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District Court of Appeal, Second District, Division 2, California.


Civ. 15324.

Decided: October 25, 1946

L. A. Gibbons, Jerry H. Powell, and Douglas C. Gregg, all of Los Angeles, and Brobeck, Phleger & Harrison, Maurice E. Harrison, and Moses Lasky, all of San Francisco, for appellant. Cross & Brandt, of San Francisco, for respondent.

This is an action for declaratory relief brought for the purpose of obtaining a judicial construction of a clause in a document, hereinafter referred to as the ‘supplemental contract,’ which amended an oil and gas lease made by respondent to appellant's predecessor. Findings and judgment were in favor of defendant and plaintiff has appealed.

By an agreement dated April 8, 1936, respondent leased to Sovereign Oil Corporation a tract of land containing approximately 6700 acres in Santa Barbara County for the production and extraction therefrom of oil, gas and other hydrocarbon substances. Subsequently defendant Pacific Coast Railway Company became a party to the lease by reason of its ownership of an 80-foot strip of land extending across a portion of the leased premises. It was named as a defendant in the action but permitted its default to be entered and is not a party to this appeal.

A detailed statement of the drilling provisions of the lease, the negotiations leading to the execution of the supplemental contract modifying the lease, the allegations in the pleadings, and the proceedings had at the two trials, including statements of counsel for appellant, is necessary in order to afford an understanding of the questions raised by the appeal.

The lease required the drilling of discovery wells and provided that if oil or gas should be found in paying quantities the lessee should continue to drill additional wells on the property until one well for each 10 acres should have been completed in the zone which oil or gas was found in paying quantities. Paragraph 7 of the lease contained the following provision: ‘After the discovery of oil or gas in paying quantities on the demised premises, Lessee agrees to continuously operate one string of tools with due diligence for the first year after such discovery, two strings of tools for the second year after such discovery, three strings of tools for the third year after such discovery, four strings of tools for the fourth year after such discovery, and five strings of tools thereafter until the drilling requirements herein specified are complied with. Lessee may defer the commencement of the next well to be commenced with each string of tools to be operated hereunder for a period of not to exceed three months after the completion of the well next preceding the well drilled with that particular string of tools. The Lessee shall be entitled to drill as many additional wells on said land and premises as it desires.’

The lease contained suspension privileges which permitted the lessee to refrain from drilling additional wells (1) while the value of oil of the quality produced from the land was 60 cents or less per barred at the well; (2) when there was no available market for the oil at the well at such price; (3) while the lessee was prevented from complying with the lease by strikes, lockouts, action of the elements, accidents, rules and regulations of any federal, state, municipal or other governmental agency, or other conditions beyond the control of the lessee; (4) in the event that the lessee should be obligated to curtail production by reason of any valid order, rule, law, or regulation of any federal, state or other governmental subdivision, and in the event that such curtailment rendered it impossible for the lessee to drill wells and produce oil at a profit.

Prior to February 1, 1940, E. H. Moore, Inc. (hereinafter referred to as ‘Moore’), succeeded by assignment to all the rights of the Sovereign Oil Corporation in and to the lease. Following the latter assignment negotiations, both oral and in writing, which will be referred to in detail hereinafter, were entered into between Moore and respondent resulting in a modification of the lease in the particulars set forth in the supplemental contract dated February 1, 1940, which provided that (1) all obligations to drill additional wells, except offset wells, were suspended for two years after said date; (2) ‘at the expiration of said two-year period, Moore shall be obligated to complete three wells per year;’ (3) the requirement as to offset wells was modified so as to provide for the drilling thereof when wells on adjoining property were drilled within 330 feet of the property line of the leased premises instead of 250 feet therefrom, as provided in the original lease; (4) commencing with the date of the supplemental contract, Moore was obligated to pay a minimum royalty of $25,000 per year, payable monthly in advance, which was to be charged against the total oil reserves during the life of the lease; that is to say, Moore would be entitled to all oil and gas produced from the lease, or the proceeds thereof, until fully reimbursed from the lessor's one-eighth royalty interest for the minimum royalty so paid; (5) ‘except in so far as the provisions of the lease of April 8, 1936, are in conflict herewith, the same shall remain in full force and effect.’

Thereafter the lease as modified was assigned to appellant. On or about June 22, 1942, respondent served on appellant a notice of default, reciting that the latter was not operating continuously two strings of tools on the leased promises, the neglect so to do constituting a failure on the part of appellant to comply with the terms and conditions of paragraph 7 of the original lease above quoted, and notifying appellant that if such failure continued for ninety days after the date of the notice the lease would terminate and the lessee's right to drill additional wells on the lease would be forfeited.

A controversy having arisen concerning the effect of the above mentioned clause (2) of the supplemental contract pertaining to the number of wells required to be drilled during each year after February 1, 1942, and the relation of said clause to the drilling provisions in the original lease, this action was brought.

After setting forth the fcts relating to the execution of the original lease and its modification by the supplemental contract, the complaint alleged that defendant claimed that the supplemental contract did not modify the drilling obligations contained in paragraph 7 of the original lease except to provide for a suspension of the drilling obligations for a period of two years and to provide that plaintiff should complete at least three wells in each year after February 1, 1942; on the other hand plaintiff claimed that the drilling obligations were modified by the supplemental contract so as to obligate plaintiff to complete only three wells in each year in lieu of the continuous operation of any specified number of strings of tools, and that upon the completion of three wells during each year until the drilling requirements of the ease were fully complied with plaintiff would be deemed to have performed fully the drilling obligations of the original lease as amended by the supplemental contract.

The prayer of the complaint was (1) that defendant be enjoined from terminating the original lease as amended and modified and from interfering with the operations of plaintiff upon the leased lands, and (2) that the court adjudge and determine ‘the rights, liabilities, duties, responsibilities and legal relations of the parties hereto with respect to the drilling of wells under and pursuant to said original lease as amended and modified by said supplemental contract.’

An answer was filed and the case came on for trial on October 13, 1943. To a question propounded to a witness relating to the negotiations leading up to the supplemental contract respondent's counsel offered an objection ‘to any extrinsic evidence seeking to construe an interpretation of the contract on the ground that the contract is plain, that extrinsic circumstances or parol evidence is inadmissible to vary or interpret the instrument, and on the ground that it is incompetent, irrelevant and immaterial.’ The court sustained the objection, saying in the course of stating its reasons: ‘It is also the rule whether or not the contract is ambiguous or is not ambiguous on its face is a question of law to be determined by the Court. Going over the lease, paragraphed 7 thereof, and paragraph 2 of the supplemental agreement, I am at a loss to find any ambiguity upon the face of the contract or lease or the supplemental agreement of a later date than the lease.’

The significance of the objection to extrinsic evidence and of the remarks of the trial judge, coupled with the offer of proof following the ruling of the court, will appear in the discussion of the questions raised by the appeal.

Upon the sustaining of the objection to evidence offered on behalf of appellant the latter's counsel made an offer of proof as follows: In October, 1939, Villard Martin, Moore's attorney and authorized representative, came to California from Oklahoma and conferred with the president of respondent company who referred him to T. A. Twitchell, who was then its attorney and counsel, for the purpose of discussing a modification of the drilling requirements contained in paragraph 7 of the lease. At that time the price of oil of the quality produced from the leased lands was 45 cents per barrel. The two attorneys arrived at a tentative plan providing: (1) For the suspension of all drilling operations for two years; (2) after the two-year suspension Moore would be required to drill only three wells per year and then only if the price of oil was more than 60 cents per barrel at the well, with the other drilling exemptions hereinbefore outlined; (3) that wells should be drilled only on the proved area which consisted of 400 acres, and Moore was not to b be required to drill on the remaining 6300 acres unless oil was discovered thereon, or a adjacent property, thus indicating that oil could probably be discovered in the unproved area. Twitchell sent a written memorandum of the discussion with his recommendations to respondent and a copy to Martin. The latter returned to California in December, 1939, for the purpose of continuing the negotiations and found that shortly after the foregoing tentative plan had been arrived at the management of respondent had changed, and a new president, Roland Tognazzini, was in charge of its affairs. Martin and Tognazzini had a conference in the presence of two directors of respondent in which Martin said that Moore intended to construct a refinery but did not desire to expend money therefor unless he could secure relief from the drilling requirements of the lease which he might be unable to fulfill. After an extended discussion between them Martin returned to Oklahoma. Thereafter Martin wrote to Tognazzini outlining certain modifications of the lease which Moore desired. Tognazzini replied under date of January 16, 1940, suggesting four amendments in the form subsequently incorporated in the supplemental contract, and hereinbefore set forth. On January 25 Moore wrote to Tognazzini requesting additional modifications. Tognazzini replied on January 27 that the concessions asked for by Moore operated unilaterally in the latter's behalf and declined to consider his request but referred to his, Tognazzini's, previousl letter and stated that if Moore desired a ratification thereof by respondent's board of directors, a meeting of which was to be held on January 31, Moore should signify his acceptance before that date. On January 29 Moore wrote to Tognazzini that the previous proposition made by the latter was accepted, and stating that ‘I will request Mr. Martin to prepare a modification of the lease embodying the principles contained in our correspondence and forward it to you within the next day or two.’ By a letter of February 1, Tognazzini notified Moore that respondent's board of directors had ratified the modifications contained in Tognazzini's letter of January 16 and accepted by Moore on January 29. The last letter was followed by the signing of the supplemental contract dated February 1, 1940, which is the subject of this action.

To the foregoing offer of proof and to the evidence proffered thereby respondent's counsel objected on the ground that it was incompetent, irrelevant and immaterial, and that ‘the lease and supplemental contract are plain on their face and that none of the proposed testimony is admissible.’ The objection was sustained. Then followed a discussion with reference to the preparation of findings in which counsel for appellant said, among other things: ‘We must give this contract under the code sections a construction that will be reasonable * * *. Our construction of the contract is, the paragraph of the supplemental contract, is that it is our obligation to complete three wells per year, and that that paragraph is a substitute for a former drastic provision, and is a reasonable compensation for that drastic monetary consideration.’ Counsel further stated that ‘the court should receive evidence of surrounding circumstances and see if the language used doesn't place on us an additional obligation over and above our obligation contained in the original lease.’ Other discussion by appellant's counsel with reference to the evidence offered for the purpose of aiding the court in the construction of the supplemental contract treated the latter as the only contract which operated to modify the original lease, and no claim was then made by counsel for appellant, as they now assert in their briefs, that the proposal made by Tognazzini on January 16, and its acceptance by Moore on January 29, of themselves constituted a binding contract between the parties or that the formal supplemental contract was surplusage.

On November 18, 1943, plaintiff gave defendant a notice of motion for leave to file an amendment to the complaint, a copy of which was served with the notice, upon the following ground: ‘* * * that in the light of the court's ruling that evidence would not be received of the circumstances surrounding, and the negotiations leading up to, the execution of the Supplemental Contract referred to in the complaint, the ends of justice require that plaintiff be permitted to set up the facts showing if there is no ambiguity apparent on the face of the contract which is the subject of the action, to-wit, the Original Lease, as amended and modified by said Supplemental Contract, then the ends of justice require that plaintiff be permitted to put in issue a mistake or imeprfection of the said contract as provided in Section 1856 of the Code of Civil Procedure, so that the aforesaid evidence may be admitted and the case heard on its merits, pursuant to Section 473 of said Code of Civil Procedure, and the rules of procedure obtaining in equitable proceedings.’

The proposed amendment to the complaint consisted of a second cause of action in which the oral negotiations and the exchange of letters which resulted in the signing of the supplemental contract were set forth substantially in the same form as contained in the offer of proof which has been outlined at length. The court granted leave to file the amendment and respondent filed its answer. The amendment did not contain a prayer for relief.

When the case came on the second time for trial on June 5, 1945, counsel for appellant made an opening statement outlining the evidence which he expected to offer on behalf of appellant. He referred to the letters which were exchanged between the parties ‘until they came to an agreement at which time an agreement known as the Supplemental Contract to the Original Lease was executed. Now as your Honor will recall, the language contained in the Supplemental Contract has to be reconciled with the language contained in the Original Lease. For the purpose of reconciling that language and of interpreting the Supplemental Contract, we have set up in our Amended Complaint the negotiations and letters that led up to the making of the agreement in order to put the Judge trying the case—Section 1860 of the Code of Civil Procedure provides—in the position of the parties in order that he may properly interpret the agreement and determine what was intended by the amendment to the lease.’

When evidence of the oral negotiations and of the written communications passing between the parties was offered respondent's counsel objected on the ground that it was incompetent, irrelevant and immaterial and was an attempt by parol to vary the terms of a written contract. Appellant's attorney again argued that the evidence was admissible to explain an ambiguity, but that even though there were no ambiguity on the face of the contract the court was entitled to know the circumstances of the parties and those surrounding the object of the contract, that is, the preliminary negotiations and circumstances leading to its execution, in order better to interpret it. The objection was overruled and the evidence outlined in the offer of proof made at the first trial was admitted.

This extended review of the proceedings is given in order that it may appear clearly that the theory of the case as presented by appellant in the trial court was that the meaning and effect of the supplemental contract was in dispute, and that we are asked to review the case and to reverse the judgment on an entirely different theory, to wit, that the real contract between the parties was created by two letters that anteceded the supplemental contract.

1. The theory tendered by appellant in the briefs on appeal relating to the supplemental contract is not the theory on which the case was tried. Although the case was presented to the trial court on the hypothesis that the supplemental contract was ambiguous and uncertain and that evidence was required to enable the court to discover and declare its true meaning, appellant asserts on appeal for the first time that the supplemental contract is not the contract that is sought to have construed; in fact, that it is not a contract at all, but that, as stated in its brief, ‘the letters of January 1940 were not merely negotiations but were themselves a complete and binding agreement’ and constitute the real and the only contract modifying the lease. Notwithstanding (1) that the prayer of the complaint asked the court to determine the rights and liabilities of the parties under the lease as amended by the supplemental contract; (2) that the motion for leave to amend the complaint referred to that contract and not to the letters; (3) that the case was tried, extrinsic evidence was presented and arguments were made to the trial court to assist the court in determining the meaning of the supplemental contract and to aid in its construction; and (4) that by its judgment the court determined the effect of the provisions of the supplemental contract upon the drilling requirements of the original lease, this court is now asked to disregard that contract as ineffective, inoperative and nonexistent and to consider the letters as constituting the only contract modifying the lease.

The complaint represented the controversy of the parties to be with reference to the particulars in which the supplemental contract of February 1, 1940 modified the original lease. It was not alleged in the complaint nor was it claimed at either of the trials that the letters passing between Tognazzini and Moore constituted a contract. The letters were not mentioned in the complaint and when they, with testimony relating to previous negotiations and correspondence, were offered in evidence at the first trial counsel for appellant stated that ‘the court should receive evidence of the surrounding circumstances' for the purpose of determining to what extent the obligations of the parties under the lease were modified by the supplemental contract. The prayer of the complaint referred not to the letters but to the supplemental contract. At the first trial the offer of proof of the negotiations and correspondence was expressly stated to be for the purpose of explaining an ambiguity claimed to have been created by the supplemental contract, and the entire argument upodn respondent's objection to the reception of the evidence contained in the offer of proof centered upon that contract.

The notice of motion for leave to file the amended complaint was upon the ground that ‘the circumstances surrounding and the negotiations leading up to the execution of the supplemental contract’ should be before the court, and that if there were no ambiguity in the original lease as modified by it then plaintiff should be permitted ‘to put in issue a mistake or imperfection in the said contract.’ (Mistake was not pleaded in the complaint or in the amendment.) The amendment to the complaint contained allegations of the oral negotiations and the correspondence preceding the execution of the supplemental contract, and at the second trial appellant's counsel, in his opening statement, referred to the negotiations and correspondence and to the execution of ‘an agreement known as the supplemental contract,’ stating that it was necessary that the language contained in the latter be reconciled with the provisions of the original lease, and that ‘for the purpose of reconciling that language and interpreting the original contract’ the negotiations and letters leading to the execution of the supplemental contract had been pleaded in the amendment to the complaint.

The action was commenced more than four years ago. The record on appeal contains nothing to indicate that at any time during its progress through the trial court was the suggestion made that the proposal of Tognazzini and its acceptance by Moore created a contract. We give no consideration to references in appellant's reply brief to arguments that may have been made to the trial court or to other matters that do not appear in the record before us. The contention that the letters of January, 1940, were not merely a part of the prolonged negotiations for a modification of the lease ‘but were themselves a complete and binding agreement’ appears nowhere in the pleadings or in plaintiff's motions but has been presented for the first time in appellant's opening brief on appeal.

The theory of a case as presented by the pleadings and upon which it is tried determines the course of the action and must be adhered to throughout the proceedings until the conclusion of the case on appeal. A different practice would be unfair to the trial court and unjust to the opposing litigant. Ernst v. Searle, 218 Cal. 233, 240, 22 P.2d 715; Sanborn v. Pacific Mutual Life Ins. Co., 42 Cal.App.2d 99, 106, 108 P. 458; Coy v. E. F. Hutton & Co., 44 Cal.App.2d 386, 391, 112 P.2d 639; Foti v. Morrissey, 57 Cal.App.2d 328, 331, 134 P.2d 51;, Mathews v. Pacific Mutual Life Ins. Co., 47 Cal.App.2d 424, 428, 118 P.2d 10; Durkee v. Chino L. & W. Co., 151 Cal. 561, 571, 91 P. 389; Kaufman v. Tomich, 208 Cal. 19, 26, 280 P. 130; Gibson Properties Co. v. City of Oakland, 12 Cal.2d 291, 299, 83 P.2d 942; Merrill v. Kohlberg, 29 Cal.App. 382, 386, 155 P. 824; Salmon v. Allen, 1 Cal.App.2d 115, 120, 36 P.2d 153. An appellate court will consider only such points as were raised in the trial court, and a party is precluded from asserting on appeal claims to relief not asserted nor asked for int he court below. Hayward Lumber & Inv. Co. v. Ford, 64 Cal.App.2d 346, 354, 148 P.2d 689.

The issues to be determined by this court are to be ascertained from the pleadings, augmented and emphasized by the purpose of the offer of extrinsic evidence as expressed by appellant's counsel, from the grounds upon which appellant's motion for leave to file the amendment to the complaint was based, and from the arguments made to the trial court, in so far as shown by the record, concerning the admissibility of the evidence. Having adhered throughout the proceedings to the theory that the negotiations and the correspondence were necessary for the single purpose of dispelling an ambiguity in the supplemental contract, appellant will not now be permitted to assert that the letters referred to had a different purpose, to wit, the creation of a new contract, or that the judgment should be reversed upon a theory not stated nor even intimated in the trial court and which the trial judge consequently had no opportunity to consider and determine.

Appellant has furnished no explanation of its change of theory after judgment went against it in the trial court, nor has it offered any justification for having tendered a question for judicial consideration and determination which, under its current theory that the supplemental contract is not the real contract between the parties, is without foundation for want of a subject. A party to an action may not depart from the course it has set for itself, but must adhere to the theory on which the case was based and not meander like a stream that changes its direction whenever a new obstacle is encountered.

If, as now argued by appellant, the letters created the agreement between the parties they the supplemental contract which is the sole subject of the action is not a contract and is superfluous. From this premise, if admitted, two consequences would eventuate: (1) That the action is based on a nonexistent contract and the complaint does not state a cause of action. (2) Since the letters were pleaded for the one purpose of explaining an alleged ambiguity in the supplemental contract and not with the object of having them construed, the trial court did not and we cannot interpret their meaning, although their construction has been argued on appeal. In either dilemma the action would fail and all the proceedings in the case would have been in vain.

Appellant advances two additional theories in its brief not presented at the trial which, for convenience, may be stated together. It is asserted that the supplemental contract did not supersede the agreement created by the letters because (1) as so construed it was without consideration and for that reason void; (2) the supplemental contract was intended to formalize the letters and if it failed to express that intention such failure was the result of mistake or imperfection. There is no necessity for elaboration of the arguments made on these propositions since (a) the case was not tried on either theory and for the reasons hereinbefore stated cannot be considered by a reviewing court, and (b) neither want of consideration nor mistake was pleaded and no proof was offered thereon.

When a contract is in writing consideration therefor is presumed (Civ.Code, sec. 1614) and a party seeking to show want of consideration must so allege and prove. Kruce v. Parlier Winery, 208 Cal. 723, 725, 284 P. 671; Pastene v. Pardini, 135 Cal. 431, 433, 67 P. 681; Bryan v. Banks, 98 Cal.App. 748, 755, 277 P. 1075; Flint v. Giguiere, 50 Cal.App. 314, 318, 195 P. 85; California Standard Finance Corp. v. J. D. Millar Realty Co., 118 Cal.App. 185, 191, 5 P.2d 41.

The only reference in the record to which our attention has been called relating to a mistake in the supplemental contract appears in the notice of motion for leave to file the amendment to the complaint to the effect that if there is no ambiguity apparent on the face of the contract then the ends of justice require that ‘plaintiff be permitted to put in issue a mistake or imperfection of said contract.’ Notwithstanding the statement of this ground for the motion, the amendment to the complaint made to reference to any alleged mistake or imperfection. To state a case of mistake it must be pleaded that the language of the writing failed for some reason to express the intention of the parties. Code Civ.Proc., sec. 1856; Harding v. Robinson, 175 Cal. 534, 542, 166 P. 808; Pascoe v. Morrison, 219 Cal. 54, 56, 25 P.2d 9; Auerbach v. Healy, 174 Cal. 60, 63, 161 P. 1157; Carr v. King, 24 Cal.App. 713, 724, 142 P. 131.

2. The letters of January, 1940, were not intended to and did not create a new contract between Moore and respondent. A series of letters, even though containing an offer and an acceptance, do not necessarily create a binding contract. Whether such result has been accomplished depends always upon the intention of the parties. Whether they intended a memorandum to constitute a contract or that there should be no contract until the execution of a formal written agreement depends on the intention of the parties as gathered from the language used when interpreted in the light of surrounding circumstances. Atlantic Terra Cotta Co. v. Chesapeake Terra Cotta Co., 96 Conn. 88, 113 Atl. 156, 159; Mississippi, etc., Co. v. Swift, 86 Me. 248, 29 A. 1063, 1066, 41 Am.St.Rep. 545; Priest v. Oehler, 328 Mo. 590, 41 S.W.2d 783, 787. Though there has been a proposal sufficiently accepted to satisfy the general rule, the parties may nevertheless intend that there shall be no agreement binding in law until put into a formal writing. El Reno Wholesale Grocery Co. v. Stocking, 293 Ill. 494, 127 N.E. 642, 645; Windsor Mfg. Co. v. S. Makransky & Sons, 322 P. 466, 186 A. 84, 86, 105 A.L.R. 1096. When letters passing between the persons negotiating a contract are understood and intended to be merely a formulation of the terms of an agreement thereafter to be reduced to writing and signed by them, the letters do not constitute the contract and there is no binding agreement until the terms agreed upon have been integrated. Spinney v. Downing, 108 Cal. 666, 668, 41 P. 797; Mercantile Trust Co. v. Sunsent Road Oil Co., 176 Cal. 461, 469, 168 P. 1037; Van Hoosen v. Briscoe, 85 Cal.App. 746, 4749, 259 P. 1115; Sam Aftergut Co. v. Mulvihill, 25 Cal.App. 784, 786, 145 P. 728; Toms v. Hellman, 115 Cal.App. 74, 77, 1 P.2d 31; Las Palmas Winery, etc., v. Garrett & Co., 167 Cal. 397, 400, 139 P. 1077.

The cases cited by appellnat do not bear out its assertion that a contract was created by the letters but affirm the rule that the intention of the parties determines when a contract comes into being—whether by reason of their letters or whether its effectiveness must await the signing of a paper embodying the terms agreed upon in the correspondence. For example, in Levin v. Saroff, 54 Cal.App. 285, 289, 201 P. 961, the court said that whether an instrument is a lease or an agreement to execute a lease is a question of the intention of the parties, and in Hollenbeck v. Lunderville, 67 Cal.App. 432, 441, 227 P. 679 and Fry v. Foster, 179 Okl. 398, 65 P.2d 1224, 1225, it is said that parties may make an informal agreement that will create an obligation notwithstanding their expressed expectation to execute a formal contract subsequently, if it appears that the parties intended the formal agreement to be binding on them from the time it was made.

The instant case presents no exception to the general rule hereinbefore stated. That the letters of January, 1940, between Tognazzini and Moore did not and were not intended by them or by their respective corporations to constitute a contract is clearly indicated: (1) In Tognazzini's letter of January 16 he said: ‘But you and I, in obtaining a modification, desire to reduce it to its simplest form and to this extent I suggest the following.’ He then stated the concessions that he was willing to make. (2) Moore answered on January 25 saying that certain of Tognazzini's suggestions ‘would be acceded to * * * except that there should be some conditions attached’ providing for exemption from drilling under certain market conditions. (3) Tognazzini replied on January 27, to the effect that if Moore desired respondent's board of directors to ratify the proposed amendments ‘it would be a simple matter to draw up a modification as heretofore outlined, the language pertaining thereto to be satisfactory to both parties.’ (4) Moore accepted Tognazzini's proposition on January 29, saying that he would request his attorney, Martin, ‘to prepare a modification of the lease embodying the principles contained in our correspondence and forward it to you within the next day or two.’ (5) In Tognazzini's letter to Moore dated February 1 he stated that respondent's board of directors had ratified the ‘proposed’ modification of the lease as contained in the previous letters between the parties and ‘I am sure that Mr. Martin and I will be able to embody the principles agreed upon, to the satisfaction of all parties, and I shall do nothing further in this connection until I hear from Mr. Martin.’ (6) On February 1 Martin forwarded a draft of the supplemental contract to Tognazzini and said that when it was signed by respondent he, Martin, would forward it to the Pacific Coast Railway Company for execution by it. (7) In addition to the matters contained in the offer of proof which we have outlined, the evidence discloses that the draft sent on February 1 by Martin to Tognazzini contained the amendments suggested by the latter and accepted by Moore, but added a clause providing for the discontinuance of the minimum royalty of $25,000 per year if the lessee surrendered all undeveloped portions of the leased property. By a letter of February 5 Tognazzini informed Martin that the added clause had never been contemplated or implied and was not acceptable to respondent. The supplemental contract was then retyped in the form appearing in evidence and was signed by both parties.

From the beginning of the negotiations until the actual signing of the supplemental contract Moore was appealing for greater concessions than respondent was willing to grant. His plea for further indulgence was even carried into the first draft of the formal agreement prepared by Martin after Moore had written the letter accepting Tognazzini's offer. Both Tognazzini and Moore referred in several letters to the drawing up of the modification, the latter's attorney to prepare and forward it. There can be no other conclusion than that the letters exchanged between the parties were never intended or regarded by them as a contract and that there was in fact no contract until the formal document which appellant has asked the court to construe was signed by respondent and Moore.

3. The construction to be placed on the supplemental contract. To what extent did it modify the original lease? The court found as facts that the supplemental contract did not and was not intended by the parties to modify or abrogate the drilling obligations of paragraph 7 of the lease except to provide for the suspension thereof for a period of two years and to provide that the lessee should, in anye vent, complete at least three wells each year after February 1, 1942; that the lessee was required and obligated by said paragraph to operate continuously the number of strings of tools specified therein, increasing the number from year to year as prescribed, with the privilege of suspending drilling obligations during the existence of conditions provided in said paragraph and as hereinbefore enumerated; that by the supplemental contract drilling obligations were suspended until February 1, 1942, at which time the lessee became obligated, notwithstanding the suspension provisions, to complete in any event three wells each year; that after said date and during the remainder of the term of the lease the lessee was and is required to conduct drilling operations continuously with the particular number of strings of tools specified in paragraph 7 of the lease. The foregoing recitals in the findings of fact are repeated in the conclusions of law and in the judgment.

Since the trial court's construction and definition of the lessee's obligations to drill and complete wells pursuant to the lease as modified by the supplemental contract are set forth as its findings of fact and as its conclusions of law reached from the facts, and are carried into the judgment, and since our views upon its interpretation are in accord with those expressed therein, it is not essential to a decision of the case that we determine whether a reviewing court may place a construction on the contract different from that declared by the trial court or whether the questions concerning its construction are questions of law or of fact. If of law, we agree with the trial court in its decision as expressed in the conclusions of law; if of fact, its determination is pronounced in the findings of fact and the findings and judgment are sustained by the evidence.

We find no ambiguity or uncertainty in the supplemental contract nor do we find that said contract created an ambiguity in the lease. While the latter provided that no wells need be drilled when conditions existed as hereinbefore related, and that when the price of oil was more than 60 cents per barrel wells hould be drilled at an increased rate until five strings of tools were in operation, the amendment provided a respite in drilling operations for two years under any and all conditions, after which time the lessee, likewise under any and all conditions, was required to drill three wells each year. It was also stipulated in the amendment, apparently by way of emphasizing the continuance of the previous obligations, that except in so far as the provisions of the lease were in conflict therewith the lease should remain in full force and effect. The only conflicts between the lease and the supplemental contract are (1) the suspension for two years of the drilling provisions of the lease; (2) the obligation to drill three wells each year thereafter without benefit of the suspension clauses; (3) the requirement as to offset wells; (4) the engagement to pay minimum annual royalty. All other provisions of the lease remained in force (a) because they were not amended, and (b) by reason of the express provision of the supplemental contract continuing them in effect. It is obvious that in return for a forbearance granted to the lessee on one obligation the latter was required to grant a concession to the lessor on another. The latter was willing to permit the suspension of all drilling provisions for two years even though the price of oil should be in excess of 60 cents per barrel during that period, and in return it demanded the drilling of three wells per year thereafter although the price should remain below that figure and curtailment orders should be in effect; but the provision in the lease as to the number of strings of tools to be kept in operation when the price of oil was more than 60 cents per barrel, increasing the number each years for five years, remained unchanged. This is the only rational construction that can be placed on the lease as modified when the documents are considered without the aid of extrinsic evidence, as they must be by reason of the absence of ambiguity.

It is the duty of the court ‘to declare the meaning of what is written in the instrument, and not what was intended to be written.’ Payne v. Commercial Nat. Bank, 177 Cal. 68, 72, 169 P. 1007, 1008, L.R.A.1918C, 328; Fraters Glass & Paint Co. v. Southwestern Const. Co., 200 Cal. 688, 695, 254 P. 1097. Under the guise of construction or explanation of a contract courts are not empowered to depart from the plain meaning of the writing or to insert a term or limitation not found therein. Tanner v. Title Ins. & Tr. Co., 20 Cal.2d 814, 824, 129 P.2d 383. Where the parties have reduced to writing what appears to be a complete and certain agreement, in the absence of fraud, accident or mistake it will be conclusively presumed to contain the entire agreement, and parol evidence of prior, contemporaneous or subsequent conversations will not be received for the purpose of adding to or varying the written instrument. Palma v. Leslie, 6 Cal.App.2d 702, 707, 45 P.2d 391; United Iron Works v. Outer Harbor, etc., Co., 168 Cal. 81, 85, 141 P. 917; Estate of Gaines, 15 Cal.2d 255, 265, 100 P.2d 1055; Van Haaren v. Whitmore, 2 Cal.App.2d 632, 634, 38 P.2d 829.

No evidence of the terms of an agreement other than the contents of the writing will be received except (1) where a mistake or imperfection therein is pleaded; (2) where the validity of the agreement is in dispute; or (3) to explain an ambiguity. Nourse v. Kovacevich, 42 Cal.App.2d 769, 771, 109 P.2d 999. The parol evidence rule is not a rule of evidence but is one of substantive law and is applied to contracts. The rule is that as a matter of substantive law the act of embodying the complete terms of an agreement in writing becomes the contract of the parties. Extrinsic evidence is excluded since it cannot serve to prove what the agreement was because the writing itself is, as a matter of law, the proof. Estate of Gaines, supra. The rule stated in section 1860* of the Code of Civil Procedure can be invoked only for the purpose of explaining an ambiguity on the face of the writing. Although evidence of the declarations of the parties may be received in some cases to explain contracts or words of doubtful meaning, the courts are not at liberty to add words to the document or to substitute words for those written therein by the parties. Barnhart Aircraft, Inc., v. Preston, 212 Cal. 19, 22, 297 P. 20; Peterson v. Chaix, 5 Cal.App. 525, 532, 90 P. 948.

These well established rules of construction plainly forbid the interpretation of the meaning of the supplemental contract to be that the provisions of the original lease relating to the number of strings of tools required to be kept in operation were expunged and that there was substituted therefor the comparatively insignificant obligation to drill only three wells during each year after the expiration of the two-year intermission.

If the entire tract for 6700 acres covered by the lease should prove to be productive of oil it would be 200 years before all wells required by the lease, one for each 10 acres, would be completed at the rate of three wells each year. It was conceded that 400 acres had already been proved to be oil producing. If the supplemental contract should be construed to have the meaning attributed to it by appellant it would be approximately 12 years before the drilling obligations would be completed in the proved lands, allowing for the wells already drilled and in production. It is unreasonable to assume that respondent's officers, who throughout the negotiations were contending for a substantial return from the property, would have agreed to an arrangement that would postpone the development of its resources for so long a period.

Moore was the lessee when the supplemental contract was executed. The evidence discloses that Martin, his attorney, for many years had been counsel for persons and corporations engaged in the oil business and had had long experience in the preparation of oil leases. If it had been intended that the drilling obligations contained in the original lease should be superseded by the requirement of only three wells each year until the entire tract had been explored the addition of a few words would have made the intent clear, and it must be assumed that Martin would have protected his client's interests by inserting such words in the contract.

We would reach the same conclusion upon the construction of the contract if we gave consideration, as appellant asserts we should, to the negotiations preceding the supplemental contract. There is practically no dispute as to the facts—the negotiations, oral and in writing, leading up to the signing of the contract—and such conflict in the evidence as there may be will be disregarded since the court's findings are sustained by substantial evidence. Buckhantz v. R. G. Hamilton & Co., 71 Cal.App.2d 777, 779, 163 P.2d 756, and cases cited; Berger v. Steiner, 72 Cal.App.2d 208, 164 P.2d 559; Estate of Isenberg, 63 Cal.App.2d 214, 216, 146 P.2d 424; Estate of Bristol, 23 Cal.2d 221, 223, 143 P.2d 689. The record shows these facts: Moore was concerned with the marketing of the oil produced from the leased property. The Union Oil Company was the only purchaser in that field and it fixed the price paid to producers of crude oil. Moore was dissatisfied with the manner in which the price had been increased and decreased at intervals and in order to secure a market for the oil he was considering the erection of a refinery. He had incurred expense in discussing plans for the refinery with a firm of engineers and was prepared to proceed with the work. By reason of the large expenditures necessary in its construction he desired to be freed from all drilling obligations for two years. Tognazzini was willing to grant the requested concession but one of the conditions demanded by him was that after the expiration of that period three wells should be drilled each year regardless of the price of oil. He testified that in the conference between him and Martin there was no discussion concerning the drilling requirements if the price of oil should be more than 60 cents per barrel after the two-year period, and that the drilling provisions of the lease would prevail; that although the price of oil was then below said figure Martin stated that an increase was anticipated and that the requested respite was desired because of the contemplated expense of erecting the refinery. Tognazzini's testimony was corroborated by two directors of respondent corporation who were present during the conversation. This evidence sustains the findings of fact. In the letters that followed there is no indication of an intention on the part of respondent to recede from the position taken by Tognazzini in the conference above mentioned.

It is of no importance whether any of the matters contained in the findings are findings of fact or conclusions of law. We need only repeat that if they are findings of fact they are sustained by the evidence. If they are matters of law their presence in the findings of fact is harmless since they are repeated in the conclusions of law.

Judgment affirmed.


FOOTNOTE.  FN* Section 1860 reads as follows: ‘For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject of the instrument, and of the parties to it, may also be shown, so that the judge be placed in the position of those whose language he is to interpret.’

WILSON, Justice.

MOORE, P. J., and McCOMB, J., concur.

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