Prowant v. Sealy , 77 Okla. 244 ( 1919 )

The issue involved in this case is the construction of an oil and gas lease. The record discloses Mr. A.P. Crockett met with some landowners near Yale, Oklahoma, for the purpose of securing oil and gas leases on a large area of land. He was desirous of obtaining leases for a period of five years, while the landowners wanted to give a lease for only two years. A meeting was held at Mr. Prowant's house and it was tentatively agreed that the landowners would execute leases for a period of three years, provided a test well was drilled the first year on one of the tracts of land. Mr. Crockett made a memorandum from which to prepare an escrow agreement that was to be entered into regarding the test well, and returned to Oklahoma City. There he had the leases prepared on blank forms of lease, the form having been prepared prior to that time by Crockett's law partner, who was interested in the leases. An escrow agreement was also prepared. The only changes made in the printed form of the lease was that the printed words "five years" were scratched out and the words "three years" inserted; that as to the rental clause, the word $1 per acre was scratched out and the word $2 per acre payable quarterly in advance was inserted. Mr. Crockett then returned to Yale and the leases were executed.

After the leases were executed, they were assigned by Mr. Crockett to divers parties, who developed the different leased premises, and this controversy arises over the leases executed by Mr. Custer on his tract of land and the one executed by C.M. Prowant on his land. The leases were dated March 11, 1914, and were for a period of three years and would expire March 11, 1917. No oil or gas was found on the premises by March 11, 1917. About sixty days prior to March 11, 1917, the assignees of the lessee erected a derrick on each lease and began drilling for oil. It was conceded on the day drilling began the lessees would not have sufficient time to complete a well to the sand that was producing oil and gas by March 11, 1917

The question involved is, did the leases expire on March 11, 1917? The lease involved is a commercial lease, and very similar to the average commercial form of leases. The habendum clause of the lease contains the following language:

"To have and to hold the same for and during the term of three years from the date hereof, and as much longer thereafter as oil or gas is found thereon or said premises developed or operated."

It is the contention of the plaintiffs in error that the lease by its term expired on March 11, 1917, unless oil and gas had been found thereon prior to said time, and that the words "developed" and "operated" referred to the development or operation of a lease where oil and gas had been found. It is the contention of the defendant in error that the finding of oil and gas was not a condition precedent, but that the commencement of a well prior to March 11, 1917, came within the words "developed or operated," and extended the life of the lease. It is the construction of this portion of the lease that is in controversy.

In the construction of oil and gas leases, this court, and the courts of the different states, have laid down certain rules, to wit:

First. In the construction of oil and gas leases different rules obtain from those applied to the construction of ordinary leases or other mining leases, owing to the peculiar nature of the mineral and danger of loss to the owner from drainage by surrounding wells, the general rule being that oil and gas leases are construed most strongly in favor of the lessor. Superior Oil Gas Co. v. Mehlin, 25 Okla. 809, 108 P. 545; Frank Oil Co. v. Belleview Gas Oil Co., 29 Okla. 719,119 P. 260; Shaffer v. Marks, 241 Fed. 139.

Second. The principal purpose and design of the parties to an oil and gas lease is the production and marketing of the oil and gas in the land for their mutual benefit. Indiana Oil Gas Co. v. McCrory, 42 Okla. 136, 140 P. 610; Brewster v. Lanyon Zinc Co., 140 Fed. 810; Plummer v. Coal Iron Co. (Pa.) 28 A. 853.

Third. Oil and gas leases in this jurisdiction are construed strongly against the lessee and in favor of the lessor, and where its terms will permit under the rules of law, said lease will be construed so as to promote development and prevent delay. Curtis v. Harris, 76 Oklahoma; New State Oil Co. v. Dunn, 76 Oklahoma,182 P. 514; Paraffine Oil Co. v. Cruce, 63 Oklahoma,162 P. 716.

Fourth. Where the lease provides that the lessee shall have a specified period of time within which to explore, although the lease may provide that the term shall be as long as rentals are paid or oil or gas produced in paying quantities, yet unless oil or gas is found in paying quantities within the specified period of time, the payment or tender of such rental after the expiration of the definite term will not extend the time. Western Pennsylvania Gas Co. v. George, 161 Pa. 47, 28 A. 1004; Bettman v. Harness, 42 W. Va. 433, 26 S.E. 271; Northwestern Ohio Nat. Gas Co. v. City of Tiffin. 59 Ohio St. 420, 54 N.E. 77; Murdock-West Co. v. Logan, 69 Ohio St. 514, 69 N.E. 984; Chaney v. Ohio, etc., Gas Co., 32 Ind. App. 193, 69 N.E. 477; Eaton v. Allegheny Gas Co., 122 N.Y. 416, 25 N.E. 981; Brown v. Fowler, 65 Ohio St. 507, 63 N.E. 76; Cassell v. Crothers, 193 Pa. 359, 44 A. 446; Lowther Oil Co. v. Miller-Sibley Oil Co., 53 W. Va. 501, 44 S.E. 433, 97 Am. St. 1027; Brewster v. Lanyon Zinc Co., 140 Fed. 801, 72 C. C. A. 213; Am. Window Glass Co. v. Williams (Ind.) 66 N.E. 912.

Fifth. Leases for oil and gas are subject to the implied covenant that the lessee will do all that is necessary to carry into effect the purposes and objects of the lease. In the absence of a covenant to begin work within a certain time, there is an implied covenant to begin within a reasonable time. When the lessee commences explorations there is an implied covenant that he will diligently prosecute the search, and if oil or gas is found in paying quantities that he will protect the lines and will develop the territory. Brewster v. Lanyon Zinc Co., 140 Fed. 801, 72 C. C. A. 213; Indiana Oil Gas Co. v. McCrory, 42 Okla. 136, 140 P. 610; Wellsville Oil Co. v. Miller, 44 Okla. 493, 145 P. 344.

There is a general rule in the construction of contracts which is as follows:

The primary object of all rules of interpretation and construction of contracts is to arrive at and give effect to the mutual intention of the parties as expressed in the contract when not forbidden by law. It must be borne in mind that all applicable laws, when an agreement is made, necessarily enter into and form a part of it as fully as if they were expressly referred to, or incorporated in its terms. Elliott on Contracts, vol. 2, p. 776; Armour Packing Co. v. United States, 153 Fed. 1, 14 L. R. A. (N. S.) 400; Metropolitan Life Ins. Co. v. Johnson (Ind.) 94 N.E. 785; Lang v. Straus (Ind.) 7 N.E. 763.

Another rule in the construction of the contracts is "that when there exists an uncertainty or ambiguity as to the meaning of the terms of the agreement and the language used may be attributed to one of the parties thereto, it will be construed most strongly against the party using the language, since he is considered as having chosen the language thereto." Elliott on Contracts, vol. 2. p. 807; sec. 964, Rev. Laws 1910.

Without considering at this time the evidence introduced in the trial of the case, nor the findings of the court, let us examine the lease with the rules set out above, as a guide to assist us in the interpretation and construction to be placed upon the oil and gas leases in question. With this in mind, what does the sentence, "And as much longer thereafter as oil or gas is found therein or said premises developed or operated," mean, when the rules set out above are applied, and what was the intention of the parties at the time of the execution of the lease? Does the lease provide three conditions to be performed, any one of which will extend the lease beyond the term of three years, that is: First, "finding of oil or gas," second, "or the premises developed," third, "or operated," or does it simply provide one condition to be performed that will extend the lease beyond its term? It surely could not have been the intent of the parties to the lease that the finding of oil or gas without producing the same or operating the premises would extend the life of the lease. There is no contention that simply finding oil or gas, irrespective of the amount found, would extend the lease indefinitely, without any operation, so this portion of the sentence cannot stand alone, unless the court adds to the sentence additional words such as "produced" or "produced in paying quantities," each of which would require the operating of the leased premises. So it must have been intended that the word "operated" refers to operating the premises after oil and gas was found. If you add the words "produced," or "produced in paying quantities," which would it be? Does the word "developed" refer to commencing a well or drilling operations, prior to the time oil or gas is found, or does it refer to the implied covenant, that goes with every lease, that after oil and gas is found the premises shall be developed with reasonable diligence along such lines as will be reasonably calculated to make the extraction of oil or gas from the leased land of mutual advantage and profit to the lessor and lessee? If this sentence is construed as exacting one condition to be performed for extending the life of the lease and we substitute the word "and" for "or" it will read "and as much longer thereafter as oil and gas is found therein and said premises developed and operated." In construing oil and gas leases the word "and" has often been substituted for the word "or" when used in the habendum clause. Western Penne. Gas Co. v. George (Pa.) 28 A. 1004; Bettman v. Harness (W. Va.) 26 S.E. 271; American Window Glass Co. v. Indiana Nat. Gas Oil Co. (Ind.) 76 N.E. 1006; American Window Glass Co. v. Williams (Ind.) 66 N.E. 912.

In the case of Bettman v. Harness, supra, the court used the following language:

"Here is a clause annexed to the clause continuing the lease which will insure the rent, if we give the word 'or' the meaning of 'and.' Words must serve intention in the construction of contracts. Story, Cont. 773, 774. These words 'or' and 'and' are so often used inexactly that the one will be read as if the other had been used, to serve the plain intent. It is done in the construction of wills. (Schuler, Wills, 477) and in the construction of statutes (Suth. St. Const. 252); and if the words of a wise legislative assembly must yield to intention, why not the words of two men not so learned and exact? The intention is the question in all these cases. Bish. Cont. 383, says it can be done in the construction of contracts. Likewise, 2 Pars. Cont. 497. Just now I notice the case of Petty v. Fogle, 16 W. Va. 497, holding this to be law in this state in construing contracts."

In substituting the word "and" for "or," in my judgment, we have a plain and unambiguous sentence in the lease which, in my opinion, will express the intent of the parties and the interpretation will comply with all the established rules used in the construction of oil and gas leases. It complies with the rule of construction: First, that an oil or gas lease for a definite term of years terminates at the time provided in the lease unless oil or gas is produced therefrom: second, that the finding of oil or gas on the premises is a condition precedent to the extending of life of an oil or gas lease beyond its term; third, that in addition to finding oil or gas, the premises must be operated and oil and gas produced therefrom; fourth, that if oil and gas are produced therefrom, it contains the implied covenant that there must be further development for properly protecting the lease and carrying out the terms of the lease to the mutual advantage of the parties thereto; fifth, that the purpose and design of executing an oil and gas lease is the royalty benefits which accrue therefrom to the landowners and the corresponding right to the benefit of the lessee; sixth, that the law applicable to the construction of oil and gas leases would be read into the lease the same as if written therein, and it will be presumed the parties intended that the terms used in said lease would mean and would be construed to mean what they had been construed to mean by the judicial decisions of the various courts and text-writers at that time.

As I understand the position of the defendants in error, it is that by reason of the lease containing the following provision, to wit:

"If a well is not commenced on said premises within one year from the date hereof, this lease shall become null and void, unless the lessee shall pay or tender to the lessors a rental of $2.00 per acre quarterly in advance for each additional one year such commencement is delayed from the time above mentioned for the commencement of said well, until a well is commenced on said land. It is expressly agreed that the right to so extend and continue this lease is fully paid for by the consideration above mentioned, and that said payment or tender, when made, shall fully and completely extend this lease from time to time until a well is commenced. The drilling of a producing well on said premises shall operate as a full liquidation of all rentals due or payable under this provision during the remainder of the term of this lease.

"The completion of drilling operations which result in a dry hole or a well not producing oil or gas in paying quantities shall be in lieu of all rentals accruing from and after the date of the commencement of said operations, for a period expiring one year after the termination of said operations, and this lease shall be in full force and effect for said time as fully as if said rentals had been paid or a producing well completed"

— that, construing both clauses together, that is, the habendum clause and the drilling clause, the lessee had three years to commence a well, and having commenced a well prior to the expiration of the lease, the life of the lease was extended thereby, and that the words "developed" and "operated" referred to commencing a well, but in this construction I cannot agree.

I have been unable to find any decision, nor has a case been cited wherein the courts have decided that the terms contained in the drilling clause of an oil and gas lease extended the life of the lease. The first provision in the drilling clause is: That if no well is commenced within one year the lease becomes null and void unless the lessee pays a certain rental for each year such commencement is delayed. The force and effect of this clause in the lease has been construed by this court in the case of Melton v. Cherokee Oil Gas Co., 67 Oklahoma, 170 P. 691, the court saying:

"An oil and gas lease containing a stipulation on the part of the lessee to commence operations on the premises within a year from a date certain or pay for delay conferred on the lessee an option to drill or pay, and a failure to do either rendered the same forfeitable at the choice of the lessor."

So if the option to commence a well or the option to pay rentals have the same force and effect, then if the party prior to the expiration of the term of the lease has a right to commence a well and extend the life of the lease, he would have the same right to pay the rental and extend the life of the lease, and no court has ever held that the lease could be extended beyond its terms by paying rental. This clause in the lease is not different from the clauses contained in many commercial forms of leases. The case of Federal Oil Co. v. Western. Oil Co., 121 Fed. 674; Indiana Oil Gas Co. v. McCrory, supra; Eastern Oil Co. v. Holkum, 212 Fed. 126; American Window Glass Co. v. Indiana Natural Gas Oil Co. (Ind.) 76 N.E. 1006, all used the word "commencement" of operations or well, instead of "completion" of well, although the identical question here presented was not presented in any of those cases.

The next sentence in the drilling clause provides that the right to extend the lease is paid for by the consideration above mentioned and that the payment or tender of rental when made shall fully and completely extend this lease from time to time until a well is commenced. This was the clause that was construed in the case of Rich v. Doneghey, 71 Oklahoma,177 P. 86; Northwestern Oil Gas Co. v. Branine, 71 Oklahoma,175 P. 533; Shaffer v. Marks, 241 Fed. 139, and was held to mean that the bonus or consideration first paid was a sufficient consideration for the lessee to exercise the option either to drill or pay rentals for the full term of the lease. This clause does not in any way assist in the construction of the habendum clause, nor could it in any way be said that it would be construed to extend the life of the lease, but it has always been held that it did not.

The next sentence provides that the drilling of a producing well on said premises shall operate as full liquidation of all rentals due or payable under this provision during the remainder of the terms of this lease. This sentence, in my judgment, does not aid or assist in construing the habendum clause, but simply provides that the drilling of a producing well is in full liquidation of all rentals due under the terms of the lease. Instead of this clause aiding the contention of the defendants in error, it seems to me, it weakens their position. If this clause is taken alone, it would be held to mean that a producing well only continues the lease for the three-year period, but if the party only commences the well, the life of the lease might be extended beyond the term of the lease. This was certainly not the intent of the parties.

The next sentence provides that the drilling of a dry hole or a well not producing oil or gas in paying quantities shall be in lieu of the rentals accruing from and after the date of the commencement of drilling operations to one year after the termination of the drilling operations and the lease shall be in full force and effect from said time as fully as if the rentals had been paid or a producing well completed.

The drilling clause provides that a producing well, as far as this clause is concerned, has the effect of payment of rentals due on the lease. Could it be said that it was intended by the parties that the commencement of a well should give the lessee a greater right than the drilling of a producing well? I cannot believe that such was the intention of the parties, from the reading of this clause, nor can I believe under the proper rule of construction that the drilling clause can be of any benefit in the construction to be placed upon the habendum clause. If we would construe the fact that the commencement of a well as provided in the drilling clause gave to the lessee a greater right than finding a producing well, we would reverse the ruling of this court in the case of Curtis v. Harris, supra, wherein the court said that the lease should be construed to promote development and not prevent delay. While in construing this lease we say that during the three years a producing well had been drilled, it only has the force and effect of paying the rentals, while if we wait and commence a well immediately prior to the termination of the lease, the life of the lease is extended.

A case nearly in point to the one at bar, is the case of American Window Glass Co. v. Indiana Natural Oil Co. (Ind.) 76 N.E. 1006. The lease there contained the following provision:

"For the term of twelve years and so long thereafter as petroleum, gas or mineral substance can be procured in paying quantities, or the payment hereinafter provided for made according to the terms and conditions attached."

The drilling clause was as follows:

"To commence operating for such drilling or mining purposes within one year from the execution of this lease or in lieu for delay in commencing said operations, and as a consideration of the agreement therein contained, thereafter to pay $36 per annum, payable in advance, each year until such operations are commenced and a well completed."

The court there held that in the habendum clause the word "or" should be read "and," so that the term was limited to twelve years unless oil or gas was procured.

That the producing of oil and gas is a condition precedent to the extending of the life of a lease, is, in effect, the holding of our court in case of Paraffine Oil Co. v. Cruce, supra.

In construing the terms of this lease contract, it should not be construed in the light of the facts that have developed since the terms of the lease expired, nor because large quantities of oil and gas have been found on said premises, subsequent to the termination of the lease, but the same should be construed in the light of the conditions as they existed at the time of the execution thereof, when the question of oil and gas was still a possibility, as was said by this court in the case of Rogers v. Harris, 76 Okla. 215, where the court quoted from the case of Gettys Appeal, 80 Pa. St. 461:

"We are not to judge this transaction by the light of subsequent events. It was consummated in the face of an uncertain future. The ebb and the flow of the business tide in that future was concealed from human vision."

If we adopt the construction placed upon this lease by the trial court, in my opinion, we have the lease contract more ambiguous and uncertain than in the first instance. It reads as follows:

"To have and to hold the same for and during the term of three years from the date hereof, and as much longer thereafter, as oil or gas is found therein or said premises are being developed or are being operated."

We then have a sentence providing that the finding of oil and gas extends the life of the lease. Whether necessary to produce the same or to produce the same in paying quantities would still be uncertain. Then the words "or said premises are being developed," would be uncertain as to how long development might occur; whether the party might drill one or more wells, and if nothing was found therein continue indefinitely to extend the life of the lease. As to what the term "being operated" meant would still be indefinite. In my judgment it would not do to say, because large quantities of oil and gas were found on said premises, subsequent to the term of the lease, therefore it is not necessary to consider the lease in this light. The finding of oil and gas subsequent to the life of the lease would not change the meaning of the words used "more than three years prior thereto," nor would it be any benefit in ascertaining what the intention of the parties was at that time. These facts were unknown at the time of the execution of the lease, and the intention of the parties must be construed as if no oil was found. It would not do to say that if large quantities of oil were found the interest of the parties at the time of the execution of the lease was different from what it would be if only a small well had been found or no oil at all. If we fail to interpret the terms of this lease in this light, then we are permitting, in my judgment, the fact that large quantities of oil or gas had been found, since that time, to influence us in the interpretation of this contract. In my judgment the lease should be so construed that parties with similar leases having controversies over the interpretation could use this as a guide to determine what the lease means, but to a person who has found a small well or no well, it still leaves it uncertain and ambiguous and in my judgment more uncertain and ambiguous than the way the lease was written in the first instance.

I agree with the rule that the lease will be construed to promote development and not delay, but I cannot agree that this fact is determined by the fact that the defendants in error, in the instant case, were drilling at the time fixed for the termination of their lease and were in a position to complete a well sooner than the second lessee could. The construction should be placed on the lease to ascertain what construction would promote development between the parties to the lease, and not the fact that as between two lessees one might drill a well quicker or sooner than another. In my judgment, such a construction would be misleading, and if two lessees were claiming under separate leases, as in the instant case, the court, irrespective of whose lease was paramount, would consider their rights on the theory that the person who obtained possession first, or started drilling first, would have an advantage because it would insure quicker production. I do not believe this fact should enter into the construction of the lease.

I do not agree with the opinion that the equities in this case are with the defendants in error. The record discloses that these two pieces of land, the Prowant land and the Custer land, are adjacent or nearly so. The evidence of Mr. Faulkner was that he had supervision over the leases for defendants in error, and ordered the locations of the wells to be made thereon. That the Burke-Hoffeld Oil Co. had a lease on the land adjacent to the Prowant land on the north, and the Twin State Oil Co. had a lease on the land adjacent to the Prowant land on the west, and both were drilling offset wells to the Prowant land. He testified further that the Prowant and Custer farms at that time were what were called "wild cat territory." These defendants in error had done nothing to develop these leases prior to that time, if they were wild cat territory, but as soon as the wells adjacent thereto which were drilled by the Burke-Hoffeld Co. and the Twin State Oil Co. showed oil, the defendants in error made locations. As soon as the wells were brought in and showed to be good producers, they immediately began building derricks, which was in January, 1917. No drilling was started until about the middle of January, 1917, and it is admitted they did not have sufficient time to complete a well prior to the three-year period, or, in other words, they were speculating. The Magnolia Petroleum Co. and the Fortuna Oil Co. were holding the leases and speculating on the outcome of the wells drilled by the Twin State Oil Co. and the Burke-Hoffeld Co. If these wells had come in dry, no lawsuit would have been instituted and no well started, but when these wells proved very valuable immediately the defendants in error started drilling.

If these leases expired on March 11, 1917, unless oil or gas had been found thereon, these defendants in error do not bring themselves within the rule of equity, for the reason they stood idly by and permitted other people to drill wells to test these leases and then expect to receive the benefits from the money expended by the parties drilling the wells on the adjacent land to these leases.

A person cannot speculate upon the outcome of an oil and gas lease, and when it becomes very valuable immediately before his lease expires, and he does not have sufficient time to comply with the conditions prescribed in the lease, he cannot commence drilling, and then ask a court of equity to make him a new contract or extend his lease contract without considering the right of the landowners. Of course, if the lease did not expire on March 11, 1917, there are no equities in the case. The defendants in error had until March 11th to begin or commence a well, and they must stand on their contract to determine that question. Equity will not make contracts for parties, nor extend contracts for parties where they have not been diligent in fulfilling the terms of the contract they themselves made. To hold otherwise would be to say: "True, you have waited too long, the lease is now worth $25,000 to the landowner, but we will extend your lease and deprive him of the value of his premises, without any consideration." This equity will not do.

The trial court made certain findings, which are set out in the opinion. The rule adopted by this court is, if the findings and judgment of the trial court in a proceeding of this kind are not clearly against the weight of the evidence the judgment will not be disturbed on appeal. This is true providing the trial court applied the proper rule of construction to the evidence introduced in making his findings. Without going into an elaborate discussion of the evidence, but if we look to the evidence of Mr. Crockett, who obtained the leases and met with the numerous landowners at Mr. Prowant's house, prior to the execution of the lease, his testimony, in substance, was that the landowners wanted to execute a two-year lease with a $2 an acre rental clause, while he wanted a five-year lease with a $1 an acre rental clause, and that they compromised and agreed on a three-year lease. The lease was not before the parties at that time. He stated there was nothing said or discussed about the beginning or completing of a well, except the test well.

The record further disclosed that at the time Mr. Custer signed the lease no discussion was had regarding the commencement or completion of a well, nor on the subject whether the commencement of a well extended the term of the lease. The record further discloses that when Mr. Prowant signed the lease, there was no discussion regarding the commencement of a well prior to the period for which the lease was to extend, nor whether the commencement of a well would extend the lease. The evidence on this point at that time is silent. If we apply the law that was applicable at the time these parties agreed upon a three-year lease, and the time they executed the same, the law was that the lease for a term of years expires at the end of the term, unless oil and gas had been produced in paying quantities, and we would naturally expect that such was the intention of the parties to this oil and gas lease. When there is practically no evidence on the subject, if we construe their intention as being otherwise, in my opinion, it must be by disregarding the proper rules of construction applicable to oil and gas leases It is admitted that Mr. Crockett's partner drew the lease in question. The landowners had nothing to do with the drafting of the same, so if there is any ambiguity it is construed strongly against the parties who caused the ambiguity, and it should be so construed. When the court in its finding stated that the words "developed or operated" were intended to mean "or being developed," or "being operated," I do not think such finding is supported by the evidence, but contrary to the evidence, nor can such a conclusion be sustained by applying the proper rule of construction to said evidence. If the law at that time was that an oil and gas lease could be extended beyond its terms by paying of rentals, and the ambiguity in a contract should be more strongly construed against the person who does not cause the ambiguity, then the findings would be correct. It is true there is a great amount of other evidence introduced, but very little evidence of any kind or character as to the conversation between the parties to these two leases, and very little evidence of conversations where either of these parties was present. In my judgment, from reading the evidence, in order to support the findings of the trial court, as not being clearly against the weight of the evidence, one must disregard all the rules of construction that have been set out heretofore, that have been used in construing oil and gas leases.

As to the question concerning the trial court being disqualified, I agree with the opinion of the majority.

For the reasons stated. I am unable to concur in the opinion as written, and therefore dissent.