GRAYHILL DRILLING CO v. SUPERIOR OIL CO

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District Court of Appeal, Second District, Division 3, California.

GRAYHILL DRILLING CO. v. SUPERIOR OIL CO.

Civ. 18775.

Decided: June 19, 1952

Lee Combs, John Barry, Los Angeles, for appellant. Hanna & Morton, Harold C. Morton, Edward A. Penprase, B. W. Burkhead, Los Angeles, Max K. Jamison, Porterville, for respondent.

Plaintiff Grayhill Drilling Company sued defendant Superior Oil Company for the sum of $32,367.02 alleged to be due for the drilling of an oil well for defendant in Oklahoma. One cause of action of the complaint was based upon an oral agreement for the drilling of the well. It was alleged that the parties entered into a written agreement for the drilling of the well and during the progress of the work entered into a new oral agreement for completion of the well, and it was also alleged that the oral agreement was a modification of the written agreement. There was also a cause of action for the reasonable value of work and labor performed for defendant at its special instance and request, and an additional cause of action upon an account stated. The principal amount sought to be recovered was the same in each cause of action. It was alleged that plaintiff had earned $103,064.42, and had been paid only the sum of $70,697.40. Defendant, by its answer, admitted the making of the written contract, denied there was any agreement modifying the same or any new oral agreement, and pleaded special defenses, among them the payment of $23,000 as an accord and satisfaction of plaintiff's claim. At the close of plaintiff's evidence the court granted defendant's motion for nonsuit and entered judgment dismissing the action. Plaintiff appeals.

The question is the usual one: Was the evidence sufficient to make out a prima facie case for recovery upon a cause of action that was pleaded. We believe it was sufficient.

The written agreement was dated February 15, 1949. The well was to be drilled in Garvin County, Oklahoma. The agreement was prepared by defendant's agents in Oklahoma, was sent to California where it was signed by J. C. Cody, vice-president of defendant, and was returned to Oklahoma where it was executed by plaintiff. The well was to be drilled to the Gibson sand, which was expected to be encountered at or below 6500 feet, and the hole was to vary not more than three degrees from vertical. Upon final completion of plaintiff's work defendant was to pay $5.25 per foot for hole drilled to 6500 feet, or lesser depth which would allow testing of the Gibson sand, and $6.00 per foot below 6500 feet, and in addition defendant was to pay for footage made in coring and reaming, and also for ‘standby time’ at certain stipulated rates. Other provisions related to compensation but are not pertinent to the questions which require consideration. It was provided that plaintiff would be considered at all times an independent contractor and responsible for any mishap, costs and damages due to breakage, breakdown, or other failure of its tools or equipment, or to its lack of skill or diligence. All work was to be performed at the risk of the contractor. Neither party was given the right to stop the work before the well reached the agreed depth. Paragraph 13 read as set out below.1 Plaintiff, upon the trial, first contended that it had a right to discontinue work at its election under this provision of the agreement. This was an untenable position and was later abandoned. Paragraph 13 gave Superior the right to take over the job and finish the well at its own expense, but in the view we take of the case it is unimportant that the contract gave it that right.

Plaintiff's work progressed favorably to a depth somewhat below 4000 feet. At some point, which was not definitely fixed by the evidence, but which was somewhere between 4000 and 5000 feet, an abrupt dip of the formation was encountered which greatly retarded progress. Plaintiff proceeded with its work for some time, although in order to keep within the three degrees tolerance little footage could be made. Under an arrangement with defendant's local agents the tolerance was increased to four degrees, but it soon became evident to plaintiff that it would be financially unable to complete the well under the terms of the written agreement. Harry Frederickson, vice-president and general manager of plaintiff, who had negotiated the contract and was in charge of the work, contacted defendant's local agents, Edwin L. Smith and B. R. Kunau. Mr. Smith was an attorney and defendant's manager for Kansas, Oklahoma and West Texas, with headquarters in Oklahoma City. He handled only land, legal and geological work. Defendant's drilling department was in charge of its local superintendent, Kunau, who was superintendent of drilling and production in Oklahoma and Kansas, with offices at Chickasha, Oklahoma. It was a part of the duties of Mr. Kunau to obtain bids for contract work and submit them to Mr. Cody, a vice-president of defendant who executed its drilling contracts, with offices at Bakersfield, California. Cody made the decisions and Kunau did not enter into drilling contracts for the company. Frederickson first explained his situation to Smith. Plaintiff was not receiving any money from defendant on the contract, creditors were pressing and plaintiff's bankers were unwilling to render further support. Frederickson insisted that plaintiff would have to abandon the work unless it was given relief from the terms of the contract. Smith was sympathetic, but referred Frederickson to Kunau, explaining that the matter was one in which he was without authority to agree to any modification of the contract. Kunau, he said, was the proper one with whom Frederickson should negotiate. Frederickson took the matter up with Kunau and explained his situation. Kunau also was sympathetic. The trial court properly accepted Frederickson's testimony respecting his conversations with Kunau and the oral agreement which the two negotiated. In brief, the agreement was that defendant would take over the work of completing the well, but plaintiff would proceed with its own equipment and crews; plaintiff would be paid $5.25 per foot for the hole drilled up to that time (about 4000 feet), and for future work would be paid on a cost plus basis. No agreement was made with respect to the amount of plaintiff's compensation above cost. Following this arrangement plaintiff proceeded with the work and defendant maintained tool pushers on the job who exercised supervision over the drilling. So far as disclosed by the evidence, Cody was not advised of this oral arrangement. The well was drilled to a depth of 7254 feet, and was abandoned as a dry hole. Thereafter, Frederickson conferred with Smith, and under agreement with Smith, and partly at his suggestion, plaintiff rendered three statements: One was for the sum of $96,872.63, ‘actual cost’ of the well; another for the sum of $100,121.42, based upon ‘footage contract to 4000′, actual cost from 4000′ to 7254′’; the third for $47,697.46, which was the amount that would have been earned by drilling the well under the original contract. These statements were furnished to Kunau July 1st, with a letter from plaintiff stating that Kunau had expressed a desire to have an invoice prepared in accordance with the written contract, another reflecting actual cost, and adding that plaintiff was going a step further and had prepared an invoice on a footage basis to 4000 feet and actual cost for the additional footage. The amount of $103,064.42, alleged in the complaint, reflected additional invoices that plaintiff received and furnished to defendant after the preparation of its statements above mentioned.

On September 1st defendant issued its check for $47,697.46 which plaintiff cashed. In the meantime efforts, oral and written, had been put forth by Frederickson in an effort to collect the balance, and these continued after the receipt of the above mentioned check. Neither Smith nor Kunau denied to plaintiff that an oral agreement had been entered into as claimed by Frederickson. However, both disclaimed responsibility for a settlement, insisting that it could only be made by their superiors. Frederickson then wrote two letters to Bill Keck, Jr., President of Superior Oil, in Los Angeles, endeavoring to get a settlement, but received no reply. He came to Los Angeles, discussed the matter with Keck and was referred to Cody who, Keck said, was authorized to make settlement. Frederickson went to Bakersfield and interviewed Cody. He explained his operations under his agreement with Kunau and offered to exhibit all his vouchers which supported his statement of cost. No item of the account was questioned by Cody, nor did he deny that a settlement was due plaintiff. He offered $23,000 in settlement, but when questioned as to how he arrived at the figure gave no reason other than that he considered the amount to be fair. He referred Frederickson to Mr. Hansen and Mr. Winther of Superior's accounting department in Los Angeles. Frederickson went to see these gentlemen, taking with him all his vouchers and statements which he exhibited to and left with them. After going over the matter at length, Winther said they had checked plaintiff's ‘recaps' and found them to be in order. Hansen said: ‘In a matter of this sort, it depends upon trust and confidence displayed by both parties,’ and that he believed Superior was willing to pay Grayhill the actual cost of the well but not any profit, to which Frederickson agreed. Plaintiff's accounts were discussed, but no item was disputed then or at any subsequent time. Hansen told Frederickson on more than one occasion that he had tried to get a check for him but that Cody would not allow him to release a check yet, although he had told Cody that they found no errors in the account and had no complaints. At Hansen's suggestion that Frederickson might be irritating Cody by his presence in California, he returned to Oklahoma City. He eventually received the invoices and statements which Hansen had had in his possession for about a month.

Sometime in October Frederickson met with Kunau and Cody in Oklahoma City and discussed the matter. Cody again offered him $23,000, which Frederickson refused to accept. Kunau then said to Cody that he had not discussed the matter of the completion of the well with Frederickson, a statement which Frederickson then denied. After discussing the possibility of plaintiff's being given more drilling work, which Cody refused to do, Cody finally said: ‘Are you going to take this $23,000 or are you going to take nothing?’ Frederickson asked time to confer with his creditors and following contact with them again met with Kunau and Cody later in the day, at which time he said he would accept the check although he did not consider it a final payment of the account. Cody said ‘all right,’ he would call for the check. Under date of November 4th defendant's comptroller mailed plaintiff a voucher check for $23,000, with a letter stating: ‘We are enclosing check No. 5305 in the amount of $23,000.00 in full and final settlement of balance of all claims and costs of drilling Craig No. 1 well in Garvin County, Oklahoma. This check is being sent in accordance with request of Mr. J. C. Cody.’ The voucher contained the notation that it was ‘in full and final settlement of balance of all claims and costs for drilling Craig No. 1’ etc. Plaintiff cashed the check and later instituted the present action.

The court stated as grounds for the nonsuit that the alleged oral agreement, insofar as it obligated Superior to pay for completion on a cost plus basis, was invalid for the reasons that it was an attempted oral modification of the written contract, and was not fully executed; Kunau and Smith had no authority to enter into the modification agreement, and it was not ratified by authorized officers or representatives of the company. With these conclusions we agree.

If the oral agreement be considered as a modification of the written agreement, it was not fully executed and was invalid under the provision of section 1698, Civil Code, that a written agreement can be modified only by written agreement or executed oral agreement. Klein Norton Co. v. Cohen, 107 Cal.App. 325, 330, 290 P. 613.

Neither Kunau nor Smith ever executed drilling contracts for the company, nor had they ever been authorized so to do. No one in authority ratified the oral modification for completion of the well on a cost plus basis. Frederickson understood that drilling contracts were subject to the approval of Cody, and were executed by him on behalf of the company. He did not inquire whether Cody had given approval to the oral agreement nor whether he had been advised concerning it. It is unnecessary to decide whether the attempted change from a footage to a cost plus basis would have been supported by a consideration as to each party.

Our agreement with the reasoning of the trial court does not enable us to agree that a nonsuit was properly granted. It is clear that there was the further question whether the written agreement was terminated by mutual consent. This could have been accomplished by an agreement of the parties that they would not be bound in the future by the terms of that agreement. The fact that the drilling of the well was not abandoned does not necessarily mean that the agreement was not terminated. If it was terminated by mutual consent it is immaterial that plaintiff thereafter completed the well under a new arrangement.

The facts in evidence presented the following questions: (1) Would the oral agreement, as testified to by Frederickson, if valid, have accomplished a termination of the obligations of the parties under the written agreement; (2) could the oral agreement be valid as a termination of the original agreement, even though invalid as to the terms on which the well was to be completed; (3) was there evidence which would have justified a finding that the parties agreed to a termination of the written agreement; (4) was there a consideration for such an agreement?

In our discussion we shall use ‘terminate’ and its derivatives as descriptive of an agreement of the parties to the original agreement that they would no longer be bound by its terms. We have reached the following conclusions: It could have been inferred from the evidence that the parties intended to terminate the original contract; oral termination of the agreement would have been supported by a sufficient consideration; the oral agreement could be valid as a termination of the written agreement, even though invalid as to the remainder; there was evidence to support a finding that the oral agreement, although entered into by Kunau without authority, was ratified by defendant insofar as it released the parties from the obligations of the written agreement.

Our reasons for these conclusions are based upon the evidence that Mr. Cody did consent to and approve the oral arrangement by which plaintiff was released from its obligation to drill the well for a footage price, and upon the evidence that defendant did take over supervision of the drilling. Other circumstances are that none of defendant's representatives, Keck, Cody, Kunau or Smith, sought to hold plaintiff to its agreement to complete the well for a footage price. All recognized the fact that plaintiff was to be compensated upon some other basis, although Frederickson was sent from pillar to post in an unsuccessful effort to find out what the basis of payment would be.

The two main features of the original agreement were that plaintiff, as an independent contractor, was to drill a well to a certain depth, to certain specifications, and for a stated price. It had the obligations and responsibilities of a contractor, and control of the operation. Defendant was to pay the agreed charges. If defendant took over control, or right of control, of the operation and plaintiff became subject to its orders rather than to the rigid provisions of the agreement, and if the parties discarded the price per foot as a basis of payment, it may be asked: What remained of the original agreement, and was plaintiff in a position different from that of any other drilling company that might have been employed to complete the work under defendant's direction? These are the principal features of the case which lead us to believe that the jury could reasonably have found that the parties terminated their contract by mutual consent.

Whether the oral agreement contemplated termination of the prior written contract was a question of intention, to be answered by the trier of fact from a consideration of the acts of the parties as well as from their words. The question of intention is usually one of fact. Treadwell v. Nickel, 194 Cal. 243, 259, 228 P. 25; Smyth v. Tennison, 24 Cal.App. 519, 521, 141 P. 1059.

A written contract may be abandoned or terminated by parol agreement. Such an agreement ends the contract and there is no occasion to apply the rule of section 1698, Civil Code. Green v. Wells & Co., 2 Cal. 584; Pearsall v. Henry, 153 Cal. 314, 317, 95 P. 154, 159; Treadwell v. Nickel, supra; Klein Norton Co. v. Cohen, 107 Cal.App. 325, 331, 290 P. 613.

The mutual agreement to terminate or abandon is usually a sufficient consideration passing from each party to the other. Haberman v. Sawall, 72 Cal.App. 576, 582, 237 P. 776; Hooke v. Great Western Lumber Co., 54 Cal.App. 681, 683, 202 P. 492; Grant v. Aerodraulics Co., 91 Cal.App.2d 68, 76, 204 P.2d 683.

We cannot say as a matter of law that an oral agreement of plaintiff and defendant to terminate their agreement would not have been within these rules. It was apparent that plaintiff was in financial difficulties and would eventually have to stop the work. Defendant's representatives deemed it wiser to end plaintiff's contract and keep the work going than to wait until plaintiff threw up the job, especially since, by so doing, plaintiff's equipment and crews would be available for completion of the well. The mutual surrender of rights under the written agreement would be sufficient, in law, as a consideration for an oral agreement to terminate it.

Our conclusion on this branch of the case is that it could properly have been determined upon the evidence that the written contract was terminated by mutual consent and that there was no valid agreement as to what plaintiff's compensation would be for finishing the well. Defendant's representatives at all times acknowledged an obligation to pay something more than plaintiff would have earned on a footage basis. An additional $23,000 was paid as the amount Mr. Cody considered to be ‘fair.’ If plaintiff had been excused from complying with the written agreement and defendant was not bound by Mr. Kunau's cost plus agreement, it would follow that there was no express agreement for completion of the work.

Defendant was bound by the oral agreement only to the extent that it was ratified by Mr. Keck and Mr. Cody. Mr. Keck's statement that Cody was authorized to settle with plaintiff assumed that some new agreement had been made. The payment of the $23,000 confirmed the fact that the written agreement was not binding, unless defendant intended it as a mere gift. It does not appear as a matter of law that it was so intended. A jury could properly decide that it was the intention of Mr. Keck and Mr. Cody to ratify abrogation of the original agreement, but not to approve the re-employment of plaintiff on a cost plus basis. The oral agreement was not necessarily indivisible and therefore could be ratified in part. See Civ.Code, sec. 2311; Colpe v. Jubilee Mining Co., 2 Cal.App. 393, 84 P. 324.

If the facts should be found in plaintiff's favor as outlined, the legal consequence would be that plaintiff drilled an oil well with no valid agreement as to what its compensation would be.

Where work is performed or work and labor are furnished under an invalid, but not illegal, agreement a recovery may be had for their reasonable value. Armstrong v. Kline, 64 Cal.App.2d 704, 717, 149 P.2d 445; Long v. Rumsey, 12 Cal.2d 334, 342, 84 P.2d 146; Hagan v. McNary, 170 Cal. 141, 144, 148 P. 937, L.R.A. 1915E, 562. As previously stated, plaintiff had a cause of action for the reasonable value of the work.

The final question is whether the defense of accord and satisfaction was established. The doctrine was given extended exposition in the recent case of Potter v. Pacific Coast Lumber Co., 37 Cal.2d 592, 234 P.2d 16. It is clear, under the rules there stated, that if it was established as a matter of law that there was a bona fide dispute as to the amount due plaintiff a nonsuit should have been granted upon the ground that the tender of $23,000 as full settlement, and its acceptance by plaintiff was a complete defense to the action. That there was a dispute is not to be questioned, but we cannot say that the evidence established the bona fides of the dispute to the exclusion of a contrary conclusion. In discussing this matter we could well repeat much that has already been said, but we find this to be unnecessary. The salient features are the following: It was understood and conceded by defendant's representatives that plaintiff was to be fairly compensated for its work; the work had been done in a manner that was satisfactory to defendant; complete data as to the cost was furnished defendant, was checked and approved; no item was challenged, no complaint was made of any overcharge; no contention was advanced that plaintiff should be paid less than the fair and reasonable value of the work, or that the cost had been unreasonably high; no claim was made that there was any agreement for completion of the well on other than a cost plus basis. Defendant simply offered $23,000, saying, ‘take it or leave it.’ To be sure, Mr. Cody said he thought the amount was fair, but he declined to give any reason for arriving at that figure. We think it cannot be said as a matter of law, upon these facts, that there was a bona fide dispute as to the amount that was due plaintiff, or that the figure of $23,000 was not arrived at arbitrarily. If a debtor should say to his creditor, ‘I do not deny that you have earned the amount you claim, I do not claim you ever agreed to accept less, but I will pay you only 40 per cent of the bill in full settlement, because I think that is a fair amount,’ would it be unreasonable for a trier of fact to find there was not a bona fide dispute? This does not appear to us to be a debatable question. Upon such facts a court or jury would be warranted in determining that the debtor's refusal to pay the debt was arbitrary, unreasonable and not founded upon a bona fide belief that the creditor was demanding more than was justly due. In the present case it would not have been unreasonable for a jury to conclude that Mr. Cody, although satisfied that defendant's statements truly reflected the actual and reasonable cost of completing the well, offered the less amount for the sole purpose of reducing defendant's cost, and consequent loss, in the drilling of a dry hole. The trial court was bound to draw the inferences most favorable to plaintiff. The bona fides of Mr. Cody's purpose and actions was clearly a question for submission to the jury. Berger v. Lane, 190 Cal. 443, 213 P. 45; B. & W. Engineering Co. v. Beam, 23 Cal.App. 164, 171, 137 P. 624; Lapp-Gifford Co. v. Muscoy Water Co., 166 Cal. 25, 27, 134 P. 989; 1 C.J.S., Accord and Satisfaction, *s 32, page 516. In Potter v. Pacific Coast Lumber Co., supra, 37 Cal.2d 592, 234 P.2d 16, and Robertson v. Robertson, 34 Cal.App.2d 113, 93 P.2d 175, relied upon by defendant, the bona fides of the dispute was not questioned and for that reason the cases are not apposite to the point we are discussing.

On this appeal from a judgment of nonsuit we must, of course, in considering the evidence relating to the defense of accord and satisfaction, give preference to the inferences to be drawn from the evidence that are most favorable to plaintiff. We are not required to and should not weigh them against opposing inferences. That is the function of the trial court. Our duty begins and ends with inquiry and decision as to whether findings by a trier of fact that the written agreement was terminated, that defendant did not agree upon any terms for completion of the well, and that there was no accord and satisfaction, would have had support in the evidence of the plaintiff and the reasonable inferences therefrom. It is scarcely necessary to add that on an appeal from a judgment of nonsuit where it appears that findings in favor of plaintiff on the controlling facts would have had support in the evidence, it is immaterial that the evidence would support findings in favor of the defendant.

In the absence of any evidence to the contrary we think it could have been inferred from plaintiff's evidence that its cost as shown by its statements was the reasonable value of its labor and material.

Certain portions of the testimony were stricken on defendant's motion. These related to statements of Smith and Kunau that they had been in communication with California, had been asked for advice and had received certain instructions. Although these statements were not sufficient to prove the authority of Smith or Kunau to make a new contract with plaintiff, since authority to bind defendant could not be established by declarations of the agents, alone, they were nevertheless admissible as evidence that the situation had been reported to California. According to defendant's contention, Smith and Kunau had no authority in the matter except to report to their superiors. Their statements that they had performed that duty were admissible and material.

In view of our holding that the evidence would have supported findings in favor of plaintiff upon the issues we have discussed, and would have established a prima facie case for plaintiff, it was error to grant a nonsuit.

The judgment is reversed; the purported appeal from the order directing a judgment of nonsuit is dismissed.

FOOTNOTES

1.  ‘In the event Contractor fails or refuses to comply with all the terms and conditions of this agreement, Company may at its election utilize Contractor's equipment and complete the drilling of said well as contemplated herein, using any or all of such equipment as it may desire, and shall compensate Contractor therefor by the payment to Contractor of the reasonable rental value of such equipment during the time that Company utilizes the same. Work done by Contractor prior to Company taking over such equipment shall be compensated for on the basis as is hereinabove provided.’

SHINN, Presiding Justice.

WOOD and VALLÉE, JJ., concur.

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