Opinion ID: 1404796
Heading Depth: 1
Heading Rank: 5

Heading: Exploration, Testing, and Development

Text: Polo Ranch contends the City breached its obligation to explore, test and develop Ranch lands in accordance with the Agreement. As such, Polo Ranch contends that the Agreement should be terminated as to the unexplored and untested lands. The City counters that Polo Ranch never asserted a claim for termination of the Agreement and, therefore, that theory should be rejected on appeal. We have carefully reviewed the numerous pleadings and the trial transcript and we are not persuaded by the City's argument. Though perhaps the claim was not presented with the greatest clarity, especially with regard to the relief sought, the City's obligation to explore and test and its right to further explore and drill on Ranch lands have been at issue since Polo Ranch filed its initial counterclaim for declaratory judgment. The court denied the City's motion for summary judgment on the declaratory judgment, leaving the issues raised therein for trial. During trial, the matter was broached on several occasions by both parties. Finally, the court adopted the following conclusion of law from the City's proposed findings of fact and conclusions of law: One of the contentions of Polo is that the City has failed to comply with the provisions of the 1955 Agreement concerning exploration and drilling of new wells, that paragraph 4 of the Agreement requires the City to drill at least 2 wells per year. Under these circumstances, we cannot say that the issue was not raised below. We turn, then, to the merits of the parties' arguments. Paragraph 4 of the Agreement sets forth the City's obligations for exploration, testing and drilling. Starting in 1955, and continuing into 1956 if necessary, the City was to drill approximately 10 test holes upon the lands of Bell covered by this agreement in the valley of Crow Creek above (westerly from) the area in which the presently flowing wells have previously been drilled. The City was then required to complete wells in such test area and in the area where flowing wells now exist, starting no later than the summer of 1956, and to complete at least six wells before the end of 1956. After the initial drilling, [t]he remainder of the lands covered by this agreement shall be explored and tested with reasonable diligence and thereafter with similar diligence shall be equipped with casing and pumps at a rate of not less than two wells per year, until the area has been fully tested, except to the extent that this agreement may have been terminated in whole or in part, in accordance with paragraph 11 hereof. During 1955 and 1956, the City drilled twenty-five test holes and completed ten of those wells for production. Thereafter, the City did no further exploration or drilling. Polo Ranch's argument rests on the premise that the activity during 1955 and 1956 fell within the City's initial drilling obligation, leaving unfulfilled the City's obligation to explore and test the remainder of the lands. The Agreement, however, only required that approximately ten test holes be drilled in the Crow Creek Valley the first two years, and that six of those be equipped with casing and pumps. The City drilled sixteen test holes in the Crow Creek Valley; seven of those test holes were completed. In addition, nine test holes were drilled north of the Crow Creek Valley, and three of those were completed with casing and pumps (the north Bell wells). This evidence is sufficient to establish that the City's test drilling in the first two years of the Agreement extended beyond the initial drilling requirements set out in Paragraph 4. The plain language of Paragraph 4 requires the City to drill and explore only until the area has been fully tested. The term fully tested is not defined in the Agreement. However, the trial court concluded that the City's drilling activity during 1955 and 1956 fulfilled its obligation to explore and test the remainder of the lands: 6. ... Once the City has explored and tested the remaining lands subject to the Agreement, it has no obligation to drill additional wells. The City explored and tested the remainder of the lands covered by the Agreement when it drilled the 25 test wells shown on Exhibit 35. There is no evidence that the City was not diligent with respect to its testing and exploration, and there is no evidence that other wells would be discovered that would justify equipping and pumping. In addition, the court concluded that Polo Ranch fail[ed] in its burden of proof that, if it was a breach of the Agreement not to drill more wells, the breach would be a material factor in the City's ability to produce water, in Polo's entitlement to more water; in short, that it would materially affect the parties' positions. The City and Polo both would be up against the safe yield of the well field and the City would have to exercise its discretion concerning how much to produce accordingly. The City's argument, and the court's implied conclusion, is that the City's obligation to develop the water under the Ranch is limited by the safe yield of the field. The City's expert groundwater hydrologist, W. Todd Jarvis, defined safe yield as the amount of ground water that can be developed from an aquifer without causing trouble, for example, a drop in the water table or land subsidence which might adversely impact water quality. The 1955 Agreement makes several references to the production capacity of the area, and to what might be said to fall within the above definition of safe yield. Paragraph 6, which sets out Polo Ranch's entitlement to water, provides for the contingency that the City may pump less water than the proven area of the field is capable of producing without depleting the field or materially lowering the water table. That paragraph also refers to firm production capacity of the field, dependable annual production of the field, without depletion or material drawdown of the basic water table, reasonable capacity and reasonably full firm capacity of the field, and reasonable firm capacity of the wells. Paragraph 10 permits Bell to terminate the Agreement [s]hould the firm productive water capacity of the entire area as determined by the actual production from the wells and measurement of the water table be less than 155.5 million gallons per year. The above provisions, read together and in light of the entire contract, demonstrate the parties' intent that the water resource underlying the Ranch not be overdeveloped so as to deplete the water supply or materially draw down the water table. A reasonable construction of those provisions is that they express the understanding that the City's obligation to develop water is limited to the safe yield of the proven area of the field. That construction is consistent with the exploration and testing requirements of Paragraph 4; reasonably diligent exploration and testing would define or prove the area of the field. Of the nine test holes drilled north of Crow Creek, six were drilled along a north-south section line to the northern perimeter of the Ranch property. The test drilling in the Crow Creek Valley did not extend to the western property boundary, but did cover four complete sections, and reached the southern boundary of the eastern sections. The six northernmost and three westernmost test holes were not completed. Jerry Mark, the current director of the Cheyenne Board of Public Utilities, testified that the reports from the drillers who drilled the test holes indicated that some of the wells did not produce sufficient quantities of water to justify completion. Others were not completed because they caused interference with the production of other wells in the Bell well field. Mr. Mark's testimony was consistent with that of Mr. Jarvis, who noted that pumping from at least one of the Bell wells interferes with other nearby wells outside the area covered by the Agreement. The court could reasonably conclude from this evidence that the City's drilling activity during 1955 and 1956 fully tested the area. Polo Ranch points to Mr. Jarvis' testimony, that the nature of the aquifer is heterogeneous and may contain pockets of water, and that there are other water-bearing formations in the area, as evidence that more exploration and testing would result in more water being available, and hence, increase the safe yield of the field. The language of the Agreement indicates that the parties contemplated development of the water table in which the original flowing wells were drilled. Paragraph 3 provides that [a]ll wells drilled shall be drilled to the sands or aquifer in which the water now flowing from drilled wells was discovered. Additional evidence of that intent is found in the termination provisions of Paragraph 10, which are based in part on the firm productive water capacity of the entire area as determined by . . . measurement of the water table. The City had no obligation to seek water in other formations. Moreover, empirical data gathered from the late 1950s to the present demonstrates that the static water level in the water table underlying the Bell wells has dropped at least seven feet since 1955, and continues to decline, even at current production levels. A reasonable inference is that additional wells in the same aquifer in which the original flowing wells were drilled would not yield more water, but would further deplete the water table. The evidence supports the court's conclusion that the area covered by the Agreement has been fully tested. As such, the court correctly determined that the City has no further obligation to explore and test under the Agreement. The Agreement makes no provision for partial termination under the circumstances present here. The court's decision on this issue is affirmed.