Ramsey Petroleum Corp. v. Davis

• Decision Date: 20 December 1938
• Docket Number: Case Number: 26800
• Citation: 85 P.2d 427,1938 OK 659,184 Okla. 155
• Parties: RAMSEY PETROLEUM CORPORATION v. DAVIS et al.
• Court: Oklahoma Supreme Court

1938 OK 659

85 P.2d 427

184 Okla. 155

RAMSEY PETROLEUM CORPORATION v. DAVIS et al.

Case Number: 26800

Supreme Court of Oklahoma

Decided: December 20, 1938

Syllabus

¶0 1. OIL AND GAS - Forfeiture of Lease for Breach of Implied Covenant to Diligently Develop or to Protect Premises From Drainage by Other Wells - Relief Dependent on Facts and Circumstances of Particular Case.

A court of equity will declare a forfeiture of an oil and gas mining lease because of the breach of an implied covenant to diligently develop or because of the breach of an implied covenant to protect the lease premises from substantial drainage by wells on adjoining land, when such forfeiture will effectuate justice, but the granting of such relief depends upon the facts and circumstances surrounding the particular case.

2. SAME - Test for Determining Breach of Implied Covenants - Burden of Proof on Plaintiff.

The test prevailing in this state for determining a breach of the implied covenants to drill additional wells and to protect the lease premises from drainage by wells on adjoining lands is "the ordinary prudent operator test". It requires the lessee to do whatever in the circumstances would be reasonably expected of operators of ordinary prudence, having regard to the interests of both lessor and lessee, but neither is the arbiter of the extent to which, or the diligence with which, the operations shall proceed. The burden of proving the breach of these implied covenants is upon the plaintiff.

3. APPEAL AND ERROR - Owner Obtaining Judgment Canceling Oil and Gas Lease on Ground of Breach of Implied Covenant to Diligently Develop not Permitted to Urge on Appeal for First Time Additional Ground of Abandonment of Lease by Defendant.

When a plaintiff files an action to cancel an oil and gas lease as to the undeveloped portion of the lease, or for damages in the alternative, because of a breach of the implied covenants to diligently develop and to protect the lease from drainage by wells on adjoining leases, and the issue is joined thereon and trial is had upon this issue, and judgment is rendered in favor of the plaintiff upon such ground, the plaintiff will not be permitted to urge in this court for the first time the ground of abandonment by the defendant lessee as an additional reason for canceling said lease.

Appeal from District Court, Caddo County; Will Linn, Judge.

Action by L.A. Davis and Marie M. Davis against the Ramsey Petroleum Corporation. Judgment for plaintiffs, and defendant appeals. Reversed.

Jarman & Brown and W.L. Harris, for plaintiff in error.

Melton & Melton, for defendants in error.

BAYLESS, V. C. J.

¶1 This is an action for the cancellation of the undeveloped portion of an oil and gas lease. The record shows that the lease was executed on June 5, 1916, covering the W.1/2 of the N.E.1/4 of the N.E. 1/4, section 1, township 5 north, range 10 west, in Caddo county, and was for a term of two years and as long thereafter as oil or gas is produced. The lease also provided that unless a well was commenced by June 5, 1918, the lease should terminate unless rentals were paid. The plaintiffs were the lessors and the Keeche Oil & Gas Company was the lessee. The Keeche Oil & Gas Company drilled two wells on the north ten acres. Well No. 1 was located 256 feet south and 202 feet west of the northeast corner, and was completed September 10, 1919, with an initial production of 175 barrels of oil. Soon after the first well was completed, the plaintiffs filed a suit against the Keeche Oil & Gas Company to cancel the lease, and the judgment in that case was appealed to this court and was determined against the plaintiffs on May 1, 1923 (Davis v. Keeche Oil & Gas Co., 89 Okla. 226, 214 P. 711). While that litigation was pending, and during the year 1920, an offset well was drilled 154 feet east of the south ten acres with initial production of 30 barrels, and another offset well was drilled 193 feet south of the south ten acres with initial production of 35 barrels. In August, 1919, a diagonal offset was drilled southeast of the south ten acres with initial production of 150 barrels. In 1920, a diagonal offset to the southwest of the south ten acres was drilled and came in dry and was abandoned. In 1922, an offset well was drilled 214 feet west of the south ten acres with initial production of five barrels. After the termination of the litigation, Well No. 2 was drilled 106 feet north and 335 feet west of the southeast corner of the north 10 acres, and was completed April 6, 1935, and the initial production was 35 barrels. No well has been drilled on the south ten acres of the lease in controversy, and the record shows that the wells offsetting said ten acres are, or were at the time of the trial in this case, still producing oil, but the record is not clear as to how much each of those wells is producing, since the oil is being run into receiving tanks with the oil from other wells.

¶2 The defendant, Ramsey Petroleum Corporation, acquired the lease on May 16, 1931. On February 4, 1933, the plaintiffs made a written demand upon the defendant to either drill a well on the south ten acres or pay royalty, and stated in the letter that if it did neither, suit would be filed to cancel the lease. The defendant failed to comply with the demand and this action was filed on December 27, 1933, and the plaintiffs prayed for cancellation of the lease on the south ten acres, or in lieu thereof, for a money judgment not to exceed $2,500. On the trial of the case, judgment was rendered for the plaintiffs canceling the oil and gas lease on the south ten acres. From that judgment this appeal was taken.

¶3 1. The first three propositions of defendant pertain to the sufficiency of the evidence. The findings of the trial court were that defendant had knowledge of the extent of development on this lease when it bought the lease; that it knew of the development of adjoining leases and knew that the wells thereon drained oil from under the south ten acres. The trial judge specifically refers to the failure to reasonably develop under the covenants of the lease. We will first determine if the evidence supports the judgment on the theory that there has been a breach of an implied covenant.

¶4 (a) According to Merrill on Covenants Implied in Oil and Gas Leases, p. 20, the implied covenants may be classified into four groups: (1) Implied covenant to drill a test well, (2) implied covenant to drill additional wells, (3) implied covenant for the diligent and proper operation of the lease if oil or gas is found in paying quantities, and (4) implied covenant to protect the lease premises from drainage by wells on adjoining land. In the present controversy we are only concerned with the covenant to drill additional wells, and with the covenant to protect the lease premises against drainage. Moreover, our discussion will be limited to the operation of those covenants after the expiration of the primary term with production, inasmuch as the exploratory period in the case at bar has long since expired.

¶5 The courts are now agreed that the duty imposed by the implied covenants under discussion is to use reasonable diligence and care to develop and protect the entire lease premises for the common benefit of both parties, having due regard for the interests of each. Merrill, Covenants Implied in Oil and Gas Leases, p. 18. The leading case is Brewster v. Lanyon Zinc Co. (1905) 140 Fed. 801. When it has been determined that the lessee has not complied with this duty, he may be compelled to surrender that portion of the lease premises which he has not properly developed or protected, even in the absence of a forfeiture clause, on the theory that the covenant is a condition. Fox Petr. Co. v. Booker (1926) 123 Okla. 276, 253 P. 33. It was said in Pelham Petroleum Co. v. North (1920) 78 Okla. 39, 188 P. 1069:

"It is now well settled that a court of equity will declare a forfeiture of an oil and gas lease because of the breach of an implied covenant to diligently operate and develop the property when such forfeiture will effectuate justice, but the granting of such relief depends upon the facts and circumstances surrounding the particular case."

¶6 To the same effect are the cases of Papoose Oil Co. v. Rainey (1923), 89 Okla. 110, 213 P. 882; Carder v. Blackwell Oil & Gas Co. (1921) 83 Okla. 243, 201 P. 252, and Blackwell Oil & Gas Co. v. Whitesides (1918) 71 Okla. 41, 174 P. 573. But the difficulty arises in determining when there has been a breach of these implied covenants. The courts have found it impossible to prescribe any fixed rule, and therefore resort to standards for measuring "reasonable diligence". Two tests have been developed: (1) the test of what an ordinary prudent operator would do; and (2) the standard of "good faith." The former test simply requires the lessee to do whatever in the circumstances would be reasonably expected of operators of ordinary prudence, having regard to the interests of both lessor and lessee, but neither the lessor nor the lessee is the arbiter of the extent to which, or the diligence with which, the operators shall proceed. Brewster v. Lanyon Zinc Co., supra; I. T. I. O. v. Haynes Drilling Co. (1937) 180 Okla. 419, 69 P.2d 624; Pelham Petroleum Co. v. North, supra; Donaldson v. Josey Oil Co. (1924) 106 Okla. 11, 232 P. 821; Robinson v. Miracle (1930) 146 Okla. 31, 293 P. 211; Broswood Oil & Gas Co. v. Mary Oil & Gas Co. (1933) 164 Okla. 200, 23 P.2d 387. The good faith test, used in a few states, leaves the determination of the obligation to drill entirely to the lessee, providing he acts in good faith. Although in Mistletoe Oil & Gas Co. v. Revelle (1926) 117 Okla. 144, 245 P. 620, this court gave significance to the good faith of the lessee in refusing to cancel that part of the lease which the lessee had developed in good faith, while canceling the other part, yet unquestionably the prevailing test in this state is the...