Source: https://supreme.justia.com/cases/federal/us/292/272/
Timestamp: 2019-04-19 08:22:36+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 292 › Sauder v. Mid-Continent Petroleum Corp.
1. Under an oil and gas lease on a royalty basis for a stated number of years and so long thereafter as oil or gas can be produced in paying quantities, a lessee who has produced oil in paying quantities from a fraction of the land and continues such production after the expiration of the primary term remains under an implied obligation to prosecute development of the other part. P. 292 U. S. 279.
2. The lessee, in the circumstances stated, cannot hold the undeveloped part of the land indefinitely, as against the lessor, merely because it may contain oil, and without drilling or any present intention to drill at any time in the future. P. 292 U. S. 279.
3. Where the lessee in an oil and gas lease covering a forty-acre tract and an adjacent half section produced oil on the forty acres, but for many years abstained from drilling on the half-section, held that the lessor was equitably entitled to have the lease cancelled as to the half-section unless, within a reasonable time, an exploratory well were drilled upon it. P. 292 U. S. 281.
Certiorari, 291 U.S. 655, to review the reversal of a decree cancelling in part an oil and gas lease in a suit begun by the lessor in a state court and prosecuted by his administratrix and heirs after removal.
Philip Sauder, as owner of the E. 1/2 of Sec. 16, Twp. 23, Range 13, Greenwood County, Kansas, and the S.E. 1/4 of the S.W. 1/4 of the same section, amounting in all to 360 acres, brought suit in a Kansas state court for the cancellation of an oil and gas lease. The cause was removed to the federal District Court, where, after Sauder's death, it was revived in the right of his administratrix and heirs. The lease was made June 6, 1916; by sundry assignments, the petroleum corporation had become the tenant. The recited consideration was $1 and the covenants and agreements on the part of the lessee. The term was ten years, and as long thereafter as oil and gas could be procured in paying quantities. The lessee was to deliver to the lessor one-eighth of the oil realized, and, if gas should be found, $100 per year was to be paid for each gas well so long as its product was sold or marketed. If no well were commenced within one year, all rights and obligations of the parties were to cease upon notice from the lessor to that effect, provided that the lessee should have the right to continue the lease in force from year to year until a well should be drilled by paying an annual rental of $1 per acre. The instrument provided that the lessee might enter upon the premises for the purposes of the lease, use water from any creek or pond or drill for water to run machinery for prospecting and for operating the wells, should have the exclusive right to erect, lay, and maintain pipe, machinery, and structures necessary for producing, storing, or transporting oil or gas. The contract ran in favor of and against the heirs, assigns, successors, and personal representatives of the parties.
nor have any locations for wells been made. On the date of the expiration of the fixed term, Sauder wrote the respondent stating that the lease had expired, and adding that he understood, if it was a profitable contract, respondent was supposed to operate, and, if not, he understood the term had run out, and the respondent should release all the tract except the portion on which the wells were being operated. He asked what action the respondent proposed to take. The reply was that respondent considered it had a paying lease, and would not surrender it.
The suit was instituted June 27, 1930. In addition to reciting the facts above outlined, the complaint asserted there had been development and production of oil on adjacent tracts, with consequent drainage of oil from the leased land; the respondent was bound to explore and develop the land, and had neglected so to do; unless the lease were cancelled, the respondent would continue to hold it for speculative purposes, and the plaintiffs be deprived of the objects and considerations for which the lease was made. The answer denied that the lease was being held for speculative purposes, denied the operations on surrounding tracts were causing drainage, alleged the drilling of the two wells was a fulfillment of the obligation to offset wells likely to drain from the demised premises, and denied any breach of the lease.
witnesses testified that, in their judgment, the geological formation, and the experience with wells drilled on nearby lands, made it so unlikely that oil would be obtained as to justify a prudent operator in abstaining from drilling additional wells on the Sauder tract.
in paying quantities. A decree was entered in accordance with the findings, adding the qualification that, as to tanks, pipes, and equipment located somewhat north of the acreage which the respondent was permitted to retain, these need not be moved until they should become obstacles to the development of the petitioners' land.
Upon appeal, the Circuit Court of Appeals (one judge dissenting) reversed the decree, holding that the respondent had not violated the covenants of its lease, and, until it should be guilty of a breach, it was entitled to continue to hold the whole tract. The reversal was without prejudice to the bringing of a new suit in the event changed conditions should indicate a breach of respondent's implied covenant to develop. We brought the case here by writ of certiorari.
The question for decision is whether the respondent failed to comply with an implied covenant to develop the tract with reasonable diligence. The petitioners' position is that, since the lease was of land in Kansas, the case is to be decided according to the rule of law adopted by the Supreme Court of the state, which is said to be more stringent as respects the lessee's obligation than that generally applied by state and federal courts. The majority of the Court of Appeals were of opinion that, at the date of the making of the lease, the law of the state, as evidenced by the decisions of its Supreme Court, was the same as that followed by the federal courts, and if, by decisions announced subsequent to the effective date of the lease, a broader rule was laid down, the federal courts ought not to apply it with retroactive effect. The petitioners assert that the court was in error in both conclusions.
It is unnecessary to inquire as to the law of Kansas, or the effect to be given it in this case, since we think that the rule followed generally requires a reversal of the decree dismissing the bill.
It is conceded that a covenant on respondent's part to continue the work of exploration, development, and production is to be implied from the relation of the parties and the object of the lease, and that this covenant was not abrogated by the expiration of the primary term of ten years. [Footnote 1] The matter in dispute is the respondent's alleged failure to comply with its obligation. The petitioners say that, if the lessee with good reason believes there is no mineral to be obtained by further drilling, it should give up the lease; the respondent insists that, as there is only a possibility of finding mineral, no prudent operator would presently develop, but the mere possibility entitles it to hold the lease, because it is producing oil from a portion of the area.
"The implication necessarily arising from these provisions -- the intention which they obviously reflect -- is that if, at the end of the five-year period prescribed for original exploration and development, oil and gas, one or both, had been found to exist in the demised premises in paying quantities, the work of exploration, development, and production should proceed with reasonable diligence for the common benefit of the parties, or the premises be surrendered to the lessor. "
"The object of the operations being to obtain a benefit or profit for both lessor and lessee, it seems obvious, in the absence of some stipulation to that effect, that neither is made the arbiter of the extent to which or the diligence with which the operations shall proceed, and that both are bound by the standard of what is reasonable."
"Whether or not in any particular instance such diligence is exercised depends upon a variety of circumstances. . . . Whatever, in the circumstances, would be reasonably expected of operators of ordinary prudence, having regard to the interests of both lessor and lessee, is what is required."
are both unfavorable to the discovery of oil or gas upon the east half of section 16 (the 320-acre tract). The respondent's officers state that they desire to hold this tract because it may contain oil, but they assert that they have no present intention of drilling at any time in the near or remote future. This attitude does not comport with the obligation to prosecute development with due regard to the interests of the lessor. The production of oil on a small portion of the leased tract cannot justify the lessee's holding the balance indefinitely and depriving the lessor not only of the expected royalty from production pursuant to the lease, but of the privilege of making some other arrangement for availing himself of the mineral content of the land.
The decisions [Footnote 3] on which the Circuit Court of Appeals relied recognize and apply the rule of Brewster v. Lanyon Zinc Co., supra, but are distinguishable because of a difference in the circumstances in which the rule was applied. Some of them involved the duty to drill wells to offset others brought into production on adjoining lands; others turned upon a waiver by the lessor of the lessee's obligation to explore, or the meaning of the phrase "so long as oil or gas is produced in paying quantities." In none of them was there a neglect to explore or develop for any such period as is here shown, or an expressed intention not to do so, in a comparable situation.
about 8 acres. The dissenting judge in the Court of Appeals thought that a decree should be entered cancelling the lease as to the 320-acre tract (the E. 1/2 of the Section) unless, within a reasonable time, an exploratory well should be drilled therein to the Mississippi lime, and that the 40 acres embraced in the S.E. 1/4 of the S.W. 1/4 of Section 16 should remain under the lease. We are of opinion that such a decree would recognize and protect the equities of both parties.
Allegheny Oil Co. v. Snyder, 106 F. 764; Brewster v. Lanyon Zinc Co., 140 F. 801; Acme Oil & Mining Co. v. Williams, 140 Cal. 681, 74 P. 296; Daughetee v. Ohio Oil Co., 263 Ill. 518, 105 N.E. 308; Gadbury v. Ohio & Indiana Consol. Nat. & Ill. Gas Co., 162 Ind. 9, 67 N.E. 259; Dinsmoor v. Combs, 177 Ky. 740, 198 S.W. 58; Harris v. Ohio Oil Co., 57 Ohio St. 118, 48 N.E. 502; Indiana Oil, Gas & Development Co. v. McCrory, 42 Okl. 136, 140 P. 610; Kleppner v. Lemon, 176 Pa. 502, 35 A. 109; J. M. Guffey Petrol. Co. v. Jeff Chaison Townsite Co., 48 Tex.Civ. App. 555, 107 S.W. 609; Hall v. South Penn Oil Co., 71 W.Va. 82, 76 S.E. 124; Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846.
Goodwin v. Standard Oil Co., 290 F. 92; Becker v. Submarine Oil Co., 55 Cal.App. 698, 204 P. 245; Daughetee v. Ohio Oil Co., 263 Ill. 518, 105 N.E. 308; Austin v. Ohio Fuel Oil Co., 218 Ky. 310, 291 S.W. 386; Prince v. Standard Oil Co., 147 La. 283, 84 So. 657; Indiana Oil, Gas & Development Co. v. McCrory, 42 Okl. 136, 140 P. 610; Texas Co. v. Ramsower, 7 S.W.2d 872; Jennings v. Southern Carbon Co., 73 W.Va. 215, 80 S.E. 368; Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846.
Goodwin v. Standard Oil Co. of Louisiana, 290 F. 92; Humphreys Oil Co. v. Tatum, 26 F.2d 882; Orr v. Comar Oil Co., 46 F.2d 59; Denker v. Mid-Continent Petroleum Corp., 56 F.2d 725; Pelham Petroleum Co. v. North, 78 Okl. 39, 188 P. 1069; Broswood Oil & Gas Co. v. Mary Oil & Gas Co., 164 Okl. 200, 23 P.2d 387.

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