to have impliedly accepted, or ratified it, by their actions. For example, a party may imply their acceptance of a contract by accepting the benefits they would receive under its terms. This principle also translates to oil and gas agreements. In Hooks v Samson Lone Star, the Texas Supreme Court held that a lessor’s acceptance of royalties calculated on a pooled basis in effect ratifies the pooling agreement, despite a lack of express consent from lessor. However, in a similar case earlier this month, the Court limited the effect of that single factor.  

In BPX Operating Company v. Strickhausen, operator BPX sought consent to pool from lessor Strickhausen. Although Strickhausen refused to sign the pooling agreements she received, BPX proceeded to pool her mineral estate and sent her royalty checks based on unit production. Strickhausen contested BPX’s authority to pool her interest, but accepted and deposited the royalty checks she received from BPX, which were calculated on a pooled basis. BPX argued that by accepting the pooled royalties, Strickhausen had ratified the pooling agreement.  

While the trial court agreed with BPX, the higher courts reversed its decision. The Texas Supreme Court clarified that a lessor’s acceptance of royalty checks may (but not must) imply ratification. Instead, the Court endorsed a totality of the circumstances test, in which the acceptance of pooled royalties is a substantial, but not sole, factor. Distinguishing this case from Hooks, the Court noted that the lessor in Hooks accepted the royalties without challenging the operator’s authority to pool, but here, Strickhausen continued to object even after depositing the royalty checks. Because this lessor was clear in her intent not to ratify and continued to bargain to avoid pooling, BPX could not rely solely on the deposit of royalty checks as lessor’s consent to their pooling authority.  

From a policy perspective, the Court recognized that if check deposits were dispositive as to ratification or consent, lessors would be unable to benefit from royalties until disagreements were settled. Instead, the Court protected lessors’ rights to collect royalties on their mineral estate while concurrently negotiating contract terms with lessees. In light of this new development, operators should carefully consider all relevant factors before assuming that a lessor has impliedly ratified an agreement.  

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.