Court Opinion

ID: 7958975
Source: CourtListenerOpinion
Date Created: 2022-09-09 00:28:01.595282+00
Date Added: 2024-06-11T16:34:21.423152
License: Public Domain

R. M. Daniels, J.
(dissenting). I must dissent.
This appeal turns on the interpretation of the oil and gas leases covering the Muttonville field. In construing an oil and gas lease, this Court is guided by the Supreme Court’s decision in J J Fagan & Co v Burns, 247 Mich 674; 226 NW 653; 67 ALR 522 (1929). The Court there noted the widespread use of standard oil and gas lease forms. The form’s language had evolved through trial and error with careful attention being paid to judicial decisions interpreting it. An oil and gas lease is not an isolated agreement drafted by uninformed neighbors to roughly express their agreement, but is a technical contract reflecting the development and present status of the law of oil and gas. J J Fagan, supra, 678. Such a lease, the Court concluded, should be read "not only according to its words, but in connection with the purpose of its clauses”. J J Fagan, supra, 678. See also Howard v Hughes, 294 Mich 533; 293 NW 740 (1940).
The following paragraph governs the terms of *88the oil and gas leases found to have expired in the present case:
"It is agreed that this lease shall remain in force for a primary term of ten years from this date and if lessee shall commence to drill within said primary term or any extension thereof, the said lessee shall have the right to continue drilling to completion with reasonable diligence and said term shall extend as long thereafter as oil and gas, or either of them, is produced by lessee from said land or from a communitized unit as hereinafter provided.” (Emphasis added.)
The underlined passage is commonly called the habendum clause. The major claims raised by plaintiff on appeal concern the interpretation of this clause.
Appellants claim that production continued, for purposes of the habendum clause, because Consolidated acted as a reasonable and prudent operator in deciding to cut back its marketing of gas from the Muttonville field in the face of the impending condemnation action. The word "produced” in the habendum clause would literally be satisfied by the production of any oil or gas. Despite the usual meaning of the word, courts have construed the term "production” to be limited to production in paying quantities to the lessee. Superior Oil Co v Devon Corp, 458 F Supp 1063 (D Neb, 1978), rev’d on other grounds 604 F2d 1063 (CA 8, 1979), 3 Williams, Oil and Gas Law, § 604.5, p 57.
The reasonable and prudent operator standard recognizes that interruptions in production may have causes other than the operator’s desire to hold the lease for its speculative value. Robinson v Gordon Oil Co, 258 Mich 643, 648; 242 NW 795 *89(1932), 1 Brown, Law of Oil and Gas Leases (2d ed), § 5.02, pp 5-4 to 5-7.
I do not agree that the reasonable and prudent operator standard applies here. In the present case, the lease contained a provision for the payment of shut-in royalties, stating:
"* * * Where such gas is not sold or used for a period of one year, lessee shall pay or tender as royalty an amount equal to the yearly delay rental as provided by the provisions of this lease, payable annually at the end of each year during which such gas is not sold or used, . and while such royalty is so paid or tendered this lease shall be held as a producing property under the above paragraph setting forth the primary term hereof.”
I would hold that the leases expired when the lessee failed to either market gas or pay the shut-in royalty. See Greer v Salmon, 82 NM 245; 479 P2d 294 (1970), but see Contra, Gard v Kaiser, 582 P2d 1311 (Okla, 1978). See also generally, 3 Williams, Oil and Gas Law, § 633.2, pp 460.2-460.4 and 4 Kuntz, Law of Oil and Gas, § 46.5, p 31.
I would affirm.