Frontier, on the other hand, concedes that “course of performance” is relevant (Frontier Br. at p. 23) but urges the court to apply the public-policy based rule, specific to oil and gas leases, that construes ambiguities in favor of the lessor. See, e.g., J.J. Fagan & Co. v. Burns, 247 Mich. 674, 226 N.W. 653 (1929) (“[O]il and gas leases are to be construed for the benefit of the lessor and against the lessee,” citing Summers, Oil and Gas (1927) 372); McClanahan Oil Co. v. Perkins, 303 Mich. 448, 6 N.W.2d 742, 743 (1942); Schroeder v. Terra Energy, Ltd., 223 Mich.App. 176, 565 N.W.2d 887, 892 (1997); Boyer v. Tucker & Baumgardner Corp., 143 Mich.App. 361, 372 N.W.2d 555, 556 (1985). Aurora challenges Frontier's cases as outdated and abandoned by the authors of the cited texts.
As noted above, however, the Court finds ¶ 15 of the 1957 Conveyances ambiguous, and will accordingly proceed to consider extrinsic evidence. While Pan Gas's reliance on Schroeder v. Terra Energy, Ltd., 565 N.W.2d 887 (Mich. Ct. App. 1997), a case similar in many respects to the case at bar, is not misguided, ultimately this case is distinguishable from Schroeder. In Schroeder, a lessor and lessee in an oil and gas lease disagreed about the meaning of the term "gross proceeds at the wellhead."
Chesapeake sells the gas at a market away from the well, which results in increased expenses, including gathering, compression, and treatment costs. See Schroeder v. Terra Energy, Ltd., 223 Mich. App. 176, 565 N.W.2d 887, 891 (1997) (noting that "natural gas is not typically sold at the wellhead"). Poplar Creek refers to these costs as "production costs," but they are more appropriately labeled post-production costs because these expenses are incurred after the gas leaves the wellhead.
The Chesapeake Defendants also cite state case law in support of their assertion that the netback method is properly used to determine the wellhead value of the gas. SeeBaker v. Magnum Hunter Prod., Inc. , 473 S.W.3d 588, 594-95 (Ky. 2015) (citing Poplar Creek ); Kilmer v. Elexco Land Servs., Inc. , 605 Pa. 413, 990 A.2d 1147, 1158 (2010) (Pennsylvania law "permit[s] the calculation of royalties at the wellhead, as provided by the net-back method in the Lease"); Schroeder v. Terra Energy, Ltd. , 223 Mich.App. 176, 565 N.W.2d 887, 893-95 (1997) (finding that leases using "at the wellhead" language must permit deduction of post-production costs to give effect to the language in the contract between the parties). The royalty paragraph in the Gross Royalty Leases envisions two distinct factual scenarios that determine how royalties will be paid based on the facts.
See, e.g., McClanahan Oil Co. v. Perkins, 6 N.W.2d 742, 743 (Mich. 1942) (noting that the ordinary rules of construction of contracts govern oil and gas leases, except that ambiguities are strictly construed in favor of the lessor); Schroeder v. Terra Energy, Ltd., 565 N.W.2d 887, 892 (Mich. Ct. App. 1997) (noting that nothing in Fagan purported to abolish general precepts of contract construction). Frontier agrees that other contract interpretation rules apply to oil and gas leases, but objects to the bankruptcy court's use of the Fagan rule as a rule of last resort.
Thus, in jurisdictions following the at-the-well rule, "at the well" lease language refers to the location as well as the quality of the gas for calculating a royalty, regardless of where the lessee sells the gas. Piney Woods Country Life School at 231; Schroeder v. Terra Energy, Ltd., 223 Mich.App. 176, 187, 565 N.W.2d 887 (1997) (" ‘At the well’ refers to proceeds minus refining and transportation costs, as opposed to proceeds at the point of sale, where refining and transportation costs are not deducted"); Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 244 (6th Cir.2011) ("at the well" refers to gas in its natural and unprocessed state, and a lessee is entitled to deduct the costs of processing and transportation from the lessor's royalty payment); Sternberger v. Marathon Oil Co., 257 Kan. 315, 322, 894 P.2d 788 (1995) ("The lease's silence on the issue of postproduction deductions does not make the lease ambiguous. The lease clearly specifies that royalties are to be paid based on ‘market price at the well’ ").
However, some jurisdictions have interpreted the phrase "gross proceeds at the well" to mean that royalties are to be calculated based on sales price minus post-production costs. Schroeder v. Terra Energy, Ltd., 565 N.W.2d 887, 891, 894 (Mich.Ct.App. 1997) ("gross proceeds at the well" contemplates the deduction of post-production costs from the sale price of the gas, based on the view that at the well refers to location for royalty valuation purposes); see also 3 Howard R. Williams Charles J. Meyers, Oil and Gas Law § 645.2, at 597-98(2000) ("A royalty or other nonoperating interest in production is usually subject to a proportionate share of the costs incurred subsequent to production where the royalty or nonoperating interest is payable `at the well.'")
"In interpreting contracts capable of two different constructions, we prefer a reasonable and fair construction over a less just and less reasonable construction." Schroeder v Terra Energy, Ltd, 223 Mich App 176, 188; 565 NW2d 887 (1997). In 2005, Anderson Woods recorded an amendment to the master deed; the 2005 amendment authorized Anderson Woods to create a "special assessment district" to facilitate the construction of a common sewage disposal system.
The words of a contract are interpreted according to their plain meaning. Schroeder v Terra Energy, Ltd, 223 Mich App 176, 182; 565 NW2d 887 (1997). When the words of a contract are clear and unambiguous, the contract must be enforced according to its terms.
Analyzing parties' course of dealing (or course of performance, course of conduct, or similar terms for the parties' historical conduct pertaining to each other and their execution of a contract) may be an appropriate way to resolve an ambiguity, at least under some circumstances. See Schroeder v Terra Energy Ltd, 223 Mich App 176, 191; 565 NW2d 887 (1997); see also Detroit Police Officers Ass'n v City of Detroit, 452 Mich 339, 345; 551 NW2d 349 (1996); Restatement Contracts 2d, § 209. Savoy is therefore clearly within its rights under the easement to drive heavy industrial trucks and equipment upon it.