Union Oil Co. v. Union Sugar Co.

188 P.2d 470, 31 Cal. 2d 300, 1948 Cal. LEXIS 311
CourtCalifornia Supreme Court
DecidedJanuary 16, 1948
DocketL. A. 19660
StatusPublished
Cited by47 cases

This text of 188 P.2d 470 (Union Oil Co. v. Union Sugar Co.) is published on Counsel Stack Legal Research, covering California Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Union Oil Co. v. Union Sugar Co., 188 P.2d 470, 31 Cal. 2d 300, 1948 Cal. LEXIS 311 (Cal. 1948).

Opinions

[302]*302TRAYNOR, J.

Plaintiff brought this action for declaratory relief to obtain a determination of its drilling obligations under an oil and gas lease as modified by a supplemental agreement between the parties. Plaintiff appeals from a judgment entered in favor of defendant, Union Sugar Company.

The original lease was executed in 1936 between defendant, Union Sugar Company, as lessor, and Sovereign Oil Corporation, as lessee. B. H. Moore, Incorporated, a one-man corporation, hereinafter referred tó as Moore, succeeded to the rights of the lessee. Subsequently, plaintiff acquired the lease from Moore. The original lease gave the lessee the right to extract oil and gas from a tract of land containing approximately 6,700 acres for 20 years and for as long thereafter as hydrocarbon substances were produced from the land. The lessee agreed to pay the lessor a royalty of one-eighth of the proceeds from the sale of the oil and gas. Paragraph 7 of the lease provided that after the discovery of oil and gas in paying quantities, the lessee would continue to drill additional wells until it had drilled one well for each 10 acres held under the lease. It also specified the rate of drilling required of the lessee:

"After the discovery of oil or gas in paying quantities on the demised premises, Lessee agrees to continuously operate one string of tools with due diligence for the first year after such discovery, two strings of tools for the second year after such discovery, three strings of tools for the third year after such discovery, four strings of tools for the fourth year after such discovery, and five strings of tools thereafter until the drilling requirements herein specified are complied with. Lessee may defer the commencement of the next well to be commenced with each string of tools to be operated hereunder for a period of not to exceed three months after the completion of the well next preceding the well drilled with that particular string of tools. The lessee shall be entitled to drill as many additional wells on said land and premises as it desires. ’ ’

The original lease contains three clauses suspending the drilling requirements of paragraph 7. Paragraph 7, in addition to its other provisions, provides:

"Drilling and producing operations hereunder may also be suspended while the value of oil of the quality produced from said land, as defined in paragraph One hereof is Sixty Cents or less per barrel at the well, or when there is no available market for the same at the well at such price. ’ ’

[303]*303Paragraph 10 of the lease contains a force majeure clause providing that the drilling requirements shall be suspended whenever the lessee is prevented from complying with the lease because of strikes, lockouts, actions of the elements, accidents, rules and regulations of any federal, state, municipal or other governmental agency, or because of other matters or conditions beyond the lessee’s control.

Paragraph 33 provides that the lessee may suspend drilling operations if it is obligated to curtail production by reason of any valid order, rule, law or regulation of any federal, state or other governmental subdivision and such curtailment makes it impossible for the lessee to produce oil at a profit.

Two other provisions of the original lease are pertinent. Paragraph 9 of the original lease provides that the lessee agrees to drill offset wells whenever a well on adjoining property within 250 feet of the limits of the land contained within the lease is producing oil or gas in paying quantities. Paragraph 25 of the original lease provides that the lessee may surrender all or any part of the acreage and thus reduce the number of wells to drill.

Soon after the lease was executed, the Pacific Coast Railway Company, which owned a strip of land extending across part of the leased premises, became a party to the lease. This company was named as a defendant in the present action, but permitted its default to be entered and is not a party to this appeal.

In September, 1939, the price of oil produced at the wells on the leased premises dropped below 60 cents a barrel, and Moore, who was then the lessee, suspended drilling operations in accord with the provisions of paragraph 7. By this time, the lessee had spent over a million dollars in drilling 12 wells, two of which were dry, three wholly unprofitable, and the rest of moderate production. In October, the price of oil of the quality produced by these wells was from 45 to 46 cents a barrel at the wells. In that month. Moore and the Union Sugar Company commenced negotiations for a modification of the lease. In 1940, the defendant Union Sugar Company entered into a formal agreement with Moore. The agreement was entitled “Supplemental Contract” and was executed as of February 1, 1940, by defendant, Pacific Coast Railway Corporation, and Moore. By the terms of this agreement the parties agreed that the original lease “be and the same is hereby, modified in the following respects, to wit:

[304]*304“ (1) All obligations to drill additional wells, except off-set wells^ are hereby suspended for a period of two years from February 1, 1940.
" (2) At the expiration of said two year period, Moore shall be obligated to complete three wells per year.
“(3) Numerical paragraph (9) of the lease of April 8, 1936, [with respect to off-set wells] shall be modified by striking out ‘250 feet’ wherever the same appears therein, and inserting in lieu thereof ‘ 330 feet. ’
“ (4) Commencing from the date of this supplemental contract, Moore agrees to pay a minimum royalty of $25,000.00 per year, payable monthly in advance, and said royalty shall be charged against the total oil reserves during the course of the life of the lease; that is to say, Moore shall be entitled to all oil and/or gas produced from said lease, or the proceeds thereof, until it is fully reimbursed from lessors’ one-eighth royalty interest for the minimum royalty so paid.
“ (5) Except insofar as the provisions of the lease of April 8, 1936, are in conflict herewith, the same shall remain in full force and effect. ’ ’

In 1940, plaintiff acquired the rights of Moore as lessee. On June 22,1942, defendant served on plaintiff a notice of default reciting that plaintiff was not operating two strings of tools on the leased property and was therefore not complying with the terms and conditions of paragraph 7 of the original lease, since the price of oil was then over 60 cents a barrel. The notice also recited that if this failure continued for 90 days after the date of the notice, the lease would terminate and the lessee’s rights to drill additional wells would be forfeited. A controversy having arisen concerning the extent to which the supplemental contract modified the drilling obligations of paragraph 7 of the original lease, this action was brought. Plaintiff alleged that clause 2 of the “Supplemental Contract”' modified paragraph 7 so that the lessee after February 1, 1942 is only obligated to drill three wells a year regardless of the price of oil.

When the case first came on for trial the court sustained defendant’s objection to the introduction of any extrinsic evidence with reference to the -negotiations and circumstances surrounding the execution of the supplemental agreement.

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Bluebook (online)
188 P.2d 470, 31 Cal. 2d 300, 1948 Cal. LEXIS 311, Counsel Stack Legal Research, https://law.counselstack.com/opinion/union-oil-co-v-union-sugar-co-cal-1948.