BHP Petroleum Co., Inc. v. Okie

• Decision Date: 28 August 1992
• Docket Number: No. 91-14,91-14
• Citation: 836 P.2d 873
• Parties: BHP PETROLEUM COMPANY, INC., Appellant (Defendant), v. Margaret Daniel OKIE and Bill Daniel, Appellees (Plaintiffs).
• Court: Wyoming Supreme Court

Page 873

836 P.2d 873

BHP PETROLEUM COMPANY, INC., Appellant (Defendant), v. Margaret Daniel OKIE and Bill Daniel, Appellees (Plaintiffs).

No. 91-14.

Supreme Court of Wyoming.

Aug. 28, 1992.

Rehearing Denied Oct. 13, 1992.

Lawrence A. Yonkee and Tom C. Toner of Redle, Yonkee & Toner, Sheridan, Neil J. Short, Casper, and Paul F. Hultin and David A. Bailey of Parcel, Mauro, Hultin & Spaanstra, P.C., Denver, Colo., for appellant.

J.N. Murdock and Mark W. Gifford of Reeves, Murdock, Lewis & Gifford, and Houston G. Williams of Williams, Porter, Day & Neville, Casper, for appellees.

Before MACY, C.J., and THOMAS, CARDINE, URBIGKIT ^* and GOLDEN, JJ.

MACY, Chief Justice.

Appellant BHP Petroleum Company, Inc. appeals from the lower court's judgment and decree ordering BHP to pay a "differential royalty" out of production from the Bighorn 2-3 well as a remedy for its breach of a contract with Appellee Margaret Daniel Okie. ¹

We reverse.

BHP raises the following issues:

1. Did the District Court fail to make findings and conclusions on the issue of the appropriate remedy as required by W.R.C.P. 52(a)?

2. May the contracts be partially rescinded?

3. Were the elements required for rescission proven by the Plaintiffs?

4. By ordering payment of a "differential royalty" has the court rewritten the contract between the parties?

5. Does this "differential royalty" constitute an impermissible penalty and a forfeiture of BHP property?

6. Are the conclusions that BHP's conduct constituted a bad faith breach of the contract clearly erroneous?

7. Is the decree awarding a "differential royalty" based on the exercise of a sound discretion?

This controversy concerns the breach of an agreement between Mrs. Okie and BHP, the unit operator of the Madden Deep Unit, a federal oil and gas unit located in Fremont and Natrona Counties, Wyoming. In 1970, Mrs. Okie committed her minerals to the Madden Deep Unit in exchange for a unique consent agreement giving her, among other things, the right to participate in decisions affecting development of the unit. The agreement worked satisfactorily for both Mrs. Okie and a succession of unit operators until June 1988 when BHP failed to inform Mrs. Okie that it was proposing a 4,000-acre participating area ² around the Bighorn 2-3 well rather than the 2,560-acre area Mrs. Okie expected. ³

An increase in the participating area acreage from 2,560 acres to 4,000 acres would have significant monetary repercussions for both Mrs. Okie and BHP. Although disputed at trial and perhaps oversimplified here, an increase in the participating area's acreage would mean fewer wells to drill because a single well would cover a larger area. ⁴ If an additional well did not have to be drilled, BHP could conceivably save its approximately 9.2 percent share of the drilling costs or almost $2 million on a well costing $20 million to drill. On the other hand, a larger participating area would dilute Mrs. Okie's unit royalty percentage. For Mrs. Okie, using today's gas prices, a 2,560-acre participating area would have meant estimated annual royalty payments of $226,000, whereas a 4,000-acre participating area would result in projected annual payments of $215,000, or a difference of $11,000 per year.

In May 1988, the Bighorn 2-3 well had been completed, and initial well pressure tests indicated that it would be a prodigious gas producer. Mrs. Okie and other interested parties understood that a 2,560-acre participating area would be used for the well. However, on the basis of the encouraging well test results, Gil Kutchins, a representative of one of the larger working interests, approached the Bureau of Land Management about using a 4,000-acre participating area. Darryl Watts, the BLM's petroleum engineer for the Rawlins district, indicated that he would be receptive to a 4,000-acre participating area.

Acting upon Watts' positive response, Kutchins suggested to Patrick Martin, a land manager for BHP, that BHP should move quickly to apply for the larger participating area because Watts was to be transferred shortly and the incoming engineer might not be as "reasonable." In early June, Martin telephoned Watts and obtained assurances that Watts would review the application for a 4,000-acre participating area before he transferred from the BLM's Rawlins office on July 5th. In a facsimile transmitted on June 22nd, BHP notified the working interest owners of its intent to apply for a 4,000-acre participating area and explained that the application was being expedited so as to secure approval before Watts' departure. This facsimile was not transmitted to either Mrs. Okie or her representatives, nor were they informed in any other manner of BHP's decision to apply for a 4,000-acre participating area prior to BHP actually filing the application.

On June 24, 1988, BHP submitted the formal 4,000-acre application to the BLM's office in Rawlins and sent a copy of the application to Mrs. Okie's representatives. On July 6th, the BLM's district office approved BHP's application. Mrs. Okie appealed the approval of the 4,000-acre area to the state director of the BLM who ordered the district office to reconsider its approval. The district office reaffirmed its initial approval, whereupon, in a second appeal, the state director found no justification for the 4,000-acre area and ordered the district office to amend its original decision to require a 2,560-acre participating area.

Two days before the state director made his final decision, Mrs. Okie brought this suit, alleging that BHP breached the consent agreement by not allowing her to participate in the proposal to enlarge the participating area. In her complaint, Mrs. Okie sought damages and declaratory relief, declaring that her proceeds of production from the Bighorn 2-3 well should be apportioned on a lease basis rather than on a unit royalty percentage. At the pretrial conference, Mrs. Okie waived her claim for damages. ⁵

The trial court agreed with Mrs. Okie, finding that BHP had materially breached the agreement in bad faith and that Mrs. Okie was entitled to equitable relief. In its decree, the district court granted Mrs. Okie a "differential royalty" to "be computed by taking the difference between six and one-quarter percent (6.25%) ('lease royalty') of the value of all production from ... the Bighorn 2-3 well ... and that royalty otherwise paid to the Plaintiffs under the Unit Agreement for production from such well ('unit royalty')." The decree also restored BHP to its position prior to its June 1988 breach by allowing BHP to retain a portion of the well drilling costs for the Bighorn 2-3 well before making any differential royalty payments to Mrs. Okie.

The precise monetary impact of the lower court's decree cannot be determined because gas prices fluctuate, actual production is unknown, and the well will remain shut in until a plant is built to remove the hydrogen sulfide. Although somewhat speculative, BHP, using relatively conservative figures, calculated Mrs. Okie's royalty payments under the decree. As already discussed, Mrs. Okie's annual unit royalty payment for a 2,560-acre participating area would be about $226,000. If Mrs. Okie were paid on a lease basis, she would receive approximately $570,000 in annual royalty payments. This additional $344,000 per year ($570,000 minus $226,000) would be paid by BHP.

On appeal, BHP does not question the lower court's finding that it breached the agreement. Instead, BHP's arguments address whether the lower court's remedy was proper and whether BHP's breach was in bad faith. Therefore, our analysis is premised upon the assumption that BHP did breach the agreement.

The lower court found that Mrs. Okie was "entitled to equitable relief as a result of the breach of contract." The court's findings of fact and conclusions of law do not specify what type of equitable relief was being granted. Both parties appear to view the relief as a partial rescission. Whether the equitable relief granted was a rescission, partial rescission, or some other equitable remedy, a basic tenet of equitable relief is that Mrs. Okie must, as a threshold matter, show that she had no adequate remedy at law. Farmers' State Bank v. Northern Trust Co., 39 Wyo. 46, 270 P. 163 (1928); Knaebel v. Heiner, 663 P.2d 551 (Alaska 1983).

Mrs. Okie offers several reasons why she had no adequate remedy at law for BHP's breach. First, she contends that merely awarding the costs of her administrative appeal to her would not be adequate compensation because, even without the consent agreement, she had the right to pursue an administrative review of the BLM's decision. Second, she claims that the agreement had an intangible uniqueness which could not be bought in the marketplace and was a substantial loss which could not be adequately compensated for except through equitable relief. Finally, she argues that, given BHP's repeated breaches of the agreement, it would be likely that she will be forced to bring multiple suits to effectuate her legal remedy.

Generally, the legal remedy for a breach of contract is the award of damages designed to place the plaintiff in the same position in which he would have been had the contract been fully performed, less proper deductions. Robert W. Anderson Housewrecking and Excavating, Inc. v. Board of Trustees, School District No. 25, Fremont County, Wyoming, 681 P.2d 1326 (Wyo.1984); Panhandle Eastern Pipe Line Company v. Smith, 637 P.2d 1020 (Wyo.1981). We fail to understand why receiving damages would not place Mrs. Okie in the same position she would have been in had the agreement been fully performed.

Our position is reinforced by the trial testimony of Mrs. Okie's nephew, Appellee Bill Daniel:

Q. Okay. My question to you, Mr. Daniel, is after the time you had submitted your comments and had met with the personnel at the Bureau of Land Management, had made your views known to them concerning your...