Ezzell v. Oil Associates, Inc.

by the Arkansas Supreme Court

Supreme Court of Arkansas

180 Ark. 802

Ezzell  v.  Oil Associates, Inc.

Appeal from the Union Chancery Court

Delivered: Jan. 13, 1930.

1. MINES AND MINERALS—OIL AND GAS LEASE—DILIGENCE IN DEVELOPMENT.—Where an oil and gas lease is executed in consideration of a nominal sum and the royalties to be received from developing the land, in the absence of an express agreement to the contrary, there is an implied covenant that the lessee will use reasonable diligence to the end that oil and gas may be produced in paying quantities throughout the whole of the leased premiums.
2. MINES AND MINERALS—LESSEE'S DISCRETION AS TO DRILLING WELLS.—The fact that an oil and gas lease, providing for payment of royalties from the profits realized by the lessee in developing the land, does not contain express provisions as to the number of wells to be drilled does not leave the matters of development subject alone to the will of the lessee.
3. MINES AND MINERALS—NUMBER OF WELLS TO BE DRILLED.—In determining the number of wells to be drilled by a lessee under an oil and gas lease calling for payment of royalties, due deference should be given to the judgment of the lessee, but he must use sound judgment and not act arbitrarily, and must deal with the leased premises so as to promote the interest of both parties and further the original purpose and intention of the parties.
4. MINES AND MINERALS—ABANDONMENT.—Where an oil and gas lease was to run for five years and as long thereafter as oil or gas should be produced in paying quantities, the lessors are entitled, in case of abandonment, to a cancellation of the lease, since it would be difficult for the lessors to prove their injury in damages.
5. MINES AND MINERALS—ABANDONMENT OF LEASE.—Whether a lessee has abandoned an oil and gas lease is a mixed question of law and fact, depending upon the particular facts and circumstances of each case, since the lessee's intention cannot be gathered from any statement of his alone, but must be determined from his intention as shown by his acts and conduct.
6. MINES AND MINERALS—ABANDONMENT OF LEASE.—Under an oil and gas lease covering 1,170 acres and calling for royalties from production, the lease to continue in force for five years and as long as oil should be produced in paying quantities, without the lessee being required to pay additional rental, the lessee's failure to drill more than one producing well on the entire tract over a period of eight years held to constitute an abandonment, warranting a cancellation.

Appeal from Union Chancery Court, Second Division; George M. LeCroy, Chancellor; reversed.

STATEMENT OF FACTS.

On the 26th day of July, 1928, appellants brought this suit in equity against appellee to cancel a certain oil lease executed by appellants to the assignor of appellee.

The oil and gas lease was in writing, and was executed on the 18th day of December, 1919. It provides that the lessors, for and in consideration of $3,000, in common stock of a certain operating oil company controlled by appellee, leases 1,170 acres of land in Union County, Arkansas, for the sole and only purpose of having it mined and operated for oil and gas. The lease continues with the following clause: "It is agreed that this lease shall remain in force for a term of five years from this date, and as long thereafter as oil or gas, or either or both, is produced from said mine by the lessee."

In consideration of the execution of the lease, the lessee warrants and agrees to pay the lessors one-eighth part of all oil produced and used from the leased premises. The lessee also agrees to pay the lessors $250 each year, in advance, for the dry gas from each well, where dry gas only is found and further agrees to deliver to the lessors, as royalty, one-eighth of the wet gas which is produced from any oil or gas, or used off of the premises, in the same manner that oil is delivered. The lease then provides that, if no well shall be commenced on the leased land before the 18th day of December, 1920, the lease shall terminate, unless the lessee, on or before that date, shall pay, or tender to the lessors, the sum of $1,170, which shall operate as a rental and cover the privilege of deferring the commencement of the well for twelve months from that date. Another clause provides that, if the first well drilled be a dry hole, that if a second is not commenced within twelve months from the expiration of the last rental period, for which rental has been paid, the lease shall terminate, unless the lessee, on or before the expiration of said twelve months, shall resume the payment of rentals in the same amount and in the same manner as hereinbefore provided. There is also a clause by which either party has a right to assign his interest, in whole or in part. The deed was duly acknowledged, and filed for record in the clerk's office on the 23rd day of July, 1920.

A supplementary written agreement was entered into between the parties on the 18th day of June, 1920. This agreement recites the execution of the original lease, and states that it is supplemental to its terms. Among other provisions is one that, within six months from date, the lessee shall begin drilling the well for oil or gas on some part of the lands in the lease, and cause the same to be drilled to a depth of at least 2,800 feet, unless oil or gas in paying quantities shall be found at a lesser depth. It further provides that if actual drilling of a well not be commenced within six months from the date of the contract, the lease shall be forfeited to the lessors, with $7,500 as liquidated damages for the failure to commence drilling within said time. The contract then provides that if the first well should be a dry hole, that the lessee shall have one year from the date of the completion of said dry hole within which to begin drilling a second well for oil and gas, and, in case no second well shall be commenced to be drilled within one year from the date of the completion of the first hole, the lessee shall immediately abandon the lease, and return it to the first party. Then follows a proviso that the lessee, if it shall so elect, instead of abandoning the lease at the end of the year from the date of the expiration of the first hole, for failure to commence another well, may keep the lease in force for the remainder of the original five-year period by payment of a rental of $5 per acre per annum for the remaining period of five years.

The record shows that the lessors owned something less than 3,500 acres of land in a solid body, and 280 acres of land nearby. Of this land, 1,170 acres were embraced in the lease. Only two wells have been drilled on the 1,170-acre tract. The first well was completed as a dry hole about the middle of March, 1921. The lessee then commenced drilling another well in December, within the six months limit they had under the contract of June 18, 1920. This well was located in the southeast quarter of section 11, about 600 feet from the east line and about 600 feet from the south line of the leased premises, and was completed about June 8, 1922. There has been no other or further development of the 1,170 acres covered by the lease, except the two wells above mentioned. In 1923, after the well in section 11 came in, the lessors made demands upon the lessee to develop the property by drilling additional wells. On the 1st of September, 1923, they wrote appellee a letter, in which they claimed that the lease had become null and void by the failure of the lessee to drill and operate additional wells on the leased premises. During the ensuing years, until this suit was brought, the lessors continued to claim that the lease had been forfeited, and the lessee that it had a right to continue the lease without drilling additional wells, as long as the well in section 11 continued to produce oil in paying quantities. Appellee expended about $8,500 in drilling the two wells.

The chancellor found that there should be a cancellation of the lease of the south part of the tract, consisting of all the land in sections 14, 22, and 23, comprising 570 acres in the southern part of the leased premises, and it was decreed that title to this land be quieted in appellants. The chancellor, however, was of the opinion that the lease should not be canceled to the northern 600 acres, being the land in section 2 and section 11, including the 10 acres around the producing well in section 11, and upon which appellants did not seek cancellation. It was decreed that the complaint of appellants should be dismissed for want of equity as to these remaining 600 acres.

Such other facts as may be necessary, to a decision of the issues raised by the appeal will be stated or referred to under appropriate headings in the opinion. The case is here on appeal.

Patterson Rector, for appellants.

Marsh, McKay & Marlin, for appellee.

[Opinion of the Court by Chief Justice JESSE C. HART.]