No. 14755
IN THE SUPREME COURT OF THE STATE OF MONTANA
1979
U. V. INDUSTRIES, INC .,
A corporation, et al.,
Appellants,
RUSSEL D. DANIELSON, ROBERT
V. DANIELSON, and MYRNA BRODHEAD,
Respondents.
Appeal from: U. S. District Court, Billings Division,
Hon. U.S. District Judge James Battin, presiding.
Counsel of Record:
For Appellant:
Crowley, Haughey, Hanson, Tool & Dietrich, Billings,
Montana
Cale Crowley argued, Billings, Montana
For Respondents:
Raymond K. Peete argued, Billings, Montana
Submitted: September 18, 1979
~ecided: NOV 1 1979
Mr. ~ustice
Gene B. Daly d e l i v e r e d t h e Opinion of t h e C o u r t .
T h i s m a t t e r i s b e f o r e t h i s C o u r t on c e r t i f i c a t i o n from
t h e U n i t e d S t a t e s D i s t r i c t C o u r t f o r t h e D i s t r i c t of Montana.
P l a i n t i f f s - r e s p o n d e n t s a r e g r a n t e e s under a m i n e r a l deed
from t h e owner and l e s s o r o f t h e o i l and g a s b e n e a t h t h e
~ 1 / 2 f s e c t i o n 1 0 i n R i c h l a n d County, Montana.
o Defendants-
a p p l i c a n t s a r e t h e l e s s e e and i t s a s s i g n s under t h e " D a n i e l -
son" o i l and g a s l e a s e c o v e r i n g t h i s t r a c t ; some o f t h e
a p p l i c a n t s a r e o r were a l s o l e s s e e s under t h e "Lewis" o i l
and g a s l e a s e c o v e r i n g a n a d j a c e n t t r a c t , t h e N W 1 / 4 of
s e c t i o n 10. On May 1 2 , 1975, r e s p o n d e n t s , t h e g r a n t e e s ,
b r o u g h t s u i t i n s t a t e D i s t r i c t C o u r t i n R i c h l a n d County,
r e q u e s t i n g damages from t h e a p p l i c a n t s f o r t h e p e r i o d be-
tween F e b r u a r y 3 , 1970 and September 1 4 , 1972, f o r f a i l u r e
t o d r i l l a n o f f s e t w e l l t o p r o t e c t t h e i r o i l i n t e r e s t s from
d r a i n a g e by a p r o d u c i n g w e l l on a n a d j a c e n t t r a c t of l a n d
(Lewis lease). The c a s e was removed t o t h e United S t a t e s
D i s t r i c t C o u r t f o r t h e D i s t r i c t of Montana, which h a s c e r t i -
f i e d s e v e r a l i s s u e s t o t h i s C o u r t f o r d e c l a r a t o r y judgment
r e g a r d i n g a p p l i c a b l e Montana law, o n a p p l i c a t i o n of t h e
lessees p u r s u a n t t o Rule 1 of t h e R u l e s of t h i s C o u r t .
The f a c t s i n t h i s c a s e a r e complex, b u t t h e p a r t i e s a r e
i n s u b s t a n t i a l agreement a s t o t h o s e f a c t s , which f o l l o w i n
summary form. T h e r e a r e two o i l and g a s l e a s e s i n v o l v e d i n
t h i s suit--the " D a n i e l s o n " l e a s e c o v e r i n g t h e E1/2 of S ~ C -
t i o n 1 0 , and t h e "Lewis" l e a s e c o v e r i n g t h e a d j a c e n t NW1/4
of S e c t i o n 10. On December 30, 1968, H i l d a ~ a n i e l s o n ,
r e s p o n d e n t s ' mother and p r e d e c e s s o r i n i n t e r e s t , e x e c u t e d a
f i v e - y e a r primary term, " u n l e s s d e l a y r e n t a l s " o i l and g a s
l e a s e ( " ~ a ~ i e l s o n e a s e ) t o a p p l i c a n t Empire S t a t e
l" oil Co.,
which s u b s e q u e n t l y a s s i g n e d i t t o t h e o t h e r a p p l i c a n t s .
This lease contained a clause providing that no change in
ownership of the mineral interest would be binding upon the
lessee until it received written notice thereof. On July
24, 1970, Mrs. ~anielsonconveyed her interest to her five
children, three of whom are respondents, in a mineral deed
subject to the existing lease. The deed was recorded on
September 20, 1971.
Meanwhile, a producing well was completed by King
Resources Co. on the adjacent Lewis tract on February 3,
1970. Two of the applicants, U. V. Industries, Inc. (through
its predecessor United States Smelting, Refining and Mining
Company), and Wolf Corporation were at relevant times part
owners of this leasehold interest in the Lewis tract. Under
the dates July 1 and July 26, 1972, U. V. Industries re-
ceived letters on behalf of two of the plaintiffs demanding
that U. V. Industries drill an offset well in the NE1/4 and
compensate them for drainage resulting from production from
the well on the adjacent Lewis lease. This demand was
refused. U. V. Industries first received a copy of the
mineral deed from Mrs. Danielson to her five children on
August 2, 1972. All delay rentals through December 1972
were paid and accepted.
Prior to September 14, 1972, the spacing of wells
drilled on Section 10 was governed by statewide spacing
orders issued by the Board of Oil and Gas Conservation. The
statewide spacing order governing well spacing in the forma-
tion and depth to which the Lewis well was drilled in
effect at the time the well was drilled provided that one
well could be drilled and operated on each quarter section
(160 acres). This order was changed by the ~oard'sOrder
No. 16-71 of May 13, 1971, which provided that one well
c o u l d b e d r i l l e d and produced on 320 a c r e s a t t h i s d e p t h .
Under t h e May 1 3 , 1971 o r d e r , t h e 320 a c r e s p a c i n g u n i t
would b e composed of two c o n t i g u o u s n o r t h - s o u t h o r e a s t - w e s t
q u a r t e r s e c t i o n s d e s i g n a t e d by t h e l e a s e o p e r a t o r , which d i d
n o t n e c e s s a r i l y have t o be w i t h i n t h e same s e c t i o n .
On September 1 4 , 1972, t h e Montana O i l and Gas Conser-
v a t i o n Board h e l d a h e a r i n g a t which r e s p o n d e n t s and a p p l i -
c a n t U . V. I n d u s t r i e s were r e p r e s e n t e d . The Board i s s u e d a
s p e c i f i c w e l l s p a c i n g o r d e r s u p e r s e d i n g t h e s t a t e w i d e spac-
ing order f o r t h e p a r t i c u l a r production f i e l d involved i n
t h e p r e s e n t c o n t r o v e r s y ( L o n e t r e e Creek f i e l d ) . This order
d e s i g n a t e d t h e N1/2 of S e c t i o n 1 0 a s a p r o d u c t i o n s p a c i n g
unit. The d e s i g n a t e d w e l l s p a c i n g u n i t i n c l u d e s t h e e x i s t -
i n g , p r o d u c i n g L e w i s w e l l on t h e N W 1 / 4 and i t a l s o i n c l u d e s
t h e NE1/4 owned by t h e r e s p o n d e n t s , where t h e y a r e a l l e g i n g
a p p l i c a n t s had a d u t y t o d r i l l a n o f f s e t w e l l . Subsequently,
on September 1 5 , 1972, a l l p a r t i e s e n t e r e d a v o l u n t a r y
p o o l i n g and u n i t agreement c o v e r i n g t h i s f i e l d .
Respondents b r o u g h t t h e p r e s e n t a c t i o n s e e k i n g damages
under t h e common l a w " o f f s e t d r i l l i n g r u l e . " The common l a w
t h e o r y i m p l i e s i n e v e r y o i l and g a s l e a s e a c o v e n a n t on t h e
p a r t of t h e l e s s e e t o p r o t e c t t h e premises of h i s l e s s o r
from d r a i n a g e o f a n a d j a c e n t producing w e l l by d r i l l i n g a n
o f f s e t well.
The t h r e s h o l d i s s u e i s : (1) Whether o r n o t t h e common
law j u d i c i a l remedy of a c i v i l s u i t f o r damages i n s t a t e
D i s t r i c t C o u r t under t h e o f f s e t d r i l l i n g r u l e h a s been
a b o l i s h e d by enactment o f t h e 1953 Montana O i l and Gas
C o n s e r v a t i o n law; i . e . , d o e s t h e Board of O i l and G a s Con-
s e r v a t i o n have e x c l u s i v e j u r i s d i c t i o n t o d e t e r m i n e such
controversies? I f t h i s question i s determined adversely t o
applicants, there a r e several subsidiary issues:
( 2 ) Was t h e l e s s o r o r h e r g r a n t e e s ( r e s p o n d e n t s ) re-
q u i r e d t o s e r v e w r i t t e n n o t i c e o r demand on t h e lessee o r
i t s assigns (applicants) t o d r i l l an o f f s e t w e l l ; i f so, d i d
t h e lessee have a r e a s o n a b l e t i m e t h e r e a f t e r i n which t o
comply; a n d , when d o e s t h e o b l i g a t i o n o f t h e lessee, i f a n y ,
t o pay damages commence?
( 3 ) What i s t h e e f f e c t o f t h e " n o c h a n g e i n o w n e r s h i p
u n t i l w r i t t e n n o t i c e " c l a u s e i n t h e l e a s e and c e r t a i n p r o v i -
s i o n s o f t h e m i n e r a l d e e d on t h e r i g h t s o f t h e p a r t i e s ?
( 4 ) What i s t h e a p p r o p r i a t e s t a t u t e o f l i m i t a t i o n s ?
The a p p l i c a n t s ' c o n t e n t i o n s a r e a s f o l l o w s :
I s s u e - . Enactment o f t h e 1953 O i l and Gas Conserva-
#l
tion Act, s e c t i o n s 82-11-101 e t s e q . , MCA, h a s e l i m i n a t e d
and a b o l i s h e d a c t i o n s t o p r e v e n t d r a i n a g e by p r o d u c i n g w e l l s
o n a d j a c e n t l a n d b a s e d o n t h e common law o f f s e t d r i l l i n g
r u l e theory. The power t o c o n d u c t p u b l i c e v i d e n t i a r y h e a r -
i n g s , i s s u e subpoenas, e s t a b l i s h w e l l spacing u n i t s , o r d e r
i n v o l u n t a r y p o o l i n g o f i n t e r e s t s w i t h i n t h e same, g r a n t o r
deny p e r m i s s i o n t o d r i l l w e l l s , p r e v e n t w a s t e and p r o t e c t
c o r r e l a t i v e r i g h t s i s now committed by s t a t u t e t o t h e d i s c r e -
t i o n o f t h e Board o f O i l and Gas C o n s e r v a t i o n . State Dis-
t r i c t C o u r t s , t h e r e f o r e , no l o n g e r h a v e j u r i s d i c t i o n t o
e n t e r t a i n and d e c i d e a n i s o l a t e d p a r t o f t h e whole scheme o f
discretionary administrative determinations vested i n the
Board by s t a t u t e . Involuntary pooling of i n t e r e s t s w i t h i n a
w e l l s p a c i n g u n i t by o r d e r o f t h e Board a f f o r d s t h e same
k i n d o f r e l i e f a s w a s f o r m e r l y g r a n t e d by t h e common law
j u d i c i a l remedy o f a c i v i l s u i t f o r damages i n t h e s t a t e
D i s t r i c t Court under t h e o f f s e t d r i l l i n g r u l e . A t any t i m e
a f t e r t h e y a c q u i r e d t h e i r i n t e r e s t and b e f o r e t h e Board
order of September 14, 1972, plaintiffs-respondents had the
statutory right to apply to the Board of Oil and Gas Con-
servation for relief but did not do so. No implied covenant
can exist which would authorize a District Court to require
a lessee to drill an offset well without permission of the
Board, or one which would, if drilled, violate statutory
purposes or restrictions or a valid order of the Board, nor
award damages if the lessee failed to do so.
Second, the same issues of fact regarding the extent
and location of the reservoir or pool with respect to the
lands, and whether or not the Lewis well does in fact drain
oil from beneath the NE1/4, are involved in both a common
law action based on implied covenant and any statutory
proceedings before the Board. Plaintiffs-respondents cannot
collaterally impeach the Board's determination of these same
factual issues, which it has already decided and which are
res judicata. Furthermore, the District Court cannot
invade the power to make discretionary determinations vested
by statute in a state board such as where, how many, and
under what circumstances wells can be drilled and the spac-
ing and pooling thereof. It cannot substitute its discre-
tion for a valid discretionary order made by the ~oard.
Third, plaintiffs-respondents waived their right, if
any, to require applicants to drill an offset well to pro-
tect them from drainage by a producing well on the ~ e w i s
tract by their acceptance of delay rental payments through
December 1972.
Issue -
#2. The following arguments need only be con-
sidered if the Court determines the threshold issue adversely
to the applicants; that is, if the Court decides that the
remedy of a civil suit for damages in the ~istrictCourt is
still available for a lessee's breach of the implied cove-
nant to protect his lessor from drainage by drilling an
offset well. First, the lessor or her grantees were required
to serve written notice or demand on the lessee or his
assigns (applicants) to drill an offset well. This is
required under the common law drilling rule. Berthelote v.
Loy Oil Co. (1933), 95 Mont. 434, 28 P. 2d 187. Since no
notice or demand was made until the demand letters of July 1
and July 26, 1972, applicants could not be under any duty to
drill an offset well before those dates. Furthermore, the
law gives a lessee a reasonable time in which to drill an
offset well following demand by his lessor, and subjects the
lessee to damages for failure to do so only after a reason-
able time has passed. Applicants here did not have a rea-
sonable time to comply after they received notice, because a
reasonable time would be longer than the two and one-half
months that elapsed before the parties entered a voluntary
pooling and unit agreement. Therefore, the obligation to
pay damages never accrued.
Issue -
#3. The oil and gas lease from Hilda Danielson
to Empire State Oil Company provides that "[nlo change in
the ownership of the land or assignments of rentals or
royalties shall be binding on the lessee until after the
lessee has been furnished with a written transfer or assign-
ment or a true copy thereof . . ." and the mineral deed from
Hilda Danielson to the three plaintiffs-respondents provided
that it was subject to any rights existing in the lessee or
its assigns. The law recognizes the validity of such "no
change in ownership" clauses, and because applicants re-
ceived no actual or constructive notice that Hilda Danielson
had conveyed her interest to plaintiffs until August 2,
1972, p l a i n t i f f s c a n n o t a s s e r t any r i g h t s a g a i n s t t h e d e f e n -
d a n t s b e f o r e t h a t d a t e under t h e t e r m s o f t h e l e a s e .
Issue -
#4. T h i s a c t i o n i s b a r r e d by Montana's two-year
s t a t u t e of l i m i t a t i o n s f o r w a s t e o r i n j u r y t o r e a l o r p e r -
s o n a l p r o p e r t y i n s e c t i o n 93-2607, R.C.M. 1947 ( s u b s e q u e n t l y
amended i n 1975, and now s e c t i o n s 27-2-207 and 27-2-303,
MCA) .
A l l p a r t i e s are i n agreement t h a t t h e common law o f f s e t
d r i l l i n g t h e o r y was t h e a p p l i c a b l e r u l e i n Montana, a t l e a s t
b e f o r e e n a c t m e n t of t h e 1953 O i l and Gas C o n s e r v a t i o n Act.
The o f f s e t d r i l l i n g r u l e was r e c o g n i z e d i n B e r t h e l o t e v. Loy
O i l Co. ( 1 9 3 4 ) , 95 Mont. 434, 28 P.2d 187, 1 9 0 , and S e v e r s o n
v. Barstow ( 1 9 3 6 ) , 103 Mont. 526, 63 P.2d 1022, 1024-25.
T h i s common law r u l e i m p l i e s i n e v e r y o i l and g a s l e a s e a
c o v e n a n t on t h e p a r t o f t h e l e s s e e t o p r o t e c t t h e p r e m i s e s
o f h i s l e s s o r from d r a i n a g e by a n a d j a c e n t p r o d u c i n g w e l l by
d r i l l i n g an o f f s e t w e l l . Severson v . Barstow, s u p r a . The
p u r p o s e of i m p l i e d c o v e n a n t s i n g e n e r a l i s t o g i v e e f f e c t t o
t h e i n t e n t i o n of t h e p a r t i e s t o t h e l e a s e . The i n t e n t i o n of
t h e p a r t i e s i s t o produce o i l and g a s f o r a p r o f i t , which i s
r e c o g n i z e d by t h e l e s s o r a s p r o d u c t i o n r o y a l t i e s , t h e
primary c o n s i d e r a t i o n he r e c e i v e s f o r h i s l e a s e . Severson,
63 P.2d a t 1024; B e r t h e l o t e , 28 P.2d a t 190. Generally, t h e
i m p l i e d c o v e n a n t t o p r o t e c t t h e p r e m i s e s from d r a i n a g e by
d r i l l i n g an o f f s e t w e l l i s s t r i c t l y applied, p a r t i c u l a r l y
when t h e l e s s e e h a s a n i n t e r e s t i n t h e a d j a c e n t a c r e a g e on
which t h e d r a i n i n g w e l l i s l o c a t e d , b e c a u s e o f t h e permanent
l o s s of o i l t h a t r e s u l t s t o t h e l e s s o r when i t i s d r a i n e d
from b e n e a t h h i s l a n d . -
Gordon, Remedies f o r Breach of
I m p l i e d Covenants - - - - e a s e s - Montana ( 1 9 6 7 ) t
i n O i l and Gas L in
28 Mont.L.Rev. 187, 192-93. The i m p l i e d d u t y of t h e l e s s e e
t o p r o t e c t t h e l a n d from d r a i n a g e i s a d u t y t o e x e r c i s e
r e a s o n a b l e c a r e and d i l i g e n c e t o p r e v e n t s u b s t a n t i a l d r a i n -
a g e from t h e l e a s e d l a n d s by d r i l l i n g o f f s e t w e l l s . "Rea-
s o n a b l e c a r e and d i l i g e n c e " i s d e f i n e d a s t h a t which a
r e a s o n a b l y p r u d e n t o p e r a t o r would do under a l l o f t h e c i r -
cumstances o f t h e p a r t i c u l a r s i t u a t i o n t o p r o t e c t t h e
i n t e r e s t s of b o t h t h e l e s s o r and t h e l e s s e e . 2 Summers, -
Oil
- - S399, p. 572 ( 1 9 6 8 ) .
and Gas,
Issue -
#1. The f i r s t q u e s t i o n c e r t i f i e d t o t h i s C o u r t
by t h e U n i t e d S t a t e s D i s t r i c t C o u r t i s whether o r n o t t h e
1953 Montana O i l and Gas C o n s e r v a t i o n Act h a s a b o l i s h e d t h e
common l a w o f f s e t d r i l l i n g r u l e and t h e j u d i c i a l remedy o f a
c i v i l s u i t f o r damages i n s t a t e D i s t r i c t C o u r t . The p r i m a r y
p u r p o s e of t h e A c t i s t o p r e v e n t " w a s t e " of o i l and g a s , a s
t h a t t e r m i s d e f i n e d , by v e s t i n g power i n t h e Board of O i l
and Gas C o n s e r v a t i o n t o r e g u l a t e t h e d r i l l i n g , p r o d u c i n g ,
and s p a c i n g of w e l l s and t h e p o o l i n g and u t i l i z a t i o n o f o i l
and g a s i n t e r e s t s . S e c t i o n s 82-11-101, -111, - 1 2 1 , -124, -
201 and -205, MCA. The Act i s l a r g e l y based upon model
l e g i s l a t i o n f o r a n o i l and g a s c o n s e r v a t i o n s t a t u t e promul-
g a t e d by t h e I n t e r s t a t e O i l Compact Commission. Marchi,
C o n s e r v a t i o n - Montana ( 1 9 5 5 ) , 17 Mont.L.Rev.
in 1 0 0 , 102.
The Montana A c t , however, d o e s n o t c o n t a i n t h e p r o v i s i o n s of
t h e model law, n o r any p r o v i s i o n s w h a t s o e v e r , d i r e c t l y
r e l a t i n g t o t h e p r o t e c t i o n of c o r r e l a t i v e r i g h t s . "Mon-
t a n a ' s A c t makes no r e f e r e n c e t o ' c o r r e l a t i v e r i g h t s . ' "
P a t t i e v. O i l and Gas C o n s e r v a t i o n Commission ( 1 9 6 5 ) , 145
Mont. 531, 402 P.2d 596, 599. This f a c t i s important t o an
u n d e r s t a n d i n g o f t h e t h r e e c a s e s which have been d e c i d e d t o
d a t e under Montana's 1953 O i l and Gas C o n s e r v a t i o n Act.
Nothing i n t h e Act e x p r e s s l y a b o l i s h e s t h e common law
o f f s e t d r i l l i n g r u l e o r t h e j u d i c i a l remedy o f a c i v i l s u i t
f o r damages. N e v e r t h e l e s s , t h e Board of O i l and Gas Conser-
v a t i o n h a s broad powers t o c o n d u c t e v i d e n t i a r y h e a r i n g s ,
e s t a b l i s h w e l l s p a c i n g u n i t s , o r d e r i n v o l u n t a r y p o o l i n g of
i n t e r e s t s w i t h i n s u c h u n i t s , g r a n t o r deny p e r m i s s i o n t o
d r i l l w e l l s , and i s s u e r u l e s , r e g u l a t i o n s and o r d e r s t o
prevent waste. A p p l i c a n t s a r g u e t h a t t h e l e g i s l a t i v e assem-
b l y i n t e n d e d t o s u b s t i t u t e f o r t h e common law remedy a n ad-
m i n i s t r a t i v e determination of a l l t h e i s s u e s involved i n t h e
present case.
The s t a t u t e i s n o t t h a t broad. S e c t i o n 82-11-144, MCA,
p r o v i d e s t h a t any i n t e r e s t e d p e r s o n who i s a d v e r s e l y a f f e c t e d
by t h e Act o r by a r u l e o r o r d e r of t h e Board can o b t a i n
j u d i c i a l review. The t e r m " i n t e r e s t e d p e r s o n " i s b r o a d l y
defined. The A c t p r o v i d e s f o r r e s t r a i n i n g o r d e r s and i n j u n c -
t i o n s ( s e c t i o n 82-11-145, MCA), f o r an a p p e a l t o t h e Montana
Supreme C o u r t ( s e c t i o n 82-11-146, MCA), and i t a l l o w s t h e
Board t o b r i n g s u i t f o r v i o l a t i o n s of t h e A c t o r o f i t s
r u l e s o r o r d e r s ( s e c t i o n 82-11-147, MCA). S e c t i o n 82-11-
1 4 2 , MCA, p r o v i d e s :
" T h i s c h a p t e r , a s u i t by o r a g a i n s t t h e b o a r d ,
a v i o l a t i o n charged o r a s s e r t e d a g a i n s t a per-
s o n under t h i s c h a p t e r , o r a r u l e o r o r d e r
i s s u e d under t h i s c h a p t e r d o e s n o t i m p a i r ,
a b r i d g e , o r d e l a y a c a u s e of a c t i o n f o r damages
o r o t h e r c i v i l remedy which a p e r s o n may have
o r a s s e r t a g a i n s t a p e r s o n v i o l a t i n g t h i s chap-
ter o r a
- - - - - r u l e o r o r d e r i s s u e d under - " it. (Em-
phasis supplied.)
These a r e t h e o n l y p r o v i s i o n s of t h e Act t h a t a d d r e s s j u d i -
c i a l actions. None of them p u r p o r t s t o r e s t r i c t any o f t h e
common l a w r e m e d i e s a v a i l a b l e t o p r i v a t e l i t i g a n t s , e s p e -
c i a l l y where t h e common law c a u s e o f a c t i o n would n o t con-
f l i c t w i t h a v a l i d r u l e o r o r d e r of t h e Board. On t h e o t h e r
hand, the savings provision contained in section 82-11-142,
MCA, applies only to a cause of action against a person
"violating this chapter or a rule or order issued under it."
This savings clause clearly does not address the common law
remedies for implied covenants. In summary then, the 1953
Oil and Gas Conservation Act is silent in respect to common
law causes of action.
Section 82-11-201, MCA, allows the Board, in the interest
of preventing waste, to establish well spacing units for a
pool of oil or gas and to grant exceptions in appropriate
cases allowing a well to be drilled outside the location
generally authorized by the Board's spacing orders. Further-
more, "[tlhe size and the shape of spacing units shall be
such as will result in efficient and economic development of
the pool as a whole, and the size shall be the area that can
be efficiently drained by one well." Section 82-11-201(2),
MCA .
There are two ways in which the Board of Oil and Gas
Conservation establishes well spacing units. The first is
by a statewide spacing order pursuant to ARM 536-3.18(10)-
S18040. Such an order is issued on the Board's own motion
without the necessity of notice or hearing. The statewide
order affects all areas of Montana as to which the Board has
not issued a specific spacing order. The second way is by a
specific order of the Board upon application of an interested
party. A specific order, issued after notice and hearing
before the Board, covers a specific area overlying a pool or
reservoir of oil or gas.
Prior to September 14, 1972, the spacing of wells
drilled on Section 10 was governed by statewide spacing
orders issued by the Board of Oil and Gas Conservation. The
statewide spacing order governing well spacing in the forma-
tion and depth to which the Lewis well was drilled, in
effect at the time of drilling, provided that one well could
be drilled and operated on each quarter section (160 acres).
his order was changed by the Board's Order No. 16-71 of May
13, 1971, which provided that one well could be drilled and
produced on 320 acres at this depth. Under the May 13,
1971, order, the 320 acre spacing unit would be comprised of
two contiguous north-south or east-west quarter sections
designated by the lease operator, which did not necessarily
have to be within the same section.
On September 14, 1972, the Board of Oil and Gas Conser-
vation held a hearing, at which respondents and applicant
U. V. Industries were represented. The Board issued a
specific well spacing order superseding the statewide spac-
ing order for the particular production field involved in
the present controversy (Lonetree Creek field). This order
designated the N1/2 of Section 10 as a production spacing
unit. The designated well spacing unit includes the exist-
ing, producing Lewis well on the NW1/4 and it also includes
the NE1/4 owned by respondents, where they are alleging
applicants had a duty to drill an offset well.
In summary, then, the applicable statewide spacing
order in effect before May 13, 1971, would allow two wells
to be drilled on respondents' property; one on the ~ ~ 1 / 4
and
one on the SE1/4. After May 13, 1971, and before the ~oard's
specific well spacing order of September 14, 1972, the
applicable statewide well spacing order would allow only one
well to be drilled on respondents' property, which comprised
320 acres (E1/2 of Section 10) -
State laws and the Board's orders and rules are incor-
porated into oil and gas leases as a matter of law. Arm-
strong v. High Crest Oils, Inc. (1974), 164 Mont. 187, 520
P.2d 1081, 1084. The Danielson lease itself subjects all of
its express and implied covenants to these state provisions.
Williams and Meyers, in their treatise Oil - Gas Law
- and - -
(1959), state the following in regard to the effect of
conservation laws, and well spacing regulations in particu-
lar, on implied covenants: "The suggestion has been made
that conservation laws put an end to implied covenants in
oil and gas leases. In Mark Twain's phrase, reports of the
death are greatly exaggerated." 5 Williams and Meyers,
supra, 5865 p. 438. Well spacing regulations affect the
implied covenant to protect from drainage. A lessee who
fails to drill an offset well - violation of a valid well
in
spacing regulation does not breach his duty under the pru-
dent operator standard. 5 Williams and Meyers, supra, 5866,
p. 440, citing cases from other jurisdictions. This is true
even though substantial drainage results. Well spacing
regulations do not eliminate the offset drilling covenant,
but they override the covenant when the two are - conflict
in
with each other. 5 Williams and Meyers, supra, 5866, p.
441, citing cases from other jurisdictions. "If the drilling
of an offset well is opposition - existing rules and
to
regulations of the conservation commission, the implied
covenant to prevent drainage is inapplicable." Sullivan,
Handbook - - - - - 593, p. 177; 5101, p. 191
of Oil and Gas Law,
(1955). Both this rule of law and also the express terms of
the Danielson lease relieve the lessee of liability for
damages only if he is prevented from performing his obliga-
t i o n s under t h e l e a s e by such s t a t e law, r u l e o r o r d e r .
Montana's s t a t u t e s and c a s e law r e c o g n i z e t h e s e p r i n c i p l e s
i n t h e analogous s i t u a t i o n of s t a t u t o r y u n i t i z a t i o n :
" O p e r a t i o n s conducted p u r s u a n t t o a n o r d e r o f
t h e board p r o v i d i n g f o r u n i t o p e r a t i o n s s h a l l
c o n s t i t u t e a f u l f i l l m e n t of a l l t h e e x p r e s s o r
implied o b l i g a t i o n s of each l e a s e o r c o n t r a c t
covering lands i n t h e u n i t area t o t h e e x t e n t
t h a t t h e o b l i g a t i o n s c a n n o t be performed b e c a u s e
o f t h e o r d e r o f t h e board." S e c t i o n 82-11-
2 1 1 ( 2 ) , MCA.
See a l s o , Armstrong v. High C r e s t O i l s , I n c . , supra.
The r e l e v a n t q u e s t i o n becomes: would t h e o f f s e t w e l l
t h a t r e s p o n d e n t s c l a i m a p p l i c a n t s had a d u t y t o d r i l l t o
p r o t e c t t h e i r p r e m i s e s from d r a i n a g e under t h e o f f s e t d r i l l i n g
r u l e be i n v i o l a t i o n o f t h e B o a r d ' s w e l l s p a c i n g r e q u i r e m e n t s ?
"Where a n o p e r a t o r c o u l d p r o t e c t a g a i n s t d r a i n a g e by d r i l l i n g
a w e l l t h a t would be p r o f i t a b l e and would not v i o l a t e c o n s e r -
v a t i o n r e g u l a t i o n s , f a i l u r e t o o f f s e t i s a b r e a c h of c o v e n a n t . "
5 W i l l i a m s and Meyers, s u p r a , 5866, p. 442, c i t i n g cases
from o t h e r j u r i s d i c t i o n s . (Emphasis a d d e d . )
Contrary t o a p p l i c a n t s ' contentions, nothing i n t h e
1953 Act o r any r u l e , r e g u l a t i o n o r o r d e r o f t h e Board
p r e v e n t e d t h e l e s s e e from complying w i t h i t s i m p l i e d cove-
nant t o d r i l l an o f f s e t w e l l . The s t a t e w i d e s p a c i n g o r d e r s
a p p l i c a b l e t o t h e l e a s e d u r i n g t h e p e r i o d o f uncompensated
drainage did not r e s t r i c t applicants' a b i l i t y t o o f f s e t the
Lewis w e l l . A p p l i c a n t s were n o t p r e v e n t e d from d r i l l i n g a n
o f f s e t w e l l on t h e NE1/4 o f S e c t i o n 1 0 u n t i l t h e s p e c i f i c
w e l l s p a c i n g o r d e r o f September 1 4 , 1 9 7 2 , p l a c e d t h e Lewis
w e l l and t h e N E 1 / 4 of S e c t i o n 1 0 i n t h e same w e l l s p a c i n g
unit. T h e r e f o r e , s i n c e it would n o t be i n c o n f l i c t w i t h any
a p p l i c a b l e s t a t e law o r Board r u l e , r e g u l a t i o n o r o r d e r , t h e
implied covenant t o d r i l l an o f f s e t w e l l w a s i n e f f e c t
between t h e p a r t i e s t o t h e l e a s e , and r e s p o n d e n t s have a
c i v i l s u i t f o r damages a s t h e i r remedy f o r a p p l i c a n t s '
breach of t h e implied covenant.
The 1953 O i l and Gas C o n s e r v a t i o n A c t p r o v i d e s f o r t h e
v o l u n t a r y and i n v o l u n t a r y p o o l i n g o f i n t e r e s t s w i t h i n a
spacing unit:
"When two o r more s e p a r a t e l y owned t r a c t s are e m -
b r a c e d w i t h i n a s p a c i n g u n i t o r when t h e r e a r e
s e p a r a t e l y owned i n t e r e s t s i n a l l o r a p a r t of
t h e s p a c i n g u n i t , t h e n t h e p e r s o n s owning t h o s e
i n t e r e s t s m a y p o o l t h e i r i n t e r e s t s f o r t h e de-
velopment and o p e r a t i o n of t h e s p a c i n g u n i t .
I n t h e absence of voluntary pooling w i t h i n t h e
s p a c i n g u n i t , t h e b o a r d , upon t h e a p p l i c a t i o n
o f a n i n t e r e s t e d p e r s o n , may e n t e r a n o r d e r
pooling a l l i n t e r e s t s i n the spacing u n i t f o r
t h e development and o p e r a t i o n t h e r e o f . The
p o o l i n g o r d e r s h a l l be made a f t e r h e a r i n g and
s h a l l be upon t e r m s and c o n d i t i o n s t h a t a r e j u s t
and r e a s o n a b l e and t h a t a f f o r d t o t h e owner o f
each t r a c t o r i n t e r e s t i n t h e spacing u n i t t h e
o p p o r t u n i t y t o r e c o v e r o r r e c e i v e w i t h o u t un-
n e c e s s a r y expense h i s j u s t and e q u i t a b l e s h a r e
o f t h e o i l o r g a s produced and saved from t h e
spacing u n i t . . ." S e c t i o n 82-11-202(1), MCA.
(Emphasis s u p p l i e d . )
S e c t i o n 82-11-201(3), MCA, g r a n t s t h e Board a u t h o r i t y
t o allow exception w e l l s i n appropriate s i t u a t i o n s :
"Subject t o t h i s chapter, the order establishing
s p a c i n g u n i t s s h a l l d i r e c t t h a t no more t h a n one
w e l l may be d r i l l e d and produced from t h e common
s o u r c e o f s u p p l y on any s p a c i n g u n i t and t h a t
t h e w e l l s h a l l be d r i l l e d a t a l o c a t i o n a u t h o -
--
r i z e d by t h e o r d e r , w i t h such e x c e p t i o n a s m a y
- r e a s o n a b l y n e c e s s a r y where it i s shown, upon
be
a p p l i c a t i o n , n o t i c e , and h e a r i n g , and t h e board
f i n d s t h a t t h e spacing u n i t i s l o c a t e d on t h e
edge of a p o o l o r f i e l d and a d j a c e n t t o a p r o -
d u c i n g u n i t o r , f o r some o t h e r r e a s o n , t h e re-
quirement t o d r i l l t h e w e l l a t t h e authorized
l o c a t i o n on t h e s p a c i n g u n i t would be i n e q u i -
t a b l e o r unreasonable." (Emphasis s u p p l i e d . )
A p p l i c a n t s c o n t e n d t h a t a t any t i m e b e f o r e September
1 4 , 1972, r e s p o n d e n t s c o u l d have, b u t f a i l e d t o , a p p l y t o
t h e Board f o r a n e x c e p t i o n w e l l , o r i f a n e x c e p t i o n w e l l
would have c o n s t i t u t e d w a s t e and t h u s been u n l a w f u l , f o r a n
involuntary pooling order pooling t h e i r i n t e r e s t s with those
of the Lewis well. They argue that the common law offset
drilling rule has been superseded by the administrative
remedy, on the grounds that the involuntary pooling of
interests within a well spacing unit by order of the Board
affords the same kind of relief as was formerly granted by
the common law judicial remedy of a civil suit for damages
in state District Court.
The applicantst argument is faulty for several reasons.
First, the Act does not compel respondents to apply to the
Board for relief, as the administrative relief is purely
optional with an interested person who may apply for it.
Second, the administrative remedy of obtaining a permit to
drill an offset well was not available to respondents
because under the terms of the Danielson lease, as is gener-
ally the rule in oil and gas leases, the lessee was given
the sole and exclusive right to drill. Rieckoff v. Consoli-
dated Gas Co. (1950), 123 Mont. 555, 217 P.2d 1076, 1081.
Respondents themselves consequently had no right under the
lease to apply to the Board for a permit to drill an offset
well. To the contrary, the applicants had a duty to apply
for such a permit if one were necessary under the implied
covenant of good faith and fair dealings. Baldwin v. Hubetz
(Calif. 1957), 307 P.2d 1005.
A third reason why applicantst argument is unpersuasive
is that the Board of Oil and Gas Conservation does not have
any authority to adjudicate disputes involving private
rights. Pattie v. Oil and Gas Conservation Commission,
supra, 402 P.2d at 601, holds that the Board "has the au-
thority and duty to consider correlative rights and private
-
interests in making regulatory orders, but it does not have
the authority to adjudicate disputes involving these rights,"
and that "correlative rights disputes between adjacent
landowners must be disposed of by civil action in the Dis-
trict Courts" according to common law principles of oil and
gas, citing Sullivan, Handbook - - - - - S141, p.
of Oil and Gas Law,
262 (1955). (Emphasis supplied.) The present case is
primarily concerned with respondents' private rights under
an implied covenant of the lease as against the applicants
as lessees. Correlative rights are peripherally involved
here because two of the applicants, U. V. Industries, Inc.,
and Wolf Corporation, besides being assigns of the lessee,
were also owners of interests in the adjacent Lewis lease
where the draining well was located. "Correlative rights"
were defined in Pattie, 402 P.2d at 599:
"The term 'correlative rights' has been variously
defined to mean those rights of each landowner,
lessee, or operator in the common source of
petroleum. The rights are limited to correspond-
ing duties to the neighboring operator. The
duties are not to take an undue amount of petro-
leum or to do injury to the common supply. Oper-
ation and production is to be carried on only in
such manner or amount as not to harm the rights
of the others. As it applies in this action,
correlative rights would mean the interest of
plaintiffs in securing a portion of the natural
gas underlying their lease. Their opponent is
the Commission rather than an adjacent owner,
but the right to share of the common supply is
still in issue."
The Pattie case involved oil and gas lessees on adjoin-
ing lands. Sumatra had applied to the Board and been granted
permission to drill an oil well within lawful spacing limits.
The well produced gas instead and was in violation of the
well spacing rule for gas. Sumatra applied to the Board for
an exception to spacing rule for gas wells. Plaintiffs, who
were the lessees on the adjoining lands, also applied to the
Board for an exception to drill an offset well to protect
their correlative rights. The Board authorized Sumatra's
well as an exception well, but denied plaintiffs' request
for permission to drill an offset on the grounds that the
Board lacked authority to consider correlative rights.
Plaintiffs obtained judicial review of the Board's order in
the ~istrictCourt, which found that the Board had authority
to adjudicate correlative rights. The Supreme Court affirmed,
modifying the District Court's holding to mean only that the
Board had authority to consider correlative rights in
issuing its regulatory orders, but -- adjudication -
that the of
those rights remained - - courts.
in the
The issue in Pattie arose because Montana's 1953 Oil
and Gas Conservation Act makes no reference to correlative
rights. Reduced to simplest terms, the holding in Pattie is
that notwithstanding the absence of any reference to corre-
lative rights in the Act, the legislature intended that the
Board consider those rights in issuing its regulatory orders,
relying on what is now section 82-11-201(3), MCA. Pattie
therefore cannot be cited in support of the argument that
the 1953 Act has abolished the common law offset drilling
rule. Furthermore, while Pattie may be narrowly construed
to apply only to correlative rights, as was the specific
holding in the case, it is more reasonable to interpret it
broadly to apply to other private interests such as respon-
dents' rights under the covenant implied by the offset
drilling rule. In the latter situation, the holding would
be support for respondents' position that the Board lacks
authority to adjudicate disputes involving rights under the
common law implied covenants.
Chevron Oil Co. v. Oil and Gas Conservation C ~ m m i ~ s i o n
(1967), 150 Mont. 351, 435 P.2d 781, adds nothing to the
holding in Pattie. In Chevron the Board authorized the
a p p l i c a n t s ' d r i l l i n g of a n o f f s e t e x c e p t i o n w e l l b u t d e n i e d
C h e v r o n ' s r e q u e s t t o l i m i t p r o d u c t i o n of t h e o f f s e t w e l l s o
a s n o t t o v i o l a t e Chevron's c o r r e l a t i v e r i g h t s , a s Chevron
was l e s s e e o f t h e a d j a c e n t l a n d s b e i n g o f f s e t by t h e excep-
t i o n well. C h e v r o n ' s r e q u e s t f o r a n o r d e r l i m i t i n g produc-
t i o n from t h e new o f f s e t e x c e p t i o n w e l l was d e n i e d by t h e
Board on t h e grounds t h a t i t l a c k e d a u t h o r i t y t o r e s t r i c t
p r o d u c t i o n i n t h e a b s e n c e o f a showing of w a s t e . The D i s -
t r i c t C o u r t s u s t a i n e d t h i s r u l i n g by t h e Board. The
Supreme C o u r t r e v e r s e d , r e l y i n g on P a t t i e , and h e l d t h a t t h e
Board had such a u t h o r i t y t o p r o t e c t Chevron's c o r r e l a t i v e
r i g h t s by l i m i t i n g p r o d u c t i o n from t h e a d j a c e n t e x c e p t i o n
w e l l , n o t w i t h s t a n d i n g t h e a b s e n c e o f a showing o f w a s t e . In
t h e c o u r s e of i t s d i s c u s s i o n , t h e C o u r t s a i d :
" J u s t a s t h e Act p r o t e c t s t h e r i g h t s o f t h e owner
t o c a p t u r e h i s s h a r e of t h e o i l and g a s when t h e
p o o l i s o n l y under p a r t of h i s l a n d , i t must pro-
t e c t t h e a d j o i n i n g landowners from h a v i n g t h e i r
s h a r e o f t h e o i l and g a s a p p r o p r i a t e d by t h e
exeption location w e l l . To h o l d o t h e r w i s e would
be t h e e q u i v a l e n t t o o p e r a t i n g under t h e Rule o f
Capture theory b u t without t h e p r o t e c t i o n a f -
f o r d e d an a d j o i n i n g landowner under t h e O f f - s e t
D r i l l i n g Rule t h e o r y . " 435 P.2d a t 784.
Applicants argue t h a t t h i s statement supports t h e i r conten-
t i o n t h a t t h e O i l and Gas C o n s e r v a t i o n Act h a s e l i m i n a t e d
t h e common law remedy o f a c i v i l s u i t f o r damages under t h e
o f f s e t drilling rule. To t h e c o n t r a r y , t h i s s t a t e m e n t by
t h e C o u r t merely draws a n a n a l o g y t o make t h e p o i n t t h a t t h e
-
A c t p r o t e c t s t h e c o r r e l a t i v e r i g h t s of a l l p a r t i e s . I t does
n o t h i n g i n t h e way o f d i s p e n s i n g w i t h t h e o f f s e t d r i l l i n g
rule.
The f i n a l c a s e r e l i e d on by a p p l i c a n t s , Armstrong v.
High C r e s t O i l s , Inc. ( 1 9 7 4 ) , 164 Mont. 1 8 7 , 520 P.2d 1081,
s a y s nothing t o support t h e i r contention t h a t Nontana's O i l
and Gas Conservation Act has eliminated the common law cause
of action under the offset drilling rule. High Crest, the
assignee of a lease executed by Armstrong's predecessor in
interest, applied to the Board and was granted, over Arm-
strong's protest, an order under the statutory unitization
provisions of the Act unitizing a large tract which included
the Armstrong lease. Armstrong filed a complaint for judi-
cial review of the Board's order, as provided by the Act,
and subsequently, while judicial review was pending, brought
an action in another District Court to cancel the lease for
breach of a one-well pooling provision in the lease. The
Court held that because the same factual arguments and
reasons were advanced by Armstrong in the suit for cancella-
tion of the lease as were made in the action for judicial
review of the Board's unitization order, the suit for can-
cellation was an attempt to circumvent the statute by an
improper collateral attack on the Board's order. The Board's
unitization order was held to be res judicata except in the
appropriate District Court on judicial review as provided by
what is now section 82-11-144, MCA. Armstrong v. High Crest
Oils, Inc., supra, 520 P.2d at 1086.
Applicants in the matter presently certified and before
this Court urge that respondents cannot maintain a common
law suit under the offset drilling rule because to do so
would be a collateral attack upon the Board's order of
September 14, 1972, establishing the Lonetree Creek field
and special well spacing rules. The argument does not wash.
First, respondents are not seeking to circumvent the Act as
was the case in Armstrong since there was no decision of the
Board to collaterally impeach before the order of September
14, 1972, and no proceeding for judicial review pending.
Second, respondents' contentions are supported, if anything,
by the Board's September 14, 1972 order because the designa-
tion of the N1/2 of Section 10 as a well spacing unit tends
to establish the fact of drainage alleged by respondents
since a well spacing unit is required to be such as will be
efficiently drained by one well. Section 82-11-201(2), MCA.
Third, respondents are not seeking to do anything that would
challenge the validity of the Board's order; their claim
relates only to damages for the period before the Board
issued its order. Finally, the Court in Armstrong stated:
"We agree with respondents' argument that the cancellation
of the oil and gas lease may be a separate issue upon which
another court may have jurisdiction." 520 P.2d at 1084. In
the present situation, the suit for damages for breach of an
implied covenant, like a suit for cancellation of the lease,
is a separate issue.
Applicants emphasize that the remedy of applying to the
Board of Oil and Gas Conservation for an involuntary pooling
order was at all pertinent times available to respondents.
This relief was available to the respondents under section
82-11-232, MCA. Respondents argue, without citing any
authority, that the administrative relief available under
the involuntary pooling statute is only available in the
event the Board has issued, after notice and hearing, a
specific well spacing order, and that it is not available in
those areas where only statewide is applicable, as was the
case here before September 14, 1972. This argument ignores
the fact that respondents had the right, as interested
persons, to apply to the Board for a specific well spacing
order under section 82-11-201(1), MCA. Although the remedy
of applying to the Board for an involuntary pooling order
was available to respondents as an alternate form of relief,
it was not, however, their only remedy to the exclusion of
the common law offset drilling rule. See the discussion in
5 Williams and Meyers, supra, S866.
~efendantsallege plaintiffs waived their right to
require defendants to drill an offset well by the acceptance
of delay rentals through December 1972. The issue raised in
defendants' brief is not one of the issues certified to this
Court for a declaratory ruling as to Montana law, and it has
not been briefed by plaintiffs-respondents. Therefore, it
should not be considered.
In summary of the first issue, the enactment of Montana's
Oil and Gas Conservation Act has not, per se, eliminated the
common law right of action under the offset drilling rule.
An oil and gas lessee still has a duty under the implied
covenant to protect his lessor's premises from drainage by
drilling an offset well, if doing so would not be in viola-
tion of the Act or of a valid rule or order of the Board.
Issue -
#2. The second issue certified to this Court is
whether or not the lessor or her grantees (respondents) was
required to serve written notice or demand on the lessee or
its assigns (applicants) to drill an offset well; if so, did
the lessee have a reasonable time thereafter in which to
comply; and when does the obligation of the lessee, if any,
to pay damages commence? The offset drilling rule generally
requires the lessor or its grantees to serve written notice
or demand upon the lessee or its assigns to drill an offset
well as a precondition to the latter's duty to drill.
Sullivan, Handbook - - - - - S94, p. 180 ( 1 9 5 5 ) .
of Oil and Gas Law,
The rationale for this rule is explained in ~erthelotev.
Loy Oil Co., supra, 28 P.2d at 190:
". .. A usual implied covenant is one against
drainage, which is not here involved. The neces-
sity of drilling offset wells is not brought
about by the acts of the lessee, but by those
of third parties, unless the lessee owns adjoin-
ing acreage. Hence, before a breach of an im-
plied covenant could be claimed as substantial,
the necessity of protecting the leased premises
must be brought home to the lessee in some manner
by reasonable notice or demand on the part of
the lessor." (Emphasis supplied.)
This quotation, while it illustrates the obligation to give
notice, also shows why the obligation is not applicable to
two of the applicants in this case. Both U. V. Industries
and Wolf Corporation owned an interest in the adjoining
acreage and in the Lewis well which was causing the drainage
to their lessors, the respondents. Thus, the reason for
requiring notice--to bring home to the lessee the necessity
of protecting the leased premises--does not apply. The
drainage was not brought about by acts of third parties; it
was brought about by a well in which U. V. Industries and
Wolf Corporation held an interest. Since neither Empire
State Oil Co. nor its successor, Ashland Oil Co., ever owned
any interest in the Lewis lease, the foregoing reasoning
does not apply to them. Plaintiffs-respondentsr as the
lessor's grantees, were required to give notice before
Empire State Oil Co. or Ashland Oil Co. could be charged
with a duty to protect the premises from drainage. Since no
such notice was ever given, neither Empire State nor Ashland
can be held liable for breach of the implied covenant to
drill an offset well.
U. V. Industries, Inc. (formerly United States Smelting,
Refining and Mining Company), took an assignment of the
Lewis lease to the NW1/4 through its predecessor on March 8,
1962. Although U. V. Industries subsequently assigned an
undivided one-half of its interest in the lease on January
13, 1970, it retained the remainder of its interest through
and beyond the time that the Lewis well was drilled as a
producer, February 3, 1970. Thus, it was not necessary for
plaintiffs-respondents to give U. V. Industries notice or
demand to drill an offset well to protect them from drain-
age, since U. V. Industries had knowledge of the drainage
from the time the Lewis well was completed as a producer.
Wolf Corporation eventually acquired the undivided one-
half interest in the Lewis lease that had been assigned to
others by U. V. Industries except for a reversionary working
interest not important here. This was accomplished by an
assignment dated August 13, 1970, some six months after the
Lewis well was brought in as a producer. Wolf Corporation
thus had notice of drainage to the NW1/4 from at least the
time it acquired its interest in the Lewis lease, and it was
not necessary for plaintiffs-respondents to demand protec-
tion from Wolf Corporation.
Under the reasonably prudent operator standard, the law
gives a lessee a reasonable time in which to drill an offset
well following either notice or demand by the lessor or its
equivalent, acquisition by the lessee of an interest in the
adjacent draining lands. 2 Summers - - - S412, 414
Oil and Gas,
(1959). Therefore, the obligation to pay damages for failure
to offset the producing Lewis well on the adjacent lease
dates back to a reasonable time after the lessee had notice
of the need to protect the premises from drainage. What
constitutes a reasonable time is a question of fact. Summers,
supra, S412. Thus, in the case of U. V. Industries, the
obligation to pay damages dates from a reasonable time after
March 23, 1971, the date that U. V. ~ndustriesacquired the
entire leasehold interest in the Danielson lease to the ~ 1 / 2
of Section 10. The reason for this is that U. V. Industries
held an interest in the adjacent Lewis lease and in the
producing ~ e w i s
well, and therefore knew about the drainage
and the need to protect the Danielson premises, from the
time it was drilled as a producer--February 3, 1970.
On May 15, 1971, the predecessor of U. V. Industries
assigned 3/8 of its interest in the Danielson lease to Wolf
Corporation and 1/8 to other parties. Wolf Corporation's
obligation to pay damages for breach of the implied covenant,
therefore, begins a reasonable time after May 15, 1971. The
reason for this is that Wolf Corporation held an interest in
the adjacent Lewis well, and therefore knew about the drain-
age and the need to protect the Danielson lease, since
August 13, 1970.
The failure of respondents to give notice to Wolf
Corporation at any time and their failure to give notice to
U. V. Industries before the demand letters dated July 1,
1972 and July 26, 1972, are irrelevant because both had
notice of the need to protect respondents from drainage by
virtue of their ownership of interests in the adjacent Lewis
well which was causing the drainage. These defendants are
liable for the covenants maturing while the lease is held by
them as assignees. Hergistad v. Hardrock Oil Co. (1935),
101 Mont. 22, 37, 52 P.2d 171.
Issue -
#3. The Oil and Gas Lease from Hilda ~anielson
to Empire State Oil Company provides that "[nlo change in
the ownership of the land or assignments of rentals or
royalties shall be binding on the lessee until after the
lessee has been furnished with a written transfer or assign-
ment or a true copy thereof . . ." and the mineral deed from
Hilda Danielson to the three plaintiffs-respondents provided
that it was subject to any rights existing in the lessor or
its assigns. What is the impact of those provisions on the
rights of the parties? The short answer is that they have
no effect on the rights arising under the implied covenant
here in issue. Defendants argue that because they received
no notice of the change of ownership of the mineral estate
until they received a copy of the mineral deed from a co-
grantee who is not a party to this case on August 2, 1972,
plaintiffs cannot assert any rights against them before that
date under the terms of the lease.
A "no change in ownership without notice" clause is
designed to prevent the lessee's forfeiture of the lease for
failure to pay delay rentals to the proper party. Sullivan,
supra, 854, p. 115. This clause is valid and is binding on
the lessor's grantee. Sullivan, supra, S85. Such a clause
has nothing to do with implied covenants, which run with
the land and can be enforced by the lessor or its grantees
against the lessee and its assigns. 3 Summers, - - Gas
Oil and -
8553, p. 589 (1958). Additionally, applicants' argument
ignores a provision in the lease to this effect:
"If the estate of either party hereto is assigned
or sublet, and the privilege of assigning or sub-
letting in whole or in part is expressly allowed,
the expressed and implied covenants hereof shall
extend to the sub-lessees or assigns, their heirs,
executors, administrators and successors . . ."
Plaintiffs were therefore given the right, as mineral grantees,
to enforce the implied covenant to protect against drainage
and to sue for damages under the terms of the lease. Thus,
plaintiffs' failure to give defendants notice of the transfer
of ownership before August 1972 does not prevent them from
enforcing the implied covenant to protect the land from
drainage. To interpret the "no change in ownership without
notice" clause in the manner contended for by the applicants
would be to ignore the purpose of the clause.
Issue -
#4. The final issue is to determine the appropri-
ate statute of limitations. Defendants-applicants contend
that this action is barred by Montana's two-year statute of
limitations for waste or injury to real or personal property
in section 93-2607, R.C.M. 1947 (subsequently amended in
1975, now sections 27-2-207 and 27-2-303, MCA). This is not
a correlative rights suit for waste or injury to real or
personal property. It is a suit by the grantees of an oil
and gas lessor against the lessee and its assigns for breach
of an implied covenant to protect from drainage by drilling
an offset well. The implied covenant is as much a part of
the written lease as the expressed covenants. Bertholote v.
Loy Oil Co. (1933), 95 Mont. 434, 28 P.2d 187, 190, citing
Brewster v. Lanyon Zinc Co. (8th Cir. 1905), 140 F. 801,
809, stated: "Whatever is implied in a contract is as effec-
tual as what is expressed." The appropriate statute of
limitations is therefore eight years, the limitation for
actions based on a written contract. Section 27-2-202(1),
MCA .
We concur:
Chief Justice /
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Justices
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