Although they’ve been around forever, oil and gas leases continue to provide fodder for the courts, as we’ve discussed before, especially in light of the boom (or temporary bust, as some might argue) of shale gas drilling.  And it is exactly that boom (or bust) that brings us the decision in Beardslee v. Inflection Energy, LLC, No. 3:12-CV-00252 (N.D.N.Y. Nov. 15, 2012).

Like many property owners in the Marcellus Shale region, the Plaintiffs entered into leases with the Defendant drilling companies which granted the Defendants to the right to explore for, drill and produce gas and oil on their lands.  The terms of these leases were five years and thereafter for so long as there was production of gas or oil on the land, a typical formulation of such leases.  In addition, the leases contained a “force majeure” clause that provided, in relevant part, that “[i]f and when drilling or other operations hereunder are delayed or interrupted . . . as a result of some order, rule, regulation, requisition or necessity of the government  . . . the time of such delay or interruption shall not be counted against the Lessee . . .”

In 2008, the Governor of New York ordered the New York Department of Environmental Conservation (NYDEC) to prepare an Environmental Impact Statement (“EIS”) with respect to drilling for gas in the Marcellus Shale and, in particular, the practice of hydraulic fracturing and horizontal drilling.  Pending the completion of the EIS, which still has not been issued, NYDEC  has placed a moratorium on the issuance of any permits for horizontal drilling in New York.  In 2010, based upon this moratorium, the Defendants invoked the force majeure clause in the leases, purporting to extend their terms for the duration of the moratorium.   The Plaintiffs then sued, seeking a declaration that the leases – which were signed between 2001 and 2006 – expired at the end of their terms  and that the moratorium did not constitute a “force majeure” under the leases.

In a compact and direct decision, Judge Hurd granted summary judgment in favor of the Plaintiffs.  Relying on hornbook law that any ambiguity in a contract must be interpreted against the drafter, the Court held that because the moratorium only prevented horizontal drilling, while the leases permitted any kind of oil and gas development, the moratorium did not prevent the Defendants from performing under the terms of the leases.  Given the Defendants’ sophistication with respect to oil and gas leases, drilling and production,  if the Defendants had intended to limit the scope of the leases to production by means of horizontal wells, or to provide that the force majeure clause could be invoked if governmental actions made horizontal drilling impossible, they could have done so, Judge Hurd noted.  And even though conventional drilling on the Plaintiffs’ property was commercially unviable, the Court held the mere impracticality[1] was not enough to excuse performance. 

This case is an important one, with implications well beyond New York.  A similar moratorium exists within the Delaware River Basin, an area encompassing large portions of New York, New Jersey, Pennsylvania, and Delaware, and in  those states, drillers have invoked force majeure clauses to extend their leases.  While there are various formulations of these leases and each may require individual analysis, the underlying principles are the same.  Further, while Judge Hurd relied on New York law, the principles he relied upon have general application.  Thus, we can expect to see more of these cases in the near future, as landowners seek to either enforce the rent provisions contained in the leases or have the leases terminated.

[1] The Court also found that the leases were not extended by the equitable doctrines of either frustration of purpose or impossibility.  Both of these doctrines, the Court noted, required unforseeability and the Court dismissed any notion that unconventional methods of drilling would not require environmental review. 

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