New York's high court rejected extending the state’s oil and gas leases that are affected by a moratorium on high-volume hydraulic fracturing (HVHF) on the grounds that a force majeure clause only applies to the secondary term of a lease.
Tuesday's unanimous ruling by the New York Court of Appeals may impact a case in federal court. Last summer, the U.S. Court of Appeals for the Second Circuit said it would ask the state court if the moratorium amounted to a force majeure event, and if so, whether it would trigger the habendum clause, which would extend the primary term of the leases (see Shale Daily, Aug. 6, 2014). The case is Beardslee v. Inflection Energy LLC, No. 12-4897-cv.
At issue are oil and gas leases that about 35 landowners in Tioga County, NY, had signed with Inflection, Victory Energy Corp. and Mega Energy Inc. Collectively, the landowners own about 1,200 acres.
"We interpret the 'notwithstanding' language of the force majeure clause as excusing the energy companies' performance only during the secondary term of the habendum clause, during which operations in the production of oil and gas would be necessary for leases to remain viable," the court said in its ruling. "To read the force majeure clause as applying to the primary term would be to interpret the leases in a manner contrary to the plain intent of the parties."
The court cited rulings in California and Texas for its decision. "Applying similar contract principles, [the other courts] have held that language identical or similar to the force majeure clause at issue here cannot extend the primary term set forth in the habendum clause...As observed by our sister courts, had the energy companies intended for the habendum clause to be subject to other provisions of the contract, they could have expressly so indicated."
Thomas West, an attorney for The West Firm PLLC in Albany, NY, who represented the producers, called the ruling a "tortured analysis." He said the court ruled that since the force majeure clause did not modify the habendum clause, the justices had deducted that they did not have to rule on whether the HVHF moratorium amounted to a force majeure event.
"In order to reach that result, they came up with a somewhat bizarre interpretation that the force majeure only applies to the secondary term of the lease, not to the primary term," West told NGI's Shale Daily on Wednesday. "They didn't provide any analysis for that, except to say because it relates to drilling and production it related to the secondary [term].
"Of course, drilling is the only mechanism to get a lease from a primary term to the secondary term. So the fact that it mentions drilling sort of demonstrates how much they misunderstood the language of the lease."
Most of the leases were signed in 2001, but others were signed between 2002 and 2006. Most also stipulated a five-year term with some extended for an additional five years.
The landowners filed a lawsuit after Inflection declared a force majeure in 2010. The landowners prevailed two years later when U.S. District Court Judge David Hurd ruled that the companies could not use the moratorium as an excuse to invoke force majeure and extend the leases (see Shale Daily, Nov. 26, 2012). The producers appealed.
"All oil and gas leases have a primary term, which is usually a defined number of years, after which the lease expires unless you've done what the habendum clause says you need to do to extend it," West said. "The habendum clause in this case, like many habendum clauses, says you have to drill and produce gas to extend it. Well, the force majeure clause says if drilling is delayed then the time doesn't get counted against the lessee, anything else in the lease to the contrary notwithstanding.
"What the court did [is] they said that language only applies to the secondary term, not the primary term. Of course, that's a fundamental error because drilling is specifically mentioned in the force majeure clause, and drilling is the only way to get into the secondary term."
As a consequence, West said the state court ruled that the habendum clause did not conflict with the force majeure clause, since the latter only applied to a lease's secondary term.
"It was a very tortured analysis to come up with the conclusion that they did, but they're the high court and they have the right to do that," West said. The federal court "will presumably render a decision.
"Because this error is so fundamental, we are discussing with our client next week whether or not they should make a motion for reargument [before the state court]. The federal court will be bound by the state court decision, and so the only way to right this wrong is to ask the state court to reconsider what it did."
West said the chances that the state court would grant a motion for reargument is about 500-to-1.
"It's very rare that they do it, but this error is so fundamental I [have to] tell my client that they should at least bring this fundamental error to the court's attention," West said. "I think the court recognizes that they don't have experience in this area. I think it's something that we just need to make take a shot at and see what happens.
"It's just another example of New York not being receptive to responsible energy development and going out of its way to make the business climate very hostile. Whether it’s politicians or the courts, they seem to go out of their way to side against the industry."