FOWLER v. ASSOCIATED OIL CO (1937)

Plaintiff brought this action on June 18, 1932, to impeach as insufficient and fraudulent the accounting made by defendant to plaintiffs respecting their royalty interests commencing with the year 1926 under an oil and gas lease to premises in the Huntington Beach oil fields. Plaintiffs also sought a forfeiture of the lease because of the alleged fraudulent accounting. The trial of the issues was concluded on April 26, 1934, and resulted in a judgment that plaintiffs recover from defendant the sum of $89,342, with interest from the date of the judgment, that defendant, in accounting to plaintiffs under the lease, had used incorrect methods of sampling and testing in ascertaining the quantity and gravity of the royalty oil, and was not entitled to make any deduction for the cost of treating, or cleaning the royalty oil, and that plaintiffs recover nothing from defendant because of any incorrect accounting or failure to pay in full for the royalty oil prior to June 18, 1928, a period four years prior to the commencement of the action. Both parties have appealed; the plaintiffs from that part of the judgment which denied recovery to them for the period prior to the running of the statute of limitations; the defendant from the entire judgment. To avoid confusion we will refer to the parties as they appeared in the trial court.

As to plaintiffs' appeal, the trial court found that there was no fraud in defendant's dealings with the plaintiffs, but that the shortages in the accounting relied on were the result of errors made by defendant in good faith due to improper and erroneous methods of testing and sampling the royalty oil. For these reasons we are in accord with the disposition of plaintiffs' appeal made by the District Court of Appeal of the Fourth District and adopt as a part of this opinion the portions of the opinion of that court reading as follows:

‘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 the 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, 15 Cal.App.2d 526, 532, 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 existance 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 abovementioned 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 monthy accountings which defendants 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. & Securities 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 shortage that occurred prior to June 18, 1928.’

As to defendant's appeal, the case is a remarkable parallel to Alamitos Land Co. v. Shell Oil Co., 3 Cal.2d 396, 44 P.2d 573, a case decided by this court on April 26, 1935. As that decision was rendered after the trial and judgment in this case, the learned trial judge did not have the benefit of that decision and fell into the same errors which were pointed out by this court in the Alamitos decision.

In approaching the defendant's appeal we must bear in mind two settled principles; first, that if there is no uncertainty in the terms of the lease it must be construed as written, and that, if uncertainty exists, it must be interpreted in the light of the circumstances at the time if was written rather than those which might have developed later; second, that technical and trade terms used in the lease must be interpreted in the light of the accepted and practical use of those terms in the trade at the time the lease was executed, and that, if during the operation of the lease, any of those terms acquired a different meaning the parties are not bound thereby unless they have accepted such new meaning either by a modification of the lease or by such acts and conduct as would imply a modification.

The lease here in question was executed on August 30, 1920, between plaintiffs and the Amalgamated Oil Company. On December 28, 1923, it was assigned to defendant. Oil in paying quantities was first produced about January 1, 1923. The lease covered certain real property of approximately twenty acres. The pertinent portions of the lease are:

‘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 which may be 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 products 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 * * * 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. * * *

‘All of said hydrocarbon substances shall be collected in tanks, reservoirs or sumps upon the demised premises or upon property convenient thereto, * * * and the lessee shall store all royalty oil accruing to the lessors under this lease for a period not exceeding thirty (30) days, without expense to the lessors. * * *

‘In the event the lessors elect in the manner hereinabove provided to receive royalty oil in kind, the lessee agrees to make delivery to the lessors at the tanks or reservoirs hereinabove referred to on or before the 20th day of each calendar month all royalty oil due the lessors from the oil produced during the preceding calendar month.’

In all operations under the lease the plaintiffs elected to require the defendant to purchase its royalty oil for cash, and that was done throughout. A clear statement of defendant's contentions is found in the opinion of the District Court of Appeal, from which we quote: ‘Defendant uniformly, from the year 1926 up to the time of trial, purchased the royalty oil upon what 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. * * *

‘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. * * *

‘Defendant's third contention is that is 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 fining 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. * * *

‘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 1/6 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 plaintiff or stand in a fiduciary relationship to them.’

In answer to these contentions the plaintiffs argue that the lease called for the purchase of dry of clean oil; that defendant's methods of sampling and testing were later found to be inaccurate and incorrect resulting in a heavy loss to them; and that, in employing these methods, though in common use throughout the oil fields in the vicinity, defendant was guilty of fraud.

To better understand the first point raised it should be said here that the parties agree that in the early development of wells in this vicinity the product was relatively free from sand, water, and other impurities, but that, as the wells grew older, the quantity of gas decreased and the amount of water and sediment increased. It is the universal practice in these operations for the lessee to capture the product as it flows from the well and to store it either in tanks located at the well, or in other ‘settling’ tanks near by. As the product settles the free water and some of the sediment filters to the bottom of the tank, where it is drawn off by means of an outlet near the bottom of the tank. These tanks located near the well are the tanks referred to in the quoted portion of the lease which fix the place of delivery of the royalty oil and the place of purchase of such oil by the lessee. This product in these tanks is what is called crude oil or wet oil. It consists of oil, gas, water, sediment, and other impurities. At the time this lease was executed, and for many years of its operation, it was the universal practice in the industry to refer to the product of crude or wet oil as ‘oil’ or ‘petroleum oil’ when those words were used in reference to royalty oil under a production oil lease. This court had occasion to comment on these features of a similar lease in the Alamitos Case, supra, 3 Cal.2d 396, at page 401, 44 P.2d 573, 575, where it was said:

‘To more accurately grasp the issue between the parties, it is necessary to state that the terms ‘wet’ oil and ‘clean’ or ‘dry’ oil have a well-understood meaning in the trade. Wet oil is such a petroleum liquid as carries in cohesion with it more than 3 per cent. by volume of water and sediment. Clean or dry oil is such a liquid as carries 3 per cent. or less of said impurities. The base or impure content of the liquid is also known in the trade as the ‘cut’ of the oil. When the gravity of the fluid in its crude state is taken, it is called its ‘observed’ gravity. Free water found in the liquid is not considered a part of the gross fluid for the purpose, as it is easily drained off from the bottom of the tanks. Usually also a well, when first put upon production, carries only dry or clean oil, but with increased pumping the encroachment of water becomes greater, and larger percentages thereof are emulsified with the petroleum. Oil is marketed upon the basis of its gravity as tested by the hydrometer. The instrument is immersed in the liquid as is likewise a thermometer. The readings on both instruments are taken and then, by use of Standard American Petroleum Institute tables, the hydrometer reading is corrected to conform to measurement at a temperature of 60° Fahrenheit. Upon this gravity reading as corrected, the prevailing price is applied to the net quantity of oil in the product. The net quantity of oil is found by actual dehydration of the entire volume of fluid or else by taking proper samples, applying to such samples the recognized A.S.T.M. standard tests, which disclose the percentage of water and other impurities; then by applying such percentage of deduction to the total volume of fluid, the approximate net quantity of oil is found.

‘Plaintiff insist that under the lease here involved it is the duty of defendant to clean the wet oil, either actually or theoretically, and then apply the gravity test to the cleaned fluid, which will thus give it a higher gravity reading than in its wet state. In other words, plaintiff contends that it was the duty of defendant to base its gravity test upon the same net substance that constituted the quantity or volume purchased. Upon the soundness of this view rests practically plaintiff's entire case.

‘It will be noted that the lease is silent both as to how the quality and how the quantity tests shall be made. Likewise, the lease fails to require defendant to prepare the royalty oil for pipe line shipment in the event it is delivered in kind. To provide tanks for the storage of plaintiff's royalty oil is the only express obligation imposed. If delivery in kind is made, it is to be as produced and saved or as produced and stored in tanks on the premises. If this means a delivery of the gross fluid as produced, it certainly follows that, if required to purchase it, defendant must pay its own current price for the same substance. If the duty to theoretically clean is absent when the royalty oil is delivered in kind, it is absent when the royalty oil is to be purchased.’

In reference to the frequent use of the words ‘oil,’ ‘petroleum oil,’ and ‘royalty oil’ in the lease, this court said, 3 Cal.2d 396, at page 403, 44 P.2d 573, 576: ‘No one can say that the ‘cleaned’ or ‘dry’ product is referred to by the above language. Our construction of the lease conforms to the commonly understood meaning of the terms and is in every respect a reasonable deduction. In Hammett Oil Co. v. Gypsy Oil Co., 96 Okl. 235, 218 P. 501, 502, 34 A.L.R. 275, it is said: ‘There was no evidence as to what the word ‘oil’ includes, when used in an oil and gas lease, or how the parties to the lease understood it, but a large amount of litigation has arisen over oil and gas leases, and the construction of such contracts, and the word ‘oil’ as used in an oil and gas lease, has always been referred to by the courts and understood to designate the oil produced from a well, or crude petroleum in its natural state. There is nothing either in the contract or in the evidence to disclose that the parties in this lease contract used it in any other sense, but the contract does support the contention that it was used in its ordinary and popular sense, and refers to crude oil as it was produced from the mouth of the well.''

The only material difference in the wording of these two leases is that in the Fowler lease the lessee agrees to deliver the ‘net’ amount of all petroleum oil saved from the premises ‘after deducting from the gross product the quantity that may be consumed in the development and operation of said property.’ From this it is argued that the lessee was required to deliver the cleaned or dry product and that all the costs of processing must be borne by the defendant. The answers to this contention are plain. First, the lease calls for the delivery of the royalty oil ‘at the tanks' maintained by the lessee in the premises; and it is conceded that oil ‘at the tanks' means the product as drawn from the well after the free water has been removed. If the product of some of the wells carries less than 3 per cen. of impurities, that is the ‘oil’ which the lessors sell, and if some runs more than 3 per cent., it is likewise the ‘oil’ which they sell; second, in view of the language quoted from the Alamitos Case, the words ‘oil’ and ‘petroleum oil’ have a well-defined meaning in the trade, and, hence, the lease was not ambiguous and called for no evidence of custom in that respect; and, third, that the call in the lease for the net amount ‘after deducting from the gross' the quantity used in operations permits no other deduction than that specified. It is plain that, if the parties had intended to use these terms in a different sense, or had intended that the lessee should clean the product, or that other deductions should be made from the gross, the lease should have so provided, and to hold otherwise would be to write a new contract for the parties.

It is proper to observe further on this subject that the parties to this lease placed this construction on their contract by their conduct running over a long period of years before the commencement of this action. It was not until the methods of sampling and testing the product were brought into dispute that the plaintiffs asked for a different interpretation of their contract in reference to the obligations of the defendant as to the ‘kind’ of oil which was deliverable to them. As we are compelled to hold, in view of the decision in the Alamitos Case and the authorities supporting it, that plaintiffs were entitled to the delivery at the tanks of wet oil as that term is defined herein, it must follow that the defendant was obligated to purchase the same oil as it stood in the tanks, and to pay the prevailing market price of such product and no other.

Defendant's second contention relates to the methods of sampling and testing the well fluid. In the matter of sampling, the defendant used the ‘3-point’ method whereby, after the free water was drained from the tanks, samples were taken from near the top, the middle, and the bottom of the tank. These samples were then placed in a rapidly rotating tube after certain solvents or diluents, were added. By this process the mixture is broken up, the foreign matter drops to the bottom of the tube and the clear oil is then tested. Throughout the period here in question the defendant used carbon bisulphide or benzol as a solvent in its certrifuge tests. Other purchasers used carbon bisulphide, and, after 1930, two used phenol. This court has heretofore hled that the use of benzol was proper in the Alamitos Case, where it was said, 3 Cal.2d 396, at page 408, 44 P.2d 573, 578: ‘Prior to August, 1926, the solvent employed was equal parts of bisulphide and gasoline; subsequently the use of benzol was instituted. The test with either of these solvents was a standard method, producing about equivalent results. Benzol as a solvent or diluent was indorsed as a substitute for gasoline and bisulphide in 1926 by the American Society for Testing Materials, an institution universally recognized as the exponent of methods of testing materials. Defendant continued to use benzol from 1926 until about June 28, 1930, at which time, with some of the other companies, it substituted therefor the use of phenol as such diluent. During the entire period here involved the current method used by defendant had the indorsement of the American Petroleum Institute, the United States Bureau of Mines, and the above-mentioned American Society for Testing Materials.’

The defendant frankly concedes that the ‘3-point’ method of sampling results in some error and in Meyers v. Texas Company, 6 Cal.2d 610, 614, 59 P.2d 132, 134, this court said that ‘this method, although approximately correct when applied to dry or clean oil (oil containing less than 3 per cent. basic sediment and water), is inaccurate when applied to wet oil.’ The extent of defendant's concession and of the ruling in the Meyers Case is that some inaccuracies follow this method. In the latter case it was found that the ‘core’ method was the proper one. But it has not been determined that such method is scientifically correct or free from error.

Since the lease is silent as to how or when the gravity and quantity tests are to be made, the rights of the parties depend upon the customs and usages of the trade. Civ.Code, §§ 1644, 1646. Here the trial court held that the ‘core’ method and the ‘running thief’ method were both proper ‘methods of sampling tanks of ‘wet oil’ and methods of handling such fluid or ‘wet oil’ by which accurate measurement could be had of the quantity of oil produced.' This was true in 1934 when the finding was made, but it was not accepted by the trade during the period here in question. The evidence here shows that prior to 1930 every operator in the field and every purchaser of oil therein, except the Shell Oil Company, used the 3-point method of sampling on both wet and dry oil. During the period from 1926 to 1930 laboratory experiments were made which disclosed a certain amount of error in this method when applied to wet oil. After July, 1930, the Texas Company adopted the ‘3 foot core’ method which met the approval of this court in the Meyers Case, but which was not adopted by other operators in this field. After 1930 the Union Oil Company and the Shell Oil Company adopted a new method designated the ‘running thief’ which has not been accepted generally as accurate or correct. The ‘3-point’ method was used by practically all the small operators and purchasers of oil from this field.

Plaintiffs argue that the defendant should have taken the samples with a ‘core’ rather than in the ‘3-point’ method because later experiments have shown that to be a more accurate method. But the lease did not call for such method, and the defendant cannot be charged with fraud when it followed the lease and the usages and practices of the trade. Much has been said about the use of phenol as a diluent and of the ‘water by distillation’ test, both of which are said to be more accurate than the methods used by this defendant. It is sufficient to say that during the period in dispute, or at least prior to 1931, the solvents employed by the defendant were generally and commonly used in that field, were what might be called ‘standard’ methods at that time, and had the indorsement of the American Petroleum Institute, the United States Bureau of Mines, and the American Society for Testing Materials.

But, in the final analysis, this issue rests upon these principles; the plaintiffs agreed to sell their royalty oil at ‘the prevailing market price of such product at the well * * * the market price * * * for oil produced in the oil field * * * of similar gravity or gravities.’ The prevailing market price was the price for wet oil at the wells, the gravity of which was measured or determined by the same methods of sampling and testing as were used by this defendant because that was the only product these plaintiffs had to sell. It matters not that some one may have advanced a theory for a better method of sampling and testing. The defendant accounted to the plaintiffs in accordance with the terms of the lease and could not be asked to do more. Whatever inaccuracies occurred from the use of these methods were a part of the trade, were included by implication in the contract, and must have been in the contemplation of the buyers in that field when the prevailing market price was set upon the ‘observed gravity net quantity.’ It is conceded by the parties that no perfect method of sampling or testing has yet been devised. The trial court expressly found that the ‘core’ method of sampling tanks and the use of the ‘phenolated benzol test’ are substantially accurate and sufficient for field purposes, and that such methods of sampling and testing may be used by the defendant in future operations under the lease. A judgment on such finding, based upon evidence of what occurred in the trade subsequent to 1930, would solve the controversy as to future operations if this action were one for declaratory relief rather than one for breach of contract. Before the trial, defendant made the offer to adopt any method of sampling and testing which the court should approve provided that the plaintiffs would agree to be bound thereby in future operations. The plaintiffs refused to agree, and the parties are left where they were when the lease was executed. It is manifest that the lessee is not required to adopt every new theory for sampling and testing, but that it is justified in following approved and accepted standards. The finings of the trial court that ‘during all the times herein referred to’ the ‘core’ and ‘running thief’ methods of sampling and the use of phenol in testing were known to be accurate and correct are not supported by any evidence, as was clearly pointed out by this court in the Alamitos Case. As in that case the evidence here shows that such methods were not in general use before 1930, and that they have not been generally accepted as accurate or correct. The lessors here contend, as they did in the former case, that it was the duty of the defendant either to adopt the distillation test, or to earlier employ phenol as a solvent in the centrifuge test. But, as was said in that case, the defendant at all times employed the tests which were standard at the time. The fact that the trial court here found, in September, 1934, that other methods were more accurate has no bearing on the question of the diligence of the defendant in the matter of testing many years previously. We are not permitted to indulge in speculation as to what results might have been obtained by the use of theoretical deductions applied at a time when they were not known to the trade and which, even at this time, are of doubtful value.

Defendant's third contention may be summarized as follows: Since it agreed to purchase plaintiffs' oil ‘at the tanks' and was required to pay the prevailing market price for such product at the well, it was entitled to observe the net oil content of the product thus agreed to be sold. When the lessors elected to sell their oil to defendant they dealt at arm's length as vendor and vendee. By the terms of the lease the defendant undertook to purchase plaintiffs' oil ‘at the tanks.’ It is not disputed that as to quantity the net oil content is the basis of sale. If the parties intended that this content should be determined upon tests of clean oil, pipe line oil, or refined oil, it would have been a simple matter to so specify in the lease. But the lease called for delivery in kind at the tanks or the purchase of the same product at the tanks. Hence, the lessors were selling the product as it stood in the tanks. The free water is drained off as a matter of accommodation, but if any further processing is required that is a matter for the lessors. We find nothing in the lease that would support plaintiffs' claim that there is an obligation on defendant to clean their oil either for the purpose of shipment or for the purpose of testing. It is of no aid in the interpretation of this lease to say that one of the large operators in this field voluntarily cleaned the oil before purchasing from its lessors, or that it took samples and made its tests after the oil had been cleaned. Usages and customs are an aid in the interpretation of doubtful expressions in a lease, but where there is no doubt and no ambiguity, the lease itself controls. Here the lease limits the obligation of the defendant to purchase the oil as produced and as it stands in the tanks at the wells. There is no obligation to dehydrate or clean, and to obligation to purchase oil in any other form. And ‘the market price at the well prevailing from tiem to time when the royalty oil would be deliverable hereunder’ means the prevailing market price of the product at the well which would then be deliverable if the lessors elected to take their royalty oil in kind. The root of the controversy between the parties rests in the fact that during the early years of production under the lease the oil was relatively free from water and foreign substances, but that as production went on the quantity of water and foreign substances increased, and the royalty payments to the lessors decreased accordingly. During the early days of production the evidence shows that defendant at all times used standard tests and standard methods of measurement. There is no support for plaintiffs' claim made at this late date that defendant should then have used other methods which, at a later date, were deemed by some parties to be more accurate.

Plaintiffs rely confidently upon the recent decision of this court in Meyers v. Texas Company, 6 Cal.2d 610, 59 P.2d 132. In this latter case this court did not overrule or depart from any part of the decision in the Alamitos Case, but said that the controlling factor in each case is found in the contract of the parties. Attention was then directed to the fact that (6 Cal.2d 610, at page 619, 59 P.2d 132, 136): ‘In the Alamitos Case the lease provided for the ‘purchase of oil’ by the defendant, whereas, in the present case, the defendant, under the facts, was bound to ‘pay the lessors in money the proceeds thereof, less cost of handling after leaving the tank or container.’' Attention was again directed, in a modification of the opinion in the Meyers Case, to the peculiar terms of the lease there involved which required the lessee to market the lessors' oil upon the same terms as it markets its own ‘and pay to said lessors the proceeds therefrom, less the cost of handling after leaving the tank or container, but in no event shall it pay lessors less than the Standard's posted market price.’ 6 Cal.2d 610, at page 613, 59 P.2d 132, 133. This obligation to account for the proceeds required the lessee to pay such proceeds, and hence no question of sampling or of testing was involved. If, by whatever methods employed, the product was gauged at a price less than the Standard Oil posted price, the lessee was required to pay that price and to account to the lessors for the ‘proceeds.’ Here, as in the Alamitos Case, the lessee was required to pay the ‘prevailing’ market price for the product which the lessors had to sell. This is far different from an obligation to account for the proceeds.

Our conclusions from the foregoing are: The plaintiffs agreed to sell and the defendant agreed to buy the royalty oil as it stood in the tanks at the wells; for the purpose of determining the prevailing market price of such product the defendant was entitled to measure that product by such quantity and quality tests as were standard and generally recognized in the trade at the time they were used; the defendant is bound to recognize and use such changes and improvements in the methods of sampling and testing from the time such new methods have become standard or recognized generally in the trade; if errors have occurred in the quantity of royalty oil paid for because of the use of methods which have been rejected as inaccurate, the defendant is liable to account for such errors occurring after the date when such new methods should have been used unless the plaintiffs have acquiesced in the conduct now criticized; if the plaintiffs elect to sell their oil on a clean, or dehydrated basis, and to have quantity and quality tests made on that basis, the cost of such preparation of the product is an expense to be borne by them. Since it has been determined in the Alamitos Case that the methods used by this defendant were standard and accepted methods prior to July, 1930, and since the evidence in this case is in accord therewith, the retrial should be confined to an examination of the conditions obtaining subsequent to that date and should be controlled by the principles herein announced on all other questions raised in the complaint.

Defendant pleaded special defenses of accounts stated, accord and satisfaction, estoppel, waiver, and laches. We do not pass on any of these defenses because, on a retrial of the questions of fact as herein directed, the evidence in relation to these special defenses might develop a different case from that now presented. Here the trial court found that there was no evidence of fraud on the part of the defendant. On the retrial, evidence might be offered that the defendant knowingly and purposely used incorrect methods to defeat plaintiffs' rights under the contract. In such event these defenses would have to be viewed in the light of those circumstances.

That portion of the judgment from which the plaintiffs have appealed is affirmed. The balance of the judgment is reversed.

NOURSE, Justice pro tem.

We concur: WASTE, C. J.; SHENK, J.; EDMONDS, J.; LANGDON, J.; SEAWELL, J.