new york fracking force majeure case

8/12/2019 New York Fracking Force Majeure Case

1/25

124897cv

Beardsleev.InflectionEnergy,LLC

United States Court of Appeals

FORTHESECONDCIRCUIT

AugustTerm,2013

(Argued:August22,2013 Decided:July31,2014)

DocketNo.124897cv

WALTERR.BEARDSLEE,INDIVIDUALLYANDASCOTRUSTEEOFTHEDRUSILLAW.

BEARDSLEEFAMILYTRUST,ANDREAR.MENZIES,ASCOTRUSTEEOFTHEDRUSILLA

W.BEARDSLEEFAMILYTRUST,JOHNA.BEARDSLEE,ASCOTRUSTEEOFTHE

DRUSILLAW.BEARDSLEEFAMILYTRUST,PHYLLISL.BENSON,ELIZABETHA.

BEARDSLEE,LYNDAB.COCCIA,NATHANJ.DONNELLY,CAROLYNB.DONNELLY,

KEVINP.DONNELLY,ROSEANNDONNELLY,MARIES.DONNELLY,WILLIAMJ.

HANER,JOSEPHHANER,JAMESHANER,MARGARETLAWTON,GLENMARTIN,LYNNM.MARTIN,JOSEPHE.MCTAMNEY,B.LOUISEMCTAMNEY,BONNIED.MEAD,R.

DEWEYMEAD,WAYNER.MIDDENDORF,CYNTHIAL.MIDDENDORF,FLOYDE.

MOSHER,JR.,LESAD.MOSHER,AKALESAHUNTINGTON,MOUNTAINPARADISE

CLUBNY31LLC,JAMESW.REYNOLDS,ASTRUSTEEOFTHEJAMESW.REYNOLDS

TRUST,MARYA.PFEILELLIS,KERRYK.ELLIS,PAULR.SALAMIDA,PAULINEM.

SALAMIDA,GARYD.SHAY,BONITAK.SHAY,BRADA.VARGASON,

PlaintiffsCounterDefendantsAppellees,

v.

INFLECTIONENERGY,LLC,VICTORYENERGYCORPORATION,MEGAENERGY,INC.,

DefendantsCounterClaimantsAppellants.


2/25

2

B e f o r e:

WINTER,WESLEY,ANDCARNEY,CircuitJudges.

AppealfromadecisionoftheUnitedStatesDistrictCourtfortheNorthern

DistrictofNewYork(DavidN.Hurd,Judge)grantingthemotionofAppellees

WalterR.Beardslee,etal.,landownersandlessors,forsummaryjudgment,and

denyingthemotionforsummaryjudgmentoftheirlessees,AppellantsInflection

Energy,LLC,VictoryEnergyCorporation,andMegaenergy,Inc. TheDistrict

Courtconcludedthatthepartiesoilandgasleaseshadexpiredbytheirterms,

reasoningthatNewYorkStatesregulatoryactionsdidnottriggerapplicationof

theleases

force

majeure

clauses.

Because

this

case

raises

significant

and

novel

questionsofNewYorkoilandgaslaw,wecertifytwoquestionstotheNewYork

CourtofAppealsforresolutioninthefirstinstance.

QUESTIONSCERTIFIED.

THOMASS.WEST,TheWestFirm,PLLC,Albany,

N.Y.,forDefendantsCounterClaimantsAppellantsInflectionEnergy,LLC,etal.

ROBERTR.JONES(PeterH.Bouman,onthebrief),

Coughlin&Gerhart,LLP,Binghamton,N.Y.,for

PlaintiffsCounterDefendantsAppelleesWalterR.

Beardslee,etal.

WALTER

P.

LOUGHLIN

(Walter

A.

Bunt,

Jr.,

Bryan

D.Rohm,onthebrief),K&LGatesLLP,NewYork,

N.Y.,forAmicusCuriaeMarcellusShaleCoalition.


3/25

3

SUSANL.CARNEY,CircuitJudge:

InflectionEnergy,LLC(Inflection),VictoryEnergyCorporation

(Victory),andMegaenergy,Inc.(Mega)(collectively,theEnergy

Companies)appealfromtheDistrictCourtsordergrantingsummaryjudgment

toWalterandElizabethBeardsleeandoverthirtyotherlandowners(collectively,

theLandowners),anddenyingsummaryjudgmenttotheEnergyCompanies.

Startingin2001,theLandownersenteredintocertainoilandgasleases

(theLeases)withtheEnergyCompanies,grantingtheEnergyCompanies

specifiedrightstoextractoilandgasunderlyingtheLandownersrealproperty

(theProperties)intheSouthernTierofNewYorkState. EachoftheLeaseshas

aninitialprimarytermoffiveyearsandprovidedforasecondarytermthat,once

triggered,would

last

as

long

thereafter

as

the

said

land

is

operated

by

Lessee

in

theproductionofoilorgas. Appx321.

TheEnergyCompaniesfailedtoproduceoilandgasfromtheProperties

withintheLeasesprimaryterms,andthereafter,in2012,theLandownersfiled

thisactionseekingadeclarationthattheLeaseshadexpired. TheEnergy

Companiescounterclaimedforadeclarationtothecontrary. Theyarguedthat

eachLeasewasextendedbyoperationofapurportedforcemajeureclause,

triggered(theyargued)byNewYorkStatesdefactomoratorium(the


4/25


5/25

5

NewYorkandborderingPennsylvania,TiogaCountysitsontheMarcellus

Shale,ablackshaleformationextendingdeepundergroundfromOhioand

WestVirginianortheastintoPennsylvaniaandsouthernNewYork.3 The

formationasawholeisestimatedtocontainupto489trillioncubicfeetof

naturalgasanenergyresourceofenormouspotential.4 Theformationhas

beencharacterizedinrecentyearsasofferingoneofthemostsignificant

opportunitiesfordomesticnaturalgasdevelopmentinmanyyears.5

Beginningin2001,theLandownersseparatelyenteredintotheoilandgas

LeaseswithVictory,grantingVictorycertainrightstoextractoilandgas

resourcesunderlyingtheProperties.6 Foranominalannualfeeor,ifdrilling

commenced,therighttoreceivearoyaltyongrossproceedsrelatedtooiland

gasextracted

and

sold,

Victory

acquired

the

rights

of

drilling,

producing,

and

contestedissuesnotedasnecessary.

3MarcellusShale:TheEnvironmentalReviewProcessforNaturalGasExplorationinthe

MarcellusShale,N.Y.STATEDEPTOFENVTL.CONSERV.,

http://www.dec.ny.gov/energy/46288.html(lastvisitedJuly29,2014)(the2012DECReport).

4Id. Accordingtoestimatespublishedinthe2012DECReport,NewYorkStatesnatural

gasusageratein2012(forcomparison)wasapproximately1.1trillioncubicfeet. Id.

5GeorgeA.Bibikos&JeffreyC.King,APrimeronOilandGasLawintheMarcellusShale

States,4TEX.J.OILGAS&ENERGYL.155,156(20082009)(footnoteomitted).

6TheLeaseswereenteredintobyindividuals,marriedcouplesactingjointly,and

trusteesactingonbehalfoftrusts.


6/25

6

otherwiseoperatingforoilandgasandtheirconstituentsduringtheleaseterm.

Appx32. Itundertooknoobligation,however,todrill.

VictoryshareditsleaseholdinterestswithMega. InJuly2010,Inflection

assumedfromMegatheoperationalrightsandresponsibilitiesundermostofthe

Leases.7

EachoftheLeasescontainsanidenticalhabendumclause.8 Thisclause

establishestheperiodduringwhichtheEnergyCompaniesmayexercisethe

drillingrightsgrantedbytheLease. TheLeaseshabendumclausescontainboth

afiveyearprimaryterm,andanoptionforasecondaryterm.9 Eachclause

provides:

Itisagreedthatthisleaseshallremaininforceforaprimary

term of FIVE (5) years from the date hereof and as long

thereafteras

the

said

land

is

operated

by

Lessee

in

the

productionofoilorgas.

7InflectiondidnotassumeoperationalrightstotheLeasesenteredintobythe

Beardslees,seeBeardslee,904F.Supp.2d.at217,butthisfactualvariationdoesnotaffectour

analysis.

8Ahabendumclause,whichistypicallyfoundinstandardoilandgasleasessuchas

thoseatissuehere,isusedtofixthedurationofsuchalease. Wiserv.EnervestOperating,

L.L.C.,

803

F.

Supp.

2d

109,

113

n.3

(N.D.N.Y.

2011).

These

clauses

typically

establish

a

definite

(orprimary)terminwhichthelessee[is]permittedtodevelop[]property,withanoptionforan

indefinitesecondarytermpermittingthelesseetoreapthelongtermvalueandreturnonthe

moneyspentdevelopingthepropertyduringtheprimaryterm. Id.at118.

9SomeoftheLeaseswereextendedforadditionalfiveyearprimaryterms,Beardslee,904

F.Supp.2dat217,buttheextensiondoesnotaltertheoperativelegalanalysis.


7/25

7

Appx321.

Inaddition,eachLeasecontainswhatthepartiesrefertoasaforcemajeure

clause,whichspeakstodelaysandinterruptionsindrilling. Thatclause

provides,inrelevantpart:

Ifandwhendrilling . . .[is]delayedor interrupted . . .asa

resultofsomeorder,rule,regulation . . .ornecessityofthe

government,oras theresultofanyothercausewhatsoever

beyond the control of Lessee, the time of such delay or

interruptionshallnotbecountedagainstLessee,anythingin

this

lease

to

the

contrary

notwithstanding.

All

express

or

impliedcovenantsofthisleaseshallbesubjecttoallFederal

andStateLaws,ExecutiveOrders,RulesorRegulations,and

this lease shallnotbe terminated, inwhole or inpart,nor

Lessee held liable in damages for failure to comply

therewith,ifcomplianceispreventedby,orifsuchfailureis

theresultofanysuchLaw,Order,RuleorRegulation.

Appx336.10

2. ApplicableStateStatutoryLawandRegulatoryActions

Article23oftheNewYorkEnvironmentalConservationLaw,Mineral

Resources,governsoilandgasproductionintheStateofNewYork. N.Y.Envtl.

10Althoughthepartiesrefertothisclauseasaforcemajeureclause,itisnotdesignated

assuchintheLeasesandmaybeamenabletootherlabels. Cf.BLACKSLAWDICTIONARY718

(9thed.2009)(definingaforcemajeureclauseasacontractualprovisionallocatingtheriskof

lossifperformancebecomesimpossibleorimpracticable,esp.asaresultofaneventoreffect

thatthepartiescouldnothaveanticipatedorcontrolled). Becausebothpartiesrefertothis

clauseasaforcemajeureclause,however,wecontinuetodosohereforeaseofreference. Our

useofthephraseforcemajeureshouldnotbeunderstoodasanaffirmationofthe

characterizationssubstance.


8/25

8

Conserv.Law230101etseq. Article8oftheNewYorkEnvironmental

ConservationLaw,EnvironmentalQualityReview,governshowstate

agenciesaddresstheenvironmentaleffectsoftheiractions,includingtheir

actionswithrespecttooilandgasproduction. N.Y.Envtl.Conserv.Law8

0101etseq. Enactedin1975andcodifiedinArticle8,theStateEnvironmental

QualityReviewAct(SEQRA)representsanattempttostrikeabalance

betweensocialandeconomicgoalsandconcernsabouttheenvironment.Matter

ofJacksonv.N.Y.StateUrbanDev.Corp.,67N.Y.2d400,414(1986). SEQRA

requiresthatNewYorkStateagenciesprepare,orcausetobeprepared...an

environmentalimpactstatement[EIS]onanyaction...whichmayhavea

significanteffectontheenvironment. N.Y.Envtl.Conserv.Law.80109(2).

Whenseparate

actions

hav[e]

generic

or

common

impacts,

regulations

issued

pursuanttoSEQRApermitagenciestoprepareagenericEIS(GEIS)

assessingtheenvironmentalimpactsofthoseactions. N.Y.Comp.CodesR.&

Regs.tit.6,617.10(a)(3). If,afterissuingaGEIS,anagencyproposestotake

actionsnotaddressedbytheGEISbutthatmightsignificantlyandadversely

affecttheenvironment,itmustprepareeitherasupplementalGEIS(SGEIS)or

asitespecificEIS. Id.617.10(d)(4).


9/25

9

In1992,theNewYorkStateDepartmentofEnvironmentalConservation

(theDepartmentorDEC)issuedaGEISthataddressedtheenvironmental

impactofconventionaldrillingtechniquestheninuse.11 The1992GEIS

describedwatergelfracsasthemostcommonstimulationtechniquethen

employedtoderivegasfromtheshaleformation. Thattechniquerequiredusing

approximatelytwentytoeightythousandgallonsoffluidinastimulation

operation. 1992GEISat926.

Morerecently,however,thetechniquesavailableforextractinggashave

undergoneadramatictransformationashighvolumehydraulicfracturing

combinedwithhorizontaldrillinghasbecomefeasible. HVHFalsocommonly

knownasfrackingisanunconventionaldrillingtechnologywhich

involvesthe

injection

of

more

than

amillion

gallons

of

water,

sand,

and

chemicalsathighpressuredownandacrossintohorizontallydrilledwellsasfar

as10,000feetbelowthesurface. Beardslee,904F.Supp.2dat216n.4. The

pressurizedmixturecausestherocklayer...tocrack....[andthe]gastoflow

11GenericEnvtl.ImpactStatementonOil,Gas,andSolutionMiningRegulatoryProgram

(GEIS),N.Y.STATEDEPTOFENVTL.CONSERV.,(1992)926,availableat

ftp://ftp.dec.state.ny.us/dmn/download/geismaster.pdf(lastvisitedJuly29,2014)(the1992

GEIS).


10/25

10

intothewell. Id.;seegenerallyWallachv.TownofDryden,__N.Y.3d__,2014WL

2921399(N.Y.June30,2014).

Thetechnologicaldevelopment,notsurprisingly,wasaccompaniedby

increasedinterestinobtainingpermitsforthecombineduseofhorizontal

drillingandHVHF. OnJuly23,2008,inresponsetothesepaireddevelopments,

thenGovernorDavidPatersondirectedtheDepartmenttoupdateand

supplementthe1992GEIS(the2008Directive). HeinstructedtheDECto

ensurethatitissuitabletoaddresspotentialnewenvironmentalimpactsfrom

drilling,includinghorizontaldrillinginMarcellusshaleformations.12 The

EnergyCompaniesallegethatthis2008Directivemarkedthebeginningofthe

Moratorium.13

Overone

year

later,

on

September

30,

2009,

the

Department

issued

adraft

SupplementalGEIS(theDraftSGEIS),whichquicklyreceivedextensivepublic

commentandgeneratedvigorouscontroversy.14 OnDecember13,2010,

12MemorandumfiledwithNewYorkStateSenateBillNumber8169A(July21,2008),

availableathttp://iarchives.nysed.gov/dmsBlue/viewImageData.jsp?id=172078(lastvisitedJuly

29,2014).

13TheNewYorkCourtofAppealsrecentlyacknowledgedtheexistenceofamoratorium

onhighvolumehydraulicfracturingcombinedwithhorizontaldrilling. Wallach,2014WL

2921399,atn.1.

14DraftSGEISontheOil,GasandSolutionMiningRegulatoryProgram(September2009),

N.Y.STATEDEPTOFENVTL.CONSERV.,availableathttp://www.dec.ny.gov/energy/58440.html


11/25

11

GovernorPatersonissuedExecutiveOrderNo.41,entitledRequiringFurther

EnvironmentalReviewofHighVolumeHydraulicFracturingintheMarcellus

Shale(the2010Order). N.Y.Comp.CodesR.&Regs.tit.9,7.41. Inthe2010

Order,theGovernorobservedthattensofthousandsofcitizens,landowners,

localgovernments,[and]largeandsmallbusinesses...haveexpressedtheir

heartfeltsupportfororoppositiontothenewtechnology. Id. Heinstructedthe

DECtorevisetheDraftSGEISandaddresscomprehensivelytheenvironmental

impactsassociatedwithhighvolumehydraulicfracturingcombinedwith

horizontaldrillinginaprescribedtimeframe. Id. Hefurtherrecogniz[ed]that,

pursuanttoSEQRA,nopermits[could]beissuedbytheStatebeforethe

completionofaFinalSGEIS. Id.

Inresponse

to

these

developments,

Inflection

sent

notices

of

extension

to

theLandowners,assertingthatNewYorksregulatoryactionsconstitutedaforce

majeureeventundertheLeases,extendingtheLeaseterms. OnSeptember7,

2011,theDepartmentreleasedaRevisedDraftSGEIS. Thatday,italsoissueda

pressreleaseinformingthepublicthat[n]opermitsfor[HVHF]willbeissued

untiltheSGEISisfinalizedand[theDepartment]issuestherequiredFindings

(lastvisitedJuly29,2014).


12/25


13/25

13

preventedthemfromusingthecombinationofhorizontaldrillingandHVHF

thattheycharacterizedastheonlycommerciallyviablemethodofdrillingin

theMarcellusShaleduringtheLeasesprimaryterms.15 Therefore,they

contended,theMoratoriumconstitutedaforcemajeureevent;itmodifiedthe

habendumclause,anditworkedtoextendtheLeasesprimarytermsuntilthe

StateliftedtheMoratorium,wheneverthatmightbe.

OnNovember15,2012,theDistrictCourtgrantedsummaryjudgmentto

theLandowners,declaringalloftheLeasesexpired. Thecourtfoundthattheso

calledforcemajeureclausewasnottriggeredbytheMoratoriumanddidnot

extendtheLeases. Itdeclinedtoruleonwhetheraforcemajeureeventoccurred,

explainingthatevenifitdid,theforcemajeureclausewouldhavenoeffectonthe

habendumclause

and

the

Lease

terms.

It

reasoned

that

the

invocation

of

aforce

majeureclausetorelieve[theEnergyCompanies]fromtheircontractualdutiesis

unnecessary,becausetheLeasessimplyprovidetheEnergyCompanieswith

theoptionratherthantheobligationtodrill. Beardslee,904F.Supp.2dat

220. ItalsoconcludedthatGovernorPatersons2008Directivedidnotfrustrate

thepurposeoftheLeases,becausetheEnergyCompaniescoulddrillusing

15AlthoughtheEnergyCompaniesrelyoncommercialviabilityasacriticalfactorin

theiranalysis,theyoffernodefinitionofthephraseorthemeasureofeithercostorprofitability

thattheyenvisionthephrasetoconvey.


14/25

14

conventionalmethods. Id.at221. WhileacknowledgingthattheEnergy

CompaniesadducedevidencesupportingtheirpositionthatHVHFwas

currentlytheonlycommerciallyviablemethodofdrillingandproductionin

theMarcellusShale,thecourtfoundthatmereimpracticalitywasnotenough

totriggertheforcemajeureclauseandextendtheLeaseterms. Id.at220(internal

quotationmarksandalterationomitted).

TheEnergyCompaniesappeal.

DISCUSSION16

1. StandardforCertification

SecondCircuitLocalRule27.2providesameansbywhichourCourtmay

certifyquestionsofNewYorklawtotheNewYorkCourtofAppeals. The

regulationsof

the

New

York

Court

of

Appeals

permit

that

Court,

in

its

discretion,toentertaindispositivequestionscertifiedtoitforresolution.

Certifiedquestionsmustbedeterminativequestionsthatareinvolvedina

casependingbefore[us]forwhichnocontrollingprecedentoftheCourtof

Appealsexists. InreThelenLLP,736F.3d213,224(2dCir.2013)(citingN.Y.

Comp.CodesR.&Regs.tit.22,500.27(a);N.Y.Const.Art.6,3(b)(9)).

16Wereviewadistrictcourtsgrantofsummaryjudgmentdenovo. Isabellav.Koubek,733

F.3d384,387(2dCir.2013).


15/25

15

Wehavedeemedcertificationappropriatewherestatelawisnotclear

andstatecourtshavehadlittleopportunitytointerpretit,whereanunsettled

questionofstatelawraisesimportantissuesofpublicpolicy,wherethequestion

islikelytorecur,andwheretheresultmaysignificantlyimpactahighly

regulatedindustry. Cruzv.TDBank,N.A.,711F.3d261,26768(2dCir.2013)

(internalquotationmarksomitted). Beforewemaycertify,however,wemake

threeinquiries:(1)whethertheNewYorkCourtofAppealshasaddressedthe

issueand,ifnot,whetherthedecisionsofotherNewYorkcourtspermitusto

predicthowtheCourtofAppealswouldresolveit;(2)whetherthequestionisof

importancetothestateandmayrequirevaluejudgmentsandpublicpolicy

choices;and(3)whetherthecertifiedquestionisdeterminativeofaclaimbefore

us.Barenboim

v.

Starbucks

Corp.,

698

F.3d

104,

109

(2d

Cir.

2012).

2. Application

UnderNewYorklaw,[o]il[andgas]leasesorcontractsstandonan

entirelydifferentbasisfromanyotherleaseholdagreements. Conklingv.

Krandusky,127A.D.761,766,112N.Y.S.13(4thDept1908). Oilandgasleases

areenteredintointhecontextofahighlytechnicalindustry,whichemploys

distinctterminologyusedbythoseinthebusiness. Wiserv.EnervestOperating,

L.L.C.,803F.Supp.2d109,117(N.D.N.Y.2011). Currently,however,thereisa


16/25

16

dearthofauthorityinNewYorkrelatingtooilandgasleasessuchasthose

nowatissue. Id. Thus,althoughthiscaseturnsonquestionsofcontract

interpretationthatmaynotbethetypicalmaterialforcertification,becausethe

disputearisesinarelativelyunderdevelopedareaoflawandbecauseit

implicatesmattersofpublicpolicyintegraltotheeconomicandenvironmental

wellbeingoftheStateofNewYork,wecertifythefollowingquestionstothe

NewYorkCourtofAppeals,basedonthemotionforsummaryjudgmentand

accompanyingsubmissions: First,whether,inthecontextofanoilandgaslease,

theStatesMoratoriumamountedtoaforcemajeureevent;andsecond,ifso,

whethertheforcemajeureclausemodifiesthehabendumclauseandextendsthe

primarytermsoftheLeases. Weexplainbelowwhythesequestionsadmitofno

clearanswer

under

New

York

law,

and

why

they

warrant

certification.

a. WastheMoratoriumaforcemajeureevent?

VirtuallyeveryLeasewasexecutedmorethanfiveyearsbeforethe

Landownersbroughtsuitin2012. TheEnergyCompaniesneverdrilledonany

oftheLandownersProperties,letaloneproducedoilorgas. Absentsome


17/25

17

exceptionormodificationtotheprimarytermsinthehabendumclauses,

therefore,eachLeasehadexpiredby2012.17

Thefirstissue,then,iswhethertheMoratoriumqualifiedasaforcemajeure

event. Theforcemajeureclauseprovides,inrelevantpart,thatwhenanorder,

rule,regulation,requisitionornecessityofthegovernment,orothercause

thatisbeyondthecontrolofLesseecausesdelayorinterruptionofdrilling

orotheroperationsundertheLease,thetimeofsuchdelayorinterruption

shallnotbecountedagainstLessee,anythinginthisleasetothecontrary

notwithstanding. Appx336.

DeterminingwhethertheMoratoriumwasaforcemajeureeventunderthe

Leasesrequiresexaminationofwhetherregulatoryactionsbarring

commerciallyviable

drilling

but

not

all

drilling

can

constitute

such

an

event. TheEnergyCompaniesallegeandLandownersdonotseriouslydispute

thatthecombineduseofHVHFandhorizontaldrillingiscurrentlytheonly

commerciallyviablereadprofitablemethodofdrillingintheMarcellus

Shale. ButtheLeasesalmostallofwhichappeartohavebeenexecutedbefore

17Thepartiesdonotaddresswhether,whentheGovernorissuedtheJuly23,2008

Directive,thefiveyearprimarytermsofthoseLeasesthatwereexecutedbeforeJuly23,2003,

hadalreadyexpired. Wedonotaddressthatquestionhere,becausethereisnodisputethat

certainLeasesthatis,thosesignedafterJuly23,2003,andthosewhoseprimarytermshad

beenextendedbyagreementofthepartieswerestillineffectasofJuly23,2008.


18/25

18

currentfrackingmethodswerefullydevelopeddonotexplicitlynotethetype

ofdrillingtheypermit. NordotheyexcusetheEnergyCompaniesfrompaying

rentduringtheprimaryperiodifdrillingproducesnothing,orfrompaying

royaltiesiftheroyaltiesduepaleincomparisontothosethatmightbederived

fromafrackedwell.18 Nevertheless,theEnergyCompaniesarguethatthe

purposeofeveryoilandgaslease,includingtheirs,istoachievepaying

production,andthatrequiringthem(ineffect)todrillatalosswouldviolatethe

impliedcovenantofgoodfaithandfairdealingthatNewYorklaw

acknowledges. See3HowardR.Williams&CharlesJ.Meyers,OILANDGASLAW

604.5(abridgeded.1984)([T]heobjectiveofthe[oilandgas]leaseisnot

merelytohaveoilorgasflowfromthegroundbuttoobtainproductionthatis

commerciallyprofitable

to

both

parties.);

LaBarte

v.

Seneca

Res.

Corp.,

285

A.D.2d

974,975(4thDept2001)([E]verycontractcontainsanimpliedcovenantofgood

faithandfairdealing.).

18TheLandownersallegethatseveralwellsareoperatingintheMarcellusShaleusing

conventionaldrillingmethods. Theydonotaddress,however,andtherecorddoesnotreflect,

whetherthosewellsareprofitable. TheEnergyCompaniesarguethattheLandownersproof

thatconventionalwelldrillingpermitswereavailableisinadequate,buttheyappeartodispute

onlytheprofitabilityofdrillingintheMarcellusShaleusingconventionaltechniques,rather

thantheavailabilityofpermitstodrillusingconventionaltechniquesinthatregion.


19/25

19

WheretheLeasecontainsnoexpressrequirementorconditionthatdrilling

beprofitable,however,andwhenconventionalwelldrillingandotheroiland

gasoperationsappearstilltobepossible,theMoratoriummightnotbeaforce

majeureevent. Generallyspeaking,inNewYork,aforcemajeureclausemust

specificallyinclude[]theeventthatactuallypreventsapartysperformancein

ordertoexcusethatperformance. KelKimCorp.v.CentralMkts.,Inc.,70N.Y.2d

900,90203(1987). Asdescribedabove,theLeasescontainnocommercial

viabilityterm. ReadingsuchatermintotheLeasesastheEnergyCompanies

proposemightthereforeviolateNewYorklawwhileencumberingthe

LandownersPropertiesindefinitely.19 GiventhedearthofNewYorkauthority

inthecontextofoilandgasleases,wearereluctanttoproceedwithoutfurther

guidancefrom

the

Court

of

Appeals.

b. Doestheforcemajeureclausemodifythehabendumclause?

OurreluctancetoaddresswhethertheMoratoriumqualifiesasaforce

majeureeventiscompoundedbyafurther,andinsomerespectsmore

fundamentalquestion:whetherthisforcemajeureclausemodifiestheprimary

termsetbythehabendumclause.

19 Inaparallelsuit,thesameDistrictCourtrejectedasimilarargumentbyotherlessees

thattheMoratoriumwasaforcemajeureeventbecauseitpreventeddrillingintheMarcellus

Shaleinacommerciallypracticabl[e]manner. SeeAukema,904F.Supp.2dat210. Theparties

withdrewtheirappealofthatdecisioninSeptember2013.


20/25

20

ThehabendumclauseprovidesthattheLeaseshallremaininforcefor

thefiveyearprimarytermandaslongthereafterasthesaidlandisoperatedby

Lesseeintheproductionofoilorgas. Appx321. Theforcemajeureclause

providesthatifdrillingisdelayedorinterruptedforanenumeratedreason,

thetimeofsuchdelayorinterruptionshallnotbecountedagainsttheLessee,

anythinginthisleasetothecontrarynotwithstanding. Appx336(emphasis

added). Itisunclearwhether,underNewYorklaw,thisclausemodifiesthe

primarytermofthehabendumclausewhenthehabendumclauseisnot

expresslymadesubjecttotheothertermsoftheLease.

ThepartieshavedirectedustonoNewYorkcasethataddressesthe

relationshipbetweenahabendumclauseandaforcemajeureclauseinanoiland

gaslease.

One

federal

court,

applying

New

York

law,

predicted,

[W]here

...

thelanguageofthehabendumclauseclearlymakesthatprovisionsubjectto

otherprovisionsintheagreement,...thelifeoftheleasemaybesubjectto

modification. Wiser,803F.Supp.2dat121. Otherjurisdictionsthathave

addressedthisissueprovidesomeadditionalguidance. Forexample,one

Californiacourtdeterminedthataforcemajeureeventdidnotmodifytheprimary

termofalease. First,itinterpretedanoilandgasleaseasbothaconveyance

andacontract. SanMateoCmty.Coll.Dist.v.HalfMoonBayLtd.Pship,65Cal.


21/25

21

App.4th401,409(Cal.Ct.App.1998). TheSanMateocourtexplained,The

conveyancingelementsarethegrantingandhabendumclauses,andthe

contractualelementsincludetheprovisionsthatpertaintothelessees

obligationswithrespecttoexploring,drilling,andproducingoperations. Id.

Then,itfollowedthelongestablishedruleofCalifornialawthat

any language in a deed, subsequent to the granting and

habendum clauses, may not modify, cut down or control

those clausesunlesssuchclauses [grantingandhabendum]

incorporate

the

additional

language

by

express

reference.

Id.at412(internalquotationmarksomitted). Thatcourtthusfoundthatin

partbecausethehabendumclausedidnotexpresslyincorporatetheforcemajeure

clausetheforcemajeureclauseatissuedidnotmodifythehabendumclause.

Id.

Itisundisputedthatthehabendumclauseinthiscasecontainsnosuch

language. TheLandownersthereforeclaimthattheprimarytermsoftheLeases

areunaffectedbytheforcemajeureclause.20

20TheEnergyCompaniesarguethattheLandownersinterpretationoftheLeases

rendersmeaninglesstheforcemajeureclausesphrase,thetimeofsuchdelayorinterruption

shallnotbecountedagainstLessee. TheLandownerscounterthattheclauseretainsforce,

becauseitwouldapplyduringtheLeasessecondaryterms,whentheEnergyCompanieshave

anobligationtooperateintheproductionofoilorgastopreventtheLeasesfrom

terminating. AppelleesBr.48. WeleavetheresolutionofthatquestiontotheCourtof

Appeals.


22/25

22

TheEnergyCompaniescontend,however,thatitisirrelevantthatthe

habendumclausedoesnotmakeitselfsubjecttotheotherLeasetermsbecause

theforcemajeureclauseapplies,anythinginthisleasetothecontrary

notwithstanding. Appx336. UnderNewYorkcontractlaw,clausessimilar

tothephrasenotwithstandinganyotherprovisiontrumpconflictingcontract

terms. BankofN.Y.v.FirstMillennium,Inc.,607F.3d905,917(2dCir.2010)

(alterationomitted). TheEnergyCompaniesthusarguethattheforcemajeure

clausemodifiesthehabendumclause,regardlessoftheabsenceofanysubject

tolanguageinthehabendumclause. Indeed,inSanMateo,thecourtsuggested

thatiftheforcemajeureclausecontainedlanguagepurportingtomodifythe

habendumclauseitself,thenthecasemayhavecomeoutdifferently. 65Cal.

App.4th

at

412

13.

NewYorklawoffersnoguidanceonwhetheraforcemajeureeventwould

extendtheprimarytermsoftheLeases. Giventheimportanceofthisissueand

thelikelihoodthatitwillrecurinothercasesinvolvingsimilaroilandgasleases,

wethinkitprudenttoleavethisissuetotheNewYorkCourtofAppeals.


23/25

23

c. CertificationofthesetwoquestionstotheNewYorkCourt

ofAppeals

Asnotedabove,beforewemaycertify,wemakethreeinquiries:

(1)whether

the

New

York

Court

of

Appeals

has

addressed

the

issue

and,

if

not,

whetherthedecisionsofotherNewYorkcourtspermitustopredicthowthe

CourtofAppealswouldresolveit;(2)whetherthequestionisofimportanceto

thestateandmayrequirevaluejudgmentsandpublicpolicychoices;and

(3)

whether

the

certified

question

is

determinative

of

a

claim

before

us.

Barenboim,698F.3dat109.

Inourview,thetwoquestionsthatwecertifysatisfyallthreeinquiries.

First,theNewYorkCourtofAppealshasnotdecidedthequestionsbeforeus.

NorhasanyNewYorkstatecaseofwhichweareawareresolvedtheseissues.

SeeGeorgeA.Bibikos&JeffreyC.King,APrimeronOilandGasLawinthe

MarcellusShaleStates,4TEX.J.OILGAS&ENERGYL.155,191(20082009)(New

Yorkpresentsessentiallyablankslateastoallsignificantoilandgaslease

issues.). Second,thesequestionsareofgreatimportancetotheStateofNew

York.There

is

substantial

interest

in

the

use

of

HVHF

in

the

Marcellus

Shale,

andinadditiontotheLandownersinthiscasemanyNewYork

landownerscouldbeaffectedbythisruling,bothastocurrentlyeffectiveleases


24/25

24

andastoleasesthatmaybeenteredintointhefuture. Andfinally,thecertified

questionsaredeterminativeoftheclaimsinthiscase. TheCourtsanswertoour

certifiedquestionswouldresolve(1)whethertheStatesMoratoriumwasaforce

majeureevent;and(2)whethertheEnergyCompaniesmayinvoketheforce

majeureclausetoextendtheprimarytermsoftheLeases,thusdetermining

whethertheLeaseshaveorhavenotexpired.

Wethereforefindthateachfactorweighsinfavorofcertifyingthese

questionstotheNewYorkCourtofAppeals.

CONCLUSION

WecertifythefollowingquestionstotheNewYorkCourtofAppeals

basedonthemotionforsummaryjudgmentandaccompanyingsubmissions:

1.

UnderNew

York

law,

and

in

the

context

of

an

oil

and

gas

lease,

did

the

StatesMoratoriumamounttoaforcemajeureevent?

2. Ifso,doestheforcemajeureclausemodifythehabendumclauseandextend

theprimarytermsoftheleases?

WeinvitetheNewYorkCourtofAppealstoexpand,alter,orreformulate

thosequestionsasitdeemsappropriate.

ItisherebyORDEREDthattheClerkoftheCourttransmittotheClerkof

theNewYorkCourtofAppealsacertificateintheformattached,togetherwitha


25/25

25

copyofthisOpinionandacompletesetofthebriefs,appendices,andrecord

filedbythepartiesinthisCourt. Thispanelwillretainjurisdictiontodecidethe

caseoncewehavehadthebenefitoftheviewsoftheNewYorkCourtof

AppealsoroncethatCourtdeclinestoacceptcertification.

CERTIFICATE

WeherebycertifytheforegoingquestionstotheNewYorkCourtof

AppealspursuanttoSecondCircuitLocalRule27.2andNewYorkCompilation

ofCodes,Rules,andRegulations,title22,section500.27(a).

new york fracking force majeure case

Documents