Amoco Production Co. v. Charles B. Wilson, Jr., Inc.

• Decision Date: 12 March 1999
• Docket Number: No. 77,999,77,999
• Citation: 976 P.2d 941,266 Kan. 1084
• Parties: AMOCO PRODUCTION COMPANY, Appellee, v. CHARLES B. WILSON, JR., INC.; UMC Petroleum Corporation; Charles B. Wilson, Jr.; Billy R. Powell; and Barbara F. Powell, Appellants.
• Court: Kansas Supreme Court

Page 941

976 P.2d 941

266 Kan. 1084

AMOCO PRODUCTION COMPANY, Appellee, v. CHARLES B. WILSON, JR., INC.; UMC Petroleum Corporation Charles B. Wilson, Jr.; Billy R. Powell; and Barbara F. Powell, Appellants.

No. 77,999.

Supreme Court of Kansas.

March 12, 1999.

Syllabus by the Court

1. Rules of construction of written agreements are reviewed and restated.

2. When a joint venture exists, the parties stand in a close relationship of trust and confidence and have the right to demand and expect from the other party full, fair, open, and honest disclosure of everything affecting the joint venture.

3. The operator in a joint operating agreement for the development of acreage for oil and gas purposes owes to the non-operators a duty of fair dealing.

4. A provision in a typed exhibit to a joint operating agreement for development of oil and gas acreage is deemed to control the acreage and interests to be governed by the agreement where there is a conflict with the printed portion of the agreement.

5. Under the facts of this case, the non-operators are entitled to share with the operator the development of a Unit Area that is legally described with clearly enumerated depths, even though the operator obtained a valid oil and gas lease on the acreage it agreed to contribute to the joint venture, considerably after the time the joint operating agreement was executed.

James G. Flaherty, of Anderson, Byrd, Richeson & Flaherty, of Ottawa, argued the cause and was on the briefs for appellants Charles B. Wilson, Jr., Inc., Charles B. Wilson, Jr., Billy R. Powell, and Barbara F. Powell.

Terry J. Barker, of Pezold, Richey, Caruso & Barker, of Tulsa, Oklahoma, argued the cause, and Joseph C. Woltz, of the same firm, and Eric L. Witcher and William J. Graybill, of Graybill & Witcher, of Elkhart, were with him on the briefs for appellant UMC Petroleum Corporation.

Steven D. Gough, of Kahrs, Nelson, Fanning, Hite & Kellogg L.L.P., of Wichita, argued the cause, and Ruth B. Johnson, of Denver, Colorado, was with him on the brief for appellee Amoco Production Company.

LARSON, J.:

This is an appeal by the non-operators of an oil and gas lease, Charles B. Wilson, Jr., Inc.; Charles B. Wilson, Jr.; Billy R. Powell; and Barbara F. Powell (collectively Wilson) and UMC Petroleum Corporation (UMC), from a decision construing the terms of an operating agreement dated August 1, 1980, with Amoco Production Company (Amoco) as the operator, covering "[a]ll rights below the base of the Hugoton" in Section 35, Township 29 South, Range 40 West, Stanton County, Kansas.

The trial court granted summary judgment to Amoco, holding oil and gas leasehold interests in the north half (N/2) of Section 35, which Amoco did not possess at the time of signing the operating agreement but later acquired, were Amoco's separate property and not subject to the agreement. This decision was affirmed by the Court of Appeals. We granted Wilson's and UMC's petition for review.

Facts

On August 1, 1980, Charles B. Wilson, Jr., and Amoco entered into a joint venture to explore for and develop all oil and gas rights below the base of the Hugoton formation in Section 35, Township 29 South, Range 40 West in Stanton County, Kansas. Wilson held a valid oil and gas lease on the south half (S/2) of Section 35 and Amoco represented and purported to own an oil and gas lease on the north half (N/2) of Section 35. The interests of each party was stated to be 50%.

Amoco had obtained an oil and gas lease from the Plummer interests in 1944, covering the N/2 of Section 35. The lease contained no depth limitation, but title records showed Santa Fe Land Improvement Company in its conveyance to Warren W. Plummer had retained all mineral rights below 3,400 feet.

Amoco had obtained a title opinion in 1946 informing it of this depth limitation and knew that it had no mineral rights or oil and gas leasehold on the N/2 of Section 35 below 3,400 feet. Despite this knowledge, Amoco represented to Wilson in the agreement it prepared that the "Unit Area" included "all of the lands, oil and gas leasehold interests and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands, oil and gas leasehold interests and oil and gas interests are described in Exhibit 'A.' " Exhibit A described "All rights below the base of the Hugoton" in Section 35.

Amoco did have a valid oil and gas lease on the N/2 of Section 35 from the Hugoton formation down to 3,400 feet, and the parties drilled and have apparently jointly operated a producing gas well from the Panoma Council Grove formation as the result of the 1980 agreement. Charles Wilson, Jr. assigned portions of his interests in Section 35 to the other non-operators who are parties to this action.

In mid-1995, Amoco began acquiring oil and gas leases covering formations below 3,400 feet in the area around Section 35. One of the leases acquired was from Parker & Parsley, who, were successors in interest of the Santa Fe Land Improvement Company. This oil and gas lease covered the rights below 3,400 feet on the N/2 of Section 35.

Correspondence and negotiations between Amoco and Wilson followed, with Amoco first suggesting a farmout of Wilson's interests in the S/2 of Section 35. Wilson pointed to the description of the Unit Area in the operating agreement as covering all of Section 35 and contended his interests had the right to participate in any well drilled in the Unit Area. Wilson made this election before Amoco commenced drilling a well in Section 35. Amoco continued to contend that because it had obtained a new lease, the N/2 below 3,400 feet was not covered by the operating agreement. This was disputed by the Wilson interests who demanded that Amoco comply with the terms of the operating agreement. Amoco refused and commenced drilling down to the St. Louis formation 5,800 feet below the surface where it completed several producing oil wells.

Amoco contended in this declaratory judgment action that the failure of the title clause in the operating agreement and, alternatively, a mutual mistake, precluded the non-operators from claiming any interest in the new wells. Wilson argued that Unit Area was designated by Amoco as all of Section 35, the title could not fail where no title existed, Amoco's claim to reform the agreement was barred by the statute of limitations, the mistake was unilateral not mutual, Wilson and Amoco intended to agree on a joint venture covering all operations below the base of the Hugoton formation in all of Section 35, Amoco prepared the agreement, and ambiguous language should be construed against it. Wilson and UMC counterclaim for damages or participation in the producing oil and gas wells under the terms of the operating agreement.

After discovery, both parties moved for summary judgment, making essentially the arguments raised by their pleadings as set forth above.

The trial court entered summary judgment in favor of Amoco. It found the operating agreement to be unambiguous, held the agreement was intended to cover only the oil and gas leases in existence on August 1, 1980, that Wilson could have requested a title opinion and learned of Amoco's lack of ownership below 3,400 feet, and both parties were knowledgeable and could have protected themselves with something more than a failure of title clause. The trial court held that to enforce the agreement to the described unit area would in effect be adding an after-acquired title clause. The court relied on Drilling, Inc. v. Warren, 185 Kan. 29, 340 P.2d 919 (1959), which was a "wash out" overriding royalty case where we held if the parties intended to have a covenant apply to unrelated leases subsequently acquired on the same property they would have put language in the granting clause of an overriding royalty assignment to that effect.

The Court of Appeals, in an unpublished opinion, affirmed the trial court, quoted much of the trial court's decision and relevant portions of the operating agreement, and ultimately held "the parties before this court are sophisticated and experienced in the oil and gas industry and quite able to protect themselves from potential unfavorable contract provisions. We are satisfied the parties here agreed upon a contract remedy for failure of title and should be bound by the contract provisions."

We granted Wilson's petition for review.

Standard of Review

Judgment was granted on cross-motions for summary judgment. However, the standard of review which is often stated that the party against whom summary judgment is sought must have the record considered in the light most favorable to it, Moorhouse v. City of Wichita, 259 Kan. 570, 576, 913 P.2d 172 (1996), does not govern here because the legal effect of a written instrument is essentially a question of law for the appellate court to decide. We determine questions of law irrespective of the construction made by the trial court. Ekan Properties v. Wilhm, 262 Kan. 495, 503, 939 P.2d 918 (1997).

This brings into our consideration a number of well-settled rules of construction which we set forth in Holly Energy, Inc. v. Patrick 239 Kan. 528, 534, 722 P.2d 1073 (1986), as follows:

"Whether an ambiguity exists in a written instrument is a question of law to be decided by the court. Mobile Acres, Inc. v. Kurata, 211 Kan. 833, 508 P.2d 889 (1973). Language in a contract is 'ambiguous' only when words used to express the meaning and intention of the parties are insufficient in that the contract may be understood to reach two or more possible meanings. Havens v. Safeway Stores, 235 Kan. 226, 678 P.2d 625 (1984). In construing a written instrument the language used anywhere in the instrument should be taken into consideration and construed in harmony with all other provisions. Heyen v. Hartnett, 235 Kan. 117, 679 P.2d 1152 (1984). The document must be construed from its four corners and all provisions must be considered...