Lavery v. Mid-Continent Oil Dev. Co.

• Decision Date: 16 January 1917
• Docket Number: Case Number: 6282
• Citation: 1917 OK 93,62 Okla. 206,162 P. 737
• Parties: LAVERY et al. v. MID-CONTINENT OIL DEVELOPMENT CO.
• Court: Oklahoma Supreme Court

1917 OK 93

162 P. 737

62 Okla. 206

LAVERY et al. v. MID-CONTINENT OIL DEVELOPMENT CO.

Case Number: 6282

Supreme Court of Oklahoma

Decided: January 16, 1917

Syllabus

¶0 Oil and Gas--Leases--Contract. Where a drilling contract by the terms of which an oil company, in consideration of the assignment to it of a one-half interest in an oil and gas lease, specifically undertook to commence and with diligence drill a well on the premises into a designated sand, contained a clause providing that the failure to commence and complete such well should work a forfeiture and render the contract null and void, held, that such provision was for the benefit of the owner of the leasehold interest, and gave to him alone the option to declare a forfeiture upon failure of the company to discharge its obligation to drill, and that the company could not by virtue of such forfeiture clause, without the consent of such owner, terminate the contract by its own default, and thus escape liability for resultant damages.

Merwine, Newhouse & Albertson and Lex V. Deckard, for plaintiffs in error.

Belford & Hiatt, for defendant in error.

BLEAKMORE, C.

¶1 This action was commenced in the district court of Okmulgee county to recover damages alleged to have been occasioned by the failure to sink a test well pursuant to the terms of an oil and gas drilling contract. The parties appear and are referred to here as in the trial court. Plaintiffs were the owners of an oil and gas mining lease covering 13 1-3 acres of land in Okmulgee county, and on August 10, 1912, entered into a written agreement by the terms of which, in consideration of the drilling of a test well on the premises by defendant, plaintiffs undertook to assign an undivided one-half interest in and to said lease, defendant agreeing within three days thereafter to commence the moving of rig timbers and necessary equipment on the premises for the erection and completion of the same and the drilling of a well with due diligence into a designated sand. The contract provided that the expense of drilling such well should be borne by defendant; that if oil or gas was found in paying quantities plaintiffs should pay out of the first production thereof one-half of the cost of casing, tubing, rods, lead lines, and other equipment used in operating the well, and should thereupon become the owners of an undivided one-half interest in the derrick, bull wheels, etc. The contract contained no surrender clause. It was also provided therein:

"The failure to begin operations as above set forth on the above-described premises, within the time provided in this contract, and to continue the same with due diligence to completion, shall work a forfeiture of the assignment of the interest in said leasehold premises herein agreed upon, and shall cause the same to be null and void and of no further force or effect whatsoever."

¶2 At the time of the making and delivering of said contract plaintiffs executed an assignment of an undivided one-half interest in said oil and gas lease, which together with the contract, was placed in an envelope and deposited in a bank, there being indorsed upon such envelope the following:

"Escrow agreement between Charles E. Martin, Mid-Continent Oil Company, and G. W. Lavery et al. This assignment to be taken down to Charles E. Martin, of the Mid-Continent Oil Development Company, when he has completed a well on the east 13 1-3 acres of the northwest quarter of the north west quarter of section 24--14 north, range 12 east, known as the Peggy Berryhill allotment."

¶3 Pursuant to the contract, a derrick was erected on the premises, about the time of the completion of which a well on an adjoining tract some 200 feet from the line of the lease in question was shown to be dry, and defendant thereupon refused to sink a well on the lands involved. Thereafter plaintiffs commenced this action, alleging, among other things:

"That at the time of the execution of said contract, and now, adjoining oil wells, which would require offset wells, were and are now draining oil in large quantities from said leasehold premises, and will continue so to do; that by reason of the premises plaintiffs have been damaged in the sum of $ 10,000."

¶4 The cause was tried to the court, which rendered the following judgment:

"The court finds that the following provision in the contract alleged and set forth in the petition and sued on herein, to wit: ''A failure to begin operations as above set forth on the above described premises within the time provided in this contract and to continue the same with due diligence to completion shall work a forfeiture of the assignment of the interest of the said leasehold premises herein agreed upon, and shall cause the same to be null and void and of no further force or effect whatsoever''--gave the defendant the right, after a derrick had been placed upon said real estate and operation begun thereunder, to declare said contract forfeited, and that by reason thereof the plaintiffs are not entitled to recover anything from the defendant in this action."

¶5 The principal question for our consideration is whether defendant had the right, by virtue of the forfeiture clause therein, in the absence of the consent of plaintiffs, to terminate the contract by refusing to drill, with cut incurring liability for resultant damages. The provisions of the contract in the instant case are clearly distinguishable from those in the oil and gas leases considered in Frank Oil Co. v. Belleview Oil & Gas Co, 29 Okla. 719, 119 P. 260, 43 L. R. A. (N. S.) 487, Deming Investment Co. v. Lanham, 36 Okla. 773, 130 P. 260, 44 L. R. A. (N. S.) 50, and subsequent decisions, and construed to confer a mere option upon the lessee, which he might exercise or not, without incurring further liability. Here for a sufficient consideration--the undertaking of plaintiffs to assign a one-half interest in an existing oil and gas lease, and with which they complied--defendant specifically obligated itself to commence the drilling of a test well on the lands involved, and to continue the same with diligence to completion into a designated sand, the approximate depth of which was evidently known to the parties. The manifest purpose of the parties was the exploration and development of the leased premises. Defendant defeated this purpose by refusing to discharge its obligation, and now sets up its own default, under the forfeiture clause, as relieving it from the alleged consequent damages. In our opinion this it may not do. In Cohn v. Clark, 48 Okla. 500, 150 P. 467, L. R. A. 1916B, 686, it was said by this court:

"If the lessee''s contention be true, then we would meet the anomalous condition of a party profiting by his own breach or gaining advantage by his own wrong. Under such as contract the lessor binds his hands and gets nothing for the lease unless the pleasure of the lessee moves him to action. Should we determine that a failure to pay the rentals stipulated, after a default in beginning operations, ipso facto operates to release the lessee from all liability, why incumber the lease with the sixth paragraph, known as the surrender clause? If failure to pay rentals nullifies the lease automatically, then there is no use of the surrender clause at all. It would be useless to insert a surrender clause in a lease requiring the lessee to go to the trouble and

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