This appeal arises from the trial of 18 actions to cancel oil and gas leases in the District Court of Ellis County, Oklahoma, the Honorable Charles M. Wilson, presiding. This appeal refers to 13 of the 18 cases consolidated for trial to the extent that the evidence presented would apply to each separate case. The balance of five actions, being against Shell Oil Company, have not been appealed. A judgment in that company’s favor was rendered because there was no dispute Shell had complied with those duties urged to inure in an oil and gas lease in this action.
These lawsuits were presaged by contacts with landowners by the corporate plaintiff, Energy Reserves, Inc. Under the contract sought by Energy from the mineral owners, the owners appointed Energy their agent for the purpose of obtaining a cancellation and release of the 23-year-old oil and gas leases held by defendants. If the efforts to free the minerals for lease were successful,
The actions involve oil and gas cancellation suits brought in the latter part of 1977 and early 1978 and referred to leases in Township 17 North, Range 22 West, and Township 17 North, Range 23 West, in Ellis County. Individual plaintiffs were joined with Energy Reserves Group, Inc. Joined as defendants are: Amerada Hess Corporation, Amoco Production Co., Pioneer Production Corp., Flag Redfern Oil Co., Claremont Corporation, Sabine Production Company, Sun Oil Co., (Del.), and Odessa Natural Corp. These defendants will be referred to as the Amerada Hess Group.
Plaintiffs’ first cause of action stated the individual plaintiffs owned the mineral interests in the subject land and the defendants were the lessees. This cause also alleged that exploration in the general area had established the presence of numerous potentially productive formations which the defendants had failed to explore and drew the conclusion that defendants were holding the leases through marginal production from the Tonkawa Formation for speculation. Plaintiffs’ second cause of action alleged the oil and gas leases should have been released under the provisions of 52 O.S.Supp.1977 § 87.1(b) as to all formations other than the productive Tonkawa and prayed for that relief. These two causes of action were pled in all 13 cases.
The trial of these causes spread over a five day period and after testimony was taken, the trial court ruled that the defendants’ demurrer to the second cause of action should be sustained in each cause of action. Referring to the first cause of action the trial court ruled the contract between the corporate plaintiff, Energy, and the individual mineral interest owners was not cham-pertous and thus was no bar to the bringing of an action. Lastly, the trial court ruled there was an implied covenant applicable in these causes and the corporate defendants (except Shell Oil Co.) had failed to comply with the implied covenant to explore deeper formations after first production. Pursuant to that finding the trial court decreed the remaining corporate defendants should suffer cancellation of their oil and gas leases unless they commenced or participated in the drilling of a well to test the Hunton on or before July 1, 1979. Upon failure to so commence a well by the last date appellants’ interest would be cancelled as to all strata below the base of the Tonkawa formations. The judgment issued is currently stayed by order of this Court.
The appellants brief four propositions of error as sufficient to overturn the judgment of the lower court. The appellants contend it was error for the court to order the leases in question cancelled for breach of an implied covenant to further explore when these leases were held by paying production. Secondly, appellants contend the trial court erroneously held the plaintiffs not to be guilty of champerty under the facts of the cause. The third error asserted relates to sufficiency of a notice of a demand to comply with the implied covenant found to exist, while the fourth proposition relates to the correctness of the judgment in Cause # C77-80, Miller, et a 1. v. Odessa Natural.
Cross Appellants Energy Reserves, Inc., defend the judgment asserting the trial court correctly determined a breach of the implied covenant to further explore had occurred. However, appellees do not agree with the judgment issued by the trial court in that, after finding a breach of the covenant, the court provided a remedy for that breach in an alternative decree requiring a single test well to be drilled before a date certain in order to preserve the several leases involved in these actions across an area of two townships. Here cross appellants contend the proper remedy under the facts and the law applied to the cause is a decree of immediate cancellation of all leases. Cross appellants also contend that if an alternative decree was justified under the facts, compliance with the implied covenant would require a well to be drilled on each lease premises.
The Court’s resolution of the issues presented for review by each party to this
The effect of the doctrine of champerty upon the maintenance of this action revolves first upon the applicability in this jurisdiction of the doctrine upon the facts at hand, and secondly, upon whether the defendants are proper parties to assert the existence of a champertous document.
The case of
Worrell v. Roxana Petroleum Corp.,
The gist of the offense or act of cham-perty and maintenance is an officious in-termeddling in a suit which in no way belongs to one, by maintaining or assisting either party with money or otherwise to prosecute or defend it.
The Worrell opinion discusses the fact that the doctrine of champerty and maintenance was rooted in an English society quite different from cultural conditions now obtaining. The case discusses the general retreat of English and American authorities from the doctrine. This Court’s strict limitation of the doctrine is evident upon a first reading of Worrell. The proof necessary to demonstrate the contract to lease for oil and gas was champertous must establish both officious intermeddling and lack of an interest in the action apart from the alleged champertous document. Wor-rell, supra, at p. 48, clearly limits the instances in which these two requirements may be satisfied. The opinion quotes from 11 C.J. 250:
Where a person promoting the suit of another has any interest whatever, legal or equitable, in the thing demanded, distinct from that which he may acquire by an agreement with the suitor, he is in effect also a suitor according to the nature and extent of his interest. It is accordingly a principle that any interest whatever in the subject matter of the suit is sufficient to exempt the party giving aid to the suitor from the charge of illegal maintenance. Whether this interest is great or small, vested or contingent, certain or uncertain, it affords a just reason to the party who has such an interest to participate in the suit of another. However, this interest must have existed or been acquired in some way other than through the contract containing the champertous agreement. It is the aiding of a litigation by a stranger having no interest, direct or remote, immediate or contingent, on an agreement with the party in interest, whereupon such stranger is to receive a part of the thing in dispute, that the law prohibits.
Further limiting the doctrine in modern application,
Worrell, supra,
quotes
Tron v. Lewis,
An agreement to contribute to the expenses of litigation in which the person so agreeing is interested, or may reasonably suppose himself to be interested, by reason of having an interest in the question at issue, is not a champertous agreement or one subject to the charge of maintenance.
The trial court’s refusal to allow the defendants to defeat plaintiffs’ actions is supported by the record when the above precepts are considered.
There is American authority which has rejected the application of a charge of champerty and maintenance to the assignment of adjoining landowner’s rights to a third party for the purpose of bringing an action as a matter of law. See
Blashfield v. Empire State Telegraph,
It is accordingly a principle that any interest whatever in the subject matter of the suit is sufficient to exempt the party giving aid to the suitor from the charge of illegal maintenance. Whether this interest is great or small, vested or contingent, certain or uncertain, it affords a just reason to the party who had such an interest to participate in the suit of another.
The relationship thus demonstrated between the defendants and the corporate plaintiff describes a sufficient nexus of interest to defeat the maintenance allegation. The corporate plaintiff could have a legitimate interest in removing a recalcitrant lessee in order to acquire new drilling and spacing unit working interest owners in units in which it has leasehold interests. Admittedly the interest so circumscribed is remote but this Court does not intend to revitalize the doctrine of champerty and maintenance by limiting the clear statements relative to the issue found in Worrell, supra.
This Court has further restricted the applicability of champerty and maintenance in contemporary Oklahoma jurisprudence in the case of
Aaronson v. Smiley,
Although a contrary view has been taken [Blixt v. Janowiak,188 N.W. 89 ,177 Wis. 175 ] the rule is well settled that the fact that there is a champertous contract in relation to the prosecution of the suit between plaintiff and his attorney or between plaintiff and another layman, in no wise affects the obligation of defendant to plaintiff; it is the champertous contract and not the right of action itself which the contract avoids, and, therefore defendant cannot avail himself of the champertous agreement as a defense to the action. However, where a champer-tous assignment, purchase, or agreement is not collateral to the claim sued upon, but is the basis or foundation of plaintiff’s suit, a judgment of dismissal or nonsuit should be rendered even though defendant is a stranger to the champer-tous contract. (Footnote omitted.)
Aaronson, supra,
establishes Oklahoma as one of the jurisdictions applying the narrow view of the effect of a champer-tous agreement. While defendants in these cases might avoid these contracts if they were held champertous, the rights forming the basis of the lawsuits arise from the duties owed between individual plaintiffs, the lessors, and the defendants as lessees, arising from their lease contracts and the duties implied in such a relationship. The champertous character of the contract between the plaintiffs does not extinguish the duties owed the lessor-plaintiffs by defendants as lessees. This Court is entirely unwilling to disapprove of
Aaronson, supra,
by
The issues joined in this proceeding were raised by a real party in interest. The determination here made that there is no disability imposed upon the individual plaintiffs by virtue of their contract with Energy Reserves, Inc. presents for resolution the central issue in this appeal dealing with the existence of an implied covenant for further exploration in this jurisdiction. There is, however, one point raised by the defendants which merits discussion and that is the fact that an action to cancel an oil and gas lease is but an action in equity to cancel a contract. Thus the demand required prerequisite to an action to cancel must be made by the parties privy to the contract the action seeks to cancel. A demand from a stranger to the instrument is ineffective. From an early date in this jurisdiction it has been said it is a settled rule that the
lessor
must demand that an implied covenant be complied with before a court of equity will grant a forfeiture.
Hudspeth v. Schmelzer,
The theory of the existence of an implied covenant to further explore as espoused by Professor Meyers in 34 Tex.L.R. at 562 requires two major inquiries: 1. Is there harm to the lessor, and 2. does that harm result from a violation of the prudent operator rule. Although recognizing the prudent operator standard is applicable to the proposed covenant, Meyers proposes that the profit motive is to be de-emphasized in determining whether a reasonably prudent operator would drill a well to previously unknown sources, basically for the reason that:
To insist that the standard [of a prudent operator] means the same thing here [under covenant of further exploration] as in the other implied drilling covenants is to abandon a general standard altogether and to substitute a rigid rule that no well need ever be drilled unless that well will be profitable. This attitude defeats the lessor’s claim before it is ever considered. Meyers, supra, at 557.
In response to a finding made by a trial court appealed ultimately to the Texas Supreme Court, in
Clifton v. Koontz,
... a showing that no well had been drilled to a deeper sand “coupled with the testimony of one witness that he would be willing to drill another well.” Clifton v. Koontz, supra, at 696.
The Court in the same paragraph as above quoted specifically mentioned the article by Meyers,
supra,
and noted that a theory requiring the lessee to drill when a ready, willing and able operator would drill regardless of the certainty of profit “is untenable and diametrically opposed to our established prudent operator rule where expectation of profit is an essential element.”
Clifton v. Koontz, supra,
at 697. As discussed, this Court is not prepared to ignore the profit incentive obviously tantamount in the minds of the lessor and lessee by recognizing the offered covenant. There remains the contention of the lessors here that this jurisdiction has committed itself to the recognition of such a covenant in our previous case law. Such a contention is supported by the interpretation of the commentator, Meyers, in his original article dealing with the covenant to further explore found at 34 Tex.L.R. 553 (1956). Therein Meyers states that
Doss Oil Royalty Co. v. Texas Co.,
In the cause of Sauder v. Mid-Continent Petroleum, supra, the Federal Supreme Court cannot be charged with recognition of an implied covenant to further develop. The action was brought in Kansas to cancel an oil and gas lease which was producing in paying quantities. The theory asserted there appears from the face of the opinion, at p. 277. The findings of the State District Court are set out followed by the conclusions of law, including the following passage:
... The conclusion was that petitioners had no adequate remedy at law, the respondent and its predecessors in title had not in good faith and with reasonable diligence explored and developed the lands as required by the express and implied covenants of the lease, ...
Additionally, the following page of the official reporter records immediately after the history of the action the express question presented the Court for decision: “The question for decision is whether the respondent failed to comply with an implied covenant to develop the tract with reasonable diligence.” A close observation of the factual recital discloses that there was a question of the existence of two productive formations on the leased premises, for
In the vicinity there were two sands, the upper of which pinched out eastward of the demised premises, . . . and that wells on the latter (the subject lease) and those on the lands to the west and south thereof were in the lower sand, .. .
In reference to this formation the plaintiff had alleged that he was suffering drainage from adjacent tracts, and the evidence showed that the west tract had two offsetting wells. The trial court found there was a probability of drainage by wells on adjoining tracts. Tracts appearing in the plural it is apparent the District Court found drainage from both east and west of the lease premises. The Court’s finding states there was a probability of such drainage and (assumedly because of the referred to pinch-out of. that sand), only a positive test would disclose whether further offset would produce paying quantities.
The facts noted here point to a duty to drill offsets where drainage is indicated and only drilling would resolve the query of the existence of a location capable of producing paying quantities as an offset. The case by its express terms deals with the implied covenant to further develop and a lease with an express covenant to explore. Under such circumstances the case does not recognize an implied covenant to conduct further exploration without regard to profitability. While
Sauder, supra,
at 279,
... contains a covenant by the lessee, arising by necessary implication from the nature of the lease and the other stipulations therein contained, that if during the term of the lease oil and gas, one or both, are found in paying quantities, the work of development and production shall be continued with reasonable diligence; that is, along such lines as will be reasonably calculated to make the extraction of oil and gas from the leased lands of mutual advantage and profit to the lessor and lessee.
Additionally,
Sauder, supra,
quotes extensively in the body of the opinion from
Brewster v. Lanyon Zinc Co.,
... The object of the operators being to obtain a benefit or profit for both lessor and lessee, it seems obvious, in the absence of some stipulation to that effect, that neither is made the arbiter of the extent to which or diligence with which the operations shall proceed, and that both are bound by the standard of what is reasonable....
The large expense incident to the work of exploration and development and the fact that the lessee must bear the loss if the operations are not successful, require that he proceed with due regard to his own interests as well as those of the lessor.
Doss Oil Royalty Co. v. Texas Co.,
The element of profitability as discussed is central to any formulation of a prudent operator standard. Texas has examined the desirability of recognizing the implied covenant to explore further after paying production is obtained and concluded: “The theory is untenable and is diametrically opposed to our established ‘prudent operator’ rule where expectation of profit is an essential element.” Clifton v. Koontz, supra, at 697.
We thus' hold there is no implied covenant to further explore after paying production is obtained, as distinguished from the implied covenant to further develop. In addition to the speculative burden the offered covenant would place on lessees, the covenant as tendered is substantially served by the covenant for further development as it is interpreted in this jurisdiction while limiting the duty to drill additional wells to those instances where a prudent operator would expect a probability of potential profit from the well contemplated.
3
An example of the protection afforded the lessor by the covenant of development in this jurisdiction is found in
Dixson v. Anadarko Production Co.,
Our present determination that the trial court erred in imposing an implied covenant of further exploration is fatal to cross appellants’ contention the trial court erred in issuing a judgment cancelling those leases conditionally upon failure to drill a single Hunton test in the South Peek area rather than applying that condition individually to each lease.
The judgment of the trial court conditionally cancelling the oil and gas leases in these thirteen consolidated actions for breach of the offered implied covenant for further exploration is reversed as it rests upon a theory untenable in this jurisdiction.
REVERSED.
Notes
. Meyers, supra, p. 554.
. The broad language, covenant to explore, develop and produce, found therein may be a result of a lease containing a drill or pay clause rather than the now-current lease containing a conveyance for a short primary term and so long thereafter as oil and gas are found in paying quantities.
. In this regard it is necessary to distinguish between probable expectations regarding this well and the statistical figures for the industry.