Freeport Sulphur Co. v. American Sulphur Royalty Co.

• Court: Texas Supreme Court
• Writing for the Court: Pierson
• Citation: Freeport Sulphur Co. v. American Sulphur Royalty Co., 6 S.W.2d 1039, 117 Tex. 439, 60 A.L.R. 890 (Tex. 1928)
• Decision Date: 23 May 1928
• Docket Number: (No. 4508.)<SMALL><SUP>*</SUP></SMALL&gt
• Parties: FREEPORT SULPHUR CO. et al. v. AMERICAN SULPHUR ROYALTY CO. OF TEXAS.

6 S.W.2d 1039

FREEPORT SULPHUR CO. et al. v. AMERICAN SULPHUR ROYALTY CO. OF TEXAS.

(No. 4508.)^*

Supreme Court of Texas.

May 23, 1928.

Error to Court of Civil Appeals of First Supreme Judicial District.

Action by the American Sulphur Royalty Company of Texas against the Freeport Sulphur Company and others. Judgment for defendants was reversed and remanded by the Court of Civil Appeals (276 S. W. 448), and defendants bring error. Affirmed.

C. P. Northrop, of New York City, W. T. Andrews, of Stamford, and C. R. Wharton, John A. Mobley, S. H. German, Palmer Bradley, Baker, Botts, Parker & Garwood and Andrews, Streetman, Logue & Mobley, all of Houston, for plaintiffs in error.

William H. Wilson, of Houston, W. S. Sproles, of Angleton, and W. T. Williams, of Austin, for defendant in error.

PIERSON, J.

So far as is necessary to our opinion, we quote the essential facts of this case from the opinion of the Court of Civil Appeals (276 S. W. 448) as follows:

"On November 30, 1911, E. F. Simms sold and agreed to convey to E. P. Swenson and S. A. Swenson, of the firm of S. M. Swenson & Sons, a large quantity of land in Bazoria county, described in an attached Exhibit A, in part represented by stock and in part to be acquired under purchase options, stipulating to convey the same by general warranty deed of even date to George Hamman, in trust for said Swenson & Sons, their nominee or nominees, heirs, executors, or assigns. The contract contained these provisions:

"`III. For all of aforesaid lands and aforesaid stock * * * so sold and agreed to be conveyed by said Simms subject to the royalty provision in paragraph IX hereof, said Swenson & Sons, have paid and agreed to pay four hundred and fifty thousand ($450,000) dollars * * *.

"`VII. As a further consideration for this contract and the performance thereof by said Simms, said Swenson & Sons agreed that they, their heirs, executors, administrators, or assigns, shall within one (1) year from June 1, 1912, erect or cause to be erected and put in operation upon the land mentioned and described in aforesaid Exhibit A a complete plant consisting of one unit in accordance with the process operated at the Union Sulphur Works in Louisiana, under the expired Frasch patent. Such plant shall be located on aforesaid land at such place as said Swenson & Sons, or their heirs, executors, administrators, or assigns, may think best and most expedient.

"`IX. It is further agreed that, upon the development of said property for sulphur, and so long as said property or any part thereof is operated as sulphur-producing property, the operator or operators of said property shall pay to said Simms, his heirs, executors, administrators, or assigns, as royalty, seventy-five (75¢) cents per ton for each and every ton of sulphur mined or taken from said property or any part thereof, and in addition thereto shall pay to him or them for the first two hundred thousand tons of sulphur so mined or taken one ($1) dollar per ton. This covenant is intended to bind each and every operator mining or taking sulphur from said property or any part thereof, but such operator or operators only. Quarterly settlements covering royalty production shall be made. Said Simms, his heirs, executors, administrators, and assigns, shall have full opportunity from time to time to verify the output of sulphur therefrom and amount of royalty that may be due him, and to visit the property at any time for the purpose, and to be fully advised as to the development thereof.'

"The contract was consummated to the satisfaction of the parties as concerns the sale and purchase of the lands.

"Simms, on the same day, November 30, 1911, pursuant to the contract, made to George Hamman, trustee, the conveyance stipulated for, which contained this provision:

"`The above-described property is conveyed subject to the royalty upon any and all sulphur that may be mined or produced therefrom, in favor of E. F. Simms, his heirs, executors, administrators, and assigns, save and except to this extent: No royalty is retained except as to such property as lies south and west of the hereinafter mentioned line: [Here follows descriptive location of the line.] The property upon which such royalty is payable, and which property is now transferred subject to such sulphur royalty, lies to the south and west of the line to be run as above indicated, and the property exempted from such sulphur royalty lies to the north and east of the line so to be established.'

"Simms made two other general warranty deeds, of October 24, 1922, both to Freeport Sulphur Company, for specified tracts of land, each containing this provision:

"`The land above described is conveyed by the grantor herein with a reserved royalty on all sulphur that may be produced from said land hereafter by the grantee, its successors or assigns, the amount, form, and time of payment of the royalty to be the same as was stipulated to be paid to E. F. Simms by S. M. Swenson & Sons on certain other lands made subject of a certain agreement of date November 30, 1911, between S. M. Swenson & Sons and E. F. Simms, which contract is hereby expressly referred to. It being understood that the royalty herein reserved shall remain and continue a first lien on all the sulphur which may be hereafter produced from said land until such royalty is paid.'

"By mesne conveyances and agreements, the title and interest acquired pursuant to the contract of sale and subsequent deeds, as concerns the sulphur properties in question in which royalties were reserved as aforesaid, became regularly vested in the sulphur company, subject to the obligation on its part to pay the specified reserved royalties to the plaintiff, the royalty company.

"Similarly, by mesne transfers and agreements, the title and interests of the vendors, E. F. Simms and his associates in interest, H. T. Staiti, John Hamman, and George Hamman, under the sale and conveyances pursuant to said contract of purchase by S. M. Swenson & Sons, became vested in the royalty company, with the right to the specified reserved royalties, to be paid to it by the sulphur company.

"The complete plant, consisting of one unit in accordance with the Frasch process, which it was stipulated should be erected and put in operation `within one (1) year from June 1, 1912,' was erected and put in operation within the specified time, and other plants were later erected and put in operation, four in all, as the demands of the market required, and the property was continuously developed, barring a few days in the early operations, until the shutdown on April 1, 1921, and after resumption of operations, June 2, 1922, until the second shutdown, which was January 22, 1924, and which continued up to the time of the trial."

After the second shutdown mentioned above, the royalty company sued the sulphur company "to recover damages for its failure to develop and operate the sulphur mines in good faith and with reasonable diligence, and to require it to proceed with and continue such development and operation in good faith and with reasonable diligence," in order that it might receive its royalty. Its cause of action was based on an alleged implied covenant on the part of the sulphur company to develop and operate the sulphur mines with reasonable diligence, a breach of that covenant, and for resulting damages. The defense of the sulphur company was that it had acquired fee-simple title to the property under warranty deeds, for a large and valuable consideration, to wit, $450,000, and though it was under obligation to pay to defendant in error royalty company 75 cents on each ton of sulphur taken from the ground, it was under no obligation or implied covenant to develop or operate the property at all; that there was a provision for the erection and putting in operation of a one-unit plant under the terms of article VII of the contract; that such a plant of one unit had been erected and put in operation, which was a full compliance with that provision of the contract; and that it was under no obligation or implied covenant to operate such plant, for reasons that will be stated later. It defended further on the ground that during a number of years previous to the shutdown it had erected and operated four such plants, which was a complete offset to the present claim for failure to operate with reasonable diligence; and also that, at the time of the shutdown, it had large quantities of sulphur unsold and in storage, and for that reason it was not chargeable with lack of diligence in continuing operation. The district judge instructed a verdict for the sulphur company. Upon appeal, the Court of Civil Appeals reversed the judgment of the district court and remanded the cause to that court for another trial. 276 S. W. 448. The Court of Civil Appeals held that the sulphur company was under an implied covenant to fully develop the land for sulphur "in good faith and with reasonable diligence." It found the measure of damages for failure to reasonably operate the sulphur mines to be an amount which the jury should find the owner would have received in royalties if the mines had been operated during the time they found operation was unreasonably suspended, together with 6 per cent. interest per annum thereon. Writ of error was granted, and the cause was transferred to section B of the Commission of Appeals, but later was withdrawn from the commission and taken under submission by the court.

The interesting and very important subject of implied covenants is presented in this case, and also the important question of the proper measure of damages.

The court cannot make contracts for parties, and can declare implied covenants to exist only when there is a satisfactory basis in the express contracts of the parties which makes it necessary to imply certain duties and obligations in order to effect the purposes of the parties in the contracts made. Before a covenant will be...