Case Title: Waechter v. Amoco Production Co.

Citation: 217 Kan. 489, 537 P.2d 228

Docket Number: 

State: kansas

Court: Kansas Supreme Court

Date: 1975-06-14T00:00:00Z

Document:
217 Kan. 489 (1975)
537 P.2d 228
LELAND C. WAECHTER, et al., Appellees,
v.
AMOCO PRODUCTION COMPANY, Formerly Pan American Petroleum Corporation, Appellant.
No. 47,474

Supreme Court of Kansas.
Opinion filed June 14, 1975.
R.H. Landt, of Denver, Colo., and Glenn D. Young, Jr., of Gott, Hope, Gott and Young, P.A., of Wichita, argued the cause and were on the briefs for the appellant.
Dale M. Stucky, of Fleeson, Gooing, Coulson and Kitch, of Wichita, argued the cause, and John T. Conlee of the same firm, was with him on the brief for the appellees.
The opinion of the court was delivered by
HARMAN, C.:
This is a declaratory judgment action commenced July 16, 1964, by Leland C. Waechter and approximately five hundred other named landowner-lessors, representing a class of some 3000 landowner-lessors, all in the Kansas Hugoton gas field, *490 involving two separate claims against Amoco Production Company, formerly Pan American Petroleum Corporation, formerly Stanolind Oil and Gas Company, as a result of gas taken by Amoco.
One claim is to determine whether Amoco as lessee under certain gas leases is obligated to account to the plaintiff-landowners for gas taken during the period June 23, 1961, to June 23, 1966, on the basis of 14.5 per thousand cubic feet at 14.65 pounds per square inch absolute instead of the lower prices actually paid to Amoco by the purchaser of the gas. The other claim is to determine whether Amoco is entitled to be repaid for overpayments of royalty it made to the plaintiff-landowners during the period from January 1, 1954, through December 22, 1957, pursuant to an 11в minimum price order of the Kansas corporation commission, and whether Amoco is obligated to account to certain plaintiffs who have already made refunds to Amoco. The trial court rendered judgment for plaintiffs upon all issues in the case, procedural and substantive, and defendant Amoco has appealed.
At the heart of this litigation, which has been a protracted three-sided battle over the years (between Amoco and the Cities Service Gas Company, purchaser of the gas, over price of gas on the one hand, and between Amoco and plaintiffs over royalties on the other) are two writings тАФ the gas purchase contract between Amoco and Cities and the royalty clause in Amoco's leases with plaintiffs. Although, as will be seen later, there are actually forty-eight different forms of royalty clauses in the leases, in somewhat similar language, plaintiffs and Amoco are agreed the royalty clause covering most of the approximately 600,000 acres involved and also that upon which all parties will stand or fall, provides as follows:
The gas purchase contract dated June 23, 1950, under which Amoco sold the gas to Cities, contained these provisos:
*491 The entire story of this litigation and the contentions of the parties pertinent to determination of this appeal may best be presented by quoting the trial court's findings of fact and conclusions of law, filed July 3, 1973, as follows:
"CONCLUSIONS OF LAW
"Class Action
"Attorney Fees
"Motions by Defendant to Dismiss
"Issue One
"(a) Were never paid any royalty by Defendant;
"(b) Paid cash refunds requested by Defendant;
"(f) Did not receive any alleged overpayments;
*507 "Issue Two
The trial court entered judgment for plaintiffs and against defendant as set out in the foregoing conclusions and defendant now appeals.
Upon appeal appellant Amoco renews its objections made at trial level, both procedural and substantive; however, we go directly to consideration of each of the two claims upon its merits.
We treat first with that denominated by the trial court as Issue Two тАФ whether appellant must account to the landowners for gas taken by it during the period June 23, 1961, to June 23, 1966, on the basis of 14.5в per mcf instead of on the basis of lower prices actually received by appellant from Cities, purchaser of the gas. The facts are undisputed. Under the 1950 sales contract Cities was to pay appellant 8.4в per mcf at 16.4 psi for gas until June 23, 1961. Then the price for each successive five year period was to be a fair and reasonable one based upon like sales in the field but in no event less than 12в per mcf. Negotiations between Cities and appellant prior to June 23, 1961, failed to result in an agreed price, whereupon appellant filed the declaratory judgment action in Shawnee county seeking determination of a price based on other contracts. In this action appellant contended the price should be 19в per mcf at 14.65 psi while Cities said it should be 12в per mcf at 16.4 psi (this latter figure would translate to 10.7195в at 14.65 psi, there having been a pressure base reduction in the field during the interval). Appellant also filed with the FPC a rate schedule of 12в, the guaranteed minimum under the 1950 contract, reserving the right to file for any increase the Shawnee county court might allow. Cities protested *509 this filing in several ways; however, the FPC permitted the 12в rate to remain effective but made no inquiry as to its reasonableness.
On May 2, 1962, the Shawnee county district court held that the reasonable price under the 1950 contract for the five year period commencing June 23, 1961, was 14.5в per mcf at 14.65 psi, which decision was affirmed in Pan American Petroleum Corporation v. Cities Service Gas Co., 191 Kan. 511, 382 P.2d 645. On June 12, 1962, appellant filed with the FPC notice of rate change from 12в at 16.4 psi to 14.5в per mcf at 14.65 psi. Cities again protested, citing the ongoing hearings on the 12в rate. After more hearings and litigation, Cities and appellant entered into an agreement settling their disputes over a group of 258 gas purchase contracts, whereby effective December 13, 1962, and continuing until June 23, 1971, Cities was obligated to pay under the contract in question 12.5в per mcf at 14.65 psi. The FPC approved this settlement. The net result of all the foregoing was that during the period in question appellant received from Cities payment for gas at the rate of both 12в and 12.5в and it has paid royalty to appellees on that basis; for a time appellant did receive payment at the higher rate of 14.5в but it had to make refund of payments so made. Appellant has paid its royalty owners their one-eighth part of the amount actually received by it from Cities.
Under the leases appellees' royalty was "one-eighth (1/8) of the proceeds if sold at the well, or, if marketed by lessee off the leased premises, then one-eighth (1/8) of the market value thereof at the well". In its finding of fact No. 42 the trial court pointed out that under the gas purchase contract with Cities appellant had the right to process gas taken from wells located in areas designated A and B for the recovery of natural gasoline, for which a royalty was separately paid; that appellant did so by taking gas to its processing plant which was "off the leased premises" and from this it concluded as a fact that the sale to Cities occurred "off the leased premises", which would make "market value" the measure for royalty. The trial court acknowledged that gas taken from area C was not so processed but made no differentiation as to it in this regard. This court has twice heretofore had occasion to discuss the point of delivery and sale of gas sold by appellant to Cities under the identical purchase contract involved here. In Stanolind Oil & Gas Co. v. Cities Service Gas Co., 178 Kan. 202, 284 P.2d 608, the court construed the contractual arrangement between the parties and said:
Upon a second appearance here of the same case (181 Kan. 526, 313 P.2d 279) this court reexamined the foregoing findings, on which judgment had been rendered upon appeal, and adhered to both the findings and the judgment. Consequently, in the case at bar it must be held the trial court erred in its finding that the gas was sold "off the leased premises". Instead it was sold at the well, title there passed to Cities with appellant having only a right to process some of the gas covered by the contract.
In ruling against appellant the trial court also made reference to appellant's duties to its royalty owners, both in connection with its declaratory judgment action against Cities in Shawnee county and in later settling with Cities on a lower basis after FPC approval could not be had on the 14.5в rate. Apparently the trial court had in mind the duty of a fiduciary mentioned in its conclusion 13, already quoted. We know of no precedent to the effect stated therein nor of any reason why an oil and gas lessee should be declared a fiduciary. It seems well established that a lessee under an oil and gas lease is not a fiduciary to his lessor; his duty is to act honestly and fairly under a contractual relationship (Bunger v. Rogers, 188 Okla. 620, 112 P.2d 361). Here there was no charge of bad faith or collusion made against appellant; in fact appellees expressly concede in their brief they have never contended appellant *511 exercised bad faith or was guilty of fraud or dishonesty in connection with their company-wide settlement with Cities which was later approved by the FPC. There is no indication appellees' rights were in any way sacrificed in that settlement. The record reveals sustained efforts by appellant to secure a price greater than the minimum of 12в fixed in the purchase contract for the period in question and there is nothing to suggest it did not use the utmost diligence to obtain the best price possible.
The issue really boils down to the parties' intent in entering into the leases in question. In the royalty clauses they used the term "proceeds" and the term "market value". Appellees contend that when the royalty clause is considered as a whole it is clear the parties intended those terms to be synonymous тАФ that they meant the same thing in terms of money. They say in the case of arms-length unregulated wellhead sale the market value of the gas would naturally equal the proceeds from a wellhead sale. They further say that the 14.5в price fixed in the Shawnee county case is "the best evidence of the market value or price for the gas for the period in question and would result in the `proceeds' contemplated by the parties, where mentioned in the lease". There are difficulties in appellees' position.
The sales of gas were not unregulated. Sales of natural gas in interstate commerce became subject to federal regulation by virtue of the National Gas Act of 1938; however, the FPC did not assume jurisdiction over the pricing of natural gas at the wellhead in the Hugoton field until in 1954 (see Cities Service Gas Co. v. State Corporation Commission, 184 Kan. 540, 337 P.2d 640). Prior to that time there had been a measure of state regulation. Most of the leases contained a clause that both the lessor and lessee contemplated and agreed that the lease in all respects should be subject to valid orders of any duly constituted authority having jurisdiction of the subject matter of the lease. Even without such language in a lease private contracts are subject to the laws of the land (Home Bldg. & L. Assn. v. Blaisdell, 290 U.S. 398, 78 L. Ed. 413, 54 S.Ct. 231). Appellees never were able to maintain the 14.5в price obtained by them in the Shawnee county case. In our opinion of affirmance of that court's order we pointed out that what the lessee was attempting to do was to have fixed a fair and reasonable price for gas under the contract which could be submitted to the FPC for its approval or rejection. It was further stated the lessee could not have a finding or conclusion made in the case which would form *512 the basis of a money judgment; the most the lessee could accomplish was determination of the contract price, which would then be submitted to the FPC for its approval or rejection; the price would have to be so approved before there could be any basis for a money judgment (Pan American Petroleum Corporation v. Cities Service Gas Co., supra).
Nor can we say the parties used the term "proceeds" and "market value" as equivalents in the royalty clauses. They were not used interchangeably. The term "proceeds" was used only in context with the phrase "if sold at the well", while the term "market value" was used in the alternative phrase "or, if marketed by lessee off the leased premises". Proceeds ordinarily refer to the money obtained by an actual sale. This connotation is not without significance in the gas business. Where the sale is at the wellhead the lessor does not consent to the uncertainties of what the market or fair value or price of the gas may be тАФ he is willing to take what the lessee sells it for, relying on the lessee's self-interest in obtaining the best price possible. Under the usual lease for every dollar the lessor receives the lessee receives seven. Where sale is off the leased premises market value at the well comes into play in determining royalty but other factors also may play a part in determining the parties' intention, such as items of expense away from the wellhead, other sales and the like, in determining just what that market value is. In such situation there is no real sale at the wellhead from which proceeds are derived. Contrariwise, where gas is sold at the wellhead there are "proceeds" of that sale тАФ the amount received by the seller from the purchaser.
Appellees make the further argument that if the intent of the parties is not clear that proceeds and market value or price mean the same thing, then under the rules of construction of ambiguous contracts the same result should be reached тАФ appellant and its predecessors having prepared the lease it is to be construed most strongly against appellant and in favor of the lessor. The difficulty is, the intent of the parties seems clear from the language used in the contract and there is no room for construction as urged. Nor do we see anything extrinsic in the case negativing the parties' clearly expressed intent. They agreed the royalty should be one-eighth of the proceeds if sold at the well. We cannot make a new contract. Appellees have been paid their share of those proceeds and the trial court erred in holding appellant liable for more.
We turn now to the other claim, appellant's entitlement to be repaid *513 for overpayments of royalty made to its lessors during the period January 1, 1954, through December 22, 1957, pursuant to KCC's 11в minimum price order, and its obligation to account to those lessors who have already made refunds to it.
On December 2, 1953, the KCC promulgated an order effective January 1, 1954, fixing a minimum price of not less than 11в per mcf at 14.65 psi to be paid for gas taken from the Kansas Hugoton field. Cities, which had been buying the gas in question at 8.4в at 16.4 psi (equivalent to 7.5036в at 14.65 psi) pursuant to its contract with appellant, considered the KCC order to be invalid and notified appellant judicial review of the order would be sought but payments would be made in compliance with the order subject to refund in event it was nullified. February 19, 1954, appellant notified its royalty owners of Cities' position. The notice further stated acceptance of the royalty checks would constitute an agreement by lessors to refund any possible overpayments. From January 1, 1954, through December 22, 1957, the KCC 11в rate was the basis for computation of royalty payments.
June 7, 1954, the United States Supreme Court held the sale and transportation of natural gas into interstate commerce was subject to FPC regulation (Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 98 L. Ed. 1035, 74 S.Ct. 794). Shortly thereafter appellant filed its 11в rate schedule with the FPC and received a certificate of public convenience and necessity. Meanwhile Cities took the KCC minimum price order through judicial channels and on January 20, 1958, secured its invalidation (Cities Service v. State Comm'n., 355 U.S. 391, 2 L. Ed. 2d 355, 78 S.Ct. 381). The order was held void ab initio (Cities Service Gas Co. v. State Corporation Commission, 184 Kan. 540, 337 P.2d 640). February 20, 1958, appellant notified its royalty owners that Cities had demanded refund but that it had denied liability and its claim against the royalty owners for refund would be held in abeyance pending final determination of its liability to Cities. Cities instituted litigation to recover the overpayments while appellant filed in a different forum a declaratory judgment action for construction of the contract. Eventually, on November 20, 1962, this litigation culminated in a Delaware superior court judgment against appellant for nearly ten million dollars plus six percent interest. Appellant then settled this litigation in an agreement with Cities whereby Cities agreed to remit half the interest and appellant agreed not to contest the *514 judgment further. February 15, 1963, appellant sent form letters to its lessors detailing the litigation and settlement. It requested cash refund of the overpayments or in the alternative that the lessor sign an authorization that 25% of the current royalty due each month be withheld until the overpayment was recovered. Some royalty owners paid the full amount of refund requested, others signed the requested authorization for deductions and some did nothing. As to some of these latter, appellant, without notice initially as to what it was doing, began making the deductions as though the royalty owners had signed the authorization. As to the remainder appellant made no claim for one reason or another тАФ transfer of interest, death, final closure of estates, claims less than $25.00, etc. Appellant's letters requesting refunds prompted a number of royalty owners to make inquiry of the Southwest Royalty Owners Association, a nonprofit organization, which led to formation of a group known as the Pan American Committee to investigate the legal position. Eventually the committee mailed to appellant's lessors agreement forms to take part in this class action against appellant.
As to this claim for relief (Issue One) the trial court held generally that appellant had no legally enforceable claim to such demands; that in view of appellant's duties to its lessors, it should have advised as to the legal basis of the demands and as to possible legal defenses thereto; there was no accord and satisfaction for the foregoing reasons and for lack of consideration; that in some manner appellant was estopped from making the demands; some lessors did not expressly agree to make the refunds; that the five year statute of limitations as to written contracts applied because more than five years elapsed between December 22, 1957, and appellant's withholding of royalties starting December 9, 1963; the 11в payment was a voluntary payment; there was no consideration for cash repayment or agreement to refund, and appellant was estopped to deny the 11в payments were proper payments.
Appellees make no argument in support of the trial court's ruling on the theory of estoppel and we do not see how the ruling can be upheld on that ground. Appellant fully advised its royalty owners of the situation respecting the claimed invalidity of the KCC order and the possibility refunds might have to be made. There was no misrepresentation or consequent detrimental change of position. The elements of estoppel were lacking (see Place v. Place, 207 Kan. 734, Syl. ╢ 4, 486 P.2d 1354). Nor can the payments of the 11в price be said to be voluntary. Appellant was under compulsion *515 of a business hazard in making them. The KCC order compelled it to pay the 11в minimum price "as a condition precedent for withdrawal from the common source of supply". If it failed to comply with the commission order it was subject to criminal penalty under K.S.A. 55-708 and civil penalty under 55-710. The point was considered in Cities Service Gas Co. v. United Producing Co., 212 F. Supp. 116 (ND, Okla., 1960) albeit in another context. It was held that payments made under the compulsion of the KCC minimum price order, accompanied by protest and request for refund if the order were invalidated, were involuntary.
The trial court also found no contractual obligation existed whereby any of the royalty owners were bound to refund the overpayment. Although we do not regard it, standing alone, as necessarily dispositive of the particular class of royalty owners involved we note that in Landon v. Northern Natural Gas Company, 338 F.2d 17 (CA 10, 1964), a dispute between a producer and a purchaser of gas where letters were sent stating that increased payments by reason of the KCC minimum price order were made under protest subject to refund if the order were invalidated, and the checks sent referred to the letters, it was held that the letters together with acceptance and endorsement of the checks constituted a refund contract.
The real basis relied upon by appellant for its right to have the overpayments refunded, and we think properly so, is stated in 3 Williams, Oil and Gas Law, з 657, as follows:
"Lessee's Remedy in Event of Overpayment of Royalty
And in 3 Kuntz, Oil and Gas (A Revision of Thornton) з 42.8, the following is found:
"Effect of mistake in payment of royalty.
..............
..............
The philosophy in the foregoing was the premise for the court's ultimate ruling in Panhandle Eastern Pipe Line Company v. Brecheisen, 323 F.2d 79 (CA 10, 1963). There a purchaser of gas produced in the Kansas Hugoton field sought to recover amounts it had paid to lessor pursuant to a KCC minimum price order greater than that in the gas purchase contract, which order was later invalidated in the federal supreme court. In determining which statute of limitations was applicable to the claim, the court said:
We have already indicated the royalty payments to the lessors based upon 11в per mcf were not voluntary in that they were mandated by the KCC. The fact appellant benefited as well in its producer capacity does not alter the character of its payment to its lessors. The minimum price order was held to be a complete nullity and void ab initio. Such an order cannot alter a valid contract rate. Under the contract and all the circumstances here appellees had no right to retain any amount above the 8.4в rate.
A more serious question is presented with respect to the application of the statute of limitations to these claims, bearing in mind there are three classes of lessors: Those who made immediate cash refunds as requested, those who signed authorizations for deductions and who may or may not have made full restitution, and those who *517 did nothing but who nonetheless had deductions made by appellant from current royalties. In its conclusion No. 27 the trial court stated that the statute of limitations, having been properly pled, applied to appellant's claim for entitlement to refund. Our search of the record on appeal reveals no mention of the statute of limitations in any of appellees' several pleadings but assuming it was brought into the case it is difficult to see the application made. Appellant was not in this action claiming a lump sum money judgment against any lessor by reason of the overpayment. Appellant sought to do that when on June 27, 1963, it filed suit in federal district court in Kansas against appellee Leland C. Waechter. Waechter's answer, among other things, pled the statute of limitations (findings 26 and 27). On September 30, 1963, the decision in Panhandle Eastern Pipe Line Company v. Brecheisen, supra, was filed. It held that any cause of action for repayment of royalty made by virtue of the KCC minimum price order accrued January 20, 1958, the date of the federal supreme court's decision voiding the order and further, as already pointed out, that the three year statute of limitation for unjust enrichment was applicable. Accordingly, such claims for refunds became outlawed January 20, 1961 (this may well have been the reason for appellant's dismissal in April, 1964, of its federal court suit against Mr. Waechter).
Can the bar of the statute of limitations be the basis for a judgment against appellant by reason of money which has been in its hands either by cash refund, written authorization or the self-help method employed by it? As to the first two classes it seems clear appellees are seeking to use the statute of limitations affirmatively as a weapon rather than as a shield. It is elemental that this cannot be done (Greenley v. Lilly, 155 Kan. 653, 127 P.2d 416). The rule is amplified in 51 Am.Jur.2d, Limitation of Actions, з 20, thus:
The statute of limitations is simply not available as a cause of action and its bar cannot be the basis of a claim for affirmative relief. As to the two classes mentioned the trial court erred in ruling that appellant was accountable for refunds received.
The question remains of appellant's accountability for its self-help action in making refund deductions from later royalty payments. *518 These were all made more than five years after its cause of action accrued and they are within the bar of the statute. K.S.A. 1974 Supp. 60-213 (d) provides:
The foregoing statute has been construed to disclose legislative intent to carry over the law as it developed under G.S. 1949, 60-715. Under the old statute it was held that a defendant could assert a counterclaim or setoff, even though barred by the statute of limitations, to the extent of the plaintiff's claim, providing both claims coexisted at some time. (Rochester American Ins. Co. v. Cassell Truck Lines, 195 Kan. 51, 402 P.2d 782.) In Tobin Construction Co. v. Holtzman, 207 Kan. 525, 485 P.2d 1276, it was stated:
In order to assert a cross-claim under the statutes the two claims must have coexisted at some point in time. Appellant's claims were barred by the statute of limitations prior to the time it commenced withholding the overpayments from current royalties due appellees. Appellees' claims are based on the amounts being withheld. Thus, it would appear appellees' claims never arose until after the appellant's claims were barred and the two claims never coexisted, which renders the statute inapplicable.
In an extensive note entitled "Developments in the Law тАФ Statutes of Limitations", 63 Harv. L. Rev. 1177, the writer says:
In Rochester American Ins. Co. v. Cassell Truck Lines, supra, it was stated:
..............
In Christenson v. Akin, 183 Kan. 207, 326 P.2d 313, a vendor sued vendee for the balance due on a written contract of sale of a business. The vendee counterclaimed alleging vendor violated an agreement not to compete. The vendee was held barred by the statute of limitations from obtaining affirmative relief by way of injunction against future competition. However, it was held the alleged violations of contract could be used as a pure defense. The court stated:
The vendee was allowed to prove damages but could not recover an affirmative judgment over and above judgment for the vendor. For another example of the use of an outlawed claim as a "pure defense", see Powers v. Sturgeon, 190 Kan. 604, 376 P.2d 904.
Closely akin to the "pure defense" use of an outlawed claim is that of the common law doctrine of recoupment. The subject is *520 discussed in 20 Am.Jur.2d, Counterclaim, Recoupment, etc., in the following terms:
"з 1. Definitions тАФ recoupment.
..............
"з 6. Nature and scope of remedy тАФ recoupment.
..............
"з 11. тАФ Recoupment and setoff.
The doctrine of recoupment has found its way into the annals of Kansas law. In Ruby v. Baker, 106 Kan. 855, 190 Pac. 6, 10 ALR 1247, Justice Mason quoted approvingly the following:
Appellees' claims here are for the amount withheld by appellant from later royalty payments. They are based on the lease contracts. Appellant's claims for the overpayments grow out of the selfsame *521 leases. Thus it would appear either under the "pure defense" or the recoupment theory appellant is entitled to offset its outlawed claims against those of appellees so that the parties are left as they were. Does appellant's extra-judicial action make any difference? We think not. Appellant rightfully came into the possession of the entire proceeds of the sale of the gas, including that portion to which the landowners would have been entitled. It cannot be said appellant acquired appellees' money by force, collusion or unfair means, which would present an entirely different picture. The situation is analogous to some of those mentioned in 6 Williston on Contracts, rev. ed., з 2002, wherein it is stated:
Appellees' indebtedness was not extinguished by the lapse of time. Appellant has not retained any money to which it was not morally entitled under all the circumstances. The trial court erred in ruling that appellant was accountable for the royalties retained by it.
The judgment is reversed.
APPROVED BY THE COURT.
FATZER, C.J., not participating.
SCHROEDER, J., dissenting:
The basic premise underlying the court's decision is that under the oil and gas leases in question the royalty owners are entitled to payment as royalty on gas marketed from each well one-eighth of the "proceeds" if sold at the well. This results from the court's interpretation of a gas royalty clause reading:
By concluding that all of the lessors' one-eighth interest in the gas is sold at the well the court holds the royalty owners are entitled to only the "proceeds" of the gas ultimately realized by Amoco Production Company, the appellant.
In my opinion this is an erroneous premise upon which to found a decision in the case at bar for several reasons.
This is a class action by approximately five hundred named landowners, representing a class of some 3,000 landowner-lessors, all in the Kansas Hugoton gas field. The appellant's evidence, "Exhibit D" attached to the Calonkey affidavit, which forms the basis of the trial court's finding No. 40, is unrefuted in the record and discloses that 48 different forms of gas or oil and gas leases have been dedicated to the fulfillment of the gas purchase contract with Cities Service Gas Company (dated June 23, 1950). These leases contain numerous variations in the gas royalty clauses. Among these are leases calling for payment to the royalty owners of "One-fourth of the proceeds of gas sold at the prevailing market rate" (emphasis added); "One-eighth of the gross proceeds at the prevailing market rate for gas used off the premises." (emphasis added); "One-eighth of the proceeds when the gas is marketed off the leased premises or if not marketed off the leased premises then 1/8 of the market value at the well." (emphasis added); and others. The royalty provision seized upon by the court to determine this lawsuit is at variance with these clauses and reads as first above quoted.
Clearly all of the members of the class are not bound by the royalty payment provision used by the court to determine this lawsuit. Neither the trial court nor the appellees regarded the variation in the royalty payment clauses of the many leases to be of major significance, in view of the appellant's conduct through the years, wherein it construed all of the various provisions regarding payment of royalty in the various leases to be the same, and as imposing identical obligations upon it to compensate the royalty owners for their share of the gas produced at the prevailing market value. The failure of the court to adopt the appellees' theory, however, does not warrant arbitrary action which penalizes all members of the class whose specific royalty payment clauses require compensation to *523 the royalty owners on the basis of the fair market value of the gas at the well.
Even if it be assumed that all royalty owners in the class are bound by one and the same royalty payment provision, and assuming further that such provision is identical to the royalty payment provision seized upon by the court to determine this lawsuit, the conclusion of the court is not warranted.
In the majority opinion the single word "proceeds" is lifted out of context from the clause and is said to control without regard to any other language in the clause. In other words, the leases in question are construed to be strictly "proceeds" leases. The practical effect of this construction is to tie the royalty owners to payment for their share of the gas produced to the established F.P.C. rate at a given time. This construction of the leases could not have been within the contemplation of the parties when the leases were entered into in 1950 and prior thereto. To ascertain the intention of the parties concerning payment under the royalty clause use of the other words "gas marketed", "market value", "marketed" and "sold" cannot be ignored.
Under the specific terms of the provision used by the court for payment of royalty, when the gas is marketed by the lessee off the leased premises, the lessee is required to pay one-eighth (1/8) of the market value thereof at the well. Simply stated this means the royalty owners are entitled to payment as royalty the market value of one-eighth of the gas produced at the well. The entire provision discloses an intention by the parties to the lease that one-eighth of the "proceeds" from the sale of gas at the well are to be measured by the market value of the gas produced. If the gas produced is marketed off the leased premises the cost of transporting the share of the royalty owner's gas to the place of sale is deducted to arrive at the fair market value of the gas at the well.
The appellant seeks to avoid its contractual royalty obligations to pay based on the value of the gas sold by asserting the same position it took before the F.P.C. that the lessors herein are only entitled to a "royalty share" of the gas sold. The appellant urges this court to interpret the leases as though they provided for payment of gas royalty in kind. But under the actual lease terms the lessors neither own nor possess any such gas and have no natural gas to sell. There is no such "royalty share" of the gas. It is apparent that something other than payment in kind was intended as to gas royalty.
Fundamentally, the interpretation of contracts requires a determination *524 of the intention of the parties. (Springer v. Litsey, 185 Kan. 531, 535, 345 P.2d 669.) This intention must be determined as of the time the contract was executed. (Kittel v. Krause, 185 Kan. 681, 685, 347 P.2d 269.) This intention is to be determined from within the four corners of the instrument, absent ambiguity. This intention shall be ascertained by consideration of all pertinent provisions of the contract and not by isolating a single word or phrase. (Drilling, Inc. v. Warren, 185 Kan. 29, 34, 340 P.2d 919.)
Where words or other manifestations of intention bear more than one reasonable meaning, an interpretation is preferred which operates more strongly against the party from whom they proceed. (Restatement of Law, Contracts, з 236 [d], p. 330.) Since one who speaks or writes can, by exactness of expression, more easily prevent mistakes in meaning, than one with whom he is dealing, doubts arising from the ambiguity of language are resolved against the former in favor of the latter. (Smith v. Russ, 184 Kan. 773, 779, 339 P.2d 286.)
Under Kansas law the construction of oil and gas leases containing ambiguities is in favor of the lessor and against the lessee because the lessee usually provides the lease form, or dictates the terms thereof, and if such lessee is desirous of more complete coverage, the lessee has the opportunity to protect itself by the manner in which it draws the lease. (Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P.2d 602; see also Stady v. The Texas Company, 150 Kan. 420, 94 P.2d 322.)
The record discloses the appellant has by its conduct through the years, and by argument in its brief, recognized that all of the various lease provisions in question here should be treated the same regarding payment of royalty, and that all of them place identical obligations upon it. At the time the gas purchase contract was executed in 1950, the appellant and Cities Service Gas Company did not anticipate that the Natural Gas Act would be made applicable to the producers of natural gas. On June 23, 1961, the appellant was entitled to a redetermined "fair and reasonable price" from Cities Service with a minimum of 12 cents per Mcf at 16.4 psia. The question was litigated in Pan American Petroleum Corporation v. Cities Service Gas Co., 191 Kan. 511, 382 P.2d 645. The appellant was there contending the "fair and reasonable price" for the gas sold under the contract for five years commencing June 23, 1961, should be 19 cents per Mcf at 14.65 psia. Cities Service contended it should be 12 cents per Mcf at 16.4 psia. The *525 Supreme Court upheld the trial court's determination that the new fair and reasonable price for the gas was 14.5 cents per Mcf at 14.65 psia, effective June 23, 1961. In the opinion the court discussed the supervision by the Federal Power Commission over a regulated natural gas company furnishing gas to a distributing company under a long term contract, and said:
The appellant having taken the position regarding payment of royalty, that the various leases place identical obligations upon it to compensate the royalty owners for their share of the gas produced at the prevailing market rate, cannot successfully argue that they now have "proceeds" leases, instead of "value" leases in which the royalty is based on the market value of the gas at the wellhead, independent of the actual sale price obtained by the appellant.
The appellees contend the royalty obligation was never intended to be measured by a governmentally-imposed rate and that under the pertinent lease provisions it is apparent the yardstick for determining royalty was intended to be that price anticipated from an arm's length sale made by appellant, as a free and willing seller, to free and willing buyers.
A reading of the royalty provision used by the court shows the parties contemplated a disposition of gas by appellant at either the wellhead or at some point off the leased premises. Appellant argues the parties contemplated a different standard of measurement for royalty purposes, depending upon the point at which appellant parted with title to the gas produced. It will be assumed *526 that this occurred at the wellhead as a result of the appellant's sale of its gathering lines to Cities. See, Stanolind Oil & Gas Co. v. Cities Service Gas Co., 178 Kan. 202, 284 P.2d 608, where it was stated that the "opinion will not be in the nature of a discussion of any particular legal principle, and that what is said will be of interest only to the parties themselves" in a case to which the appellees herein were not parties.
In both cases (wellhead or off-the-leased-premises sale), the disposition is preceded by reference to "gas marketed from each well". What did the parties mean by this quoted phrase? According to Webster's Third New International Dictionary (1961), a market is, "1 a (1) a meeting together of people, at a stated time and place, for the purpose of traffic ... by private purchase and sale...." Since F.P.C. rate regulation was nonexistent when the lessors executed the leases in question (even as late as 1950, both the lessee and its purchaser, Cities, "did not anticipate that the Natural Gas Act would be made applicable to the producers of natural gas." Pan American Petroleum Corporation v. Cities Service Gas Co., supra, p. 519), it is obvious the parties must have intended disposition of the gas by private and unregulated sale, if the words employed by the parties are given their ordinary meaning.
This conclusion is fortified by an analysis of the language applicable to the marketing of gas at the wellhead and off the leased premises. As to wellhead dispositions, the lessors are to receive, as royalty for gas so marketed, one-eighth (1/8) of the proceeds if sold at the well. A sale is certainly not the equivalent of an imposed governmentally controlled rate. "A. `sale' implies willing consent to the bargain. A transaction although in the form of a sale, but under compulsion or duress, is not a sale." (Dore v. United States, 97 F. Supp. 239, 242 [Ct. Cl. 1951]).
When the appellant received the proceeds on a regulated per Mcf basis for the gas produced from appellees' lands, it is manifestly contrary to the intention of the parties to say the appellees' royalty should be measured by such proceeds, when they do not constitute the proceeds of sale, as that term was used and intended by the parties.
As for gas not marketed at the wellhead, the parties specified "if marketed by lessee off the leased premises, then one-eighth (1/8) of the market value thereof at the well." (Emphasis added.) The dominant concept again is the marketing of gas to determine the *527 amount of royalty to be paid. And, despite the fact that marketing of the gas off the leased premises is here contemplated, the yardstick for royalty purposes in such instances is expressly stated as the market value at the well, which makes the place where gas is to be valued identical in both cases.
Conceding that the proceeds permitted to be received or retained by the appellant as a regulated F.P.C. producer, measured on a per Mcf basis, represented less than proceeds receivable under the contract of 1950 or market value of the gas, appellant urges the contract or market values do not constitute a proper standard for royalty purposes. According to the appellant, language used in the lease must be construed to mean that off-premises disposition of gas entails a market value at the well standard for royalty purposes, while the parties intended something different when they referred to gas marketed through sales technically occurring at the wellhead. If the appellant is correct that F.P.C. rates govern royalty payments where appellant disposes of gas at the well, but such F.P.C. rates do not govern when gas is marketed away from the well, even though royalty is to be measured by the market value of the gas at the well тАФ such a result is wholly incongruous, unreasonable and inconsistent.
In both instances, it was contempated that the gas would be marketed and sold by appellant. Undoubtedly, apart from unforeseen government regulation, it is reasonable to assume when the leases were signed the appellant's duty to market would result in sale prices established at arm's length by appellant as a free and willing seller, which sales prices would approximate the market value of the gas at either location, less a deduction for transportation costs when sales occurred at a point removed from the leased premises. The appellant's own self-interest precluded good faith sales at prices less than those obtainable in the prevailing, unregulated market for gas, regardless of where the sale was made. But these obviously anticipated controlling conditions do not govern payments for gas received by appellant when such payments represent the per Mcf proceeds obtained from imposed rates, instead of proceeds received from unfettered sales such as those obviously contemplated when the leases were signed.
The parties obviously intended that the most appropriate place for establishing the per Mcf factor, however it was to be measured, was at the wellhead. The landowner-lessor could rely on the economic self-interest of the lessee to obtain the maximum sales price *528 for his own benefit. The term "proceeds if sold at the well" would, accordingly, equal the market value at that point.
This is the only interpretation which harmonizes all parts of the entire royalty clause. It also accords with common sense. It is the construction which is consistent with the uniform per Mcf basis used by lessee in paying royalty under all of the 48 lease forms.
In other words, sales at market value occurring at the well were dictated by lessee's own self-interest at the time the leases were signed and it was deliberately emphasized that the same market value standard would apply as to sales made off the leased premises.
For the above reasons the owners as a class in this action are entitled to payment on gas marketed from each well one-eighth (1/8) (or one-fourth [1/4] in some cases) of the fair market value of the gas at the well.
While the court is bound by that interpretation of the Natural Gas Act which restricts the amounts which producers of natural gas may receive upon interstate disposition of their product, nothing in the federal statutory scheme governing the profits of producers controls the issues here before the court. Royalty agreements between landowners, such as appellees here, and producers, such as appellant, are not subject to regulation by the F.P.C. under the Natural Gas Act. Mobil Oil Corporation v. Federal Power Commission, 463 F.2d 256 (1972), cert. den. 406 U.S. 976, 32 L. Ed. 2d 676, 92 S. Ct. 2409, 2410, 2413, reh. den. 409 U.S. 902, 34 L. Ed. 2d 166, 93 S. Ct. 103; and see findings Nos. 53, 54, 55 and 56 in the court's opinion. In Mobil, the commission took the position that when a landowner executed a "`proceeds'" or "`value'" lease, "`he has contracted to retain an economic interest in interstate sales by the producer,'" and "`has joined the other interest owners in such sales and he has become a seller of natural gas.'" The court, however, held Congress did not give the F.P.C. jurisdiction to take whatever action it might deem appropriate and said:
Since the advent of federal regulation, the major portion of our nation's supplies of natural gas, including that from the once rich store in the Kansas Hugoton field, has been substantially depleted in the span of a few decades. By prevention of market place determination *529 of the price payable for interstate sales of natural gas, millions of consumers far removed from sources of supply have been able to obtain heretofore seemingly unlimited quantities of natural gas at artifically low cost, while those who purchase in the uncontrolled markets have been paying higher prices as a result of market forces. The soundness of a policy which has hastened the depletion of our natural gas reserves and which has postponed the development of alternative sources of fuel is not a matter appropriate for judicial determination, but, again, nothing in the issues presently before the court requires it to either deliberately further or to hinder a program, the consequences of which are becoming increasingly disastrous for all those consumers who have become dependent upon an artificially cheap and supposedly inexhaustible supply of natural gas. Certainly, compelling facts today might well support a legislative policy which encourages conservation of our remaining gas reserves to the extent that normal market forces would operate to do so. The court is not concerned with these policy considerations. Rather, the fundamental question before the court is whether the parties to the leasing contracts intended, when they were written, to limit the measure of compensation for royalty to whatever rates were federally imposed upon the appellant to limit its profits in connection with its own interstate disposition of gas produced from appellees' land.
The fair market value of the gas at the well was judicially determined in an independent action designed to resolve that issue in Pan American Petroleum Corporation v. Cities Service Gas Co., supra. The district court there determined the fair and reasonable price for gas sold under the contract involved herein for five years commencing June 23, 1961, based on and compared with the price for gas then being paid by other purchasers in the field under similar contracts and conditions, was the sum of 14.5 cents per Mcf at 14.65 psia. That decision and judgment was affirmed by the Kansas Supreme Court on appeal. This is the best and actually the only evidence of market value for the period in question. The finding of the trial court herein based upon such evidence is binding on appeal.
Subsequent to the production of the gas and the purchase of the royalty owners' interest therein by the appellant, the delivery and transportation of the gas in interstate commerce, where it became subject to F.P.C. regulation, does not alter the obligation of the appellant to pay the royalty owners the fair market value for the *530 gas. (Craig v. Champlin, Petroleum Company, 300 F. Supp. 119 [1969].)
The royalty owners' share of the gas was purchased at the well, prior to its becoming subject to F.P.C. price regulation. The function of the F.P.C. under the Natural Gas Act is to permit sales of natural gas in interstate commerce to consumers at rates which it finds to be just and reasonable. The rate making process includes consideration of the interests, not only of the consumers, but also of the investors in order that returns on investments may be sufficient to assure confidence in the financial integrity of the enterprise. The resulting utility rates found acceptable by F.P.C. are not based upon the value of the natural gas produced, but upon the "actual legitimate cost" incurred in production, gathering, transportation and marketing of the natural gas, including the cost of the royalty owners' share of the gas purchased at the well. (Power Comm'n v. Hope Gas Co., 320 U.S. 591, 88 L. Ed. 333, 64 S. Ct. 281.) In the early 1960's the F.P.C. began to substitute area rates for company-by-company rate-making. (Wisconsin v. Fed. Power Comm'n., 373 U.S. 294, 10 L. Ed. 2d 357, 83 S. Ct. 1266.)
Appellant contends that royalty payments, by virtue of the lease provisions, must be considered on a different basis than all other "actual legitimate costs", which taken together govern the maximum amount it may receive for its delivery of interstate gas as determined by the F.P.C. While market forces control other costs incurred by the appellant, the royalty clauses, it argues, subject royalty payments to rate regulation. According to appellant, its royalty obligation is limited to payments derived from its allowable rate and consequently, its royalty costs alone must be determined after, not before, its rates are established.
The F.P.C. regulated rates are designed to prevent overall excess profits to the appellant over and above the regulated return. But it does not follow that effect should not be given to the intention of the parties as to the standard of value to be applied in determining appellant's royalty obligation. Again, it is the duty of the courts to give effect to the intention of contracting parties whenever it is possible to do so. Requiring the appellant to make payment for royalty on the basis of the fair market value of the gas does not place any hardship upon the appellant which cannot be alleviated by the adjustment of its F.P.C. rates to absorb such royalty costs. This court cannot assume the F.P.C. would do otherwise, since royalty payments are one of the appellant's actual costs bearing upon the *531 determination of its allowable utility rate for the resale of gas to its customers. Presumably, all of the appellant's other costs are determined by market forces, and no reason warrants an exception for its royalty costs.
Had the appellant consistently paid royalty in accordance with the fair market value of the gas at the well, it would have been in a position to include such royalty costs in its F.P.C. rate base, even though the contract proceeds might have been in excess of the amount the appellant could keep or receive, on a per Mcf basis. But, when appellant ascertained that its allowable F.P.C. rates were less, on a per Mcf basis, than contract prices obtainable, it and other producers undertook to avoid their contractual royalty obligations by urging the subjection of royalty payments to F.P.C. rate regulation. The appellant succeeded in its efforts before the F.P.C., but did not prevail before the federal courts. Even if the appellant is eventually unable to retroactively recover the full extent of its royalty costs from its pipeline customers (Cities), that will be attributable to appellant's own initial failure to fulfill its royalty obligation in accordance with the provisions of its lease agreements.
When a producer subject to F.P.C. regulation is required to account for royalty on the basis of its fair market value, it is still in the producer's self-interest to account for royalty on such basis in order to include the full royalty cost in its rate base. It is not the function of a court, when called upon to give effect to the intention of parties to a royalty agreement, to rewrite their agreement because one of the parties subsequently was subjected to governmental regulation which does not extend to their contract.
Appellant, in its reliance on the isolated lease term "proceeds", seeks to obscure the distinction crucial to a resolution of this case. Two concepts must be distinguished. The contract price of natural *532 gas must be distinguished from the regulated rate, stated on a per Mcf basis, to arrive at the amount of money it may receive or retain to prevent excessive profits, considering its overall operations. The appellees' judgment in the lower court is based upon the contract price. The appellant's appeal is based upon the federally regulated F.P.C. rates.
Here the appellant did not pursue an ultimate determination by the F.P.C. It compromised by settling the dispute, accepting a 12.5 cent rate which the F.P.C. approved. It must be conceded the appellant had the right and authority to compromise with Cities Service Gas Company and seek F.P.C. approval insofar as it affected its own interests, but it was not authorized to bind the royalty owners to the F.P.C. rate. (See F.P.C. v. Sierra Pacific Power Co., 350 U.S. 348, 100 L. Ed. 388, 76 S. Ct. 368.) The reduced rate was not imposed unilaterally by the F.P.C. upon the parties. Rather, it was the rate sought by the appellant in conjunction with a "package" deal which the appellant submitted to the F.P.C. for approval. The record discloses a settlement proposal which indicates the underlying assumption, wherein the lessors relied upon the economic self-interest of the lessee to secure marketing arrangements to their mutual advantage, no longer obtains.
Here the appellees' claims are based solely upon the contractual rights secured to them by their oil and gas leases.
References in Pan American Petroleum Corporation v. Cities Service Gas Co., supra, pp. 519, 520, to the effect that the 14.5 cent contract price "cannot be made retroactive and form the basis of a money judgment for past sales" and that under the Natural Gas Act the contract provisions that any new price shall be retroactive is "void and unenforceable" must be understood in the light of the above discussion of the Mobil doctrine under which the contract price, as distinguished from the per Mcf filed rates, continued in effect as the contract price, with lessee being paid on a given date the contract price and at other rates lower than the contract price because of the differing way in which F.P.C. regulation was imposed.
Accordingly, the royalty owners are entitled for gas taken during the period of June 23, 1961, to June 22, 1966, to collect the fair and reasonable value of 14.5 cents per Mcf at 14.65 psia instead of the lower price paid by the appellant to them.
In my opinion the trial court correctly determined the appellant *533 on or subsequent to February 15, 1963, had no legally enforceable claim against the lessors for a refund of royalty paid by the appellant for production of gas during the period January 1, 1954, through December 22, 1957, pursuant to K.C.C.'s eleven cent minimum price order.
Under the oil and gas leases in question the lessors have absolutely no say as to when, where, or how deep the wells are drilled, nor the size of the hole or pipeline, when or how much gas is produced, to whom it is sold, the price for which it is sold, the duration of the contract under which it is sold, where it is transported, and how it is to be used. The trial court in conclusion No. 13 stated:
The trial court continued in conclusion No. 13 to declare the appellant's duties under these circumstances were equivalent to the imposition of fiduciary duties.
Although the imposition of fiduciary duties upon the lessee under these circumstances does not find support in American authorities, the court in its opinion says:
This statement is too broad and does not conform to either the Oklahoma or the Kansas law. The Bunger case summarily disposed of the matter before it. There the court only had to decide that there was no fiduciary obligation imposed upon the lessees under an oil and gas lease to hold the action barred by the statute of limitations and "laches".
Under both Oklahoma and Kansas law an implied duty or obligation is imposed upon the lessee to exercise the diligence of a prudent operator, having due regard for the interests of both the lessor and the lessee, to obtain a market for the gas at the best price obtainable. (Gazin v. Pan American Petroleum Corporation, 367 P.2d 1010 [Okla. 1962]; Townsend v. Creekmore-Rooney Co., 358 P.2d 1103 [Okla. 1960]; Harding v. Cameron, 220 F. Supp. *534 466 [1963]; and Craig v. Champlin Petroleum Company, 300 F. Supp. 119 [1969].)
In Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P.2d 602 this court held the duty to market gas rests constantly upon the lessee who is under an implied obligation to exercise reasonable diligence in marketing the gas produced. If a market value for the gas produced does not actually exist, the basis of the reasonable value thereof may be established by competent evidence.
The inescapable conclusion in the instant case is that the appellant acted in a dual capacity, as both buyer and seller of the gas at the wellhead, (Stanolind Oil and Gas Co. v. Cities Service Gas Co., 181 Kan. 526, 313 P.2d 279), when it dedicated all of the gas or oil and gas leases it had in the Hugoton field to the fulfillment of the gas purchase contract with Cities Service Gas Company on June 23, 1950. Under the circumstances, the appellant was obligated to exercise the diligence of a prudent operator, having due regard for the interests of the lessors to obtain the fair market value for the gas. If the best price obtainable in the open market is established by the sale of gas in intrastate commerce than the appellant was obligated under the leases to pay the lessors the fair market value of the gas so established at the wellhead.
The regulatory body in Kansas was the Kansas Corporation Commission which for the period of time in question had fixed the price at eleven cents. This sum was paid by the appellant to the appellees under its contractual obligation to do so. Subsequent efforts by the appellant to recover, what it conceived to be overpayments to the appellees, including self-help without notice to some of the appellees, falls short of good faith and fair dealing in the exercise of reasonable diligence for and on behalf of the appellees. Under these circumstances the trial court came to the correct conclusion and its judgment should prevail.
In my opinion a dangerous precedent is established by the court's decision construing the royalty clauses of the leases here in question to be "proceeds" leases. Damages to the landowners of the state, who have executed similar leases, will be irreparable. Giant corporations of national and international scope operating in the oil and gas industry, with the ingenuity of counsel available to them, can operate through parent and wholly-owned subsidiary corporations to completely defeat the rights of the lessors to the fair market value of their royalty interest in the gas produced.
*535 A good illustration of a parent company and a wholly-owned subsidiary company, indicating the magnitude of their close dealings, is Power Comm'n v. Hope Gas Co., 320 U.S. 591, 88 L. Ed. 333, 64 S. Ct. 281, where the Hope Natural Gas Company is a wholly-owned subsidiary of Standard Oil Company of New Jersey.
The impossibility of identifying the controlling corporation in many instances, coupled with the possibilities sanctioned by the court in Cline v. Angle, 216 Kan. 328, 532 P.2d 1093, wherein a circuitous sale from the lessor-producer Angle to Kansas-Nebraska, and a sale back to Angle as purchaser-processor of the gas, was permitted to defeat the clear provisions of a paragraph in a lease assignment agreement upon which the parties had negotiated and reached agreement, foretells oil and gas lessors in the State of Kansas of "handwriting on the wall."
It is respectfully submitted the judgment of the lower court should be affirmed.
KAUL, J., joins the foregoing dissenting opinion.