Opinion ID: 2419334
Heading Depth: 1
Heading Rank: 2

Heading: Conditional Cancellation

Text: Cancellation of an oil and gas lease is an appropriate remedy when breach of the implied covenant of reasonable development is shown. Nolan v. Thomas, 228 Ark. 572, 309 S.W.2d 727 (1958). When this equitable remedy is sought on the basis that the remedy at law is inadequate, however, the remedy of conditional cancellation is preferred. H. Williams and C. Meyers, Oil and Gas Law, § 834, pp. 247-248 (1984). The first case in which this court dealt with conditional cancellation was Poindexter v. Lion Oil Refining Co., 205 Ark. 978, 167 S.W.2d 492 (1943), in which we reversed the chancellor's refusal to cancel but ordered a six-month period to allow development. There was no question that a breach justifying immediate cancellation had occurred, but we allowed the six-month period because it was a case of first impression on the implied covenant of reasonable development, and fairness to the lessee required the delay. Then in Smart v. Crow, supra , a lessor sought cancellation of an oil and gas lease on four ten-acre tracts. The chancellor found there had been reasonable development on two of the tracts and gave the lessees sixty days to begin drilling on the third tract and twenty days after drilling commenced on the third tract to drill on the fourth tract. On appeal the lessor argued that there should have been immediate cancellation. The lessee did not appeal the conditional cancellation. We held it was reasonable for the chancellor to decline immediate cancellation and said ... it is not inequitable to allow them the time prescribed by the [c]hancellor to commence wells on the two ten acre tracts.... In Arkansas Oil and Gas, Inc. v. Diamond Shamrock Corporation, 281 Ark. 207, 662 S.W.2d 824 (1984), the lessor appealed the chancellor's refusal to order immediate cancellation, and we affirmed. We recited that the chancellor found the lessee was not in default, but we then concluded it was not error to enter a conditional cancellation as opposed to an immediate cancellation. No issue was raised by the lessee contesting the conditional cancellation, so once again we were not asked to decide whether a lessee not yet in default could be ordered to drill or forfeit within a stated period. In none of those cases were we directly confronted with the question whether the chancellor must find a breach of the implied covenant for reasonable development as a predicate for conditional cancellation. Cases from other jurisdictions demonstrate that conditional cancellation should be ordered when a breach of the implied covenant of reasonable development is found. See Amerada Petroleum Co. v. Doering, 93 F.2d 540 (5th Cir.1937); Slaughter v. Cities Service Oil Co., 660 S.W.2d 860 (Tex.Civ.App.1983); Rush v. King Oil Co., 220 Kan. 616, 556 P.2d 431 (1976); Vickers v. Vining, 452 P.2d 798 (Okla.1969). We have found no case in which a conditional cancellation has been ordered absent the finding of a present breach of the implied covenant of reasonable development where the issue on appeal was the propriety of the conditional cancellation. A good reason for ordering conditional rather than absolute cancellation upon finding a breach of the covenant is that the question of reasonableness of development is a difficult one, generally approached ad hoc. H. Williams and C. Meyers, Oil and Gas Law, § 832.2 (1984). Equity need not give all or nothing relief and may impose conditions with respect to the remedy awarded. State of Arkansas v. Cate, 236 Ark. 836, 371 S.W.2d 541 (1963). While it may be said that implicit in the chancellor's order of conditional cancellation is a finding that the appellants will have breached the implied covenants of reasonable development if they do not commence drilling before February 5, 1986, neither we nor the chancellor could know what conditions will prevail on that date. The decree presumably speculates that all conditions will be the same as on the date the decree was rendered. While this sort of decree might be a salutary time saving device if the speculation proves correct, we are unwilling to place on these appellants the burden of coming back to the court to demonstrate they are not in breach of the implied covenants next year. Until they are found to have done something wrong, no remedy should be imposed. Modified and affirmed. PURTLE, J., not participating.