CHAPTER 6 STATE BY STATE ANALYSIS OF IMPLIED COVENANT LAW

• Jurisdiction: United States

Implied Covenants
(Nov 1986)
CHAPTER 6
STATE BY STATE ANALYSIS OF IMPLIED COVENANT LAW
Joan B. Burleson
Cogswell & Wehrle
Denver, Colorado

COLORADO

1. Lanham v. Jones, 84 Colo. 129, 268 P. 521 (1928). The Colorado Supreme Court recognized that a lease (or lease option) for the development of oil and gas should be construed strongly against the lessee, so as to secure the speedy development of oil and gas.

2. Mountain States Oil Corporation v. Sandoval, 109 Colo. 401, 125 P.2d 964 (1942). The court recognized the four basic implied covenants (to drill, to develop after discovery, to operate diligently and prudently, and to protect from drainage). Whether or not the implied covenants have been breached is primarily a question for the factfinder to determine. Oil and gas leases are to be construed in favor of development. Cancellation is proper for breach except for areas around producing wells; conditional cancellation and damages are also proper remedies.

3. Rocky Mountain Fuel Co. v. Clayton Coal Co., 110 Colo. 334, 134 P.2d 1062 (1943). This case extended the oil and gas implied covenant rule to coal; time is of the essence in a coal lease, so that a lease is deemed abandoned when no operations have begun after six years from the date of the execution of the lease.

4. Graefe & Graefe v. Beaver Mesa Exploration Co., 635 P.2d 900 (Colo. App. 1981) appeal aff. remand, 695 P.2d 767 (Colo. App. 1984). This case acknowledged the existence and the breach of the implied covenant of exploration and development upon the failure of the lessee to test or to drill over a period of ten years. Cancellation was held to be the proper remedy for such breach.

5. Gillette v. Pepper Tank Company, 694 P.2d 369 (Colo. App. 1984). The court found violation of both the covenant to develop and to further explore. The implied covenant of reasonable development requires a determination that additional development would probably be profitable. The further exploration covenant, on the other hand, requires the lessor only to prove the lessee is unreasonable for not exploring further, considering all relevant circumstances. Factors to be considered are listed and discussed. Implied covenants apply to unitized tracts separately, so that an entire unit should be considered together in determining whether or not implied covenants have been breached on any portion of the unit. The court upheld a judicial ascertainment clause, and held that conditional cancellation is appropriate as the equitable remedy for breach of implied covenants.

6. North York Land Associates v. Byron Oil Industries, Inc., 695 P.2d 1188 (Ct. of Appeals, 1984). The Court approved a finding that, even though further exploration is unjustified, and there is no breach of the prudent operator standard, a lease may be cancelled rather than allowing the lessee to hold it for mere speculation.

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WYOMING

There are very few Wyoming cases on implied covenants:

1. Phillips v. Hamilton, 17 Wyo. 41, 95 P. 846 (1908). This early case held that covenants would be implied to impose a duty on the lessee to diligently continue the work of exploration for oil and gas on a lease, but that did not mean the lessee had to prosecute development without intermission. Seven months between wells was not sufficient to terminate a lease. The court recognized the prudent operator standard, as set forth in Brewster v. Lanyon Zinc Company, 140 F. 801 (8th Cir. 1905)

2. Boatman v. Andre, 44 Wyo. 352, 12 P.2d 370 (1932). The court stated that the obvious purpose of energy leases was to effectuate speedy and reasonable development of the property. Nevertheless, the court relied upon a theory of abandonment to quiet title in the landowner when the lessee was slow in developing the lease.

3. LeBar v. Haynie, 552 P.2d 1107 (Wyo. 1976). Although not an implied covenant case per se, the case states and develops the prudent operator's standard in Wyoming. Due diligence is a factual question, involving comparison of the operators' act with the standards then prevailing in the area, all in an economic context.

4. Sonat Exploration Co. v. Superior Oil Co., 710 P.2d 221 (Wyo. 1985). No obligation rests on an oil and gas lessee to carry development operations beyond the point where they will be profitable to him. The lessor has the burden of proving such profitability.

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MONTANA

1. Berthelote v. Loy Oil Co., 95 Mont. 434, 28 P.2d 187 (1933). This is apparently the first implied covenant case in Montana. The court states that forfeitures are favored by law with regard to oil and gas leases, although it is not so in other types of contracts. The failure to market gas is judged by the prudent operator standard; notice is required to the lessee in an action for damages.

2. Brown v. Homestake Exploration Co, 98 Mont. 305, 39 P.2d 168 (1934). This is an action for failure to drill an initial exploration well. There is, however, a discussion of the reasonable diligence standard as to development wells.

3. Fey v. A.A. Oil Corp., 129 Mont. 300, 285 P.2d 578 (1955). This case construed the implied covenant to market gas. The court reaffirmed that notice is required before forfeiture, even though forfeiture is favored in oil and gas leases.

4. Braun v. Mon-O-Co Oil Corporation, 133 Mont. 101, 320 P.2d 366 (1958). Drilling to and testing the only known producing horizon was deemed due diligence. The lessors' attempt to repudiate title was sufficient to legally excuse the lessee's failure to continue further development.

5. Christian v. A.A. Oil Corp., 161 Mont. 420, 506 P.2d 1369 (1973). After a reasonable time, an oil and gas lease will terminate automatically if gas is not marketed. Whether implied covenants have been breached is a question of fact for the fact-finder.

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