Blair v. Clear Creek Oil & Gas Co.

• Decision Date: 18 April 1921
• Docket Number: 285
• Citation: 230 S.W. 286,148 Ark. 301
• Parties: BLAIR v. CLEAR CREEK OIL & GAS COMPANY
• Court: Arkansas Supreme Court

230 S.W. 286

148 Ark. 301

BLAIR v. CLEAR CREEK OIL & GAS COMPANY

No. 285

Supreme Court of Arkansas

April 18, 1921

Appeal from Crawford Chancery Court; J. V. Bourland, Chancellor reversed.

STATEMENT OF FACTS.

Appellants brought this suit in equity against appellees to cancel a gas lease on the ground that appellees were drawing off the gas from appellants' land by means of wells drilled on adjacent lands near appellants' boundary lines, and for damages resulting therefrom. Appellee defended the suit on the ground that there was no liability under the terms of the lease upon which the suit is based.

The material facts are as follows: What is known as the Kibler gas field was explored in the fall of 1915, and the first well was drilled by appellee in November, 1915. On the 24th day of November, 1915, E. T. and Mary Blair leased to appellee, Clear Creek Oil & Gas Company, 27 acres of land to be explored for oil and gas in the center of what is known as the Williams field, which is adjoining the Kibler field. Appellants leased to appellee the twenty-seven acres of land for the term of five years and as long thereafter as oil or gas might be produced in paying quantities. Appellee had the exclusive right to explore the land for oil and gas. If gas was found, it was provided that the lessee should pay the lessors one-eighth of the net proceeds of the sale of the gas. The lease further provides that, in case no well drilling operations for oil, gas, or other minerals is begun on the land within one year, all rights and obligations under the lease shall cease upon notice in writing being served on the lessee by the lessors, unless the lessee shall elect to continue the lease in force by paying to the lessors an annual rental of $ 100, until a well is drilled, provided that when such well is drilled the above provided-for rental shall cease.

The Kibler field was first developed and most of the gas drawn from it. In the fall of 1918, the Williams field was explored for gas, and the first producing well was brought in some time in November or December of that year. Appellee had leases on the land west and north of the Blair land, known respectively as the Greig and Bryant lands. Appellee drilled two wells on the Greig land. The first well was drilled in the spring of 1919, and is about 400 feet northwest of the northwest corner of the Blair land. A second well was then drilled about 350 feet west of the Blair land and about one-quarter of a mile south of the first well. Appellee also in the spring of 1919, drilled a well on the Bryant tract about 500 feet north of the Blair land. All of these wells produce gas and draw gas from the Blair land.

The testimony of experts shows that the Williams field is uniform in character, and that the gas producing sand is equally porous, and that gas will be drawn along all the radii of a circle of which the well is the center for a quarter of a mile.

The lessors and the lessee construed their lease to mean that payment of the reserve rental for delay in drilling should be made quarterly in advance. On the 4th day of June, 1919, the lessors wrote the lessee a letter calling attention to the fact that they had drilled wells on an adjoining tract near the boundary line of the 27-acre tract in question, and that the wells were producing a large amount of gas; that much of the gas coming from these wells was drawn from under the land of the lessors, and they demanded that the lessee should protect them by drilling a well at an early date on their land. The lessee failed or refused to comply with this demand, and on the 28th day of July, 1919, the lessors wrote the lessee another letter that the lease on the land in question had been canceled, because of the failure of lessee to drill protection wells on the land of the lessors as requested in their former letter.

Testimony was also introduced by appellants tending to show the amount of gas taken from the wells on the adjoining lands.

According to the testimony of appellee, it did not drill the wells on the adjoining lands for the purpose of drawing gas from the land of its lessors. In developing a gas field, it is necessary to take leases on large areas of land, and the drilling must necessarily be delayed on some of the land, and for this reason the leases provide for an annual rental for the delay. Appellee had only two sets of drilling machinery and was drilling wells on the land leased by it in the Williams field as fast as it was practicable after gas had been discovered in that field and a producing well brought in.

On the 3d day of November, 1920, the chancellor found the issue as to the cancellation of the lease in favor of appellants, but found against them on the question of damages. A decree was therefore entered of record, canceling the lease of appellants to appellee, but dismissing their cause of action for taking gas from their land through wells on the adjoining land by appellee.

The appellants have duly prosecuted an appeal to this court.

Decree reversed and cause remanded. Motion for rehearing denied.

C M. Wofford and E. L. Matlock, for appellants.

The court erred in refusing to allow appellants to recover damages for breach of the implied covenant to drill protecting wells against drainage. Thornton's Law of Oil and Gas, §§ 104, 121; 176 Pa.St. 502; 49 Ind.App 602; 96 N.E. 19; 238 Ill. 397; 87 N.E. 381; 107 S.W. 609; 162 Ind. 395; 68 N.E. 1020.

Hill & Fitzhugh, for appellees.

Appellants had no remedy in equity, and their remedy, if any, was an action at law for damages. The lessor (plaintiff) could not claim and receive royalty under the lease and claim damages for alleged violation thereof during the same period.

The acceptance of rentals shows she was relying on the lease and is estopped from claiming that the lease was violated, or that she was entitled to damages during the period covered. 11 L. R. A. (N. S.) 419, note; L. R. A. 1917 A, p. 171.

That lessor can not complain of failure to drill during the period that he has accepted rentals for delay is well established by all the Federal authorities. 140 F. 801; 237 U.S. 856. Under these authorities plaintiff can recover no damages, and the court erred in canceling defendant's lease.

OPINION

HART, J. (after stating the facts).

The record in this case shows that appellee drilled three wells which produced gas on adjoining tracts of land so near to the boundary lines of appellants that the wells are drawing the gas from underneath their land and in time will draw it all away. The only practical way to offset this is to drill protection wells on the land of appellants. It made no effort to drill protection wells. The lease does not contain any protection clause. The doctrine of protection is new in this State and arises from the fluid underground situation of either oil or gas.

On the part of appellants, it is claimed that when oil is drawn from underneath land by wells drilled near the boundary line which will obviously drain the land, there is an implied obligation on the part of the lessee to sink the number of wells necessary to protect the demised tract.

Counsel for appellants insist that, appellee having failed and refused to drill the protection wells as requested by appellants, or to account to them for the gas drawn from their land, the refusal constitutes a breach of the contract and entitles appellants to declare a forfeiture and to sue for the damages resulting therefrom.

Counsel for appellee contend that appellants had no remedy in equity, and that their remedy, if any, was an action at law for damages. In the first place, it may be said that, if it was the duty of appellee to drill a protection well, and it refused to do this, its refusal would constitute an abandonment of the contract, and equity would afford relief.

In the case of Mauney v. Millar, 134 Ark. 15, 203 S.W. 10, the court held that where the sole benefit of a contract results from a continued performance of the contract (such as to develop a mine, to operate it, pay royalties or to divide the proceeds), where one party completely abandons the performance thereof, equity will give relief by canceling the contract. For a partial breach the parties will be remitted to their remedies at law.

Moreover no objection was made or exceptions saved to the jurisdiction of the chancery court, and, under the repeated decisions of this court, the objection that equity had no jurisdiction can not be raised for the first time on appeal. Apple v. Apple, 105 Ark. 669, 152 S.W. 296, and cases cited.

It is well settled that, when equity has acquired jurisdiction of a matter in a suit for one purpose, all matters in issue will be adjudicated and complete relief afforded. Horstmann v. LaFargue, 140 Ark. 558.

This brings us to the question of whether there was an implied covenant in the lease to protect appellants against drainage, and, if so, what is the measure of damages recoverable for drainage through wells operated on other lands adjacent to appellants' boundary lines.

The lease provides for a term of five years, and as long thereafter as gas is produced in paying quantities. The consideration for the first year is $ 1, and for each succeeding year that operation or exploration is delayed the lessee shall pay a yearly rental of $ 100 for the delay. The lease expressly authorizes the lessee to elect to pay a yearly rental, instead of drilling. Hence, the lessors can not recover damages for failure of the lessee to commence exploration for gas. If, however, the lessee commences to explore for gas, it must exercise due diligence in drilling and there is an implied covenant on its part to do so. Mansfield Gas Co. v. Alexander, 97 Ark. 167, 133 S.W. 837. See, also, Lawrence v....