FOWLER et al. v. ASSOCIATED OIL CO.*
Plaintiffs and the predecessor in interest of the defendant were respectively the lessors and lessee under an oil and gas lease of certain real property compromising approximately 20 acres of land located in the Huntington Beach Oil Field. The lease was executed on August 30, 1920, and on December 28, 1923, the original lessee named in the lease agreement assigned and transferred all rights and interest which it had in the lease to the defendant and the latter thereupon succeeded thereto and to the duties and obligations imposed upon the original lessee by the terms of the lease contract. This action in equity was instituted by plaintiffs on June 18, 1932, for the purpose of impeaching as insufficient and fraudulent the accounting made by defendant to plaintiffs respecting the latter's one–sixth royalty interest in the oil and gas produced and saved from the demised premises after the beginning of the year 1926, and to obtain a forfeiture of the lease because of said fraudulent accounting rendered thereunder. A trial of the issues framed by the pleadings was begun on March 28, 1934, and was concluded on April 26 of the same year. The court made 28 separate findings. The judgment which was rendered in conformity with the findings and the legal conclusions drawn therefrom provided, first, that plaintiffs recover from defendant the sum of $89,342, together with interest thereon from the date of judgment; second, that plaintiffs recover their costs; third, that defendant, in ascertaining the quantity of gravity of royalty oil under the lease, is required to use correct methods of sampling and testing and must pay plaintiffs upon the gravity of clean oil in the fluid produced by the wells on the leased premises and not on the gravity of wet oil and that defendant is not entitled to make any deduction for the cost of treating or cleaning the royalty oil; fourth, that plaintiffs recover nothing from defendant by reason of defendant's failure to pay plaintiffs in full for royalty oil produced prior to June 18, 1928.
From the judgment thus rendered both plaintiffs and defendant have appealed. The appeal of plaintiffs is from that portion which denies them any recovery for the period prior to June 18, 1928. Defendant's appeal is from the entire judgment.
The controlling question presented on this appeal is the proper interpretation of the oil and gas lease in the light of the evidence produced by the parties to the action. In this connection both parties agree that the following language of the agreement is of paramount importance:
“The lessee also further agrees to pay to the lessors a royalty of one–sixth (1/6) of the net amount of all petroleum, oil, natural gas, naphtha and other hydrocarbon substances produced and saved from the demised premises, after deducting from the gross product the quantity that may be consumed in the development and operation of said property while any of said substances are being produced from said premises, and in pumping said product a reasonable distance to a shipping point. * * *
“The lessee further agrees that at the option of the lessors it will deliver the royalty oil to the lessors at the tanks, reservoirs or sumps hereinabove referred to, or will purchase the royalty oil from the lessors at the prevailing market price of such product at the well, provided that the lessors shall exercise such option by giving lessee notice in writing at least sixty (60) days prior to the commencement of a calendar year of lessors' desire in the premises for the next ensuing calendar year. Such option shall be exercised by the lessors yearly only, and upon exercise of such option for any calendar year the method of payment of royalty prescribed in the notice shall prevail during the entire calendar year therein specified and thereafter until notice of change is given, which notice may be given for a calendar year only, and the prevailing market price hereinabove referred to shall be the market price at the well prevailing from time to time when the royalty oil would be deliverable hereunder if same were not purchased by the lessee, for oil produced in the oil field in which the demised premises are situated of similar gravity or gravities as that produced from the demised premises. * * *
“The lessee agrees that it will, on or before the 15th day of each calendar month, furnish to the lessors a true account of the production of all substances herein named from the demised premises during the next preceding calendar month, except such portion as may be used in the development and operation of the property under the terms of this lease.”
It may properly here be observed that in all operations under this lease plaintiffs elected to require defendant to purchase their royalty oil for cash.
Defendant uniformly, from the year 1926 up to the time of trial, purchased the royalty oil upon which is known as the “observed gravity–net quantity” basis and paid therefor what it claimed was the prevailing market price of oil of such grade and gravity. In so doing it maintains that it completely fulfilled its obligation “to purchase the royalty oil from the lessors at the prevailing market price of such product at the well.” Defendant insists that, since the lease neither expressly nor by necessary implication requires the lessee to clean or otherwise to process the royalty oil produced, the lessors are bound either to take the oil in kind as produced and saved or to accept the prevailing market price in the field for unprocessed oil of similar gravity. It is particularly urged that the word “oil” as used in the lease means crude or wet oil, the uncleaned fluid as it comes from the well. The term “net amount” as used in the lease provisions whereby the lessee “agrees to pay to the lessors a royalty of one sixth (1/6) of the net amount of all * * * oil * * * produced and saved * * *” is declared to be expressly defined in the same provision as being that part which remains “after deducting from the gross product the quantity that may be consumed in the development and operation of said property while any of said substances are being produced from said premises and in pumping said product a reasonable distance to a shipping point.”
It is apparent that, if defendant's contention that the word “oil” which occurs approximately 41 times in the lengthy agreement which the parties entered into means, as defendant urges, the crude uncleaned fluid produced and brought to the surface of the earth by the wells drilled for the purpose, the problem presented on this particular appeal is comparatively simple of solution and must be resolved in defendant's favor. We are not, however, impelled to the conclusion that the word was used by the parties to the agreement in the sense for which defendant contends. We are particularly not constrained to accept the contention that, because one provision of the contract contains a covenant on the part of the lessee to pay a designated fractional part of the net amount of all oil produced after deducting from the gross product the quantity consumed in the development and operation of the property, that thereby the parties irrevocably defined “net amount of oil” to mean what remained of the gross volume of well fluid produced from the wells after deducting whatever amount of such fluid that should be consumed in developing and operating the wells. We think that such an argument does not assist us in arriving at the meaning which the parties intended should be conveyed by the term “oil.” We think that the parties did not thereby define the meaning of the term to be the crude uncleaned fluid produced by the wells. We do think that by this provision the parties intended to indicate, and did indicate, that the lessee would not pay a royalty on all oil produced by the wells, and that the one–sixth royalty would be calculated on the portion that should remain after the lessee had taken from the total amount produced whatever amount it might require for the development and operation of the property.
One of the fundamental rules which is applied to the construction of contracts declares that the verbiage employed by the parties in a written agreement is to be understood in its ordinary and popular sense rather than in accordance with strict legal meaning. Section 1644, Civil Code. When this principle is applied for the purpose of attempting to discover what meaning the parties intended the word “oil” should have, it is evident that they meant oil in the ordinary, popular acceptation of the term and that they did not mean the crude fluid that came from the wells containing water and various substances foreign to oil which must be removed before the well product may be put to the uses for which oil is usually employed.
Another fundamental principle of interpretation is the rule of practical construction which gives consideration to the interpretation which the parties to an agreement have by their conduct and action placed upon the language of the contract. It is here conceded that throughout the period under consideration the defendant consistently took samples of the fluid contained in the field tanks for the purpose of ascertaining the percentage of water and sediment which it would deduct from the gross content of the tanks. If the defendant, as it now maintains, was purchasing “wet oil,” there would have been no necessity to take samples whose only purpose was to discover the quantity of oil which it would purchase. The very process of sampling and testing the well fluid indicates that defendant realized that it was purchasing oil, as the term is generally understood, and not an emulsion of oil and water. This was a practical contemporaneous construction of the agreement by the defendant which is entirely different from the interpretation which is now insisted should be given to the language of the contract.
Defendant's second contention is that the methods which it used in sampling and testing the well fluid were methods that were in general use in the particular oil field wherein the leased property is located, and that, since the lease contract contains no provision requiring the use of other methods, its employment of methods that were in general use by purchasers of oil in this particular field was fully justified. In this connection it was shown, and is here conceded, that defendant employed the so–called 3–point method of sampling whereby, after the free water was drained from the well fluid and it had then been deposited in field tanks, samples were taken from near the top, the middle, and near the bottom of such tanks and such samples were then commingled for the purpose of testing to discover the “cut” of the fluid. The evidence presented to the trial court was ample to sustain its finding that the 3–point “method of sampling results in errors of great magnitude in determining the quantity of oil in a tank of ‘wet oil.”’ The trial court further found that “not less than 35% of the ‘cut’ so treated and considered by the defendant as water was in fact oil.” The record shows that this finding that the employment of the 3–point method resulted in an error of not less than 35 per cent. has ample evidentiary support.
With respect to the matter of testing the samples of fluid taken as above described, it was shown that the defendant employed the centrifugal test using benzol as a solvent or diluent for the purpose of breaking down and separating the water in the emulsion that was contained in the sample. The record discloses that evidence was produced which showed that this particular method of testing is erroneous, for the reason that benzol does not actually break down and separate all of the water contained in an emulsion of oil and water and that the error resulting from the use of benzol as a diluent was magnified by defendant's employment of the highly erroneous 3–point method of sampling. The trial court expressly so found, and, since it is apparent that there is evidentiary support therefor, the finding may not be disturbed on appeal.
With respect to defendant's contention that it was justified in employing the 3–point method of sampling and the centrifugal method of testing, using benzol as a diluent, the very recent decision of Meyers v. Texas Company (Cal.Sup.) 59 P.(2d) 132, furnishes a complete answer thereto. The decision is peculiarly apropos to the problems offered on this appeal because of the unusually striking factual similarity to that which is here presented. The action brought in the cited case, like that which was here instituted, was one whereby lessors sought to impeach an accounting rendered by lessees over a period of almost six years of royalties under an oil lease. The oil wells in the Meyers Case, like those in this case, were located in the Huntington Beach oil field, and the lessees employed precisely the same methods of sampling and testing as were employed by the defendant in the instant action. The trial court in the Meyers Case found that the methods of sampling and testing applied by the lessees were not those in general use by oil operators in the particular field where the leased premises were situated and that many other companies used the more accurate methods to which reference was made in the findings. The court also specifically found that the 3–point method of sampling was inaccurate and resulted in an error of 35 per cent. in calculating the “cut” (the amount of percentage estimated to be the basic sediment and water) of the wet oil as recoverable oil. The Supreme Court declared that the findings thus made had sufficient evidentiary support and refused to disturb them. As heretofore noted, our review of the record in the instant action impels the conclusion that similar findings of the trial court have ample evidentiary support and may not therefore be disturbed.
Defendant's third contention is that it was amply justified by custom and usage in employing the observed gravity method for determining the gravity of the royalty oil, and that the trial court's finding that such method is incorrect and erroneous is therefore lacking in proper evidentiary support. The observed gravity method is well described in the decision in Alamitos Land Co. v. Shell Oil Co., 3 Cal.(2d) 396, at page 401, 44 P.(2d) 573. The significant feature of this method and the feature which provoked the contest between the parties as to the correctness of the method is that samples of “wet oil” taken from the field tanks rather than cleaned or dehydrated oil are used for the purpose of discovering the gravity of the oil. Since it is conceded that the uncleaned well fluid from which the samples were taken contained a considerable proportion of water and some sedimentary matter, it is obvious that a gravity test of such samples would disclose a different and less gravity than if the test were employed on samples of cleaned dehydrated oil. The trial court found that the true gravity of the oil produced from the demised premises during the period of time which extended from January, 1926, to the date of trial was 26 per cent., but that defendant throughout such period used the incorrect observed gravity test and consequently accounted to plaintiffs on the basis of oil of lower gravity whereby it resulted that defendant failed to pay plaintiffs the prevailing market price of the royalty oil as defendant was obligated to do by the terms of the lease agreement.
The defendant's complaint with respect to this feature of the case may be summarized as follows: Defendant is obligated by the terms of the lease contract to pay plaintiffs a royalty of one–sixth of the amount of oil produced from the demised premises. Plaintiffs are entitled to take the royalty oil in kind as it comes from the wells in its uncleaned undehydrated state, or they may at their option require defendant to purchase the royalty oil at the prevailing market price therefor. Defendant is not, however, required by any provision of the lease contract to clean the royalty oil and, if plaintiffs elect, as they have consistently done, to sell their share of the oil produced, they are entitled to be paid therefor, not on the basis of clean oil having a certain gravity, but on the basis of wet oil which concededly has a lower gravity than clean oil. When plaintiffs elected to require defendant to purchase the royalty oil and defendant, in compliance with the lease provisions, purchased the oil, the parties to the lease agreement became respectively sellers and buyer of the oil dealing at arm's length, and in such dealings defendant did not act as agent or trustee for plaintiffs or stand in a fiduciary relationship to them.
It is our conclusion that the correct answer to defendant's contention in this regard may be discovered by considering what it was that plaintiffs were selling and defendant was buying. If, as defendant contended throughout the trial and here contends, the subject of their dealings was the crude uncleaned fluid produced by the wells, there is some merit in defendant's argument. If, on the other hand, it was oil in the ordinary acceptation of the term which plaintiffs were selling and the defendant was purchasing, then plaintiffs were entitled to be paid for oil and not for a mixture of oil, water, and other sediment, and they were further entitled to be paid for the correct amount of oil contained in the well fluid on the basis of the gravity not of the “wet oil” but of the clean oil contained in the fluid produced by the wells. We entertain the opinion, as heretofore expressed, that the word “oil” which occurs so frequently in the lease agreement means oil in the ordinary acceptation of this term and not “wet oil” or the crude product of the wells, as defendant maintains, and that the royalty oil which plaintiffs sold and defendant purchased was oil and not a mixture of oil and water. From this it follows that plaintiffs were entitled to be paid for the amount of oil actually contained in the fluid in the tanks on the basis of the true gravity of the oil and not on the basis of the gravity of the fluid which admittedly contained a considerable amount of water. The trial court thus construed the lease agreement in its findings. There is sufficient evidentiary support therefor; hence the findings as to this particular phase of the case may not be disturbed. Meyers v. Texas Company, supra.
Defendant particularly complains that the findings require it to bear the expense of dehydrating or cleaning the well fluid. It is true that the court has expressly so declared in its finding that “defendant is not entitled to charge plaintiffs with any cost of treating or cleaning the fluid produced and the plaintiffs are entitled to be paid the prevailing market price at the well of the gravity of the oil in the fluid produced without deduction for any cost of treating or handling such fluid.” In this connection it may be observed that the evidence showed that the expense of cleaning or processing the well fluid is slight. Evidence was also produced which showed that during most of the time under consideration a bonus of approximately 15 cents per barrel over the posted price was generally paid by buyers of oil. The trial court undoubtedly took the view that such bonus, admittedly not paid to plaintiffs, would offset the slight expense of treating or cleaning the wet oil. We think that no error was committed by the trial court in this conclusion. It is apparent that for the purpose of ascertaining the true gravity of the oil actually contained in the fluid no more would be required than to clean the relatively small samples taken from the tanks.
Defendant's fourth contention is that the trial court erroneously refused to sustain its special defenses of accounts stated and settled, accord and satisfaction, estoppel, waiver, and laches. It is urged that these defenses were established by the uncontradicted evidence which was produced on this feature of the case. The record shows that it was alleged in the complaint and found by the court that plaintiffs are not skilled in matters pertaining to the operation of oil wells and the handling, measuring, gauging, and market value of oil or otherwise dealing with oil, and at all times until the year 1931 believed that defendant was rendering correct reports of the quantity and value of the royalty oil and a correct accounting therefor; that at all times until March 26, 1931, plaintiffs had implicit faith in the honesty and integrity of defendant, and by reason thereof, and also because of their total lack of knowledge of matters pertaining to accounting for oil royalties, plaintiffs accepted as true the monthly reports and accountings and the monthly remittances paid them by defendant and that defendant knew of plaintiffs' unfamiliarity with the operation of oil wells and realized that plaintiffs accepted its monthly reports and remittances in the belief that they represented true and correct accountings for the royalty oil. It is further found that defendant was required by the terms of the lease agreement to determine accurately the quantity of royalty oil and its correct gravity and to render correct monthly reports showing the true value of the entire quantity of such oil, that defendant failed in the performance of this duty, and its failure in this regard resulted in an unjust enrichment of defendant at the expense of plaintiffs. It is also specifically found that, by reason of plaintiffs' acquiescence in the monthly reports and their acceptance of monthly remittances, defendant did not treat the same as accounts stated nor have they constituted accounts stated, and that defendant has not destroyed and data upon which such monthly reports and accountings were based or permitted employees who had compiled such data to sever their connections with defendant or their whereabouts to become unknown so that it is now difficult to restate from original records or competent testimony the truth of any facts upon which the monthly statements were based. It is further found that it was not until the month of March, 1931, that the plaintiffs ascertained the possibility that erroneous methods had been used in determining the quantity and gravity of their royalty oil through the employment of a certain firm of engineers, and that theretofore nothing had been called to their attention which in any respect caused them to be suspicious of defendant or dubious regarding its methods of rendering accounts or the correctness of its reports.
It is evidently the theory of the complaint and of the findings that the defendant concealed facts from the plaintiffs and induced them by its concealment and representations to accept statements that were not true. It is correctly stated in Meyers v. Texas Company, supra, 59 P. (2d) 132, at page 136, that “it is a rule well recognized that, where the account has been accepted as the result of any mistake or fraud or undue advantage, a court of equity will not suffer it to defeat the rights of the innocent party, but will allow it to be opened and examined.” It may be observed that the complaint in the present action was filed on June 18, 1932, which was well within the time after it is found that plaintiffs discovered the concealment. It is our conclusion that on the state of facts presented by the record herein the trial court did not err in its refusal to entertain the various special defenses alleged by defendant. Meyers v. Texas Company, supra.
It is here urged by defendant that the trial court erred in allowing interest because no demand was shown to have been made and the damages were not capable of being made certain by calculation. This precise contention was advanced by the appellant in Meyers v. Texas Company, supra, and was expressly denied at page 136 of the opinion. On the authority of this case and for the reasons therein set forth we hold that defendant's complaint respecting the allowance of interest is not sustainable.
Defendant's final complaint is that the amount of damages awarded to plaintiffs by the judgment is not supported by the evidence, and particularly that the evidence upon which the allowance of damages is based is too speculative and uncertain to sustain the award. While it is true that, because of the absence of original data, the amount of royalty oil recovered during the earlier years of the period under consideration had to be estimated by a process of reconstruction of past conditions which conceivably may not have presented an absolutely correct picture of such conditions, we are not for this reason disposed to disturb the trial court's award. There is here no uncertainty as to the cause of the damages sustained by plaintiffs. The reason for the loss incurred by them is defendant's failure to have employed correct methods of sampling and testing the royalty oil and its erroneous accounting to plaintiffs based on the gravity of wet oil rather than on the gravity of dehydrated oil. The cause of damage is therefore not speculative or uncertain. On the contrary, it is certain and definite. The only uncertainty that exists is as to the extent of damage. The complaint that the amount of damage is not capable of exact measurement comes with poor grace from one who has caused the loss through its failure to perform properly the obligations of the lease agreement. Defendant may not thus escape liability for the loss which its acts have caused. 17 Cor. Jur. pp. 756, 757; Sobelman v. Maier, 203 Cal. 1, 11, 262 P. 1087; Northern Light Co. v. Blue Goose Co., 25 Cal.App. 282, 293, 143 P. 540; Pye v. Eagle Lake Lumber Co., 66 Cal.App. 584, 590, 227 P. 193.
Because of defendant's insistence that a reversal of the judgment herein is demanded by the decision in Alamitos Land Co. v. Shell Oil Co., 3 Cal. (2d) 396, 44 P.(2d) 573, 575, we are constrained to point out certain matters which, in our opinion, distinguish the problems here presented from those which were offered in the cited case.
In the first place, as was remarked in the more recent decision of Meyers v. Texas Co., supra, at page 136 of 59 P.(2d) no complaint was made concerning the method employed in sampling the royalty oil in the Alamitos Case. It has heretofore been noted herein that the employment of the 3–point method of sampling was questioned in the Meyers Case and that it was there decided that the evidence was ample to sustain the trial court's finding that this particular method was erroneous and resulted in an error of 35 per cent. of the amount of oil recoverable from the estimated “cut” of the well fluid. With respect to the feature of erroneous sampling the Meyers Case is therefore directly in point and furnishes ample authority for sustaining that part of the judgment which permits recovery of the specified damages which the trial court found had resulted from the erroneous sampling and testing methods employed by defendant.
With respect to the amount awarded plaintiffs in the instant action by way of damages which were found to have resulted from defendant's employment of the observed–gravity test for discovering the gravity of the royalty oil, the Alamitos Case, at first blush, seems to sustain defendant's contention that the award thus made is improper since the cited case appears to grant judicial approval to the employment of the observed–gravity test in a situation similar to that which is here presented. It is our conclusion, however, that there are certain features of factual differentiation which distinguish the two cases and which render the decision in the Alamitos Case inapplicable to the problem here offered.
In the Alamitos Case the lease agreement obligated the lessee to pay the lessor, if the latter exercised its option to require the former to purchase the royalty oil, “the current price paid by the Lessee for oil of like grade and gravity at the wells of production in the same vicinity.” The trial court expressly found that during the period under consideration the major portion of the oil produced in the particular oil field where the oil was produced was purchased by the lessee, Shell Oil Company, and certain other designated oil companies, and that during the whole of the time in question these companies had paid for the oil purchased upon the “observed gravity–net quantity” basis irrespective of the percentage of water and sediment therein. The Supreme Court held that a finding of this character was sufficient to establish that it was the prevailing custom in the particular oil field where the wells were located, which was the Signal Hill field, to purchase oil on the basis of its observed gravity, and that it was entirely sufficient to establish that the lessee had accounted to the lessor on the basis of the current price paid by lessee for oil of like grade and gravity at the wells of production in the vicinity. It was therefore held that the lessee had fully complied with the duty imposed upon it by the lease contract and could not be subjected to further liability.
In the instant case, the lease contract obligated the defendant to purchase the royalty oil of plaintiffs “at the prevailing market price of such product at the well,” and the prevailing market price is defined to be “the market price at the well prevailing from time to time when the royalty oil would be deliverable hereunder if same were not purchased by the lessee, for oil purchased in the oil field in which the demised premises are situated of similar gravity or gravities as that produced from the demised premises.” It is apparent therefore that, in order to discover whether or not the defendant had complied with its obligation to pay the prevailing market price for the royalty oil, it was necessary to discover what price was paid for oil of similar gravity produced in the Huntington Beach field from time to time during the period under investigation.
The trial court found that there was no custom or practice in the Huntington Beach field to pay lessors for oil on the basis of its “wet gravity.” There is evidence in the record which supports this finding, hence it may not be disturbed. We therefore have in the instant case a finding which possesses evidentiary support expressly negativing the existence of a trade custom among purchasers of oil in the Huntington Beach field to purchase the commodity on the basis of observed gravity. This is essentially different from the above–mentioned finding in the Alamitos Case which the reviewing tribunal held was sufficient to establish the existence of a custom in the Signal Hill field to purchase on the observed gravity basis.
Again in the Alamitos Case it is declared that the uncontradicted evidence showed that the lessee had rendered to its lessor the exact accounting which it made to all others with whom it occupied the relationship of lessee and to all others from whom it purchased wet oil. In other words, according to the undisputed evidence, the Shell Oil Company had dealt with all others from whom it purchased oil during the period under consideration on the basis of the gravity of wet oil. It was therefore properly decided that the Shell Oil Company had fully performed the obligation of its agreement to pay to its lessor the current price which it paid for oil of like grade and gravity at the wells of production in the same vicinity. In the instant case the defendant's obligation is not to pay the current price which it paid for other oil of like grade and gravity. It's obligation is to pay the prevailing market price which is expressly stated to be the prevailing market price paid for oil produced in the same field and having similar gravity or gravities to that produced from the demised premises. The defendant in the instant case had therefore a different and more difficult burden to sustain in order to establish its defense that it had rendered true and correct accountings in accordance with its lease obligations. It could not simply show that it had dealt with all others from whom it purchased oil on the basis of the gravity of wet oil and rest with that showing. It had to go further and show that throughout the entire period which was being considered it had consistently paid to plaintiffs the prevailing market price for oil of similar gravity produced in the same field. The peculiar wording of the lease contract required that it pay a price which could only be established by showing what other purchasers of oil paid for oil of like gravity. If other purchasers dealt with their sellers on the basis of the gravity of clean oil and paid accordingly, then defendant's obligation under its contract was to deal with plaintiffs on the same basis. When the trial court found that it was not the custom or practice in the Huntington Beach field for lessees to pay their lessors on the basis of wet gravity and further found that “wet oil” is not deemed to be marketable oil in the oil industry until it has been so treated that it contains not more than 3 per cent. of water or other foreign substances, the court in effect found that defendant had not sustained the burden of showing that it had dealt with plaintiffs on the same basis as other lessees had dealt with their lessors in purchasing oil produced in the Huntington Beach field. Since the above–mentioned findings are not lacking in evidentiary support, it is apparent that defendant, unlike the Shell Oil Company in the Alamitos Case, has not sufficiently sustained the heavier burden of proof imposed upon it by the peculiar wording of its contract.
It should further be noted that, in the instant action, the trial court has expressly found that, at all times since January, 1926, the defendant has caused the fluid produced from the various wells on the demised premises, whether the same as produced was clean oil or “wet oil,” to be commingled in tanks and thereupon tested the fluid or “wet oil” resulting from such mixing process for the purpose of ascertaining the gravity of the oil as a basis for making the monthly payments to plaintiffs for the royalty oil. This finding is likewise not lacking in evidentiary support and presents another feature of factual differentiation from the situation which obtained in the Alamitos Case.
It is therefore our conclusion that the decision in the Alamitos Case is not, because of the various points of material distinction, controlling upon us in our decision of the present action. It is evident from our frequent citation of the case of Meyers v. Texas Company, supra, that we regard this later decision as more nearly applicable to the problems which are here presented and that we consider it to be determinative of these problems. In this connection, it is only fair to discuss a marked point of distinction between the Meyers Case and the present proceeding.
The differentiating feature which we have in mind has to do with the obligation imposed upon the respective defendants in the two cases in the matter of accounting for royalty oil purchased by them in accordance with the provisions of their lease contracts. In the Meyers Case the lessee was authorized, if the lessor did not elect to take its royalty share of oil, “to handle, market, sell and/or otherwise dispose of said royalty oil, with and as a part of the products belonging to the lessee, and pay to the lessors in money, the proceeds thereof, less cost of handling after leaving tank or container, * * * but in no event shall it pay lessors less than the Standard's posted market price.” It is obvious that the obligation thus imposed is different from that which is imposed upon defendant in the instant case which is simply to pay the prevailing market price for oil of like gravity produced from wells in the same field. That the defendant's obligation in the Meyers Case was deemed to be a matter of some importance in its decision is made evident by the following language which occurs at page 134 of the opinion in 59 P.(2d) by Mr. Justice Thompson: “There can be no doubt that, in so far as sampling is concerned, the finding is amply justified by the evidence, and, although the specific finding is not attacked, we might doubt the implied reference to the method of testing by benzol or carbon bisulphide during the period here in question, if the method were involved in the purchase of oil, but, as we have already observed, the trial court proceeded upon the theory that defendant here was bound to account for the proceeds of the oil, rather than being obligated to purchase.” (Italics ours.)
Having in mind the above–mentioned point of difference in the obligations of the respective lessees in the two cases, it is proper to consider whether or not this feature is sufficient to impel the conclusion that the decision in the Meyers Case is not determinative of the various contentions raised by the defendant on this appeal. Consideration of this question may be assisted by more detailed reference to certain findings which have heretofore been mentioned.
The trial court found that plaintiffs at all times during the period in question were entirely unfamiliar with and inexperienced in matters that concerned the operation of oil wells and in the details of the oil industry including the various methods that are in use in said industry for sampling, testing, and gauging oil and for determining the gravity of oil. The court also found that until March 26, 1931, plaintiffs had implicit faith in defendant's honesty and integrity, and because of this fact, and further because of their total lack of knowledge of matters pertaining to accounting for oil, they accepted as true and correct defendant's monthly reports and accountings and the monthly remittances paid to them. It is further expressly found that the defendant knew that plaintiffs were entirely unfamiliar with the aforementioned matters relating to the oil industry and to the matter of accounting for oil, and that plaintiffs accepted its reports and remittances because they had implicit faith in its honesty and integrity and that defendant rendered its monthly reports and made its remittances to plaintiffs with the purpose and intent that plaintiffs should receive and accept them as true and correct, and that at no time did defendant inform plaintiffs that its various reports and accountings were based on incorrect methods of sampling and testing and that the royalty oil really had a higher gravity than its reports showed. It is further found that the rendering of incorrect statements respecting the quantity and gravity of royalty oil misled plaintiffs into believing that defendant was paying them the true amounts which were due them for their royalty oil, and that, although plaintiffs on a number of occasions visited the leased premises and although it would have been possible for plaintiffs sooner to have discovered the incorrectness of the various statements and reports rendered by defendant, nevertheless, because of their lack of experience and understanding in all matters relating to the oil industry and because of their faith in defendant's honesty, they relied upon the statements furnished them by defendant and accepted the monthly payments based on such statements in the belief that they were correct. Various other lengthy and elaborate findings deal with the inaccuracy of the sampling and testing methods used by defendant for discovering the quantity of oil present in the fluid produced from the wells and the incorrectness of the method which it employed for ascertaining the gravity of the royalty oil and the erroneousness of the monthly statements and remittances based thereon due to the employment of the aforesaid inaccurate and incorrect methods of sampling, testing, and gauging.
Examination of the record impels the conclusion that the various findings to which reference is here made and others to the same general effect are not lacking in evidentiary support. It is apparent from them that there is not here presented the ordinary situation of a buyer and seller dealing at arm's length and on a plane of equal knowledge. On the contrary, we have sellers who are entirely ignorant, unskilled, and inexperienced in the various details of an industry placing implicit faith in the honesty and integrity of a buyer who is fully familiar with all details and matters relating to the industry and who knows that the sellers repose entire confidence in representations that it may make concerning the quantity and gravity of the peculiar product which is the subject of sale. Under these circumstances we conceive that the duty of rendering true accountings, based on the employment of correct and proper methods for determining quantity and gravity of the product, is as much imposed on the buyer as if it had agreed that it would handle, market, and sell the product and pay to the buyers the money which it received as proceeds of the sale of the product. We find no distinction in principle, therefore, between the situation which obtained in the Meyers Case and that which is here presented, and the reasoning of the cited decision appeals to us as being entirely applicable to the facts here disclosed.
Appeal of Plaintiffs.
As heretofore noted, this appeal is only from that portion of the judgment which denies to plaintiffs recovery for any amount due them for that part of the royalty oil for which no payment was made prior to June 18, 1928. The trial court expressly found that defendant's failure to account to plaintiffs for royalty oil constituted a breach of the lease agreement between the parties and that recovery for any breach that occurred more than four years prior to the commencement of the action is barred by subdivision 1 of section 337 of the Code of Civil Procedure. The contention of plaintiffs on their appeal is that the evidence which was produced during the trial was sufficient to convict the defendant of constructive fraud and that, if this claim be denied, the evidence was nevertheless sufficient to show that the monthly payments for royalty oil purchased by defendant were received and accepted by them in the mistaken belief that they constituted true and correct payments and in either event the trial court was in error in holding that their claim for that part of the oil purchased prior to June 18, 1928, was barred by the above–mentioned statute.
In connection with the contention thus advanced, it should be observed that the trial court has specifically acquitted the defendant of actual fraud by finding that defendant at all times believed in good faith, though erroneously, that it was entitled to pay plaintiffs on the observed gravity–net quantity basis, using the 3–point sampling and centrifugal test with benzol as a diluent and that defendant's acts in employing such methods did not constitute fraud. The record discloses that these findings have evidentiary support and they may not therefore be disturbed.
Constructive fraud is defined in section 1573 of the Civil Code as “any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault * * * by misleading another to his prejudice.” Constructive fraud most frequently arises from a breach of duty where a relationship of trust and confidence exists. Darrow v. Robert A. Klein & Co., Inc., 111 Cal.App.310, 315, 295 P. 566. The trial court here found that plaintiffs had implicit faith in the honesty and integrity of defendant. This is not, however, sufficient to make out a fiduciary relationship. There must be more than mere confidence in another's honesty and integrity to sustain the presumption of constructive fraud. Jackson v. Gorham, 98 Cal. App. 112, 116, 276 P. 391; Wilson v. Zorb (Cal.App.) 59 P. (2d) 593. It is our conclusion that the facts and circumstances developed by the evidence which was produced during the trial fail to show that defendant was guilty of constructive fraud.
We likewise entertain the opinion that the evidence is insufficient to disclose the existence of mistake that would make applicable the provisions of subdivision 4 of section 338 of the Code of Civil Procedure. This statute prescribes that no action for relief on the ground of fraud or mistake may be commenced when a period of three years has elapsed after discovery by the aggrieved party of the facts constituting fraud or mistake. For a proper consideration of the applicability of the above–mentioned statute to the instant case it is necessary to determine the real nature of the cause of action which was here instituted. Examination of the complaint wherein plaintiffs disclosed their cause of action indicates that it was one for breach of contract. Throughout the trial of the action plaintiffs consistently maintained that they were entitled under the lease to be paid for their royalty oil the prevailing market price of clean or dehydrated oil and the defendant by the employment of erroneous and incorrect methods of sampling and testing had not fulfilled its contract obligations. True, they claimed that defendant had defrauded them and sought to impeach the monthly accountings which defendant had rendered on the ground that defendant had acted fraudulently and in bad faith in making such accountings. The charge of fraud was, however, incidental to the real purpose and object of the suit which was to recover for breach of contract. It may be noted in passing that the complaint contains no proper allegation of mistake and no relief is demanded on this ground. Where a cause of action is founded upon an alleged mutual mistake, it is necessary that the complaint contain appropriate allegations thereof. Bradbury v. Higginson, 167 Cal. 553, 140 P.254; Harding v. Robinson, 175 Cal. 534, 166 P. 808; Quality Bldg. & Sec. Co. v. Bledsoe, 125 Cal.App. 493, 498, 14 P.(2d) 128. The record herein shows that the plaintiffs alleged, and throughout the trial maintained, that defendant was obligated by the terms of the lease contract to pay for the royalty oil which it purchased on the basis of the gravity of clean oil and on the quantity of such oil correctly determined by the employment of proper methods of sampling and testing. The trial court interpreted the lease in accordance with the contentions thus advanced by plaintiffs, but specifically acquitted defendant of the charge of fraud or bad faith in its dealings with plaintiffs. We think that such acquittal is not unsupported by the evidence. We also entertain the opinion that the court applied the proper statute of limitation and denied recovery of any shortages that occurred prior to June 18, 1928.
For the reasons stated herein, the appeals of both parties to the action are disallowed, and the judgment is in all respects affirmed.
We concur: BARNARD, P. J.; MARKS, J.