Are unpaid royalty payments for oil-and-gas leases subject to simple or compound interest? Simple, the Texas Supreme Court said in Samson Exploration, LLC v. Bordages on June 7, 2024.

Samson Exploration entered into oil-and-gas leases on properties in multiple Texas counties for several families. Samson’s lease with the Bordages family stated that royalty payments were due by the first day of the calendar month following 60 days after production. If Samson did not make those payments on time, the lease imposed a late charge the next day “based on the amount due” and “at the maximum rate allowed by law,” due on the last day of that month.

The Bordages family sued Samson for unpaid royalties. Samson had paid all royalties it owed the Bordages family plus late charges, but the parties disagreed about what would happen if Samson was late on paying those charges. The Bordages family argued that another late-charge calculation was triggered, which applied not only to the past-due royalties as of the first day of the month, but also to the accrued late charges as of the last day of the prior month. Samson agreed that the late charges constituted a form of interest at an 18% rate, but said the late charges were not compounded.

The question before the Court was whether the Bordages were entitled “to late charges on the late charges, compounding them each month.” The Court said no.

The Court analyzed whether Texas favored compound interest in the absence of a written agreement on the applicable rate of interest. It answered this question in the negative, stating that from Texas’ “earliest jurisprudence” the default rule has been that simple interest applies unless parties “expressly stipulate” to compound interest.

The next question was whether the lease between Samson and the Bordages family “expressly stipulate[d]” to compound interest. Once again, the Court said no. The lease stated that interest becomes “due and payable on the last day of each month,” and because that language did not “expressly stipulate” compounding interest, the Court could not read compounding interest into the lease. Thus, only simple interest was available.

What can oil-and-gas lessors and lessees take from Samson? If you want compounding interest on unpaid royalty payments, do not leave it to chance. Make sure it is “expressly stipulate[d].”