The opinion of the court was delivered by
This сase resolves whether a 3-or 5-year statute of limitations applies to an alleged breach of implied covenants in an oil and gas lease. The actions of defendant Amoco Production Company (Amoco), the producer lessee, under an implied covenant to market in a government-controlled gas price environment are also at issue. Although other jurisdictions have addressed the statute of limitations issue, Kansas has not. Also, we may be the first appellate court to be presented with the type of lessor royalty owner claims asserted here, i.e., breach of the implied covenant to market arising in a factual setting under the Natural Gas Policy Act (NGPA), where the Federal Energy Regulatory Commission’s (FERC) Order 451 has been invoked by the lessee.
The class action representative plaintiff, George Smith, and others (either the Smith Class or lessors) are lessors under a minority of natural gas leases held by defendant Amoco in the Kansas Hugoton and Panoma Council Grove fields (Hugoton area). This equitable action for an accounting is based on alleged breaches of the implied covenant to market and the implied duty of good faith and fair dealing, in each lease indepеndently, between Amoco and each lessor.
The lessors claim that from November 1,1990, through December 31,1992, Amoco should either have sold all the lessors’ natural gas for maximum lawful prices or paid them compensatory royalties. According to the Smith Class, “[a]n equitable accounting was sought to require that Amoco share equitably the economic benefits of the strategic plan it successfully employed at the expense of this class of royalty owners.” The difference between maximum lawful prices and the market prices for which the gas was sold would be the basis for computing the royalty owed. The leases called for royalties to be paid on either market value of the gas or proceeds of sale.
In applying K.S.A. 60-512, a 3-year statute of limitations, the district court limited its time frame for viewing Amoco’s duty to
■The district court also found that Amoco had an implied duty to obtain the best possible price for gas produced from the lessors’ leases and that it had done so. Amoco cross-appeals the best possible price finding.
The issues for review on the lessors’ appeal are whether the district court erred in finding that: (1) K.S.A. 60-512, a 3-year statute of limitations, applies and (2) Amoco acted as a prudent operator.
The issue on the cross-appeal is whether the district court erred in concluding that there was an implied duty for Amoco to obtain the best possible price for gas.
We have jurisdiction under our order of transfer. K.S.A. 20-3018(c).
We hold the implied covenants at issue here are implied in fact; thus K.S.A. 60-511, a 5-year limitation statute, applies. Our ruling on the statute of limitations issue expands the window for viewing Amoco’s conduct, and, thus, the prudent operator issue will be decided by the finder of fact on remand. The standards for measuring whether Amoco has met its prudent operator duty to the lessors will include the effect of a government-controlled price environment, as more fully discussed in the opinion.
Our statute of limitations ruling also affects the cross-appeal. The district court held that Amoco had marketed at the best possible price. (We have used the phrase “best prices obtainable at the place where the gas was produced.”
Maddox v. Gulf Oil Corporation,
We reverse and remand.
FACTS
This case was tried over a 7-day period by experienced counsel before an able judge. The record consists of 59 volumes, over 3,700 pages, plus numerous depositions, and over 200 exhibits. The parties before trial entered into 83 separate written stipulated facts. All of the stipulated facts were incorporated into the findings of the district court. In order to convey the historical background and complexity of the case, we have set out the district court’s findings in full. The Smith Class does not challenge any of the findings.
“The following facts are those that the Court considers material to its decision herein, which include the 83 stipulated facts submitted by the parties.
“The Plaintiff in this proceeding is George Smith, both individually and as class representative for all oil and gas royalty owners whose royalty payments for natural gas were reduced on a per MMBtu basis due to renegotiation, amendment to or termination of the gas purchase contracts between Amoco Production Company and Williams Natural Gas Company, Inc., after the effective date of Order 451 issued by the Federal Energy Regulatory Commission (FERC).
“The Defendant, Amoco Production Company, is the lessee of an oil and gas lease in which Smith owns a royalty interest covering a tract of land in Finney County, Kansas. At all times relevant, Amoco produced natural gas from the Smith lease.
“The Hugoton natural gas field covers a large portion of Southwest Kansas and extends into Oklahoma and Texas. The Panoma natural gas field underlies a portion of the Hugoton natural gas field. There are in excess of 5,800 wells in the Kansas portion of this field, which produce approximately 80 percent of all the gas produced in the State of Kansas.
“The predecessor to Amoco and the predecessor to Williams entered into a contract dated June 23rd, 1950, which was amended substantially in 1966,1971, and 1974. Under the terms of this contract Amoco sold all gas from all of its leases covering approximately 600,000 acres in the Hugoton and Panoma fields to Williams for so long as the leases continued to produce.
“Williams owns a gas line which extends from Grant County, Kansas, to Johnson County, Kansas.
“Also on the same date, the predecessors to Amoco and Williams entered into a gas processing agreement, which allows Amoco to process all gas produced inareas A and B covered by the 1950 contract through a gas processing plant located in Grant County, Kansas, where Amoco removes liquids from tire gas stream prior to committing the gas stream to Williams pipeline for resale by Williams. A third area known as area C of tire Amoco field was not processed by Amoco as a result of the 1950 contract.
“One of the additional terms 'of the 1950 contract was that tire predecessor to Amoco sold to the predecessor to Williams the gathering system that it had constructed for area A, and Williams then constructed a gathering system to connect all of Amoco’s wells locаted on the leases in area B of the Hugoton field to Amoco’s gas processing plant. A separate gathering system was built by Williams to connect Amoco’s leases in area G to another gas processing company.
“The 1974 amendment to the 1950 contract required Williams to purchase gas from Amoco at the highest price authorized by law.
“In 1938, the United States Congress enacted the Natural Gas Act of 1938, which authorized the Federal Power Commission to regulate pipeline rates for transportation and resale of natural gas. At the time of the 1950 contract and until the late 1980’s the primary buyers of natural gas were the pipeline companies such as Williams.
“Between 1970 and 1976, various rulings of the FPC established the maximum lawful price for various classes of natural gas being produced in the Hugoton/ Panoma fields.
“After an extremely cold winter of 1976 to 1977, a natural gas shortage began to develop.
“In response, die United States Congress on November 9, 1978, enacted die Natural Gas Policy Act (NGPA) as a part of a national energy policy. The NGPA defined various categories of natural gas and established maximum lawful prices for those classes.
“The NGPA established a higher price for stripper gas and new gаs in order to encourage die production of more natural gas in the United States.
“The NGPA established the following classes of natural gas: section 104 old flowing; section 104 biennium; section 104 post-1974; section 103 new onshore; section 108 stripper gas well production.
“The NGPA established die maximum lawful prices for natural gas. The section 108 gas was set at the highest price, the section 103 new onshore was slightly less, the section 104 post-1974 gas slightly lower, the section 104 biennium was lower, and the section 104 old flowing was the lowest in price.
“By early 1984, the NGPA, because of its pricing structure for new gas and stripper gas and because of odier parts of die Act, which discouraged several industries from relying on natural gas, had created an abundance of natural gas.
“Because of die increased prices resulting from the passage of NGPA and because of die other natural gas saving aspects of diat law, the total sales of Williams was reduced by approximately one-half between 1979 and 1986.
“In late 1985, the Federal Energy Regulatory Commission, predecessor to die FPC, issued Order 436, which gave open access to pipelines and had the effectof changing a pipeline from a buyer of gas and reseller of the same tо a transporter of gas for either a consumer or a producer.
“The effect of this Order 436 on Williams was to reduce by two-thirds Williams’ total purchases of gas between 1985 and 1992 because Williams’ customers would buy from producers directly.
“In late 1986, Williams attempted to retain customers to purchase its gas at the same time it was dealing with customers and producers to transport gas through its pipelines. Williams attempted to retain its customers by establishing a certain priced gas based on die weighted average cost of gas to its customers, and was able to do this by its purchases of gas in the spot market and purchases of section 104 low cost gas from Amoco, along widi rateable purchases of die higher priced gas from Amoco.
“Although Williams controlled the right to purchase all of Amoco’s gas under die 1950 contract, Williams also purchased gas from many odier suppliers under approximately 1,300 gas purchase contracts from 500 producers in six states. Williams also purchased gas from other interstate pipelines, and it purchased gas not only in Kansas, but also Oklahoma, Texas, Colorado, Wyoming, and Missouri.
“Between late 1987 and early 1988, almost all of the major suppliers of gas to Williams invokеd Order 451, and those suppliers diereby effectively terminated whatever purchase contracts they had with Williams.
“FERC Order 451 became effective January 23, 1987. A producer invoked Order 451 by instituting good-faith negotiations and requesting a new price nomination from die purchaser. The purchaser could nominate the maximum lawful price permitted under Order 451, which was the price established for section 104 post-1974 gas, in which case the producer was obligatéd to continue to sell the gas at that price. If die purchaser nominated a lesser price than the maximum lawful price for section 104 post-1974 gas, the producer had the option of accepting die lower price or rejecting it, and if rejected, die contract was abandoned. If the purchaser refused to set a new price, the contract was abandoned.
“After March of 1988, Williams’ only major remaining Hugoton gas purchase contract was the 1950 gas purchase contract with Amoco, under which Williams could purchase up to 300 million cubic feet per day of gas. That 1950 gas purchase contract then represented approximately 95 percent of all of the gas that Williams had under contract in die Hugoton-Panoma gas fiеlds after March of 1988.
“FERC Order 451 had the effect of allowing some producers to obtain the release of gas otherwise dedicated to interstate sales widiout die voluntary agreement of the purchaser.
“But Order 451 did not have diis effect on the Amoco and Williams 1950 contract, because under the terms of diat contract Williams was not required to purchase any certain quantity of gas. Williams only had the obligation to take gas from die Amoco leases ratably and ratably as it took gas from other producers in die Hugoton/Panoma fields.
“In the summer of 1986, Amoco and Williams entered into informal negotiations to try to resolve several problems and conflicts diat existed between them.Amoco wanted to increase the price of the section 104 old gas and obtain the release of all of the gas dedicated to the 1950 contract that Williams did not need so that Amoco could sell diis gas to other customers. Amoco wanted to own or operate the gathering system so it could make improvements to die system owned by Williams, and thereby sell more gas and to obtain reliable transportation at reasonable rates and to obtain additional processing rights to the gas it produced, that being in area C of the Hugoton field, and to drill and connect infill wells.
“There were additional disputes between Amoco and Williams involving claims under gas purchase contracts in the Moxa and Wamsutter fields in Wyoming and other ongoing litigation and direats of litigation.
“These informal negotiations, starting in the Summer of 1986, continued to June 8 of 1989. Amoco did not invoke the provisions of FERC Order 451 during this period of time because it was afraid that if it did so Williams would nominate the maximum lawful price and shut in the gas field, because pursuant to the 1950 gas purchase contract, Williams was only required to take ratably from die Amoco wells with what it took from other wells in die Hugoton/Panoma gas field.
“These negotiations extending from the Summer of 1986 to 1989 never achieved the goals of either Amoco or Williams.
“On June 8,1989, Amoco formally exercised its rights under FERC Order 451 as to section 104 old flowing gas produced in the Hugoton field. Within 30 days, Williams invoked Order 451 good-faith negotiations as to section 103 and 108 gas. Williams nominated die maximum lawful price for section 104 flowing gas. Following that, Amoco nominated the maximum lawful price for section 103 and 108 gas.
“The action taken by Amoco had the effect of raising the section 104 old flowing gas from .579 to $2,864, and it increased section 104 recompletion gas from $1,040 to $2,864 and section 104 biennium gas from $1,851 to $2,864.
“The invocation of FERC Order 451 by Amoco did not decrease the price of either section 103 or 108 gas. At the time Williams invoked good-faith negotiation on die section 103 and section 108 gas, the maximum lawful price of section 103 gas was at $3,460 and section 108 gas was at $5,762.
“At diis time, in August of 1989, the average market value of gas at the well was $1.20 MMBtu. Between 1989 and 1992, the published actual prices of wellhead gas per MMBtu, die free market price, ranged from $1.29 to $1.42.
“Prior to August of 1989, Williams was able to purchase the section 103 and section 108 gas at its maximum lawful price, which was far above the spot market price of gas, because Williams was able to purchase section 104 gas at approximately two-diirds the market price and blend the cheap section 104 gas it was purchasing with die more expensive section 103 and section 108 gas, thereby being able to hold its total cost of gas down to where it could satisfy its customers’ pricing, and thereby sell gas taken from Amoco under die 1950 contract.
“After Amoco invoiced Order 451 as to die section 104 gas and raised up its price, and Williams responded by invoking Order 451 as to the 103 and 108 gas, diis was no longer possible.
“Williams shut in Amoco’s Hugoton/Panoma gas field, talcing only minimаl amounts of gas each month from each lease.
“Williams could meet its needs on the spot market and did not have to purchase any substantial quantity of gas under the 1950 contract with Amoco.
“Beginning in 1989,1990, and 1991, through negotiations, Amoco and Williams agreed for the release of increasingly larger amounts of gas from the 1950 contract under temporary agreements.
“The released gas was then sold by Amoco to any consumer it could find at spot market prices from November, 1990, through the end of December, 1992.
“Williams would not release all of the gas that Amoco produced from the terms of 1950 contract because Williams needed the Amoco gas to meet its peak delivery requirements during the Winters of 1990-1991 and 1991-1992.
“After Amoco invoked Order 451 and instituted the good-faith negotiations, the average weighted price of gas to Williams under tire 1950 contract increased from $1.29 to $3.24 primarily because of tire huge increase in price of the section 104 gas being increased from .58 to $2.86. Williams had access to other gas supplies besides those coming from Amoco where they were able to purchase cheaper gas on the spot market far below the $3.24 price they would have had to have paid Amoco. This was important to Williams in order to maintain its $2.10 weighted average cost of gas to keep its customers.
“During 1989, 1990, and 1991, Williams continued to take gas at peak cold times and one day per month from each lease to prevent cancellation of the lease. For this gas Williams paid prices established by Order 451, and, therefore, Williams continued to pay tire maximum lawful price for 103 and 108 gas purchased during this period of time.
“From August, 1989, through the end of 1992, Williams’ purchases of gas under the 1950 contract continuously declined each year.
“Commencing in November of 1990, Amoco’s production of gas increased dramatically, and they were able to sell all of the gas they produced, excepting only that taken by Williams pursuant to tire 1950 contract, at market price under these short-term release agreements.
“In August, 1991, a long-term release agreement, which extended through December of 1992, was entered into between Amoco and Williams. This release agreement did not contain the recall agreements that had been in the prior short-term release agreements.
“Amoco knew that tire gas of the Smith Class that was dedicated to tire 1950 contract was eligible for section 103 and 108 NGPA prices, which were much higher tiran tire average spot market prices that Amoco could receive for released gas between August, 1990, and December, 1992.
“Prior to obtaining the release of the section 103 and section 108 gas and all other classes of gas from the 1950 contract, Amoco was only selling very small volumes at the regulated price because Williams was only taking a very small amount of gas from tire Amoco wells in order to hold its position under the 1950 contract.
“There was no market in the free market for any gas priced at the maximum lawful price of section 103 and section 108 gas between August, 1990, and December 31, 1992. It was simply too high for anyone to pay when there was an abundance of cheaper gas in the market place.
“The United States Government, through die Wellhead Decontrol Act, which took all price regulations off of natural gas as of December 31, 1992, as well as FERC Orders 436 and 451, intended to create a free market to determine die price of natural gas.
“The invocation of Order 451 by Amoco in June of 1989 and die negotiated releases of gas from the 1950 contract in die years 1990 tiirough the end of 1992 allowed Amoco to use the released gas sales to develop a customer base because the future was certain that Williams would not be the only customer of Amoco in die coming years.”
DISCUSSION
Proceedings Below
This action, filed in Finney County on August 11, 1993, was consolidated with Youngren v. Amoco, Case No. 89 CV 22, and transferred to Stevens County. In Youngren, royalty owners with leases in the Hugoton area whose old gas sold for the low maximum lawful prices sued Amoco for failing to invoke Order 451 sooner (to increase the price of gas produced by their leases). Youngren was settled.
This case went to trial. The sales in question were those released from the 1950 contract occurring from November 1990 through December 1992. Amoco invoked Order 451 in 1989. The district court, on June 2, 1998, in denying both Amoco’s and the lessors’ motions for summary judgment focused on unresolved fact questions saying:
“Whether or not [Amoco] was acting as a prudent operator when it entered into agreements for the sale of the released gas in 1990, ‘91 and ‘92 at the prevailing market prices begs the question as to whether or not it was acting as a prudent operator when it chose to exercise its rights to invoke Order 451. That is the key question of fact that must be resolved by the trier of fact in this proceeding.” (Emphasis added.) (Denying Amoco’s motion.)
“At die heart of the Plaintiffs’ case this Court believes that there is a question of fact that is unresolved as to whether or not the Defendant was using the negotiating provisions of the FERC Order 451 tо obtain a financial benefit for the Defendant, to the detriment of these Plaintiffs. It is uncontroverted that the Defendant herein entered into the good-faith negotiations with William Natural Gasand [was] aware of the impact of those negotiations upon the Smith Class new’ gas prices.” (Emphasis added.) (Denying the lessors’ motion.)
Amoco later filed a second motion for summary judgment based on the statute of limitations. The district court, in June 1999, relying on
Zenda Grain & Supply Co. v. Farmland Industries,
Inc.,
“There seems to this Court to be an inherent inconsistency created when an arbitrary time limit is imposed upon an artificial cause of action which was created to promote justice.
“Nevertheless, trial courts must be bound by appellate court precedence or chaos results. This Court has spent too much time trying to find some precedent other than Zenda Grain and is bothered by the result of an arbitrary time limit imposed, оn a cause of action created to promote fairness andjustice, but is bound by Zenda Grain, nevertheless.
“Relying upon the authority of Zenda Grain v. Farmland Industries, this Court finds that die implied covenants to deal fairly, to market gas, and to obtain the best price possible can only be imposed by operation of law and are clearly implied • obligations within the lease agreement, which have a three-year statute of limitations.
“. . . Plaintiffs are entitled to pursue claims against Amoco for all breaches and damages occurring on or after August 11, 1990.” (Emphasis added.)
The District Court’s Ruling at Trial
During the bench trial the district court was presented with deposition testimony, documentary evidence, stipulations, and live testimony from witnesses, including expert testimony for both sides. It concluded that Amoco had an implied duty to obtain the best possible price for gas produced from its leases and that Amoco had fulfilled that duty. Applying K.S.A. 60-512(1), the 3-year limitation statute, the district court found “that in all regards to the Smith Class royalty owners Amoco did act as a prudent operator
because
The Statute of Limitations
The district court said that if the 5-year statute of hmitations applied, the damages resulting from breach of lease agreements would be hmited to the 5 years preceding the date the action was filed, August 11, 1993. If the 3-year statute of hmitations apphed, “the resulting damages occurring from and after August 11, 1990, the preceding three years, would be at issue.” The district court concluded that the lessors were entitled to pursue claims against Amoco for “all breaches and damages occurring on or after August 11, 1990.” Lessors sought no accounting for sales after December 31, 1992, because gas prices were deregulated after that time.
The lessors contend that the district court erred by keying on the date, August 11, 1990, (3 years from the filing of the claim) to define the substantive nature of the case, rather than as a procedural rule to decide if the action was filed in a timely manner after it had accrued. Because of our holding that K.S.A. 60-511, the 5-year statute, apphes, resolution of the parties’ debate on whether the district court confused a statute of hmitations with a statute of repose is neither pivotal nor required.
The lessors’ equitable action arises out of an alleged breach of imphed covenants and duties. Amoco’s intent, conduct, and motives that occurred before, during, and after August 11, 1990, to December 31, 1992, are relevant in determining whether a breach of imphed covenants occurred.
Excerpts from the journal entry of decision mirror the significance placed by the district court on the date of August 11, 1990.
“To this Court what makes Amoco a prudent operator is confined to the issues in this case and the acts that Amoco did between August 11,1990, and December 30, 1992.
“[Bjetween August 11,1990, and December 31,1992, Amoco did the best thing it could possibly do for the Smith Class royalty owners.
. . Plaintiffs have failed to prove that any action done by Amoco between August, 1990, and December, 1992, breached the duty to deal fairly and honestly with die Smith Class.” (Emphasis added.)
The lessors, having filed their action in time, were entitled to prove their claim by advancing admissible evidence of the Amoco-lessor relationship before or after August 11, 1990. In fact, the district court focused on Amoco’s negotiating the provisions of FERC Order 451 and invoking 451 in 1989 as the unresolved questions of fact requiring denial of both parties’ 1998 summary judgment motions.
We next take up the 3-year/5-year statute of limitation controversy. The lessors contend that the district court’s finding conflicts with the well-settled rule that an action upon implied covenants in a written oil and gas lease is an action governed by a 5-year statute of fimitations. See K.S.A. 60-511(1). According to the lessors, the lease covenants here are implied in fact, not in law, and are, thus, an integral part of the written lease. We agree.
This issue involves a question of law, over which we have unlimited review.
Gillespie v. Seymour,
K.S.A. 60-511(1) says:
“The following actions shall be brought within five (5) years: (1) An action upon any agreement, contract or promise in writing.”
K.S.A. 60-512(1) says:
“The following actions shall be brought within three (3) years: (1) All actions upon contracts, obligations or liabilities expressed or implied but not in writing.”
We identify the unique character of oil and gas jurisprudence as the cardinal thread in our analysis of the statute of fimitations question. Implied covenants in oil and gas leases and government regulation of the gas industry have historically been litigated, discussed in texts, and debated by scholars. One result has been the development of a body of law that recognizes implied covenants in an oil and gas lease as either implied in fact or implied in law. In
The district court relied on
Zenda Grain,
A contract implied in fact is one “inferred from the facts and circumstances of the case” but which is “not formally or explicitly stated in words.”
Atchison County Farmers Union Co-op Ass’n v. Turnbull,
Commentator Roger C. Cohen agrees with the lessors here that
Mills v. Hartz,
The lessors also rely on
Gillet v. Investment Co.,
The lessors also direct us to oil and gas lease cases involving statute of limitation issues from other jurisdictions. In
Texas Pacific Coal & Oil Co. v. Stuard,
Indian Terr. Illuminating Oil Co. v. Rosamond,
In addition to
Zenda Grain,
Amoco relies on other non-oil and gas cases to support its implied in law argument. See
Turner and Boisseau v. Nationwide Mut. Ins. Co.,
Amoco also advances
Waechter v. Amoco Production Co.,
“ ‘Although a written contract was in existence between the lessor and the lessee and another between the lessee and the distributor of the gas, the amounts here claimed are not due under either contract. The sole basis for recovery must be found in a contract implied in law requiring a person who has been unjustly enriched at the expense of another to make restitution.’ [Citation omitted.]” (Emphasis added.)217 Kan. at 516 .
In
Lightcap,
we again apphed the 3-year statute of hmitations to a claim regarding the overpayment of royalties under a theory of unjust enrichment.
As Amoco points out, ah commentators in oil and gas law do not agree on the question of whether imphed covenants in oil and gas leases are integral parts of the written contract and, thus, imphed in fact.
We next take up a review of text authorities.
“The question is sometimes discussed, though seldom litigated, whether covenants are implied ‘in fact’ or ‘in law.’ Eminent authorities have disagreed: Mr. A.W. Walker, Jr., believes that covenants are implied in fact; Professor Maurice Merrill believes very firmly they are implied in law.” 5 Williams & Meqyers, Oil & Gas Law § 803, p. 17 (2000).
Williams and Meyers conclude that there is a large element of truth on both sides of the controversy. They opine:
“A covenant is implied in fact when its existence is derived from the written agreement and the circumstances surrounding its execution. A covenant is implied in law when it is added to the contract by a court to promote fairness, justice and equity.” 5 Williams & Meyers § 803, p. 18.
They ask:
“Does it make any difference whether covenants are implied in fact or in law? Judging from the reported cases, the answer seems to be, not often and not much. The decisions disclose three consequences that may depend upon the distinction.
“First, the statute of hmitations applicable to an action for breach of implied covenant may be determined by the classification of the covenant as implied in fact or implied in law. Two cases in point hold tire covenant to be implied in factand give the lessee the benefit of the longer period of limitation applicable to written contracts [citing Indian Territory (Oklahoma) and Stuard (Texas)]. Both reject the сontention that since covenants are implied by courts to accomplish justice and are not part of the contract made by the parties the shorter limitation period applicable to contracts not in writing should govern implied covenants.
“Second, it is said that the continued liability of the original lessee, after his assignment of the lease, depends upon whether the covenants in the lease are implied in fact or in law. If implied in fact, the lessee remains liable; if implied in law, he does not, since liability is predicated on a relationship that has terminated. Here, again, the cases seem to adopt the position that the covenant is implied in fact, and hence the lessee remains liable for performance of the covenant [citing Gillet,111 Kan. 755 (1922)].
“In summary, wherever it has mattered, the courts have declared covenants to be implied in fact and have invoked the consequences that follow from such classification.” (Emphasis added.) 5 Williams & Meyers § 803, pp. 18-19.
Williams & Meyers critique the issue this way:
“One may wonder why all the sound and fury about the question of implication ‘in law’ or ‘in fact’ when the consequences seem so minor and the authorities so uniformly in favor of implication in fact. We suspect that the disagreement is moré than academic shadоwboxing.” 5 Williams & Meyers § 803, p. 19.
Another text writer, Eugene Kuntz, says:
“Although there is no clearly recognized and uniformly applied basis for making a classification of things implied in law and things implied in fact in other areas of the law, the term ‘implied in law’ is a better description of the nature of covenants implied in oil and gas leases.
“In the few cases decided on the subject in which a classification of implied covenants was material, most of the deliberate expressions on the subject are to the effect that the implied covenants are implied in fact. The cases in which such classification was material involved the statute of limitations, the parol evidence rule, venue, and the liability of a lessee on the covenants after an assignment of tire lease.
“In those instances in which the court has been called upon to determine which statute of limitations should be applied to actions on the implied covenants, it has been held that the statute governing the bringing of actions on written contracts is applicable.” (Emphasis added.) 5 Kuntz, A Treatise on the Law of Oil and Gas § 54.3(b), pp. 9-10 (1978).
Kuntz also comments on
Gillet,
“It has been held that the original lessee does remain liable on the covenants of full development and protection against drainage after assigning the lease. In the case so holding, the court disposed of the question by saying that the original lessee remained liable on the covenants, ‘because he made them.’ Merrill would have held otherwise.” 5 Kuntz § 54.3(b), p. 12.
Professor Merrill is the advocate for the implied in law approach. See Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases § 220 (2d ed. 1940).
Kuntz concludes:
“Basically, the result of the decisions is that implied covenants are to be treated as a part of the written instrument.” 5 Kuntz § 54.3(b), p. 13.
Professor David E. Pierce believes that in Kansas, implied lease covenants are “implied in fact,” explaining that “implied lease covenants, being implied in fact, are limited by the express terms of the lease agreement and the intent of the parties as reflected by the nature and purpose of the leasing transaction.” 1 Pierce, Kansas Oil and Gas Handbook § 10.01, pp. 10-4 to 10-5 (1989).
According to Professor Richard W. Hemingway:
“There is much to be said for the implied-in-law approach championed by Professor Merrill. Although courts state that they are effectuating the intent of the parties, seldom is an actual inquiry to intent reported.. . .
“Controversy also exists as to whether the covenants are implied in law or in fact. If the former, they do not constitute part of the contract itself. If the latter, they are considered as being part of the contract and are subject to the same lаws affecting limitations, venue, etc., as the written lease. It appears that the majority view is that implied covenants are implied in fact and not in law.” (Emphasis added.) Hemingway, The Law of Oil & Gas § 8.1, p. 543 (3d ed. 1991).
Hemingway leads off his recitation of authorities supporting the implied in fact view with a Kansas case, Gillet. Hemingway § 8.1, p. 543.
The
Indian Territory
court observed in 1941 that it had found no support for Professor Merrill’s implied in law doctrine in the adjudicated cases.
K.S.A. 60-511 will control on remand.
The Cross-Appeal ^
The district court found that Amoco had an implied duty to obtain the best possible price for gas produced from the Smith Class leases. Amoco cross-appeals arguing that, under the express provisions of the leases, it merely had a duty to pay royalties based upon either the market value of the gas or on the proceeds of the sale of the gas. In effect, Amoco argues that the royalty clauses of the leases determine the level of price it has the duty to obtain. According to Amoco, the district court has imposed “a new ill-defined standard requiring perfection from producers in a gas market that fluctuates greatly.”
The members of the Smith Class are lessors in a total of 1,439 leases. Of those leases 1,236 are
“Waechter”
leases (the type considered in
Waechter,
Waechter
leases provide that the “lessee shall pay lessor monthly as royalty on gas marketed from each well one-eighth of the proceeds if sold at the well, or, if marketed off the leased premises, then one-eighth of the market value at the well.”
Waechter,
The district court’s conclusion that Amoco had a duty to obtain the best possible price did not affect the outcome below because
Amoco relies on Waechter,
The Smith Class observes that
Waechter
noted that the record revealed that Amoco had made sustained efforts to secure a higher price. There was “nothing to suggest it did not use the utmost diligence to obtain the best price possible.”
In
Maddox v. Gulf Oil Corp.,
Amoco also relies on
Holmes v. Kewanee Oil Co.,
In
Matzen
we reaffirmed
Waechter
and
Lightcap
and adopted the interpretations of market value and proceeds set forth in
Light-cap.
A major question left undecided by
Lightcap
was: “How is the free market value of natural gas to be determined in a highly regulated interstate market?”
Matzen,
Amoco argues that the district court here imposed a much higher and unrealistic standard. According to Amoco, under Waechter, Lightcap, Holmes, and Matzen, royalty owners under a proceeds lease are merely entitled to a share of money received from the actual sаles of gas; royalty owners under a market value lease are merely entitled to a share of the market value which is determined by what a willing buyer would pay to a willing seller in a free market.
The Smith Class correctly points out that in oil and gas leases, lessees are bound by the covenant to market gas. See
Robbins v. Chevron U.S.A., Inc., 246
Kan. 125, 134,
The Smith Class looks to
Watts v. Atlantic Richfield Co.,
Amoco acknowledges that it had an obligation to act in good faith and to deal fairly with the Smith Class. The district court found that the lessors failed to prove that Amoco breached this obligation. Amoco asserts, however, that the Smith Class attempts to erroneously apply the obligation to unambiguous exрress provisions in the leases. See
Havens v. Safeway Stores,
Amoco, recognizing the “scarcity of authority” in this area, cites
Schroeder v. Terra Energy,
Amoco argues that in
Matzen,
The Smith Class contends that it is illogical to say that the expressed royalty provisions override the lessee’s implied duties. They reason that setting aside a duty to obtain the best price possible ehminates the duty of good faith and fair dealing and the implied covenant to market. They suggest that the marketing duty arises in any lease in which royalties are paid in kind or based on the value of a fraction of the mineral produced or even on the payment of a fixed sum of money, citing 5 Williams & Meyers, Oil and Gas Law § 853, pp. 390.4-390.5. See also
Kansas Baptist Convention,
We have reversed and remanded on the statute of Hmitations issue. On remand the best possible price (best available price) issue raised by Amoco in its cross-appeal may again be present. Our difficulty in resolving the cross-appeal with a simple up or down pronouncement like, “yes” Amoco has, or “no” Amoco has not
This is a complex case with an 8-year litigation history. Kansas has always recognized the duty of a lessee under an oil and gas lease to use reasonable diligence in finding a market for the product or run the risk of causing the lease to lapse.
Gilmore v. Superior Oil Co.,
In
Robbins,
“ ‘In absence of a controlling stipulation, neither the lessor nor the lessee is the sole arbiter of the extent, or the diligence with which, the operations and development shall proceed. The standard by which both are bound is what an experienced operator of ordinary prudence would do under die same or similar circumstances, having due regard for the interests of both.’ ”246 Kan. at 131 (quoting Adolph v. Stearns,235 Kan. 622 , 626,684 P.2d 372 [1984]).
In
Robbins
we reasoned that “[i]t is not the place of courts, or lessors, to examine in hindsight the business decisions of a gas
The difficulty here lies in crafting an even-handed formula because of the lessors’ claim of conflict in the interests between Amoco and the lessors. Amoco admits that its obligations as lessee apply independently to each lease. The independent duty principle is applied to prevent Amoco from making the management of a given lease dependent upon the management of another lease. See
Stamper v. Jones,
At this juncture of our opinion, we repeat a finding of the district court that suggests both the conflict between the interests of Amoco and lessors and the dilemma confronting Amoco by invoking FERC’s Order 451. The district court (1) found that Amoco knew that the Smith Class gas dedicated to the 1950 contract was eligible for section 103 and 108 NGPA prices that were “much higher” than average spot market prices that Amoco could receive for released gas between August 1990 and December 1992 and (2) observed in denying the lessors’ motion for summary judgment: “It is uncontroverted that the Defendant herein entered into the good-faith negotiations with William Natural Gas and [was] aware of the impact of those negotiations upon the Smith Class ‘new’ gas prices.”
With our teaching of Robbins, the purpose of Order 451, and recognition that the gas at issue here was eligible for price negotiation under Order 451 in mind, the district court should apply a reasonably prudent operator standard in deciding whether Amoco properly carried out its implied covenant to market. Amoco’s implied covenant to market pricing obligation, under the facts here, is contained within its duty to act at all times as a reasonably prudent operator.
It appears that the good-faith negotiating provisions allow a producer and a purchaser to raise gas prices in somе contracts and lower gas prices in other contracts. Here, Amoco took advantage of the good-faith negotiating provisions, and the Smith Class royalty payments were reduced. We note that Amoco was also sued by the Youngren Class (Youngren v. Amoco, Case No. 89 CV 22) for failing to invoke Order 451 at an earlier time to increase the price of gas produced by their leases. The Youngren Class’ (most of Amoco’s royalty owners) gas sold for the low maximum lawful prices for old gas. Amoco was faced with conflicting demands either to renegotiate or to not renegotiate. FERC adopted Order 451 to resolve pricing distortions that had resulted from the NGPA’s pricing structure. FERC’s Order 451 affects Amoco’s implied covenant to market. Under the reasonably prudent operator standard, Amoco must not only consider its own economic interest but also take into account the interest of the Smith Class.
An observation made in the American Bar Association Section of Natural Resources Law suggested the situation now before us:
“On June 6, 1986, FERC issued Order 451, 51 Fed. Reg. 22,168 (June 18, 1986), which intended to substantially increase U.S. natural gas reserves and to offer natural gas pipelines a way out of the heavy take-or-pay liabilities they face at the samе time that it pushes the gas industry an additional step toward complete deregulation. What Order 451 does is to give producers of natural gas still regulated at low prices under sections 104 and 106 of the Natural Gas Policy Act of 1978 tire right to negotiate with their purchasers for higher prices. Of course, leases will remain profitable longer if producers receive higher prices, and so U.S. gas reserves will be increased.
“The catch from the producers’ viewpoint is that if a producer requests renegotiation of prices for low-priced gas, it must also lay on die table for renegotiation its higher-priced contracts. The scheme is that low-priced contracts will be negotiated to a higher price more clearly reflecting the value of the gas in the market, while high-priced contracts with heavy take-or-pay obligations will be negotiated to a lower price.” Lowe, Gas Rule May Trigger Implied Covenants Problem, 2 Natural Resources & Environment 35 Winter (1987).
Sword v. Rains,
The purpose of FERC Order 451 was to bring some rationality to natural gas pricing. The balancing approach suggested in
Rains
takes into account particular facts and circumstances affecting Amoco’s marketing decision. Whether Amoco has performed its
1. Amoco’s conduct will be evaluated by considering “ ‘what an experienced operator of ordinary prudence would do under the same or similar circumstances, having due regard for the interests of both [lessor and lessee].’ ”246 Kan. at 131 .
2. Evaluation of Amoco’s conduct under the prudent operator standard is a question of fact.
3. The district court must apply the prudent operator standard to the facts as they existed at the time Amoco took the action complained of.
4. The lessors have the burden of proof.
5. The facts are not contested, and Amoco’s actions are not patently imprudent; thus, expert testimony will be required to establish a breach of die covenants alleged.246 Kan. at 131-34 .
Reversed and remanded.