Extension of Implied Duty to Market and Post-Production Cost Deductions to In-Kind Royalty Leases

Introduction

Francis Kaess v. BB Land, LLC, decided by the Supreme Court of Appeals of West Virginia on June 6, 2025, presented two certified questions:

Whether an oil and gas lease containing an in-kind royalty provision carries an implied duty to market the royalty owner’s share when the owner cannot or does not take physical possession of production.
Whether the post-production cost-deduction standards of Wellman v. Energy Resources, Inc. (2001) and Estate of Tawney v. Columbia Natural Resources (2006) apply to in-kind royalty leases.

The majority held “yes” to both questions, effectively extending to in-kind royalty provisions (where a lessor receives physical oil and gas at the wellhead) the well-established duties and cost-allocation rules previously confined to proceeds-based royalty leases. Justice Walker, joined by Justice Bunn, dissented, arguing that the majority rewrote freely negotiated contracts and blurred the essential distinction between proceeds and in-kind royalty clauses.

Summary of the Judgment

The Court’s majority opinion announced two new legal principles:

An implied duty to market exists in every oil and gas lease, including those that grant in-kind royalties, whenever the royalty owner does not take physical possession of its share.
The requirements for deducting post-production costs set forth in Westman and Tawney—expressly demanding clear contractual language before shifting any marketing or transportation costs to lessors—apply equally to in-kind royalty provision leases.

In dissent, Justice Walker insisted the clear wording of an in-kind royalty lease obliges a lessee to deliver the physical share at the wellhead, and only if the lessor lacks the infrastructure to take that share does an implied duty to market arise. Under that narrow duty, any post-production costs the lessee incurs while marketing the royalty owner’s share may be charged against the owner. But absent that circumstance, there is neither an implied marketing covenant nor the need to apply proceeds-lease precedents.

Analysis

Precedents Cited

Wellman v. Energy Resources, Inc. (2001): Held that in a proceeds royalty lease silent on post-production costs, the lessee must bear all costs of exploration, production, marketing, and transportation.
Estate of Tawney v. Columbia Natural Resources (2006): Clarified that to shift any marketing or transportation costs to a proceeds-royalty lessor, the lease must expressly enumerate the specific deductions and method of calculation.
McCullough Oil, Inc. v. Rezek (1986): Recognized that an oil and gas lease is both conveyance and contract; contractual portions govern party obligations.
Cotiga Development Co. v. United Fuel Gas Co. (1962): Established that unambiguous written instruments are enforced according to their plain terms without judicial rewriting.
Fraternal Order of Police, Lodge No. 69 v. City of Fairmont (1996) and Auto Club Prop. Cas. Ins. Co. v. Moser (2022): Confirmed courts do not rewrite contracts or insurance policies contrary to their clear language.

Legal Reasoning

The majority began with industry-specific precedent on post-production cost deductions. It reasoned that nothing in an in-kind clause expressly forbade an implied marketing covenant, so Wellman and Tawney should dictate cost allocation. Justice Walker’s dissent countered:

Contractual Primacy: A clear, unambiguous in-kind royalty clause grants the lessor physical production at the wellhead. There is no need to imply a duty to market where the royalty owner can take physical delivery.
Trigger for Implied Duty: An implied marketing covenant arises only when the royalty owner cannot or does not take in-kind delivery. At that point, to prevent waste, the lessee must market the owner’s share and may charge the owner its proportional post-production costs.
Limitation of Wellman/Tawney: Those precedents addressed proceeds-based royalty provisions. They do not govern in-kind leases, and the majority’s universal application rewrites contract provisions freely negotiated by parties.

Impact

The majority’s new rule has significant implications:

Contract Drafting: Parties must now anticipate that any in-kind royalty lease may carry an implied duty to market, even if the owner has or could build infrastructure to take in-kind delivery.
Litigation Risk: Royalty owners may challenge deductions more frequently, arguing the lessee failed to obtain the “best price reasonably available” or improperly allocated costs.
Industry Uniformity vs. Freedom to Contract: The decision prioritizes uniform application of post-production cost rules over respect for negotiated lease terms. Future courts and legislators may revisit the balance between standardization and contractual autonomy.

Complex Concepts Simplified

In-Kind Royalty Provision: A clause under which the lessor receives a physical share of oil and gas at the wellhead rather than a cash percentage of sale proceeds.
Proceeds Royalty Provision: A clause granting the lessor a share of money the lessee receives upon selling production; post-production costs may reduce that share if the lease allows.
Implied Duty to Market: An unwritten obligation, inferred by courts, requiring lessees to sell a royalty owner’s share when the owner cannot or does not take physical delivery, to prevent waste.
Post-Production Costs: Expenses incurred after extraction—such as gathering, compression, dehydration, transportation, and marketing—needed to prepare oil and gas for sale.

Conclusion

Francis Kaess v. BB Land marks a departure from West Virginia’s traditional contract‐focused approach to oil and gas leases by extending an implied duty to market—and the strict Wellman/Tawney cost‐allocation framework—to in-kind royalty provisions. The majority’s holding diminishes the primacy of clear lease language and curtails parties’ freedom to contract. Moving forward, drafters must explicitly address marketing obligations and cost sharing in both proceeds and in-kind royalty clauses. The decision may also prompt legislative action to clarify or limit courts’ power to imply duties in unambiguous contracts. Justice Walker’s dissent underscores the principle that courts enforce contracts as written, cautioning against judicial rewriting of negotiated terms in any context.