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Cannon v. Cassidy

Supreme Court of Oklahoma
52 Oil & Gas Rep. 533, 1975 OK 151, 542 P.2d 514 (1975)
ELI5:

Rule of Law:

The failure of a lessee to pay royalties under an oil and gas lease does not give the lessor grounds to cancel the lease unless the lease contains an express provision granting the lessor the right of forfeiture for non-payment.


Facts:

  • Lessors and lessees entered into oil and gas leases for certain tracts of land.
  • The leases contained an express provision requiring lessees to make quarterly payments to lessors of a one-eighth (1/8) royalty on all gas sold.
  • The leases did not contain any clause authorizing forfeiture or cancellation for the lessees' failure to pay these royalties.
  • From August 1971 until July 1972, lessees produced and sold gas from the property to Cities Service Oil Company.
  • During this eleven-month period, the lessees failed to pay the lessors the accrued royalties, which amounted to $1,693.62.

Procedural Posture:

  • The lessors filed an action against the lessees in the district court (trial court) seeking cancellation of the oil and gas leases.
  • The trial court, ruling on stipulated facts, entered judgment in favor of the lessees, holding that the leases could not be cancelled.
  • The lessors, as appellants, appealed to the Oklahoma Court of Appeals.
  • The Court of Appeals reversed the trial court's judgment and ordered the leases cancelled.
  • The lessees, as petitioners, were granted a writ of certiorari by the Oklahoma Supreme Court for review of the appellate decision.

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Issue:

Does a lessee's failure to pay accrued royalties, in violation of an express lease term, justify the cancellation of an oil and gas lease when the lease itself does not specify cancellation as a remedy for non-payment?


Opinions:

Majority - Simms, J.

No. The failure to pay royalties does not justify cancellation of an oil and gas lease unless the lease explicitly provides for such a remedy. The court relied on its long-standing precedent in Wagoner Oil & Gas Co. v. Marlow, which established that forfeiture is not an available remedy for non-payment of royalty unless expressly provided for in the lease. The court rejected the lessors' novel argument that non-payment of royalties constituted a breach of the implied covenant to market, holding that the duty to pay is an express covenant. Because cancellation is a harsh equitable remedy, it is inappropriate when a plain, speedy, and adequate remedy at law—a suit for money damages—is available to fully compensate the injured party. The court noted that this holding aligns with the overwhelming majority of other jurisdictions.


Dissenting - Williams, C.J., and Barnes, J.

The dissent did not provide a written opinion.



Analysis:

This decision reaffirms the traditional distinction between express and implied covenants in oil and gas law, refusing to expand the implied covenant to market to include the payment of royalties. It solidifies the principle that forfeiture is a disfavored remedy in contract law and equity will not intervene with such a harsh outcome when a simple legal remedy like money damages is sufficient. The ruling places the burden squarely on lessors to negotiate and include specific forfeiture clauses in their leases if they wish to have the power to cancel for non-payment, thereby providing stability and predictability for lessees regarding their operational investments.

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