Gulf Production Co. v. Kishi
129 Tex. 487, 103 S.W.2d 965, 1937 Tex. LEXIS 368 (1937)
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Rule of Law:
When an oil and gas lease expressly provides for the number of wells to be drilled for development, this express stipulation negates any implied covenant for further or more extensive development.
Facts:
- On December 28, 1919, appellees' predecessors leased a 150-acre tract to appellant, Gulf Production Co., for oil and gas development.
- This first lease required Gulf Production Co. to drill a total of 12 wells if oil was discovered in paying quantities, or else forfeit all but five acres per producing well.
- On March 12, 1920, the same parties entered into a second lease for a separate 20-acre tract.
- The second lease required Gulf Production Co. to drill until as many as four producing wells were completed, with similar forfeiture provisions for failure to do so.
- Gulf Production Co. discovered oil in paying quantities on both tracts of land.
- Gulf Production Co. subsequently drilled 15 wells on the 150-acre tract and 6 wells on the 20-acre tract, thereby exceeding the numbers specified in both leases.
- Appellees believed that reasonable diligence required the drilling of many more wells on both properties to fully extract the available oil.
Procedural Posture:
- Appellees sued appellant, Gulf Production Co., in a Texas trial court for damages, alleging a breach of an implied covenant to reasonably develop the leased properties.
- A jury found in favor of the appellees, and the trial court entered judgment for damages against Gulf Production Co.
- Gulf Production Co., as appellant, appealed to the Court of Civil Appeals.
- The Court of Civil Appeals reversed the trial court's judgment and rendered judgment in favor of Gulf Production Co.
- While a motion for rehearing was pending, the Court of Civil Appeals certified a question of law to the Supreme Court of Texas (which was decided by the Commission of Appeals).
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Issue:
Does an implied covenant to reasonably develop an oil and gas lease exist when the lease itself expressly stipulates the specific number of wells the lessee is required to drill?
Opinions:
Majority - Mr. Presiding Judge Smedley
No, an implied covenant for reasonable development does not exist where the parties have expressly agreed upon the lessee's drilling obligations. The court reasoned that implied covenants arise only out of necessity and in the absence of express stipulations. Here, the parties explicitly contracted regarding the lessee's development duty by specifying the number of wells to be drilled (12 in the first lease, 4 in the second). This express agreement on the subject of development precludes the court from implying a different or additional duty. The court cited Freeport Sulphur Co. v. American Sulphur Royalty Company of Texas for the principle that courts cannot make contracts for parties and will not override their expressed intentions with an implied term. Because the leases were not silent on the issue of development, the express provisions control, and no further obligation can be implied.
Analysis:
This decision solidifies the foundational principle that express contract terms supersede implied covenants in oil and gas law. It establishes that the implied covenant for reasonable development is a default rule that applies only when a lease is silent on the matter. The ruling provides certainty for lessees; by fulfilling the specific drilling requirements negotiated in a lease, they are shielded from subsequent litigation claiming they should have done more under a vague 'reasonable diligence' standard. Consequently, this case underscores the importance of comprehensive and specific drafting in mineral leases, as parties cannot later rely on implied duties to address matters they could have defined explicitly.
