Berthelote v. Loy Oil Co.

• Decision Date: 29 November 1933
• Docket Number: 7076.
• Citation: 28 P.2d 187,95 Mont. 434
• Parties: BERTHELOTE et al. v. LOY OIL CO. et al.
• Court: Montana Supreme Court

28 P.2d 187

95 Mont. 434

BERTHELOTE et al. v. LOY OIL CO. et al.

No. 7076.

Supreme Court of Montana

November 29, 1933

Rehearing Denied Jan. 10, 1934.

Appeal from District Court, Toole County; R. M. Hattersley, Judge.

Action by Louis Berthelote and another against the Loy Oil Company and others. From an adverse judgment, defendants appeal.

Affirmed.

In suit to cancel oil and gas lease, permitting lessors at close of testimony to amend complaint to conform to proof by alleging that well drilled was not drilled to depth sufficient reasonably to test location for oil or gas held not abuse of discretion (Rev.Codes 1921, § 9187).

Logan & Child, of Kalispell, and David R. Smith, of Helena, for appellants.

Louis P. Donovan and Henry McClernan, both of Shelby, for respondents.

ANDERSON Justice.

This is a statutory action brought under the provisions of sections 6902 to 6904, inclusive, Revised Codes of 1921, for the cancellation of an oil and gas lease, for the recovery of damages, and for the statutory penalty for the failure of the lessee, upon demand in accordance with these statutes, to release it of record.

Plaintiffs executed the lease in question on February 26, 1926, for a term of five years "and as long thereafter as oil and gas or either of them is produced from said land by the lessee." The lease described 3,600 acres of land and named the defendant Loy Oil Company as lessee. It further provided that, if no well was commenced on the described land on or before July 1, 1926, the lease should terminate "unless" delay rentals were paid as specified. It also provided that, if the first well was a dry hole, then "unless" the payment of rentals was resumed, the lease would terminate. This lease was an "unless lease," in the form known to the oil industry as "producers 88." The recited cash consideration was $1. The lessee, in consideration of the leasing of the premises described in the lease, agreed to deliver to the credit of the lessor one-eighth of all the oil "produced and saved," and "to pay the lessor one-eighth of all gas saved at the market value for the gas from each well where gas only is found while the same is being used off the premises."

Plaintiffs by their complaint alleged that the lease was terminated and forfeited by reason of the breach of its terms and conditions during the five-year term in this: (a) That there was a failure to drill a well sufficient to test any of the sands where oil and gas in the district are usually found in commercial quantities; (b) that no oil was found, and no gas in commercial quantities; (c) that, if oil or gas was discovered in commercial quantities in the wells drilled on the premises, the lessee failed to produce and market these products; and (d) that, if gas was found in commercial quantities, the lessee failed to develop the premises by drilling additional wells.

The defendants Loy Oil Company, K. A. Laux, and John Laux filed a joint answer, and the defendant R. A. Davidson filed a separate answer. As to the other defendants a default was entered as to two for failure to answer, and the action was dismissed as to others. The answering defendants by their several answers denied the breaches of the terms and conditions of the lease, and alleged affirmatively that within the term a well was drilled producing gas in commercial quantities, which well had been and was producing gas in such quantities. They further alleged that, commencing with February 22, 1931, and continuing to the time of the bringing of the action, the plaintiffs "constantly continually and violently interfered with the operation of the well." Issue was joined on these affirmative allegations by reply.

The pleadings contain numerous other allegations, but the foregoing résumé sufficiently states the issues for the purpose of deciding the questions here submitted for decision.

The drilling of the well referred to in the answers as the producing gas well was commenced in September, 1926. A flow of gas was encountered at a depth of approximately 1,450 feet during that year. In the spring of 1927, this well was drilled to a greater depth, where a flow of water was encountered. The lessee attempted to shut off the water and utilize the flow of gas discovered the previous year. Attempts were made to drill two other wells on the leased premises, but neither gas nor oil was found in either of them.

Gas was used on the premises, about the camps, and in the drilling operations on the other wells. On February 23, 1931, or on the day following, the lessee attempted to connect the gas well with the pipe line running to a drilling rig operating on a neighboring lease. One of the plaintiffs asserted ownership in the pipe being used by the lessee, and removed the same to a point near his residence.

It is manifest from the record that none of the wells ever encountered any of the usual productive sands in the district or area wherein the lands in question are located.

Plaintiffs produced an expert, who testified that he made an accurate measurement, using a meter, and found that the well on May 2 1931, had an "open flow of 46,600 cubic feet per day, and a rock pressure of 38 pounds." Witnesses testified that the only constant market for gas in that vicinity was the Montana City Pipe Line, and that the flow of gas from the well in question was not of sufficient pressure to permit the well to be connected with this pipe line, as no gas from the well could be forced therein. This pipe line was located some seven miles distant from the well.

On February 27, 1931, plaintiffs served upon the lessee and other defendants notice of forfeiture of the lease and demand for a release of the same of record, which was refused. This action was commenced on June 1, 1931. No royalty was ever paid or tendered to plaintiffs prior to the service of the notice, other than the sum of $1.90, which offer was refused.

The case was tried as an action at law. No evidence was offered as to any damage other than as to attorneys' fees. A general verdict was returned in favor of the plaintiffs for $1,000 attorneys' fees, and $100 statutory penalty. Judgment in accordance with this verdict and for the cancellation of the lease was entered. The appeal is from the judgment.

The defendants contend, as they did throughout the trial at every opportunity, that the court was in error in trying the case as one at law and not in equity. They assert that, even though conceding that an action brought under the terms of sections 6902 to 6904, inclusive, supra, is an action at law, and further that though there may be implied covenants in an oil and gas lease, the breach of which may entitle the lessor to release by way of cancellation when relief is sought for the breach of implied covenants, the action is then not one at law but in equity.

By the above sections a purely statutory remedy not theretofore existing was conferred, and, although it embodies the equitable relief of a release of record, it must be classed as an action at law. Solberg v. Sunburst Oil & Gas Co., 70 Mont. 177, 225 P. 612.

All the breaches of the terms of the lease relied upon by plaintiffs in their complaint, with the exception of the failure of the defendants to produce oil and gas within the five-year term, are predicated upon implied covenants. This lease contained no express terms prescribing the extent of either exploration, operation, development, protection against drainage, or the diligence with which these should be carried on. This is a usual condition with oil and gas leases. Merrill on Implied Covenants of Oil & Gas Leases, 18.

Where, as here, a lease is granted for a nominal initial consideration, and the lessee agrees to pay as a return therefor a share of the oil or gas produced from the land, it is apparent that the principal consideration for the grant is the promise of the lessee to pay the royalty. The payment of the royalty is, however, contingent upon production. Where the real purpose is thus disclosed but the lease does not contain in itself express provisions creating duties in the lessee to do such acts as were necessary for the accomplishment of that purpose, the law implies them. Summers on Oil & Gas, 391; Merrill on Implied Covenants, 18-21; Thornton on Oil & Gas (5th Ed.) §§ 154-157.

The courts have implied various covenants in oil and gas leases in furtherance of this purpose, as is illustrated by the following cases: Brewster v. Lanyon Zinc Co., 140 F. 801, 809, 72 C. C. A. 213; J. M. Guffey Petroleum Co. v. Oliver (Tex. Civ. App.) 79 S.W. 884; Acme Oil & Mining Co. v. Williams, 140 Cal. 681, 74 P. 296; Gadbury v. Ohio, etc., Gas Co., 162 Ind. 9, 67 N.E. 259, 62 L. R. A. 895; Andrews v. Andrews, 256 Pa. 24, 100 A. 521; Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846; Logan Natural Gas & Fuel Co. v. Great Southern Gas & Oil Co., 126 F. 623, 61 C. C. A. 359; Mansfield Gas Co. v. Alexander, 97 Ark. 167, 133 S.W. 837; Mills v. Hartz, 77 Kan. 218, 94 P. 142.

This being an "unless" lease, it terminated ipso facto so far at least as it was expressly provided therein that it should be terminated upon the breach of its conditions. McDaniel v. Hager-Stevenson Oil Co., 75 Mont. 356, 243 P. 582; Steven v. Potlatch Oil & Refining Co., 80 Mont. 239, 260 P. 119; Bowes v. Republic Oil Co., 78 Mont. 134, 252 P. 800. But was the lease so terminated upon the breach of one or more implied covenants?

Mr Justice Van Devanter, then circuit judge, in the case of Brewster v. Lanyon Zinc Co., supra, said: "Whatever is implied in a contract is as effectual as what is expressed. Implication is but another name for intention, and if it arises from the language of the contract when considered in its entirety, and is not gathered from the mere expectations...