Co-author Rees LeMay*

“Ratification is not a game of ‘gotcha’”, said the Texas Supreme Court in BPX Operating Co. v. Strickhausen.  The Court, in a 5-4 opinion, addressed the standard for an oil and gas lessor’s implied ratification of an unauthorized pooling. Among other lessons, this decision warns royalty owners to be careful when cashing those royalty checks.

Strickhausen owned land in La Salle County. Her lease with BPX prohibited pooling of her tract with other lands without her “express written consent”. Notwithstanding this requirement, BPX pooled Strickhausen’s tract together with adjacent tracts.

BPX asked Strickhausen’s to ratify the pooling arrangement, which she withheld. Following an unsuccessful exchange of settlement discussions in which both parties acknowledged the provision, BPX sent a royalty check calculated using the method prescribed under the unresolved pooling arrangement. Strickhausen cashed this check and others under the pooling arrangement for a lengthy period leading up to the commencement of the lawsuit.

In Strickhausen’s breach of contract suit the trial court granted BPX’s motion for summary judgment, reasoning that she had impliedly ratified the pooling arrangement by accepting royalty checks from the pooled unit. The court of appeals reversed, finding that Strickhausen’s “ongoing challenge” of the pooling arrangement created a fact issue as to implied ratification, notwithstanding her acceptance of the checks.

The Supreme Court’s totality of the circumstances approach

In agreeing with the result reached by the court of appeals, the Supreme Court introduced a “clear-showing requirement for implied ratification.” This standard looks to the totality of the circumstances, and to objective evidence of the allegedly ratifying party’s intent, thus functionally requiring that “the party asserting implied ratification… must show that [the other party’s] behavior clearly evidenced an intent to ratify.” In endorsing this test, the Court expressed its concern that an opposite holding might make ratification “a trap for the unwary’” in which one action inconsistent with rejection could be leveraged to establish ratification, notwithstanding the presence of other acts manifesting an intent to reject.

Strickhausen’s actions did not rise to a level of clarity sufficient to establish implied ratification as a matter of law. The holding gave significant weight to the clarity of the anti-pooling provision, noting that “a party armed with a lease prohibiting pooling without express, written consent should have less reason to worry about mistakenly giving her implied, unwritten consent.” The Court noted that her acceptance of the royalty checks meant that the “facts bearing on objective intent point[ed] in different directions,” but emphasized that the evidence must clearly establish the intent to ratify. Taking the express contract terms alongside the vigorous denial of the pooling arrangement by Strickhausen’s counsel, the majority held that “BPX could hardly have been under a misimpression about Strickhausen’s intentions.”

A vociferous dissent

Litigants similarly situated to Ms. Strickhausen should be mindful that four dissenters believed the majority misconstrued precedent establishing that “any act inconsistent with an intent to avoid a contract has the effect of ratifying the contract.” Not to be outquipped, the dissent opined that “actions may speak louder than words,” and that either acceptance of benefits from a wrongful act or failure to challenge the wrongful act may suffice on their own to establish ratification. Emphasizing the apparent fact that Strickhausen knew the royalty checks were calculated using the pooling method, the dissent would have held that her conduct “conveyed nothing less than her intention to accept the benefits of the pooling and thereby ratify the pooling agreement.”

Your musical interlude.

*Rees is a Gray Reed summer associate and rising 3L at Duke Law School.