Plaintiffs granted defendants exclusive right to explore, drill, mine, produce and own all oil and gas found on their property in exchange for specified royalty payments. Plaintiffs claimed that defendants were under an obligation to act prudently to protect the plaintiffs' mineral interest from drainage and that defendants failed and neglected to fulfill their duty thereby damaging plaintiff's mineral interest by allowing gas and oil beneath plaintiffs' property to drain and be produced through a well on an adjoining property, thereby reducing plaintiffs' royalty rights. Defendants filed a motion for summary judgment claiming, inter alia, that plaintiffs' claims were barred by the six-year statute of limitations applicable to breach of contract actions, MCL §600.5807(8). Plaintiffs asserted that their action was not barred because they did not discover their potential claim until 1990, when one of the plaintiffs examined oil production records in Lansing and, thereby, determined that as production from the plaintiffs' well reduced, production from the adjoining property's well increased.
The court held that the plaintiffs' action was barred by the statute of limitations. The court found that although there was not a specific contractual duty for the defendants to develop and protect the well against drainage, that such covenants are implied. An implied covenant to protect against drainage, however, is a part of the lease and is contractual in nature and, therefore, subject to the six-year statute of limitations. In the absence of disputed facts, the question whether the statute of limitations bars plaintiffs' cause of action is a question of law to be determined by the judge, under applicable Michigan law. Here, plaintiffs became aware in 1987 that the production of their well was substantially decreasing but they did not file their complaint under May 1996, two and one-half years after the statute of limitations had expired. The court found that Michigan would not apply a "discovery rule" in a breach of contract action because the breach of contract claim accrues on the date of the breach, not the date that the breach is discovered.
The court also found that even if the discovery rule applied, plaintiffs' claim would still be time-barred. Plaintiffs admitted that they knew as of the Fall of 1987 that production from their well had substantially fallen off yet did nothing to find out why for nearly three years. Pursuant to applicable Michigan law, plaintiffs' claim would be barred when they knew or "should have known" on the basis of objective facts that they had been injured. Since the records relating to oil well production were available, the basis for plaintiffs' cause of action was objectively discoverable and the plaintiffs should have discovered that they had a possible cause of action well before 1990. Probate Estate of Raymond Krause, et al. v. Shell Oil Company, et al., Case No. 96-CV-72144-DT, 1/30/98, Rosen, G.E. (dkt. #16).
This article was prepared by William F. Frey, a partner in our Litigation Department, and previously appeared in the May 1998 issue of the Michigan Bar Journal.