Durbin v. Osborne

Opinion op the Court by Stanley, Commissioner Reversing in part, affirming in part. This is a suit by tbe grantors of an oil and gas lease of 116 acres in Estill County to recover rentals at the rate of $1 a day for delay in completing a well. Tbe lessors are tbe appellees, Robert Osborne and bis ten children, and tbe lessees are tbe appellants, James M. Durbin and James D. Crabtree. Tbe lease, dated June 28, 1938, contains tbe following provisions: “First — lessees agree to drill a well upon said premises witbin 40 days from this date, or thereafter pay to lessors rentals as hereinafter provided until a well is completed or tbe property hereby granted is reconveyed to lessors. ‘ ‘ Fifth— * * * * In tbe event a well has not been begun on tbe premises witbin 40 days from tbe date hereof (unavoidable accidents and delays excepted), tbe lessees may thereafter pay a yearly rental of $1.00 per day, payable quarterly in advance until a well is completed, which payments for delay in completing well may be made direct to Robert Osborne or deposited to-credit in tbe-bank, which payments shall fully and completely extend this lease from time to time until a well is completed, and lessors agree to accept said payments of rentals when made and to mail receipts for same to tbe lessees.” Tbe petition as amended sought to recover $1,003 upon tbe allegation that tbe lessees bad never completed a well. 'Material issues were joined as to tbe beginning and completion of a well, and a trial entered upon. Tbe evidence disclosed that a well bad been drilled on tbe land in 1919 and oil discovered but not in marketable quantity, so it bad been abandoned. About two weeks after this lease was executed tbe lessees moved their drilling machinery and other equipment to tbe site of tbe old well and proceeded at once with extensive work there in removing old casing, cleaning out tbe well, and doing some reaming. They then drilled tbe well 16 feet deep *466 er. Several months were spent in endeavoring to make something out of the well. It was repeatedly pumped and made a little oil from time to time, but intermittently produced nothing but water. Durbin, one of the lessees, testified that it was “just enough to keep us working at the thing. ’ ’ Finally, the effort was given up and a new well started elsewhere in April, 1939. Much trouble was encountered here, including inclement weather, the striking of a cave and the loss of tools on several occasions. This well was drilled to the oil-bearing sand in October, 1940, but produced nothing. It was plugged and abandoned as a dry hole. The lessees contended in their evidence that the lessors had verbally agreed they should “try to make a well out of the old one” before starting a new well. Robert Osborne, to whom the rentals were payable and who it was claimed made the agreement, testified merely that he did not remember it. He further testified that before the lease was executed it was the intention to try to make something out of the old well, and in this he is corroborated by one of his sons, who, however, testified that the 40-day period specified in the lease allowed ten days to cover that effort. Robert Osborne lived on the place and worked for the lessees in their operations. None of the parties ever suggested that this effort was not a compliance with the terms of the lease in respect to beginning to drill or asked payment of the rental, which, as stated, was payable quarterly in advance. An amended answer was filed to conform to the defendants’ proof and the case was submitted to a jury upon the issue of the existence of the verbal agreement. The verdict was for the plaintiffs in the sum of $745, which was the rental beginning 40 days from the date of the lease to October 1, 1940, the date the court regarded the new well as having been completed, less $40,'for which deduction there is no basis. The defendants appeal and plaintiffs cross appeal. Each group argues they were entitled to a judgment as a matter of law, the defendants insisting that no judgment should have been rendered against them, and the plaintiffs insisting they were entitled to recover the full amount prayed, which is based upon the theory the dry well completed in October, 1940, was not a ‘ ‘ completed well, ’ ’ since no oil was obtained. Under the conclusion we have reached, we need to consider only one question. *467 Obviously, tbe primary purpose of tbe owners of tbe land was to secure its development in expectation of royalties. In order to obtain tbat promptly, tbe quite heavy rental of $1 per day was stipulated for delay. We construe tbe provisions of tbe lease above quoted to mean tbat if tbe lessees began drilling witbin 40 days they did not have to pay any rental; if they did not begin witbin tbat time rent began to accrue and continued until a well should be completed. This was an absolute obligation of tbe lessees of which they could be relieved only by a reconveyance of tbe lease, except as tbe contract might perhaps be affected by the terms of Ky. Rev. Stats. 353.020 (Section 3766b-4, Ky. Stats.). See Bradshaw v. Hurt, 198 Ky. 38, 247 S. W. 1113; James v. Deskins, 278 Ky. 570, 129 S. W. (2d) 129. Putting aside tbe claim of tbe verbal agreement, tbe question is whether tbe work with and tbe deepening of tbe old well, which bad been abandoned 19 years before, was tbe equivalent of beginning to drill a well as provided for in tbe lease. What constitutes beginning of a well is determined from tbe facts and circumstances of each case. 40 O. J. 1068. Particular clauses of a lease are to be read in tbe light of their purpose. Those involved here were primarily to obtain early exploration, and secondly to afford for tbe lessees a privilege of delay, and to provide for tbe lessors compensation or liquidated damages therefor. Tbe construction of such provisions is generally tbat tbe obligation is met where tbe lessee witbin tbe stipulated time makes substantial preparation for drilling, such as placing derrick timbers, establishing machinery and equipment at tbe site, wholly or partly, and for proceeding with tbe drilling, even though tbe actual drilling begins after the date bad passed; but it has been held tbat commencing to drill means tbe first movement of tbe drill in penetrating tbe ground. Willis’ Thornton on Oil and Gas, Sections 201, 1281. See in addition to cases therein cited Henderson v. Ferrell, 198 Pa. 547, 38 A. 1018; Smith v. Gypsy Oil Co., 130 Okl. 135, 265 P. 647. Tbe term “beginning of operations to drill,” and similar phrases are tbe equivalent of tbe provision “begin to drill.” McCallister v. Texas Co., Tex. Civ. App., 223 S. W. 859; Robinson v. Gordon Oil Co., 258 Mich. 643, 242 N. W. 795; Wilcox v. West, 45 Cal. App. (2d) 267, 114 P. (2d) 39. *468 The element of good faith is an important consideration in determining when drilling or other development shall be deemed to begin or to have begun. Willis’ Thornton on Oil & Gas, Section 164. Cf. Warfield Natural Gas Co. v. Allen, 248 Ky. 646, 59 S. W. (2d) 534, 91 A. L. R. 890. When that appears a substantial compliance with the terms of the contract as to time to commence to drill is sufficient. 40 C. J. 1068. In Flanigan v. Stern, 204 Ky. 814, 265 S. W. 324, the lease provided that if no well should be commenced on or before a specified date, the lease would terminate unless the lessee on or before that date should pay or tender a certain sum as rental and to cover the privilege of deferring the commencement period two months. Before the day specified, the lessee had sunk his drill into the ground four to six feet, which is generally called “spudding in” and regarded as only a gesture towards drilling a well. Nothing more was done, the equipment being moved away, at least temporarily. We held there was a forfeiture of the lease, being influenced, if not controlled, by the apparent absence of good faith and the failure of the lessee to prosecute the work with reasonable diligence. Of like effect is Phillips v. Berg, 120 Kan. 446, 243 P. 1054. In the case at bar the lessees’ good faith in exploring or beginning to develop the lease cannot be doubted. Eliminating from consideration the persuasive, if not conclusive, evidence of an express agreement to accept the restoration and deepening of the old well in lieu of the beginning of a new one, the facts justify the implication that there was an extension of time for such new development. Willis’ Thornton on Oil & Gas, Section 165; 24 Am. Jur., Gas & Oil, Section 76. ■ If the acquiescence by the lessors of the delay in beginning of a new well because of the exploring of possibilities of and the drilling deeper of the old well be not a valid consent, waiver or estoppel (Cf. Lacer v. Sumpter, 198 Ky. 752, 249 S. W. 1026), it fortifies our construction of the provisions in respect thereto as being the true intention of the parties, and our conclusion that the lessees met their obligation to begin to drill a well on the premises within forty days. We are of opinion, therefore, that the court should have directed a verdict for the defendants. Judgment reversed on original and affirmed on the cross appeal.