Union Gas & Oil Co. v. Diles

• Decision Date: 22 June 1923
• Citation: 254 S.W. 205,200 Ky. 188
• Parties: UNION GAS & OIL CO. v. DILES.
• Court: Kentucky Court of Appeals

254 S.W. 205

200 Ky. 188

UNION GAS & OIL CO. v. DILES.

Court of Appeals of Kentucky.

June 22, 1923

Rehearing Denied Sept. 25, 1923.

Appeal from Circuit Court, Johnson County.

Action by James Diles against the Union Gas & Oil Company for cancellation of an oil and gas lease. Judgment for plaintiff and defendant appeals. Reversed, with directions to dismiss plaintiff's petition.

Holt Duncan & Holt, of Huntington, W. Va., and Otto C. Gartin, of Ashland, for appellant.

Howes &amp Howes, of Paintsville, for appellee.

TURNER C.

In May 1916, appellee executed an oil and gas lease on his farm in Johnson county to A. C. Albin, which lease was thereafter in 1917 assigned to appellant. In April, 1921, appellee, acting under the provisions of section 4 of chapter 24 of the Acts of the General Assembly of 1920 (page 110) which act became effective March 18, 1920, gave a written notice to appellant, in which he recited that a producing oil well had been brought in on the adjoining farm of John Rose and within 200 feet of appellee's line, and that oil had been marketed and sold from said premises, and requiring appellant to drill on his (appellee's) farm an offset to that well under the provisions of the act referred to.

Appellant having failed to drill such offset well, this equitable action by appellee was filed in September, 1921, seeking a cancellation of the lease on that account, and no other. Several issues of fact were made in the pleadings, and the chancellor upon submission entered a judgment canceling the lease, and from that judgment this appeal is prosecuted.

In view of our conclusion that the legislative act in question, in so far as it attempts to impose upon the lessee an added duty not imposed by law at the time the lease contract was entered into, and requires the drilling, after notice, of such offset wells as therein described, is an impairment of the obligations of the contract, in contravention of the provisions of both the state and federal Constitutions, we deem it unnecessary to consider any other question.

The lease contains no provision whatever requiring the lessee to protect the leased premises from drainage of oil or gas by reason of wells on adjacent or nearby property; but there is an implied obligation, read into such contracts, upon the lessee to protect such premises from drainage by wells drilled on adjoining lands. That implied obligation, however, is a general one, and from its nature only imposes upon the lessee the general duty to protect the leased property from such drainage, but imposes upon him no specific duty as to the drilling of offset wells, where the wells on adjoining property are within any named distance of the property line, nor does it require of him the drilling of such offset well with diligence, or provide that his failure so to do shall automatically bring about the cancellation of his lease.

Not only so, where there are general provisions in an oil and gas lease imposing the duty upon the lessee to protect the property from drainage by wells on adjacent lands, or when such general duty is imposed upon him by implication of law, it is within the sound judgment of the lessee to determine when and where the offset wells shall be drilled, or whether they shall be drilled at all. As said by the Circuit Court of Appeals in the case of Kellar v. Craig, 126 F. 630, 61 C.C.A. 366:

"In all leases for oil and gas purposes, a covenant to 'protect the lines' of and 'well develop' the land leased is implied by law, and so it follows that the general words relating to those matters, inserted in the lease under consideration, really add nothing to the obligations assumed by the lessee concerning such work. In such leases, where general covenants of that character are found or are implied, the lessee or his assigns are permitted to determine the character of the work to be done, and such ascertainment by him or them, in the absence of fraud, disposes of the question."

The legislative enactment in this state, by its terms in the second section thereof, is made to apply to "existing or future contracts and leases for oil and gas rights," and the fourth section thereof, imposing the duty upon lessees to drill offset wells, is as follows, to wit:

"That in the event of oil or gas being discovered in paying quantities on an adjoining leasehold and the products therefrom being taken out of the ground and marketed and said well is within two hundred feet of another lessor's property line, then within three months after written notice has been given lessee to the effect that such oil or gas has commenced to be transported off and marketed from the said adjoining premises the lessee or lessees of the land lying within two hundred feet of the said wells shall begin to drill an offset well to each of such wells so located, provided said offset wells to be drilled are not less than five hundred feet of each other, and upon his failure to so commence said offset well and complete same with diligence the said contract and lease shall automatically expire and become null and void: Provided this shall not apply to leases that are being operated, or on which wells are being drilled."

It appears, then, that in 1916, when this lease was executed, only the general duty implied by law was imposed upon the lessee to protect the leased property from drainage by wells on adjacent property, and that same law which imposed that general duty on him clothed him, in the absence of fraud, with the discretion to determine when and how and to what extent, if any, such protection was necessary.

It would appear to need no argument to show that the act in question imposes upon the lessee duties and obligations different from and greater than those implied by law at the time the parties entered into the contract. The implied duty imposed in the first place did not require him to look to the distance the well on the adjoining property might be from the property line, nor did it require of him diligent completion of an off-set well upon pain of forfeiture of...