Gazin v. Pan Am. Petroleum Corp.

• Citation: 367 P.2d 1010
• Decision Date: 19 December 1961
• Docket Number: No. 39313,39313
• Parties: R. C. GAZIN, Bess Gazin and Oil Incorporated, a corporation, Plaintiffs in Error, v. PAN AMERICAN PETROLEUM CORPORATION, a corporation; Calvert Petroleum Company, a corporation; Lee H. Armer; Gulf Oil Corporation, a corporation; and King-Stevenson Oil Company, Inc., a corporation, Defendants in Error.
• Court: Oklahoma Supreme Court

Page 1010

367 P.2d 1010

R. C. GAZIN, Bess Gazin and Oil Incorporated, a corporation Plaintiffs in Error, v. PAN AMERICAN PETROLEUM CORPORATION, a corporation; Calvert Petroleum Company, a corporation; Lee H. Armer; Gulf Oil Corporation, a corporation; and King-Stevenson Oil Company Inc., a corporation, Defendants in Error.

No. 39313.

Supreme Court of Oklahoma.

Dec. 19, 1961.

As Amended Jan. 11, 1962.

Rehearing Denied Jan. 16, 1962.

Syllabus by the Court

1. Under an oil and gas lease providing for a primary term of five years with a requirement for commencement of a well within one year or the payment of delay rentals, lessors are not entitled to a decree of forfeiture or cancellation for failure to market the gas during the portion of the term of five years for which delay rentals are made and accepted with knowledge that a well has been completed capable of producing in paying quantities but is shut in.

2. Where oil and gas lease does not, in express terms, provide for the marketing of the product of a well drilled on the leased land, the lessee is under an implied covenant to market production within a reasonable time. In complying with the covenant, lessee must exercise due diligence in securing a satisfactory market. The matter of whether the lessee exercised due diligence in obtaining a satisfactory market within a reasonable time depends on the facts of each case.

Appeal from District Court of Kingfisher County; F. B. H. Spellman, Judge.

Action to cancel oil and gas lease. From judgment for defendants, plaintiffs appeal. Affirmed.

Shutler, Shutler & Baker, C. Everett Murphy, Kingfisher, for plaintiffs in error.

Coleman Hayes, Norton Standeven, Oklahoma City, Monnet, Hayes, Bullis, Grubb & Thompson, Oklahoma City, of counsel, for defendants in error.

HALLEY, Justice.

Plaintiffs, R. C. Gazin and his wife, own part of a section of land in Kingfisher County on which they gave a lease in May, 1954, to defendant, Lee H. Armer. Parties will be referred to as they appeared in the trial court and by name. Oil Incorporated, a corporation, took an oil and gas lease on plaintiffs' property in March, 1960, and is joined as a party plaintiff. Defendant Armer assigned parts of his interest under the 1954 lease to predecessors of the following corporate defendants: Pan American Petroleum Corporation, Calvert Petroleum Corporation and King-Stevenson Oil Company. The corporate defendant, Gulf Oil Corporation, owns an interest in other land located in the same section of land as plaintiffs, which section has been established as a drilling and spacing unit for gas by order of the Corporation Commission.

Plaintiffs brought this suit in May, 1960, to cancel the 1954 lease which lease contained a 'thereafter' clause providing that it should remain in force for a primary term of five years 'and as long thereafter as oil or gas or either of them is produced from said land by lessee.' The usual requirement for the commencement of a well within one year or the payment of delay rentals was contaned in the lease. The specified delay rentals were paid and accetped each year to and including that commencing May, 1958.

In October, 1956, defendant Armer completed a gas well on the leased land capable of producing in excess of 20 million cubic feet of gas per day and with an overall potential of approximately 4 billion cubic feet of gas. The well was shut in and no contract for sale of the gas was made until April, 1960. Defendants then attempted to go onto the leased premises to install equipment in order to produce and market the gas, but they were denied access by the Gazins. Defendants' answer and cross-petition therefore sought to enjoin the interference with their asserted rights and sought to quiet title to their leasehold estate as against plaintiffs. The trial court made written findings of fact and conclusions of law and entered judgment against plaintiffs and granted relief as prayed for by defendants. Plaintiffs appealed from the judgment and order overruling their motion for new trial.

Plaintiffs' contention is that the trial court erred in not cancelling the 1954 oil and gas lease because of its provisions and because of defendants' breach of an implied covenant to market the gas within a reasonable time after the well was completed in October, 1956. Plaintiffs advance two theories: first, that the lease terminated by its own provisions at the end of the primary term in May, 1959; or second, that the failure by defendants to execute a contract for sale of the gas before April, 1961, indicates an unreasonable length of time.

Plaintiffs cite Woodruff v. Brady, 181 Okl. 105, 72 P.2d 709, 113 A.L.R. 391; Anthis v. Sullivan Oil & Gas Co., 83 Okl. 86, 203 P. 187; and Curtis v. Harris, 76 Okl. 226, 184 P. 574, in support of the theory that the lease terminated by its own provisions at the end of the primary term in May, 1959. In each of those cases the evidence showed that there was no well on the leased premises during the primary term which was capable of producing in paying quantities. Those cases are not in point because in the case at bar a well was drilled and completed during the primary term which was capable of producing under the provisions of the lease.

Moreover, in the instant case the Gazins, lessors, received and accepted delay rentals on or before May, 1957, and May, 1958, as provided in the lease. They thereby waived any right which they may have had to claim that the lease terminated by its own provisions. If defendants could have delayed the commencement of a well during the primary term by payment of delay rentals and thereby deprived lessors of potential royalties, it is clear that the lessors may waive their right to demand production or marketing of the product by accepting delay rentals during the primary term of the lease as was done here. The trial court found that there was no drainage of oil or gas from the...