Gulf Oil Corp. v. Southland Royalty Co.

OPINION

RAMSEY, Chief Justice.

This is an appeal from a judgment of the District Court of Crane County wherein a declaratory judgment was sought to construe an oil and gas lease. Gulf Oil Corporation, Plaintiff-Appellant, and six other Plaintiffs-Appellants filed suit against Southland Royalty Company and eighty-seven other Defendants-Appellees, seeking judgment declaring, as a matter of law, that an oil and gas lease did not expire on the date specified in the lease. At the close of Plaintiffs’ case, the Court granted Defendants' motion, withdrew the case from the jury, and entered judgment for Defendants. Plaintiffs have appealed. We affirm.

The lease involved was executed on July 14, 1925, between W. N. Waddell, et al., lessors, and Gulf Production Company (now Gulf Oil Corporation), as lessee. The lease involves 45,771 acres of land in Crane County on which there are 925 producing oil and gas wells. The only issue in the case is the time of the termination of the lease.

The lease is a printed form with the designated lessee, Gulf Production Company, printed in the form. It is undisputed that the lease provides that it is for a term of fifty (50) years. No ambiguity is claimed by either party. Plaintiffs contend, however, that by reason of Section 7 of the lease, that they are entitled to either 4,661 or 4,286 additional days of production beyond July 14, 1975, due to delays and interruptions arising out of their compliance with regulatory orders of the Texas Railroad Commission. Defendants contend that Section 7 is nothing more than a force majeure or excuse clause and not a provision whereby the expressed term should be extended.

The provisions of the lease forming the basis for the controverted construction are as follows:

Section 1, Paragraph 2:

“TO HAVE AND TO HOLD unto said Lessee and to Lessee’s successors and assigns for the term of Twelve (12) years from the date hereof and as much longer thereafter as oil or gas (or other minerals, if produced hereunder) are produced from said land. Provided, that this lease shall not remain in force longer than fifty (50) years from this date, and provided further, that a temporary cessation of production due to cleaning out, working over or drilling deeper of any well, or similar causes occurring after production secured, shall not terminate this lease. And Lessor covenants that Lessor has good title to said land and will protect Lessee in the quiet and peaceable possession thereof.”

Section 7, Paragraph 1:

“When drilling or other operations are delayed or interrupted by storm, flood, or other act of God, by fire, war, rebellion, scarcity of water, insurrection, riots, strikes, scarcity of labor, differences with employees, or failure of carriers to transport or furnish facilities for transportation, or as the result of some order, requisition or necessity of the Government, or as the result of any cause whatsoever beyond the control of the Lessee, the time of such delay or interruption shall not be counted against the Lessee — anything in this lease to the contrary notwithstanding.”

In addition to the paragraphs above shown, Paragraph 3 of Section 1 of the lease provided that the Plaintiff agrees to begin operations for the drilling of a well within twelve (12) months and if it failed to do so, Plaintiff agreed to pay $5,721.37 each six (6) months, and not to exceed eighteen (18) such periods. Failure to make such payments would allow the Lessor to forfeit the lease. Also, paragraph 6, Section 1 of the lease, provided that if operations should not begin before the expiration of ten (10) years, the lease would then terminate; but if, prior to the termination of the ten (10) years, the Lessee shall have begun operations to find oil or gas and is actually engaged in such operations at the end of the ten (10) years, then such attempts could continue no longer than twelve (12) years provided such attempts were successive with no more than sixty (60) days elapsing between the abandonment of one well and the commencement of operations on another.

Plaintiffs contend that during the period of January 1, 1938, through June 30, 1967, the Railroad Commission of Texas denied them the right to produce the respective daily allowables on the wells drilled for the equivalent of 4,661 days, or in the alternative, for 4,286 days. Plaintiffs in their arguments contend that under the terms of the lease they are entitled to thirty-eight (38) years production time, and for the delays and interruptions occasioned by their compliance with the Railroad Commission orders, the Court should then construe the termination date of the lease in order that such time should not be “counted against” them as provided in Section 7. Defendants contend that the lease is a fixed, definite term lease, and that Section 7 is nothing more nor less than a force majeure or excuse clause and not intended by the parties, nor to be construed by the Courts as a provision to extend the termination date of the lease.

The record submitted on appeal is voluminous. The parties have filed most comprehensive briefs in support of their respect contentions. Plaintiffs have assigned seven points of error committed by the trial Court. All points of error relate to the actions of the Court in withdrawing the case from the jury and refusing to construe the provisions of Section 7 of the lease to extend the termination date of the lease and in refusing to allow the Plaintiffs the additional producing days which they sought.

In construing contractual obligations, it is the duty of the Court to ascertain the intention of the parties. In so doing, the instrument must be considered in its entirety. Klein et al. v. Humble Oil & Refining Co. et al., 126 Tex. 450, 86 S.W.2d 1077 (1935); Smith v. Liddell et al., 367 S.W.2d 662 (Sup.Ct.1963); Leon v. Gulf Production Co., 35 S.W.2d 1101, (Tex.Civ.App., err. ref.). At the same time, the language used by the parties should be given its plain grammatical meaning unless it definitely appears that the intention of the parties would thereby be defeated. Fox et al. v. Thoreson, 398 S.W.2d 88 (Tex.Sup.Ct.1966). Neither party contends that there is any ambiguity in the instrument. The latest expression of the Supreme Court on this point is taken from City of Pinehurst v. Spooner Addition Water Company et al., 432 S.W.2d 515 (1968) when it held:

“It is elementary that if there is no ambiguity, the construction of the written instrument is a question of law for the Court. Myers v. Gulf Coast Minerals Management Corp., 361 S.W.2d 193 (Tex.Sup.1962). It is the general rule of the law of contracts that where an unambiguous writing has been entered into between the parties the Courts will give effect to the intention of the parties as expressed or as is apparent in the writing. In the usual case, the instrument alone will be deemed to express the intention of the parties for it is objective, not subjective, intent that controls. Woods v. Sims, 154 Tex. 59, 273 S.W.2d 617, 620 (1954). See generally: 3 Wil-liston on Contracts § 610 (1936) ; Restatement of the Laws of Contracts § 230 (1932).”

Additionally, surrounding facts and circumstances may be examined as an aid to construction or interpretation, in order to find out the intention with which the words are used. Gulf Production Co. et al. v. Spear, 125 Tex. 530, 84 S.W.2d 452 (op. ad.); City of Pinehurst v. Spooner Addition Water Company et al., supra; Spence & Howe Construction Company v. Gulf Oil Corporation, 365 S.W.2d 631 (Tex.Sup.Ct.1963).

To attempt to formulate rules for the construction of contractual obligations can be an exercise in futility. Case authority can be cited to substantiate almost any controverted interpretation. The ultimate end to be achieved is to effectuate the intentions of the parties based upon a reasonable and fair construction of the contractual instrument consistent with the usual and primary meaning of the words used, Spence & Howe Construction Company v. Gulf Oil Corporation, supra; 13 Tex.Jur.2d, Sec. 122, p. 287; 42 Tex.Jur.2d, Sec. 165, p. 349; 17 Am.Jur.2d, Sec. 247, p. 639; Phillips Petroleum Company v. Harnly et al., 348 S.W.2d 856 (Tex.Civ.App., n. r. e.). The problem is well stated by Chief Justice Calvert in Moore et al. v. Smith et al., 443 S.W.2d 552 (Tex.Sup.Ct.1969) :

“It is nearly always possible to find some provision in a lengthy written instrument which seems to some extent to be out of harmony with the main thrust of the instrument, but such provision or provisions should not be permitted to obscure the otherwise clearly indicated intention of the parties to the instrument.”

The lease under examination provided that the Plaintiff, Gulf Production Company, would have the exclusive right to explore and produce oil, gas, and other minerals on the land described therein. The primary term of the lease provided for a term of twelve (12) years, and as long thereafter as oil, gas or minerals were produced. The additional provision was then inserted :

“Provided, that this lease shall not remain in force longer than fifty (50) years from this date, .....”

Thus, the lease in question is a lease for a definite or fixed term.

The greater weight of authority in construing oil and gas leases ascribes to the habendum or term clause, the dominate role in determining the length term of the lease, unless it is properly modified by other provisions. As stated in 58 C.J.S. Mines and Minerals § 198, pp. 440-441:

“The term clause, which is the habendum clause, dominates the period for which the lease shall run, unless it is properly modified by other provisions, and the fixed time therein stated is not to be extended by indirect, ambiguous, and negative language in the development clause.”

Of similar effect is the conclusion stated in 38 Am.Jur.2d, Gas and Oil, Sec. 96, p. 563:

“Under what has been described as the ‘weight of authority,’ the habendum clause dominates the period for which a gas and oil lease is to run, so that unless it is properly modified by other provisions, all rights of the lessee cease at the expiration of a fixed time stated therein.”

Other authorities support this general proposition. See Walker, Property Interests Created by Lease, 8 Tex. Law Rev. p. 516, 2 Summers, The Law of Oil and Gas, Perm. Ed., Sec. 303.1, p. 319 and Sec. 302, pp. 278-279.

The only question then remaining is whether or not the provisions of Section 7 “properly modify” the habendum clause or evidences an intention on the part of the contracting parties that it should do so.

The terminology of oil and gas leases has evolved through various phases of the industry. It has of necessity been influenced by the reactions of the parties and judicial interpretation. In the earlier days, long, definite terms were typical. Their ultimate disfavor is commented on by Summers, Oil and Gas, Vol. 2, Sec. 284, p. 181:

“ . . . . But, whatever the inducement for making leases for long definite terms, experience soon taught the lack of wisdom exercised in making them.”

Brown, Oil and Gas, Chap. V, p. 59, observes as to the next innovation:

“The next development was to add to the long definite or primary term a ‘thereafter’ clause, that is, the lease would run for a term, say of 25 years, and as long thereafter as oil or gas was produced.”

An excellent discussion is contained in Walker, Tex.Law Rev., Vol. VII, p. 1.

Defendants introduced twelve exhibits, being oil and gas leases purchased by Gulf Production Company. These leases were in different localities. One was executed in 1924 and the remaining were executed from 1926 to 1931. Each lease contained a paragraph with the identical wording of the Section 7 under examination. Each of the exhibits contained an habendum clause providing for a term of years and further provided “and as much longer thereafter as oil or gas (or other minerals, if produced hereunder) are produced from said land.” None of the exhibits contain the provisions as contained in the lease in this suit limiting the term of the lease to a definite number of years. These exhibits are at least mute evidence of intention, either on the part of the lessor, or lessee, or both, that this lease would differ from other leases acquired by Plaintiff Gulf prior and subsequent to the lease in question. Further, it dispels the thought that perhaps due to the early date of the lease, that the “thereafter” provision had not found favor or usage in the industry. The clear and unmistakable intent is evidenced that the parties contemplated a definite and fixed term lease.

In considering the provisions of Section 7 and its effect, if any, on the habendum clause, it will be noted that the section contains fourteen specifically enumerated matters and one blanket provision which would excuse performance. To adopt Plaintiffs’ reasoning and to hold that governmental regulation would suffice to extend the term clause, would, out of consistency, require the holding that each of the other causes be of equal dignity and effect. Such construction would be most drastic and far-reaching not only as to oil and gas leases but to any contractual obligation that might arise containing a similar provision. Thus, a contract which in its inception was for a fixed or definite term could easily be resolved into one in perpetuity. Regulatory orders have been established as legal and desirable for conservation of natural resources. We can confidently assume that they will continue. Plaintiffs seek an additional producing time equivalent to approximately twelve (12) years. Thus, at the expiration of the extension sought, additional time would then have accrued resulting from regulatory orders issued during the extension. Theoretically, at least, there would be no termination date. We cannot construe the language of the lease as so intended by the parties.

The only testimony introduced by Plaintiffs was that of Mr. Jack K. Baumel. Mr. Baumel is eminently qualified in his field, having been associated with the Railroad Commission of Texas from 1939 to 1954 and thereafter engaged in private practice as a petroleum consultant. His vast knowledge of commission activities and the oil and gas industry is evident. The gist of his testimony was to show that by the shut down orders and the market demand orders for the period of time from January 1, 1938, through June 30, 1967, denied Plaintiffs of the producing days which they now seek. Based on his computations, Plaintiffs would be entitled to 4,661 days. The alternative plea is for 4,286 days. The difference in number of days was due to the fact that marginal wells, discovery allowable oil wells, and non-associated gas wells were not affected by the Commission orders, and these wells were not restricted in their production. Thus, the allowance was calculated to provide for a reduction in lost producing time. To illustrate Plaintiffs’ contentions, Plaintiffs seek a one day extension for each day of production lost. Thus, as the exhibits show, as an example, in 1941, 14 wells were shut down for nine (9) days. This would result in a loss of 126 well producing days. Under Plaintiffs’ contention, assuming there are now 925 wells on the lease, it would mean that Plaintiffs would be entitled to nine additional days to produce the 925 wells. This would result in Plaintiffs obtaining 8,325 well producing days, if the number of wells remains the same. Though there is not the great disparity in well numbers throughout the period of time involved, as in the example, yet it would be a strained construction indeed to hold that the parties so intended.

The Legislature of this State recognized the public interest in the production of oil and gas as early as 1899 by enacting Art. 6004-6007, Brown et al. v. Humble Oil & Refining Co., 126 Tex. 296, 83 S.W.2d 935 (126 Tex. 296, 87 S.W.2d 1069, modified) (1935).

The conservation and development of natural resources has been a declared policy of this State since the enactment of a Constitutional Amendment in 1917. Art. XVI, Sec. 59(a), Vernon’s Ann.St. To effect such policy, the Constitution provides that “the Legislature shall pass all such laws as may be appropriate thereto.” In compliance therewith, the 36th Legislature (1919), Article 3, Chapter 155, at page 286, provided:

"It shall be the duty of the railroad commission to make and enforce rules and regulations for the conservation of oil and gas, it shall have authority to prevent the waste of oil and gas in drilling and producing operations and .... it is authorized to do all things necessary for the conservation of oil and gas whether here especially enumerated or not, and to establish such other rules and regulations as will be necessary to carry into effect this Act and to conserve the oil and gas resources of the State.”

Defendants introduced exhibits being Railroad Commission Circulars 11 issued July 26, 1919, and Oil and Gas Circular 13 issued on March 1, 1923, which undertook to regulate the production of oil and gas to prevent waste and to regulate the production of natural gas according to market demand. We conclude that the public policy had been declared and implemented to some extent prior to the execution of this lease. Appellants in their brief acknowledge an awareness that some order of the government might be issued in the future that could delay or interrupt drilling or other operations. The wording of the lease itself by the inclusion in Section 7 relating to governmental orders is indicative of the awareness of Appellants and the suspicioned possibility of government intervention or control.

The Courts must presume that contracting parties are knowledgeable of the law and contract accordingly. 13 Tex. Jur.2d, Sec. 165, p. 353. Thus, it is our opinion that the lease contract was entered into in contemplation of the regulatory authority vested in the Railroad Commission.

Neither party questions the validity of the Railroad Commission orders, but on the contrary have abided by its directives. Appellees rely on Butler v. Jenkins Oil Corporation et al., Tex.Civ.App., 68 S.W. 2d 248; 128 Tex. 356, 97 S.W.2d 466 (Tex.Com.App.1936), which Appellants contend is not applicable. While a different matter is presented there for Court construction, yet the basic effect is the same. That being the rights of the contracting parties to an oil and gas lease will be subordinated to the regulatory authority of the State even though the contractual rights or obligations may be affected in so doing.

Plaintiffs argue that they must produce the oil and gas within the fifty year term “under penalty” of losing title to any they fail to produce. We perceive no penalty. The lease provided for twelve years and “as much longer thereafter” with the express provision that it should not remain in force longer than fifty years. The lease simply terminates by its own limitation.

Forfeiture has always been of concern to lessees in oil and gas leases. Prior to the decision in 1929 of W. T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, the Courts of this State decreed forfeiture for breach of implied covenants in addition to breach of express covenants, non-user or abandonment. Under the terms of this lease, once production was obtained, the Plaintiff was then entitled to the fifty year term as long as oil, gas or minerals were produced. The habendum clause itself contained a force majeure provision excusing temporary cessation, yet such excuse for temporary cessation of production did not provide an extension of the fifty year term.

By way of contrast to production as used in the habendum clause, the following clauses 3, 4, 5 and 6 of the lease deal with operations necessary within the primary term to hold the lease; or, in lieu thereof, the payment of delay rentals. Thus, the overall import of the document leads to a persuasive conclusion of a differentiation within the lease between “production” or “produce” and “operations.” We would not hold that the term “other operations” could not include production, yet the basic import of its use in this lease, when considering the instrument in its entirety, leads to the inevitable conclusion, that such refers to exploration and development rather than to production.

We conclude that Section 7 is a force majeure or excuse clause. We do not construe it as being intended to modify or extend the fixed term of the lease.

The interpretation and effect of a force majeure clause is summarized in Brown, Oil and Gas Leases, Sec. 13.05, page 243, as follows:

“In summary, it is apparent that the force majeure clause was designed to grant relief from contractual obligations where the law would not otherwise excuse nonperformance. The courts appear reluctant to overturn what they have called ‘a well established rule’ that impossibility of performance will not excuse a party from complying with the obligations of a contract, especially where the performance becomes impossible after the contract is executed. While there seems to be no reason why a court would refuse to enforce the provisions of a force majeure clause in an oil and gas lease, nevertheless it seems evident that courts generally will apply the rule of strict construction to such provisions.

“Accordingly, to be effective, a force majeure clause should be clear and definite (1) as to the acts and circumstances which are covered thereby, and (2) that the happening of those acts and circumstances will extend the habendum or term clause of the lease for definite or ascertainable periods, based upon the delay period during which performance is prevented.”

Plaintiffs filed a motion to strike a portion of the transcript. This was occasioned by Defendants’ filing their request for transcript and the entry by the trial Court of its order finding such request proper and ordering the Clerk of the trial Court to forward the original papers on file to this Court. Included in the order were depositions, portions of which were not introduced in evidence, as well as exhibits, motions and material that were not introduced. Defendants justify their request and the action of the trial Court based on the Supreme Court order under Rule 376-a, T.R.C.P., which provides:

“The judge may order any instrument included in the transcript which he deems proper.”

The duty of this Court is to consider only the testimony adduced and the evidence tendered and/or admitted at the time of trial on which the judgment of the trial Court is based. To encumber the record on appeal with matters not introduced at the time of trial is contrary to the end result desired as expressed in Rule 370, T.R.C.P. Such matters should not, and will not, be considered on appeal. Texlite, Inc. v. Wineburgh, 373 S.W.2d 325 (Tex.Civ.App., n. r. e.).

For the foregoing reasons, we affirm the judgment of the trial Court.