# Opposition Brief — Humble Oil & Refining Co. v. Price > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385605_0887%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1971 - **Citation:** 402 U.S. 934 ## Text @ ws oh rth apr au od + TABLE OF CONTENTS Page STATEMENT OF THE CASE 1, “Tee Pe 2 1 a RR a er on 3 IN REPLY TO HUMBLE’S ALLEGATIONS OF WHY A WRIT SHOULD BE GRANTED... 5 SNOT cr ecceraccoensssssssnesneenGomeiteenconaniemeeeia. 8 11 hs eS ¢ eee 11 APPENDIX A a a a a A-1 I. United States District Court Judgment on Motion for Summary Judgment A-1 II. United States District Court’s Findings on Motion for Summary Judgment A-3 III. Reasons for Summary Judgment —_...._>>>E A-8 Pl, GR _ RMRRDRRRINEenenerteneie =r oot Aten eau oreonebom Be Se B-1 I. Opinion of the United States Court REESE . B-l II. On Petition for Rehearing and Petition for Penne tO BNE oe ec B-33 III. Judgment of the United States Court 0 I ccctaiccsksscaciictadenstass easeannaapetce B-38 APPENDIX C __ cheiathieenaieatijactiaaesssciichiniaaaetadl C-1 SEE, OP > debt PMT SE ah Basen i o- AS elie” Seed 3 f B-3 Bank to sell the leased premises back to the Williams family, from whom it had been acquired. The Land Bank reserved a quarter interest in the minerals. The Williams family granted Price and another plaintiff, Edwin F. Gayle, mineral interests in the leased property in return for their services. In 1937 Humble brought in its discovery well in the North Crowley field now known as Williams No. 1. As of March 1, 1964, Humble had drilled twenty wells on the leased premises at a cost of more than $2,750,000. These wells were drilled in a surface spacing pattern contain- ing approximately twenty acres per well. Production of oil and gas from the leased premises is stil] continuing, and the plaintiffs and others who share in royalties pay- able under the 1933 lease have received payments from the date of first production to March 1, 1964, of more than $1,274,000. The gross value of the oil and gas recovered from the Williams property in those years exceeded $10,192,000. The plaintiffs’ contentions in this case relate only to the shallow sands, those located above the Frio. As of March 1, 1964, Humble had performed at least 46 work- over operations on the wells producing from the shallow sands at a cost of more than $1,000,000. In addition, Hum- ble applied to the State Conservation Department for units affecting certain of the shallow reservoirs, and in 1963 unitization orders were issued pooling the Williams prop- erty with other lands overlying the shallow reservoirs. The plaintiffs contend that their property is being drained by Humble’s operations on the adjacent premises. The district court found that there are two unit wells, in the production of which the plaintiffs share, situated on B-4 adjoining property within 150 feet of the Williams tract. There are no other wells on adjacent premises located with- in 150 feet of the Williams property. Nevertheless, the plaintiffs urge that Humble should have taken steps — either by multiple completions or forced pooling — to pre- vent their land from being drained and that those steps would have been economically feasible for the company. The questions for review are these: (1) Were the plaintiffs entitled to an accounting? (2) What is the na- ture and ex‘ent of the lessee’s implied obligation to protect the leased premises from drainage? (3) Does an express offset provision in the lease preclude the implication of a further duty upon the lessee to protect against drainage? (4) Does the plaintiffs’ failure to comply with a notice pro- vision in the lease bar their cause of action for damages? I. ACCOUNTING ‘Nhe plaintiffs contend that because Humble failed to exeicise reasonable diligence to prevent their property from being drained, it must account to them for that frac- tion of production on the adjacent property that is attribu- table to the drainage.® In granting Humble’s motion for summary judgment on this cause of action, the district court held that under Louisiana law the plaintiffs’ proper remedy is an action to recover damages. “A creditor, as such, has no right to an accounting in Louisiana”. 290 F.Supp. at 412-13. We 3 These plaintiffs argue that Humble by its tardy ~~ for unitization declared that it is taking oil and from the plaintiff’s land through wells it drilled on other land. Humble accounts for oil and gas taken since unitization. The plaintiffs contend that it should also be made to account for oil and gas so taken and so taken to its oe before it made the fact known through unitization ap- plications. ee ie AMET PIPE NEE EE WET LTS ; ; ; 4 7 : —— RN Seika aah Dotnet SABA B-5 agree with the result and affirm the judgment. We hold that in the circumstances of this case, the plaintiffs have no action for an accounting. We do not go so far as to say that in Louisiana a mineral lessor is a mere creditor or that mineral lessors never have a right to an accounting from their lessee. Humble’s arguments rest on the incontestable prin- ciple that a Louisiana landowner neither owns the min- erals beneath his land nor has any right to the oil and gas produced on adjoining property. Humble’s position is that an accounting is available only to one who has a property interest in the subject matter of the suit. It is quite true that Louisiana adheres to the non- ownership theory of oil and gas; thus only upon drilling and reducing the minerals to possession does the Louisiana landowner become vested with ownership. Frost-Johnson Lumber Co. v. Salling’s Heirs, 1922, 150 La. 756, 91 So. 207. It is also true that under the rule of capture a land- owner may produce as much oil and gas as he can from a well bottomed on his land and need not account to his neighbor if he drains oil and gas from beneath his neigh- bor’s land. Louisiana Gas & Fuel Co. v. White Bros., 1925, 157 La. 728, 103 So. 23; Higgins Oil & Fuel Co. v. Guar- anty Oil Co., 1919, 145 La. 233, 82 So. 206. Nevertheless, we consider that these principles are not determinative of the issue. It is unsettled in Louisiana what right the plain- tiff must possess in order to maintain an action for an ac- counting. The landowner’s exclusive right to explore his land and drill for oil or his right under a lease to one- eighth of gross production in certain circumstances may be sufficient interests to entitle him to an accounting.‘ In McCoy v. Arkansas Natural Gas Co., 1932, 175 La. 487, 143 So. 383, the Supreme Court of Louisiana stated that the owners have B-6 It would be a mistake to think that a Louisiana land- owner may never compel an accounting by his mineral lessee. Indeed, we have been able to find several oil and gas cases in which Louisiana courts have ordered an ac- counting. E.g. Fontenot v. Sunray Mid-Continent Oil Co. (La. App. 3d Cir. 1967) 197 So.2d 715; Mire v. Hawkins, (La. App. 3 Cir. 19 ) 177 So.2d 795; Davies v. Texar- kana Crude Oil Co., 1923, 154 La. 424, 97 So. 597; Harris v. J. C. Trahan Drilling Contractor, Inc., La. App. 2d Cir. 1964, 168 So.2d 881; Pierce v. Atlantic Ref. Co., La. App. 3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La. App. 2d Cir. 1961, 130 So.2d 501. Each case, however, follows a well-defined pattern, typically an action by the lessor to cancel his mineral lease on the ground of nonpayment of royalties. If the court orders cancellation of the lease, it may also direct the lessee to account to the plaintiff for the royalties earned until cancellation. See Davies v. Tex- arkana Crude Oil Co.; Fontenot v. Sunray Mid-Continent Oil Co.; Pierce v. Atlantic Ref. Co.; Bailey v. Meadows. Even if the court rejects the lessor’s demand for cancella- tion because nonpayment was excusable, plaintiff is still entitled to an accounting of royalties that have accrued under the terms of the lease. See Mire v. Hawkins; Harris v. J. C. Trahan Drilling Contractor, Inc. Thus at least in oil and gas lease cancellation cases an accounting is an- cillary to the action and exists for the equitable purpose an exclusive right to drill and reduce minerals to possession and that that right is as well entitled to the protection of the law as is the own- ership of corporeal property. In a number of ways the Conservation Law of Louisiana (Act 157 of 1940-R.S. 30:1, et seq.) has recognized the incidents of ownership with respect to oil and gas before its production. “Owner” and “pro- ducer” are defined in Section 3 as follows: For example, (8) “ ‘Owner’ means the person who has the right to drill and produce from a pool and to appropriate the production either for himself or for others. “(9) ‘Producer’ means the owner of a well capable of pro- ducing oil or gas or both.” SYR TITAS OTS TIFT OT re RE TTS a ry eda EE 5 fs ‘ B-7 of adjusting in one proceeding all the differences between the parties arising from the main cause of action. For many years in Louisiana the existence of a cause of action based on drainage was in doubt. Finally the case of Breaux v. Pan American Petroleum Corp., La. App. 3d Cir. 1964, 163 So.2d 406, established the right of a landowner to recover damages from his lessee for breach of the lessee’s implied obligation to exercise reasonable diligence to prevent drainage. The plaintiffs are right, of course, when they argue that Breaus merely held that an action for damages lies; it did not hold that an action of accounting will not lie. Nevertheless, we believe that an action for damages based on drainage and an action fox an accounting are fatally incompatible in a way that an action for cancellation and an accounting are not. The district court correctly enumerated the elements of an action for damages that Breaux requires the land- owner to prove. 290 F. Supp. at 411. In the ordinary drain- age case the plaintiff must prove first that substantial drainage has occurred and that offset wells drilled on his premises could have produced oil and gas from the same reservoirs as those from which production was actually 5 Authority for the equitable adjustment of the parties’ differ- ences can be found in Article 21 of the Louisiana Civil Code: “In all civil matters, where there is no express law, the judge is bound to proceed and decide according to equity. To decide equitably, an ap- peal is to be made to natural law and reason, or received usages, where positive law is silent.” See Miller v. Kellerman, W.D. La. 1964, 228 F. Supp. 446, 464. In that case Judge Hunter also found support for the accounting in Article 1965: “The equity intended by this rule is founded in the christian principle not to do unto others that which we would not wish others should do unto us; and on the moral maxim of the law that no one ought to enrich himself at the expense of another. When the law of the land, and that which the parties have made for themselves by their contract, are silent, courts must apply these principles to determine what ought to be incidents to a contract, which are required by equity.” See also Art. 2037: “Manner of per- formance of conditions. Every condition must be performed in the manner , it is probable that the parties wished and intended that it should be. B-8 obtained through the draining wells. Second, he must prove that it would have been economically feasible for the lessee to drill such offset wells. Finally, he must prove “with some degree of certainty” the quantity of oil and gas that would have been produced from the offset wells and the value of his share of that production. Breaux v. Pan American Petroleum Corp., 163 So.2d at 415. It is this last requirement that makes an accounting incompatible with an action for damages under the rule in Breaux. By means of an accounting the plaintiffs seek to shift to Humble the burden of proof on the issue of dam- ages imposed on them by Breaux. They would have the court require Humble to calculate and present to them the quantity of oil and gas drained from beneath their land. This conflict, however, does not arise in the situation in which a plaintiff seeks cancellation of a lease based upon nonpayment of royalties. In that case the plaintiff’s right to cancellation depends not on the amount of royalties but rather on the lessee’s failure to pay any amount of royal- ties without a valid justification. See Bollinge v. Texas Co., 1957, 282 La. 637, 95 So. 2d 132, 1386. Thus once the fact of unexcused nonpayment is proved and cancellation awarded, it is appropriate, in order to afford full and com- plete relief, to require the lessee to account for the accrued royalties. Davies v. Texarkana Crude Oil Co., 1923, 154 La. 424, 97 So. 597, 598. The Breaux case establishes that if the plaintiffs can prove the elements of the cause of action, they are entitled to damages from Humble for breach of its implied obli- gation to exercise reasonable diligence to protect the prop- erty from drainage. But they must prove “with some de- gree of certainty” the quantum of harm suffered. Since an order of accounting would require Humble to deter- 7 B-9 mine the amount of oil and gas drained, it is inconsistent with the rigorous burden of pleading and proof that Breaux places on aggrieved landowners. Thus we conclude that in oil and gas cases the Louisiana courts would con- fine an action of accounting to that situation in which the lessee unjustifiably fails to pay his lessor royalties pro- duced from wells drilled on the lessor’s land. II. THE NATURE AND EXTENT OF THE LESSEE’S IMPLIED OBLIGATION TO PROTECT AGAINST DRAINAGE In the alternative, the plaintiffs sued for damages for breach of Humble’s implied obligation as their mineral lessee to exercise reasonable diligence to protect the plain- tiffs’ property from drainage of oil and gas. The district court, denying Humble’s motion for summary judgment in relation to the cause of action for damages, reached the following conclusion of law. 5. A mineral lessee has a duty to the mineral lessor to act as a prudent administrator of the leased premises. If the lessee is draining oil or gas from beneath the leased premises by a well drilled by the lessee on other property, its duty to act as a prudent - administrator may include an implied obligation to unitize the leased premises with those from which production is being obtained, or to drill an offset well, or to effect an offset completion of a well al- ready drilled on the leased premises, if these acts are economically feasible . . . or to do those other _ things, if any, that a prudent administrator would do under the circumstances. What action a pru- dent administrator would take under the circum- stances is a factual question to be decided by the finder of fact in the light of the relevant evidence. 290 F. Supp. at 411-12. B-10 On appeal neither side is satisfied with that conclu- sion. The plaintiffs urge this Court to hold that as a matter of law a mineral lessee, upon discovery of drainage from beneath the leased premises, has an affirmative duty to unitize the leased premises with those to which the oil or gas is draining, or to inform the lessee of the drainage so that he may seek unitization, or to drill an offset well, or to effect an offset completion of a well already drilled on the leased premises, if these acts are economically feas- ible. Humble, on the other hand, argues first that the in- clusiou in the lease of an express provision dealing with drainage precludes the implication of any other obligation to protect the leased property from drainage. Second, Humble argues that as a matter of law in Louisiana the extent of its obligation to protect against drainage is lim- ited to drilling offset wells or completions and that it would be both unfair and unwise to impose any new obli- gation. We deal with Humble’s first contention in Section III of this opinion. The general rule in Louisiana is that the landowner has no cause of action for damages against the owner of the adjoining property or his lessee for drainage of oil an: gas from beneath his land. Louisiana Gas & Fuel Co. v. White Bros., 1925, 157 La. 728, 103 So. 23; Higgins Oil & Fuel Co. v. Guaranty Oil Co., 1919, 145 La. 233, 82 So. 206. That rule is based on the concept that oil and gas — fugacious substances — are not subject to ownership in place. Frost-Johnson Lu:nber Co. v. Salling’s Heirs, 1922, 150 La. 756, 91 So. 207. Thus the Louisiana landowner may drill wells on his property and capture as much oil and gas as he can, even though he may draw some of his production from his neighbor’s land. A different situation obtains, however, when the party B-11 whose production on adjacent premises is also the plain- tiff’s lessee. In that case a cause of action for damages lies based on the contractual relationship between lessor and lessee and the lessee’s codal obligation to act as “a good administrator”. In an oil and gas lease the land- owner/lessor surrenders to the lessee his exclusive right to drill for oil in return for a percentage share in the gross proceeds of production. When the lessee acquires the lease, he also assumes a number of obligations, one of which is a duty to protect the leased premises from drainage. When drainage does occur, the landowner’s judicial remedy is then an action against the lessee for damages or cancella- tion of the lease for breach of his implied obligation to pro- tect against drainage.® For many years the existence of this remedy against the mineral lessee was in doubt in Louisiana.’ In 1929 in Swope v. Holmes, 169 La. 17, 124 So. 131, the Louisiana Supreme Court granted a landowner cancellation of his lease because the lessee had drilled wells on adjacent prop- erty that were draining the leased premises. Yet as late as 1964 it was accurate to say that the Louisiana courts, for one reason or another, had never awarded damages for drainage.* Nevertheless, in several cases, although re- lief was denied, the court assumed the existence of the remedy. E.g., Billeaud Planters, Inc. v. Union Oil Co. of Cali- fornia, W.D. La. 1956, 144 F. Supp. 564, 569, aff'd, 5 Cir. 1957, 245 F.2d 14; Roberts v. United Carbon Co., 5 Cir. 1935, 78 F.2d 39, 42; Coyle v. North American Oil Consol., 6 See Arata, Louisiana Law of Drainage, in Eleventh Ann. Inst. on Mineral Law 46, 47 (1964). 7 Hardy, Drainage of Oil and Gas From Adjoining Tracts —A Further Development, 6 Nat. Res. J. 45 (1966). 8 —— supra, note 6, at 51. See also Billeaud Planters, Inc. v. Union Oil Co. of California, W.D. La. 1956, 144 F. Supp. 564, 569, affd, 5 Cir., 1957, 245 F.2d 14. B-12 1942, 201 La. 99, 9 So.2d 473, 475-76; Louisiana Gas Lands v. Burrow, 1941, 197 La. 275, 1 So.2d 518, 521-22. The issue is no longer an open one in Louisiana. In Breaux v. Pan American Petroleum Corp., La. App. 3d Cir. 1964, 163 So.2d 406, writ denied, 246 La. 581, 165 So. 481, the court said that we know of no reason why a landowner would not be entitled to recover from his mineral lessee: the damages which the lessor has sustained as the re- sult of a breach of the implied obligation on the part of the lessee to exercise reasonable diligence in endeavoring to prevent substantial drainage of the leased premises. We think the lessor under those circumstances would have a cause of action for damages for breach of a mineral lease contract just as he would for breach of any other contract. 163 So.2d at 415. If there is no longer any doubt about the existence of the duty, there is still—as the present lawsuit illus- trates — question as to the nature and extent of the les- see’s obligation to protect against drainage. We hold that on this issue the district court correctly stated the law of Louisiana: [T]he mineral lessee who is leasing adjacent tracts and is producing oil or gas from a well on one tract that drains the other has a duty to act as a pru- dent administrator in order to protect the owner of the tract being drained by taking such steps as a prudent administrator would take under the cir- cumstances then prevailing. 290 F. Supp. at 422. Whether on a particular set of facts the lessee has breached his duty is a question for the trier of fact. To B-13 recover damages for breach of the implied obligation to protect from drainage, the plaintiff in Louisiana must show (1) that substantial drainage has occurred, (2) that the lessee cc id have prevented the drainage with- out sustaining an economic loss and (8) an amount of royalties that the landowner would have received had the lessee taken appropriate preventive meas- ures, Id. at 419. In Breaux the Court declared: We conclude, therefore, that plaintiffs in this suit have no greater rights and no different cause of action against defendants-lessees simply because the defendants are also the lessees of the adjoining tract of land on which the alleged draining well is located. But the fact that the lessee himself is causing the damage has an important bearing on the proof of the lessee’s knowledge of the drainage and on the steps the lessee is capable of taking to prevent or diminish drainage. Breaux makes it clear that a cause of action for dam- ages can be predicated as much upon the lessee’s failure to seek unitization as upon the more commonplace failure to drill offset wells or completions. In the ordinary drain- age case the plaintiff must allege and prove that the les- see could have produced oil and gas from the same reser- voir by offset wells or completions drilled on the leased premises and that it would have been economically feasi- ble for the lessee to drill such wells. He must also allege and prove the quantity of oil and gas that would have been produced from such a well and the value of his share of production. The plaintiff may also recover damages, however, if he alleges and proves that the lessee could have B-14 created a pooling unit under which plaintiff would have participated in the production from the reservoir, but that he failed to do so. Damages in that case would be limited to the amount plaintiff would have received from such a unit. 163 So.2d at 415-16. Moreover, drilling offset wells, completions, and unitization do not exhaust the possible ways in which the lessee might discharge its duty to pro- tect against drainage. Indeed, if he deems it inadvisable or unprofitable to drill offset wells or unitize the prem- ises, the prudent administrator should perhaps disclose the fact of drainage to the lessor so that he may apply to the Louisiana Commissioner of Conservation for the es- tablishment of a drilling unit.’ In appropriate circum- stances failure to make a full disclosure may provide the basis for a cause of action for damages. In addition to the precedental effect of Breaux, sound policy reasons support the decision not to limit the lessee’s duty to protect against drainage by drilling offset wells.’° Admittedly, the implied obligation to protect against drain- age has long been thought of solely in the context of drill- ing offset wells. The emphasis on that mode of protection was understandable in the early years of the oil industry. * Under La. Rev. Stat. § %0:6F the lessor himself may seek a hear- ing to determine whether a unit should be formed. Because administrative relief is thus available to both the lessor and lessee, it could be argued that the lessee should not have to assume the burden of applying for unitization. Professor Hardy, however, points out the weakness of this argument: one of the principal motivations of any lessor in executing a lease contract is to shift the burdens of development and ad- ministration to the lessee. Therefore, the mere fact that the possibility of lying for unitization is open to the lessor Thould not alter basic obligation of the lessee in this regard. Hardy, note 7, at 48-49 n. 13. ‘Many of the arguments that follow have been articulated in two tening articles on the Breaux decision by Professor Geo w. , Ill, of the Louisiana State University ae Sa Hardy, typ gg ag go tg ey 1963-64 Term —Mineral Rights, 25 La. L. Rev. 1965); Drainage of Oil i Fone Maney oh 2. R 4 if [ree mn B-15 The rule of capture effectively precluded resort to the courts to prevent drainage; thus the drilling of a well to offset each of the draining wells on adjacent property was the only method avaiiable to lessees to fulfill their obliga- tion. Conservation laws, however, have added at least one other self-help remedy to the lessee’s repertoire, forced pooling or unitization. It is reasonable to require that the lessee, as a prudent administrator, utilize all the methods available to him to prevent drainage." To require the lessee in certain circumstances to seek unitization will not place an unfair burden upon him. In- deed, the concept of a duty to unitize is thoroughly com- patible with the “prudent administrator” standard gov- erning his conduct with respect to other implied covenants. The lessee may always defend a suit based upon his fail- ure to unitize by showing that a prudent operator would not have formed a unit or that he had attempted without success all reasonable means to establish a unit or that the costs of unitization would not leave him a profit. Moreover, from the point of view of the landowner, recognition of a duty on the part of the lessee to unitize in circumstances in which a prudent administrator would do so can afford significant protection against drainage of valuable reserves. Especially is this so in cases when it would be unprofitable — or perhaps even impossible be- cause of spacing regulations — for the lessee to drill addi- tional wells. In those circumstances the lessee’s contribu- tion to the cost of a unit well may be recoverable from his share of unit production, and the lessor will be saved at least part of his mineral reserves. When the lessee him- 11 Cf. George, The Impact of Conservation Laws and Decisions 7 “y the — Obligations of the Mineral Lease, 24 La. L. Rev. 571, 6 (1964 B-16 self is doing the draining on adjacent land, the argument for unitization is even more compelling. The lessor in that case can get adequate protection against drainage without further cost to the lessee, whose drilling costs are already incurred. Thus he need only divide the royalty interest among the pooled landowners. It is true that any recovery of damages by the lessor for the lessee’s failure to unitize, coming on top of a full royalty payment to the adjacent landowner, will decrease the lessee’s profit — or perhaps turn a marginally profitable well into a losing enterprise. But if the lessee had originally exercised the requisite diligence to prevent drainage, the added “cost” would not have bee® incurred. As Professor George W. Hardy, III, points out, “if there is a penalty involved here for the les- see, it does not seem unfair because it would have been avoided Py due diligence.” For these reasons then we hold that the district court’s conclusion of law number 5 correctly states the law of Louisian@- Il. EXPRESS OFFSET PROVISION Even if it be conceded that conclusion of law number 5 correctly states the nature and extent of the Louisiana lessee’s implied obligation to protect against drainage, Humble argues that its implied duty has been superseded by an express offset provision in the lease. The 1933 lease contains the following sentence: [Im the event a well or wells producing oil or gas in paying quantities should be brought in on adjacent land and within one hundred fifty (150) feet of and draining the leased premises, Lessee agrees to > Hardy, Drainage of Oil and Ges From Adjoining Tracts — A Purther Development, note 7, at 58. a B-17 drill such offset wells as a reasonably prudent oper- ator would drill under the same or similar circvm- stances. Humble now urges that the inclusion in a lease of an ex- press covenant to drill offset wells under specified circum- stances preclude the implication of any different or greater obligation with respect to drainage. After reviewing the principal cases and secondary sources, the district court concluded that the Louisiana courts would not hold that inclusion in the lease of an express requirement to drill offset wells under limited con- ditions negates any other obligation imposed upon the 'les- see to protect the leased premises from drainage. 290 F. Supp. at 416. We agree. At the outset it must be recognized that there are no decisions of the Louisiana courts squarely in point. A re- view of the decisions of other jurisdictions reveals an in- creasing reluctance to allow displacement of the implied protection covenant by express offset provisions, especially when the lessee is also the operator whose drilling on ad- jacent land is causing the drainage.” The experience of the Texas courts is illustrative. Hutchins v. Humble Oil & Ref. Co., Tex. Civ. App. — Gal- veston, 1942, 161 S.W.2d 571, writ ref’d n.r.e., is probably the authority most often cited for the proposition that an express offset provision bars the implication of any other duty to protect against drainage. The Texas courts them- selves, however, have limited that principle so that the express provision controls only during the primary term WB ng Ry yt Sy aw § 826.3 at Affecting Im: Ry hey Ry AP Mt. Mineral Lew Inst. 133, 148-54 (1956). B.i8 of the lease. See Coats v. Brown, Tex. Civ. App. — Texar- kana, 1957, 301 S.W.2d 932, 936; Magnolia Petroleum Co. v. Page, Tex. Civ. App. — San Antonio, 1940, 141 S.W.2d 691, 693, writ ref'd. After that the implied protection covenant — applicable to draining wells no matter how far from the boundary line they are located — becomes effective. Moreover, in the recent case of Shell Oil Co. v. Stansbury, Tex. 1966, 410 S.W.2d 187, the Texas Supreme Court held that an express offset provision in a lease did not limit the lessee’s obligation to protect against drain- age when the lessee was also the operator whose drilling on adjacent property was causing the drainage. The court concluded that the lessor was entitled to recover damages — notwithstanding the express offset. provision — if he could prove that the lessee had caused substantial drain- age and that a reasonably prudent operator would have drilled a well on the lessor’s land to protect it from drain- age. The court specifically overruled Hutchins v. Humble Oil & Ref. Co., insofar as it conflicts with the principle that “a lessee i is under a duty to protect his lessor against depletion of the lessor’s minerals by the affirmative act of the lessee upon adjacent land.” 410 S.W.2d at 188. The same result has been reached in the other juris- dictions. In R.R. Bush Oil Co. v. Beverly-Lincoln Land Co., 1945, 69 Cal. App. 2d 246, 158 P.2d 754, a California court refused to allow an express offset provision displace the implied protection covenant when the lessee through its operations on adjoining land was draining the lessor’s property. The decision was an outgrowth of the court’s view that “there is an implied obligation on the part of an oil and gas lessee to refrain from taking any affirm- ative course of action which will result in draining a sub- stantial quantity of oil and gas from the lessor’s prop- erty.” 158 P.2d at 758. Thus in the situation where the B-19 lessee drained his lessor’s premises by production on ad- joining lands, the express offset provisions of the lease could have no application. The Supreme Court of Mississippi approached the problem in a similar way in Millette v. Phillips Petroleum Co., 1950, 209 Miss. 687, 48 So.2d 344. The court first rec- ognized that the express lease provision limiting the les- see’s duty to drill offset wells precluded resort to any other implied obligation with respect to offset wells. 48 So.2d at 346. Nevertheless, the court held that “there is an im- plied covenant in a lease of oil property that the lessee will do nothing to impair the value of the lease, and must use reasonable care to protect the lessor from damage or loss by the affirmative act of such lessee.” Id. at 347. That responsibility is entirely separate from the traditional duty to drill offset wells — although it may require in some cases the lessee to drill offset wells. Thus an express lease provision absolving the lessee from any duty to drill offset wells will not necessarily relieve him from liability for substantial drainage caused by his own affirmative act.* Id. j 74 Summarizing Millette, one author has said: “. . . In sustaining the recov of po Me by the lessor in the trial court, the majority opinion held: (1) the prudent operator rule has no place in a case - involving pene coal by a common lessee; (2) That bn, | to drill offset wells and the — dh — nsa or drainage are entirely ——, an aati clause affecting the offset well o ligation does not _ affect the duty to compensate for drain- age, (3) That the prudent operator rule applies only to the obli- gation to compensate for drainage. reaching its conclusion the ority also launched a new im- stat tan noted above, which it’ toned to exist under the cir- cumstances. The covenant was variously stated as: (1) ‘The obligation of the lessee not to deplete the resources of the lessor,’ and, (2) “The obligation to conserve the mineral resources of the B-20 The question then is whether there is any principle in Louisiana jurisprudence similar to the duty expressed in the Stansbury, Bush, and Millette cases that might form the basis for our decision. We believe there is. Article 2710 of the Louisiana Civil Code imposes on a lessee the obligation “[t]o enjoy the thing leased as a good adminis- trator, according to the use for which it was intended by the lease.”"® As Judge Rubin pointed out: These words are no hollow invocation. They imply basic obligations of the lessee arising, as the caption of the Code article tells us, “from the na- ture of the contract” of lease. The original French text used in the Code of 1808 is even more graphic: The lessee is bound to enjoy the thing leased as “bon pere de famille. ... It is therefore the duty of the lessee, necessarily implied in the lease, to develop the leased premises properly and to prevent drain- age of oil and gas from beneath it, not at all haz- ards and all costs, but “as a good administrator,” just as it is the obligation of a lessee enjoying a store under a percentage rental to operate the store with regard to the lessor’s interests as well as its own. ° Again, as the district court well stated, the lessee’s duty to act as a good administrator is not a separate and distinct obligation imposed in lessor and to refrain from depletory acts. € * * cad * By way of summary, it may be said that the jealous protection af- forded by the courts to the implied covenants to protect against i has materially reduced colle my of express clauses upon this covenant. This protection is ially apparent when the drain- age results from the activity of a common lessee. In that situation, it appears likely that a rem will be afforded the ieved lessor in = _ regardless of any express covenant.” Malone, Note at . 15 Walker, Implied Drilling Obligations in Oil and Gas Leases in Louisiana, 1 Loyola L. Rev. 1, 6-7 freee; Brown v . Producers Oil Co., 1914, 134 La. 672, 64 So. 674, 677. B-21 addition to the implied obligations announced by the Louisiana courts: it is the basic obligation of the lessee and all of the implied obligations already drawn are merely elaborations of it. 290 F.. Supp. at 414. Planiol, commenting on the analogous provision in the French Code, Article 1766, says that as a good admin- _ istrator the lessee should maintain the thing as it should be done, and take for its preservation the same precautions that a prudent owner would take for his own. For ex- ample, if it is a horse which is leased, the lessee should avoid tiring him, to take it on too long a journey, or make it pull too heavy loads; he should care for and nourish it suitably. If it is cultivated land, he should keep it in good condition; if it is a vineyard, give it the care that vines demand, ete. Art. 1766. The lessee should not, therefore, while using the thing according to its destination, make an abusive use of it, such as would compromise its good condition or even its existence.'® It-is settled in Louisiana that mineral leases are con- strued as leases generally and that the codal provisions applicable to ordinary leases must be applied to mineral leases whenever they are pertinent. Melancon v. Texas Co., 1956, 280 La. 593, 89 So.2d 135, 142; Coyle v. North American Oil Consol., 1942, 201 La. 99, 9 So.2d 473, 478. The duty of the Louisiana lessee to use the leased premises as a good administrator must of course encom- pass an obligation to protect the premises against any im- 16 Planiol, Traite de Droit Civil (11th Ed. 1939), T. II, No. 1692 Trans. La. Law Inst. 1959). Quoted in Rials v. Davis, 1947, 212 La. {ei 31 So.2d 726, a landmark case on the obligations of a Louisiana lessee. Cd B-22 pairment of value threatened by the affirmative act of the lessee himself. An obligation as basic as this one to the protection of the lessor can not be displaced by the in- sertion in the lease of an express provision relating solely to the establishment of offset wells. Several factors lead us to this conclusion. First, lease provisions in derogation of implied obli- gations are to be strictly construed.'* Applying that prin- ciple to the lease in question, we see that there is only a small area in which the traditional obligations of the les- see are displaced. The lease obligates Humble to drill off- set wells whenever production in paying quantities is brought in on adjacent land within 150 feet of plaintiffs’ premises, if a reasonably prudent operator would do so under the same or similar circumstances. The district judge correctly observed that the lease ‘does not expressly negate any obligation on the part of the Lessee to protect The Williams Property from drainage under other circum- stances,” 290 F. Supp. at 413. Moreover, the lease con- tains no mention of the possibility of drilling offset com- pletions or seeking unitization or taking any other steps when the lessee himself is causing the drainage. Strictly construed, the lease merely guarantees that in certain cir- cumstances Humble will drill offset wells. When those cir- cumstances are not present, Humble is still obligated to act as a good administrator with respect to the leased premises. It would require a clear and unequivocal clause in a lease to convince the court that the lessor intended to sacrifice that basic obligation owed him by his lessee.'* * M. Merrill, Covenants Implied in Oil and Gas Leases § 200 (2d ed. 1940): Merrill, Lease Clauses Affecting Implied Covenants, in Sec- ond Ann. Inst. on ‘Oil & Gas Law & Tax. 141, 142.43 (1951). 18 See Walker, Express Clauses in Oil and Gas Leases Aff a Implied Obligations of the Lessee, 13 Miss. L. J. 292, 30 ( B-23 Second, when the lessee inserts an express offset pro- vision into a lease, he is, of course, attempting to limit the implied responsibility to protect against drainage that he would otherwise have under the law of the jurisdiction.” As a general proposition, when the average landowner reads a lease form containing the usual offset provision, it is reasonable for him to assume that the lessee is shoulder- ing an added responsibility. Although there is no objection to enforcing a clause stating clearly that the lessee is not obligated to offset a well more than 150 feet f.om the boundary line, “to accomplish this through indirection, by appearing to confer a benefit while taking one away, smacks of fraud or unfair dealing.”*° The element of un- fairness is most striking in those leases in which the off- set distance has been fixed at a figure equal to or even shorter than that permitted by the Conservation Depart- ment’s spacing rules; those clauses, if enforced, would — because of the impossibility of there ever being a well with- in that distance — effectively relieve the lessee of all obli- gation to protect against drainage.*' Thus because of the indirection of the usual offset provision and the conse- quent possibility of misinterpreting its legal effect, such clauses should be, at the very least, strictly construed. Third, we are in agreement with the district court that “the fundamental duties imposed on the parties to a lease by the very nature of their contract must be inter- preted in the light of changes in technology and industry practices.” 290 F. Supp. at 416. The lease in question was executed in 1933 on Bath’s Louisiana Form 12A. The pro- vision obligating the lessee to drill offset wells if draining 19 Caldwell, Standard Provisions in Louisiana Mineral Lease Forms — Variations Thereof, 11 La. B. J. 185 (1963); Walker, note 18, at 305. 205 H. Williams & C. Meyers, Note 13, §826.3 at 206. 21 Jd. B-24 wells were brought in on adjacent property within 150 feet was boilerplate; for how many years earlier this form and its offset clause had been in use is unknown. In any event, the offset distance of 150 feet may have represented an honest effort in 1933 to estimate the distance at which drainage usually occurs.** If so, that estimate reflected the industry’s then existing knowledge of drainage. Im- provements in technology, however, have made it abund- antly clear that drainage can and regularly does occur at distances far beyond 150 feet. Strict enforcement of lease provisions that were reasonable in light of scientific knowl- edge and industrial practices in 1933 might be wholly un- fair in 1963 or more recent years. We hold that the offset provision does not displace Humble’s implied obligations. Our holding does not change the nature of the mineral lessee’s obligation. His obliga- tion remains the same — to protect the leased premises against impairment by drainage. What must charge in light of scientific and technological advances are the steps necessary to satisfy that obligation, To measure a lessee’s performance of his duties by industry standards long since discarded or upgraded would undermine the continuing duty of the lessee to act as “a good administrator”, the “bon pere de famille”. - 22 Bath’s Form 42 CPM-New South Louisiana Revised Six (6)- Pooling, currently in favor with South Louisiana operators, sets the offset distance at 330 feet. Caldwell, note 19, at 190-91. Then there is the additional provision ‘it being provided however, that lessee shall not be required to drill any offset wells unless the well on adjacent land is within 330 feet of any line of the lands hereunder, nor such shall cffset well be necessary when said lands are being reasonabl protected by a well on the leased premises or land pooled therewi (all or any part thereof).’”’ An interesting feature of this provision is that at the present time there is no such thing as a well within 330 feet of any line of the leased premises because the Commissioner of Conservation Statewide Order 29-E specifically prohibits drilling wells within 330 feet of any property line. In a situation where the leased premises are —— substantial net drainage, beyond question, from a robber well loca more than 330 feet m the leased pre it may be wondered whether the courts will hesitate to find that an obligation to offset exists despite this provision of the printed form. /d. B-25 IV. REQUIREMENT OF NOTICE Humble contends that the plaintiffs’ suit is barred as a matter of law because of their failure to comply with the notice provision of the 1933 lease. The last sentence in paragraph 8 of the lease provides, And in the event Lessor considers that operations are not being conducted in compliance with this contract, Lessee shall be notified in writing of the facts relied upon as constituting a breach hereof and Lessee shall have sixty (60) days after receipt of such notice to comply with the obligations im- posed by virtue of this instrument. Rejecting Humble’s argument, the district court stated in conclusion of law number 4 that “[t]his suit is not barred as a matter of law by the plaintiffs’ failure to give notice of breach or notice of default. Whether or not it is barred is a question of fact to be decided by the jury.” 290 F. Supp. at 411. : : We would go one step further; we conclude that this is a matter to be decided by the court. As a matter of law, we hold that the plaintiffs’ cause of action for damages is not barred by their failure to give notice in conformity with paragraph 8 of the lease. In the law of contracts (conventional obligations) a proper distinction exists between the “interpretation” of written instruments and their “construction”. “Inter- pretation” refers to the process of determining the mean- ing of the words used; that process is traditionally thought 23 See 8 A. Corbin, Contracts § 534 (1960) he S. Williston, Contracts 602 (Jaeger ed. 1961); ALI, —a Second), Contracts § 226, 5 Fe c. (Tent. Draft No. 5, Mar. 31, 1970 B-26 to be a function of the jury.”’ On the other hand, the proc- ess of determining the legal effect of the words used — once we know their meaning — is properly labelled “con- struction” ;* it is peculiarly a function of the court.”** On this point, we agree with Humble that there is nothing in this case for the jury to decide. There is no doubt what words were used — as well as what words were not used — and what those words mean. What is left is for the court to assess the legal effect of the words chosen in the light of the nature of the contract. Notice provisions were originally inserted in mineral leases primarily to protect the lessee against a forfeiture of the lease for breach of some express or implied obliga- tion. Because forfeiture or cancellation is an extraordi- nary remedy that terminates the lessee’s interest it is fair to require that notice, demand, and an opportunity to cure the breach be given the lessee.** Thus whenever the lessor has sought cancellation, the Louisiana courts have required strict compliance with the notice requirements of the lease. See, e.g., Vance v. Hurley, 1949, 215 La. 805, 41 So.2d 724; Bollinger v. Republic Petroleum Corp., La. App. 1st Cir. 1966, 194 So.2d 139, writ ref’d, 250 La. 463, 196 So. 2d 276 (1967) ; Fawvor v. U.S. Oil of Louisiana, Inc., La. App. 3d Cir. 1964, 162 So.2d 602. On the other hand, an action for damages threatens no such harsh consequences as termination of the lessee’s interest. There is less reason to insist upon notice and de- 24 Both Professors Corbin and Williston, however, discern a trend toward the interpretation of written contracts by the court. 3 A. Cor- bin, Contracts § 554, at 225 (1960); 4 S. Williston, Contracts § 616, at 649 (Jaeger ed. 1961). 233 A. Corbin, Contracts § 534 (1960). 26 id. § 554. 27 See 4 H. Williams, Oil and Gas Laws § 682, at 334-35 (1969); M. Merrill, note 17, § 192, at 421. B-27 mand. Indeed, in the ordinary drainage action notice to the lessee would be superfluous. The harm has already been committed, and no action by the lessee to repair the breach could adversely affect the lessor’s right to compen- sation for past harm.** In many cases the fact of injury is already known to the lessee, who has superior knowl- edge of his own operations, long before it becomes known to the lessor. The lessor’s inability to give notice of that which he does not know should not in all fairness bar him forever from recovery for damages already incurred.” The oil industry was undoubtedly conscious of these con- siderations when the standard form notice provision in the instant lease was drafted. Therefore, we hold that failure to comply with a notice provision drafted in this language and in these circumstances was not then intended to and does not now bar an action for damages. We have found no Louisiana decision denying a cause of action for damages for breach of an implied covenant on the ground that the lessor failed to comply with a notice provision in the lease. Both Bollinger v. Republic Petro- lewm Corp., and Vance v. Hurley, relied on by Humble, were actions for cancellation of the lease. Lease provisions of this type are specifically intended to bar actions for cancellation unless the prescribed notice is first given. Since that is the obvious purpose of the clause, it makes sense in that case to enforce its provisions. -In the instant 28 4 H. Williams, note 27, § 682, at 335. 29 M. Merrill, note 17, § 192, at 421. 30 Our conclusion that the notice provision in the 1933 lease was not intended to bar an action for damages for breach of the implied rotection covenant is further ened by placing the issue in istorical perspective. Recall that in 1933 the mere existence of such a damage action was doubtful. See McCoy v. State Line Oil & Gas Co., 1932, 175 La. 231, 143 So. 58; Caddo Oil & Co. v. Producers Oil Co., 1914, 134 La. 701, 64 So. 684. It is therefore highly unlikely that the notice provision in the 1933 lease was intended to bar an ac- tion that, to the best of anyone’s knowledge, probably did not even exist in Louisiana. B-28 case notice as a prerequisite to an action for damages makes little sense and could not have been intended by the draftsmen in 1933 when they chose the language of para- graph 8. We consider that Billeaud Planters, Inc. v. Union Oil Co. of California, 5 Cir. 1957, 245 F.2d 14, is inapposite. Billeaud was an action for damages for failure to prevent drainage. In that case, however, the lease, drafted in 1944, contains the explicit language, “all [the lessee’s] obiiga- tions BOTH EXPRESS AND IMPLIED”. The notice pro- vision has an additional sentence not contained in the Humble lease: “The service of said notice and the lapse of sixty (60) days without Lessee meeting or commencing to meet the alleged breaches shall be a condition precedent to any action by Lessor for any cause hereunder.” (Em- phasis supplied.) 245 F.2d at 16. The Court took this language as establishing the intent of the parties to re- quire notice as a prerequisite to an action for damages. Moreover, as Judge Rubin pointed out, the Billeaud court focused on the failure to drill an offset well, not on the af- firmative act of drainage. The coaclusion reached in Billeaud is not compelled by the language of the lease.*' For example, in Texas Oil & Gas Corp. v. Vela, Tex. 1968, 429 S.W.2d 886, the Texas Supreme Court held that a similar clause did not bar an action for damages. Recognizing that the purpose of a notice provision is to protect the lessee against a sudden forfeiture, the court held that the parties “could not have intended that the lessor would be forever barred from re- covering damages sustained prior to the giving of notice.” 429 S.W.2d at 875. In any event, paragraph 8 of the in- 31 For criticisms of the decision of this Court in Billeaud, see M. Merrill, note 12, § 200 (1964 Supp.) ; Note, 18 La. L. Rev. 854 (1958). B-29 stant lease contains no such language. Judge Rubin held that the “difference in language may signify a profound difference in intention [between the Billeaud lease and the Williams lease]”; whether it did in fact was to be resolved by the jury. 290 F. Supp. at 419. We hold, as a matter of law, that the difference in language requires a result dif- ferent from that reached in the Billeaud case. The district court correctly ruled that if paragraph 8 does not appl; to this case, it is still necessary to deter- mine whether notice was nevertheless required under the Louisiana Civil Code The Code distinguishes between “active” and “passive” breaches of a contract. A contract may be breached “either actively by doing something in- consistent with the obligation it has proposed or passively by not doing what was covenanted to be done.”®? A breach that is passive only requires notice and demand before damages are due,** while an active breach does not.™ Damages for an active breach are due from the moment of the violation. The district court thought it unnecessary at the time to determine whether the classification of a specific breach as active or passive is a question of law or a question of fact. The court did, however, express the opin- ion that it woulc be proper to give the issue to the jury, aided of course by appropriate definitions. 290 F. Supp. at 420. This conclusion we believe to be incorrect. Our read- ing of the cases convinces us that the Louisiana courts approach the active-passive classification problem as a question for the court. See, e.g., Melancon v. Texas Co., 1956, 230 La. 593, 89 So.2d 135; Noel Estate, Inc. v. Lou- 82 La. Civil Code art. 1931. 33 Jd. art. 1933. 34 Jd. art. 1932. B-30 ‘ dsiana Oil Ref. Corp., 1937, 188 La. 45, 175 So. 744; Broad- head v. Pan American Petroleum Corp., La. App. 3d Cir. 1964, 166 So.2d 329; Bailey v. Meadows, La. App. 2d Cir. 1961, 180 So.2d 501. That rule, moreover, would seem to be the better view. The classification of a specific breach as active or passive requires a construction of the bare words of the Code in the light of the gloss of past decisions. Defining the terms “active” and “passive” for a jury in accord with the simple language of Article 1931 of the Louisiana Civil Code consistent with the complicated de- cisions on the subject would tax the jury with drawing a bright dividing line where none exists in the jurispru- dence.* The chances of arbitrary decision making will be substantially lessened if the court, guided by the Code, de- cisions, and commentaries, should decide whether a specific breach is to be characterized as active or passive. Applying that principle to the instant case, we con- clude that the specific violation alleged is an active breach and therefore that the plaintiffs were not required to give notice as a condition to their action for damages. Gen- eraiiy the failure to perform an obligation in an oil and gas lease is a passive breach, which requires notice and a formal demand. See Savoy v. Tidewater Oil Co., W.D. La. 1963, 218 F. Supp. 607, aff'd 5 Cir. 1964, 326 F.2d 757; Bonsall v. Humble Oil & Ref. Co., W.D. La. 1961, 201 F. Supp. 516, 521, aff'd 5 Cir. 1962, 300 F.2d 150; Touchet v. Humble Oil & Ref. Co., W.D. La. 1960, 191 F. Supp. 291, 294; Broadhead v. Pan American Petroleum Corp., La. App. 3d Cir. 1964, 166 So.2d 329, 332. In several cases involving the nonpayment of royalties, however, the Lou- isiana courts have held that an unreasonable and unjusti- fiable delay in paying royalties constituted an active rather 35 Cf. Smith, The woo! Concept of Default, in Twelfth Ann. Inst. on Mineral Law 3 (1965). B-31 than passive breach. Bollinger v. Texas Co., 1957, 282 La. 637, 95 So.2d 132; Melancon v. Texas Co., 1956, 230 La. 598, 89 So.2d 135; Pierce v. Atlantic Ref. Co., La. App. 3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La. App. 2d Cir. 1961, 180 So.2d 501. Thus, in some cases at least, a willful failure to perform may amount to action incon- sistent with the contract. The Louisiana courts have not as yet had an oppor- tunity to classify a breach of the lessee’s implied obliga- tion to prevent drainage. In Breaux the question of notice. did not arise. In his dissenting opinion, Judge Tate as- sumed that such a breach was passive, as are failure to act generally. Nevertheless, he acknowledged the possibil- ity that the breach may have been active because the lessee himself was doing the draining through wells drilled on the adjacent premises. 163 So.2d at 421. Professor Hardy has also made the suggestion that when drainage is caused by the operations of the lessee on adjoining property, no- tice is unnecessary.** In that situation the lessee has not merely failed to perform his duty to protect against drain- age; he has also knowingly and affirmatively acted in a manner inconsistent with that obligation. The action of the common lessee in this regard is analogous to the wilful conduct that characterized the nonpayment of royalty cases. Just as in Bollinger, Melancon, Pierce, and Bailey, the lessee’s action here should be viewed as an active breach of his lease obligations. In Billeaud Planters, Inc. v. Union Oil Co. of Cali- fornia, this Court characterized the lessee’s failure to pre- vent the drainage that he was also causing as “only a pas- 36 , The Work of the Louisiana Appellate Courts for the 1968-1984 erm, note 10, st 365; Note, 18 L. Rev. 354, 359-60 (1958). B-82 sive breach of contract.” 245 F.2d at 18. The statement was purest dictum, however, inasmuch as the lessor’s cause of action was held to be barred by his failure to comply with an express notice provision in the lease. In addition, the Court cited only a 1910 construction contract case*’ as authority for its conclusion. We conclude that the Louisiana courts would find the analogy of the Bollinger, Melancon, Pierce, and Bailey cases persuasive and hold that the lessor’s action for dam- ages is not in the circumstances of this case barred by his failure to give notice to his lessee. Necessarily, we also conclude that the Louisiana courts would characterize as “active” the lessee’s failure to prevent the drainage that he is in fact causing by his own operations on adjoining property.* AFFIRMED as to the result reached by the district court and REMANDED for further proceedings consist- ent with this opinion. 37 Godchaux v. Hyde, 1910, 126 La. 187, 52 So. 269. 3s“. . . On the other hand, it would appear that the lessee is bound, as in any a to do an inconsistent with its obligations to do. Where lessee has omitted to accomplish its posi- tive obligations, while wilfully draining from a productive sand under- _ the leased tract, he is in a rather poor position to contend that e only fault on his part is passive omission to act. Thus, it is cer- tainly not illogical to assert that the default of obligations to do, coupled with the —- depletion of sands beneath the leased tract, is an active breach of the lease contract. . . . However, where pro- duction from the adjoining lands is fully within control of the lessee, it would appear that drainage from the undeveloped tract is not mere- ly an omission but action inconsistent with the ress and implied obligations to develop the leased tract. It can y be denied that in this instance the lessee was aware that it was depleting the reserves underlying the leased tract. Protection from liability could have been achieved by compliance with the obligations of the lease contract. It seems inconsistent with civilian ideas of fault as a basis of recov to state that the lessee was in need of notice of its transgression.” Hardy, Note, 19 La. L. Rev. 354, 359-60. B-33 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 26968 FLOYD WILLIAMS, FREDERICK C. WILLIAMS, ET AL, Plaintiffs-Cross Appellees, I. R. PRICE, EDWARD H. TAUSSIG and EDWIN F. GAYLE, Plaintiffs-A ppellants- Cross Appellees, versus HUMBLE OIL & REFINING COMPANY, Defendant-Appellee- Cross-Appellant. Appeals from the United States District Court for the Eastern District of Louisiana (December 8, 1970) ON PETITION FOR REHEARING AND PETITION FOR REHEARING EN BANC Before WISDOM and DYER, Circuit Judges, and KRENTZMAN, District Judge. WISDOM, Circuit. Judge: The Court has considered all of the issues raised in Humble’s Petition for Rehearing and Suggestions of Rehearing en Banc and the brief of the amici curiae in support of the petition for rehearing. B-84 Humble and amici curiae argue strenuously that this Court erred in holding that “the Louisiana courts would characterize as ‘active’ the lessee’s failure to prevent the drainage that he is in fact causing by his own operations on adjoining property.” See Williams v. Humble Oil & Refining Co., 5 Cir. 1970, 481 F.2d _..... We agree with the petitioners that under Louisiana law the breach of an implied obligation in an oil and gas lease is generally a passive breach, which requires notice and a formal demand. But we cannot agree that the alleged breach in the cir- cumstances of this case was merely passive. We have found no case in which the Louisiana courts have classified a lessee’s failure to prevent the drainage that he is in fact causing by his own operations on adjoin- ing property. In Breaux v. Pan American Petrolewm Corp., La. App. 8 Cir. 1964, 163 So.2d 406, the question of notice did not arise, inasmuch as the plaintiffs made a formal demand before filing suit. Jd. at 408. Neverthe- less, the petitioners now argue that Breaux holds that the alleged breach in a factual situation of this kind is only passive. Specifically, they point to the court’s statement in Breaux “that plaintiffs in this suit have no greater rights and no different cause of action against defendants- lessees simply because the defendants are also the lessees of the adjoining tract of land on which the alleged drain- ing well is located.” Id. at 417. We do not dispute this statement, but we cannot agree that the language is con- trolling on the issue of notice. In Breaux the plaintiffs argued that when the defend- ant occupies the dual position of being lessee of the plain- tiffs’ property and also lessee of the adjoining tract on which the draining well is located, the plaintiff lessor is then entitled to one-half the royalties due on production B-35 from the draining well. In the words of Judge Hood, “The question presented, therefore, is whether a different meas- ure of damages should be used where plaintiff’s lessee is also the operator of the draining well.” Jd. at 416. The language to which petitioners refer is the court’s answer to that question. By that language the court was simply reaffirming its holding that even in a factual situation of this kind, to recover damages the lessor must prove (1) that substantial drainage has occurred, (2) that it would have been economically feasible for the lessee to take steps to prevent the drainage, and (3) the amount of roy- alties that the lessor would have received had the lessee taken the appropriate steps. In other words, the plain- tiffs in this case have no greater rights or different cause of action than do the plaintiffs in an ordinary drainage action. But the court’s views on the requisite proof of drainage and the proper measure of damages cannot be treated as controlling on the question of notice, especially when that question was not even presented to the court. As pointed out in our original opinion, in Billeaud Planters, Inc. v. Union O11 Co. of California, 5 Cir. 1957, 245 F.2d 14, the Court characterized the lessee’s failure to _ prevent the drainage that he was also causing as “only a passive breach of contract.” Id. at 18. We did not follow Billeaud, however, as the characterization there seemed both unnecessary to the result in the case and also based on scant authority. The petitioners now argue that the classification of the breach was essential to the decision and cite additional authorities to support the finding of a passive breach. We still do not consider ourselves bound by that state- ment in Billeaud. Since the Court’s decision in Billeaud a line of cases has developed in which the Louisiana courts B-36 have indicated that in some instances at least, a willful failure to perform an obligation may amount to action in- consistent with the contract, i.e., an active breach of the contract. See Bollinger v. Texas Co., 1957, 232 La. 637, 95 So.2d 135; Melancon v. Texas Co., 1956, 230 La. 593, 89 So.2d 135; Fontenot v. Sunray Mid-Continent Oil Co., La. App. 3d Cir. 1967, 197 So.2d 715; Sellers v. Continen- tal Oil Co., La. App. 3d Cir. 1964, 168 So.2d 435; Pierce v. Atlantic Ref. Co., La. App. 3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La. App. 2d Cir. 1961, 130 So.2d 501; cf. Jones v. Whittington, La. App. 2d Cir. 1965, 171 So. 2d 764. In addition to the analogy to this growing num- ber of cases on the nonpayment of royalty, the Billeaud Court lacked the advantage o: Professor Hardy’s cogent analysis of civilian concepts of fault. In his words, The act of draining two leases by means of one well is not merely a passive failure to comply with an obligation to protect the drained lease, it is conduct clearly inconsistent with that obligation if it occurs in the face of actual or constructive knowledge of the drainage. Thus, the lessee’s ac- tion should properly be viewed as an active breach of his lease contract. Hardy, The Work of the Louisiana Appellate Courts for the 1963-64 Term — Mineral Rights, 25 La. L. Rev. 360, 865-66 (1965). See also Note, 18 La. L. Rev. 354 (1958). For these reasons as well as those expressed in our original opinion, we adhere to our conclusion that the Lou- isiana courts would characterize as “active” the breach of the lessee’s obligation to protect against drainage that the plaintiffs allege occurred in this case. If the plaintiffs can prove their allegations, they are entitied to damages despite their failure to give notice before commencing this lawsuit. B-37 The Petition for Rehearing on behalf of Humble Oil is DENIED and no member of this panel nor Judge in regular active service on the Court having requested that the Court be polled on rehearing en banc, (Rule 35 Federal Rules of Appellate Procedure; Local Fifth Circuit Rule 12) the Petition for Rehearing En Banc is DENIED. B-38 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT October Term, 1969 No. 26968 D. C. Docket No. CA 14312 FLOYD WILLIAMS, FREDERICK C. WILLIAMS, ET AL, Plaintiffs-Cross Appellees, I. R. PRICE, EDWARD H. TAUSSIG and EDWIN F. GAYLE, Plaintiffs-A ppellants- Cross Appellees, versus HUMBLE OIL & REFINING COMPANY, Defendant-Appellee- Cross-Appellant. Appeal from the United States District Court for the Eastern District of Louisiana Before WISDOM and DYER, Circuit Judges, and KRENTZMAN, District Judge. JUDGMENT This cause came on to be heard on the transcript of the record from the United States District Court for the Eastern District of Louisiana, and was argued by counsel; ON CONSIDERATION WHEREOF, It is now here ordered and adjudged by this Court that the judgment of B-39 the said District Court in this cause be, and the same is hereby, affirmed; and that this cause be, and the same is hereby remanded to the said District Court for further pro- ceedings consistent with the opinion of this Court; It is further ordered that plaintiffs-cross appellees and plaintiffs-appellants-cross appellees be condemned to pay one-third the costs on appeal to be taxed by the Clerk of this Court and that defendant-appellee-cross-appellant be condemned to pay two-thirds of said costs. September 30, 1970 Issued As Mandate: Dec. 16 1970 C-1 APPENDIX “C” March 29, 1963 REGISTERED MAIL RETURN RECEIPT REQUESTED SPECIAL DELIVERY Humble Oil & Refining Company 909 S. Jefferson Davis Parkway New Orleans, Louisiana Re: Floyd Williams Lease 997.19 Acre Lease North Crowley Field Acadia Parish, Louisiana Gentlemen: By instrument dated January 28, 1933, The Federal Land Bank of New Orleans, as Lessor, granted an oil, gas and mineral lease to I. R. Price, as Lessee, which lease is recorded in Book Y-4, Page 233, of the conveyance records of Acadia Parish, Louisiana, and covers the following de- scribed lands in said Parish: All of the S% of fractional Section 34, Township 8 South, Range 1 East, La. Meridian, containing 159.40 acres; All of the S% of Section 33, Township 8 South, Range 1 East, La. Meridian, containing 356.53 acres; That certain tract described as beginning at the SE corner of Section 32, Township 8 South, Range 1 East; thence North 2 degrees 40 minutes west a distance of 1375 feet, thence south 89 degrees 30 minutes west a distance of 706 feet, thence south 2 degrees 40 minutes east a distance of 1371 feet, thence north 89 degrees 45 minutes east a distance of 706 feet to the point of beginning, and containing 22.22 acres, as per copy of plat of survey made by M. Bernard, C. E., November 1921; C-2 The E% of NE% and the S% of SW% of NE% of Section 5, Township 9 South, Range 1 East, con- taining 102.50 acres, SAVE AND EXCEPT all that part of S% of SW%4 of NE\% which lies west of the center of the channel of the Long Point Bayou, and containing 7.50 acres, more or less; The NW of the NW\,; the E% of the NWY%; the W14 of the NE; and the NE% of the NE%4 of Section 4, Township 9 South, Range 1 East, and containing 242.74 acres, more or less; The W\% of NW% and the NW% of the SW% of fractional Section 3, Township 9 South, Range 1 East, containing 121.30 acres. All of the above tracts of land containing in the aggregate 997.19 acres, more or less, situated in the Parish of Acadia, State of Louisiana. _ By various transfers, assignments and releases the above described lease is now owned of record by your com- pany, insofar as it covers and affects lands covered there- by, less and except that portion which was released by in- strument dated the 24th day of July, 1934, and recorded in Book E-5, Page 197 of the conveyance Records of said parish and described as follows: That certain tract described as beginning at the SE corner of Section 32, Twp 8, SR, 1E; thence north 2 degrees 40 minutes west a distance of 1375 feet; thence south 89 degrees 30 minutes west a distance of 706 feet, thence south 2 degrees 40 minutes east a distance of 1871 feet, thence north 89 degrees 45 minutes east a distance of 706 feet to the point of beginning and containing 22.22 acres, as per copy of survey made by M. Bernard, C.E. November 1921; The E\% of NE% and the S% of SW% of NE% of Sec. 5, Twp 9 SR 1E, containing 102.50 acres, save and except all that part of S% of SW% of NE which lies west of the center of the channel C-3 of the long Point Bayou, and containing 7.50 acres, more or less; The above two tracts containing in the aggregate 117.22 acres, more or less. The lease was for a period of three (3) years and six (6) months from the date thereof, and has therefore been in its secondary term for a period of more than twenty- five (25) years. We consider that you have not diligently endeavored to produce the minerals or protect our minerals from drain- age of the above property. In addition, you have conducted your operations on adjoining properties so as to cause such drainage. This constitutes an active breach of your obli- gations under this lease. As a result, this lease has now terminated. 3 This letter is to demand that you execute a release of such oil, gas and mineral lease and place same of record in the Parish of Acadia within ten (10) days, pursuant to the provisions of LRS 30:102. This letter likewise demands payment as to our pro- portionate interest of $1,226,000.00, as compensatory pay- ment for the royalty oil drained from this leasehold prem- ise by your undip Stakes, Reimers and Ohlenforst wells. Unless we receive payment within ten (10) days, we will institute the necessary legal proceedings to recoup this damage. Yours very truly, Richard F. Price Agent for I. R. Price et al RFP/gw D-1 APPENDIX “D” HUMBLE OIL & REFINING COMPANY New Orleans 60, Louisiana New Orleans Area Post Office Box 61012 Law Department Peter Monrose April: 9, 1963 Area Attorney Floyd Williams Lease 997.19 Acre Lease North Crowley Field Acadia Parish, Louisiana Mr. Richard F. Price 326 Oil and Gas Building New Orleans 12, Louisiana Dear Mr. Price: Reference is made te your letter of March 29, 1963 per- taining to the captioned lease in which you requested a release of the same, apparently on the theory that we had not diligently endeavored to produce this lease or protect it from drainage by other properties. On receipt of your letter we reviewed carefully all of our files relating to both past and present activities on this lease. This review clearly indicated that we have at all times operated the lease in the manner that a prudent operator would under the same or similar circumstances. We have at all times had a continuous program for this lease which program included both the drilling of a large number of wells and the reworking of certain of these wells from formation to formation wherever such was feasible and practicable. In fact, we are at the present time conducting reworking operations on the iecase. In addition, the evidence we have does not indicate that there has been at any time any substantial drainage of minerals or any substantial movement of minerals from beneath the property covered by this lease by wells on other leases. D-2 In view of the foregoing we must respectfully refuse to grant the release requested in your letter, as well as the payment demanded in the last paragraph of the same, and we ask that you withdraw your letter of March 29, 1963 so that we may proceed with the additional operations that are contemplated for this lease. Yours very truly, HUMBLE OIL & REFINING COMPANY By /s/ Peter Monrose Peter Monrose PM :mws E-1 APPENDIX “E” HUMBLE OIL & REFINING COMPANY ‘Exploration Department P. 0. Box 626 New Orleans 7, La. September 28, 1959 Eastern Division Re: North Crowley Field Acadia Parish, La. Mr. Guy H. Johnston 2444 Times Boulevard Houston 5, Texas Dear Mr. Johnston: In reply to your letter of September 22 and the two specific items of information requested by you, please be advised as follows: 1. We understand your position in regards to the oil unit recently requested around the Williams 19 well in the F-5 sand and we wish to advise you currently a study is being made of all reser- voirs in the subject field and consideration will be given to formation of units necessary to re- solve equities in the future. We will advise you of the results of this study at the earliest pos- sible date. 2. It is our belief that at this time the drilling of the Williams #19 weil did not provide sufficient information to justify a hearing to revise Fault Block C in the F-17 sand. I realize that we did present an indication of some different geology relative to this reservoir, but we do not feel that the Commissioner would feel the evidence of importance enough to justify any additional revisions. At this time we have plans to drill additional wells south of Reservoir C, and we E-2 feel that these will have some direct bearing on the geology to the north. It is our belief that any further revision should be delayed until these wells are drilled and the information ob- tained from them fully evaluated. Should you have additional questions regarding your inter- est in this field, please contact me. Very truly yours, HUMBLE OIL & REFINING COMPANY /s/ Mont G. Calvert, Jr. Mont G. Calbert, Jr. MGC,Jr:an ec: Mr. R. W. Ulricksen Humble Oil & Refining Company New Orleans, Louisiana — F-1 APPENDIX “F” SECTION 3—OF THE OBLIGATIONS AND RIGHTS OF THE LESSEE Art. 2710. The lessee is bound: 1. To enjoy the thing leased as a good administrator, according to the use for which it was intended by the lease. 2. To pay the rent at the terms agreed on. Art. 2721. The lessee is only liable for the injuries and losses sustained through his own fault. Art. 2722. He is, however, liable for the waste committed by the persons of his family (household), or by those to whom he may have made a sublease. G-1 APPENDIX “G” Proposal to Dually Complete A. Ohlenforst Well No. 8 North Crowley Field Acadia Parish, Louisiana Mr. R. S. Sullins Building Attention: Mr. Jerry C. Brown This is in answer to your letter of December 1, 1960, in which you state that Humble desires to dually complete the A. Ohlenforst Well No. 8 in the Marg. 3 and 3A Sands. Said letter states that four leases are productive in these sands, said leases being A. Ohlenforst, F. Williams, P. J. Reiners and K. J. Thevis. If Humble places these sands on production it must take the necessary steps to assure that all leases underlain by productive portions thereof participate equitably in the production from these sands. The Law Department has advised that this may be accom- plished by either forming units or drilling the necessary offset well on each participating lease. Since according to your letter the productive area of each of these sands en- compasses approximately 130 surface acres, it would ap- pear that 43 acre units would be in order. It is suggested that 2 meeting between the Production De- partment, Geological and Land Departments be held to determine the proper unitization program to be adopted. All papers attached to your letter of December Ist are returned herewith. J. P. Robbins, III JPR,III :kh Enclosures ee: Mr. Mont Calvert Building G-2 HUMBLE OIL AND REFINING COMPANY New Orleans, Louisiana New Orleans, La. April 15, 1957 Re: Workover — North Crowley Field J. B. Stakes No. 1 Mr. C. L. Tate Building . This request proposes to plug off the present open hole completion interval by the use of PTWC tools and to recomplete in a higher stringer of the _________ sand, the Mi-7A. The present interval is producing 100% salt water by gas-iift. While it is recognized that an oil completion can probably be effected in the Mi-7A sand through perfora- tions from 7184-7188 feet and in the Mi-Z sand through perforations from 7134-7139 feet, it is recommended that the well be shut-in in the form of a temporary abandon- ment. The North Crowley Gas Unit 14, No. 1, a recently completed 200’ west offset, has no commercial gas pro- duction in the deep Frio sands, but has been completed as a good oil well in the Marg-1 sand. The J. B. Stakes No. 1 well did not go deep enough to encounter the Marg-1 sand. A small fault east of the J. B. Stakes No. 1 well probably controls the assumulation. Since the Gas Unit 14, No. 1 well can be used to deplete the Marg-1 reservoir which might contain as much as 550,000 barrels of oil, it is rec- ommended that this well be produced to depletion of the Marg-1 oil sand while the Stakes No. 1 well is shut-in so that there can be no question of twin well production from the viewpoint of the lessor. We do not want to initiate a twin well drilling program. The question of an offset well for the F. Williams lease will undoubtedly arise within the near future. The F. Wil- liams No. 7 well had 23 feet of net oil sand from 85/1-3604. G-3 During workover operations in 1950, the M-1 sand tested salt water through perforations from 8571-76’. At the present time, an attempt is being made to recomplete the Williams No. 7 well in the Mi-3A-2 sand. This attempt has met with little success since, after __.the forma- tion, the well is gas-lifting only 12 barrels of fluid per day, 30% of which is salt water. In order to meet the off- set obligation it is recommended that the F. Williams No. 7 well be tested at this time in the Marg-1 sand through perforations from 8575-8578 or that a 40 acre oil unit be formed around the Gas Unit 14, No. 1 well so that both the Stakes and Williams leases will participate in the Marg 1 sand production. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385605_0887%3A2. Public record. Not legal advice.