Harrison Decision: Cabot Oil Denied Equitable Extension of Oil and Gas Lease

by Morgan Lewis
Contact

The decision marks another departure by the Pennsylvania Supreme Court from “mainstream” oil and gas jurisprudence.

On February 17, the Pennsylvania Supreme Court (the Court) unanimously ruled that state law does not recognize equitable extensions of leases in the absence of an absolute and unequivocal repudiation of the agreement and expressly refused to create an exception for the oil and gas industry when there is a declaratory judgment action that seeks to invalidate a lease without an actual repudiation of that lease.

Background

In August 2007, Wayne Harrison (Harrison) entered into a five-year oil and gas lease (the Lease) with Cabot Oil & Gas Corporation (Cabot). Halfway through the Lease’s term, Harrison sought to invalidate the Lease, which he claimed was fraudulently procured. His complaint, filed in the U.S. District Court for the Middle District of Pennsylvania (District Court), alleged that Cabot had represented that it would pay no more than $100 per acre. but, as he subsequently learned, his neighbors were receiving substantially larger amounts, some as much as $3,000 per acre. As a result of the lawsuit, Cabot did not operate on the leased property, and therefore sought an equitable extension of the Lease’s primary term equivalent to the lawsuit’s duration.

Although the District Court granted Cabot’s motion for summary judgment on Harrison’s fraud claim, it also granted summary judgment for Harrison against Cabot’s counterclaim for equitable extension of the Lease.[1] While the District Court acknowledged that Cabot had “advance[d] persuasive arguments” and that several other jurisdictions recognized the relief Cabot sought, the District Court expressed doubt that a declaratory judgment action was a repudiation of the Lease under Pennsylvania law and declined to create state law when there was little precedent to do so.[2] The decision was the second from the Middle District of Pennsylvania to reach this conclusion.[3]

In addition to its appeal, Cabot sought certification to the Pennsylvania Supreme Court on the question of whether a lessee is entitled to an equitable extension of the lease if a lessor unsuccessfully challenges its validity. The U.S. Court of Appeals for the Third Circuit certified the question to the Supreme Court of Pennsylvania, which accepted the question. The Court affirmed the District Court’s rejection of an equitable extension due to the filing of a declaratory judgment action.

Analysis

In its opinion, the Court declared, “[W]e view the controlling determination in this case as devolving to whether this Court will adopt a special approach to repudiation pertaining to oil-and-gas leases, as a substantial number of other jurisdictions would appear to have done. We decline to do so, however.”[4] By its decision, the Court deviated from courts in other traditional oil and gas–producing states, such as Texas, Montana, Oklahoma, Louisiana, Michigan, Arkansas, Illinois, and Ohio, which recognize equitable extensions of leases in similar circumstances.

In its analysis, the Court noted that oil and gas companies frequently possess superior bargaining power over landowners and could, therefore, easily draft contracts to include tolling provisions that account for the possibility of lease validity challenges. Relying on such reasoning, the Court brushed aside Cabot’s arguments that it had been denied the benefit of its bargain and that pursuing drilling operations while the lawsuit was pending would have been both an unnecessary risk and economically unwise.

The Court concluded that Harrison had not absolutely and unequivocally refused to perform his obligations under the Lease by filing a declaratory judgment lawsuit, and, accordingly, Cabot was not entitled to an equitable extension of the Lease. In so deciding, the Court was careful to limit its ruling to the particular facts of this case: “We do not foreclose that equitable relief may be available to oil-and-gas-producing companies—subject to applicable requirements governing recourse to equity—where there is an affirmative repudiation of a lease.”[5]

Impact

The Harrison decision represents another example of the Court’s willingness to break from other oil and gas jurisdictions, as demonstrated by its 2013 affirmation of the historic “Dunham Rule,” under which natural gas is presumptively not a “mineral” under oil and gas leases. More significantly, the ruling can be viewed as yet another missed opportunity for the Court to provide a measure of predictability and security to the oil and gas industry in Pennsylvania. Only 14 months ago, we reported in our December 2013 LawFlash on the Court’s landmark Robinson Township decision that invalidated major components of the Commonwealth’s modernized Oil and Gas Act, known as Act 13. The ruling dismantled the legislature’s attempt to establish a uniform set of rules that governs the responsible development and operation of natural gas resources.

On the surface, the Harrison decision can be viewed narrowly as a simple warning to the oil and gas industry to draft leases more carefully. But more importantly, this ruling represents another significant development in the ongoing evolution of the judicial, regulatory, and political regime that oversees oil and gas operations in Pennsylvania. As this landscape continues to change, operators should keep a close eye on emerging developments in Pennsylvania, as its common law does not necessarily track that of other oil and gas–producing states.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.