No. 14755 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1979 

U. V. INDUSTRIES, INC . , A corporation, et al., 

Appellants, 

RUSSEL D. DANIELSON, ROBERT 

V. DANIELSON, and MYRNA BRODHEAD, 

Respondents. 

Appeal from: U. S. District Court, Billings Division, 

Hon. U.S. District Judge James Battin, presiding. 

Counsel of Record: 

For Appellant: 

Crowley, Haughey, Hanson, Tool & Dietrich, Billings, 

Montana 

Cale Crowley argued, Billings, Montana 

For Respondents: 

Raymond K. Peete argued, Billings, Montana 

Submitted: September 18, 1979 

~ecided: NOV 1 1979 
Mr. ~ustice Gene B. Daly delivered the Opinion of the Court. 

This matter is before this Court on certification from 

the United States District Court for the District of Montana. 

Plaintiffs-respondents are grantees under a mineral deed 

from the owner and lessor of the oil and gas beneath the 

~1/2 of section 10 in Richland County, Montana. Defendantsapplicants are the lessee and its assigns under the "Danielson" oil and gas lease covering this tract; some of the 

applicants are or were also lessees under the "Lewis" oil 

and gas lease covering an adjacent tract, the NW1/4 of 

section 10. On May 12, 1975, respondents, the grantees, 

brought s u i t i n state District Court in Richland County, 

requesting damages from the applicants for the period between February 3, 1970 and September 14, 1972, for failure 

to drill an offset well to protect their oil interests from 

drainage by a producing well on an adjacent tract of land 

(Lewis lease). The case was removed to the United States 

District Court for the District of Montana, which has certified several issues to this Court for declaratory judgment 

regarding applicable Montana law, on application of the 

lessees pursuant to Rule 1 of the Rules of this Court. 

The facts in this case are complex, but the parties are 

in substantial agreement as to those facts, which follow in 

summary form. There are two oil and gas leases involved in 

this suit--the "Danielson" lease covering the E1/2 of S~Ction 10, and the "Lewis" lease covering the adjacent NW1/4 

of Section 10. On December 30, 1968, Hilda ~anielson, 

respondents' mother and predecessor in interest, executed a 

five-year primary term, "unless delay rentals" oil and gas 

lease ("~a~ielson" lease) to applicant Empire State oil Co., 

which subsequently assigned it to the other applicants. 
This lease contained a clause providing that no change in 

ownership of the mineral interest would be binding upon the 

lessee until it received written notice thereof. On July 

24, 1970, Mrs. ~anielson conveyed her interest to her five 

children, three of whom are respondents, in a mineral deed 

subject to the existing lease. The deed was recorded on 

September 20, 1971. 

Meanwhile, a producing well was completed by King 

Resources Co. on the adjacent Lewis tract on February 3, 

1970. Two of the applicants, U. V. Industries, Inc. (through 

its predecessor United States Smelting, Refining and Mining 

Company), and Wolf Corporation were at relevant times part 

owners of this leasehold interest in the Lewis tract. Under 

the dates July 1 and July 26, 1972, U. V. Industries received letters on behalf of two of the plaintiffs demanding 

that U. V. Industries drill an offset well in the NE1/4 and 

compensate them for drainage resulting from production from 

the well on the adjacent Lewis lease. This demand was 

refused. U. V. Industries first received a copy of the 

mineral deed from Mrs. Danielson to her five children on 

August 2, 1972. All delay rentals through December 1972 

were paid and accepted. 

Prior to September 14, 1972, the spacing of wells 

drilled on Section 10 was governed by statewide spacing 

orders issued by the Board of Oil and Gas Conservation. The 

statewide spacing order governing well spacing in the formation and depth to which the Lewis well was drilled in 

effect at the time the well was drilled provided that one 

well could be drilled and operated on each quarter section 

(160 acres). This order was changed by the ~oard's Order 

No. 16-71 of May 13, 1971, which provided that one well 
could be drilled and produced on 320 acres at this depth. 

Under the May 13, 1971 order, the 320 acre spacing unit 

would be composed of two contiguous north-south or east-west 

quarter sections designated by the lease operator, which did 

not necessarily have to be within the same section. 

On September 14, 1972, the Montana Oil and Gas Conservation Board held a hearing at which respondents and applicant U. V. Industries were represented. The Board issued a 

specific well spacing order superseding the statewide spacing order for the particular production field involved in 

the present controversy (Lonetree Creek field). This order 

designated the N1/2 of Section 10 as a production spacing 

unit. The designated well spacing unit includes the existing, producing Lewis well on the NW1/4 and it also includes 

the NE1/4 owned by the respondents, where they are alleging 

applicants had a duty to drill an offset well. Subsequently, 

on September 15, 1972, all parties entered a voluntary 

pooling and unit agreement covering this field. 

Respondents brought the present action seeking damages 

under the common law "offset drilling rule." The common law 

theory implies in every oil and gas lease a covenant on the 

part of the lessee to protect the premises of his lessor 

from drainage of an adjacent producing well by drilling an 

offset well. 

The threshold issue is: (1) Whether or not the common 

law judicial remedy of a civil suit for damages in state 

District Court under the offset drilling rule has been 

abolished by enactment of the 1953 Montana Oil and Gas 

Conservation law; i.e., does the Board of Oil and Gas Conservation have exclusive jurisdiction to determine such 

controversies? If this question is determined adversely to 
applicants, there are several subsidiary issues: 

(2) Was the lessor or her grantees (respondents) required to serve written notice or demand on the lessee or 

its assigns (applicants) to drill an offset well; if so, did 

the lessee have a reasonable time thereafter in which to 

comply; and, when does the obligation of the lessee, if any, 

to pay damages commence? 

(3) What is the effect of the "no change in ownership 

until written notice" clause in the lease and certain provisions of the mineral deed on the rights of the parties? 

(4) What is the appropriate statute of limitations? 

The applicants' contentions are as follows: 

Issue - #l. Enactment of the 1953 Oil and Gas Conservation Act, sections 82-11-101 et seq., MCA, has eliminated 

and abolished actions to prevent drainage by producing wells 

on adjacent land based on the common law offset drilling 

rule theory. The power to conduct public evidentiary hearings, issue subpoenas, establish well spacing units, order 

involuntary pooling of interests within the same, grant or 

deny permission to drill wells, prevent waste and protect 

correlative rights is now committed by statute to the discretion of the Board of Oil and Gas Conservation. State District Courts, therefore, no longer have jurisdiction to 

entertain and decide an isolated part of the whole scheme of 

discretionary administrative determinations vested in the 

Board by statute. Involuntary pooling of interests within a 

well spacing unit by order of the Board affords the same 

kind of relief as was formerly granted by the common law 

judicial remedy of a civil suit for damages in the state 

District Court under the offset drilling rule. At any time 

after they acquired their interest and before the Board 
order of September 14, 1972, plaintiffs-respondents had the 

statutory right to apply to the Board of Oil and Gas Conservation for relief but did not do so. No implied covenant 

can exist which would authorize a District Court to require 

a lessee to drill an offset well without permission of the 

Board, or one which would, if drilled, violate statutory 

purposes or restrictions or a valid order of the Board, nor 

award damages if the lessee failed to do so. 

Second, the same issues of fact regarding the extent 

and location of the reservoir or pool with respect to the 

lands, and whether or not the Lewis well does in fact drain 

oil from beneath the NE1/4, are involved in both a common 

law action based on implied covenant and any statutory 

proceedings before the Board. Plaintiffs-respondents cannot 

collaterally impeach the Board's determination of these same 

factual issues, which it has already decided and which are 

res j udicata. Furthermore, the District Court cannot 

invade the power to make discretionary determinations vested 

by statute in a state board such as where, how many, and 

under what circumstances wells can be drilled and the spacing and pooling thereof. It cannot substitute its discretion for a valid discretionary order made by the ~oard. 

Third, plaintiffs-respondents waived their right, if 

any, to require applicants to drill an offset well to protect them from drainage by a producing well on the ~ewis 

tract by their acceptance of delay rental payments through 

December 1972. 

Issue - #2. The following arguments need only be considered if the Court determines the threshold issue adversely 

to the applicants; that is, if the Court decides that the 

remedy of a civil suit for damages in the ~istrict Court is 
still available for a lessee's breach of the implied covenant to protect his lessor from drainage by drilling an 

offset well. First, the lessor or her grantees were required 

to serve written notice or demand on the lessee or his 

assigns (applicants) to drill an offset well. This is 

required under the common law drilling rule. Berthelote v. 

Loy Oil Co. (1933), 95 Mont. 434, 28 P. 2d 187. Since no 

notice or demand was made until the demand letters of July 1 

and July 26, 1972, applicants could not be under any duty to 

drill an offset well before those dates. Furthermore, the 

law gives a lessee a reasonable time in which to drill an 

offset well following demand by his lessor, and subjects the 

lessee to damages for failure to do so only after a reasonable time has passed. Applicants here did not have a reasonable time to comply after they received notice, because a 

reasonable time would be longer than the two and one-half 

months that elapsed before the parties entered a voluntary 

pooling and unit agreement. Therefore, the obligation to 

pay damages never accrued. 

Issue - #3. The oil and gas lease from Hilda Danielson 

to Empire State Oil Company provides that "[nlo change in 

the ownership of the land or assignments of rentals or 

royalties shall be binding on the lessee until after the 

lessee has been furnished with a written transfer or assignment or a true copy thereof . . ." and the mineral deed from 

Hilda Danielson to the three plaintiffs-respondents provided 

that it was subject to any rights existing in the lessee or 

its assigns. The law recognizes the validity of such "no 

change in ownership" clauses, and because applicants received no actual or constructive notice that Hilda Danielson 

had conveyed her interest to plaintiffs until August 2, 
1972, plaintiffs cannot assert any rights against the defendants before that date under the terms of the lease. 

Issue - #4. This action is barred by Montana's two-year 

statute of limitations for waste or injury to real or personal property in section 93-2607, R.C.M. 1947 (subsequently 

amended in 1975, and now sections 27-2-207 and 27-2-303, 

MCA) . 

All parties are in agreement that the common law offset 

drilling theory was the applicable rule in Montana, at least 

before enactment of the 1953 Oil and Gas Conservation Act. 

The offset drilling rule was recognized in Berthelote v. Loy 

Oil Co. (1934), 95 Mont. 434, 28 P.2d 187, 190, and Severson 

v. Barstow (1936), 103 Mont. 526, 63 P.2d 1022, 1024-25. 

This common law rule implies in every oil and gas lease a 

covenant on the part of the lessee to protect the premises 

of his lessor from drainage by an adjacent producing well by 

drilling an offset well. Severson v. Barstow, supra. The 

purpose of implied covenants in general is to give effect to 

the intention of the parties to the lease. The intention of 

the parties is to produce oil and gas for a profit, which is 

recognized by the lessor as production royalties, the 

primary consideration he receives for his lease. Severson, 

63 P.2d at 1024; Berthelote, 28 P.2d at 190. Generally, the 

implied covenant to protect the premises from drainage by 

drilling an offset well is strictly applied, particularly 

when the lessee has an interest in the adjacent acreage on 

which the draining well is located, because of the permanent 

loss of oil that results to the lessor when it is drained 

from beneath his land. Gordon, Remedies for Breach of - 

Implied Covenants ---- in Oil and Gas Leases - in Montana (1967)t 

28 Mont.L.Rev. 187, 192-93. The implied duty of the lessee 
to protect the land from drainage is a duty to exercise 

reasonable care and diligence to prevent substantial drainage from the leased lands by drilling offset wells. "Reasonable care and diligence" is defined as that which a 

reasonably prudent operator would do under all of the circumstances of the particular situation to protect the 

interests of both the lessor and the lessee. 2 Summers, - 

Oil 

-- and Gas, S399, p. 572 (1968). 

Issue - #1. The first question certified to this Court 

by the United States District Court is whether or not the 

1953 Montana Oil and Gas Conservation Act has abolished the 

common law offset drilling rule and the judicial remedy of a 

civil suit for damages in state District Court. The primary 

purpose of the Act is to prevent "waste" of oil and gas, as 

that term is defined, by vesting power in the Board of Oil 

and Gas Conservation to regulate the drilling, producing, 

and spacing of wells and the pooling and utilization of oil 

and gas interests. Sections 82-11-101, -111, -121, -124, - 

201 and -205, MCA. The Act is largely based upon model 

legislation for an oil and gas conservation statute promulgated by the Interstate Oil Compact Commission. Marchi, 

Conservation - in Montana (1955), 17 Mont.L.Rev. 100, 102. 

The Montana Act, however, does not contain the provisions of 

the model law, nor any provisions whatsoever, directly 

relating to the protection of correlative rights. "Montana's Act makes no reference to 'correlative rights.'" 

Pattie v. Oil and Gas Conservation Commission (1965), 145 

Mont. 531, 402 P.2d 596, 599. This fact is important to an 

understanding of the three cases which have been decided to 

date under Montana's 1953 Oil and Gas Conservation Act. 
Nothing in the Act expressly abolishes the common law 

offset drilling rule or the judicial remedy of a civil suit 

for damages. Nevertheless, the Board of Oil and Gas Conservation has broad powers to conduct evidentiary hearings, 

establish well spacing units, order involuntary pooling of 

interests within such units, grant or deny permission to 

drill wells, and issue rules, regulations and orders to 

prevent waste. Applicants argue that the legislative assembly intended to substitute for the common law remedy an administrative determination of all the issues involved in the 

present case. 

The statute is not that broad. Section 82-11-144, MCA, 

provides that any interested person who is adversely affected 

by the Act or by a rule or order of the Board can obtain 

judicial review. The term "interested person" is broadly 

defined. The Act provides for restraining orders and injunctions (section 82-11-145, MCA), for an appeal to the Montana 

Supreme Court (section 82-11-146, MCA), and it allows the 

Board to bring suit for violations of the Act or of its 

rules or orders (section 82-11-147, MCA). Section 82-11- 

142, MCA, provides: 

"This chapter, a suit by or against the board, 

a violation charged or asserted against a person under this chapter, or a rule or order 

issued under this chapter does not impair, 

abridge, or delay a cause of action for damages 

or other civil remedy which a person may have 

or assert against a person violating this chap- 

----- ter or a rule or order issued under - it." (Emphasis supplied.) 

These are the only provisions of the Act that address judicial actions. None of them purports to restrict any of the 

common law remedies available to private litigants, especially where the common law cause of action would not conflict with a valid rule or order of the Board. On the other 
hand, the savings provision contained in section 82-11-142, 

MCA, applies only to a cause of action against a person 

"violating this chapter or a rule or order issued under it." 

This savings clause clearly does not address the common law 

remedies for implied covenants. In summary then, the 1953 

Oil and Gas Conservation Act is silent in respect to common 

law causes of action. 

Section 82-11-201, MCA, allows the Board, in the interest 

of preventing waste, to establish well spacing units for a 

pool of oil or gas and to grant exceptions in appropriate 

cases allowing a well to be drilled outside the location 

generally authorized by the Board's spacing orders. Furthermore, "[tlhe size and the shape of spacing units shall be 

such as will result in efficient and economic development of 

the pool as a whole, and the size shall be the area that can 

be efficiently drained by one well." Section 82-11-201(2), 

MCA . 

There are two ways in which the Board of Oil and Gas 

Conservation establishes well spacing units. The first is 

by a statewide spacing order pursuant to ARM 536-3.18(10)- 

S18040. Such an order is issued on the Board's own motion 

without the necessity of notice or hearing. The statewide 

order affects all areas of Montana as to which the Board has 

not issued a specific spacing order. The second way is by a 

specific order of the Board upon application of an interested 

party. A specific order, issued after notice and hearing 

before the Board, covers a specific area overlying a pool or 

reservoir of oil or gas. 

Prior to September 14, 1972, the spacing of wells 

drilled on Section 10 was governed by statewide spacing 

orders issued by the Board of Oil and Gas Conservation. The 
statewide spacing order governing well spacing in the formation and depth to which the Lewis well was drilled, in 

effect at the time of drilling, provided that one well could 

be drilled and operated on each quarter section (160 acres). 

 his order was changed by the Board's Order No. 16-71 of May 

13, 1971, which provided that one well could be drilled and 

produced on 320 acres at this depth. Under the May 13, 

1971, order, the 320 acre spacing unit would be comprised of 

two contiguous north-south or east-west quarter sections 

designated by the lease operator, which did not necessarily 

have to be within the same section. 

On September 14, 1972, the Board of Oil and Gas Conservation held a hearing, at which respondents and applicant 

U. V. Industries were represented. The Board issued a 

specific well spacing order superseding the statewide spacing order for the particular production field involved in 

the present controversy (Lonetree Creek field). This order 

designated the N1/2 of Section 10 as a production spacing 

unit. The designated well spacing unit includes the existing, producing Lewis well on the NW1/4 and it also includes 

the NE1/4 owned by respondents, where they are alleging 

applicants had a duty to drill an offset well. 

In summary, then, the applicable statewide spacing 

order in effect before May 13, 1971, would allow two wells 

to be drilled on respondents' property; one on the ~~1/4 and 

one on the SE1/4. After May 13, 1971, and before the ~oard's 

specific well spacing order of September 14, 1972, the 

applicable statewide well spacing order would allow only one 

well to be drilled on respondents' property, which comprised 

320 acres (E1/2 of Section 10) - 
State laws and the Board's orders and rules are incorporated into oil and gas leases as a matter of law. Armstrong v. High Crest Oils, Inc. (1974), 164 Mont. 187, 520 

P.2d 1081, 1084. The Danielson lease itself subjects all of 

its express and implied covenants to these state provisions. 

Williams and Meyers, in their treatise Oil ---- and Gas Law 

(1959), state the following in regard to the effect of 

conservation laws, and well spacing regulations in particular, on implied covenants: "The suggestion has been made 

that conservation laws put an end to implied covenants in 

oil and gas leases. In Mark Twain's phrase, reports of the 

death are greatly exaggerated." 5 Williams and Meyers, 

supra, 5865 p. 438. Well spacing regulations affect the 

implied covenant to protect from drainage. A lessee who 

fails to drill an offset well - in violation of a valid well 

spacing regulation does not breach his duty under the prudent operator standard. 5 Williams and Meyers, supra, 5866, 

p. 440, citing cases from other jurisdictions. This is true 

even though substantial drainage results. Well spacing 

regulations do not eliminate the offset drilling covenant, 

but they override the covenant when the two are - in conflict 

with each other. 5 Williams and Meyers, supra, 5866, p. 

441, citing cases from other jurisdictions. "If the drilling 

of an offset well is opposition - to existing rules and 

regulations of the conservation commission, the implied 

covenant to prevent drainage is inapplicable." Sullivan, 

Handbook ----- of Oil and Gas Law, 593, p. 177; 5101, p. 191 

(1955). Both this rule of law and also the express terms of 

the Danielson lease relieve the lessee of liability for 

damages only if he is prevented from performing his obliga- 
tions under the lease by such state law, rule or order. 

Montana's statutes and case law recognize these principles 

in the analogous situation of statutory unitization: 

"Operations conducted pursuant to an order of 

the board providing for unit operations shall 

constitute a fulfillment of all the express or 

implied obligations of each lease or contract 

covering lands in the unit area to the extent 

that the obligations cannot be performed because 

of the order of the board." Section 82-11- 

211(2), MCA. 

See also, Armstrong v. High Crest Oils, Inc., supra. 

The relevant question becomes: would the offset well 

that respondents claim applicants had a duty to drill to 

protect their premises from drainage under the offset drilling 

rule be in violation of the Board's well spacing requirements? 

"Where an operator could protect against drainage by drilling 

a well that would be profitable and would not violate conservation regulations, failure to offset is a breach of covenant." 

5 Williams and Meyers, supra, 5866, p. 442, citing cases 

from other jurisdictions. (Emphasis added.) 

Contrary to applicants' contentions, nothing in the 

1953 Act or any rule, regulation or order of the Board 

prevented the lessee from complying with its implied covenant to drill an offset well. The statewide spacing orders 

applicable to the lease during the period of uncompensated 

drainage did not restrict applicants' ability to offset the 

Lewis well. Applicants were not prevented from drilling an 

offset well on the NE1/4 of Section 10 until the specific 

well spacing order of September 14, 1972, placed the Lewis 

well and the NE1/4 of Section 10 in the same well spacing 

unit. Therefore, since it would not be in conflict with any 

applicable state law or Board rule, regulation or order, the 

implied covenant to drill an offset well was in effect 
between the parties to the lease, and respondents have a 

civil suit for damages as their remedy for applicants' 

breach of the implied covenant. 

The 1953 Oil and Gas Conservation Act provides for the 

voluntary and involuntary pooling of interests within a 

spacing unit: 

"When two or more separately owned tracts are embraced within a spacing unit or when there are 

separately owned interests in all or a part of 

the spacing unit, then the persons owning those 

interests may pool their interests for the development and operation of the spacing unit. 

In the absence of voluntary pooling within the 

spacing unit, the board, upon the application 

of an interested person, may enter an order 

pooling all interests in the spacing unit for 

the development and operation thereof. The 

pooling order shall be made after hearing and 

shall be upon terms and conditions that are just 

and reasonable and that afford to the owner of 

each tract or interest in the spacing unit the 

opportunity to recover or receive without unnecessary expense his just and equitable share 

of the oil or gas produced and saved from the 

spacing unit. . ." Section 82-11-202(1), MCA. 

(Emphasis supplied.) 

Section 82-11-201(3), MCA, grants the Board authority 

to allow exception wells in appropriate situations: 

"Subject to this chapter, the order establishing 

spacing units shall direct that no more than one 

well may be drilled and produced from the common 

source of supply on any spacing unit and that 

the well shall be drilled at a location authorized by the order, with -- such exception as may 

- be reasonably necessary where it is shown, upon 

application, notice, and hearing, and the board 

finds that the spacing unit is located on the 

edge of a pool or field and adjacent to a producing unit or, for some other reason, the requirement to drill the well at the authorized 

location on the spacing unit would be inequitable or unreasonable." (Emphasis supplied.) 

Applicants contend that at any time before September 

14, 1972, respondents could have, but failed to, apply to 

the Board for an exception well, or if an exception well 

would have constituted waste and thus been unlawful, for an 

involuntary pooling order pooling their interests with those 
of the Lewis well. They argue that the common law offset 

drilling rule has been superseded by the administrative 

remedy, on the grounds that the involuntary pooling of 

interests within a well spacing unit by order of the Board 

affords the same kind of relief as was formerly granted by 

the common law judicial remedy of a civil suit for damages 

in state District Court. 

The applicantst argument is faulty for several reasons. 

First, the Act does not compel respondents to apply to the 

Board for relief, as the administrative relief is purely 

optional with an interested person who may apply for it. 

Second, the administrative remedy of obtaining a permit to 

drill an offset well was not available to respondents 

because under the terms of the Danielson lease, as is generally the rule in oil and gas leases, the lessee was given 

the sole and exclusive right to drill. Rieckoff v. Consolidated Gas Co. (1950), 123 Mont. 555, 217 P.2d 1076, 1081. 

Respondents themselves consequently had no right under the 

lease to apply to the Board for a permit to drill an offset 

well. To the contrary, the applicants had a duty to apply 

for such a permit if one were necessary under the implied 

covenant of good faith and fair dealings. Baldwin v. Hubetz 

(Calif. 1957), 307 P.2d 1005. 

A third reason why applicantst argument is unpersuasive 

is that the Board of Oil and Gas Conservation does not have 

any authority to adjudicate disputes involving private 

rights. Pattie v. Oil and Gas Conservation Commission, 

supra, 402 P.2d at 601, holds that the Board "has the authority and duty to consider correlative rights and private 

interests in making regulatory orders, but it does not - have 

the authority to adjudicate disputes involving these rights," 
and that "correlative rights disputes between adjacent 

landowners must be disposed of by civil action in the District Courts" according to common law principles of oil and 

gas, citing Sullivan, Handbook ----- of Oil and Gas Law, S141, p. 

262 (1955). (Emphasis supplied.) The present case is 

primarily concerned with respondents' private rights under 

an implied covenant of the lease as against the applicants 

as lessees. Correlative rights are peripherally involved 

here because two of the applicants, U. V. Industries, Inc., 

and Wolf Corporation, besides being assigns of the lessee, 

were also owners of interests in the adjacent Lewis lease 

where the draining well was located. "Correlative rights" 

were defined in Pattie, 402 P.2d at 599: 

"The term 'correlative rights' has been variously 

defined to mean those rights of each landowner, 

lessee, or operator in the common source of 

petroleum. The rights are limited to corresponding duties to the neighboring operator. The 

duties are not to take an undue amount of petroleum or to do injury to the common supply. Operation and production is to be carried on only in 

such manner or amount as not to harm the rights 

of the others. As it applies in this action, 

correlative rights would mean the interest of 

plaintiffs in securing a portion of the natural 

gas underlying their lease. Their opponent is 

the Commission rather than an adjacent owner, 

but the right to share of the common supply is 

still in issue." 

The Pattie case involved oil and gas lessees on adjoining lands. Sumatra had applied to the Board and been granted 

permission to drill an oil well within lawful spacing limits. 

The well produced gas instead and was in violation of the 

well spacing rule for gas. Sumatra applied to the Board for 

an exception to spacing rule for gas wells. Plaintiffs, who 

were the lessees on the adjoining lands, also applied to the 

Board for an exception to drill an offset well to protect 

their correlative rights. The Board authorized Sumatra's 
well as an exception well, but denied plaintiffs' request 

for permission to drill an offset on the grounds that the 

Board lacked authority to consider correlative rights. 

Plaintiffs obtained judicial review of the Board's order in 

the ~istrict Court, which found that the Board had authority 

to adjudicate correlative rights. The Supreme Court affirmed, 

modifying the District Court's holding to mean only that the 

Board had authority to consider correlative rights in 

issuing its regulatory orders, but -- that the adjudication of - 

those rights remained -- in the courts. 

The issue in Pattie arose because Montana's 1953 Oil 

and Gas Conservation Act makes no reference to correlative 

rights. Reduced to simplest terms, the holding in Pattie is 

that notwithstanding the absence of any reference to correlative rights in the Act, the legislature intended that the 

Board consider those rights in issuing its regulatory orders, 

relying on what is now section 82-11-201(3), MCA. Pattie 

therefore cannot be cited in support of the argument that 

the 1953 Act has abolished the common law offset drilling 

rule. Furthermore, while Pattie may be narrowly construed 

to apply only to correlative rights, as was the specific 

holding in the case, it is more reasonable to interpret it 

broadly to apply to other private interests such as respondents' rights under the covenant implied by the offset 

drilling rule. In the latter situation, the holding would 

be support for respondents' position that the Board lacks 

authority to adjudicate disputes involving rights under the 

common law implied covenants. 

Chevron Oil Co. v. Oil and Gas Conservation C~mmi~sion 

(1967), 150 Mont. 351, 435 P.2d 781, adds nothing to the 

holding in Pattie. In Chevron the Board authorized the 
applicants' drilling of an offset exception well but denied 

Chevron's request to limit production of the offset well so 

as not to violate Chevron's correlative rights, as Chevron 

was lessee of the adjacent lands being offset by the exception well. Chevron's request for an order limiting production from the new offset exception well was denied by the 

Board on the grounds that it lacked authority to restrict 

production in the absence of a showing of waste. The District Court sustained this ruling by the Board. The 

Supreme Court reversed, relying on Pattie, and held that the 

Board had such authority to protect Chevron's correlative 

rights by limiting production from the adjacent exception 

well, notwithstanding the absence of a showing of waste. In 

the course of its discussion, the Court said: 

"Just as the Act protects the rights of the owner 

to capture his share of the oil and gas when the 

pool is only under part of his land, it must protect the adjoining landowners from having their 

share of the oil and gas appropriated by the 

exeption location well. To hold otherwise would 

be the equivalent to operating under the Rule of 

Capture theory but without the protection afforded an adjoining landowner under the Off-set 

Drilling Rule theory." 435 P.2d at 784. 

Applicants argue that this statement supports their contention that the Oil and Gas Conservation Act has eliminated 

the common law remedy of a civil suit for damages under the 

offset drilling rule. To the contrary, this statement by 

the Court merely draws an analogy to make the point that the 

Act protects the correlative rights of - all parties. It does 

nothing in the way of dispensing with the offset drilling 

rule. 

The final case relied on by applicants, Armstrong v. 

High Crest Oils, Inc. (1974), 164 Mont. 187, 520 P.2d 1081, 

says nothing to support their contention that Nontana's Oil 
and Gas Conservation Act has eliminated the common law cause 

of action under the offset drilling rule. High Crest, the 

assignee of a lease executed by Armstrong's predecessor in 

interest, applied to the Board and was granted, over Armstrong's protest, an order under the statutory unitization 

provisions of the Act unitizing a large tract which included 

the Armstrong lease. Armstrong filed a complaint for judicial review of the Board's order, as provided by the Act, 

and subsequently, while judicial review was pending, brought 

an action in another District Court to cancel the lease for 

breach of a one-well pooling provision in the lease. The 

Court held that because the same factual arguments and 

reasons were advanced by Armstrong in the suit for cancellation of the lease as were made in the action for judicial 

review of the Board's unitization order, the suit for cancellation was an attempt to circumvent the statute by an 

improper collateral attack on the Board's order. The Board's 

unitization order was held to be res judicata except in the 

appropriate District Court on judicial review as provided by 

what is now section 82-11-144, MCA. Armstrong v. High Crest 

Oils, Inc., supra, 520 P.2d at 1086. 

Applicants in the matter presently certified and before 

this Court urge that respondents cannot maintain a common 

law suit under the offset drilling rule because to do so 

would be a collateral attack upon the Board's order of 

September 14, 1972, establishing the Lonetree Creek field 

and special well spacing rules. The argument does not wash. 

First, respondents are not seeking to circumvent the Act as 

was the case in Armstrong since there was no decision of the 

Board to collaterally impeach before the order of September 

14, 1972, and no proceeding for judicial review pending. 
Second, respondents' contentions are supported, if anything, 

by the Board's September 14, 1972 order because the designation of the N1/2 of Section 10 as a well spacing unit tends 

to establish the fact of drainage alleged by respondents 

since a well spacing unit is required to be such as will be 

efficiently drained by one well. Section 82-11-201(2), MCA. 

Third, respondents are not seeking to do anything that would 

challenge the validity of the Board's order; their claim 

relates only to damages for the period before the Board 

issued its order. Finally, the Court in Armstrong stated: 

"We agree with respondents' argument that the cancellation 

of the oil and gas lease may be a separate issue upon which 

another court may have jurisdiction." 520 P.2d at 1084. In 

the present situation, the suit for damages for breach of an 

implied covenant, like a suit for cancellation of the lease, 

is a separate issue. 

Applicants emphasize that the remedy of applying to the 

Board of Oil and Gas Conservation for an involuntary pooling 

order was at all pertinent times available to respondents. 

This relief was available to the respondents under section 

82-11-232, MCA. Respondents argue, without citing any 

authority, that the administrative relief available under 

the involuntary pooling statute is only available in the 

event the Board has issued, after notice and hearing, a 

specific well spacing order, and that it is not available in 

those areas where only statewide is applicable, as was the 

case here before September 14, 1972. This argument ignores 

the fact that respondents had the right, as interested 

persons, to apply to the Board for a specific well spacing 

order under section 82-11-201(1), MCA. Although the remedy 

of applying to the Board for an involuntary pooling order 
was available to respondents as an alternate form of relief, 

it was not, however, their only remedy to the exclusion of 

the common law offset drilling rule. See the discussion in 

5 Williams and Meyers, supra, S866. 

~efendants allege plaintiffs waived their right to 

require defendants to drill an offset well by the acceptance 

of delay rentals through December 1972. The issue raised in 

defendants' brief is not one of the issues certified to this 

Court for a declaratory ruling as to Montana law, and it has 

not been briefed by plaintiffs-respondents. Therefore, it 

should not be considered. 

In summary of the first issue, the enactment of Montana's 

Oil and Gas Conservation Act has not, per se, eliminated the 

common law right of action under the offset drilling rule. 

An oil and gas lessee still has a duty under the implied 

covenant to protect his lessor's premises from drainage by 

drilling an offset well, if doing so would not be in violation of the Act or of a valid rule or order of the Board. 

Issue - #2. The second issue certified to this Court is 

whether or not the lessor or her grantees (respondents) was 

required to serve written notice or demand on the lessee or 

its assigns (applicants) to drill an offset well; if so, did 

the lessee have a reasonable time thereafter in which to 

comply; and when does the obligation of the lessee, if any, 

to pay damages commence? The offset drilling rule generally 

requires the lessor or its grantees to serve written notice 

or demand upon the lessee or its assigns to drill an offset 

well as a precondition to the latter's duty to drill. 

Sullivan, Handbook ----- of Oil and Gas Law, S94, p. 180 (1955). 

The rationale for this rule is explained in ~erthelote v. 

Loy Oil Co., supra, 28 P.2d at 190: 
". . . A usual implied covenant is one against 

drainage, which is not here involved. The necessity of drilling offset wells is not brought 

about by the acts of the lessee, but by those 

of third parties, unless the lessee owns adjoining acreage. Hence, before a breach of an implied covenant could be claimed as substantial, 

the necessity of protecting the leased premises 

must be brought home to the lessee in some manner 

by reasonable notice or demand on the part of 

the lessor." (Emphasis supplied.) 

This quotation, while it illustrates the obligation to give 

notice, also shows why the obligation is not applicable to 

two of the applicants in this case. Both U. V. Industries 

and Wolf Corporation owned an interest in the adjoining 

acreage and in the Lewis well which was causing the drainage 

to their lessors, the respondents. Thus, the reason for 

requiring notice--to bring home to the lessee the necessity 

of protecting the leased premises--does not apply. The 

drainage was not brought about by acts of third parties; it 

was brought about by a well in which U. V. Industries and 

Wolf Corporation held an interest. Since neither Empire 

State Oil Co. nor its successor, Ashland Oil Co., ever owned 

any interest in the Lewis lease, the foregoing reasoning 

does not apply to them. Plaintiffs-respondentsr as the 

lessor's grantees, were required to give notice before 

Empire State Oil Co. or Ashland Oil Co. could be charged 

with a duty to protect the premises from drainage. Since no 

such notice was ever given, neither Empire State nor Ashland 

can be held liable for breach of the implied covenant to 

drill an offset well. 

U. V. Industries, Inc. (formerly United States Smelting, 

Refining and Mining Company), took an assignment of the 

Lewis lease to the NW1/4 through its predecessor on March 8, 

1962. Although U. V. Industries subsequently assigned an 

undivided one-half of its interest in the lease on January 
13, 1970, it retained the remainder of its interest through 

and beyond the time that the Lewis well was drilled as a 

producer, February 3, 1970. Thus, it was not necessary for 

plaintiffs-respondents to give U. V. Industries notice or 

demand to drill an offset well to protect them from drainage, since U. V. Industries had knowledge of the drainage 

from the time the Lewis well was completed as a producer. 

Wolf Corporation eventually acquired the undivided onehalf interest in the Lewis lease that had been assigned to 

others by U. V. Industries except for a reversionary working 

interest not important here. This was accomplished by an 

assignment dated August 13, 1970, some six months after the 

Lewis well was brought in as a producer. Wolf Corporation 

thus had notice of drainage to the NW1/4 from at least the 

time it acquired its interest in the Lewis lease, and it was 

not necessary for plaintiffs-respondents to demand protection from Wolf Corporation. 

Under the reasonably prudent operator standard, the law 

gives a lessee a reasonable time in which to drill an offset 

well following either notice or demand by the lessor or its 

equivalent, acquisition by the lessee of an interest in the 

adjacent draining lands. 2 Summers --- Oil and Gas, S412, 414 

(1959). Therefore, the obligation to pay damages for failure 

to offset the producing Lewis well on the adjacent lease 

dates back to a reasonable time after the lessee had notice 

of the need to protect the premises from drainage. What 

constitutes a reasonable time is a question of fact. Summers, 

supra, S412. Thus, in the case of U. V. Industries, the 

obligation to pay damages dates from a reasonable time after 

March 23, 1971, the date that U. V. ~ndustries acquired the 

entire leasehold interest in the Danielson lease to the ~1/2 
of Section 10. The reason for this is that U. V. Industries 

held an interest in the adjacent Lewis lease and in the 

producing ~ewis well, and therefore knew about the drainage 

and the need to protect the Danielson premises, from the 

time it was drilled as a producer--February 3, 1970. 

On May 15, 1971, the predecessor of U. V. Industries 

assigned 3/8 of its interest in the Danielson lease to Wolf 

Corporation and 1/8 to other parties. Wolf Corporation's 

obligation to pay damages for breach of the implied covenant, 

therefore, begins a reasonable time after May 15, 1971. The 

reason for this is that Wolf Corporation held an interest in 

the adjacent Lewis well, and therefore knew about the drainage and the need to protect the Danielson lease, since 

August 13, 1970. 

The failure of respondents to give notice to Wolf 

Corporation at any time and their failure to give notice to 

U. V. Industries before the demand letters dated July 1, 

1972 and July 26, 1972, are irrelevant because both had 

notice of the need to protect respondents from drainage by 

virtue of their ownership of interests in the adjacent Lewis 

well which was causing the drainage. These defendants are 

liable for the covenants maturing while the lease is held by 

them as assignees. Hergistad v. Hardrock Oil Co. (1935), 

101 Mont. 22, 37, 52 P. 2d 171. 

Issue - #3. The Oil and Gas Lease from Hilda ~anielson 

to Empire State Oil Company provides that "[nlo change in 

the ownership of the land or assignments of rentals or 

royalties shall be binding on the lessee until after the 

lessee has been furnished with a written transfer or assignment or a true copy thereof . . ." and the mineral deed from 

Hilda Danielson to the three plaintiffs-respondents provided 
that it was subject to any rights existing in the lessor or 

its assigns. What is the impact of those provisions on the 

rights of the parties? The short answer is that they have 

no effect on the rights arising under the implied covenant 

here in issue. Defendants argue that because they received 

no notice of the change of ownership of the mineral estate 

until they received a copy of the mineral deed from a cograntee who is not a party to this case on August 2, 1972, 

plaintiffs cannot assert any rights against them before that 

date under the terms of the lease. 

A "no change in ownership without notice" clause is 

designed to prevent the lessee's forfeiture of the lease for 

failure to pay delay rentals to the proper party. Sullivan, 

supra, 854, p. 115. This clause is valid and is binding on 

the lessor's grantee. Sullivan, supra, S85. Such a clause 

has nothing to do with implied covenants, which run with 

the land and can be enforced by the lessor or its grantees 

against the lessee and its assigns. 3 Summers, --- Oil and Gas 

8553, p. 589 (1958). Additionally, applicants' argument 

ignores a provision in the lease to this effect: 

"If the estate of either party hereto is assigned 

or sublet, and the privilege of assigning or subletting in whole or in part is expressly allowed, 

the expressed and implied covenants hereof shall 

extend to the sub-lessees or assigns, their heirs, 

executors, administrators and successors . . ." 

Plaintiffs were therefore given the right, as mineral grantees, 

to enforce the implied covenant to protect against drainage 

and to sue for damages under the terms of the lease. Thus, 

plaintiffs' failure to give defendants notice of the transfer 

of ownership before August 1972 does not prevent them from 

enforcing the implied covenant to protect the land from 

drainage. To interpret the "no change in ownership without 
notice" clause in the manner contended for by the applicants 

would be to ignore the purpose of the clause. 

Issue - #4. The final issue is to determine the appropriate statute of limitations. Defendants-applicants contend 

that this action is barred by Montana's two-year statute of 

limitations for waste or injury to real or personal property 

in section 93-2607, R.C.M. 1947 (subsequently amended in 

1975, now sections 27-2-207 and 27-2-303, MCA). This is not 

a correlative rights suit for waste or injury to real or 

personal property. It is a suit by the grantees of an oil 

and gas lessor against the lessee and its assigns for breach 

of an implied covenant to protect from drainage by drilling 

an offset well. The implied covenant is as much a part of 

the written lease as the expressed covenants. Bertholote v. 

Loy Oil Co. (1933), 95 Mont. 434, 28 P.2d 187, 190, citing 

Brewster v. Lanyon Zinc Co. (8th Cir. 1905), 140 F. 801, 

809, stated: "Whatever is implied in a contract is as effectual as what is expressed." The appropriate statute of 

limitations is therefore eight years, the limitation for 

actions based on a written contract. Section 27-2-202(1), 

MCA . 

We concur: 

Chief Justice / 

' .I I\ ,LC ') ,,u C bL" 1 

Justices J