Roberson Enterprises, Inc. v. Miller Land and Lumber Co., 85-149

• Decision Date: 09 December 1985
• Docket Number: No. 85-149,85-149
• Citation: 700 S.W.2d 57,287 Ark. 422
• Parties: ROBERSON ENTERPRISES, INC. and Roppolo Petroleum, Appellants, v. MILLER LAND AND LUMBER COMPANY, Appellee.
• Court: Arkansas Supreme Court

Page 57

700 S.W.2d 57

287 Ark. 422

ROBERSON ENTERPRISES, INC. and Roppolo Petroleum, Appellants, v. MILLER LAND AND LUMBER COMPANY, Appellee.

No. 85-149.

Supreme Court of Arkansas.

Dec. 9, 1985.

Smith, Stroud, McClerkin, Dunn & Nutter by Hayes C. McClerkin & R. Bruce Lorenzen, Texarkanna, for appellants.

Williams & Kemp by Karlton H. Kemp, Jr., Texarkanna, for appellee.

NEWBERN, Justice.

The appellee sought an order partially cancelling three oil and gas leases between it, as lessor, and the appellants, as lessees. The basis of the complaint was breach of alleged implied covenants of reasonable development of the mineral interests on portions of each of the leased lands. The chancellor found the implied covenants to exist and that there had thus far been no breach by the appellants. However, the chancellor ordered the appellants to execute a release on February 5, 1986, from the leases of the lands in question unless they had drilled a producing well or had begun continuous drilling operations on those lands.

The issues on appeal are (1) whether by finding the existence of the implied covenants in the leases the chancellor improperly "reformed the contracts" and (2) whether the chancellor, assuming the implied covenants were properly found, had the authority to enter a conditional order of partial cancellation of the leases having found no breach of the implied covenants at the time his order was entered.

We hold it was not error to find the implied covenants but that it was error to enter the conditional cancellation, and thus we modify the decree to omit the conditional cancellation order and affirm.

1. Reformation

While the appellants couch this allegation of error in terms of "reformation" which they contend was erroneous because there was no finding of fraud, mistake or trickery, we must conclude their real complaint is that it was error to hold there were implied covenants of reasonable development in the leases. A reformation occurs when the court determines an instrument does not reflect the terms intended by the parties to it and then revises the terms written in the instrument to reflect the intent of the parties. Kohn v. Pearson, 282 Ark. 418, 670 S.W.2d 795 (1984). The chancellor did not purport to revise the leases to incorporate or revise a negotiated term. Rather he found there were implied covenants requiring reasonable development of the mineral interests on the leased property. There is plenty of authority for finding such an implied covenant in any oil and gas lease in which royalties are to be the lessor's principal compensation. Byrd v. Bradham, 280 Ark. 11, 655 S.W.2d 366 (1983); Smart v. Crow, 220 Ark. 141, 246 S.W.2d 432 (1952). The appellants do not assert that the royalty provisions were not the principal compensation contemplated by these leases. It was thus proper for the chancellor to find the existence of the implied covenants to develop the mineral interests.

2. Conditional Cancellation

Cancellation of an oil and gas lease is an appropriate remedy when breach of the implied covenant of reasonable development is shown. Nolan v. Thomas, 228 Ark. 572, 309 S.W.2d 727 (1958). When this equitable remedy is sought on the basis that the remedy at law is inadequate, however, the remedy of conditional cancellation is preferred. H. Williams and C. Meyers, Oil and Gas Law, § 834, pp. 247-248 (1984). The first case in which this court dealt with conditional cancellation was Poindexter v. Lion Oil Refining Co., 205 Ark. 978, 167 S.W.2d 492 (1943), in which we reversed the chancellor's refusal to cancel but ordered a six-month period to allow development. There was no question that a breach justifying immediate cancellation had occurred, but we allowed the six-month period because it was a case of first impression on the implied covenant of reasonable development, and fairness to the lessee required the delay. Then in Smart v. Crow, supra, a lessor sought cancellation of an oil and gas lease on four ten-acre tracts. The chancellor found there had been reasonable development on two of the tracts and gave the lessees sixty days to begin drilling on the third tract and twenty days after drilling commenced on the third tract to drill on the fourth tract. On appeal the lessor argued that there should have been immediate cancellation. The lessee did not appeal the...