Samano v. Sun Oil Co.

621 S.W.2d 580, 70 Oil & Gas Rep. 64, 24 Tex. Sup. Ct. J. 553, 1981 Tex. LEXIS 341

• Court: Texas Supreme Court
• Decided: September 16, 1981
• Docket: B-9969
• Status: Published

Opinions

POPE, Justice.

George Samano and others (hereafter called Samano), as lessors of an oil and gas lease, sued Sun Oil Company and Tanya Oil Company (hereafter called Sun), as lessees, for a declaratory judgment that the lease had expired; because, during the secondary term, there was neither production nor any drilling or reworking operations for a continuous period of seventy-three days. The question presented by the case is whether a sixty-day limitation period for drilling or reworking operations was applicable to the secondary term of the lease. The trial court granted lessor, Samano, a summary judgment, holding that the lease had terminated. The court of civil appeals, with a divided court, reversed that judgment, 607 S.W.2d 46, holding that the sixty-day requirement in the drilling or reworking clause applied only to operations in progress at the end of the primary term. We reverse the judgment of the court of civil appeals and affirm the judgment of the trial court.

Paragraph 2 of the Samano lease is an early habendum clause which also includes a continuous drilling or reworking clause. Paragraph 2 of the lease provides:

2. Subject to other provisions herein contained, this lease shall remain in force for a term of ten years from this date, called primary term, and as long thereafter as oil, gas or other mineral is produced from said land, or as long thereafter as Lessee shall conduct drilling or reworking operations thereon with no cessation of more than sixty consecutive days until production results, and if production results, so long as any such mineral is produced.

Samano and Sun executed the lease on March 29, 1934, so the ten-year primary term ended March 29, 1944. Production in paying quantities extended the lease beyond the primary term and until May 4, 1977, when production stopped. Sun did nothing to restore production until July 15, a continuous period of seventy-three days. Sun urges that the cessation of drilling or reworking operations for the seventy-three days was a temporary cessation.

This court has held that, absent an express time limitation in the lease for continuous drilling operations, a temporary cessation of production after the primary term does not terminate the estate when the production stops because of some mechanical breakdown in the equipment. Amoco Production Co. v. Braslau, 561 S.W.2d 805 (Tex.1978). That rule was a negative corollary to the rule that a lease terminates upon a cessation of production for an extended period of time after the primary term. Watson v. Rochmill, 137 Tex. 565, 155 S.W.2d 783 (1941). Ours is a question of construing the lease clause, quoted above, to determine whether the express sixty-day time limitation controls this case. See, Woodson Oil Co. v. Pruett, 281 S.W.2d 159 (Tex.Civ.App.—San Antonio 1955, writ ref’d n. r. e.); Haby v. Stanolind Oil & Gas Co., 228 F.2d 298 (5th Cir. 1955); 3 H. Williams, Oil and Gas Law § 616.2 (1980).

Standard rules of English show that paragraph 2 was carefully drafted and that its meaning is clear and easily breaks into three parts. These are the three divisions of the clause:¹

Subject to the other provisions herein contained, this lease

(1)

shall remain in force for a term of ten years from this date, called primary term, (March 29, 1944 was end of term)

(2)

and as long THEREAFTER as oil, gas or other mineral is produced from said land, (May 4,1977 was last day of production)

(3)

or as long THEREAFTER as Lessee shall conduct drilling or re-working operations thereon with no cessation of more than sixty consecutive days until production results, so long as any such mineral is produced. (July 3, 1977, was the end of the sixty-day period).

Sun and the majority of the court of civil appeals have ignored this division and more particularly, they have ignored the word “thereafter” which was used not once, but twice, each time with a meaning and a reference to what had gone before.

The draftsman stated three distinct things which would prolong the term of the lease. The habendum clause first provided for a ten-year primary term. “Thereafter,” meaning “after that,” or after the duration of the primary term, the lease would continue in force as long as there was production. We are now into the secondary term, when we reach the third provision. That provision is the continuous drilling or reworking clause, and it looks back upon the two prior habendum provisions, the one for the primary term and the other one for its extension into the secondary term by production. It then states that the duration of the lease can be extended even further. We know this because the second “thereafter” now refers to what has already been stated. It was not until both methods (1) and (2) for extending the life of the lease were stated in the habendum clause that the lease provided for yet a third extension, that is, “thereafter by drilling or reworking operations.” An inseparable part of this drilling or reworking clause was that there could be no cessation of drilling or reworking operations for more than sixty days — not seventy-three days.

Sun quotes a number of textbooks on English grammar in support of its contention that modifiers are intended to refer to the words closest to them in the sentence.² That, of course, is the correct rule. It was not observed by the court of civil appeals. The rule concerning modifiers is:

The reader naturally assumes that the parts of a sentence which are placed next to each other are logically related to each other.... The rule which will guide you may be stated in two parts: (1) place all modifiers, whether words, phrases, or clauses, as close as possible to the words they modify; (2) avoid placing these elements near other words they might be taken to modify.³

Another statement of the rule of grammar is: “Place modifiers so that they will be connected immediately with the words they modify.” ⁴ “Thereafter” is an adverbial modifier, but Sun ignores it entirely. The first “thereafter” refers to the primary term clause that is nearest to and is the only thing that has gone before. The second “thereafter” also refers to what has gone before and is nearest. That is the clause which extends the lease by production. The thing that will accomplish the extension of the lease “thereafter” and beyond the production period is drilling or reworking operations with no cessation of more than sixty days. Consistent with good English, the first “thereafter” refers to the extension of the primary term; and the second “thereafter” reasonably refers to both — not just one — of the prior statements about duration of the lease.

If, as urged by Sun and held by the majority of the court of civil appeals, the clause requiring drilling or reworking within sixty days applies only to operations in progress at the end of the primary term; according to the grammar books, the drilling or reworking clause would have followed next and immediately after the clause stating the ten-year primary term. Instead, consistent with the rules of grammar, the drilling or reworking clause within sixty days is next to and ir-mediately after the part of the habendum clause concerning the secondary period by production. The court of civil appeals erroneously leaps over that clause to apply the second “thereafter” exclusively to the primary term clause.

This court has already decided, and correctly so, that the drilling or reworking clause, including its express limitations by time, applies to operations in progress at the end of the primary term. While rules of good English are not always controlling, under those rules there is stronger reason for holding that the drilling or reworking clause within sixty days applies to the instance of cessation of production during the secondary term, than there is for holding that the clause only applies to the operations in progress at the end of the primary term.

The better, consistent, and more workable rule would be to apply the same rule to both parts of the habendum clause — that is, to operations at the end of the primary term and also the cessation of production during the secondary term, both of which immediately are followed by the sixty-day drilling or reworking clause.

This grammatical construction of the compound sentence is also good common sense. All of the drilling or reworking clause must be applied, if it is to be applied at all. This includes the sixty-day limit which is an integral part of that clause. It means that when there is the right to drill or rework, that operation must be done in that stated time. It means that the right to drill or rework was not intended to be within the stated time in one instance but within a reasonable time in the other. The exercise of the right and the time limit to do it are both necessary parts of the whole.

The habendum has two events which maintain the lease in force, the ten-year term and production after that term. Both of those events are also terminating factors. It is not reasonable to hold that the lessor and lessee intended, as Sun says and the court of civil appeals has held, that the two terminating events stated in the habendum clause should be treated differently with respect to the drilling or reworking clause. Sun says that the drilling or reworking clause applies to operations in progress at the end of the primary term, but it is not applicable to the other terminating event, the cessation of production during the secondary term. It says that the sixty-day requirement for drilling or reworking to keep a lease alive applies to operations at the end of the primary term, but has no application to operations required upon the cessation of production during the secondary term. It says that the parties, while intending to avoid the rule of reasonable temporary cessation as to operations in progress at the end of the primary term, still intended that the rule of temporary cessation would apply with respect to operations when production stops during the secondary term. Sun says that the parties intended a specific limit of sixty days for one-half of the habendum clause, but intended an uncertain period of time which can be determined by a fact-finder for the other half of the habendum clause.

The court of civil appeals has held, and Sun seeks to uphold that decision, that the drilling or reworking clause appended to the habendum clause applies exclusively to operations at the end of the primary term. 607 S.W.2d at 49. We do not agree. That construction would require our reading out of this lease, and those like it, the drill or rework clause which expressly entitles Sun to drill entirely new wells during the secondary term after production has ceased. The reasonable and common-sense meaning of the clause is that the whole drilling or reworking clause, including its sixty-day limit for the operations, must be applied to the whole habendum clause.

Both Samano and Sun cite many of the same cases. This is so, because this court has not previously addressed this question. But, this court has never held that a specific time limit for drilling or reworking operations, stated as a part of the habendum clause and required to keep a lease alive, applies exclusively to the operations at the end of the primary term and has no application to operations required to keep a lease alive upon cessation of production during the secondary term. Precedents about leases that state no time for drilling or reworking operations are not helpful. In those cases, of course, the rule of reasonable temporary cessation applies. See, Amoco Production Co. v. Braslau, 561 S.W.2d 805 (Tex.1978); Midwest Oil Corp. v. Winsauer, 159 Tex. 560, 323 S.W.2d 944 (Tex.1959); Watson v. Bochmill, 137 Tex. 565, 155 S.W.2d 783 (1941); Stuart v. Pundt, 338 S.W.2d 167 (Tex.Civ.App.—San Antonio 1960, writ ref’d); Scarborough v. New Domain Oil & Gas Co., 276 S.W. 331 (Tex.Civ.App.—El Paso 1925, writ ref’d w.o.j.).

Gulf Oil Corporation v. Reid, 161 Tex. 51, 337 S.W.2d 267 (1960), was also factually different, because this court held that there had never been any production, actual or constructive, during either the primary or secondary term.

Woodson Oil Company v. Pruett, 281 S.W.2d 159 (Tex.Civ.App.—San Antonio 1955, writ ref’d n.r.e.), relied upon by Sama-no, is also not controlling, because the ha-bendum clause and the continuous drilling clauses are couched in different terms.

There have been some cases which hold that the drilling or reworking clause with an express time limitation applies to operations actively in progress at the end of the primary term. See, Citizens Nat. Bank of Emporia v. Socony Mobil Oil Co., 372 S.W.2d 718 (Tex.Civ.App.—Amarillo 1963, writ ref’d n.r.e.); Skelly Oil Company v. Harris, 163 Tex. 92, 352 S.W.2d 950 (1962); Phillips Petroleum Co. v. Rudd, 226 S.W.2d 464 (Tex.Civ.App.—Texarkana 1949, no writ), and Duke v. Sun Oil Company, 320 F.2d 853 (5th Cir. 1963). That, too, is not our present problem.

There are some decisions, however, which have applied the whole of the drilling or reworking clause to the whole habendum clause in the same manner that this court has applied it to that part which related to operations at the end of the primary term. Sunray DX Oil Company v. Texaco, Inc., 417 S.W.2d 424 (Tex.Civ.App.—El Paso 1967, writ ref’d n.r.e.), had these very similar provisions in the habendum and the “drilling or reworking” clause:

“3. This lease shall remain in force, unless terminated as hereinafter provided, for the term of five years (hereinafter called the ‘primary term’), and so long thereafter as oil, gas, casinghead gas, cas-inghead gasoline, or any of them, is produced hereunder in paying quantities.”

“7. * * * if after the discovery of oil or gas in paying quantities the production thereof should cease from any cause, this lease shall not terminate if the lessee commences additional drilling or reworking operations within thirty days thereafter * * * ”

The lease was dated October 23, 1951, and production extended the lease beyond the primary term until December 12,1962. The lessee did not commence drilling or reworking operations within thirty days. The court held, as we now hold in this present case:

Also, the terms of the lease prevent the application of the temporary cessation doctrine in this case. The above quoted habendum clause being expressly subject to the thirty-day drilling or reworking clause, all production having ceased, and no drilling or reworking operation having been commenced within the thirty-day period, the lease terminated.

Hall v. McWilliams, 404 S.W.2d 606 (Tex.Civ.App.—Austin 1966, writ ref’d n.r.e.), was another case which held that a lease terminated when production ceased during the secondary term, and the lessee failed to commence drilling or reworking operations within sixty days. In Wainwright v. Wainwright, 359 S.W.2d 628 (Tex.Civ.App.—Fort Worth 1962, writ ref’d n.r.e.), the court refused to apply the temporary cessation rule because there was a failure to resume operations within sixty days after a well ceased to produce during the secondary term. Quoting from Woodson Oil Co. v. Pruett, supra, the court held in response to the claim that the cessation of production was temporary: “This might be true under the terms of some leases, but under the lease here the parties agreed and stipulated what would constitute temporary cessation.”

Professor Kuntz has discussed this problem and agrees with this analysis:

If the clause is of the type that is combined with the habendum clause and provides “and so long thereafter as oil or gas is produced from the land or the premises being developed or operated,” it has an apparently broad purpose of preserving the lease during operations as well as during production without regard to whether the operation began during the primary term or began after its expiration. Accordingly, such clause should be construed to preserve the lease while the lessee continues to conduct operations, regardless of when the operation began so long as it began while the lease was in effect. [Emphasis added.]

4 Kuntz, Oil and Gas § 47.4, at 121 (1972). He would construe the lease provision to permit drilling or reworking operations so long as the lease was in effect, whether it be during the primary term or during the secondary term when the lease is preserved by production. That is the common-sense meaning of the contract that would protect the mutual interests of both the lessors and lessees. The sixty-day provision is an integral part of the drilling or reworking provision affording a known time for commencing drilling or reworking operations, while the contract is in effect during the secondary period. Neither precedent nor sound reason exists for striking down that agreement.

When production stopped on May 4, 1977, during the secondary period, Sun had an express sixty days to drill or rework the well. When it failed to do so, the lease by its express terms automatically terminated. The judgment of the trial court was a correct one.

The judgment of the court of civil appeals is reversed and that of the trial court is affirmed.

1 . The parenthetical notes are added.

2 .F. Watkins, W. Dillingham, E. Martin, Practical English Handbook 65 (4th ed. 1974); G. Leggett, C. D. Mead, W. Charvat, Prentice Hall Handbook for Writers 75, 77 (7th ed. 1978); W. Herman, Portable English Handbook 158 (1978); D. Fear, S. Schiffhors, Short English Handbook 151 (1979).

3 . Kierzek, The MacMillan Handbook of English (3d ed. 1954).

4 . Wooley and Scott, College Handbook of Composition 72 (4th ed. 1944).