Court Opinion

ID: 3544246
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:55:42.584414+00
Date Added: 2024-06-11T14:22:18.403740
License: Public Domain

In the view I take of this case, reversible error was committed in adopting the "well-cost" *Page 351 
rule as the measure of damages. If we take the contract as amplified by the preliminary oral negotiations, we still have a contract which does not specify the number of wells that defendants should drill. Their obligation under the contract, as amplified by the oral evidence, was simply to do such drilling as a reasonably prudent oil and gas operator under all the circumstances would have drilled in the exercise of reasonable diligence. The court so instructed the jury. The jury was also instructed that "the defendants were not bound to drill additional wells on the permit acreage merely to demonstrate the existence or nonexistence of oil or gas, nor to drill any additional wells where there was no reasonable expectation of securing oil or gas in paying quantities."
The court also instructed the jury that: "In determining the question of whether or not other wells should have been drilled, you must give consideration to all of the facts regarded collectively. Some of these are: the result of oil operations and exploration work on adjacent premises; the extent of the subterranean reservoir; also its character and contour; market conditions; the prospects for further production; and the knowledge possessed by those expert in locating oil bodies. This contract was intended for the benefit of both parties, and the defendants had the right to regard their own interests as well as those of the plaintiffs. In short, the diligence required of the defendants involved such a course of conduct upon their parts as operators of ordinary prudence would pursue, having in mind the securing of the financial benefits sought by both parties to this contract."
In the cases cited in the majority opinion as sustaining the well-cost rule as the proper measure of damages, there was breach of an express contract for the drilling of a specified number of wells. The drilling company in each of those cases could read its contract and determine therefrom the exact extent of the drilling to be done. It could easily determine when it had breached its contract. Even in those cases I fail to see justification for adopting the well-cost as the measure of damages. But, however that may be, under the contract here *Page 352 
defendants, apparently in good faith, believed they had complied fully with the contract. They believed further drilling would be unprofitable. Their conclusion in that respect would, of course, not be final. The rule is that neither party to an oil and gas lease is the arbiter of what is reasonable diligence, but both are bound by the standard of what, in the circumstances, would be reasonably expected of an operator of ordinary prudence having due regard for the interests of both. (Texas Co. v. Ramsower, (Tex.Com.App.) 7 S.W.2d 872; Fox Petroleum Co. v.Booker, 123 Okla. 276, 253 P. 33; Broswood Oil  Gas Co. v.Mary Oil  Gas Co., 164 Okla. 200, 23 P.2d 387.)
Until this verdict was returned, defendants had no way of knowing definitely that they were obliged to do further drilling under the contract. It then becomes necessary to determine what the measure of damages is in such a case. In the case of failure to operate a well or to drill offset wells, the authorities generally hold that the measure of damages is the value of the oil that would have been produced to plaintiffs in the way of royalties, had the drilling been done. (Junction Oil  Gas Co.
v. Pratt, 99 Okla. 14, 225 P. 717; Morrison  De Soto on Oil and Gas Rights, pp. 209, 210; Howerton v. Kansas Natural GasCo., 82 Kan. 367, 108 P. 813, 34 L.R.A. (n.s.) 46; Gwynn v.Wisdom, (Tex.Com.App.) 14 S.W.2d 265; Blair v. ClearCreek Oil  Gas Co., 148 Ark. 301, 230 S.W. 286, 19 A.L.R. 430; Summers on Oil and Gas, sec. 1397.) The fact that the matter is difficult of definite proof does not alter the rule. (Texas Co.
v. Ramsower, supra, rehearing denied (Tex.Com.App.)10 S.W.2d 537; Summers on Oil and Gas, supra.)
The same rule has been extended to cases where there has been a breach of the covenant fully to develop land for oil and gas. (Texas Pacific Coal  Oil Co. v. Barker, 117 Tex. 418,6 S.W.2d 1031, 1039, 60 A.L.R. 936.)
Some courts deny the right to recover the well-cost under any circumstances. Thus the well-cost rule was disapproved in the case of Guardian Trust Co. v. Brothers, (Tex.Civ.App.)59 S.W.2d 343, 345, where the court said: "Suppose *Page 353 
these appellants had been the owners of a vacant lot in the town of Desdemona, near which the land covered by this lease is situated, and had entered into a contract with appellee, under the terms of which appellee agreed to erect a building thereon according to certain specifications and to pay appellants one-eighth of the gross revenues to be derived from renting the building, and that the contract had provided that appellee should have the right to remove the building at the expiration of the lease, placing the land in as good condition as it was before the lease was given. Then suppose that appellee had failed to erect the building. Would it be seriously contended that appellant's measure of damages for the breach of that contract would be what it would have cost to erect the building? We think not. The loss or injury actually sustained by the obligee, rather than the cost of performance by the obligor, is the proper measure of damages for the breach of a contract. When that well-established rule is departed from, compensatory damages become either punitive damages, because too much, or inadequate damages, because too little, and the fundamental purpose of compensatory damages is lost sight of. We can see no just reason for departing from the well-established rule of law for measuring damages simply because the contract relates to the sinking of an oil well. The fact that the nature of the contract is such as to render it impossible to ascertain with mathematical accuracy the exact amount of the damages suffered by the lessor should not operate to change the rule. The parties knew that difficulty inhered in the subject about which they were contracting, but chose not to stipulate for liquidated damages."
It seems to me that where, as here, there is no loss to plaintiffs because of failure to drill offset wells, but only their right to be compensated for defendants' failure to drill exploratory wells, to the extent that a reasonably prudent operator would have done, and where the contemplated drilling was for the mutual benefit of the parties, the well-cost rule is not the proper measure of damages. Under the contract here, if the defendants did further drilling and discovered oil or gas, plaintiffs *Page 354 
would not be entitled to any of it until defendants were first repaid out of production for the expense of the drilling.
I think, if plaintiffs are able to prove with the requisite degree of certainty the value to them of requisite additional drilling in the way of royalty that would come to them, that should be the rule of damages. While there is authority to the contrary (Breeden v. Hopkins, 210 A.D. 412, 206 N.Y. Supp. 282; Texas Pacific Coal  Oil Co. v. Barker, supra), I think, at most, if plaintiffs cannot prove their damages with sufficient certainty, that then their remedy under the facts here is to compel defendants specifically to perform the contract, or, in the alternative, pay to plaintiffs the cost of the wells which should be drilled. There is a recognized field of equity jurisprudence for specific performance of a contract when for some reason an action for damages cannot be maintained. This, I think, is such a case, if plaintiffs cannot prove with a reasonable degree of certainty the value of the oil or gas which would have come to them, had the drilling been done. (CompareAlley v. Peeso, 88 Mont. 1, 290 P. 238.)
I see no reason why, if plaintiffs cannot prove the loss of the value of the oil and gas resulting to them, with reasonable certainty, a court of equity should not define the rights of the parties, determine what wells should be drilled and the time in which they should be drilled — the contract not yet having expired — and give defendants an opportunity to comply with its order, or, in the alternative, to pay plaintiffs the cost thereof. A somewhat similar decree was entered in the cases ofAustin v. Ohio Fuel Oil Co., 218 Ky. 310, 291 S.W. 386,Webb v. Croft, 120 Kan. 654, 244 P. 1033, and Alford v.Dennis, 102 Kan. 403, 170 P. 1005, where the question arose as to whether leases should be forfeited for noncompliance with drilling covenants.
The case of Texas Pacific Coal  Oil Co. v. Barker, supra, recognizes the right of defendants to receive the benefits which would have come to them, had the required drilling been done. In that case the court said: "We do not mean to say that a lessee, desiring and offering to go on and comply with his *Page 355 
obligations, might not be able to invoke the aid of a court of equity in such a way as to obtain the benefit of unmined minerals on which such lessee had been required to pay royalties. Since the effect of judgment in favor of the lessor for the value of royalties is to award specific performance of the lessee's obligation, the lessee might be able to present a state of facts under which a court of equity would be warranted in decreeing to the lessee like specific performance by the lessor, including delivery of the minerals on which the royalty had been paid." In other words, if defendants are required to do the drilling found by the jury to be necessary for compliance with the contract, or bear the expense thereof, justice between the parties requires that defendants be afforded the opportunity to recoup their expenses from oil production before plaintiffs are entitled to a money judgment for compensatory damages.
The adoption of the well-cost rule affords no such opportunity unless the decree is made in the alternative. The rule adopted here is oppressive and seems to me to award punitive, not compensatory, damages. I think it was error to adopt the well-cost as the measure of damages under the facts here. But, if the well-cost is the proper measure of damages, the court should, I think, enter an alternative decree awarding such damages to plaintiffs only in the event that defendants fail to drill the number of wells specified in the decree, within the time therein to be specified.
No useful purpose would be subserved in here discussing the question whether the contract is ambiguous so as to admit of oral evidence to explain the ambiguity.
I think the cause should be remanded for a new trial.
Rehearing denied January 4, 1935.
MR. CHIEF JUSTICE CALLAWAY and MR. JUSTICE ANGSTMAN dissenting. *Page 356