Doss Oil Royalty Co. v. Texas Co.

• Decision Date: 27 April 1943
• Docket Number: 29792.
• Citation: 137 P.2d 934,192 Okla. 359,1943 OK 154,1943 OK 155
• Parties: DOSS OIL ROYALTY CO. v. TEXAS CO.
• Court: Oklahoma Supreme Court

137 P.2d 934

192 Okla. 359, 1943 OK 154, 1943 OK 155

DOSS OIL ROYALTY CO. v. TEXAS CO.

No. 29792.

Supreme Court of Oklahoma

April 27, 1943

Syllabus by the Court.

1. A suit for cancellation of the undeveloped portion of a producing oil and gas lease is of equitable cognizance, and is governed by principles of equity.

2. A court of equity will declare a forfeiture of the undeveloped portion of a producing oil and gas lease because of the breach of implied covenant to diligently develop the property when such forfeiture will effectuate justice, but the granting of such relief depends upon the facts and circumstances surrounding the particular case.

3. In an action to cancel the undeveloped portions of producing oil and gas leases after the expiration of the primary term evidence that the operator has failed for an unreasonable length of time to develop substantial portions thereof is sufficient to withstand defendant's demurrer to the evidence.

4. Under 12 O.S.1941 § 264, a plaintiff is not required to name the theory upon which he seeks relief, but he need only state facts sufficient to constitute a cause of action and pray for the relief to which he believes himself entitled, and upon proof thereof the court will grant him the relief to which he may be entitled under any theory.

Appeal from District Court, Carter County; Marvin Shilling, Judge.

Suit by the Doss Oil Royalty Company, against the Texas Company, for cancellation of the undeveloped portion of two producing oil and gas leases, wherein certain royalty owners were joined as defendants but filed an answer adopting plaintiff's petition and asking for cancellation. Judgment for defendant and plaintiff appeals.

Reversed with instructions to grant a new trial and to proceed in accordance with the opinion.

GIBSON V. C.J., and BAYLESS and WELCH, JJ., dissenting.

H. A. Ledbetter and H. E. Ledbetter, both of Ardmore, for plaintiff in error.

J. H. Hill, John R. Ramsey, B. W. Griffith, and Sol H. Kauffman, all of Tulsa (Champion, Champion & Fischl, of Ardmore, and Harry T. Klein, of New York City, of counsel), for defendant in error.

W. F. Semple, I. L. Lockewitz, Geo. W. Cunningham, Horace B. Clay, Edward R. Hastings, Ray S. Fellows, Villard Martin, L. G. Owen, F. M. Darrough, C. E. Cooper, and Wm. I. Robinson, all of Tulsa, amici curiae.

HURST Justice.

This is a suit for cancellation of the undeveloped portion of two producing oil and gas leases, upon which no wells have been drilled for more than fourteen years. The principal question for decision is whether, in such a case, the lessor may have cancellation without the burden of proving that the lessee could have drilled additional wells with a reasonable expectation of profit.

The first lease covered 40 acres, was executed January 13, 1917, and was for a term of five years and as long thereafter as oil or gas is produced in paying quantities. During the years 1920, 1921, and 1922, six producing wells were drilled thereon near the north and east lines, five in the east 20 acres and one in the northeast corner of the west 20 acres. No wells have been drilled thereon since May, 1922.

The other lease covers 100 acres, was executed December 19, 1916, and was also for a term of five years and as long thereafter as oil or gas is produced in paying quantities. During 1921 and 1922, ten producing wells were drilled thereon. A dry hole was completed January 1, 1923, and in May, 1924, one of the wells was deepened. No wells have been drilled or deepened since that date. Seven of the producing wells were drilled on the east 40 acre tract and three were drilled in the northeast portion of the 60 acre tract. The dry hole was in the center of the north 40 acres of the 60 acre tract.

It is clear that the wells so drilled did not fully test or develop all of either lease, and the defendant does not so contend. Both leases were on regular Producers 88 forms, and neither contained any provision as to the number of wells required to fully develop the leased premises.

On July 7, 1938, the plaintiff, Doss Oil Royalty Company, served a notice on the defendant, The Texas Company, owner and operator of the leases, demanding that it commence an additional well on each lease within thirty days, and stating that if it failed to do so it would elect to declare the undeveloped portions thereof terminated on the ground of abandonment and breach of the implied covenant to fully develop. No additional wells were commenced. Thereupon the plaintiff, owner of one-half the royalty, commenced this action on October 10, 1938. The other royalty owners refused to join as plaintiffs, and were joined as defendants, as provided by 12 O.S.1941 § 232, but they filed an answer adopting the plaintiff's petition and asking cancellation.

Plaintiff's petition contained but one cause of action. It stated the facts substantially as above set out and in addition alleged that defendant had abandoned the purposes of the leases. The prayer was for determination that the implied covenants had been breached and the leases abandoned, and that the undeveloped portions thereof be cancelled and for general relief.

Defendant by answer denied any intention to abandon any portion of the leases. It denied that it had breached any of the implied covenants of the leases, and excused its failure to drill additional wells by asserting that it had acted as an ordinarily prudent operator and that the circumstances did not indicate that further drilling would prove a profitable venture. It said it expected to drill when circumstances warranted, and that it had reasonable hopes thereof in the future.

At the beginning of the trial plaintiff dismissed the petition as to the implied covenant and announced that it "relied alone on the theory of abandonment."

In addition to the facts above set out, plaintiff introduced evidence that it was the custom of operators in that field to drill a well on each 2 1/2 acre tract, and that there were 29 untested drilling sites on the two leases. It produced no evidence, save the failure to drill additional wells for the fourteen year period, to show intention to abandon the lease on the part of the operator. It made no effort to show that other wells could have been drilled on either lease with a reasonable expectation of profit. At the conclusion of plaintiff's evidence, defendant interposed a demurrer thereto which was sustained, and plaintiff appeals.

The case has been extensively briefed by the parties and by amici curiae. It has also been orally argued. The principal question concerns the doctrine of abandonment. The plaintiff argues that where there has been a long failure to drill on portions of producing oil and gas leases, there is a legal presumption that the lessee has abandoned such portions, though there has been no physical relinquishment thereof. The defendant urges that such doctrine is unsound, and that in any event the doctrine has been recognized only where there has been an expression by the lessee indicating his intention not to drill presently, or at least until changed conditions justify. It says that cancellation should be granted only for breach of covenant as tested by the standard of the ordinarily prudent operator. The question thus raised, as we shall hereinafter point out, is whether, where there has been initial production on a lease, and after the expiration of the primary term the lessee has failed to drill additional wells for an unreasonable length of time (here fourteen years), the courts should grant relief without requiring the lessor to prove that such additional wells may be drilled with a reasonable expectation of profit as required by the prudent operator rule, and if so, upon what theory or doctrine. This question has engaged the attention of courts and text writers for some time. For a discussion of the various doctrines upon which cancellation is granted in various states, see 3 Summers Oil & Gas, Perm.Ed., §§ 453-472, pp. 1-177, and Merrill, Covenants Implied in Oil & Gas Leases (2d ed.) pp. 268-338.

1. Regardless of the theory urged, suits for the cancellation of oil and gas leases call for the exercise of the equity powers of the courts. Newman v. Replogle, 139 Okl. 86, 281 P. 272; Liles v. Bigpond, 190 Okl. 112, 121 P.2d 596; 9 Am. Jur. 402; 9 C.J. 1159, 1257; 12 C.J.S., Cancellation of Instruments, §§ 50, 71. Equity was evolved to escape the rigidity and technicalities of the common law. It looks at substance rather than form. It seeks justice rather than technicality. 30 C.J.S. Equity, § 12, p. 331, § 105, p. 506, § 107, p. 513; 21 C.J. 198, 204; 19 Am.Jur. 318. We decline to become so involved in theories or distinctions as to render ourselves impotent to deal effectively with the problem presented in the instant case.

The important fact, regardless of theory, is that defendant had at the commencement of this action, held substantial undeveloped portions of these leases for over fourteen years without drilling a single well thereon. Defendant contends that it is entitled to hold the whole of both leases because it has production on other parts of the leases, and that further development is not required under the implied covenants because circumstances have not indicated that development would be profitable. If defendant's theory is correct, it may hold the land without further development as long as production from the present wells continues in paying quantities, regardless of how long that may be. The courts and text writers condemn such attempts of lessees to so indefinitely freeze the undeveloped portions of oil and gas leases, hold them for speculative purposes, and thus prevent the owners from getting full development of their land. 2 Summers Oil & Gas, ...