Gillette v. Pepper Tank Co.
694 P.2d 369 (1984)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A judicial ascertainment clause in an oil and gas lease allows for conditional cancellation rather than absolute cancellation for breaches of implied covenants, but the court must consider the entire unit for unitized lands when assessing such breaches.
Facts:
- In 1951, Donald P. and Miles T. Gillette executed an oil and gas lease covering approximately 3,360 acres of land.
- Between 1952-1953, a number of successful wells were drilled on the leased property.
- In 1957, one additional well was drilled on the leased property.
- In 1959, the lease was assigned primarily to Pepper Tank Company (Pepper).
- In 1963, a unitization agreement was executed, affecting certain portions of the leased lands, and Pepper commenced a water-flood operation.
- Pepper abandoned the water-flood operation in 1971.
- In 1972, Pepper drilled one well, which was plugged and abandoned the same year, and there have been no drilling efforts of any nature on the leased property since that time.
- Presently, all wells have been abandoned with the exception of Gillette well #10, which continues to produce at a marginal rate, and Pepper maintains pits improperly, leading to discharge of water and surface damage.
Procedural Posture:
- Lessors (Underwood) alleged the lease had been terminated due to the defendants' (Pepper Tank Company) failure to produce in paying quantities and breaches of implied covenants, requesting a decree cancelling the lease and quieting title.
- The state trial court, after a trial to the court, found violations of implied covenants and, relying on the judicial ascertainment clause, granted conditional cancellation of the lease, requiring Pepper to submit a development plan for non-producing areas and make repairs for producing areas.
- Both the defendants (Pepper) and the plaintiffs (Underwood) appealed the trial court's judgment to the Colorado Court of Appeals.
- The Colorado Court of Appeals previously remanded the case to the trial court for further findings.
- The case was resubmitted to the Colorado Court of Appeals for reconsideration of the appeal.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a judicial ascertainment clause in an oil and gas lease allow for conditional cancellation upon a finding of a breach of implied covenants, and must the court consider unitized lands as a whole when assessing breaches of implied covenants?
Opinions:
Majority - Pierce, Judge
Yes, a judicial ascertainment clause in an oil and gas lease allows for conditional cancellation upon a finding of a breach of implied covenants, and the court must consider unitized lands as a whole when assessing breaches of implied covenants. The court found that Pepper breached implied covenants to drill, develop, and operate diligently. Colorado recognizes four implied covenants in oil and gas leases: to drill; to develop after discovery in paying quantities; to operate diligently and prudently; and to protect against drainage, all based on the concept that exploration, development, and production should proceed with reasonable diligence for the common benefit. The trial court's findings of one marginal producing well, a well drilled and abandoned in 1972, an abandoned water-flood project, deliberate failure to clear title, speculative holding, and third-party interest in drilling supported a breach of the implied covenant to further explore. Additionally, improper maintenance and discharge of water, surface damage, and a poorly conducted water-flood operation supported a breach of the implied covenant to operate prudently. While the general rule is that equity provides relief only if there is no adequate remedy at law, cancellation is an appropriate equitable remedy for implied covenant breaches, and a conditional decree does not constitute a forfeiture. The judicial ascertainment clause in the lease specifically permitted conditional cancellation, distinguishing it from cases where absolute cancellation was decreed in the absence of such a clause. However, for unitized lands, unitization relieves the lessee of the obligation of the implied covenant for reasonable development for each tract separately; implied covenants apply to the unit as a whole. Production on any portion of the unitized area extends the lease as to the unitized portion of the lease. Therefore, the trial court erred by not considering the entire unit when assessing breaches on unitized land. The court affirmed the conditional decree as to the non-unitized remainder of the lease but reversed the judgment as to the unitized portions, remanding for reconsideration in view of the entire unit.
Analysis:
This case is significant for oil and gas law in Colorado, as it reinforces the existence and enforceability of implied covenants, emphasizing the 'prudent operator' standard. It clarifies that a judicial ascertainment clause provides a lessee an opportunity to cure breaches, promoting a more equitable outcome than immediate absolute cancellation. Crucially, the decision distinguishes how implied covenants are applied to unitized versus non-unitized lands, requiring a unit-wide assessment for unitized areas, which has profound implications for how lessees manage and develop such complex agreements and how courts will evaluate their performance.
