Atlantic-Pacific Oil Co. v. Gas Dev. Co. , 105 Mont. 1 ( 1937 )

I concur in the result announced in the opinion of Mr. Justice Morris, but not with all that is stated in it.

I think too much effort has been expended in placing the proper label on the clause "subject to the approval of the Secretary of the Interior," and not enough in an attempt to ascertain the intention of the parties in its use. The construction of this clause virtually determines the merits of this controversy. The troublesome clause appears in the last paragraph of the contract, which reads: "This contract is made subject to the approval of the Secretary of the Interior and the right to assign it, in whole or in part, by the second party [being Herbert Stokes], subject to the consent of the Secretary of the Interior, if his consent is necessary, is reserved to the second party."

This clause in the operating agreement was evidently placed in the contract because of the federal statute (Act Feb. 25, 1920, sec. 27) as amended, Title 30, U.S.C.A., sec. 184, reading in part as follows: "No person, association, or corporation shall take or hold at one time oil or gas leases or permits exceeding in the aggregate seven thousand six hundred and eighty acres granted hereunder in any one State, and no more than two thousand five hundred and sixty acres within the geologic structure of the same producing oil or gas field. * * * And provided further, That * * * if any of the lands or deposits leased under the provisions of this subchapter shall be subleased, trusteed, possessed, or controlled by any device permanently, temporarily, directly, indirectly, tacitly, or in any manner whatsoever, so that they form a part of * * * control in excess of the amounts of lands provided in this subchapter, the lease thereof shall be forfeited by appropriate court proceedings."

The operating agreement here purported to give to plaintiff's predecessor the right to take oil or gas from the lands in question upon payment of royalty to the government and to the permittees. Before this could be done a lease must have been obtained from the Secretary of the Interior. The record shows that the practice of the Department of the Interior is not to limit the acreage which any person, association, or corporation may hold under prospecting permits, but that the statute above referred to restricting the acreage is applied when leases are sought after oil or gas is discovered. Consequently, when the permittees offered plaintiff's predecessor in interest a percentage of the oil or gas, that offer required the approval of the Secretary of the Interior; but that approval would come when a lease was applied for, after oil or gas was discovered. I think that was the only purpose of this clause.

When section 11 of the contract is read in its entirety it is apparent that the contracting parties had doubt as to the extent of the authority of the Secretary of the Interior with respect to such contracts. This is shown by the use of the clause "if his consent is necessary."

I agree with Mr. Justice Morris that the provisions of section 11 did not create a condition precedent. If it was intended that the Secretary's approval was a condition precedent, I think that intention would have been clearly expressed. If it was intended that mere silence on the part of the Secretary of the Interior would prevent the contract from being effective, is it not strikingly strange that the contract does not provide who shall take the initiative in attempting to secure his approval?

If the above clause had the effect now claimed by appellant, is it reasonable to suppose that the parties would have left the contract silent as to how the Secretary's approval must be expressed, or when it should be obtained, or how the parties were to obtain notice and knowledge thereof, so as to be advised as to the effective date of their contract? Even a city ordinance containing similar language has not been given this construction. (Doty v. Lyman, 166 Mass. 318, 44 N.E. 337.)

Here the parties to the operating agreement recognized it as effective. Plaintiff proceeded thereunder to do the promised drilling, by contract with the Capital Gas Corporation, and did everything necessary to enable the permittees to obtain leases. The permittees recognized the contract as in operation, because they later served notice of its cancellation. If it never became effective, why did it require any action to effect its cancellation? Moreover, the Secretary of the Interior has recognized the contract as being in effect. It was submitted to the Secretary of the Interior shortly after its execution. The Secretary extended the permits from time to time upon the operator's representations, accepted the drilling requirements of the permits, and on the strength thereof actually authorized the issuance of leases on the premises. To all intents and purposes the Secretary of the Interior has held that these operating agreements were effective. In a proceeding before the Secretary of the Interior involving the question whether he should issue a lease to the Montana Eastern Pipe Line Company, over protest of plaintiff that, if issued, it should be made subject to the operating agreements, that official held as follows: "The permittees entered into these operating agreements, and unless such agreements are finally declared canceled, any assignment the permittees subsequently made would be subject thereto, assuming that the assignees had knowledge of the agreements."

I think these operating agreements, as between the parties thereto and their assigns, were effective without the expressed approval of the Secretary of the Interior. Furthermore, the Secretary of the Interior has gone as far as he can to approve of them.

I can see no analogy between this case and the illustrations given in the dissenting opinion. Neither do I believe the clause in question can be construed as a covenant. I think it simply means that if the Secretary's consent or approval of the contract was essential to give it validity under the law, then his refusal to consent or approve would operate to release the parties from the obligations of the contract.

I think the parties by the language used in section 11 of the contract as well as by their conduct so regarded it. This, perhaps, leads to the conclusion that the condition was a condition subsequent, but I am not so much concerned with the legal label that is applied to it, as I am at arriving at the intention of the parties as ascertained from the language used and their conduct in acting under it. When these are considered it brings me to the same conclusion announced in the opinion of Mr. Justice Morris, and I therefore concur in the result reached in his opinion.