In Smart v. 3039 RNC Holdings LLC, the court reminds us that it will harmonize all parts of a contract, even one that “is not a model of clarity”, to reach the correct result.

RNC owned the surface and 50% of the mineral estate in a 45.6 acre tract in Karnes County. RNC agreed to convey and Smart agreed to purchase the surface and part of the mineral estate. Nancy, part owner of RNC and a real estate agent, used the then-in-effect TREC Farm and Ranch Contract and an Addendum for Reservation of Oil, Gas and Other Minerals to memorialize their agreement.

Paragraph 2F of the Contract said any reservation … “is made in accordance with the attached Addendum or Special Provisions”. The parties addressed the percentage of minerals in the Addendum. Paragraph 11 of the Contract, Special Provisions, said, “Seller to convey 10% mineral interest (of what the seller owns – 50%) to Buyer, see mineral reservation.”

The Mineral Reservation Addendum checked the box, “Seller reserves an undivided 40% interest in the mineral estate owned by Seller. NOTE: If Seller does not own all of the mineral estate, Seller reserves only this percentage or fraction of Seller’s interest.

Nancy filled in the blanks and everyone signed. The title company prepared a Warranty Deed providing that “Sellers reserve an undivided 2/5ths of all oil, gas … “. The deed did not mention or account for the 50% of the mineral estate that was not RNC’s to convey.

The parties agreed that on its face the deed appeared to convey 3/5ths of the entire mineral estate and also agreed to reform due to a scrivener’s error. The parties disagreed on the division of the mineral estate.

Smart’s position: The Addendum unambiguously conveyed 30% of the total mineral estate and reserved 20% to RNC. RNC’s position: When read as a whole and properly harmonized, the contract unambiguously provided that RNC would reserve 40% of the total mineral estate and convey 10%.

30% to Smart and 20% to RNC.

Smart argued:

  1. The court should disregard Paragraph 11 and rely on the Addendum. That would render Paragraph 2F of the contract meaningless, so it failed.
  • Paragraph 11 should be subordinated to the Addendum because the Addendum attributes most essentially to the agreement. But the Addendum did not contain any essential terms that Paragraph 11 lacked.
  • The court may elevate one contractual provision over another without attempting to harmonize the two. No. That is contrary to principles of contract construction.
  • The parties intended for the Addendum to control because Paragraph 11 instructed the reader to “see the Addendum”.  No. The contract did not acknowledge the precedence of the Addendum.
  • Doubt as to the proper construction must be construed against RNC because Nancy drafted the agreement. No. Courts should not rely on that principle in determining whether the agreement is ambiguous or when construing an unambiguous agreement.

5% to Smart and 45% to RNC.

Paragraph 11 was subject to two potential meanings. 10% of RNC’s 50% or 5% of the total to Smart is a reasonable interpretation of Paragraph 11 in isolation, but that would require the court to ignore the Addendum. Thus 5% to Smart and 45% to RNC was not a reasonable conclusion.  

40% to RNC and 10% to Smart – Bingo!

Paragraph 11 and the Addendum could be harmonized to give effect to both. The result was the parties’ intention that 40% of the total mineral estate would be reserved to RNC and 10% conveyed to Smart. This was a reasonable construction of the contract as a whole.

The contract was not ambiguous. Summary judgment for RNC was proper.

Your musical interlude. Sinead O’Conner RIP.