Title: Western Petroleum Co. v. Atlantic Refining Co.

State: new-mexico

Issuer: New Mexico Supreme Court

Document:

359 P.2d 773 (1961) 68 N.M. 149 WESTERN PETROLEUM COMPANY, Plaintiff-Appellant, v. ATLANTIC REFINING COMPANY, Defendant-Appellee. No. 6717. Supreme Court of New Mexico. February 21, 1961. *774 Rose & Johnson, Hobbs, for appellant. Hervey, Dow & Hinkle, Lewis C. Cox, Jr., Roswell, for appellee. MOISE, Justice. Under date of April 23, 1932, one C.M. Carlson obtained an Oil and Gas Prospecting Permit covering 2560.20 acres of land in Lea County, New Mexico, from the Secretary of Interior. On November 2, 1936, C.M. Carlson, as "Owner," and Anderson-Prichard Oil Corporation, hereinafter referred to as Anderson-Prichard, as "contractor," entered into a drilling and operating agreement covering the 2560.20 acres included in the prospecting permit, whereby Anderson-Prichard was given certain rights of possession and occupancy of the lands for purposes of "prospecting or drilling for, developing, producing and marketing of oil, gas, casinghead gas and kindred substances therefrom." By the terms of this agreement 640 acres described therein was denominated "Preferential (a) Lease" and the balance as "Secondary (b) Lease." We are only interested in the lands included in the "Preferential (a) Lease." The agreement provided that Anderson-Prichard would, on or before December 1, 1936, commence drilling a well in the SW 1/4 NW 1/4 of Section 21, Twp. 25 S., Rge. 37 E., N.M.P.M., being 40 acres of the "preferential (a) lease" and drill it to 3650 feet unless oil was discovered at a lesser depth or sulphur or salt water encountered. This well was drilled and oil discovered, whereupon pursuant to the terms of the agreement a lease was obtained from the Secretary of Interior. Thereupon, as provided in the drilling and operating agreement, Anderson-Prichard received an assignment of 520 acres of the preferential (a) lands, including the 40 acres where the discovery well was located. Under the agreement certain drilling requirements and duties were imposed and assumed. The duties included payment of royalties, and in paragraph 9 provided for other obligations. Since the dispute in this case revolves principally around paragraph 9, it is quoted in full: Paragraphs numbered 12 and 23, also being of particular interest, they are likewise quoted in full: Thereafter, the interests of Carlson as owner were conveyed to and are now owned by the plaintiff-appellant. In turn, Anderson-Prichard, under date of January 19, 1943, conveyed to the defendant-appellee all of its interest in N 1/2 SE 1/4 of Section 23, Twp. 25 S., Rge. 37 E., N.M.P.M., containing 80 acres, being part of the preferential (a) land. The present action sought to have the court declare all interests of appellee in the 80 acres standing in its name, to be terminated and reverted to appellants pursuant to the terms of paragraph 12 of the November 2, 1936, agreement, and for an order requiring a reconveyance to appellant by appellee of all rights claimed by it. Upon cross motions for summary judgment being considered by the court, the motion of appellee was sustained and this appeal followed. There is no dispute in the evidence. As stated, the case was decided on motion for *776 summary judgment where the court considered certain answers to interrogatories, the various written instruments and the deposition of the Chairman of the Board of appellant corporation. To continue with the facts: After execution of the 1936 agreement, and prior to February 1, 1943, Anderson-Prichard drilled three wells and pursuant to the provisions of the contract acquired all lease rights in the three 40-acre tracts on which the wells were located. On February 1, 1943, Anderson-Prichard having failed to drill at least one well each year as required by the 1936 agreement, an instrument denominated Modification of Drilling and Operating Agreement was entered into between them and Indian Petroleum Corporation, being Carlson's successor and appellant's predecessor in interest, whereby it was agreed that all the requirements of sections 9 and 23 of the 1936 agreement quoted above had been complied with or waived and that the contract was in good standing, and further providing that from and after February 1, 1943, paragraph 9 was "changed and modified" to read as follows: Incidentally, it should be mentioned that in this modification agreement dated February 1, 1943, it is recited that subject to certain rights of El Paso Natural Gas Company under a 1939 contract, "all claims, rights, title and interest of Anderson-Prichard Oil Corporation" in and to the North half of the Southeast quarter of Section 23, Township 25 South, Range 37 East, N.M.P.M. under the 1936 agreement, were owned by the appellee. After this modification agreement was entered into, Anderson-Prichard drilled one more well which was a dry hole but failed to drill any additional wells as provided in paragraph 9 as revised. Thereafter, the five 40-acre tracts described in the revised paragraph 9 were reassigned by Anderson-Prichard to appellant's predecessor in interest. Under date of September 18, 1951, by letter agreement, an arrangement was again worked out and pursuant thereto Anderson-Prichard drilled a fifth well. The court also had before it an operating agreement entered into in 1955 between Indian Petroleum Company, appellant's predecessor in interest, Anderson-Prichard and El Paso Natural Gas Company, in which the oil and gas leasehold rights of Anderson-Prichard in and to the North half of the Southeast quarter of Section 23, Township 25 South, Range 37 East, N.M.P.M., were ratified and confirmed in Anderson-Prichard, and the 80-acre tract was referred to as the "Atlantic Tract." The agreement did contain a reservation to the effect that nothing in it should "in any way affect the ownership of oil rights as between Indian (appellant's predecessor) * * * and Atlantic Refining Company (appellee)." Appellant never questioned appellee's rights to the 80 acres in issue here until June 3, 1958, when it sent a letter notice as provided in paragraph 12 of the 1936 agreement advising that it was exercising its option under that agreement for failure to drill the wells as required, for failure to protect the lands against drainage and for failure to get a memorandum from assignees agreeing to be bound by the agreement, all as required by the 1936 agreement. This notice was sent within 30 days of the completion of a producing well immediately to the north of the tract here in question and it gave appellee 45 days within which to commence drilling, all as provided in paragraph 23 quoted above. When appellee failed to drill demand was made for reassignment which appellee likewise did not do, and this suit resulted. Appellant, in its brief, states that the controversy turns upon whether or not appellee's title to the oil rights is subject to the provisions of paragraphs 9 and 12 of the 1936 agreement, quoted above, and whether or not appellant is prevented by the passage of time or its conduct and that of its predecessors from asserting that appellee *779 did take the assignment subject to these provisions. With this statement of the issue appellee generally agrees, but would add into the case the question of the effect of the 1943 modification and whether or not the agreement as so modified has been performed. Appellee also agrees generally with appellant's statement that it is appellee's position that the 1943 agreement completely absolved Anderson-Prichard or appellee from any responsibility to carry out the drilling program provided by the 1936 agreement or to prevent drainage or to return land to the "owner" under the 1936 agreement on failure to drill after notice to do so. Appellee, however, contends that the drilling of the well in 1943 after execution of the 1943 modification, and the reassignment of the acreage as provided in that agreement constituted complete performance thereof. In the light of the issues as agreed to by the parties it is clear to us that the first question that we must answer concerns the legal effect of the 1943 modification. If upon consideration of this issue we conclude that all duties had been performed that were required under the contracts of the parties, then it will not be necessary for us to pass upon the question arising out of appellee's pleas of laches, estoppel, statute of limitations, etc. If, on the other hand, we find that under the terms of the agreements of the parties, Anderson-Prichard had defaulted in its contractual undertakings, we must then consider the various defenses based upon conduct of appellant and the passage of time. The problem arises primarily because in the 1936 agreement Anderson-Prichard undertook to drill eight wells, exclusive of the discovery well, on eight separate 40-acre tracts, in return for which it would gain the oil and gas rights under 480 acres, exclusive of the 40 acres on which the discovery well was located. If all eight wells had been drilled there can be no question that 160 acres, which for lack of a better term we shall call excess acreage, would have been earned by Anderson-Prichard without any drilling thereon. However, there is a deficiency in the contract in that it failed to spell out who would have the rights on the excess acreage in the event all eight wells were not drilled as required by the 1936 contract. Aside from this, the question is presented as to whether or not the 1943 agreement was intended to supply this deficiency. Appellee argues that it was, whereas appellant contends that it was not. First, it would seem clear, as stated above, that if eight wells had been drilled, one each year for eight years, Anderson-Prichard would have earned the rights not only on 320 acres drilled, but also on 160 additional or excess acres which it was not required to drill. It is not so clear that when the wells were not drilled as contemplated in paragraph 9, if appellant or its predecessors had exercised their right to select an undrilled 40-acre tract and have it assigned to them thus terminating the obligation of Anderson-Prichard to drill during that year, the duty to drill would not have continued until either eight wells were drilled or a 40-acre tract had been reassigned for each year in which a well was not drilled, including the excess acreage. Although, as stated, that this was the intention of the parties and the effect of the contract is not as clear as we might like, we believe that a careful reading of paragraph 9 in the 1936 agreement leads to such a conclusion. Also paragraph 12 provides that upon demand, after default, the "Contractor shall execute and deliver to Owner a re-assignment or quit claim deed of the lands held by Contractor." What was meant by the words "lands held by Contractor"? Does this include the lands drilled and on which all rights had been earned? We doubt it, and appellant seems to agree with this. However, we are inclined to the opinion it contemplated all lands which hadn't been earned by drilling should be reconveyed. When the 1943 modification enters upon the scene what is the effect on this obligation under paragraph 9 of the 1936 agreement? Appellee argues that the 1943 agreement is merely a construction placed by the *780 parties on the 1936 agreement to the effect that paragraph 9 was not intended to merely postpone the duty to drill from year to year, but actually reduced the number of wells to which the owner was entitled by one for each 40 acres selected and reassigned; or, on the other hand, if the 1936 obligations were different, they were superseded and that the limit of appellee's obligation under the 1943 modification was to drill five additional wells or to reconvey five specified 40-acre tracts, one for each well not drilled, and that this was done. Appellant argues that the obligation to drill the five wells was the same as under the 1936 agreement, except as to time and depth, and that until they are all drilled appellant had a right, upon compliance with paragraph 12 of the 1936 agreement to a reassignment of all undrilled 40-acre tracts, including the excess acreage. It is with this position of appellant that we do not agree, and apparently the trial court likewise disagreed. First, we would point out that by the 1943 agreement paragraph 9 of the 1936 agreement was "changed and modified to read as follows:" whereupon the new paragraph 9 is set out in full. In Webster's New International Dictionary (2nd Ed.) "change" is defined as meaning "a succession or substitution of one thing in place of another"; also as "any variation or alteration; a passing from one state or form to another." "Modify" is defined as "to change somewhat the form or qualities of, to alter somewhat, as to modify the terms of a contract." See Board of Directors of Lewis Consolidated School District, Cass County v. Board of Education, In and For Cass County, 250 Iowa 1107, 97 N.W.2d 166; Levin v. Hamilton, 240 Mo. App. 764, 218 S.W.2d 131. Next, and we think this is the most significant point, paragraph 9 in the 1936 agreement provides that upon failure to drill a well in any one year, upon complying with certain conditions, including reassignment of a 40-acre tract "the obligation of Contractor (Anderson-Prichard) to drill a well upon said land during such year shall terminate," thus clearly indicating merely a postponement of the obligation. On the other hand, paragraph 9 as changed and modified spells out the obligations and duties consequent upon failure to drill any of the five wells, this duty being to reassign 200 specified and described acres. If one well was drilled and the other four not drilled, the duty was to reconvey a specified 160 acres, and so on, until if four wells were drilled and one was not, the duty was to reconvey a particular 40-acre tract. It is interesting to note that in an inter-office memorandum by an officer of Indian Petroleum Corporation to an employee in the year 1946, this same understanding is expressed when it is stated: The conclusion is also supported by an agreement executed by Indian Oil Corporation and Anderson-Prichard on June 3, 1947, in which the following appears: The drilling or reconveyance of undrilled 40-acre tracts as provided in the 1943 agreement, was completed in 1948. The only right to postponement of drilling obligations arose when a well was drilled either on appellee's 80-acre tract, or on another 80-acre tract similarly situated, and this provision never came into play. As a third and additional consideration, the assignment by Anderson-Prichard to appellees of the 80 acres in issue here was made on January 19, 1943, and purports to be an absolute conveyance subject only to the payment of an overriding royalty and two contracts for development for gas and casinghead gas. On February 1, 1943, the modification agreement was executed. Appellee says this relieved the 80 acres assigned to it from any drilling requirement, if such a requirement ever existed. That Anderson-Prichard should have been interested in accomplishing such an end would seem to be self-evident, and we are convinced that appellant's predecessors, for reasons and considerations sufficient unto themselves, understood and intended the new paragraph 9 to have this effect. That appellee may be entitled to the benefits of the contract as one on whose behalf and for whose interest the agreement was entered into can hardly be questioned. Hoge v. Farmers Market and Supply Company of Las Cruces, Inc., 61 N.M. 138, 296 P.2d 476. Hamill v. Maryland Casualty Co., 10 Cir. 209 F.2d 338, is particularly interesting and instructive on this proposition as applied in the instant case. See also 4 Corbin on Contracts, § 775, where it is stated, "* * * the fact that the promised performance is one that would beneficially affect the legal relations of the third party has a very considerable evidential weight in determining what the intentions of the promisee were; it also aids the court in determining whether judgment and execution in favor of the third party will attain the result for which the promisee contracted." In addition, appellant in its reply brief concedes that the 1943 agreement was for the benefit of appellee. To our minds, the language is clear, and permits of only one interpretation, and that is that the new paragraph 9 of the 1943 agreement "changed" and "modified" the original paragraph 9 and was in complete substitution therefor. We do not find anything in the 1943 agreement to support appellant's contention that any waiver of any rights under the 1936 agreement by the 1943 agreement was temporary and conditioned on future performance by Anderson-Prichard. By its terms it was an absolute substitution of rights and obligations without conditions of any kind. No argument is advanced by appellant that such change was not supported by sufficient consideration; accordingly, it is not necessary for us to denominate the 1943 agreement as a novation, accord and satisfaction, release or compliance and settlement as argued by appellee. In re Kellett Aircraft Corporation, D.C., 77 F. Supp. 959; Priest v. Oehler, 328 Mo. 590, 41 S.W.2d 783; 6 Corbin on Contracts, § 1293. We are satisfied that the agreement was a valid modification of the original contract and that paragraph 9 therein was in complete substitution for paragraph 9 in the 1936 agreement and accordingly is entitled to enforcement in court. The authorities hereinabove set forth likewise support this result. Also, we are satisfied that Anderson-Prichard, having reconveyed the five tracts to appellant as provided by the 1943 modification, *782 although not exactly according to the time schedule therein, oil rights on the 80-acre tract in issue here were earned and vested free from any additional obligation to drill. In view of the conclusion reached, it is unnecessary for us to consider whether appellee's additional special defenses of statute of limitations, laches, estoppel, and impossibility of performance, were meritorious. This leaves only the question of appellee's duty to protect against drainage. Appellant complains that the court did not permit testimony concerning the issue of whether or not appellees failed to drill "any wells reasonably necessary to protect the lands against drainage." The quoted language is from paragraph 9 of the 1936 agreement. However, the language is omitted from the 1943 modification and there is nothing said therein about drilling of wells to protect against drainage. Since we have already determined that the 1943 modification replaced the 1936 original insofar as the obligation to develop the lease was concerned, and since in the 1943 modification no mention is made of protection against drainage, and since appellant disavows any intention to claim the duty was implied, it follows that the trial court did not err in holding that evidence on this claim of the appellant was not necessary or proper. We find no error in the record, and the appellant's claims to be without merit. Accordingly, the decision of the lower court is affirmed. It is so ordered. COMPTON, C.J., and CARMODY and CHAVEZ, JJ., concur. NOBLE, J., not participating.