J. J. Fagan & Co. v. Burns

• Decision Date: 04 September 1929
• Docket Number: No. 53.,53.
• Citation: 226 N.W. 653,247 Mich. 674
• Court: Michigan Supreme Court
• Parties: J. J. FAGAN & CO. v. BURNS.

247 Mich. 674

226 N.W. 653

J. J. FAGAN & CO.

v.BURNS.

No. 53.

Supreme Court of Michigan.

Sept. 4, 1929.

Appeal from Circuit Court, Muskegon County, in Chancery; John Vanderwerp, Judge.

Suit by J. J. Fagan & Co. against Minnie L. Burns, in which defendant filed a crossbill. Decree for plaintiff, and defendant appeals. Reversed and rendered.

Argued before the Entire Bench.

George H. Cross, of Muskegon, for appellant.

Cross, Foote & Sessions and Joseph T. Riley, all of Muskegon, for appellee.

FEAD, J.

This case involves construction of an oil and gas lease, and marks the introduction into this court of what, from the experience in other states, bids frir to be a prolific and not entirely happy subject of legal inquiry.

The lease was for one year from December 17, 1927. It granted, demised, leased, and let certain premises to plaintiff for the purpose of mining and operating for oil and gas, laying pipe lines, and building tanks, towers, stations, and structures thereon, to produce, save, and take care of the products. Plaintiff began no operations on the premises until December 15, 1928. The question is whether, having commenced operations within the year, plaintiff had the right to complet the well after the end of the year.

The issue rests upon the construction and reconcilement or dominance of the term and development clauses of the lease. The instrument was on printed form, and was originally filled in as a five-year lease, but on defendant's request it was changed to one year. To indicate the changes, we insert the figure ‘5’ where that number appeared in the original draft. With these insertions, the term clause reads: ‘It is agreed that this lease shall remain in force for a term of one (5) year from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.’

The pertinent part of the development clause is: ‘4th. There is expressly granted to the said lessee the right at any time before one year after this date to begin operations for drilling a well for oil or gas on said premises, and also the right to extensions of time in which to begin such operations for successive periods of twelve months from and after December, 1928, on condition that the said lessee shall on or before the first day of each such respective twelve months' period, pay to the lessor or deposit to her credit in the Union National Bank of Muskegon, Michigan, (which shall continue as the depository regardless of changes in the ownership of said land) the sum of one dollar ($1,00) per acre, provided that if such payment shall not be made within ten days after the first day of each such respective twelve months' period. then and on such default this lease shall wholly determine; and provided further that these successive periods in which the right may be acquired to begin the operation of drilling a well in search for oil or gas shall not exceed in the aggregate one (5) year from this date, and if such operations shall not be begun on or before the expiration of said one (5) year from December 17, 1927, and continue with due diligence to a reasonable determination of the presence of oil or gas in paying quantities, then this lease shall wholly determine.’

The form lease is known as ‘Producer’ 88.' Producers' Oil Company forms are so well known and commonly used that some of them are shown in the text-books. Summers, Oil and Gas (1927) 751; Mills & Willingham, Law of Oil and Gas (1926) 601, 604. As demonstrated by these authorities and Thornton's Law of Oil and Gas (1925), the lease forms in common use are more the result of evolution than of initial drafting. In the early days many leases were for long terms, on nominal consideration, contained no requirement of development, and followed the forms of real estate or mining leases. Probably the first important general change came because the courts read into the leases an implied covenant to develop within a reasonable time. Summers, Oil and Gas (1927) 398; Mills & Willingham, Law of Oil and Gas (1926) 151, 152. This led to designation in the leases of specific time to develop. As other controversies arose and came before the courts, the lease forms changed from time to time to meet the decisions. The evolution is entertainingly and instructively set out in the above text-books. It is sufficient for our purpose to appreciate the fact of such evolution and that the lease at bar is not an isolated or private agreement, drafted by uninformed neighbors to roughly express their understanding, but is a technical contract, reflecting the development and present status of the law of oil and gas, as far as it may be said to have a status in view of the bewildering conflict in reasoning and ruling. The lease should be read, not only according to its words, but in connection with the purpose of its clauses.

No other lease just like this one seems to have been construed by the courts. Upon other forms, Perkins v. Sanders, 109 Kan. 372, 198 P. 954, and Cooke v. Gulf Refining Co. of Louisiana, 127 La. 592, 53 So. 874, sustain defendant's contention that the term clause dominates the time and that the expiration date therein stated is not extended by a development clause which permits commencement of a well at any time within the fixed term. On the other hand, a majority of the court, in a case closely in point, Lester v. Mid-South Oil Co., 296 F. 661 (C. C. A. 6th Circuit), has held to the contrary. The latter case involved a Kentucky lease for five years, which provided for rentals for deferring commencement of operations for successive periods during the term. The court held the term and development clauses inconsistent and that the latter modified the former, so...