DENIO ET AL. v. CITY OF HUNTINGTON BEACH.*
This is an appeal from a judgment in the sum of $2,000 for attorneys' fees under the terms of a written contract between plaintiffs and defendant.
Many of the facts of the case are in sharp dispute. As conflicts in the evidence are addressed to and settled by the trier of fact, in this case a jury, we will confine our summary to those facts tending to support the verdict and judgment and will, as far as possible, disregard conflicts in the evidence.
There is much evidence of negotiations between plaintiffs, who are duly licensed attorneys at law, and the defendant city, which resulted in a contract consisting of a written proposal by plaintiffs dated February 25, 1937, and a written acceptance of this proposal under authority of a resolution of the city counsel of defendant passed on March 1, 1937. As these negotiations were preliminary to and were concerned with the terms of the contract we will not concern ourselves with them. They were merged into the written contract which must be controlling here. Sec. 1625, Civ.Code; United Iron Works v. Outer Harbor Dock & Wharf Co., 168 Cal. 81, 141 P. 917; 6 Cal.Juris., sec. 166, p. 261.
Prior to May 15, 1937, the City of Huntington Beach was a city of the sixth class. After that date it operated under a charter. Stats. 1937, p. 2975. Its uplands lie along and northeasterly of the line of mean high tide of the Pacific Ocean. Its southwesterly boundary parallels that line and is distant three miles from it. Carr v. Kingsbury, 111 Cal.App. 165, 295 P. 586. The boundaries described in the charter conform to the prior boundaries of the municipality. Art. I, Charter.
Oil in paying quantities was discovered within the city limits a number of years ago. Drilling operations approached the water line and operators became satisfied that large quantities of oil lay under the tide and overflow lands and under the floor of the ocean. A controversy arose over the right to extract this oil and over royalties from wells whipstocked into it from wells surfaced on the uplands bordering the ocean. See Carr v. Kingsbury, supra; Joyner v. Kingsbury, 97 Cal.App. 17, 275 P. 255. Defendant was one of the active claimants to this oil. A number of bills were introduced in the legislature granting this oil to defendant. Some were defeated there and others were vetoed by Governors Rolph and Merriam. Two that were approved were subsequently submitted to a referendum vote and were defeated by the people.
Ultimately the State of California took control and is receiving royalties from operating companies recovering this oil. This is under authority of the State Lands Act. Chap. 5, p. 23, Extra Session 1938. Lately the federal government has entered the controversy and legislation has been introduced in congress pointing to its claim of the minerals underlying tide lands and the ocean.
In 1934 the City of Huntington Beach entered into an oil lease with the Southwest Exploration Company which attempted to give that company the right to drill for and remove oil from these oil sands. The area described in this lease is bounded on the northeasterly by the line of mean high tide, on the northwesterly by the northwesterly boundary of the city which extends over the ocean, on the southwesterly by the southwesterly boundary of the city, and on the southeasterly by the southeasterly line of Twenty–third Street produced over the ocean. Upon the execution of the lease, the lessee paid to the city $6,000 as a bonus and agreed to pay it a one–sixth royalty of all oil and gas produced, saved and sold from the leased premises. No development work was done under this lease but, evidently, it has not been cancelled.
Ocean Avenue is a public street of the City of Huntington Beach, 100 feet wide, and parallels the shore line a few hundred feet distant from it. It is believed that the city owns this street in fee (Marshall v. Standard Oil Co. of California, 17 Cal.App.2d 19, 61 P.2d 520) and can therefore prevent operating oil companies from whipstocking wells on the landward side of the street, under its surface and into the oil sands underlying the ocean.
Plaintiffs' letter which contains the terms of the contract between the parties, reads in part as follows:
“February 25, 1937.
“The Honorable, the Mayor and City Council of the City of Huntington Beach, California.
“The firm of Denio, Hart, Taubman & Simpson will act as special counsel for the City of Huntington Beach in cooperation with your City Attorney in:
“(a) The preparation of a freeholders' charter for submission to the electors of the City of Huntington Beach for adoption or rejection as soon as reasonably possible.
“(b) In all suits and legal matters in connection with your proposed efforts to obtain the City's just control and returns from the oil, gas or other hydrocarbon substances claimed by it or to which it is entitled, in the tide or overflow lands within the City boundaries of the City of Huntington Beach.
“For the above services we are to receive the following compensation:
“1. A retainer of Twenty–five Hundred Dollars ($2500.00) in cash upon the execution hereof, which shall be, in case no recovery is had as hereinafter specified, in full for all legal services rendered or to be rendered in the above, exclusive of court costs, filing fees, printing, traveling and hotel expenses.
“2. If a recovery is had by the City of Huntington Beach, either by a Court decision or by a compromise or settlement of the City's claims, we are further to be paid out of all moneys paid to the City of Huntington Beach as royalties, or received by it out of the sale of its oil, gas or other hydrocarbon substances, if its royalties are paid to it in kind, the following:
“Ten Per Cent (10%) of the moneys so received by the City for the first two (2) years;
“Fifteen Per Cent (15%) of the moneys so received by the City for the next three (3) years;
“Twenty Per Cent (20%) of the moneys so received by the City for the next ten (10) years.
“The above payments to commence with the first returns paid to or received by the City of Huntington Beach on account of royalties, as above.
“In computing the above periods of percentage payments, the time during which the City does not receive royalty payments, directly or indirectly, either in money or in kind, shall be excluded.
“Payments to be made to this firm within ten (10) days after receipt by the City of its royalties.
“It is understood, of course, that your City Attorney will be in charge of all litigation, and that all compromises, if any, will be subject to his approval and to the approval of your Honorable body.”
The $2,500 was paid to plaintiffs.
At a meeting of the city counsel of Huntington Beach held on August 29, 1938, the following resolution was passed: “That that certain Resolution No. 769 entitled: ‘Resolution of the City Counsel of the City of Huntington Beach, California, Employing Special Counsel,’ be and the same is repealed and the contract therein referred to is hereby cancelled and the said attorneys are hereby discharged.”
Under date of October 6, 1938, the city attorney of Huntington Beach wrote a letter notifying plaintiffs of the foregoing action.
Under date of October 8, 1938, plaintiffs replied to that letter as follows:
“This day we have received a letter from your City Attorney referring to the action taken August 29, 1938, by the City Council of the City of Long Beach by Resolution No. 814.
“This is to inform you that we remain, as at all times we have been, ready, able, and willing to proceed and perform all services under our contract of employment with the City of Huntington Beach, as special counsel for said city for the purposes, and upon the conditions and compensation set forth in our said contract of employment. We do not concede your right to terminate our right to the compensation set forth in said contract, and we do not consent to any purported termination of the contract or our rights thereunder. We will continue to hold ourselves ready to act as special counsel for the City of Huntington Beach in cooperation with your City Attorney in all suits and legal matters in connection with the matters and things referred to in said contract or relating thereto, and will expect to receive the compensation therein provided.”
Under date of September 26, 1938, the State of California entered into a contract called “Agreement for Easement No. 392.” This instrument gave the Southwest Exploration Company the right to surface the drilling of oil wells on certain uplands in the City of Huntington Beach and drill them to the oil sands under the ocean.
Under date of November 3, 1938, the Southwest Exploration Company and the City of Huntington Beach entered into a contract called “Agreement and Easement for Right of Ways.”
This agreement recited the fact of the execution of the “Agreement for Easement No. 392” by the State of California; that the Southwest Exploration Company is drilling oil wells under that agreement; that the City of Huntington Beach claims it is entitled to certain royalties by reason of those operations and claims the oil and gas underlying the lands; that these claims are disputed by the Southwest Exploration Company. The oil lease of October 4, 1934, was mentioned with the statement that Southwest Exploration Company questioned the right of the City of Huntington Beach to enter into that lease and has not operated and does not intend to operate under it except under circumstances thereafter set forth.
The contract proceeds as follows:
“Now therefore, in order to settle and compromise the claims of Huntington Beach to the payment of monies and royalties to it by Southwest, and in full settlement and satisfaction thereof, it is understood and agreed as follows:
“1. Upon the due execution and delivery of this agreement, Southwest agrees to and has herewith paid to Huntington Beach the sum of Twenty–five Thousand Dollars ($25,000.00) lawful money of the United States, receipt of which is hereby acknowledged.
“2. Southwest further agrees to pay to Huntington Beach monthly a sum equal to two per cent (2%) of one hundred per cent (100%) of the gross amount received by Southwest from the sale of one hundred per cent (100%) of all the oil, gas, and other hydrocarbons produced, saved and sold by Southwest during the preceding calendar month from the lands described in the above mentioned Agreement, said payments to be made on the 20th day of each month until, in addition to the monies provided for in paragraph 1 hereof, there has been paid to Huntington Beach the further sum of One Hundred Fifty Thousand Dollars ($150,000.00).”
It is further provided that after the City of Huntington Beach has been paid $175,000, including the $25,000 mentioned in paragraph 1, it shall receive two per cent of the total royalties paid to the State of California, and that none of the foregoing payments shall be considered made under the terms of the lease of October 4, 1934.
Paragraph 7 of the contract provides as follows: “In the event that either by the final decision of a court of competent jurisdiction or by the terms of a compromise agreement it shall be determined that Huntington Beach is the owner of the oil, gas and other hydrocarbon substances within and underlying the tide and submerged lands lying within the city limits of the City of Huntington Beach, including the above mentioned lands, then the Oil and Gas Lease dated October 4, 1934, shall become effective and the parties hereto shall thereafter operate thereunder and in accordance with the provisions thereof, and Southwest shall pay to Huntington Beach the royalties therein contained, provided further that any monies paid to Huntington Beach by Southwest hereunder shall be applied in partial or total payment and satisfaction of the monies provided for in paragraph 11 of said Oil and Gas Lease.”
The first ground urged for reversal of the judgment is that the contract under which plaintiffs claim is ultra vires, is contrary to public policy and is void. This contention is based on the arguments that the execution of the contract was the result of a legislative act of the city council acting in a governmental capacity and that the attempt to extend the employment beyond the terms of office of the councilmen who adopted it rendered the entire transaction void.
While there seems to be some intimation to the contrary in its opening brief, if we understand its counsel correctly, it is now conceded that the defendant city had authority to employ special counsel. Secs. 850 and 862.27, Municipal Corporation Act, Gen.Laws 1937, Act 5233; Buck v. City of Eureka, 109 Cal. 504, 42 P. 243, 30 L.R.A. 409; Buck v. City of Eureka, 124 Cal. 61, 56 P. 612; State Compensation Ins. Fund v. Riley, 9 Cal.2d 126, 69 P.2d 985, 111 A.L.R. 1503.
There is a sharp conflict of authority in various jurisdictions of the United States on the right of a board of a municipality or a quasi municipal organization to contract for services to be rendered after the terms of office of the members of the appointing body have expired. The majority rule is thus stated in 70 A.L.R. at page 799: “In most jurisdictions where a board appoints an officer, or contracts for services, and the duties of the officer or the services to be rendered are duties delegated to the supervision of the board, such appointment or contract for a period beyond the term of the board is not valid. And the same rule applies to confidential relations, such as counsel for the board.”
In arguing this question defendant cites and quotes from those authorities following this majority rule. If this rule prevailed in California these authorities would be most persuasive.
The minority rule is thus stated on page 802 of the same volume, with California cases cited as following it: “In a few jurisdictions it is held that contracts of employment and appointment of officers may extend beyond the term of the board.”
There is a further distinction recognized in some jurisdictions which is stated in McQuillin on Municipal Corporations, 2d Ed., volume 3, at page 952, as follows: “Respecting the binding effect of contracts extending beyond the terms of officers acting for the municipality, there exists a clear distinction in the judicial decisions between governmental and business or proprietary powers. With respect to the former, their exercise is so limited that no action taken by the governmental body is binding upon its successors, whereas the latter is not subject to such limitation, and may be exercised in a way that will be binding upon the municipality after the board exercising the power shall have ceased to exist. Consequently independent of statute or charter provisions, it is generally held that the hands of successors cannot be tied by contracts relating to legislative functions but may as to contracts relating to business affairs.”
It has been held in California that oil royalties are received by a municipality in its proprietary and not in its governmental capacity (C. J. Kubach Co. v. City of Long Beach, 8 Cal.App.2d 567, 48 P.2d 181) and that a city acts in its proprietary capacity in maintaining and operating certain utilities and auditoriums. Davoust v. City of Alameda, 149 Cal. 69, 84 P. 760, 5 L.R.A.,N.S., 536, 9 Ann.Cas. 847; South Pasadena v. Pasadena Land & Water Co., 152 Cal. 579, 93 P. 490; Barsoom v. City of Reedley, 38 Cal.App.2d 413, 101 P.2d 743; Chafor v. City of Long Beach, 174 Cal. 478, 163 P. 670, L.R.A.1917E, 685, Ann.Cas.1918D, 106.
There is some confusion in some of the earlier cases in California on the right of a board to make a contract which could not be performed within the terms of office of its members. Certain phases of this question were settled in affirming the power to make such a contract in the case of McBean v. Fresno, 112 Cal. 159, 44 P. 358, 31 L.R.A. 794, 53 Am.St.Rep. 191. This holding was expressly approved in Higgins v. San Diego Water Co., 118 Cal. 524, at page 554, 45 P. 824, 50 P. 670, and has been very generally followed.
It now seems to be settled in California that the governing body of a municipality, or quasi municipality, may make contracts for special employment in cases where the time in which services may be performed will extend beyond the terms of office of the members of the appointing body. See Cope v. Sutter County, 206 Cal. 445, 274 P. 750; City and County of San Francisco v. Boyd, 17 Cal.2d 606, 110 P.2d 1036; Skidmore v. County of Alameda, 13 Cal.2d 534, 90 P.2d 577; Pacific Finance Corp. v. City of Lynwood, 114 Cal.App. 509, 300 P. 50, 1 P.2d 520; King City Union High School Dist. v. Waibel, 2 Cal.App.2d 65, 37 P.2d 861.
We therefore conclude that as plaintiffs were employed to perform legal services in connection with matters pertaining to property affairs for defendant by a written contract, into which the city council had legal authority to enter, the mere fact that the services to be rendered might have been but were not completed during the terms of office of the councilmen authorizing its execution furnishes no ground for holding the contract illegal.
Defendant next urges that plaintiffs abandoned the contract. The evidence on this question is sharply conflicting, but we must accept as true the evidence supporting the implied finding of the jury that the contract had not been abandoned and disregard conflicting evidence.
There is a great deal of evidence showing the amount of work done by plaintiffs. The first work was in connection with the charter that was adopted and the investigation of the ownership of the tidelands and the oil under them and under the bed of the ocean. Mr. Simpson testified, “There was a tremendous amount of research involved.” There were numerous conferences with officers of the city in plaintiffs' offices in Long Beach and some trips to Huntington Beach. There were two trips to Sacramento during the legislative session to attempt to secure legislation giving defendant title to the oil.
Mr. Simpson advised defendant that his study had led to the conclusion that the state and not the city owned the oil and that any litigation of that question would lead to a prompt defeat of the city in its claim to any interest in this oil. He further advised at least two councilmen that he had concluded that the city owned Ocean Avenue and the ground under it in fee and could prevent any whipstocking of wells through that ground. He advised that this situation be kept secret and used as a final weapon to attempt to force the operating companies to give the city some benefits from the oil.
He also investigated the legality of a zoning ordinance in force in the city and concluded that it was void. He prepared a pencil outline of a new zoning ordinance which was not used because the city attorney had prepared one to his own liking. One purpose of this ordinance seems to have been to prevent the drilling of oil wells on certain uplands that would tap the oil sands under the ocean.
After the charter was adopted a citizen of Huntington Beach applied to the attorney general for permission to bring a quo warranto proceeding to test its validity. By a formal resolution the city council requested plaintiffs to oppose this application. They held conferences with the deputy attorney general in charge of the matter and filed an extensive brief in opposition to the request to bring the action, which was not granted.
In apparent explanation of why there was not considerable activity in the matter during the first half of 1938, Mr. Simpson testified to a conversation with the city attorney, as follows: “We discussed generally the fact of the pending––of the condition of the legislation then pending concerning the Huntington Beach oil. In other words, we talked back and forth to the effect that the Legislature before its adjournment in 1937 had passed several bills affecting the Huntington Beach tideland oil matters. Two of these had been signed by the Governor. Both of those bills that had been signed by the Governor had been held up by referendum, and as I recall, I think there was also litigation filed trying to invalidate the referendum on the two. * * * That was, I believe, the main contention. In any event, we discussed the fact that everything was held in abeyance at this time because no one knew what the law would be, the statute would be that might be passed concerning the Huntington Beach tidelands proposition as a matter of legislation. * * * Yes, I told Mr. Overacker that we should not do anything on any of the other propositions we had pending, other programs, except we should go ahead with our zoning set–up. I told him that I had checked over as carefully as I could all of the zoning ordinances, restrictive ordinances of the City of Huntington Beach. As a matter of fact, I had them lying on my desk at that time, I believe, because I had procured copies of all of the zoning ordinances of the City of Huntington Beach, and still have such, as a matter of fact, and I told him I had checked those over and I had done considerable research into the legal angles involved and that I had come to the conclusion that their zoning ordinances were invalid and void.”
He also testified that he continued his work on the legal problems of defendant “to a more or less extent right up to the time when they attempted to terminate our employment.”
M. M. McCallen was elected a councilman of the City of Huntington Beach at the spring election of 1938. G. P. Taubman, Jr., one of the plaintiffs, testified to a conversation had with Mr. McCallen in the late summer or early fall of 1938, which Taubman detailed in part as follows: “I don't know how the subject matter came up. The substance of it was that Mr. McCallen told me––I rather imagine I made inquiry of him as to the status, and he stated that the Southwest Exploration Company, he thought, was in a position to negotiate concerning the matter of the City securing some of the proceeds from the oil production, that the time had arrived when they were ripe, so to speak, for such negotiations. * * * Q. I will ask you, Mr. Taubman, whether or not you ever refused to furnish any advice or to do anything which was requested of you by the City of Huntington Beach, or any of its officers, in connection with procuring returns from the oil on behalf of the City? Witness: A. I did not. In fact, I think on one of these occasions, I offered, when Mr. McCallen told me he was negotiating with these gentlemen, one of whom I told him I had known for many years, I offered to aid if I could and discuss the matter with him and he said no, he had the thing well in hand and he was going to get what the City was entitled to, either that, or no one else would get it.”
Much of the foregoing testimony was sharply contradicted. However, the jury apparently accepted it as true and it is sufficient to support the implied finding that plaintiffs did not abandon the contract.
Defendant suggests, if it does not argue, that the $2,500 paid to plaintiffs was ample compensation for the services performed by them. As we are here concerned with a written contract providing for a specific compensation we are not concerned with the reasonable value of the services rendered. If plaintiffs are permitted to recover at all they must recover under the terms of the contract. Cope v. Sutter County, supra.
Defendant next urges there is no evidence showing that any of the oil produced by the Southwest Exploration Company came from below the tide or overflow lands within the City of Huntington Beach. This contention is based on the language of paragraph “b” of the contract whereby plaintiffs undertook to secure returns to defendant from hydrocarbons in the tide or overflow lands within the boundaries of the City of Huntington Beach.
We have searched the record and have failed to find, and have been cited to no parol evidence on this question. However, we believe that there are reasonable inferences to be drawn from the documentary evidence which sufficiently support the implied finding that the oil was drawn from sands below those lands within the City of Huntington Beach.
That we are entitled to take judicial notice of the boundaries of municipalities cannot be questioned. The southwesterly boundary of the City of Huntington Beach lies southwesterly three miles from the line of mean high tide. Carr v. Kingsbury, supra. The lease of October 4, 1934, between the City of Huntington Beach and the Southwest Exploration Company, described the land from which oil was to be extracted as lying in the City of Huntington Beach and between the line of mean high tide and the southwesterly boundary of the city. The contract dated November 3, 1938, between the Southwest Exploration Company and the City of Huntington Beach referred to that lease and provided for its revivor under certain contingencies. That same contract referred to the Agreement for Easement No. 392 under which the Southwest Exploration Company proposed to extract oil from certain described lands within the City of Huntington Beach lying along and seaward from the line of mean high tide. It is only on oil produced from under such lands that the drilling company promised to pay defendant royalties. The Agreement for Easement No. 392 described those lands particularly.
It is therefore clear that the only oil recovered by the Southwest Exploration Company upon which it was required to pay defendant a royalty is that recovered under property within the city lying seaward from the line of mean high tide.
There is a disputable presumption in California “That the ordinary course of business has been followed.” Subd. 20, sec. 1963, Code Civ.Proc. Certainly in the ordinary course of business a drilling company would not pay royalties to a municipal corporation not entitled to receive them. Subdivision 19 of the same section establishes the presumption “That private transactions have been fair and regular.” It would be neither fair nor regular for the City of Huntington Beach to wrongfully accept and keep royalties to which it is not entitled.
It is urged that the verdict of the jury is not responsive to the issues raised in the pleadings.
It is both alleged and admitted that defendant received $25,000 in cash from the Southwest Exploration Company on the execution of the contract of November 3, 1938, and the sum of $2,794.09, 2 per cent of the value of the oil produced under that contract. It is argued under this heading that the verdict for $2,000 was neither supported by the pleadings nor the evidence.
It seems clear that if the $25,000 and the $2,794.09 were received as royalties plaintiffs were entitled to a judgment in the sum of $2,794.09 instead of $2,000. However, plaintiffs are not complaining and have not appealed. A party cannot complain of a judgment more favorable to it than one justified by the pleadings and the evidence. McClung v. Moore, 138 Cal. 181, 71 P. 98; Payne v. Commercial National Bank, 177 Cal. 68, 169 P. 1007, L.R.A.1918C, 328; Crocker–Huffman, etc., Co. v. Goss, 203 Cal. 233, 263 P. 802; Guitron v. Rodriguez, 105 Cal.App. 513, 288 P. 134; Archibald v. Schultz, 14 Cal.App.2d 320, 58 P.2d 233; Orfanos v. California Ins. Co., 29 Cal.App.2d 75, 84 P.2d 233.
Defendant urges error in the giving of certain instructions proposed by plaintiffs and in refusing an instruction which it proposed. We have considered these instructions carefully and have concluded that the action of the trial judge on them was proper. They present questions considered elsewhere in this opinion and it should not be necessary to repeat reasons for this conclusion.
Defendant complains of an instruction proposed by it and modified by the trial court which in effect told the jury that the burden is on plaintiffs to prove that the money was paid to the City of Huntington Beach on account of rental and of royalty for oil. The emphasized words were added by the trial judge. Plaintiffs' contract gave them the right to receive percentages on royalties paid to defendant or received by it out of the sale of oil. Rental, as that word is commonly understood, differs from a royalty received under an oil contract. La Laguna Ranch Co. v. Dodge, 18 Cal.2d 132, 114 P.2d 351, 135 A.L.R. 546. However, under the view we take of the case, we regard the error, if any, as harmless.
Defendant urges that all of the money was paid to it as rentals for the use of the easement under Ocean Avenue and none of it as royalties on the oil produced; that under their contract plaintiffs, if they could recover at all, were entitled to receive percentages of the royalties but not of the rentals.
It is clear from their contract that plaintiffs are only entitled to be paid a percentage of the royalties received by defendant from oil, gas or other hydrocarbon substances produced from the described property. “A party to a contract may absolutely limit his liability to pay a certain sum to funds to accrue to him from a certain source [citing cases] and under such circumstances a recovery cannot be had without pleading and proof that funds became available to the debtor from the source which he specified.” Martin v. Martin, 5 Cal.App.2d 591, 43 P.2d 314, 315. Therefore we must examine the definition of “royalty” and determine if the facts of this bring any of the payments made to defendant within the meaning of that term. As a preliminary we must first consider the contention that all payments were made as rental for the easement under Ocean Avenue.
In the lease of October 4, 1934, it is expressly provided the Southwest Exploration Company shall pay to defendant one–sixth of the value, or one–sixth of the oil and gas produced from the described premises, subject to certain specified deductions. Such provisions are common in oil leases and provide for payment of what are generally known as royalties to the lessor by the lessee.
The contract between the State of California and the Southwest Exploration Company provides for the payment of a “royalty” from the latter to the former. This “royalty” is defined as a variable percentage of the production of the wells dependent upon the amount of oil produced.
We have already quoted at considerable length from the contract of November 3, 1938, between Southwest Exploration Company and defendant. $25,000 was paid on the execution of the contract. Two per cent of the gross amount received monthly by the Southwest Exploration Company from the sale of oil, gas or other hydrocarbons was to be paid defendant monthly. This last provision has all of the characteristics of an agreement to pay royalties usually found in oil leases. After $175,000 had been paid defendant, the Southwest Exploration Company agreed to pay to defendant a sum equalling two per cent of the total royalties paid to the State of California. It also appears from the contract that defendant claimed the oil in the sands under the tide lands and the right to receive royalties from that oil and that the Southwest Exploration Company denied that ownership and the claim to royalties. Evidently the contract of November 3, 1938, between the Southwest Exploration Company and defendant was made, as it states, “to settle and compromise the claims of Huntington Beach to the payment of monies and royalties to it * * *,” and not in payment for the use of an easement under Ocean Avenue. The ownership of that land may have provided the force that compelled the execution of the contract but nothing in it demonstrates that the payments were rentals for the easement and not a bonus and royalties.
This contract appears to have been drawn by skillful and experienced attorneys. If the sole consideration for the payments to be made to the city had been the use of the easement it would have been a simple matter to have said so. Had there been any such understanding between the parties it is hardly probable that paragraph 7 would have been incorporated in it giving the city a one–sixth royalty in the oil and gas produced in the event the city either by judgment or compromise should establish its ownership of those substances. Taken as a whole the contract negatives the idea that the payments were to be made solely for the use of the easement and that none of them represented royalties from the hydrocarbons produced.
Defendant seriously contends that at best, the $25,000 was paid to it as a bonus and not as a royalty and that the most plaintiffs can recover is ten per cent of $2,794.09, received by defendant as its share of the oil produced.
In 8 Cal.Juris.Supp., pages 690–692, we find the following:
“An owner's right to take oil or gas from his land is often a valuable one, and it is customary, when making a grant of it by way of lease, to include therein very definite provisions for the payment of compensation.
“Royalty.––The most common form of compensation is what is known as royalty––that is, a right to receive periodical payment in the nature of a rental of a fraction or percentage of the production or of its proceeds.
“Bonus.––But it is not unusual in proven territory for the lessee to pay a designated sum to the lessor upon execution of the lease, over and above the promised royalties. This form of compensation is termed a bonus.
“ ‘Bonus and royalties are both consideration for the lease and are income of the lessor.’
“* * * Royalties.––A lease may fix the royalty at a designated sum per barrel, or at a prescribed proportion of the lessee's gross income, etc. But in the majority of modern leases, including governmental leases, the lessor's royalty is fixed at an agreed fraction or percentage of all oil, gas or other hydrocarbon substances produced and saved from the leased premises, or, at the option of the lessor, ‘exercised whenever settlements are made’ a like fraction of the proceeds of their sale.” These definitions are supported by the cases cited.
In Geller v. Smith, 130 Cal.App. 485, 20 P.2d 102, 104, the word “bonus” when used in an oil lease is defined as follows: “My opinion is that the term ‘bonus' as applied to an oil lease has come to have a definite meaning, to–wit: A sum of money paid by a lessee to the lessor in consideration for the execution of a lease, as distinguished from the return of royalty reserved by the lessor to be paid by the lessee through the term of the lease.”
The foregoing definition was quoted with approval in Elsinore Oil Co. v. Signal Oil, etc., Co., 3 Cal.App.2d 570, 40 P.2d 523, 524, and the following definition of “royalty” was given: “It is apparent that the ‘rentals' which were to be reduced upon quitclaiming of the land were not the ‘bonus' but the ‘royalty,’ for here, as in the case of a mining lease, the amounts stipulated to be thus paid as royalties are not the purchase price of the oil and gas in place, but are ‘ “the compensation which the occupier pays the landlord for that species of occupation which the contract between them allows.” * * * In mining leases, these words “rent” and “royalty” are used interchangeably to convey the same meaning.’ Nelson v. Republic Iron & Steel Co., [8 Cir.], 240 F. 285, 290 [153 C.C.A. 211]. ‘ “Royalty” is “perhaps the most appropriate word where rental is based upon the quantity of coal or other mineral that is or may be taken from the mine.” ’ Payne v. Neuval, 155 Cal. 46, 49, 99 P. 476, 478. The same definition applies here.''
Among the many cases in harmony with the foregoing definitions we cite the following: Dabney–Johnston Oil Corp. v. Walden, 4 Cal.2d 637, 52 P.2d 237; Aldridge v. Houston Oil Co., 116 Okl. 281, 244 P. 782; Robinson v. Jones, 119 Kan. 609, 240 P. 957; Byrne v. Fulton Oil Co., 85 Mont. 329, 278 P. 514; Parker v. Riley, 250 U.S. 66, 39 S.Ct. 405, 63 L.Ed. 847.
The contract between plaintiffs and defendant was prepared by plaintiffs who are skillful attorneys. If they intended to claim a percentage of any bonus paid to the city, as distinguished from a royalty, it would have been a simple matter to have so provided in the written instrument. If there are any ambiguities or uncertainties in the contract they must be interpreted most strongly against plaintiffs who prepared it. Bennett v. Potter, 180 Cal. 736, 183 P. 156. As plaintiffs failed to provide in the written contract that a percentage of any bonus received by the defendant should be paid to them, we must conclude that they cannot recover any part of such bonus.
Under the foregoing rules we must regard the $25,000 paid to defendant on its execution of the contract with the Southwest Exploration Company as a bonus and not a royalty, and the $2,794.09 as a royalty of which plaintiffs are entitled to recover ten per cent under their contract.
The judgment is reduced to the sum of $279.40, and as so reduced is affirmed. Neither party will recover costs.
BARNARD, P. J., and GRIFFIN, J., concurred.