Lavery v. Mid-Continent Oil Development Co. , 62 Okla. 206 ( 1917 )

This action was commenced in the district court of Okmulgee county to recover damages alleged to have been occasioned by the failure to sink a test well pursuant to the terms of an oil and gas drilling contract. The parties appear and are referred to here as in the trial court.

Plaintiffs were the owners of an oil and gas mining lease covering 13 1-3 acres of land in Okmulgee county, and on August 10, 1912, entered into a written agreement by the terms of which, in consideration of the drilling of a test well on the premises by defendant, plaintiffs undertook to assign an undivided one-half interest in and to said lease, defendant agreeing within three days thereafter to commence the moving of rig timbers and necessary equipment on the premises for the erection and completion of the same and the drilling of a well with due diligence into a designated sand.

The contract provided that the expense of drilling such well should be borne by defendant; that if oil or gas was found in paying quantities plaintiffs should pay out of the first production thereof one-half of the cost of casing, tubing, rods, lead lines, and other equipment used in operating the well, and should thereupon become the owners of an undivided one-half interest in the derrick, bull wheels, etc. The contract contained no surrender clause. It was also provided therein:

"The failure to begin operations as above set forth on the above-described premises, within the time provided in this contract, and to continue the same with due diligence to completion, shall work a forfeiture of the assignment of the interest in said leasehold premises herein agreed upon, and shall cause the same to be null and void and of no further force or effect whatsoever."

At the time of the making and delivering of said contract plaintiffs executed an as signment of an undivided one-half interest in said oil and gas lease, which together with the contract, was placed in an envelope and deposited in a bank, there being indorsed upon such envelope the following:

"Escrow agreement between Charles E. Martin, Mid-Continent Oil Company, and G. W. Lavery et al. This assignment to be taken down to Charles E. Martin, of the Mid-Continent Oil Development Company, when he has completed a well on the east 13 1-3 acres of the northwest quarter of the north west quarter of section 24 — 14 north, range 12 east, known as the Peggy Berryhill allotment."

Pursuant to the contract, a derrick was erected on the premises, about the time of the completion of which a well on an adjoining tract some 200 feet from the line of the lease in question was shown to be dry, and defendant thereupon refused to sink a well on the lands involved.

Thereafter plaintiffs commenced this action, alleging, among other things:

"That at the time of the execution of said contract, and now, adjoining oil wells, which would require offset wells, were and are now draining oil in large quantities from said leasehold premises, and will continue so to do; that by reason of the premises plaintiffs have been damaged in the sum of $10,000."

The cause was tried to the court, which rendered the following judgment:

"The court finds that the following provision in the contract alleged and set forth in the petition and sued on herein, to wit: 'A failure to begin operations as above set forth on the above described premises within the time provided in this contract and to continue the same with due diligence to completion shall work a forfeiture of the assignment of the interest of the said leasehold promises herein agreed upon, and shall cause the same to be null and void and of no further force or effect whatsoever' — gave the defendant the right, after a derrick had been placed upon said real estate and operation begun thereunder, to declare said contract forfeited, and that by reason thereof the plaintiffs are not entitled to recover anything from the defendant in this action."

The principal question for our consideration is whether defendant had the right, by virtue of the forfeiture clause therein, in the absence of the consent of plaintiffs, to terminate the contract by refusing to drill, with cut incurring liability for resultant damages.

The provisions of the contract in the instant case are clearly distinguishable from those in the oil and gas leases considered in Frank Oil Co. v. Belleview Oil Gas Co.,29 Okla. 719, 119 P. 260, 43 L. R. A. (N. S.) 487, Deming Investment Co. v. Lanham, 36 Okla. 773, 130 P. 260, 44 L. R. A. (N. S.) 50. and subsequent decisions, and construed to confer a mere option upon the lessee, which he might exercise or not, without incurring further liability. Here for a sufficient consideration — the undertaking of plaintiffs to assign a one-half interest in an existing oil and gas lease, and with which they complied — defendant specifically obligated itself to commence the drilling of a test well on the lands involved, and to continue the same with diligence to completion into a designated sand, the approximate depth of which was evidently known to the parties.

The manifest purpose of the parties was the exploration and development of the leased premises. Defendant defeated this purpose by refusing to discharge its obligation, and now sets up its own default, under the forfeiture clause, as relieving it from the alleged consequent damages. In our opinion this it may not do.

In Cohn v. Clark, 48 Okla. 500, 150 P. 467, L. R. A. 1916B, 686, it was said by this court:

"If the lessee's contention be true, then we would meet the anomalous condition of a party profiting by his own breach or gaining advantage by his own wrong. Under such a contract the lessor binds his hands and gets nothing for the lease unless the pleasure of the lessee moves him to action. Should we determine that a failure to pay the rentals stipulated, after a default in beginning operations, ipso facto operates to release the lessee from all liability, why incumber the lease with the sixth paragraph, known as the surrender clause? If failure to pay rentals nullifies the lease automatically, then there is no use of the surrender clause at all. It would be useless to insert a surrender clause in a lease requiring the lessee to go to the trouble and expense of executing an actual reconveyance, when there is a provision in the lease for his advantage which is self-executing upon his failure to pay the rentals. We must construe this contract so as to give some effect and meaning to every part of the same. We are not permitted to say that the parties hereto have deliberately inserted a clause in this contract that is useless and unnecessary, when a fair and reasonable construction will give weight and effect to it, and, following this line, we conclude that if the surrender clause has been inserted in the contract for the benefit of the lessee, and affords him an easy and expeditious way of ridding himself of the contract and its liability, the forfeiture clause in paragraph 1 must have been inserted for the benefit of the lessor only. This construction will give both of the clauses the weight and effect that were reasonably intended for them, and give both of the parties to the contract a means of protection and a way of relieving themselves of the contract."

See, also, Brown v. Wilson, 58 Okla. 392, 160 P. 94.

In Thornton on the Law of Oil and Gas, sec. 151, the rule is announced as follows:

"A lessee cannot set up his own default in order to terminate the lease or escape liability under its provisions. If he make default, not keeping the covenants of the lease, it is with the lessor to declare a forfeiture, or that it shall no longer be in force. If a mining lease provide that if the mine should not be worked the lease should be void, the word 'void' means 'voidable' at the election of the lessor; and it will be necessary for him to do some act evincing an intention to avoid it before it can be considered avoided or terminated. This is true even though a clause provides that a failure to do the thing covenanted to do 'shall render this lease null and void, together with all rights and claims, and not binding on either party and not to be revived without the consent of both parties hereto in writing.' 'Such provisions of forfeiture,' said the court, 'are for the benefit of the lessor, and not for the benefit of the lessee. The lessee cannot plead his own default or wrong in discharge of his obligation to drill or pay rental.' The lessor has the option to discontinue the lease, on default of the lessee, or affirm the continuance of the contract. Where a lease provided that the lessee's failure to complete a well within a period certain, or, in default thereof, to pay a certain yearly rental, should render the lease 'null and void,' and that all rights and claims should therefrom cease, 'with like effect as if this agreement had never been made,' it was held that the lessee, by his own default could not relieve himself from liability already incurred."

In Woodland Oil Co. v. Crawford, 55 Ohio St. 161, 44 N.E. 1093, 34 L. R. A. 62, it is said:

"The principal contention in this case arises upon that part of the lease which provides that a test well should be drilled within one year, and in default payment of a yearly rental of $128 for further delay, and the further provision that a failure to drill the test well or pay the rental should render the lease null and void, and not binding on either party, and not to be revived without the consent in writing of both parties. It was this provision that was relied upon in the demurrer to the amended petition and in the third general defense in the answer of the oil company. Reduced to its essence, this is a promise in writing upon sufficient consideration to pay a yearly rental of $128 for the right to use, to a limited extent, certain premises, with a further provision in the same instrument, that a failure to pay should discharge the debt; that a default of payment should be the equivalent of payment; that failure should be performance; that nonpayment should be payment. Such contradictions in like instruments have caused the courts to look critically into such instruments to ascertain the real intention of the parties, because such contracts cannot be enforced according to their letter. A promise to pay cannot be fulfilled by a failure to pay. A promise to drill a well cannot be satisfied by failure to drill such well. The proper construction to be placed upon such an agreement is, that upon failure of the lessee to drill a well, or pay the rental, or both, as the case may be, the lessor may elect to put an end to the lease, and enforce payment of the promised rental, or sue for damages, for failure to drill the well, or he may elect to have the lease continue in force to the end of the term, and enforce the drilling of wells, and the payment of rentals, as provided in the lease."

In Evans v. Consumers' Gas Trust Co. (Ind.) 29 N.E. 398, 31 L. R. A. 673, it is held:

"A provision in an oil and gas lease that it shall be null and void on failure of the lessee to perform his agreement is no defense to him for breach of his agreement, but merely gives the lessor an option to declare it void for that reason."

The lease there under consideration contained a forfeiture clause similar to the one in the case at bar. In the body of the opinion it is said:

" 'Appellee contends that a proper construction of the leases gives it the option to avail itself of the benefits of the contract or not, as it pleases; if it fails to avail itself according to the terms of the contract and within the time limited, the right to do so expires and the contract becomes a nullity;' also that the contracts are not properly leases, but merely contracts between the parties for the doing of certain things and the payment of certain sums of money,' with the remarkable and peculiar feature of a contract that the entire failure of one party to perform not only forfeits his rights under it, but relieves him of liability. This is the effect, the appellee insists, of the provisions of the contract that a failure to complete such well or to make the deposit or payment as stipulated should render the lease null and void, and to remain without effect between the parties. * * *

"It is, however, not material whether it be regarded as a lease or not. Whether it be regarded as a lease, a license, or a mere option, that construction is unsound."

In Galey Bros. v. Kellerman, 123 Pa. 491, 16 A. 474, it is said:

"The lessees had the right to enter at any time during the eight months and either drill a well or make the stipulated payment. If they did neither within the time limited, their right of entry was extinguished and the contract itself was at an end. But the acts that forfeited their rights did not also forfeit those of the lessor. Their liabilities growing out of their nonperformance are to be distinguished from their rights under the contract. The latter they could forfeit, but the former belonged to the lessor, and could be lost only by his act."

It is contended by defendant that, anticipating a breach of the contract, the parties by the forfeiture clause stipulated in lieu of damages that the failure on the part of defendant to comply with its obligation to complete the well should result merely in relieving plaintiffs of their undertaking to execute and deliver an assignment of a one-half interest in the lease. This position we do not consider tenable.

In Woodland Oil Co. v. Crawford, supra, it is said:

"Parties may agree that in the case of failure to drill or failure to pay, or both, the lessee shall be relieved of his obligation upon such terms as the parties may agree upon in the lease, whether the terms be of value to the lessor, or loss or inconvenience to the lessee, but a naked default and non-performance, as in this lease, cannot be held to discharge the obligations of the lessee. The following authorities are in point: Leatherman v. Oliver, 151 Pa. 646, [25 A. 309]; Ray v. Western Pennsylvania Nat. Gas Co., 138 Pa. 576 [20 A. 1065] 12 L. R. A. 290 [21 Am. St. Rep. 922]; Clark v. Jones, 1 Denio (N.Y.) 516, 43 Am. Dec. 706; Galey Bros. v. Kellerman, 123 Pa. 491 [16 A. 474]; Jones v. Western Pennsylvania Nat. Gas Co.,146 P. 904 [23 A. 386]; Wills v. Manu facturers' Nat. Gas Co., 130 Pa. 222 [18 A. 721], 5 L. R. A. 603; Ogden v. Hatry,145 Pa. 640 [23 A. 334]; Smith v. Miller, 49 N.J. Law, 521 [13 A. 39]; Taylor Land. T., sec. 492; 1 Smith, Lead. Cas. 102, 119."

The question of the measure of damages not properly before us on this appeal.

The judgment of the trial court should be reversed and the cause remanded.

By the Court: It is so ordered.