Fox Petroleum Co. v. Booker

• Decision Date: 01 June 1926
• Docket Number: Case Number: 16597
• Citation: 253 P. 33,1926 OK 519,123 Okla. 276
• Parties: FOX PETROLEUM Co. et al. v. BOOKER et al.
• Court: Oklahoma Supreme Court

1926 OK 519

253 P. 33

123 Okla. 276

FOX PETROLEUM Co. et al. v. BOOKER et al.

Case Number: 16597

Supreme Court of Oklahoma

Decided: June 1, 1926

Syllabus

¶0 1. Evidence--Oral Negotiations Presumed Merged in Oil and Gas Lease. The statutory rule that previous and contemporaneous oral negotiations are conclusively presumed to have been embodied in the written contract between the parties, except for accident, fraud, or mistake of fact, is applicable to oil and gas leases.

2. Oil and Gas--Implied Covenants to Develop--When Operative Within Fixed Term. The implied covenants in an oil and gas lease for further exploration and development after the discovery of oil or gas are operative within the fixed term as well as when the lease is held thereafter under the production clauses.

3. Same--Diligence in Operation--Rule Stated. Neither party to an oil and gas lease is the arbiter of the extent to which, or the diligence with which, operation thereunder shall proceed; but both are bound by the standard of what, in the circumstances, would be reasonably expected of an operator of ordinary prudence, having due regard for the interest of both.

4. Same--Duty to Test and Develop--When Implied. The lessee is under two duties--to test and to develop--which will be implied unless the matter is expressly covered by the contract.

5. Same--Implied Covenant--Initial Well--Further Development--When Financial Result Considered. The financial return of the enterprise is not to be considered where the implied covenant is to drill the initial well. It is only in the development of the land already tested, and in cases involving protection against drainage, that the probable financial result, under implied covenant, becomes material.

6. Same--Equity May Decree Cancellation Regardless of Forfeiture Clause. Equity may decree the cancellation of an oil and gas lease in whole or in part where such cancellation will effectuate justice, without regard to whether the lease contains a forfeiture clause.

7. Same--Implied Covenants -- Breach by Lessee--Three Remedies of Lessor Stated. Where the implied covenants to test or further develop have been breached, the lessor may, according to the circumstances of the case, invoke these remedies in equity; declare forfeiture and sue to quiet title treating the implied covenant as an implied condition; elect to treat the lease as still in force and effect and sue to cancel same for inadequacy of legal remedy; sue to cancel the lease as a cloud upon his title for abandonment of the lease or of its purposes.

8. Same--Implied Covenants Are Also Implied Conditions. Implied covenants are also implied conditions for the violation of which equity may decree cancellation of the lease in whole or in part.

9. Same--Lease--Abandonment of Enterprise Abandons Estate in Land. An oil and gas lease contemplates a mining enterprise, and the estate granted the lessee is for the purpose of effectuating and is incidental to the enterprise, so that the lessee cannot retain the estate after abandoning the enterprise.

10. Same--Abandonment of Purposes--Cancellation. Where an oil and gas lessee abandons the objects and purposes of the lease, equity will cancel the lease as a cloud on lessor's title.

11. Same--Abandonment of Part of Producing Lease. The lessee may abandon the objects and purposes of part of a lease although he may be producing oil or gas from the remainder.

12. Same--Abandonment--How Inferred. Intention to abandon may be inferred from the acts and conduct of the lessee as well as from his express declarations.

13. Same--Actual Relinquishment of Property not Essential to Abandonment by Lessee. The rule that there must be a concurrence of intention to abandon and an actual relinquishment of the property in order to effectuate an abandonment as applied to physical property, has no application to abandonment of intangible rights created by an oil and gas lease where the lessee acquires no title to the minerals.

14. Same --Judgment Cancelling Lease not Sustained. Record examined, and held, that the judgment of the court is clearly against the weight of the evidence on the issues of breach of implied covenants to develop and on abandonment.

Dolman & Dyer and Hefner & Johnson, for plaintiffs in error.

Brett & Brett and R. A. Howard, for defendants in error.

ESTES, C.

¶1 This action was instituted by the defendants in error against the plaintiffs in error to cancel an oil and gas lease as to 100 acres of the original 160 covered by the lease. The parties will be hereinafter referred to as they appeared in the court below. The lease in question was executed January 31, 1919, and demised the land (for a term of five years "and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee") "for the sole and only purpose of mining and operating for oil and gas," etc. This lease contained no "forfeiture clause" and no "drilling clause." At the time of its execution there was on the land a gas well which had been drilled under a former lease concerning which there seems to have been some controversy. The new lease provided for one-eighth of the gas as royalty instead of $ 50 per year per well, as provided in the former lease.

¶2 After the execution of the second lease, the lessees drilled four additional wells, none of which were on the 100 acres sought to be canceled out. These wells were all producers but the production was not great. The last of these wells was completed in June, 1923. This action was commenced February 2, 1924, just two days after the expiration of the fixed term of five years. The journal entry recites:

"And from said special findings, the court finds that the defendants have not diligently developed and operated the 100 acres of land described in said special finding No. 14. And that by reason of the negligence and the breach of covenant, both expressed and implied, to diligently develop and operate the 100 acres of land for oil and gas, that the forfeiture and cancellation of the lease of the defendants, in so far as it affects said 100 acres, will effectuate justice."

¶3 Thereupon, the court decreed cancellation of the lease as to the undeveloped 100 acres, and left the lessees with 60 acres around their wells. It is urged for reversal that the trial court erred in admitting testimony concerning an alleged oral drilling agreement at the time of the execution of the second lease, and that the decree is contrary to the weight of the evidence.

¶4 1. The court, over the objection of defendants, admitted testimony tending to show an express oral agreement, contemporaneous with the written lease, that defendants would diligently develop by drilling wells on the 100 acres in controversy. From the findings of the court, we take it that the judgment was, at least, in part based upon such testimony. This was error. That previous and contemporaneous oral negotiations are conclusively presumed, as provided by statute, to have been embodied in the written contract, in the absence of accident, mistake of fact, or fraud, is applicable to an oil and gas lease. Chi-Okla Oil & Gas Co. et al. v. Shertzer, 105 Okla. 111, 231 P. 877. The rights of the parties herein must be determined by the express terms and implied covenants of their written lease. The cause being in equity, our duty is to consider and weigh the evidence to determine whether the judgment of cancellation is clearly against the weight thereof. If the implied covenants to diligently develop this lease have been breached, or if the evidence, under said rule, discloses an intent to abandon the lease as to said 100 acres, the judgment should be affirmed.

¶5 2. Since this suit was brought just two days after the expiration of the fixed five year term, it is obvious that any breach of implied covenants must have occurred within the term, and it becomes necessary to determine whether the covenant for further development has any application within the fixed term of the lease. That it does so apply seems to have been recognized in Indiana Oil, Gas & Development Co. v. McCrory, 42 Okla. 136, 140 P. 610; Cotner v. Mundy, 92 Okla. 268, 219 P. 321; Donaldson v. Josey Oil Co., 106 Okla. 11, 232 P. 821; Howerton v. Kansas Nat. Gas. Co., 81 Kan. 553, 106 P. 47; 82 Kan. 367, 108 P. 813, 34 L.R.A. (N.S.) 34; Dinsmoor v. Combs, 177 Ky. 740, 198 S.W. 58. It is specifically so decided in Daughetee v. Ohio Oil Co., 263 Ill. 518, 105 N.E. 308; and it is a fair inference from Texas Co. v. Davis, 113 Tex. 321, 254 S.W. 304; Robinson v. Jacobs, 113 Tex. 231, 254 S.W. 309; Munsey v. Marnet Oil & Gas Co., 113 Tex. 212, 254 S.W. 311. The recent helpful work, Mills-Willingham on Oil and Gas, page 155, states:

"It has been contended that this covenant does not operate during the fixed term of the lease; that upon the drilling of a producing well, the lessee is under no obligation, during the fixed term, to further develop, because the parties have agreed upon the diligence to be exercised. It is not believed, however, that this is the true rule. The fixed term is intended as a period of exploration and determination of the capacity of the land for producing; not as a period of development. Upon discovery, the lease is automatically changed from one for years into one that shall endure as long as oil or gas is produced. The acceptance of rentals extends the lease for another year and defers the drilling of the first well, not the development of the lease, after discovery of oil or gas. Upon both reason and authority, the implied covenant for development operates both during and after the fixed term, after discovery of oil or gas."

¶6 See, also, the late case of Webb v. Croft et al. (Kan.) 120 Kan. 654, 244 P. 1033. In this particular lease, however, there was no drilling clause and a gas well was already on the property when the lease was made. In such case, it is difficult to assign any meaning to the five-year term which would exclude the operation...