Gulf Production Co. v. Kishi

• Court: Texas Supreme Court
• Writing for the Court: Smedley
• Citation: Gulf Production Co. v. Kishi, 103 S.W.2d 965, 129 Tex. 487 (Tex. 1937)
• Decision Date: 14 April 1937
• Docket Number: No. 1660-6794.,1660-6794.
• Parties: GULF PRODUCTION CO. v. KISHI et al.

103 S.W.2d 965

GULF PRODUCTION CO. v. KISHI et al.

No. 1660-6794.

Commission of Appeals of Texas, Section B.

April 14, 1937.

Certified Questions from Court of Civil Appeals of Ninth Supreme Judicial District.

Action by K. Kishi and others against the Gulf Production Company. Judgment for plaintiffs, and defendant appealed to the Court of Civil Appeals, which certified a question to the Supreme Court pending motion for rehearing, after the trial court's judgment had been reversed and a judgment for defendant had been rendered.

Question answered.

John E. Green, Jr., of Houston, W. E. Lea, of Orange, David Proctor, of Houston, V. H. Stark, of Orange, and Oswald S. Parker, of Houston, for appellant.

K. W. Stephenson and E. L. Reid, both of Orange, for appellees.

SMEDLEY, Commissioner.

Appellees recovered judgment against appellant for damages on account of appellant's failure, according to a jury's finding, to develop with reasonable diligence for the production of oil two tracts of land leased by appellees and their predecessors in title to appellant. The Court of Civil Appeals reversed the trial court's judgment and rendered judgment in favor of appellant but, pending action on motion for rehearing, certified to the Supreme Court the following question:

"Was appellees' petition, wherein they attempted to plead a cause of action based upon an implied covenant to drill wells in development of the leased premises in excess of the number agreed upon and stipulated for in the two leases, subject to appellant's general demurrer? In other words, since, by the express language of the two leases, provision was made for the development of the leased premises for oil by stipulating the number of wells to be drilled after the bringing in of the discovery well, and appellees plead affirmatively that all these wells had been drilled, were both leases, or either of them, subject to an implied covenant for additional development?"

The first of the two leases was executed December 23, 1919, for a recited consideration of $2,000 covers a tract of land containing about 150 acres, and provides for the payment to lessors as royalties of one-eighth of the oil produced, one-eighth of the value of the casinghead gas, and $100 per annum for each well producing natural gas. It gives to the lessee the exclusive right to explore, drill, operate, and produce on and from the leased land oil, gas, and other minerals. There is no fixed term. In the first paragraph of the lease the lessee obligates itself to commence in good faith within ninety days from the date of the lease operations in the drilling of a well for oil and to prosecute such operations continuously until the well has been completed. The second and third paragraphs of the lease are as follows:

"Second.

"If oil in paying quantities should not be found in the first well sunk on said premises, then the Company shall have the right within Sixty (60) days from the completion of said first well to commence and complete in a like manner a second well on said premises, and this right shall continue to additional wells, as long as said Company may desire, it commencing one of such additional wells at all times within 60 days after the completion of the preceding well, and this lease shall remain in force during all such operations. Failure to commence said second or additional wells within said 60 days shall automatically operate as a forfeiture of this lease.

"Third.

"If oil shall be found on said premises in paying quantities, then unless lessee shall within 60 days from such finding of oil in paying quantities, begin the drilling of another well and unless lessee shall thereafter continue to drill other wells (beginning each additional well within 60 days from the completion of the last prior well), until a total of 12 wells, shall have been drilled on said premises, this lease shall on such failure at any time cease to be effective except as to, and the lessee shall on such failure lose its rights hereunder, except as to an area equal to five (5) acres, for each producing well, which total area may be selected by lessee, both as to location and shape, and as to which this lease and lessee's rights hereunder, shall remain effective so long as production or explorations are continued by lessee on such retained area in accordance with the other terms of this lease; Lessee having expressly the right to drill as many additional wells, as it pleases on such retained area. It is expressly stated that such alternative right to drill 12 wells or to forfeit the lease with the exception of the retained area at any time during the drilling of such 12 wells, is at lessee's election."

The lease also contains a paragraph requiring the lessee to drill offset wells to producing wells that may be drilled within 200 feet of any line of the leased premises.

The second lease, which covers a tract of land containing 20 acres, was executed March 12, 1920, for a consideration of $2,000, and provides for the payment of royalties of one-eighth of the oil produced from all pump wells, one-sixth of the oil produced from all flowing wells, one-eighth of the net proceeds of the sales of casinghead gas, and $200 per annum for each well producing gas only. It gives the lessee the exclusive rights of mining and operating for oil, gas, or other minerals on the leased land. The term is for one year from the date of the lease and as long thereafter as the terms and conditions of the lease are complied with. The fourth and fifth paragraphs of the lease are as follows:

"Fourth.

"If no well or shaft is commenced on the premises on or before the 12th. day of March, A. D. 1921, this lease shall terminate as to both parties, unless lessee on or before said date shall pay or tender to lessors, in the manner hereinafter provided, the sum of Two Thousand ($2,000.00) Dollars, which payment or tender shall operate as a renewal to cover the privilege of deferring the commencement of a well, or shaft, for twelve months (12) from said date. But in the absence of drilling or mining operations, this lease cannot be kept in force by such payments or tender for a longer total period that two (2) years from the date of this lease, and if lessee shall fail to make any such payments or tender when due, this lease shall terminate and both parties be released from all obligations hereunder.

"Fifth.

"Lessor agrees that the cash payment or bonus received by him for this lease, and the other obligations of lessee to offset as expressed in the next succeeding paragraph, constitutes a valid and sufficient consideration to support each and every right and privilege conferred on the lessee by this instrument, including the option to the lessee to extend this lease from time to time, within the limitations and upon the terms hereinbefore stated. But, except as stated in the next succeeding paragraph hereof, the lessee shall not be obligated against its will to drill or otherwise conduct operations hereunder."

The sixth paragraph requires the drilling of offset wells whenever producing oil or gas wells are drilled on adjacent lands within 200 feet of any line of the premises.

The fourteenth paragraph of the lease is as follows:

"Fourteenth.

"Should oil in paying quantities be found on the leased premises, then additional wells shall be drilled thereon until as many as four producing wells are drilled and such additional wells shall be drilled within not more than 90 days interval between the completion or abandonment of one and commencement of work on another and a failure to drill such additional wells shall terminate this lease as to all land except 5 acres in a square around each producing well, with the well in the center."

Appellant completed a producing well on the tract of land covered by the first lease on or about May 2, 1921, and thereafter prior to January 20, 1927, it drilled to completion fifteen wells on that tract. All but three of such wells produced oil in large quantities. It completed its first producing well on the other tract, the 20 acres, on or about October 5, 1920, and thereafter prior to January 1, 1927, it completed on that tract six wells, all of which produced oil in large quantities. The foregoing facts as to the wells drilled by appellant are set out in appellees' petition, and copies of the two leases are made parts of the petition and attached as exhibits. It is not alleged that the wells were not drilled successively within the time stipulated in the leases. The petition alleges that reasonable diligence in the development of the first lease required the drilling of an average of fifteen wells per year from January 20, 1927, to the time when the suit was filed, and that reasonable diligence in the development of the other lease required the drilling of an average of five wells per year during that period. The prayer of the petition is for the recovery of damages in an amount equal to the royalties for the oil that would have been produced in the period from four years immediately preceding the filing of the suit to July 31, 1931, if the leased land had been developed with reasonable diligence.

We agree with the conclusion expressed by the Court of Civil Appeals that "the conditions of the leases prescribing the number of wells to be drilled by appellant necessarily excluded the implied covenant plead by appellees for further development, thereby denying as a matter of law appellees' contention that appellant rested under an implied covenant to drill wells in the development of the leased premises in excess of the number called for by the terms of the two leases."

The argument first presented by appellees in support of the implication of a covenant for further development by the drilling of additional wells after the completion of the wells expressly provided for by the terms of the leases proceeds from the premise that a covenant for reasonable development of land leased for the purpose...