Cedar Creek Oil & Gas Co. v. Archer

• Decision Date: 02 October 1941
• Docket Number: 8154.
• Parties: CEDAR CREEK OIL & GAS CO. v. ARCHER et al.
• Court: Montana Supreme Court

117 P.2d 265

112 Mont. 477

CEDAR CREEK OIL & GAS CO. v. ARCHER et al.

No. 8154.

Supreme Court of Montana

October 2, 1941

Appeal from District Court, Sixteenth District, Fallon County Rudolph Nelstead, Judge.

Action by the Cedar Creek Oil & Gas Company against C. L. Archer and others to quiet title to an oil and gas lease. From an adverse judgment, the defendants appeal.

Reversed and remanded, with instruction to enter judgment in accordance with opinion.

Al Hansen, of Baker, and Sam D. Goza, Jr., of Helena, for appellants.

Danzil R. Young, of Baker, for respondent.

MORRIS Justice.

This is an action in the nature of an action to quiet title. The purpose of the plaintiff is to have a certain drilling agreement declared null and void, cancelled on the records of Fallon county, in order to remove a cloud from plaintiff's title to an oil and gas lease.

The lease was entered into January 12, 1929, between the plaintiff and the then owner of the leased land, George W Sawyer. Sawyer subsequently died and the title to the land was acquired by Clarence S. and Frances Doherty Lillie husband and wife, jointly. The owners of the land are not parties to the action. February 21, 1931, the plaintiff, the lessee, and the principal defendant, C. L. Archer, entered into a drilling agreement covering the land involved, which will hereafter be adverted to section by section.

The operator sold and assigned royalty interests in the land to some ten or twelve other parties, and it appears that the money obtained from such sales of royalty was used to carry on the drilling operations. The land owners will hereinafter be referred to by that term, the lessee as the plaintiff, and Archer as the operator.

The drilling operations were commenced May 1, 1931, and diligently proceeded with in accordance with the agreement, and on July 1st such operations resulted in bringing in a gas well capable of producing in excess of twelve million feet of gas per day. Gas having been produced in commercial quantities, the next step was to obtain a market therefor. Each party, both in the respective pleadings and arguments, contends that the primary obligation to obtain a market for the gas was on the other, and each alleges loss due to the other's negligence in this particular.

The pleadings are extensive and contain a great deal of matter that, it appears to us, is of little value in interpreting the drilling agreement, and it is in that instrument that we must discover the respective obligations of the parties. In construing that instrument, however, it will be necessary to take into account certain extrinsic evidence tending to show how the parties construed certain provisions of the contract relative to which there is sharp conflict. Only such pleadings and evidence will be commented upon as bear upon the question as to whose duty it was to find a market for the gas and other questions and contentions relating to such marketing, and such comments will be made when the respective questions are taken up for consideration.

The trial court was exceedingly lenient with the litigants in granting motions to amend the pleadings. Such leniency was exercised within the court's discretion and no issue is made as to the exercise of that discretion. A number of demurrers were interposed as the pleadings progressed, all of which were overruled. By stipulation the cause was tried to the court without a jury. Many of the facts were also stipulated. The testimony of witnesses for both parties was heard, and numerous exhibits were received in evidence. When the evidence was all in, the plaintiff moved for judgment on the pleadings, which was denied. Briefs were filed and in due course the court made and entered its findings of fact and conclusions of law, which were generally in favor of the plaintiff.

The findings were elaborate and their import is logically expressed by the conclusions of law, which we here set out in full:

"1. That it was the duty of defendant Archer and of his assignees, the remaining defendants, by the express covenant in the sublease or drilling agreement to drill a second well on the leased premises by May 1, 1932, and that the said defendants' failure so to do constituted a forfeiture of all their right, title and interest in the sublease or drilling agreement.

2. That plaintiff is not estopped or precluded from enforcing such forfeiture.

3. That plaintiff is entitled to a decree declaring said sublease or drilling agreement to be null and void and cancelled of record, and that defendants, and each and all of them, be forever barred and enjoined from asserting any right, title or interest in plaintiff's oil and gas lease, said sublease or drilling agreement, said described premises, or any of the oil or gas produced therefrom.

4. That plaintiff is entitled to its costs and disbursements herein. Let judgment be entered accordingly."

Judgment was entered accordingly. The defendants appealed, specifying eleven specifications of error. As we have already outlined what we deem as the essential scope of our review in the premises, we think it unnecessary to take up these assignments of error in detail. The substance of the whole, in so far as we deem pertinent, will be covered by our opinion.

Before proceeding with the consideration of the merits of the controversy, we will dispose of some of the contentions of counsel which, in our opinion, are not within the essentials, but which we do not wish to have it appear to the trial court or counsel that we have ignored.

There was not a little controversy over the question as to whether the operating agreement set out above should be legally classified as an operating agreement or a sublease. The two contracts are separate and distinct. The plaintiff entered into the lease contract with the land owner and then entered into the "drilling agreement" with the operator, by which the latter agreed, for a percentage of the oil and gas discovered and saved, to carry out the obligations that were assumed by the plaintiff in the lease agreement between the plaintiff and the land owner. The operating agreement, of course, relates to the lease, but there is no direct relation between the operator and the land owner, and it is our opinion that the agreement between plaintiff and Archer, the operator, must be classed strictly as a drilling agreement or a plain operating contract. The form and contents of the drilling agreement do not follow the terms of an ordinary oil and gas lease. We are furthermore of the opinion that irrespective of how the drilling agreement may be classified, its terms must be applied in accordance with the general rules and the laws relating to ordinary contracts. The land owner or lessor would have no right of action against the operator for the breach of any provision of the operating agreement. Any remedy the land owner might seek for breach of the lease would necessarily have to be sought from the lessee, the plaintiff here.

Another phase of the controversy between counsel which was emphasized both in the pleadings and arguments is that each party vigorously contends that the other is a speculator. We can see no sound reason for applying the term of "speculator" to either of the litigants in a way that could be construed to mean a matter of reproach or censure. When the lessee acquired his lease, and when the operator in his agreement with the lessee acquired certain contingent rights in the lease, each acquired a right of property which no provision of the law prohibits either from disposing thereof, and both exercised that right by assigning certain portions of the royalties in both the gas and oil to others. It does not appear that the plaintiff assigned royalties to more than one party. These assignments were within the law and were regularly recorded in Fallon county. All oil and gas development operations are more or less in the nature of speculation, but this has no bearing on the merits of this controversy.

It appears from the record that the plaintiff has oil and gas leases and government permits on approximately 2,800 acres of land in the gas field, and some five or six other producing wells in that field, and the evidence tends to show that all of this property is handled by arrangements similar to that existing between the plaintiff and defendant here; that is the plaintiff obtains oil and gas leases on the lands under the terms of which the plaintiff agrees to turn over to the land owner a specified portion of the gas and oil produced or the proceeds of such portion, where the power to sell is vested in the lessee, and plaintiff then turns the lease or leases over to a driller, such as the operator in the case at bar, for a less percentage of production than is reserved to the land owner. Take the lease involved in this controversy for illustration: Under the lease between the land owner and the plaintiff as originally made, and prior to the modification agreement entered into between the land owner and the plaintiff in 1936, which will be presently adverted to, the consideration for the lease running to the land owner is 12 1/2 per cent. of the oil produced and saved, and $300 cash per annum for the gas from each well where the gas is used off the premises. With this lease in hand, plaintiff entered into the above "drilling agreement" with the operator. Under this agreement the consideration running to the operator is 80 per cent. of the oil and 75 per cent. of the gas. It will be noted that under this agreement the plaintiff will receive 7 1/2 per cent. of the oil which cost him nothing except expenses incurred in obtaining the lease, and 25 per cent. of the gas or the proceeds thereof, which cost plaintiff $300 for each well producing gas in...