Rich v. Doneghey , 71 Okla. 204 ( 1918 )

I am unable to concur in this case. I cannot agree that the $1 mentioned in the lease as part of the consideration is sufficient to support every covenant of the lease for the full term of five years. There was no bonus paid, and, as I construe the lease, the real consideration is the covenant to develop the premises and pay royalties. The language is:

"For and in consideration of the sum of $1.00 to them in hand paid by the said parties of the second part, the receipt of which is hereby acknowledged, and of the covenants and agreements hereinafter contained on the part of the parties of the second part to be paid, kept, and performed," etc.

Then follows in the usual form, the covenants to develop the premises for oil and gas, and to pay the stipulated royalties in the event either oil or gas is found. If the lease did not contain a surrender clause, the conclusion reached by the majority of the court would be correct. The lessee would be bound by these terms, and this would be a sufficient consideration to support the grant. In the opinion it is stated:

"The lessee is obligated thereunder to do one of three things: (1) Drill and complete a well in the fixed time; or (2) surrender all his rights and pay in addition the sum of $1; or (3) pay during the term of five years, or until surrender, $15 per month for each additional month the completion of the well is delayed."

In support of the proposition that the lessee is bound to do one or the other, the cases of Cohn v. Clark, 48 Okla. 500,150 P. 467, L. R. A. 1916B, 686, and McKee v. Grimm, 57 Okla. 680,157 P. 308, are cited. As I understand these cases, they held the lessee was bound to pay rent until he availed himself of the surrender clause. In both cases the action was to recover rentals, there having been no drilling, and the leases had not been surrendered. In Cohn v. Clark, supra, the surrender clause was:

"Second party may at any time remove all his property and reconvey the premises hereby granted, and thereupon this instrument shall be null and void."

The lessee had failed to drill, and refused to pay the rentals, and contended that this ipso facto canceled the lease, and it was not necessary to reconvey. The court held that not having reconveyed, he was liable for the rentals due according to the terms of the lease, and that the surrender clause, for the benefit of the lessee, must be construed in connection with the forfeiture clause, for the benefit of the lessor. In the opinion, by Commissioner Mathews, appears the following discussion:

"The lessee contends that, in order to relieve himself of liability under the contract, it was unnecessary for him to avail himself of the sixth provision therein, known as the surrender clause, and execute a reconveyance as provided in this clause; but that he was not bound in the contract to begin operations on the lease, or to pay rentals, or to execute a reconveyance, but that upon failure on his part to either begin operations, or to pay the specified rentals as provided in the contract, ipso facto there was a self-executing automatic release, which relieved him of all liability. * * * 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 was reasonably intended for them, and gives both of the parties to the contract a means of protection and a way of relieving themselves of the contract."

In McKee v. Grimm, supra, the lessee alleged that he had offered to comply with the surrender clause. The lessor, by reply, denied this allegation. The opinion holds there was a material issue of fact, with the burden of proof on the lessee, and failing to prove this affirmative defense he was liable for the rentals under the authority of Cohn v. Clark, supra.

The lease in question contains a surrender clause, giving the lessee, at any time, on the payment of $1, the right to surrender the lease after which all payments and liabilities under and by virtue of its terms shall cease and determine. The error is in holding that the lessee is bound to do one of three things, and that the $1, paid at the time of the execution of the lease, is sufficient consideration to support the option to do either, in addition to supporting the grant for the full term of five years. I do not so understand this contract. The lessee had the option, for which he had paid nothing, to surrender this lease and avoid either drilling or paying rental. Under the express language of this clause, if at any time he decided to avoid the obligations to drill or pay rental, he could do so upon paying $1, not "an additional $1," to the lessor and surrendering the lease for cancellation. This negatives the premise that $1 originally paid was intended by the parties to pay for the valuable and substantial right to surrender and avoid the expense of development.

At one of the periods mentioned in the lease, at which time the lessees, by the terms of the lease, had the option of either drilling or paying rent, or of refusing to do either, and thereby avoid liability, upon the payment of $1, the lessor refused to accept the rental tendered and brought this action to cancel the lease. No bonus had been paid and there had been no attempt at development. The covenants for development and payment of royalties being the real consideration for the lease, the contract, as I view it, was at that time unperformed on the part of the lessee. The $1 mentioned as part of the consideration was merely nominal, and the lessor would not have executed this lease for such consideration.

The courts have repeatedly held that the real and moving consideration for leases of this character is not the nominal consideration paid in advance — that is, the $1 as in this case — but the exploration and development of the land for oil and gas is the real consideration. This announcement has been made so frequently by the courts that a decision construing similar leases can scarcely be found in which such declarations are absent. In the case of Federal Oil Co. v. Western Oil Co. (C. C.) 112 Fed. 373, the lease under consideration was identical with the one here in reciting $1 and the covenants to develop as the consideration for its execution. There it was said:

"The cash payment, if actually made, was merely nominal, and it is quite apparent, from a consideration of the terms of the whole lease, that the lessors would not have executed it for any such paltry consideration. If there was no further consideration which the lessee was bound to yield to the lessors, a court of equity would be bound to refuse the enforcement of the lease. The consideration would be so trifling, compared with the value of the leasehold interest, as to shock the moral sense. * * * Oil leases stand upon quite different grounds from leases of other immovable property. The governing principle in gas and oil leases of the character in question is that the discovery and production of gas or oil is a condition precedent to the existence and continuance of any vested estate in the demised premises. Where, as in this case the only consideration is prospective royalties to arise from exploration and development, failure to properly explore and develop the demised premises renders the agreement nudum pactum, and works a forfeiture of the lease, for it is of the essence of such a lease that the work of exploration shall be commenced and prosecuted with promptness."

Under the terms of the lease in question there was no further consideration which the lessee was bound to advance to the lessor. The lessee was not bound to drill, nor was he bound to pay rental. It is begging the question, in my opinion, to say that he was bound to surrender the lease unless he drilled or paid rental. The surrender clause is for lessee's benefit, and is his option, for which he paid nothing to avoid the covenants in the lease. That is equivalent to saying that binding himself to valid liability, unless he elected to incur that liability, is sufficient to amount to performance on his part. I agree that if the lease was a performed contract, if the lessee had paid a substantial bonus, or was bound to perform something that would be of substantial benefit to the lessor, in consideration of the five-year grant of an exclusive privilege to explore the premises, then the presence of the surrender clause would not render the contract voidable. The surrender clause does not render a performed contract voidable, but it does render an unperformed contract, without a sufficient consideration, voidable at the option of the lessor where it is voidable at the option of the lessee. A contract is performed when the consideration moving from the lessee to the lessor had been paid or performed, or when the lessee is bound by its terms to pay or perform. Other cases holding prospective royalties to be the moving consideration for execution of leases of like character are: Huggins v. Dale, 90 Fed. 606, 40 Cow. C. A. 12, 48 L. R. A. 320; Venture Oil Co. v. Fretts,152 Pa. 451, 25 A. 732; Steelsmith v. Gartlan, 45 W. Va. 27, 29 S.E. 978, 44 L. R. A. 107; Foster v. Elk Forl Oil Co., 90 Fed. 178, 32 Cow. C. A. 560; Gadbury v Ohio Oil Co., 162 Ind. 9, 67 N.E. 259, 62 L. R. A. 895; Cowan v. Radford, 83 Va. 547, 3 S.E. 120; Knight v. Ind. Coal Co., 47 Ind. 110, 17 Am. Rep. 692; Witherspoon v. Staley (Tex. Civ. App.) 156 S.W. 557; Smith v. Guffey (Ill.) 202 Fed. 109, 120 Cow. C. A. 436; Owens v. Corsicana Pet. Co. (Tex. Civ. App.) 169 S.W. 193; Long v. Sun Co., 132 La. 691, 61 So. 684; Great West Oil Co. v. Carpenter, 43 Tex. Civ. App. 229, 95 S.W. 57; Dill v. Fraze,169 Ind. 53, 79 N.E. 971; Ohio Oil Co. v. Detamore,165 Ind. 243, 73 N.E. 907; Jennings-Heywood Oil Synd. v. Houssiere-Latreille Oil Co., 119 La. 793, 44 So. 501; Murray v. Barnhart, 117 La. 1023, 42 So. 492; Mansfield Gas Co. v. Alexander, 97 Ark. 167, 133 S.W. 837; Berry v. Frisbie,120 Ky. 337, 86 S.W. 558; Bay State Pet. Co. v. Penn. Lubr Co.,121 Ky. 637, 87 S.W. 1102; Flanagan v. Marsh (Ky.) 105 S.W. 424.

In holding that the $1 is sufficient to support every covenant of the lease and for the entire period of five years, it is said "the $1 is a thing of value in the eye of the law." That rule prevails in actions at law where any consideration of value is sufficient, and where the sufficiency of the consideration will not be inquired into. This is not such an action. This is an action of purely equitable cognizance, and a court of equity will look to the reasonableness of the moving consideration. That was held in the case of Federal Oil Co. v. Great Western Oil Co., supra, where it was said:

"Except to the extent of $1, the lessee has yielded no consideration for the lease; nor is it bound by any enforceable promise or covenant, for the breach of which the lessors would have a right of action to compel the payment or yielding of any further consideration whatever. * * * The complainant is under no obligation to pay the monthly rental. * * * The lessors could maintain no action to recover the same if the complainant should refuse to continue payment. Such a lease is without consideration, and must be held nudum pactum and void. A lease so unfair, inequitable, and against good conscience no court ought to enforce."

Other cases to like effect are: Long v. Sun Co., supra; Huggins v. Daley, supra; Berry v. Frisbie, supra; Jennings-Haywood Oil Synd. v. Houssiere-Latreille Oil Co., supra; Smith v. Gruffey, supra; Murray v. Barnhart, supra; Owens v. Corsicana Pet. Co., supra.

It is suggested that the $1 in many instances has been held to support a conveyance of land by warranty deed, and the case of Ehrig v. Adams, 67 Okla. 157, 169 P. 645, is cited as authority on this proposition. That was not the question before the court in that case. In that case a restricted Indian had by warranty deed, and for a sufficient consideration, attempted to convey certain land. By reason of the restrictions on alienation that deed was void. Later, and after the restrictions had been removed by operation of law, the same Indian conveyed the same premises to the same grantee, under a deed reciting a consideration of $1. It was contended that the principal consideration for this last deed was, in fact, the consideration received under the first deed, and, the first deed being void, therefore the last deed, based on the same consideration, was void. It was said:

"There is no merit in the contention that the deed of July, 1910, was void for the reason that it was supported principally by the consideration received under the deed of 1907. There is no allegation of fraud or want of consideration. The second deed stands as an independent transaction. The allottee being of less than one-half blood, all restrictions upon his powers of alienation of this land were removed by the act of May 27, 1908. When he saw fit to convey this land to Bratton in 1910 for $1, he was at liberty to do so, without regard to his void deed made prior to this act. The fact that the Indian appears to have been sufficiently honest to recognize and remember the consideration which he had received under the void deed did not impose any restrictions upon his power to alienate."

The sufficiency of the consideration was not in question. The question was whether receiving consideration under a void deed rendered the later deed void. In the instant case the question necessary for determination is whether the lessor had received a sufficient consideration to distinguish this case from the rule that contracts unperformed, without sufficient consideration, which are optional as to one are optional as to both. It is not contended that the lessee was bound to render a sufficient consideration in the future by developing the premises or paying rentals. He was not bound to do either.

This action to cancel the lease being of purely equitable cognizance, a court of equity must inquire into the sufficiency of the consideration, and must say, as I view the lease, the covenants to develop and pay royalties were the moving consideration from the lessee to the lessor, and the lessee was not bound to perform these. That being true, and there being no development, this case falls squarely within the rule announced in Hill Oil Gas. Co. v. White, 53 Okla. 748, 157 P. 710, where it was said, Mr. Justice Hardy speaking for the court:

"The rule in this state is that contracts unperformed, without sufficient consideration, which are optional as to one are optional as to both."

The contract here was unperformed, because no sufficient consideration had been paid, neither was the lessee bound to do anything that would amount to sufficient consideration.

Other cases in which this rule was announced are: Frank Oil Co. v. Belleview, 29 Okla. 719, 119 P. 260, 43 L. R. A. (N. S.) 487; Superior Oil Co. v. Mehlin, 25 Okla. 809.108 P. 545, 138 Am. St. Rep. 942; Kolachny v. Galbreath, 26 Okla. 772,110 P. 902, 38 L. R. A. (N. S.) 451; Brown v. Wilson,58 Okla. 392, 160 P. 94, L. R. A. 1917B, 1184.

Assuming that the $1 mentioned as a part of the consideration was in fact paid, this payment was, in my opinion, wholly inadequate to support the exclusive right to enter and explore for five years, and the lower court did not err in giving the lessor the right to terminate the contract, which was without sufficient consideration, unperformed and optional as to the lessee, and therefore optional as to the lessor.

It is a universal rule that courts will not grant specific performance at the instance of one of the parties to an unperformed contract who himself is not bound to perform the contract. There is an unbroken line of decisions of this court following that rule. To deny the lessor the right to go into court and by proper action cancel such a contract is to deny him a remedy in the courts of which he might avail himself by force of arms.