## Facts

- In 1949, lessors executed an oil and gas lease covering about 3,440 acres in Banner County, Nebraska, for a ten-year primary term and “as long thereafter as” production continued.
- Oil was discovered and produced within the primary term, extending the lease beyond ten years.
- Superior assigned part of its leasehold interest to Lark Oil Company, which later assigned to Petroleum, Inc.
- In 1961, producing acreage was unitized into the Willson Ranch Field “J” Sand Unit under a unitization agreement.
- After unitization, Superior and its assignees conducted no further drilling on lease tracts outside the unitized area.
- In February 1976, successor lessors executed new “top leases” to Chris L. Christensen, Jr. on certain tracts still subject to the prior lease.
- A well under the top leases was successfully completed in February 1977.
- Superior and Petroleum sued the lessors and subsequent lessees, alleging breach by execution of the top leases and claiming trespass and conversion for production from the 1977 well.
- The lessors counterclaimed that Superior breached the implied covenant to further develop and sought cancellation of the lease.

## Issues

1. Whether the lessee breached the implied covenant to further develop the leasehold under the prudent-operator standard.
2. Whether a court may cancel an oil and gas lease for breach of an implied covenant to further develop without prior notice and demand by the lessor.
3. Whether dismissal of claims against subsequent lessees under Fed. R. Civ. P. 41(b) was proper when premised on cancellation of the original lease.

## Decision

- The Eighth Circuit reversed the judgment cancelling the lease and remanded.
- The court accepted that oil and gas leases include an implied covenant to further develop, and it did not disturb the district court’s finding that the lessee’s conduct could constitute breach.
- The court held cancellation was erroneous because the lessors gave no prior notice and demand to cure alleged inadequate development.
- The court rejected arguments that the lessee waived the notice-and-demand requirement or that demand would have been futile.
- Because dismissal of claims against subsequent lessees was predicated on the improper cancellation, the related Rule 41(b) dismissal was also reversed for reconsideration on remand.

## Legal Principles

- Oil and gas leases generally carry an implied covenant to further develop, evaluated by the prudent-operator standard.
- Forfeiture (cancellation) is a disfavored remedy and is not imposed absent strong justification.
- Cancellation for breach of the implied covenant to further develop ordinarily requires prior notice to the lessee and a demand for additional development within a reasonable time.
- The notice-and-demand requirement may be excused only upon clear waiver by the lessee or a showing that demand would be futile.
- Constructive notice of a recorded lease undermines a lessor’s claim that lack of actual knowledge excuses failure to provide notice and demand.

## Conclusion

The court held that, even if the lessee failed the prudent-operator standard for further development, the lease could not be cancelled without prior notice and demand giving the lessee an opportunity to cure; it therefore reversed the cancellation and the related dismissal of claims against subsequent lessees and remanded for further proceedings.


Superior Oil Co. v. Devon Corp., 604 F.2d 1063 (8th Cir. 1979)