The opinion of the court was delivered by
In this action plaintiff lessors contend defendant lessee
breached an implied covenant to market gas. The district court
entered summary judgment in favor of the plaintiffs cancelling
the oil and gas leases involved and ordering an accounting.
Twelve wells are involved. Defendant appeals therefrom.
Plaintiffs own the mineral interests in approximately 5,900
acres of land situated in Kiowa and Comanche counties. In 1956
and 1957, Gulf Oil Corporation, defendant's predecessor in
interest, obtained oil and gas leases from plaintiffs.
Subsequently, substantial quantities of gas were found. The
leases represent the greater part of what is known as the Glick
In June 1960, Gulf entered into a 20-year gas purchase contract
with Kansas Gas Supply Corporation (KGS). Under this contract,
KGS agreed to "take or pay" for an amount of gas that would: (1)
exhaust the reserves over the life of the contract; or (2) be at
least 80% of each well's ability to deliver gas. KGS owns a
Kansas intrastate natural gas pipeline that originates in the
Glick Field and terminates in the Wichita area. The primary
of gas so transported was to provide boiler fuel for Wichita
power plants owned by Kansas Gas & Electric Company (KGE).
In 1978 Gulf and KGS entered into an amended contract which
extended the term from June 1980 to December 31, 1990. In return
for the extension, KGS agreed to increase the price of the gas
purchased under the contract to either 45¢ or 55¢ per Mcf,
depending upon whether or not compression was applied, until
December 3, 1980; to $1.50 per Mcf from December 4, 1980, to
December 3, 1981; to $1.55 per Mcf from December 4, 1981, to
December 3, 1982; and for the remainder of the contract the price
would be redetermined annually based on the average of the
highest price paid by any three pipeline buyers within an
eight-county area. There were no changes to the contractual
taking requirements. At the time of this amendment, the price for
gas under the existing contract was 20.5¢ per Mcf.
On April 17, 1978, the date of the contract amendment, Gulf
imposed the following express condition on the amended contract:
"Gulf's execution of this amendment is expressly
conditioned upon receiving the stated price increases
as set forth. If the Kansas Corporation Commission
refuses to approve any of the price increases and/or
redetermined prices as of the dates provided by this
amendment, then the gas purchase contract dated June
24, 1960, as amended, will terminate the date of said
refusal and the term extension provided by this
amendment will not be applicable."
Gulf received the price of gas in accordance with the terms of
the amendment and paid royalties based on these prices in the
years 1978 through 1982.
Beginning on December 4, 1982, the determined price for the gas
was to be $3.27 per mmbtu. However, the price under the contract
was set at $2.289 per mmbtu by the Kansas Natural Gas Price
Protection Act (Act), K.S.A. 55-1401 et seq. Gulf and KGS
agreed that the contract price was capped by the Act. Gulf sold
gas at the $2.289 per mmbtu price through December 1984, when the
In 1984, a dispute arose between Gulf and KGS. Demand for the
gas had been sharply reduced, prices were down, and KGS was under
pressure from the Kansas Corporation Commission to reduce its
costs by renegotiating contracts containing "favored nations"
clauses such as the one herein. KGS successfully renegotiated
contracts with some Glick Field producers. It did not reach
agreement with Gulf.
From January 1, 1985, until September 13, 1985, Gulf continued
to sell gas to KGS. According to Gulf, the contract price, upon
redetermination, was approximately $3.56 per mmbtu. KGS paid,
however, $2.28 per mmbtu for the gas.
On September 13, 1985, by which time Gulf had merged with
Chevron USA, Inc., (Chevron) the wells were shut in. The wells
remained shut in until approximately October 1, 1987. During the
shut-in period, Chevron timely tendered shut-in royalty payments.
Other producers in the Glick Field continued to produce and sell
gas from this common source of supply.
In February 1987, Chevron filed suit against KGS in the United
States District Court for the District of Kansas, Chevron
U.S.A., Inc. v. Kansas Gas Supply Corp., et al. v. Kansas Gas and
Electric Co., No. 87-1115-C, for alleged breach of contract.
That lawsuit is being vigorously pursued by all parties.
In October 1987, Chevron began selling gas from the wells
herein at approximately $1.21 per Mcf to Oxy Marketing, Inc., a
On July 28, 1988, plaintiffs filed this lawsuit to cancel the
gas leases, alleging that in 1978 Chevron breached its implied
obligation to market their gas by extending the gas purchase
contract through 1990 and by the lack of sales between September
1985 and September 1987. On September 1, 1988, Chevron filed its
answer and third-party complaint against KGS, seeking indemnity
for any losses it might incur as a result of this action.
Concurrent with its answer, Chevron filed a motion to dismiss,
contending in part that Chevron, as a matter of law, did not
breach its implied marketing obligation and that cancellation was
not a remedy available to the plaintiffs. The motion was denied.
On October 14, 1988, plaintiffs filed a motion for partial
summary judgment seeking a determination that Chevron's leases
should be cancelled for breach of the implied covenant to market.
On November 2, 1988, Chevron responded to plaintiffs' motion for
partial summary judgment and filed a cross-motion for partial
summary judgment, again contending that no implied duty to market
the gas had been violated.
Following a hearing on the motions, the district court, on
December 16, 1988, granted plaintiffs' motion for partial summary
judgment, ruling that Chevron had breached its implied duty to
market the gas and that cancellation of the leases effective as
of the date the wells were shut in (September 13, 1985) was the
appropriate remedy. The district court further ordered an
accounting for all production after ...