Court Opinion

ID: 7915164
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:10:05.140852+00
Date Added: 2024-06-11T16:32:46.369567
License: Public Domain

Wedell, J.
(concurring in part and dissenting in part): I concur in the majority opinion touching the two items of damage which pertain to exploration and development of the Viola formation and to the conversion of the gas well into a combination oil and gas well. I do not agree with the majority opinion touching exploration and development of the Chat formation.
Before discussing the latter question I desire to state briefly my personal views relative to the alleged failure to convert the gas well into a combination oil and gas well. Accurately speaking, it seems to me the subject of converting the gas well did not really involve the question of breach of the implied covenant to explore and develop but rather a question of the proper method or manner of development where one of the minerals for which the lease was *305executed had been discovered. In such a situation the real question was how a reasonably prudent operator would have proceeded with development under the same or similar circumstances at that time. (Empire Oil & Refining Co. v. Hoyt, 112 F. 2d 356, 360.) While appellants’ witnesses testified reasonably prudent operation required the deepening of that well and its conversion into a combination well, the facts upon which their testimony was based were too speculative, uncertain and conjectural. The evidence was therefore too speculative as to the cause of damage. While my approach to this particular item of damage may vary somewhat from that of the majority, the result is the same.
Does it, however, follow appellants’ evidence was insufficient to take the case to the jury on the question of otherwise exploring and developing the Chat formation than by a combination well? I do not think so.
It was appellants’ contention a separate and distinct Chat well should have been drilled for exploration purposes not later than October 1, 1933. The lease was not given only for its exploration and development as a gas property. It was also given for the purpose of obtaining its exploration and development as an oil property. In my opinion, it will not do to say the lease was fully developed for gas and the landowners were receiving substantial profits from the gas. That was one of their contractual rights, but it was not their only right. Lessors were also entitled to have the lease explored for oil. (Webb v. Croft, 120 Kan. 654, 658, 244 Pac. 1033.)
I cannot agree with appellees that no implied covenant exists to explore and that an implied covenant exists only to prevent drainage by drilling offset wells and to reasonably develop the lease after commercial production is obtained on some part óf it. The first implied covenant by which a lessee is bound is.the duty to explore. The second implied covenant is to reasonably develop the lease in the event exploration proves successful. (Collins v. Oil & Gas Co., 85 Kan. 483, 486, 118 Pac. 54; Ray v. Brush, 112 Kan. 110, 210 Pac. 660; Powell v. Danciger Oil & Refining Co. of Texas, [Tex. Civ. App.] 134 S. W. 2d 493, 497; Baird’s Appeal, 334 Pa. 410, 6 Atl. 2d 306, affirming 132 Pa. Sup. Ct. 573.) Obviously, there could be no development unless exploration or discovery preceded. If there was no duty to explore for oil, a lessee could hold the oil rights forever without exploring the productivity of oil-bearing sands simply because he had developed the lease for gas. That cannot be and, in my *306opinion, is not the law. This statement, however, must not be construed as necessarily being contrary to the majority opinion. My statement concerning the implied covenant to explore for oil goes to the cause of damage, and the majority opinion, as to Chat formation, is based upon the speculative extent, or measure, of damage. It is my opinion there existed, under the evidence, a duty to more seasonably explore for oil, under the implied covenant, especially in view of the demand for such earlier exploration.
The basic, primary, or five-year term of the leases expired in 1931 and 1932. In 1932 the landowners began making demand upon both appellees for exploration and development of the lease for oil. They continued such demands during 1933 and 1934. The manager of the Shell in 1934 finally advised that a year and a half previously he had recommended the development of the Meyers 80 for oil. That evidence was of some value, as the evidence of one engaged in the business, as to whether the lease could be developed profitably for oil. (Wheeland v. Gas Co., 92 Kan. 50, 51, 139 Pac. 1010.) Appellants were informed their guess as to when the lease would be developed for oil was as good as his.
Ordinarily, appellants, under such circumstances, had the option of seeking cancellation of the lease, at least as to the oil rights, or to allow the lease to stand and sue for damages for breach of the implied covenant to explore and develop for oil. (Julian Petroleum Corporation v. Courtney Petroleum Co., 22 F. 2d 360, and cases therein cited.) Appellants chose the latter course. That was their privilege.
No Chat well was drilled on their land until December, 1936. When finally drilled it proved to be a commercial well with large initial and accumulated production. The large production from this Chat well more than confirmed the previous estimated production by appellant’s expert, Holl. This subsequent event tended to disclose his opinion was not based upon mere speculation or conjecture. Events which occur after the wrong complained of may, and frequently do, serve to render the damages sufficiently certain. (15 Am. Jur., Damages, § 23.) In view of the entire record I do not believe we are fairly justified in saying the opinion of the experts was based on hindsight so far as the Chat was concerned. The expert, Holl, stated that even the Shell had little information concerning the Chat formation in 1935 that it did not have in 1933.
Appellees insist appellants are not suing for damages due to *307drainage. That is true. The implication of appellees’ contention is that the oil therefore remains under appellants’ land and that they have not been damaged. With that contention I cannot agree. It is no defense in a damage action for failure to explore and produce oil at an earlier date, that the oil remains in the oil formations. In the first place the evidence in fact was that some of the oil had been drained, although appellants are not suing for that damage. Their evidence, however, was further that only a portion of what oil remained, after drainage, could now be recovered. It was for the latter loss that they sought to be compensated. But if all the oil in fact remained under the land and actually could be recovered later, that fact would constitute no defense to the instant action for damages, based upon failure to produce the oil at the time it should have been produced by prudent exploration and development. The owners of the land were entitled to have the benefit of the oil at the time the wells should have been drilled and not at some remote period in the future. (Mills v. Hartz, 77 Kan. 218, 220, 221, 94 Pac. 142; Daughetee v. Ohio Oil Co., 263 Ill. 518, 527, 105 N. E. 308.) Appellants were entitled to one-eighth of the oil produced. The damage for failure to develop and produce, under such a lease, is the value of the royalty lessor would have obtained. The damage is not limited to the interest on such value. (T. P. Coal & Oil Co. v. Barker et al., 117 Tex. 418, 6 S. W. 2d 1031.)
The evidence was sufficient to raise an issuable fact relative to 'the cause of damage, namely, the breach of the implied covenant to explore and develop. Issuable facts are for the determination of the jury. Appellants’ experts and practical operators testified the Chat formation on the Myers 80 was not explored and developed in accordance with the diligence exercised by reasonably prudent operators. They testified their opinions were based upon the stipulated facts. On demurrer that testimony must be accepted as true. It should be noted we do not have evidence here that production from the Chat would have been unprofitable or probably unprofitable, as the record disclosed concerning the Viola formation. The opinion evidence of experts and practical operators was that production in the Chat would have been profitable.
It is not claimed appellants’ witnesses were not qualified as experts and practical operators in the oil and gas industry, and indeed they were qualified. It is well established that qualified experts in the oil and gas industry, while not able to determine production with *308absolute certainty, are able to furnish reasonably accurate estimates of what a certain territory will produce, estimating from producing wells in the locality, and that such testimony will support a verdict for damages. (Wheeland v. Gas Co., 92 Kan. 50, 139 Pac. 1010.) That is the kind of -testimony appellants introduced in the instant case as to the Chat formation. It is only where such damages do not afford an adequate remedy for failure to develop that courts give redress by means of the more drastic remedy of forfeiture. (Howerton v. Gas Co., 82 Kan. 367, 108 Pac. 813; Wheeland v. Gas Co., supra.)
Since there was competent evidence the lease owner had breached the implied covenant to explore and develop the Chat formation, the only remaining question is the extent of the damage resulting from the breach. The modern tendency is not to deny recovery where the cause of damage is established and uncertainty remains only as to the exact extent of the damage. (17 C. J. 756, § 90; 15 Am. Jur., Damages, § 23; 1 Thornton’s Law of Oil and Gas, 4th ed., p. 325; Annot. 36 A. L. R. 1408.) My own views on this aspect of the law are disclosed by cases cited in the dissenting opinion in Hogan v. Santa Fe Trail Transportation Co., 148 Kan. 720, 85 P. 2d 28, in which action the principle involving extent, or measure, of damages was involved.
Was the evidence as to the extent, or measure, of damage, however, too speculative in the instant case? In my opinion it was not, in view of the particular circumstances in the instant case. The Shell had acquired all the oil and gas leases adjacent to or immediately surrounding the eighty acres in question, except the southwest quarter of the section in which the Myers 8Ú was located and the quarter section which touched the Myers 80 to the southeast. It therefore had the right to determine the locations at which oil wells could and would be drilled adjacent to the Myers 80. Whether the McPherson also had some rights in that respect I need not decide in view of the majority opinion. At any rate the Shell was not relieved so far as its duties and obligations to appellants were concerned by reason of any contractural relations it may have had with the McPherson. The Shell chose not to drill wells earlier in the Chat formation at locations which required offsets on the Myers 80. It chose not to drill any oil wells on the Myers 80. Had there been any exploration of the Chat formation earlier on the Myers 80, as the evidence disclosed there should have been, there might have ex*309isted a more definitely proven basis for estimating the damage resulting from their failure to fully develop the Chat formation of the Myers 80. Appellants were not responsible for the fact that a more accurate basis for measurement of damages did not exist. The lessee was responsible for that fact. A party who breaches a contract cannot escape liability for his own wrong by reason of lack of a more perfect measure of damages where he is responsible for the inadequate means of measuring the damage. (Hoffer Oil Corporation v. Carpenter, 34 F. 2d 589; Stanolind Oil & Gas Co. v. Kimmel, 68 F. 2d 520.) It seems to me this principle is particularly applicable to the oil industry in which a certain amount of speculation inheres in.the very nature of the industry. The parties to such contracts are charged with knowledge of their uncertainties and are held to have contracted with reference to their uncertain and speculative character. (Hoffer Oil Corporation v. Carpenter and Stanolind Oil & Gas Co. v. Kimmel, supra.)
The fact damages are difficult of measurement with mathematical certainty, or are not as exact as courts might wish for, is no defense in an action for damages for failure to reasonably develop a lease. The best evidence of which the subject is susceptible is frequently the opinion of experts and practical operators in the oil industry, and such evidence' has been held sufficient in a great variety of oil and gas cases. (1 Thornton’s Law of Oil and Gas, 4th ed., p. 332, § 116, p. 357, § 122b; Daughetee v. Ohio Oil Co., 263 Ill. 518, 525, 526; Hartman Ranch Co. v. Associated Oil Co., 10 Cal. 2d 232, 72 P. 2d 1163; T. P. Coal & Oil Co. v. Barker et al., 117 Tex. 418, 6 S. W. 2d 1031; Ross v. Damm, 278 Mich. 388, 270 N. W. 722; Julian Petroleum Corporation v. Courtney Petroleum Co., 22 F. 2d 360, 362, 363; Stanolind Oil & Gas Co. v. Kimmel, 68 F. 2d 520, 522, 523.) For general rule see, also, 15 Am. Jur., Damages, § 23, and City of Kennett v. Construction Co., 273 Mo. 279, 202 S. W. 558.
Insofar as my own views are concerned, it may be conceded that in the cases last above cited some, or all, of the wells used as a basis for estimating the damages involved may have been closer than the producing Chat wells were to the Myers 80 on October 1, 1933. That fact would not, in my opinion, alter the rule that the evidence of experts and practical operators, the best evidence available, was sufficient, where the lessee is responsible for the lack of a more perfect measure of damages. The testimony of appellants’ *310witnesses, including the purported statement of the manager of the Shell in 1934, which we must at this stage accept as true, and the further fact that a large commercial well was discovered in 1936 in the Chat formation of the Myers 80 convinces me the evidence was sufficient to raise factual issues on both the element of breach of covenant and the element of the extent, or measure, of damages insofar as the Chat formation was concerned.
There are some other aspects of this case I should like to discuss, but limitation of time forbids. I think the demurrer was properly sustained as to items of damage previously indicated and improperly sustained as to the item of damage pertaining to failure to more seasonably explore the Chat formation for oil.
Allen and Hooh, JJ., concur in the dissent.