Fallis v. Julian Petroleum Co.

CRAIG, J. By a contract dated February 26, 1925, the appellants leased to the defendant Courtney Petroleum Company for a period of five years certain real property upon which the latter agreed to drill to a depth of 5,200 feet for oil, gas and other allied products, and to pay as rental $2,500 from the first production and one-sixth of all other production. The lessee drilled to a depth of 4,158 feet, whereupon by written assignment and a collateral contract, it delivered possession to respondent Julian Petroleum Corporation. The lessors do not appear to have consented to the assignment. On December 20, 1926, the lessors commenced this action against their original lessee and its assignee by a complaint consisting of three causes of action, embracing said lease and contemporaneous agreements, alleging that the Julian Corporation had not drilled to a depth exceeding 4,162 feet, that both companies had ceased operations and that through their negligent and unworkmanlike conduct of the project production had failed. The original lease provided that “the terms and conditions hereof shall be binding upon, and accrue to the benefit of the heirs, executors, successors and assigns of the respective parties hereto, and an acceptance of an assignment hereof, by any person, shall be construed as a promise on his part to be bound by and perform all of the lessee’s *561 covenants herein contained. Time is of the essence of this lease.” By the assignment it was agreed that the Courtney Company sold and conveyed to the Julian Corporation “all of the right, title and interest of the original lessee and present owner in and to said lease and all rights thereunder”. The collateral agreement recited that said assignment was made upon conditions and covenants not contained therein, but which were contained in the collateral contract; that if the well be put on production at a depth less than 4,600 feet, but should make less than 350 barrels, it should be deepened to a specified horizon located approximately 5,000 feet to 5,100 feet; that the assignee “does not undertake to complete said well as a producing oil well at said depth, but does agree to properly drill the same to said depth and there endeavor in the usual and customary manner to place the same on production”. By the terms of the original lease it was recited that it was impossible to determine from current developments as to the necessary depth of the well, but that at a later date the parties would confer regarding the progress of other wells in that vicinity, and “determine what is the best to do for their mutual interests”, and the lessors reserved the right to determine the lease for failure to perform any of its terms or conditions upon ten days’ notice of election so to do. Neither of these two provisions appears to have been observed by the parties. The plaintiffs alleged that “had a well been drilled on said leased property as so required by said lease to a depth of fifty-two hundred (5200) feet, or production at a lesser depth, a well producing oil and gas in large and commercial quantities would have resuited”, that one-sixth of the production would have been worth $65,000; that the Julian Corporation failed to continue drilling to a depth of 5,200 feet, or to a lesser depth at which mineral in paying quantities might be found, and that it had not been paid the $2,500 nor placed the well on production by diligent or continuous operation in good faith. The respondent Julian Corporation interposed a demurrer to the complaint, upon general grounds, and specifically urging that it failed to allege any obligation of said corporation to drill to a depth of 5,200 feet, what, if any, would have been the initial production, how long the well *562 would have produced, or at what rate, or the price of oil over any period of production, or upon what basis the plaintiffs computed the amount of $67,500 for which they prayed judgment. The demurrer was sustained without leave to amend as to the Julian Corporation, and the plaintiffs appealed. The first point advanced by appellants is well taken. While the respondent by accepting an assignment of the lease became liable only to the lessee, its entry into possession created the relation of landlord and tenant between the original lessor and the assignee, and its holding created a privity of estate. (Bonetti v. Treat, 91 Cal. 223 [14 L. R. A. 151, 27 Pac. 612]; Webb v. Jones, 88 Cal. App. 20 [263 Pac. 538].) It is observed that the sublessee did not agree with the lessee to drill below 5,100 feet, nor to complete a producing well, and that the original parties did not confer regarding surrounding developments as to means or methods contributing to their mutual benefit However, regardless of these omissions, without some knowledge as to the necessary depth, the probable regularity or volume of flow, if any, or the market price of such production, the amount of damages or rentals is wholly unascertainable. While, as argued by appellants, a demurrer admits the pleaded facts, the allegations and constituent contracts concede that respondent’s sole neglect or evasion consisted of a failure to drill to a depth of 5,200 feet, that it agreed to pay no rental except from production, and that it did not contract to furnish a producing well. Respondent agreed to drill but 5,100 feet, and its experienced drillers may have determined at a depth of 4,162 feet that further expenditures for that purpose would be futile. Damages for the breach of covenants, such as are here presented, may be agreed upon in advance, and an amount so fixed will be presumed as adequate compensation for losses incurred by a lessor through failure of performance by the lessee. (Civ. Code, secs. 1670, 1671.) When profits are wholly prospective and speculative or conjectural, and the success or failure of such an experiment is of mutual interest, neither party is the arbiter of the extent to which or the diligence with which operations shall proceed. (Brewster v. Lanyon Zinc Co., 140 Fed. 801 [72 C. C. A. 213].) Hence, if the *563 compensation or penalty be not specified by the parties, or if it be impracticable or extremely difficult of estimation, they are relegated to proper proceedings in equity for relief. (Hanlon Dry Dock etc. Co. v. McNear, 70 Cal. App. 204 [232 Pac. 1002]; Brewster v. Lanyon Zinc Co., supra; Craig v. Wade, 159 Cal. 172 [112 Pac. 891].) “No damages can be recovered for breach of a contract which are not clearly ascertainable in both their nature and origin. " (Civ. Code, sec. 3301.) In the instant case even the initial payment of $2,500 is dependent only upon a mere venture, and is wholly contingent upon uncertainties, the extent of which cannot be estimated or determined judicially in dollars and cents. It is a matter of common knowledge that the success or failure of such enterprises, and the casualties and incidental effort and expense of production, if any result, are matters ever held in suspense until mineral is found or the project is abandoned. By the most favorable reading of the complaint and the contract of the parties, this fact appears to have been recognized. It was expressly stated that “the lessee agrees as a further consideration to pay the lessor one-fourth (¼) of the entire production from the lease, of all oils or other hydro-carbons”; “Said twenty-five hundred dollars ($2500) oil bonus to be paid out of twenty-five per cent. (25%) of the gross production of oil, gas and other hydro-carbons”; “a one-sixth royalty and the twenty-five hundred dollars ($2500) provided for in said lease to be paid out of twenty-five per cent. (25%) of the first oil”. The principles above announced were aptly applied in the case last cited (Craig v. Wade, supra), wherein the plaintiff sought to recover upon alleged misrepresentations as to the value of certain oil properties. Our Supreme Court there said: “Twenty thousand dollars may have been expended in sinking a well which has not yet reached oil sands, and which may never reach them. To a sanguine man in the expectation of soon striking oil, the well may have a value of many hundred of thousands of dollars. To the pessimistic man, who believes oil will never be struck, the twenty thousand dollars expended is money lost, and the well is valueless. So, too, if oil be in fact found, the duration of its flow is entirely uncertain and the flow itself may in *564 crease or decrease without apparent reason. If the well yields one hundred barrels of oil today, it may yield a thousand barrels, or none at all, tomorrow. To place a value in terms of money upon such a flowing well must, therefore, itself, of necessity be a matter of opinion merely, since it is not within human knowledge to foresee the contingencies which may result in greatly enhancing or utterly destroying its output.” There are other decisions in this state of like import. (Escondido Oil Co. v. Glaser, 144 Cal. 494 [77 Pac. 1040]; Burrows v. Petroleum Dev. Co., 181 Cal. 253 [184 Pac. 5]; Sledge v. Stolz, 41 Cal. App. 209 [182 Pac. 340].) Numerous decisions from other jurisdictions expressly detail evidence of proximate locality of adjacent wells, and the quantity of their production, as a basis for calculating damages, from which it may be inferred that the pleadings were.so framed as to permit of its introduction. Likewise, in Julian Petroleum Corp. v. Courtney Petroleum Co., 22 Fed. (2d) 360, 362, wherein the same lease here in controversy was involved, it is recited that witnesses testified “that they were familiar with the Athens field, and the location and the production of other wells in that field; that the well in question was favorably located; that, if drilled to the Miley sand, the well would, in their opinion, have produced oil; that the estimated cost of drilling the well to the Miley sand would be a certain amount; that the production of oil would be a certain quantity; that the cost of operation would be a certain amount; and that the oil would sell for a certain price”. However, we are of opinion that it was error to sustain the demurrer without leave to amend. The plaintiffs should be permitted to proceed further in the premises as they may be advised. Authorities upon which the appellants rely in support of their theory of recovery are not persuasive, since they either sound in tort or arise from facts furnishing fixed bases for the estimation of damages, such as the known production of other wells in the immediate locality, as was the case in Wheeland v. Fredonia Gas Co., 92 Kan. 50 [139 Pac. 1010]. We think the rules applicable to the instant case are so well established that to confuse them with distinctions would serve no good purpose. The judgment is reversed.