Case Name: UNION OIL COMPANY OF CALIFORNIA, Appellant, v. UNION SUGAR COMPANY (a Corporation), Respondent
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1948-01-16
Citations: 31 Cal. 2d 300
Docket Number: L. A. No. 19660
Parties: UNION OIL COMPANY OF CALIFORNIA, Appellant, v. UNION SUGAR COMPANY (a Corporation), Respondent.
Judges: 
Reporter: California Reports
Volume: 31
Pages: 300–341

Head Matter:
[L. A. No. 19660.
In Bank.
Jan. 16, 1948.]
UNION OIL COMPANY OF CALIFORNIA, Appellant, v. UNION SUGAR COMPANY (a Corporation), Respondent.
L. A. Gibbons, Jerry H. Powell, Douglas C. Gregg, Brobeck, Phleger & Harrison, Maurice E. Harrison and Moses Lasby for Appellant.
Cross & Brandt and Arthur H. Brandt for Respondent.

Opinion:
TRAYNOR, J.
Plaintiff brought this action for declaratory relief to obtain a determination of its drilling obligations under an oil and gas lease as modified by a supplemental agreement between the parties. Plaintiff appeals from a judgment entered in favor of defendant, Union Sugar Company.
The original lease was executed in 1936 between defendant, Union Sugar Company, as lessor, and Sovereign Oil Corporation, as lessee. B. H. Moore, Incorporated, a one-man corporation, hereinafter referred tó as Moore, succeeded to the rights of the lessee. Subsequently, plaintiff acquired the lease from Moore. The original lease gave the lessee the right to extract oil and gas from a tract of land containing approximately 6,700 acres for 20 years and for as long thereafter as hydrocarbon substances were produced from the land. The lessee agreed to pay the lessor a royalty of one-eighth of the proceeds from the sale of the oil and gas. Paragraph 7 of the lease provided that after the discovery of oil and gas in paying quantities, the lessee would continue to drill additional wells until it had drilled one well for each 10 acres held under the lease. It also specified the rate of drilling required of the lessee:
"After the discovery of oil or gas in paying quantities on the demised premises, Lessee agrees to continuously operate one string of tools with due diligence for the first year after such discovery, two strings of tools for the second year after such discovery, three strings of tools for the third year after such discovery, four strings of tools for the fourth year after such discovery, and five strings of tools thereafter until the drilling requirements herein specified are complied with. Lessee may defer the commencement of the next well to be commenced with each string of tools to be operated hereunder for a period of not to exceed three months after the completion of the well next preceding the well drilled with that particular string of tools. The lessee shall be entitled to drill as many additional wells on said land and premises as it desires. ' '
The original lease contains three clauses suspending the drilling requirements of paragraph 7. Paragraph 7, in addition to its other provisions, provides:
"Drilling and producing operations hereunder may also be suspended while the value of oil of the quality produced from said land, as defined in paragraph One hereof is Sixty Cents or less per barrel at the well, or when there is no available market for the same at the well at such price. ' '
Paragraph 10 of the lease contains a force majeure clause providing that the drilling requirements shall be suspended whenever the lessee is prevented from complying with the lease because of strikes, lockouts, actions of the elements, accidents, rules and regulations of any federal, state, municipal or other governmental agency, or because of other matters or conditions beyond the lessee's control.
Paragraph 33 provides that the lessee may suspend drilling operations if it is obligated to curtail production by reason of any valid order, rule, law or regulation of any federal, state or other governmental subdivision and such curtailment makes it impossible for the lessee to produce oil at a profit.
Two other provisions of the original lease are pertinent. Paragraph 9 of the original lease provides that the lessee agrees to drill offset wells whenever a well on adjoining property within 250 feet of the limits of the land contained within the lease is producing oil or gas in paying quantities. Paragraph 25 of the original lease provides that the lessee may surrender all or any part of the acreage and thus reduce the number of wells to drill.
Soon after the lease was executed, the Pacific Coast Railway Company, which owned a strip of land extending across part of the leased premises, became a party to the lease. This company was named as a defendant in the present action, but permitted its default to be entered and is not a party to this appeal.
In September, 1939, the price of oil produced at the wells on the leased premises dropped below 60 cents a barrel, and Moore, who was then the lessee, suspended drilling operations in accord with the provisions of paragraph 7. By this time, the lessee had spent over a million dollars in drilling 12 wells, two of which were dry, three wholly unprofitable, and the rest of moderate production. In October, the price of oil of the quality produced by these wells was from 45 to 46 cents a barrel at the wells. In that month. Moore and the Union Sugar Company commenced negotiations for a modification of the lease. In 1940, the defendant Union Sugar Company entered into a formal agreement with Moore. The agreement was entitled "Supplemental Contract" and was executed as of February 1, 1940, by defendant, Pacific Coast Railway Corporation, and Moore. By the terms of this agreement the parties agreed that the original lease "be and the same is hereby, modified in the following respects, to wit:
" (1) All obligations to drill additional wells, except off-set wells^ are hereby suspended for a period of two years from February 1, 1940.
" (2) At the expiration of said two year period, Moore shall be obligated to complete three wells per year.
"(3) Numerical paragraph (9) of the lease of April 8, 1936, [with respect to off-set wells] shall be modified by striking out '250 feet' wherever the same appears therein, and inserting in lieu thereof ' 330 feet. '
" (4) Commencing from the date of this supplemental contract, Moore agrees to pay a minimum royalty of $25,000.00 per year, payable monthly in advance, and said royalty shall be charged against the total oil reserves during the course of the life of the lease; that is to say, Moore shall be entitled to all oil and/or gas produced from said lease, or the proceeds thereof, until it is fully reimbursed from lessors' one-eighth royalty interest for the minimum royalty so paid.
" (5) Except insofar as the provisions of the lease of April 8, 1936, are in conflict herewith, the same shall remain in full force and effect. ' '
In 1940, plaintiff acquired the rights of Moore as lessee. On June 22,1942, defendant served on plaintiff a notice of default reciting that plaintiff was not operating two strings of tools on the leased property and was therefore not complying with the terms and conditions of paragraph 7 of the original lease, since the price of oil was then over 60 cents a barrel. The notice also recited that if this failure continued for 90 days after the date of the notice, the lease would terminate and the lessee's rights to drill additional wells would be forfeited. A controversy having arisen concerning the extent to which the supplemental contract modified the drilling obligations of paragraph 7 of the original lease, this action was brought. Plaintiff alleged that clause 2 of the "Supplemental Contract"' modified paragraph 7 so that the lessee after February 1, 1942 is only obligated to drill three wells a year regardless of the price of oil.
When the case first came on for trial the court sustained defendant's objection to the introduction of any extrinsic evidence with reference to the -negotiations and circumstances surrounding the execution of the supplemental agreement. The complaint was amended, and when the case came on for trial the second time defendant's objection to the introduction of this evidence was overruled and the evidence was admitted. The trial court, however, found that the drilling obligations of paragraph 7 were not modified by the "Supplemental Contract so as to obligate plaintiff only to complete three wells each year in lieu of the continuous operation of any specified number of strings of tools." Accordingly, the trial court concluded that the plaintiff, after February 1, 1942, and during the remainder of the terms of said lease, is bound by the drilling requirements of paragraph 7 of the original lease, and construed the modification clause as binding the plaintiff, "after February 1, 1942 . to complete in any event at least three wells each year on the premises described in said lease." (Italics added.)
This requirement, however, was held subject to the provisions of paragraph 10 of the original lease and "plaintiff is not required to perform the same if and while plaintiff is prevented from complying therewith in whole or in part by reasons of strikes, lockouts, action of the elements, accidents, rules and regulations of any Federal, State, Municipal or other governmental agency or other matters or conditions beyond the control of the plaintiff. ' '
From a judgment for defendant entered in accord with this conclusion, the plaintiff appeals, on the ground that the trial court erroneously construed the "Supplemental Contract" as not modifying the drilling requirements of paragraph 7 of the original lease. The first question presented by this appeal is whether the trial court acted properly in admitting evidence of negotiations between the parties as an aid to the interpretation of the supplemental contract. Both parties contend that apart from these negotiations the contract is susceptible of only one interpretation. They disagree, however, as to what that interpretation should be. Defendant contends that the trial court's interpretation must be sustained because the supplemental contract on its face provides that "All obligations to drill additional wells . . . are hereby suspended for a period of two years from February 1,1940. . At the expiration of said two year period, Moore shall be obligated to complete- [In any event at least] three wells per year. ' ' Plaintiff contends that the provision in question is clear on its face and reasonably susceptible of only one construction, namely "At the expiration of said two year period, Moore shall be obligated to complete [only] three wells per year." The basis of plaintiff's contention is that since the provision contains the word "obligated," it was intended to measure the obligation of the lessee and thus replaces the drilling requirements of paragraph 7 of the original lease. An examination of both the lease- and the "Supplemental Contract" makes it clear that they cannot be construed together without reading words into clause 2 of the latter instrument.
Once something has to be read into a contract to make it clear, it can hardly be said to be susceptible of only one interpretation. It would have been error for the trial court to read something into the contract by straining "to find a clear meaning in an ambiguous document, and having done so exclude the extrinsic evidence on the ground that as so construed no ambiguity exists." (Body-Steffner Co. v. Flotill Products, 63 Cal.App.2d 555, 562 [147 P.2d 84].) Moreover, the construction advanced by the defendant would not support the decision of the trial court. Merely reading the words "in any event" into the clause in question was not sufficient to clarify the meaning of the lease as modified, for the trial court held that plaintiff was not obligated to drill wells in any event. Paragraph 7 was not the only provision of the original lease providing for a suspension of drilling requirements. The trial court held that plaintiff's obligation to drill was subject to suspension in the event of strikes, accidents and other conditions specified in the provisions of paragraph 10 of the original lease but such obligation to drill would not be suspended by reason of the conditions specified in paragraph 33. This construction, if based only on the express wording of clause 2 of the ' ' Supplemental Contract, ' ' would be unreasonable, for it would require the court to read the clause as if it provided that "Moore shall be obligated to drill three wells per year [under all circumstances except those provided in paragraph 10 of the original lease but not including the provisions of paragraphs 7 and 33 thereof]."
It is thus apparent that the contract is not clear on its face, and under the theory of the parol evidence rule that has been accepted by the majority of this court, evidence of the negotiations of the parties and of surrounding circumstances was admissible for the purpose of determining the meaning of the lease as modified by clause 2 of the "Supplemental Contract." (Code Civ. Proc., § 1856, I860; Universal Sales Corp. v. California etc. Mfg. Co., 20 Cal.2d 751, 761 [128 P.2d 665]; Wachs v. Wachs, 11 Cal.2d 322, 326 [79 P.2d 1085]; Balfour v. Fresno Canal & Irrigation Co., 109 Cal. 221, 223 [41 P. 876]; Weinstein v. Moers, 207 Cal. 534, 540 [279 P. 444]; McNeny v. Touchstone, 7 Cal.2d 429, 433 [60 P.2d 986]; Body-Steffner Co. v. Flotill Products, supra, 63 Cal.App.2d 555, 561; McBaine, California Evidence Manual, § 408, 409.)
This conclusion does not run counter to the provision of the "Supplemental Contract" that "Except insofar as the provisions of the lease of April 8, 1936, are in conflict herewith, the same shall remain in full force and effect." It is clear that before this general provision can be applied, the meaning of the specific provisions of the agreement must first be ascertained in order to determine the extent to which they conflict with the original lease.
The question remains whether the trial court's conclusion as to the meaning of clause 2 of the supplemental contract can be affirmed on the basis of the extrinsic evidence. This evidence consisted of various letters between the representatives of the parties to the modification agreement and testimony with reference to a conference, during the cour.se of negotiations, between Moore's representative and the president and two directors of defendant corporation. The evidence with reference to the letters is not in conflict. The trial court made specific findings as to what occurred at the conference and found that the letters were properly mailed and received.
In October, 1939, Mr. Villard Martin, Moore's attorney, entered into negotiations with Mr. T. A. Twitchell, attorney for defendant, for the purpose of modifying the original lease. The evidence regarding these negotiations and the tentative plan agreed upon by the two representatives is contained in a letter written on October 14,1939, by Mr. Twitchell addressed to Mr. Edmunds Lyman, then president of defendant corporation, for the purpose of having Mr. Lyman submit the proposed plan to defendant's board of directors. The letter stated that "Mr. Moore desires to construct a topping plant to handle the oil from the lease, but does not desire to spend the money required to build this plant if he has to comply with the exist ing drilling requirements of the lease. ' ' The plan tentatively agreed upon by the two attorneys is outlined in the letter as follows:
"1. The Union Sugar Company shall agree to suspend all drilling obligations for a period of two years, except the obligation to drill offset wells. At first glance, this may appear to be too much of a concession, but on the other hand, at the present price of oil, Moore is not obligated to drill. Based upon my conversations with operators in the field, I do not believe that the price of this grade of oil is going above 60$ per barrel within the next two years. Of course, no one can foresee the future market conditions, and if oil should go to 60$ or more per barrel, the Company would lose the royalty on the allowable production from the wells which Moore would be required to drill if the lease was not modified. To offset this, the Company would begin to receive royalty from the lease immediately if the lease is modified and Moore constructs a topping plant.
"2. The existing proven area, comprising some 400 acres, would be zoned and in that zone, after two years, Moore would be required to drill 3 wells per year, provided that the price of oil is 60$ or more per barrel at the well, excepting when the following circumstances existed: . [at this point the letter contains further limitations on the requirement of drilling three wells a year which are not material to the case since they are not covered in the contract.]
"The provision calling for three wells per year was inserted because three wells per year would be all that Moore would be required to drill, assuming that he was operating with one string of tools. Martin said he might desire to drill three wells all at one time under contract rather than to allow 90 days to elapse between wells, as provided in the lease.
"3. Moore should not be obligated to drill any additional wells on any part of the leased property outside of the proven area, unless oil should be discovered in the property or adjacent property at such locations that it would appear probable that oil could be discovered and produced from a portion of the unproven area."
This plan was rejected by defendant's board of directors. The negotiations leading to it are important, however, for they indicate that at that time Moore was interested in building a refinery; that he wished to be relieved of drilling obligations for two years; and that thereafter he was to drill only three wells per year when the price of oil was over 60 cents. The letter is also relevant to show the connection between the requirement of paragraph 7 of the original lease that the lessee operate a certain number of strings of tools and the requirement of clause 2 that the lessee drill three wells since one string of tools will ordinarily drill one well a month. In view of the 90-day interval between the completion of one well and the beginning of another provided for in the original lease, one string of tools would apparently drill about three wells each year.
After entering into the foregoing negotiations with Mr. Twitchell, Moore's attorney returned to Tulsa, Oklahoma. The trial court found that, "in December 1939 [Mr. Martin] again went to California; that upon his return to California he had a conference with Eoland E. Tognazzini, Francis L. Cross and Fred Cooke respecting a possible modification of said Original Lease; that said Roland E. Tognazzini was then President and said Francis L. Cross and said Fred Cooke were then directors of the defendant Union Sugar Company ; That during said conference said Villard Martin stated to said Roland E. Tognazzini that said E. H. Moore, In'c. considered the drilling requirements of said lease of April 8, 1936, as prohibitive and desired some relief therefrom and that said E. H. Moore, Inc. desired to have said drilling requirements modified so as to provide for a complete suspension of drilling operations for two years.
"That it is true that said Roland E. Tognazzini stated to Villard Martin that defendant Union Sugar Company 'had a situation where the Company because of a posted price of oil being less than 600 which was the figure in this particular lease stood not to receive revenue for a great many years to come' and that if said E. H. Moore, In'c. desired relief upon the drilling requirements of said Lease it would be necessary for them to pay an adequate consideration for it.
' ' That it is true that said Villard Martin returned to Tulsa, Oklahoma, and on January 11, 1940 wrote and sent to said Roland E. Tognazzini and said Roland E. Tognazzini in due course received the letter dated January 11, 1940. . . ." This letter repeated substantially the plan that had been submitted to defendant in Twitchell's letter of October 14, 1939. By a letter dated January 16, 1940, and addressed to Martin, defendant's president, Tognazzini, again rejected this proposal and made a counteroffer. This letter reads as follows: "In response to yours of the 11th, may I first advise that the terms and conditions contained therein are unsatisfactory.
"It was my impression from past conversations you had with my predecessor, and more recently, with Messrs. Cooke, Cross, and me that it was the desire of E. H. Moore, Inc. to obtain a modification of the present oil and gas lease existing between E. H. Moore, Inc., and the Union Sugar Company. In this connection, I expressed to you at our recent meeting that Union Sugar Company was desirous of cooperating with E. H. Moore, Inc., but only to the extent that both parties were to benefit mutually by said modification.
"I gathered definitely that the main desire for a modification on your part was to eliminate what you consider an onerous drilling clause. In this connection I stated that we would be willing to modify said drilling clause after due and proper consideration were given therefor.
"As I see the problem, it resolves itself down to a very simple one, to-wit: your desire to be released of the present drilling clause and be permitted to drill after a two year suspension of all drilling requirements, three wells per year. We on the other hand, desire to obtain a minimum royalty throughout the duration of the lease. In view of the fact that the present lease ties up some 6,700 acres and further, in view of the fact that E. H. Moore, Inc., has arbitrarily determined that 400 acres are proven, in spite of the fact that it is the consensus of opinion that considerably more acreage is oil bearing, it necessarily follows that to determine a minimum royalty based upon the unit plan as you have indicated in yours of the 11th, cannot logically follow.
"Both you and I, in obtaining a modification, desire to reduce it to its simplest form and to this extent I suggest the following, to-wit:
"(1) the suspension of all obligation to drill additional wells, except offset wells, for a period of two years from date of the modification,
" (2) the modifying of the paragraph 9, by striking out 250 feet and inserting in lieu thereof 330 feet, and in addition thereto, appropriate language to provide that when offset wells are being produced within said range, more or less, E. H. Moore, Inc. likewise produce,
" (3) at the expiration of the two year period, E. R. Moore, Inc. shall be obligated to drill three wells per year.
"The consideration for the above will be the paying of a minimum royalty of $25,000 per year, said royalty payable monthly in advance." (Italics added.)
It is notable that the wording of clause (1) of this proposal is almost identical with paragraph (1) of the modification agreement and that there is no substantial difference between the wording of clause 3 of the proposal and paragraph (2) of the agreement. (See McNeny v. Touchstone, 7 Cal.2d 429, 435 [60 P.2d 986].)
The proposal contained in the foregoing letter was eventually accepted by Moore but not without further negotiations. Moore replied to Tognazzini's letter on January 25, 1940, stating that clauses (1) and (2) were acceptable but that "there should be some conditions attached [to clause (3)] that would provide for an exemption from drilling obligations under certain possible market conditions and the price of oil." Moore also stated that the consideration asked by Tognazzini was not satisfactory, and Moore offered to pay $1,000 a month minimum advance royalty beginning February 1, 1940.
In a letter dated January 27, 1940, Tognazzini rejected this counteroffer and again offered the terms contained in his letter of January 16, 1940. He stated in his January 27th letter:
"It has been the policy of this company to cooperate to the fullest with its lessees, whomsoever, and it shall continue that policy in the future. In this particular case you have asked for concessions which in the final analysis operate exclusively unilaterally in your behalf.
"Because of your past financial performance on our property and the anticipated future performances in the same connection, we have been willing to entertain such a unilateral arrangement solely because of our desire to be cooperative. In entertaining such a modification, we have ashed only for a nominal sum of $25,000 per year, payable monthly in advance. Said consideration is really not a consideration, but merely a payment, monthly in advance, of a minimum royalty from presently known oil reserves; said royalty to be charged against the total oil reserves during the course of the life of the lease. So in effect any modification of this lease operates strictly to your added and new benefit and without any added benefit to us.
"You infer that the modification might commence as of February 1st. In this connection may I advise that the monthly meeting of the Board of Directors is to be held Wednesday, January 31st at 1:30 p. m. If you desire that I obtain from the Board at such meeting a ratification of the proposed modification, as contained in mine of January 16th, please notify me on or before said date. If that be your desire, it will be a simple matter to draw up a modification as heretofore outlined, the language pertaining thereto to be satisfactory to both parties." (Italics added.)
This offer was accepted by Moore in a letter dated January 29, 1940. Moore wrote:
"Replying to your favor of the 27th inst., I beg to advise that I have decided to accept your proposition and pay you an advance royalty equalling $25,000.00 per year, payable monthly in advance, beginning with the month of February. I am therefore enclosing herewith check for $2,083.33 being the first monthly payment on the proposed modification that you will submit to your Board of Directors on the 31st."
The letter continued with reference to matters not pertinent to this case. Moore concluded the letter as follows:
"I will request Mr. Martin to prepare a modification of the lease embodying the principles contained in our correspondence, and forward it to you within the next day or two. I would do it at this writing, but Mr. Martin is occupied now in the trial of a lawsuit that may cause a little delay, but if your Board authorized the modification, I think that is all that will be required. ' '
Mr. Tognazzini aelmowledged the check and reported that the proposal had been accepted by the board of directors of respondent in a letter dated February 1st, 1940, with the following language:
"In reply to yours of January 29th, I am pleased to advise that at the meeting of the Board of Directors yesterday afternoon the proposed modification of Oil Lease by and between Union Sugar Company and B. H. Moore, Inc., as contained in my letter to you of the 16th and accepted by you in yours of January 29th, was ratified.
"I am sure that Mr. Martin and I will be able to embody the principles agreed upon, to the satisfaction of all parties, and I shall do nothing further in this connection until I hear from Mr. Martin."
The trial court found that "thereafter and as of the date of February 1, 1940, defendant Union Sugar Company and the said E. H. Moore, In'c., entered into a written agreement entitled ' Supplemental Contract'. ." The Pacific Coast Railway Corporation signed the "Supplemental Contract," thus making it a binding modification of the original lease.
Considering the correspondence quoted above and the specific findings of the trial court with reference to the negotiations, the conclusion is inescapable that, except for the provision in regard to offset wells, the parties intended to relieve the lessee of the obligation to drill more than three wells a year after the expiration of the two-year period of suspension of drilling. These letters and findings show that the lessee wanted a two-year suspension of all drilling because he was contemplating the building of a refinery and that the defendant was willing to agree to this suspension because there was little likelihood that the lessee would be obligated under the lease to drill during that period in any event. The lessee also desired a modification of the drilling requirements of clause 7, subject to, limitations, based on market conditions and the price of oil. On the other hand, the lessor wanted an assurance of annual income from the lease and insisted that Moore, after the end of the two-year suspension, be required to drill three wells a year regardless of market conditions and the price of oil. The parties finally agreed to terms suggested by defendant's president, which were proposed as a concession to the lessee without any substantial benefit to the lessor except for the advance royalties. Given the explanation of these terms by defendant's president, it is clear that the parties agreed that the lessee would be obligated to drill three wells a year regardless of the price of oil or other market conditions, and that this obligation was in lieu of the drilling requirements of para graph 7 of the original lease. In consideration for this concession, the lessee agreed to pay advance royalties and to increase his drilling obligations in regard to offset wells.
The trial court nevertheless concluded not only that the parties did not intend to grant any concession to the lessee other than the two-year suspension, which the lessor's president had virtually admitted to be an unnecessary provision, but that the lessee had agreed to assume drilling obligations in addition to those under paragraph 7 of the original lease, to pay advance royalties, and to increase his obligations with respect to offset wells.
It is contended that the trial court erroneously interpreted the contract without regard to the extrinsic evidence. The trial court found "That it is untrue that the claims of defendant Union Sugae Company have created an ambiguity or that any ambiguity is apparent upon the face of said Original Lease as modified by said Supplemental Contract." If this "finding" was intended as a finding that extrinsic evidence was inadmissible, it is of course an erroneous conclusion of law. (Brant v. California Dairies, Inc., 4 Cal.2d 128, 133 [48 P.2d 13]; Wachs v. Wachs, 11 Cal.2d 322, 325 [79 P.2d 1085].) The trial court, however, admitted evidence with reference to the negotiations between the parties and made extensive findings thereon. It must therefore be assumed that the finding merely means that the trial court concluded that the contract, considered with reference to the evidence of these negotiations, was none the less susceptible of only one interpretation, namely the interpretation relied on by defendant. (Eastman Oil etc. Corp. v. Lane-Wells Co., 21 Cal.2d 872, 875 [136 P.2d 564].) The question remains, therefore, whether there was any evidence from which a reasonable inference could be drawn to support this conclusion. (Eastman Oil Corp. v. Lane-Wells Co., supra; Estate of Platt, 21 Cal.2d 343, 352 [131 P.2d 825]; Estate of Rule, 25 Cal.2d 1, 10 [152 P.2d 1003, 155 A.L.R. 1319].)
Defendant contends that the evidence with reference to the conference in San Francisco between Martin, as Moore's representative, and three directors of defendant corporation is in conflict and that a reasonable inference can be drawn from the evidence in defendant's favor, supporting the conclusion that the contract means that the drilling requirements of paragraph 7 of the original lease were not modified by the supplemental agreement.
Tognazzini testified that when Martin came to California after the submission of the plan outlined in the Twitchell letter of October 14th, 1939, the witness informed him that the proposal had been rejected by defendant's board of directors. The witness also testified that he stated at the conference that because of the price of oil, defendant, under the original lease, stood not to receive revenue for a great many years to come; that defendant was willing to agree to a two-year suspension of all drilling requirements; that "they were under no obligation to drill anyway; ' ' but that thereafter there should be a requirement that the lessee drill three wells a year when the price of oil was below 60 cents, as well as some provision for advance royalties. Tognazzini testified further that "Clause 7 [of the original lease] as such, or any other numerical paragraph was never mentioned" and that nothing was said at the conference as to what the drilling requirements would be after the two-year suspension whenever the price of oil should be above 60 cents; bnt on cross-examination, the witness admitted that Martin had stated that the drilling requirements under the original lease "were burdensome and prohibitory" and that Martin "in substance . . . again submitted the proposition that had been turned down which called for the drilling of three wells at the expiration of the two years if the price were sixty cents. ." According to the witness, the answer to this request was "that at the expiration of two years I would require that even though the price of oil be under sixty cents, there would have to be three wells drilled."
The director who testified at the trial, Francis L. Cross, testified that at the conference "Mr. Tognazzini and Mr. Martin did all the talking, Mr. Cooke and I merely sat in and listened to the conversation." His recollection of the discussion between Martin and Tognazzini was substantially the same as that of Tognazzini. This witness also testified that Martin brought up the question of a modification of the drilling requirement after the end of the two-year suspension period in the form of the plan outlined in the Twitchell letter, but that "Mr. Tognazzini told him unequivocally that that was out. ' '
The deposition of the third director, F. O. Cooke, who did not testify at the trial, remains for consideration. He stated that paragraph 7 of the original lease was not mentioned at the conference; that Martin did not state that the lessee wanted, in addition to a two-year suspension, "a modification of the lease so that they would [thereafter] only be required to complete three wells a year." When asked on cross-examination whether Martin suggested a modification along the lines of the Twitchell plan, Cooke stated that "I don't recollect. I think I will stand on that."
The foregoing evidence shows that there is support either for the conclusion that the question of modification of the drilling requirements after a two-year suspension of drilling was not raised at the San Francisco conference or for the conclusion that Martin suggested at the conference that the original lease should be modified along the lines outlined in the previous tentative understanding between Martin and Twitchell and that this suggestion was rejected.
In any event the points to be covered in a supplemental agreement were not decided upon in San Francisco. The negotiation continued by letters thereafter, and those letters comprehensively cover all the points finally agreed upon by the parties. The evidence is without conflict that the parties were unable to agree on the question of drilling requirements until some time after the San Francisco meeting.
The Twitchell plan should not be confused with the modification of drilling requirements proposed by Tognazzini in his letters of January 16, 1940, and January 25, 1940, accepted by Moore in his letter of January 29, 1940. The Twitchell plan reduced the drilling requirements to three wells a year when the price of oil was over 60 cents a barrel and suspended all drilling requirements except with respect to offset wells when the price of oil was below 60 cents a barrel and when other market conditions prevailed. This is the plan rejected by defendant. The counter proposal by Tognazzini was essentially different from the Twitchell plan in that Moore's drilling obligation (except for offset wells) was reduced to the drilling of three wells a year after two years and Moore was to drill these three wells regardless of the price of oil and other market conditions. This plan was not immediately accepted by Moore, for he wanted more concessions. (Moore's letter of January 25, 1940.) The concessions were refused, and in his letter of January 25, 1940, Tognazzini repeated the offer of January 16, 1940. This offer was accepted by Moore in his letter of January 29, 1940.
Defendant contends that a general finding that all allegations of plaintiff's complaint not found to be true are untrue, is in effect a finding that at the San Francisco conference modification of the drilling requirements of the lease after a two-year suspension was not discussed because plaintiff alleged that it was discussed. Defendant cannot rely on the specific findings of the trial court with reference to this conference, however, for there is nothing in those findings to indicate that the parties agreed that clause 7 was not to be modified, and nothing therein from which a reasonable inference could be drawn in conflict with the letters. The evidence as to what occurred at the San Francisco conference was in conflict, and the findings may be construed to the effect that there was no discussion at that time of any modification of the drilling requirements of the lease after a two-year suspension. It does not follow, however, that it is reasonable to draw an inference that the modification of the drilling requirements was never discussed by the parties or their representatives. The evidence is without dispute that the modification of the lease was discussed by Martin and Twitch-ell before the conference, but that the plan for a modification was rejected. The evidence is without dispute that on Martin's return to California to continue negotiations, he was informed by Tognazzini before the conference in question that this plan was rejected. A few days after the conference, he wrote a letter again proposing a modification of paragraph 7. The proposal was again rejected, but the modification of the drilling requirements of paragraph 7 was considered in virtually every letter between the representatives of the parties. All this evidence is without conflict.
Only if the letters are disregarded could an inference be drawn from the testimony with respect to the San Francisco conference, that the parties never considered the modification of paragraph 7 and consequently did not intend clause 2 of the supplemental contract to be the measure of the lessee's drilling obligations. The letters cannot be disregarded, for the trial court found that they were mailed and received. There is no authority for the proposition that such an inference must be drawn to sustain the judgment. The defendant relies on the majority opinion in Estate of Rule, 25 Cal.2d 1, 10-11 [152 P.2d 1003, 155 A.L.R. 1319], but that case is not authority for such a conclusion. The doctrine of the Rule case is that, "in the absence of findings of fact and conclusions of law, every intendment is in favor of the judgment or order appealed from and it is presumed that every fact or inference essential to the support of the order and warranted by the evidence was found by the court. . . . The rule is that an ' appellate court will accept or adhere to the interpretation [of a contract] adopted by the trial court—and not substitute another of its own—. . . where parol evidence was introduced in aid of its interpretation, and such evidence . . . is such that conflicting inferences may be drawn therefrom.' " (Italics added.) It is clear that this doctrine is inapplicable to the present case, for the trial court made extensive findings and conclusions of law with respect to the negotiations, including the letters and the intervening conference, and it cannot be assumed that the letters were not considered, for they were virtually incorporated into the findings. To apply the doctrine of the Rule case it would be necessary to infer that because there was no discussion of the modification at the San Francisco conference such a modification was never considered by the parties, and then to infer further that the parties did not intend such a modification. Since the letters, which show that the parties considered such a modification, were found by the trial court to be mailed and received, the evidence is not reasonably susceptible of an inference that would support the judgment. (See Estate of Platt, 21 Cal.2d 343, 352 [131 P.2d 825]; Eastman Oil etc. Corp. v. Lane-Wells Co., 21 Cal.2d 872, 875 [136 P.2d 564].)
The defendant also contends that the judgment of . the trial court is supported by the rule of construction embodied in Civil Code, section 1654 that "In cases of uncertainty not removed by the preceding rules [including section 1647 that a contract may be explained by reference to the circumstances under which it was made], the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist. The promisor is presumed to be such party. ." This rule on its face cannot support the judgment in the present case. Clearly it cannot be applied against the lessee as the promisor, for a basic issue in the ease is who was the promisor. Nor can it be said that the lessee caused the uncertainty to exist, for the evidence is without conflict that the precise modification was suggested by defendant's president in language that was copied almost verbatim into the formal document.
Defendant also contends that a reasonable inference might be drawn in support of the trial court's conclusion from the fact that the formal document was drawn up by Moore's attorney. The basis for this contention seems to be that Martin as a competent attorney should have known that the lease would be interpreted in favor of defendant, and that, therefore, unless he intended that interpretation, he would have inserted certain words that would have removed any uncertainty. Such an inference, however, assumes that Martin was aware of the ambiguity. The provision in question was taken from Tognazzini's letter of January 16th. That letter seems clear and unambiguous, and when considered in the context thereof, the provision itself likewise appears clear and unambiguous. There is no reason to assume that Martin was any more aware of the possibility of this ambiguity than Tognazzini, who suggested the modification and who signed the formal document without suggesting any changes in the disputed provision. There is no reason to assume that Tognazzini is any less competent than Martin, and it is difficult to comprehend why he did not insert into his proposal or into the formal document the words that defendant now claims must be read into the instrument. It certainly is not reasonable to support the judgment of the trial court on the basis of some appraisal of the relative competence of these two men.
The determination of the trial court that the lease as modified is capable of only one construction and that the parties intended that the drilling requirement of paragraph 7 would not be modified by clause 2 of the "Supplemental Contract" are without support in the evidence or any reasonable inference from the evidence. The specific findings as to the negotiations, and the evidence, which is without conflict in any essential element and not reasonably susceptible of conflicting inferences, show clearly that the parties intended to modify paragraph 7 of the original lease. It follows that the trial court's construction of the lease is erroneous.
The judgment is reversed.
Gibson, C. J., Edmonds, J., and Spence, J., concurred.
The view has been expressed that the requirement of ambiguity involved in the admission of extrinsic evidence "simply means that the language used by the parties must be susceptible to the meaning claimed to have been intended by the parties. ' ' (Dissenting opinion in Estate of Rule, 25 Cal.2d 1, 22 [152 P.2d 1003, 155 A.L.R. 1319].) Under this theory, extrinsic evidence is generally admissible to show the sense in which the parties used language embodied in the contract, whether or not the words appear ambiguous to the reader. (See concurring opinion in Universal Sales Corp. v. California etc. Mfg. Co., 20 Cal.2d 751, 776 [128 P.2d 665]; Best. Contracts, § 242, comment a; Holmes, The Theory of Legal Interpretation, 12 Harv.L.Rev. 417, 420; Wigmore on Evidence, (3d ed.) § 2458-2478; McBaine, The Rule Against Disturbing Plain Meaning of Writings, 31 Cal.L.Rev. 145.) In view of the fact that the instrument involved in this ease is not free from ambiguity, it is unnecessary to consider the applicability of this interpretation of the extrinsic evidence rule. (See Body-Steffner Co. v. Flotill Products, supra at 562.)
With respect to the modification of drilling requirements of the lease Mr. Martin's letter of January 11, 1940, contained the following proposal :
' ' All obligation to drill additional wells, except offset wells, are hereby suspended for a period of two years from the date of this contract.
"At the expiration of said two year period, Moore shall be obligated to drill three wells per year in any area consisting of approximately 400 acres, being that part of the leased premises which is considered proven territory and identified by a plat attached hereto as Exhibit A, provided that the price of oil is sixty cents per barrel, or more, at the well, except that Moore shall not be obligated to drill during the existence of either of the following conditions:
"(a) If Moore is unable to market oil to be produced from said property;
" (b) If operators in the field are unable to market 100 barrels, or more, per day from wells capable of producing 1500 barrels, or more, per day, and Moore would be unable to market 100' barrels, or more, per day from any well to be drilled by it on said property;
" (c) If Moore is unable to market any oil in addition to the quantity of oil produced from wells already drilled by Moore while said w.ells are being operated in compliance with good oil field practice. ' '
It has been suggested that this modification was proposed by Martin in a letter dated January 11, 1940. An examination of that letter, how evef, see footnote 2, supra, reveals that the modification there suggested, based on the price of oil and other market conditions, was clearly not the modification incorporated into the " Supplemental Contract. ' '