Title: U V INDUSTRIES INC v DANIELSON
Citation: N/A
Docket Number: 14755
State: Montana
Issuer: Montana Supreme Court
Date: October 31, 1979

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 M r . ~ u s t i c e Gene B. Daly delivered t h e Opinion of t h e Court. This matter i s before t h i s Court on c e r t i f i c a t i o n from t h e United S t a t e s D i s t r i c t Court f o r t h e D i s t r i c t of Montana. Plaintiffs-respondents a r e grantees under a mineral deed from the owner and l e s s o r of the o i l and gas beneath t h e ~ 1 / 2 of s e c t i o n 10 i n Richland County, Montana. Defendants- applicants a r e t h e l e s s e e and its assigns under t h e "Daniel- son" o i l and gas l e a s e covering t h i s t r a c t ; some of t h e applicants a r e o r were a l s o l e s s e e s under t h e "Lewis" o i l and gas l e a s e covering an adjacent t r a c t , t h e NW1/4 of s e c t i o n 10. O n May 1 2 , 1975, respondents, t h e grantees, brought s u i t i n s t a t e D i s t r i c t Court i n Richland County, requesting damages from t h e applicants f o r t h e period be- tween February 3, 1970 and September 1 4 , 1972, f o r f a i l u r e t o d r i l l an o f f s e t w e l l t o p r o t e c t t h e i r o i l i n t e r e s t s from drainage by a producing w e l l on an adjacent t r a c t of land ( L e w i s l e a s e ) . The case was removed t o t h e United S t a t e s D i s t r i c t Court f o r t h e D i s t r i c t of Montana, which has c e r t i - f i e d s e v e r a l i s s u e s t o t h i s Court f o r declaratory judgment regarding applicable Montana law, on a p p l i c a t i o n of t h e lessees pursuant t o Rule 1 of the Rules of t h i s Court. The f a c t s i n t h i s case a r e complex, b u t the p a r t i e s a r e i n s u b s t a n t i a l agreement a s t o those f a c t s , which follow i n summary form. There are two o i l and gas l e a s e s involved i n t h i s suit--the "Danielson" l e a s e covering t h e E1/2 of S ~ C - t i o n 1 0 , and t h e "Lewis" l e a s e covering t h e adjacent NW1/4 of Section 10. On December 30, 1968, Hilda ~ a n i e l s o n , respondents' mother and predecessor i n i n t e r e s t , executed a five-year primary term, "unless delay r e n t a l s " o i l and gas l e a s e ( " ~ a ~ i e l s o n " l e a s e ) t o applicant Empire S t a t e o i l Co., which subsequently assigned it t o t h e o t h e r 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 re- ceived 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 forma- tion 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 d r i l l e d and produced on 320 a c r e s a t t h i s depth. Under t h e May 13, 1971 order, t h e 320 a c r e spacing u n i t would be composed of two contiguous north-south o r east-west q u a r t e r sections designated by t h e l e a s e operator, which d i d n o t necessarily have t o be within t h e same section. O n September 1 4 , 1972, the Montana O i l and Gas Conser- vation Board held a hearing a t which respondents and appli- c a n t U. V. I n d u s t r i e s were represented. The Board issued a s p e c i f i c well spacing order superseding t h e statewide spac- ing order f o r t h e p a r t i c u l a r production f i e l d involved i n t h e present controversy (Lonetree Creek f i e l d ) . This order designated t h e N1/2 of Section 10 a s a production spacing u n i t . The designated w e l l spacing u n i t includes t h e e x i s t - ing, producing L e w i s w e l l on t h e NW1/4 and it a l s o includes t h e NE1/4 owned by t h e respondents, where they a r e a l l e g i n g applicants had a duty t o d r i l l an o f f s e t well. Subsequently, on September 15, 1972, a l l p a r t i e s entered a voluntary pooling and u n i t agreement covering t h i s f i e l d . Respondents brought the present a c t i o n seeking damages under t h e common l a w " o f f s e t d r i l l i n g r u l e . " The common l a w theory implies i n every o i l and gas l e a s e a covenant on t h e p a r t of t h e l e s s e e t o p r o t e c t t h e premises of h i s l e s s o r from drainage of an adjacent producing w e l l by d r i l l i n g an o f f s e t well. The threshold i s s u e is: (1) Whether o r n o t t h e common law j u d i c i a l remedy of a c i v i l s u i t f o r damages i n s t a t e D i s t r i c t Court under t h e o f f s e t d r i l l i n g r u l e has been abolished by enactment of t h e 1953 Montana O i l and Gas Conservation law; i.e., does t h e Board of O i l and G a s Con- servation have exclusive j u r i s d i c t i o n t o determine such controversies? I f t h i s question i s determined adversely t o a p p l i c a n t s , t h e r e a r e s e v e r a l s u b s i d i a r y i s s u e s : ( 2 ) Was t h e l e s s o r o r h e r g r a n t e e s (respondents) re- q u i r e d t o s e r v e w r i t t e n n o t i c e o r demand on t h e lessee o r i t s a s s i g n s ( a p p l i c a n t s ) t o d r i l l an o f f s e t w e l l ; i f s o , d i d t h e lessee have a reasonable t i m e t h e r e a f t e r i n which t o comply; and, when does t h e o b l i g a t i o n of t h e lessee, i f any, t o pay damages commence? ( 3 ) What i s t h e e f f e c t of t h e "no change i n ownership u n t i l w r i t t e n n o t i c e " c l a u s e i n t h e l e a s e and c e r t a i n provi- s i o n s of t h e mineral deed on t h e r i g h t s of t h e p a r t i e s ? ( 4 ) What i s t h e a p p r o p r i a t e s t a t u t e of l i m i t a t i o n s ? The a p p l i c a n t s ' c o n t e n t i o n s a r e a s follows: I s s u e - #l. Enactment of t h e 1953 O i l and Gas Conserva- t i o n A c t , s e c t i o n s 82-11-101 e t seq., MCA, has e l i m i n a t e d and abolished a c t i o n s t o prevent d r a i n a g e by producing w e l l s on a d j a c e n t land based on t h e common law o f f s e t d r i l l i n g r u l e theory. The power t o conduct p u b l i c e v i d e n t i a r y hear- i n g s , i s s u e subpoenas, e s t a b l i s h w e l l spacing u n i t s , o r d e r i n v o l u n t a r y pooling of i n t e r e s t s w i t h i n t h e same, g r a n t o r deny permission t o d r i l l w e l l s , p r e v e n t waste and p r o t e c t c o r r e l a t i v e r i g h t s i s now committed by s t a t u t e t o t h e d i s c r e - t i o n of t h e Board of O i l and Gas Conservation. S t a t e D i s - t r i c t Courts, t h e r e f o r e , no longer have j u r i s d i c t i o n t o e n t e r t a i n and decide an i s o l a t e d p a r t of t h e whole scheme of d i s c r e t i o n a r y a d m i n i s t r a t i v e determinations v e s t e d i n t h e Board by s t a t u t e . Involuntary pooling of i n t e r e s t s w i t h i n a w e l l spacing u n i t by o r d e r of t h e Board a f f o r d s t h e same kind of r e l i e f a s w a s formerly granted by t h e common law j u d i c i a l remedy of a c i v i l s u i t f o r damages i n t h e state D i s t r i c t Court under t h e o f f s e t d r i l l i n g r u l e . A t any t i m e a f t e r they acquired t h e i r i n t e r e s t and before t h e Board order of September 14, 1972, plaintiffs-respondents had the statutory right to apply to the Board of Oil and Gas Con- servation 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 spac- ing and pooling thereof. It cannot substitute its discre- tion 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 pro- tect them from drainage by a producing well on the ~ e w i s tract by their acceptance of delay rental payments through December 1972. Issue - #2. The following arguments need only be con- sidered 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 cove- nant 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 reason- able time has passed. Applicants here did not have a rea- sonable 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 assign- ment 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 re- ceived no actual or constructive notice that Hilda Danielson had conveyed her interest to plaintiffs until August 2, 1972, p l a i n t i f f s cannot a s s e r t any r i g h t s a g a i n s t t h e defen- d a n t s before t h a t d a t e under the t e r m s of t h e l e a s e . I s s u e - #4. This a c t i o n i s barred by Montana's two-year s t a t u t e of l i m i t a t i o n s f o r w a s t e o r i n j u r y t o r e a l o r per- sonal property i n s e c t i o n 93-2607, R.C.M. 1947 (subsequently amended i n 1975, and now s e c t i o n s 27-2-207 and 27-2-303, MCA) . A l l p a r t i e s are i n agreement t h a t t h e common law o f f s e t d r i l l i n g theory was t h e applicable r u l e i n Montana, a t l e a s t before enactment of t h e 1953 O i l and Gas Conservation Act. The o f f s e t d r i l l i n g r u l e was recognized i n Berthelote v. Loy O i l 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 r u l e implies i n every o i l and gas l e a s e a covenant on t h e p a r t of t h e l e s s e e t o p r o t e c t t h e premises of h i s l e s s o r from drainage by an a d j a c e n t producing w e l l by d r i l l i n g an o f f s e t w e l l . Severson v. Barstow, supra. The purpose of implied covenants i n general i s t o give e f f e c t t o t h e i n t e n t i o n of t h e p a r t i e s t o t h e l e a s e . The i n t e n t i o n of t h e p a r t i e s i s t o produce o i l and gas f o r a p r o f i t , which i s recognized by t h e l e s s o r a s production r o y a l t i e s , t h e primary consideration he r e c e i v e s f o r h i s l e a s e . Severson, 63 P.2d a t 1024; Berthelote, 28 P.2d a t 190. Generally, t h e implied covenant t o p r o t e c t t h e premises from drainage by d r i l l i n g an o f f s e t w e l l i s s t r i c t l y applied, p a r t i c u l a r l y when t h e l e s s e e has an i n t e r e s t i n t h e adjacent acreage on which t h e draining w e l l i s located, because of t h e permanent l o s s of o i l t h a t r e s u l t s t o t h e l e s s o r when it i s drained from beneath h i s land. Gordon, Remedies f o r Breach of - Implied Covenants ---- i n O i l and Gas Leases - i n Montana (1967)t 28 Mont.L.Rev. 187, 192-93. The implied duty of t h e l e s s e e t o p r o t e c t t h e land from drainage i s a duty t o e x e r c i s e reasonable c a r e and d i l i g e n c e t o prevent s u b s t a n t i a l drain- age from t h e leased lands by d r i l l i n g o f f s e t wells. "Rea- sonable c a r e and d i l i g e n c e " i s defined a s t h a t which a reasonably prudent operator would do under a l l of t h e c i r - cumstances of t h e p a r t i c u l a r s i t u a t i o n t o p r o t e c t t h e i n t e r e s t s of both t h e l e s s o r and t h e l e s s e e . 2 Summers, O i l - and Gas, S399, p. 572 (1968). -- I s s u e - #1. The f i r s t question c e r t i f i e d t o t h i s Court by t h e United S t a t e s D i s t r i c t Court i s whether o r n o t t h e 1953 Montana O i l and Gas Conservation Act has abolished t h e common l a w o f f s e t d r i l l i n g r u l e and t h e j u d i c i a l remedy of a c i v i l s u i t f o r damages i n s t a t e D i s t r i c t Court. The primary purpose of the A c t i s t o prevent "waste" of o i l and gas, a s t h a t t e r m i s defined, by v e s t i n g power i n t h e Board of O i l and Gas Conservation t o r e g u l a t e t h e d r i l l i n g , producing, and spacing of w e l l s and t h e pooling and u t i l i z a t i o n of o i l and g a s i n t e r e s t s . Sections 82-11-101, -111, -121, - 1 2 4 , - 201 and -205, MCA. The Act i s l a r g e l y based upon model l e g i s l a t i o n f o r an o i l and g a s conservation s t a t u t e promul- gated by t h e I n t e r s t a t e O i l Compact Commission. Marchi, Conservation - i n Montana (1955), 17 Mont.L.Rev. 100, 102. The Montana Act, however, does n o t contain t h e provisions of t h e model law, nor any provisions whatsoever, d i r e c t l y r e l a t i n g t o t h e p r o t e c t i o n of c o r r e l a t i v e r i g h t s . "Mon- t a n a ' s Act makes no reference t o ' c o r r e l a t i v e r i g h t s . ' " P a t t i e v. O i l and Gas Conservation Commission (1965), 145 Mont. 531, 402 P.2d 596, 599. This f a c t i s important t o an understanding of t h e t h r e e cases which have been decided t o d a t e under Montana's 1953 O i l and Gas Conservation Act. Nothing i n t h e Act expressly abolishes the common law o f f s e t d r i l l i n g r u l e o r t h e j u d i c i a l remedy of a c i v i l s u i t f o r damages. Nevertheless, the Board of O i l and Gas Conser- vation has broad powers t o conduct evidentiary hearings, e s t a b l i s h well spacing u n i t s , order involuntary pooling of i n t e r e s t s within such u n i t s , g r a n t o r deny permission t o d r i l l wells, and i s s u e r u l e s , regulations and orders t o prevent waste. Applicants argue t h a t t h e l e g i s l a t i v e assem- b l y intended t o s u b s t i t u t e f o r t h e common law remedy an ad- m i n i s t r a t i v e determination of a l l the i s s u e s involved i n the present case. The s t a t u t e i s not t h a t broad. Section 82-11-144, MCA, provides t h a t any i n t e r e s t e d person who i s adversely a f f e c t e d by the Act o r by a r u l e o r order of t h e Board can obtain j u d i c i a l review. The t e r m " i n t e r e s t e d person" i s broadly defined. The A c t provides f o r r e s t r a i n i n g orders and injunc- t i o n s ( s e c t i o n 82-11-145, MCA), f o r an appeal t o t h e Montana Supreme Court ( s e c t i o n 82-11-146, MCA), and it allows t h e Board t o bring s u i t f o r v i o l a t i o n s of t h e A c t o r of i t s r u l e s o r orders ( s e c t i o n 82-11-147, MCA). Section 82-11- 1 4 2 , MCA, provides: "This chapter, a s u i t by o r a g a i n s t t h e board, a v i o l a t i o n charged o r a s s e r t e d a g a i n s t a per- son under t h i s chapter, o r a r u l e o r order issued under t h i s chapter does n o t impair, abridge, o r delay a cause of a c t i o n f o r damages o r other c i v i l remedy which a person may have o r a s s e r t a g a i n s t a person v i o l a t i n g t h i s chap- ter o r a r u l e o r order issued under i t . " (Em- - - - - - - phasis supplied.) These a r e t h e only provisions of t h e Act t h a t address judi- c i a l actions. None of them purports t o r e s t r i c t any of t h e common l a w remedies a v a i l a b l e t o p r i v a t e l i t i g a n t s , espe- c i a l l y where the common law cause of a c t i o n would n o t con- f l i c t with a v a l i d r u l e o r order of t h e Board. O n t h e o t h e r 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. Further- more, "[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 forma- tion 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 Conser- vation held a hearing, at which respondents and applicant U. V. Industries were represented. The Board issued a specific well spacing order superseding the statewide spac- ing 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 exist- ing, 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 incor- porated into oil and gas leases as a matter of law. Arm- strong 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 particu- lar, 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 pru- dent 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- t i o n s under t h e l e a s e by such s t a t e law, r u l e o r order. Montana's s t a t u t e s and case law recognize t h e s e p r i n c i p l e s i n t h e analogous s i t u a t i o n of s t a t u t o r y u n i t i z a t i o n : "Operations conducted pursuant t o an order of t h e board providing f o r u n i t o p e r a t i o n s s h a l l c o n s t i t u t e a f u l f i l l m e n t of a l l t h e express o r implied o b l i g a t i o n s of each l e a s e o r c o n t r a c t covering lands i n t h e u n i t a r e a t o t h e e x t e n t t h a t t h e o b l i g a t i o n s cannot be performed because of t h e order of t h e board." Section 82-11- 211(2), MCA. See a l s o , Armstrong v. High Crest O i l s , Inc., supra. The r e l e v a n t question becomes: would t h e o f f s e t w e l l t h a t respondents c l a i m a p p l i c a n t s had a duty t o d r i l l t o p r o t e c t t h e i r premises from drainage under t h e o f f s e t d r i l l i n g r u l e be i n v i o l a t i o n of t h e Board's w e l l spacing requirements? "Where an operator could p r o t e c t a g a i n s t drainage by d r i l l i n g a w e l l t h a t would be p r o f i t a b l e and would not v i o l a t e conser- v a t i o n r e g u l a t i o n s , f a i l u r e t o o f f s e t i s a breach of covenant." 5 W i l l i a m s and Meyers, supra, 5866, p. 4 4 2 , c i t i n g cases from o t h e r j u r i s d i c t i o n s . (Emphasis added.) Contrary t o a p p l i c a n t s ' contentions, nothing i n t h e 1953 Act o r any r u l e , r e g u l a t i o n o r o r d e r of t h e Board prevented t h e l e s s e e from complying with i t s implied cove- nant t o d r i l l an o f f s e t w e l l . The statewide spacing o r d e r s a p p l i c a b l e t o t h e l e a s e during t h e period of uncompensated drainage d i d n o t r e s t r i c t a p p l i c a n t s ' a b i l i t y t o o f f s e t t h e Lewis w e l l . Applicants were n o t prevented from d r i l l i n g an o f f s e t w e l l on t h e NE1/4 of Section 10 u n t i l t h e s p e c i f i c w e l l spacing order of September 1 4 , 1 9 7 2 , placed t h e Lewis w e l l and t h e NE1/4 of Section 1 0 i n t h e same w e l l spacing u n i t . Therefore, s i n c e it would n o t be i n c o n f l i c t with any a p p l i c a b l e s t a t e law o r Board r u l e , r e g u l a t i o n o r o r d e r , t h e implied covenant t o d r i l l an o f f s e t well w a s i n e f f e c t between t h e p a r t i e s t o t h e l e a s e , and respondents have a c i v i l s u i t f o r damages a s t h e i r remedy f o r a p p l i c a n t s ' breach of t h e implied covenant. The 1953 O i l and Gas Conservation A c t provides f o r t h e voluntary and involuntary pooling of i n t e r e s t s within a spacing u n i t : "When two o r more s e p a r a t e l y owned tracts are em- braced within a spacing u n i t o r when t h e r e a r e s e p a r a t e l y owned i n t e r e s t s i n a l l o r a p a r t of t h e spacing u n i t , then t h e persons owning those i n t e r e s t s m a y pool t h e i r i n t e r e s t s f o r the de- velopment and operation of t h e spacing u n i t . I n t h e absence of voluntary pooling within t h e spacing u n i t , t h e board, upon t h e a p p l i c a t i o n of an i n t e r e s t e d person, may e n t e r an order pooling a l l i n t e r e s t s i n t h e spacing u n i t f o r t h e development and operation thereof. The pooling order s h a l l be made a f t e r hearing and s h a l l be upon terms and conditions t h a t a r e j u s t and reasonable and t h a t a f f o r d t o t h e owner of each t r a c t o r i n t e r e s t i n t h e spacing u n i t t h e opportunity t o recover o r r e c e i v e without un- necessary expense h i s j u s t and e q u i t a b l e share of t h e o i l o r gas produced and saved from t h e spacing u n i t . . ." Section 82-11-202(1), MCA. (Emphasis supplied.) Section 82-11-201(3), MCA, g r a n t s t h e Board a u t h o r i t y t o allow exception w e l l s i n appropriate s i t u a t i o n s : "Subject t o t h i s chapter, t h e order e s t a b l i s h i n g spacing u n i t s s h a l l d i r e c t t h a t no more than one w e l l may be d r i l l e d and produced from t h e common source of supply on any spacing u n i t and t h a t t h e w e l l s h a l l be d r i l l e d a t a l o c a t i o n autho- r i z e d by t h e o r d e r , with -- such exception a s m a y be reasonably necessary where it i s shown, upon - a p p l i c a t i o n , n o t i c e , and hearing, and t h e board f i n d s t h a t t h e spacing u n i t i s l o c a t e d on t h e edge of a pool o r f i e l d and a d j a c e n t t o a pro- ducing u n i t o r , f o r some o t h e r reason, t h e re- quirement t o d r i l l t h e w e l l a t t h e authorized l o c a t i o n on t h e spacing u n i t would be inequi- t a b l e o r unreasonable." (Emphasis supplied.) Applicants contend t h a t a t any time before September 1 4 , 1972, respondents could have, b u t f a i l e d t o , apply t o t h e Board f o r an exception well, o r i f an exception w e l l would have c o n s t i t u t e d waste and thus been unlawful, f o r an involuntary pooling order pooling t h e i r i n t e r e s t s 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 gener- ally the rule in oil and gas leases, the lessee was given the sole and exclusive right to drill. Rieckoff v. Consoli- dated 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 au- thority 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 Dis- trict 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 correspond- ing duties to the neighboring operator. The duties are not to take an undue amount of petro- leum or to do injury to the common supply. Oper- ation 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 adjoin- ing 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 corre- lative 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 respon- dents' 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 a p p l i c a n t s ' d r i l l i n g of an o f f s e t exception well b u t denied Chevron's request t o l i m i t production of t h e o f f s e t w e l l s o a s n o t t o v i o l a t e Chevron's c o r r e l a t i v e r i g h t s , a s Chevron was l e s s e e of t h e adjacent lands being o f f s e t by t h e excep- t i o n well. Chevron's r e q u e s t f o r an o r d e r l i m i t i n g produc- t i o n from t h e new o f f s e t exception w e l l was denied by t h e Board on t h e grounds t h a t it lacked a u t h o r i t y t o r e s t r i c t production i n t h e absence of a showing of waste. The D i s - trict Court sustained t h i s r u l i n g by t h e Board. The Supreme Court reversed, r e l y i n g on P a t t i e , and held t h a t t h e Board had such a u t h o r i t y t o p r o t e c t Chevron's c o r r e l a t i v e r i g h t s by l i m i t i n g production from t h e adjacent exception w e l l , notwithstanding t h e absence of a showing of waste. I n t h e course of its discussion, t h e Court s a i d : " J u s t a s t h e Act p r o t e c t s t h e r i g h t s of t h e owner t o capture h i s share of t h e o i l and g a s when t h e pool i s only under p a r t of h i s land, it must pro- t e c t t h e adjoining landowners from having t h e i r share of t h e o i l and g a s appropriated by t h e exeption l o c a t i o n w e l l . To hold otherwise would be t h e equivalent t o operating under t h e Rule of Capture theory b u t without t h e p r o t e c t i o n a f - forded an adjoining landowner under t h e Off-set D r i l l i n g Rule theory." 435 P.2d a t 784. Applicants argue t h a t t h i s statement supports t h e i r conten- t i o n t h a t t h e O i l and Gas Conservation Act has eliminated t h e common law remedy of a c i v i l s u i t f o r damages under t h e o f f s e t d r i l l i n g r u l e . To t h e contrary, t h i s statement by t h e Court merely draws an analogy t o make t h e p o i n t t h a t t h e A c t p r o t e c t s t h e c o r r e l a t i v e r i g h t s of - a l l p a r t i e s . I t does nothing i n t h e way of dispensing with t h e o f f s e t d r i l l i n g r u l e . The f i n a l case r e l i e d on by a p p l i c a n t s , Armstrong v. High C r e s t O i l s , Inc. (1974), 164 Mont. 187, 520 P.2d 1081, says nothing t o support t h e i r contention t h a t Nontana's O i l 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 Arm- strong'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 judi- cial 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 cancella- tion of the lease as were made in the action for judicial review of the Board's unitization order, the suit for can- cellation 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 designa- tion 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 viola- tion 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 ( 1 9 5 5 ) . 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 neces- sity of drilling offset wells is not brought about by the acts of the lessee, but by those of third parties, unless the lessee owns adjoin- ing acreage. Hence, before a breach of an im- plied 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 drain- age, 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 one- half 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 protec- tion 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 ~ e w i s 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 drain- age 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 assign- ment 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 co- grantee 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 sub- letting 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 appropri- ate 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 effec- tual 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 \ , L C ' ) ,,u C b L " 1 Justices J