## Facts

- Landowners leased mineral rights for gas production and reserved a royalty “based upon the market value at the well” for gas sold or used off the premises.
- In 1961, the lessees entered into a 20-year gas purchase contract with the only available purchaser in the area.
- The long-term contract was negotiated at arm’s length and in good faith and contained a price-escalation clause.
- The lessees paid royalties based on the contract price for years without dispute.
- By about 1976, the contract price fell below higher contemporaneous open-market prices.
- The lessors sued in 1978 seeking additional royalties, asserting that “market value” required a current, production-time valuation rather than the long-term contract price.

## Issues

1. Under a gas lease royalty clause based on “market value at the well,” must market value be recalculated at the time of production when gas is sold under a long-term purchase contract?
2. May a long-term contract price measure “market value” for royalty purposes if the contract was negotiated in good faith, at arm’s length, and reflected market conditions when executed?

## Decision

- The Louisiana Supreme Court affirmed the court of appeal and rejected the lessors’ claim for additional royalties.
- The court held that the lessees satisfied the “market value” royalty obligation by paying royalties based on the 1961 long-term contract price.
- The court treated the contract price as an appropriate measure of market value because the contract was arm’s-length, in good faith, and reflective of the market at the time of contracting.
- The court declined to require royalty recalculation using higher contemporaneous open-market prices once the contract price later diverged from current prices.

## Legal Principles

- For a “market value at the well” gas royalty clause, market value may be measured by the price in a long-term gas purchase contract when the contract was negotiated at arm’s length, in good faith, and reflected prevailing market conditions when executed.
- Absent evidence of bad faith, collusion, or an unrepresentative contract at formation, a lessee need not revalue “market value” at each production period merely because later market prices rise above the contract price.
- Lease language that does not expressly require ongoing, production-time revaluation may be construed in light of industry practice that long-term contracts are often necessary to secure a market and justify development.

## Conclusion

The court held that a bona fide long-term gas contract price can satisfy a “market value at the well” royalty clause, fixing market value at the time of a good-faith, arm’s-length contract rather than requiring later recalculation based on changing market prices.


Henry v. Ballard & Cordell Corp., 418 So. 2d 1334 (La. 1982)