Clarkson & Co. v. Continental Resources, Inc.

#25804, #25821-a-LSW

2011 S.D. 72

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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CLARKSON AND COMPANY, Plaintiff and Appellee,

v.

CONTINENTAL RESOURCES, INC., Defendant and Appellant.

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APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
HARDING COUNTY, SOUTH DAKOTA

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THE HONORABLE JOHN W. BASTIAN
Judge

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KENNETH E. BARKER
TIMOTHY J. VANDER HEIDE of
Barker Wilson Law Firm, LLP
Belle Fourche, South Dakota Attorneys for plaintiff
and appellee.
MICHAEL M. HICKEY
SARAH E. BARON HOUY of
Bangs, McCullen, Butler, Foye &
Simmons, LLP
Rapid City, South Dakota

and

LAWRENCE BENDER of
Fredrikson & Byron, PA
Bismarck, North Dakota Attorneys for defendant
and appellant.
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CONSIDERED ON BRIEFS
ON AUGUST 22, 2011

OPINION FILED 11/09/11
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WILBUR, Justice

[¶1.] Clarkson and Company (Clarkson) owned and leased land in Harding

County, South Dakota, on which Continental Resources, Inc. (Continental)

conducted oil and gas exploration activities. Continental agreed to pay Clarkson for

use of and damage to Clarkson’s property. Clarkson sued Continental, seeking

declaratory relief to clarify the terms of the payment agreement Continental and

Clarkson made. After cross-motions for summary judgment and a court trial, the

trial court granted judgment to Clarkson for $164,102.

[¶2.] Continental raises the following issues on appeal:

1. Whether the agreement calls for annual escalation of road use
payments;

2. Whether Clarkson’s claims are barred by laches;

3. Whether roads on land that Clarkson leased in 1981 and
subsequently purchased are subject to the road use payment
provision of the agreement; and

4. If road use payments are subject to annual escalation under the
agreement, whether the consumer price index formula in the
escalation clause should begin, and continue to accrue during a
time period otherwise barred by the statute of limitations.

[¶3.] By notice of review, Clarkson raises two issues on appeal:

1. Whether Clarkson is entitled to recover road use payments for
leased roads which existed at the time of entering the
agreement; and

2. Whether Clarkson is entitled to road use payments for 0.69
miles of existing road which Continental used to construct a new
road.

[¶4.] We affirm.

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FACTS AND PROCEDURAL HISTORY

[¶5.] Clarkson owns and leases property in Harding County. Continental

conducts oil and gas exploration, discovery, and production in Harding County. In

1981, Continental’s predecessor in interest, Koch Oil, entered into an agreement

with Clarkson’s predecessor in interest, Clarkson Land & Livestock Company, Inc.,

to conduct oil and gas exploration on Clarkson’s property. The agreement provided

that Continental would compensate Clarkson for the use of Clarkson property as

well as damage caused by Continental’s operations on Clarkson property. Over the

years, the agreement has been the source of several disagreements. Neither party

elected to bring the matter to court until 2006, when Clarkson brought this action.

[¶6.] Most of the disputes have centered on how many miles of roadway on

Clarkson land are subject to road use payments under the agreement. To resolve

one dispute, in 1996, the parties orally modified the agreement. The oral

modification called for a “base” of 15 miles. At trial, Clarkson argued that the oral

modification was provisional. However, the trial court found that the 1996 oral

agreement constituted a modification of the 1981 agreement. Clarkson has not

appealed this issue.

[¶7.] On appeal, the parties have two central disputes. First, the parties

dispute the applicability of the Section XI “Escalation” clause to the road use

payments specified under Section III(C), “Roads.” Section III(C) provides that if

Continental “uses a roadway already in existence and owned by [Clarkson], then,

and in that event, [Continental] shall pay to [Clarkson] the sum of Seven Hundred

Fifty Dollars ($750.00) per mile per year for the use of said roadway.” The

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escalation clause provides that “damages payable” under the contract will be

adjusted for inflation each year based on the CPI:

ESCALATION

These parties agree that the damages payable by and under the
terms of this Agreement as the same pertains to roads, flow
lines, locations and geophysical exploration are subject to an
escalation in the amount so paid, the same being hereinafter set
forth.

As to the damage payment for roads, flow lines, and locations
and/or sites, [Continental] agrees to pay to [Clarkson] the unit
amounts specified above and in addition thereto to increase said
unit amounts by ten (10) percent effective July 1, 1981, and to
increase the unit amounts on July 1st each year thereafter by a
percentage equal to the percentage increase in the Consumer
Price Index. It is the intention of these parties that any
damages determined and to be paid subsequent to July 1st of
any given year shall be subjected to the percentage increase in
the Consumer Price Index.

The parties filed cross-motions for summary judgment concerning the escalation

payments. The trial court found that the agreement unambiguously provided that

the road use payments contained in Section III(C) are “damages payable” and

subject to the escalation clause and granted Clarkson’s motion.

[¶8.] Second, the parties dispute whether roads located on property leased

by Clarkson are subject to the road use fee provided for in Section III(C) of the

agreement. The relevant portion of the agreement provides: “In the event that

[Continental] uses a roadway already in existence and owned by [Clarkson], then,

and in that event, [Continental] shall pay to [Clarkson] the sum of Seven Hundred

Fifty Dollars ($750.00) per mile per year for the use of said roadway.” The trial

court found the plain language of the provision clear. Since the agreement provides

for use payments for “roadway already in existence and owned by” Clarkson, roads

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on leased land were not subject to the fee. (Emphasis added.) Therefore, the trial

court granted summary judgment in favor of Continental. However, the trial court

held that when Clarkson purchased land previously leased from the State, the road

became subject to the annual road use payments.

[¶9.] In January 2010, the trial court held a two-day bench trial to resolve

the dispute about the effect of the 1996 oral modification and determine damages.

The court entered judgment against Continental for $164,102.

STANDARD OF REVIEW

[¶10.] Contract interpretation is a question of law. Ziegler Furniture &

Funeral Home, Inc. v. Cicmanec, 2006 S.D. 6, ¶ 14, 709 N.W.2d 350, 354. “Thus we

must determine whether the trial court’s interpretation of the contract was correct,

and we make this determination de novo.” Vollmer v. Akerson, 2004 S.D. 111, ¶ 4,

688 N.W.2d 225, 227. In addition to the contract interpretation questions,

Continental also appeals the trial court’s determination on the doctrine of laches.

Whether or not the trial court used the correct legal standard in determining laches

is a question of law, which we review de novo. However, if the trial court applied

the correct legal standard in determining laches, its findings are reviewed under the

clearly erroneous standard and its application of the doctrine is reviewed for abuse

of discretion. Tovsland v. Reub, 2004 S.D. 93, ¶ 26, 686 N.W.2d 392, 402.

ANALYSIS

[¶11.] We must first determine whether Clarkson’s claims are barred by

laches (Continental appeal issue two). Both parties agree that Clarkson’s recovery

of damages is limited to those sustained on or after June 13, 2000, because of the

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applicable statute of limitations. See SDCL 15-2-13(1) (Civil actions upon a contract

can be commenced only within six years after the cause of action shall have

accrued). However, Continental argues that Clarkson’s delay in bringing action

should bar any recovery whatsoever under the doctrine of laches. We agree with

the trial court that Clarkson’s claim is not barred by laches.

[¶12.] Laches is an equitable remedy which will apply when the defendant

can show that the plaintiff “(1) had full knowledge of the facts upon which the

action was based, (2) regardless of this knowledge, he engaged in an unreasonable

delay before seeking relief in court, and (3) that it would be prejudicial” to allow the

plaintiff to maintain the action. In re Admin. of C.H. Young Revocable Living Trust,

2008 S.D. 43, ¶ 10, 751 N.W.2d 715, 717 (citations omitted). Because laches is an

affirmative defense, Continental “has the burden of proof” for each of the three

elements. Zephier v. Catholic Diocese of Sioux Falls, 2008 S.D. 56, ¶ 9, 752 N.W.2d

658, 663. Although there is no dispute that there was considerable delay in

bringing this action, “[l]aches does not depend upon passage of time alone; plaintiff

must be chargeable with lack of diligence in failing to proceed more promptly.”

Conway v. Conway, 487 N.W.2d 21, 25 (S.D. 1992).

[¶13.] The trial court found that Continental had not shown any significant

prejudice. Continental disagrees. Specifically, Continental argues that allowing

this action subjected it to evidentiary and economic prejudice. Despite such

arguments, as the trial court found, “there is scant evidence of the same in the

record.” To the contrary, the record shows that Continental was well aware of

continuing disagreements between the parties. Thus, Continental should have been

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well aware of the possibility of litigation and therefore cannot be prejudiced by this

action.

[¶14.] Moreover, Continental provides no legal authority to support its

contention that economic prejudice is a type of prejudice that the equitable remedy

of laches seeks to address. Even if it is presumed that “economic prejudice” can

sustain a laches defense, it is questionable, at best, whether Continental has been

subject to such prejudice. Continental argues that Clarkson’s dilatory claim has

caused it to be subject to excessive prejudgment interest on overdue escalated

payments. Even assuming this to be true, Continental has received the

corresponding economic benefit of retaining the money owed under the agreement

well past its actual due date. We agree with the trial court’s conclusion that the

doctrine of laches does not bar this action by Clarkson.

[¶15.] Since we find that Clarkson’s claims are not barred by laches, we must

address the various issues raised by the parties as to the proper meaning of the

agreement. The disputes center on the language contained in two portions of the

agreement: (1) Section XI “Escalation” (the Escalation Clause) and (2) Section III(C)

“Roads” (the Road Use Payment Clause). When interpreting a contract, “[t]his

Court looks to the language that the parties used in the contract to determine their

intention.” Pauley v. Simonson, 2006 S.D. 73, ¶ 8, 720 N.W. 2d 665, 667-68

(citations omitted). If the intent of the parties is “clearly manifested” by the plain

language of the agreement, “it is the duty of this Court to declare and enforce it.”

Id. (citations omitted).

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The Escalation Clause

[¶16.] The Escalation Clause provides that “damages payable” under the

agreement are to be increased each year “by a percentage equal to the percentage

increase in the [CPI].” Clarkson claims that the agreement unambiguously

provides that annual road use payments, as set forth in Section III(C) of the

agreement, are “damages payable” and therefore subject to the escalation clause.

Continental disagrees. According to Continental, the agreement distinguishes

between “damages” and “use” and the plain language of the escalation clause does

not provide for the escalation of “use” fees. The trial court agreed with Clarkson

and granted Clarkson’s motion for partial summary judgment and denied

Continental’s motion.

[¶17.] 1. Whether the agreement calls for annual escalation
of road use payments (Continental appeal issue one).

[¶18.] Continental argues that the agreement distinguishes between

“damage” fees and “use” fees. Therefore, since the Escalation Clause explicitly

references “damage” fees but makes no mention of “use” fees, it was the intention of

the parties that only damage fees be subject to escalation. Although it is true that

the escalation clause does not explicitly reference road “use” fees, such a narrow

reading overlooks the general context in which the language appears.

[¶19.] First, the payment for roads—whether for use of an existing road or

new construction—is found under Section III “Future Surface Damages.” The trial

court found such to be “an implicit acknowledgement of the obvious: damage to

Clarkson’s land results from new road construction and from use of existing roads.”

Indeed, the parties explicitly acknowledge this fact in the prefatory, or

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“Witnesseth,” section which provides that “the exploration activities on and under

such properties of [Clarkson] by [Continental] have and will continue to restrict the

use of or to damage the surface owned or leased by [Clarkson].” For example, when

Continental uses Clarkson’s roads, Clarkson is not able to enjoy use of its roads,

thereby causing Clarkson “damages.”

[¶20.] Second, the escalation clause specifically provides that it applies to

“roads, flow lines, locations and geophysical exploration,” but, at the same time,

does not contain any limiting language indicating that it was the intent of the

parties that existing roads should be treated differently than newly constructed

roads. (Emphasis added.) Third, as the trial court noted in ruling in favor of

Clarkson’s motion for summary judgment on the issue, as a matter of logic, “it

would seem unusual that the parties intended to freeze the amount paid for road

use for over twenty-five years without any express intention of the same.” For the

foregoing reasons, we agree with the trial court.

[¶21.] 2. If road use payments are subject to annual escalation
under the agreement, whether the consumer price index
formula in the escalation clause should begin, and
continue to accrue during a time period otherwise
barred by the statute of limitations (Continental appeal
issue four).

[¶22.] Continental claims that if road use payments are subject to annual

escalation under the agreement, Clarkson should not benefit from the accumulation

of inflation prior to 2000 since the statute of limitations bars claims for that period.

Such a result is achieved by setting the CPI to 100 in the year 2000 (as opposed to

171.3, the actual CPI for the year 2000) and then adjusting for inflation from that

point forward. Continental offers no authority to support its position.

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[¶23.] The trial court found that the CPI rate should accrue from 1981 to the

present date with Clarkson’s damages commencing in 2000. We agree with the trial

court that the statute of limitations does not prevent Clarkson from recovering for

inflation adjustments under the escalation clause during the barred period. The

agreement clearly and unambiguously establishes 1981 as the base year for the

calculation. To rule otherwise would defeat the purpose of such a clause which is to

allow Clarkson the ability to keep up with inflation. Therefore, the CPI rate should

be applied from 1981 to the present date with Clarkson’s damages calculated

commencing in 2000.

The Road Use Payment Clause

[¶24.] Section III(C) provides that “[i]n the event that [Continental] uses a

roadway already in existence and owned by [Clarkson], then, and in that event,

[Continental] shall pay” Clarkson $750 per mile per year for the use of the road. In

granting Continental’s motion for summary judgment, the trial court reasoned that

“[i]f the parties meant to include leased land in the provision at issue, the contract

would so state. Accordingly, ext[r]insic evidence is unnecessary to determine the

parties’ intent.” However, in determining damages, the trial court found that

nothing in the agreement suggested that Continental should be exempt from paying

compensation to Clarkson when it uses an existing road on land purchased by

Clarkson after 1996 (the year the parties entered into the oral modification).

Continental disagrees with the trial court’s ruling as it applies to after-acquired

ownership of leased land and Clarkson disagrees with the trial court’s ruling on this

issue because it required ownership prior to the application of the road use fee.

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[¶25.] 1. Whether Clarkson is entitled to recover road use
payments for leased roads which existed at the time of
entering the agreement (Clarkson notice of review issue
one).

[¶26.] Clarkson argues that the trial court erred when it found that the

phrase “owned and existing” as used in the second paragraph of Section III(C) of the

agreement limited its application to roads on land Clarkson owned. We agree with

the trial court.*

[¶27.] As Clarkson itself points out, in several sections the agreement refers

to land “owned and/or leased” by Clarkson. Notably, the first paragraph of Section

III(C) uses such terminology in establishing payment due to Clarkson for roads

built or constructed by Continental. The relevant language provides, “[Continental]

agrees to pay [Clarkson] the sum of [$2.50] per rod of road built or constructed in

any fashion on and across the surface of land owned and/or leased by

[Continental].” (Emphasis added.) In contrast, the second paragraph of Section

III(C), which governs road use payments, refers only to land owned by Clarkson.

This contrasting use demonstrates that if the parties intended to include leased

land for the payment at issue, they would have used the term “leased” as they did in

other parts of the contract.

* We also note that the trial court made a finding that, in 1996, when the
parties agreed to an oral modification, establishing a 15-mile base for the
road use fees, both parties relinquished the right to have the actual mileage
measured. The court further found that such an agreement was in the
parties’ best interest because it allowed them to resolve the road use mileage
dispute and establish a base number of road miles subject to road use
payments going forward. Clarkson did not appeal the trial court’s finding of
fact that the 15-mile agreement applies to all roads Continental used as of
1996.
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[¶28.] Clarkson points to SDCL 45-5A-3(7) to support its reading of the plain

language of the agreement. The statute, which addresses “Compensation for

Damages From Mining, Oil and Gas Development” provides a definition of “Surface

Owner.” According to the statute, a “Surface Owner” is “the person who has

possession of the surface of the land, if other than the mineral developer, either as

an owner or as a lessee.” SDCL 45-5A-3(7) (emphasis added). However, we find this

argument to be of limited persuasive value for two reasons. First, Clarkson did not

raise the argument at trial, and therefore, raising it now is a new legal theory which

may not be considered for the first time on appeal. Alvine Family Ltd. P’ship v.

Hagemann, 2010 S.D. 28, ¶ 21, 780 N.W.2d 507, 514. Second, the statute was

enacted in 1982, the year after the agreement was drafted. Therefore, even if this

Court were to consider the statute when determining the intention of the parties, it

would hold little probative value.

[¶29.] 2. Whether roads on land that Clarkson leased in 1981 and
subsequently purchased are subject to the road use
payment provision of the agreement (Continental appeal
issue three).

[¶30.] The plain language of the agreement is consistent with the trial court’s

ruling that Continental must compensate Clarkson when it uses an existing road on

land purchased by Clarkson following the 1996 oral modification. The agreement

provides that Continental must pay the annual use fee “[i]n the event that [it] uses

a roadway already in existence and owned by” Clarkson. We read the adverb

“already” to modify “in existence,” but not “owned.” As a result, when Clarkson

purchased a portion of the land it had previously leased from the State, Clarkson

was entitled to receive compensation under the agreement’s road use payment

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provision. Therefore, the trial court correctly found that the land Clarkson

purchased from the State in 2006 is subject to the road use damage payments.

[¶31.] 3. Whether Clarkson is entitled to road use payments for
0.69 miles of existing road which Continental used to
construct a new road (Clarkson notice of review issue
two).

[¶32.] Finally, under the terms of the agreement, Clarkson is to be

compensated if (1) Continental uses a road already in existence or (2) constructs a

road. In 2004, Continental built a 0.69 mile road on or near an existing track or

trail that was unusable by Continental. Clarkson argues that the two fees are not

mutually exclusive; and therefore, Clarkson is entitled to payment under both the

road use and road construction provisions for this stretch of road. The trial court

found that when Continental builds a new road over an existing track or trail, it is

not “using” the old road. Therefore, Clarkson is not entitled to a road use payment

for this road. We agree.

CONCLUSION

[¶33.] We affirm the trial court’s construction of the plain language of the

agreement and the judgment against Continental for $164,102.

[¶34.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and

SEVERSON, Justices, concur.

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