Appeal from the District Court of Dunn County, Southwest Judicial District, the Honorable Zane Anderson, Judge.
The opinion of the court was delivered by: Crothers, Justice.
N.D. Supreme CourtIrish Oil & Gas, Inc. v. Riemer,
This opinion is subject to petition for rehearing. [Go to Documents] [Download as WordPerfect] Concurring & dissenting opinions [ 1 ] [ 2 ] filed.
AFFIRMED IN PART, REVERSED IN PART AND REMANDED.
Opinion of the Court by Crothers, Justice.
[¶1] Irish Oil and Gas, Inc. appeals from the district court judgment dismissing its complaint against Gerald C. Riemer, Doris E. Riemer, Lillie J. Riemer, and Joanne Johnson ("the Riemers") with prejudice. We affirm in part, reverse in part and remand for proceedings consistent with this decision.
[¶2] In January and February 2008, Irish Oil entered into oil and gas leases with the Riemers for a single parcel of land they owned jointly. A Letter Agreement in Lieu of Draft for Oil and Gas Lease Bonus Consideration accompanied each lease. The pertinent portions of the letter agreement read:
"Irish Oil & Gas, Inc. is interested in acquiring an oil and gas lease on the above referenced mineral interest, which you appear to own mineral interest, and is offering a bonus consideration payment of $160.00 per net mineral acre, for a primary term of five years, and a 1/6th royalty in the event of production. . .
"Within 60 days upon receipt of the signed lease, and subject to approval of title, with right of payment extension of 30 additional days, in the event of title curative issues, from expiration of original 60 days, you will receive a check in the amount of $10,640.00. On January 15, 2009 you will receive the balance of bonus consideration in the amount of $10,640.00."
[¶3] Gerald C. Riemer testified during a deposition that he called Irish Oil on March 24, 2008 and spoke with Irish Oil's landman, Clarence Herz. Gerald C. Riemer asked Herz why the first payment described in the letter agreement had not yet arrived. Gerald C. Riemer spoke with Irish Oil's vice president, Tim Furlong, the following day. Furlong sent a letter to Gerald C. Riemer purporting to memorialize Gerald C. Riemer's conversations with Herz and Furlong. Furlong stated in the letter:
"As mentioned in your conversation with Clarence Herz of yesterday in which you expressed concerns of payment, please accept our apologizes [sic] for the delay. As agreed Irish Oil & Gas intends to pay you and your sisters, subject to title as agreed in our letter agreement executed by you and your sisters. We through the examination of title have encountered title issues, more specifically old mineral reservations that may or may not cover the oil and gas interest. As I told you today we will have to further examine documents and possibly get a legal opinion on the same. This may take as long as the first of June, but if [it] takes longer than June 15th we will contact you to either extend the time to pay or release our leases of record.
"Again, thanks for your patience; if this does not correctly memorialize our conversation please feel free to contact me . . . ." Gerald C. Riemer testified he did not agree to give Irish Oil additional time to make payment. Furlong asserted in an affidavit that he "obtained Gerald Riemer's agreement for an extension of time to June 15, 2008, to pay the bonus consideration for the Leases."
[¶4] On April 30, 2008, Gerald C. Riemer signed an oil and gas lease with Continental Oil Company for the mineral rights that had been leased to Irish Oil. On May 26, 2008, Irish Oil sent Gerald C. and Doris E. Riemer a check for $10,640. The Riemers sent the check back to Irish Oil with a note stating, "Sorry I leased it to another company. Sincerely, Gerald C. Riemer[,] Doris E. Riemer." Lillie J. Riemer also voided a check she received from Irish Oil after May 27, 2008.
[¶5] On October 6, 2008, Irish Oil sued the Riemers for breach of the leases. The Riemers answered and counterclaimed for Irish Oil's breach of the leases. On September 1, 2009, Irish Oil moved for leave to amend its complaint. Irish Oil sought to add a claim against Gerald C. Riemer for deceit regarding their purported oral agreement to extend the deadline for payment of the bonus. All parties filed motions for summary judgment.
[¶6] On December 17, 2009, the district court issued its memorandum opinion. The district court denied Irish Oil's motion to amend its complaint, stating, "Even though the motion was timely filed, in accordance with the scheduling order, the Court does not find that justice requires that leave to amend the complaint be given. The Court therefore denies the motion."
[¶7] Regarding the summary judgment motions, the district court explained, "[T]he first issue to be resolved is whether the alleged extension given by Gerald Riemer on behalf of himself and the other Defendants could be valid." The district court explained further, any modification of the leases had to be in writing: "It is irrelevant whether an oral modification was made, as it would have been without effect." The district court concluded no valid modification of the leases was made and any dispute over the facts related to the modification was irrelevant.
[¶8] Next, the district court determined the effect of the late bonus payment. Interpreting that portion of paragraph 16 of the leases requiring judicial determination of a breach and giving a reasonable time to cure the breach before the lease could be terminated, the district court explained, "The Court agrees with the Defendants that the provision is not applicable to the circumstances presented here. The Court bases its interpretation on who drafted it, the language used, the placement and the context of the paragraph." The district court asserted the remainder of paragraph 16 of the leases dealt with development and implied responsibilities, where a breach can be "difficult to ascertain." The district court explained requiring judicial determination of a breach of an express duty "would be unreasonable and it would waste judicial and other resources." The district court concluded, "The provision therefore does not pertain to the current circumstances."
[¶9] Finally, the district court held there was a total failure of consideration. While recognizing that failure of consideration is normally a question of fact, the district court noted, "It is clear and undisputed that Irish [Oil] did not comply with its duty to provide the bonus payments within 90 days." The district court concluded reasoning minds could not differ and the total failure of consideration excused the Riemers from performing. The district court granted the Riemers' motions for summary judgment and issued a judgment dismissing Irish Oil's complaint with prejudice.
[¶10] On appeal, Irish Oil argues the district court erred when it concluded Irish Oil's failure to timely make the bonus payments was a total failure of consideration, rather than only a partial failure of consideration. Irish Oil argues further the Riemers did not comply with the leases because they did not seek judicial determination of a breach before canceling the leases. Finally, Irish Oil argues the district court abused its discretion when it denied Irish Oil's motion to amend its complaint.
[¶11] We consider the district court's interpretation of paragraph 16 of the leases. Interpretation of a contract is a question of law, and on appeal this Court independently examines and construes the contract to determine if the district court erred in its interpretation. Egeland v. Continental Resources, Inc., 2000 ND 169, ¶ 10, 616 N.W.2d 861. "A contract must be read and considered in its entirety so that all of its provision are taken into consideration to determine the true intent of the parties." Id. "Words in a contract are construed in their ordinary and popular sense." Id. "The same general rules that govern interpretation of contractual agreements apply to oil and gas leases." Id.
[¶12] Paragraph 16 of each of the leases contained the following provision:
"This Lease shall not be terminated, forfeited, or canceled for failure by Lessee to perform in whole or in part any of its implied covenants, conditions, or stipulations until it shall have been first finally and judicially determined that the failure or default exists, and then Lessee shall be given a reasonable time to correct any default so determined, or at Lessee's election it may surrender the Lease with the option of reserving under the terms of this Lease each producing well and forty (40) acres surrounding it as selected by Lessee, together with the right of ingress and egress. Lessee shall not be liable in damages for breach of any implied covenant or obligation." (Emphasis added.) Irish Oil argues the term "implied" only modifies "covenants," but does not apply to "conditions, or stipulations." The Riemers argue "implied" modifies "covenants," "conditions," and "stipulations." The Riemers alleged Irish Oil breached an express provision of the lease; thus, judicial determination of the breach was not necessary. The district court agreed with the Riemers and held that "the provision is not applicable to the circumstances presented here."
[¶13] Courts in multiple jurisdictions over multiple decades have been asked to interpret the phrase "implied covenants, conditions, or stipulations." In some cases, only a breach of an implied covenant was alleged, so the court did not discuss whether "implied" also applied to "conditions" and "stipulations." See Gillette v. Pepper Tank Co., 694 P.2d 369, 372-73 (Colo. Ct. App. 1984); Kuehne v. Samedan Oil Corp., 626 P.2d 1035, 1040 (Wyo. 1981). Two courts have provided relevant discussions of the phrase. The Supreme Court of Michigan has stated:
"Defendant insists that the lease should not be forfeited
or cancelled for failure to perform covenants or stipulations until it
had been judicially determined that such a failure existed, and that
thereafter defendant should be given a reasonable time to comply with
such stipulations. The default, as determined by the trial court, was
a failure to perform an express covenant to pay money. We are of the
opinion that defendant's contention in this regard is without merit."
Steffes v. Allen, 295 N.W. 245, 246 (Mich. 1940).
The Supreme Court of Tennessee has explained:
"The provision quoted above, and others of similar import, are designed to give lessees relief from the legal effects of these implied covenants in oil and gas leases. We are cited to no authority and our independent research has disclosed none, holding that this provision has any relevance to a default in the obligation to drill or to pay delay rental under specific conditions set forth in the lease.
"We conclude that this lease required lessee to drill, to pay delay rental, or to be in production in paying quantities on the 'rental paying date[s],' or the lease terminated by its own terms. Under the facts of this case, the no termination or forfeiture clause has no application to those obligations." Waddle v. Lucky Strike Oil Co., 551 S.W.2d 323, 327 (Tenn. 1977) (alteration in original). Thus, courts that have considered the question have determined the phrase "implied covenants, conditions, or stipulations" does not apply to express provisions of the lease. The district court's conclusion is in line with these courts' reasoning. The district court did not err in its interpretation of the leases.
[¶14] The Riemers claim as an affirmative defense that Irish Oil's failure to make a timely bonus payment was a total failure of consideration, excusing the Reimer's performance under the leases. Irish Oil argues that consideration for the leases did not fail and that they remain enforceable against the Riemers.
[¶15] Oil and gas leases generally are construed like other contracts. This Court has stated:
"The same general rules that govern interpretation of contractual agreements apply to oil and gas leases. The construction of a written contract to determine its legal effect is a question of law for the court to decide, and on appeal, this Court will independently examine and construe the contract to determine if the trial court erred in its interpretation of it. Words in a contract are construed in their ordinary and popular sense, unless used by the parties in a technical sense or given a special meaning by the parties. We also construe contracts in light of existing statutes, which become part of and are read into the contract as if those provisions were included in it. A contract must be read and considered in its entirety so that all of its provisions are taken into consideration to determine the true intent of the parties." Egeland, 2000 ND 169, ¶ 10, 616 N.W.2d 861 (internal citations omitted); but see Greenfield v. Thill, 521 N.W.2d 87, 90 (N.D. 1994) (different rule of construction may apply to rights upon cessation of production); Holman v. State, 438 N.W.2d 534, 539 (N.D. 1989) ("Unless a different intention is clearly indicated, oil and gas leases are not and should not be governed by the law or policy applicable to ordinary landlord and tenant leases."). See also 58 C.J.S. Mines and Minerals § 283 (2010) ("General rules relating to the construction and operation of contracts and leases apply in construing oil and gas leases and determining the rights and liabilities of the parties thereunder, except to the extent that different applications of such rules or different rules apply by reason of the peculiar nature of the mineral and the terms and conditions of this class of leases.").
[¶16] In order for a contract to exist it must be supported by "[s]ufficient cause or consideration." N.D.C.C. § 9-01-02(4). This concept remains true from formation through the existence of the contract. Professor Lord explains:
"Where no consideration exists, and is required, the lack of consideration results in no contract being formed in the absence of a substitute for consideration such as a writing under seal (where the seal retains vitality) or an estoppel. By contrast, when there is a failure of consideration, there is originally a contract when the agreement is made, but because of some supervening cause, the promised performance fails." 3 Richard A. Lord, Williston on Contracts § 7:11 (4th ed. 2008) (footnotes omitted). [¶17] The Riemers signed written leases and letter agreements. The letter agreements called for $160.00 per acre bonus payments plus "a 1/6th royalty in the event of production." Neither party asserts insufficient consideration supports the formation of the contract; thus, the issue is whether consideration failed when Irish Oil did not pay the bonus payments when promised.
[¶18] "The burden of showing a want of consideration sufficient to support [a contract] lies with the party seeking to invalidate or avoid it." N.D.C.C. § 9-05-11. "Failure of consideration arises when a valid contract has been formed, but the performance bargained for has not been rendered." Check Control, Inc. v. Shepherd, 462 N.W.2d 644, 646 (N.D. 1990). We have stated, "A failure of consideration may be either partial or total." Id.
[¶19] Distinguishing between a partial or a total failure of consideration is important because it dictates the ...