Court of Appeals Rules Against Energy Companies in "Fracking" Dispute

“Force majeure” is an important concept in contract law. Literally translated, it means “superior force,” and it refers to circumstances where a party cannot meet its obligation under a contract because of some external event beyond the party's control. Force majeure generally includes “acts of God”—e.g., hurricanes, earthquakes, flooding—but can also apply to human-driven events such as war, a labor strike, or rioting.

New York's highest court recently addressed the scope of force majeure in the context of a more mundane human event, government regulation, and its effect on the term of oil and gas leases. The Court of Appeals acted in response to a request from a federal appeals court charged with applying New York law to the underlying leases.

Beardslee v. Inflection Energy, LLC

Beginning in 2001, a number of landowners in Tioga County, New York, signed oil and gas leases with a group of energy companies. These leases authorized the energy companies to exploit a huge formation of natural gas beneath the owners' property. The property owners received an annual fee and, if drilling actually commenced, a percentage of the royalties derived from any natural gas recovered. Each of the leases stated they would “remain in force for a primary term of five years...and as long thereafter as the said land is operated by Lessee in the production of oil or gas.”

The leases also contained a force majeure clause, which provided if any drilling activity was “delayed or interrupted” because of any “order, rule, regulation...or necessity of the government,” the time spent addressing any such delay would not count against the five-year term of the lease.

This became an issue in July 2008, when then-Gov. David Paterson ordered the New York Department of Environmental Conservation to review and update the state's regulations governing a key technique employed by the energy companies—popularly known in the press as “fracking”—to assess its environmental impact. The energy companies declared this constituted a force majeure event and informed the property owners this would extend the lease terms accordingly. Although the DEC issued new fracking regulations in 2011, to date no drilling has occurred on any of the land leased by the energy companies.

In 2012, after the leases passed the stated five-year term, the landowners filed suit in federal court, seeking a declaration the leases had in fact expired. The energy companies filed a counter-suit seeking the exact opposite declaration—that the force majeure clause extended the initial five-year term to account for the state's regulatory review. In November 2012, a federal judge ruled for the landowners. The energy companies appealed, and the U.S. Second Circuit Court of Appeals asked the New York Court of Appeals to clarify state law on this issue.

In a March 31 opinion, the Court of Appeals unanimously held the force majeure clause did not modify the primary five-year lease term. The clause stating the primary term “does not incorporate the force majeure clause by reference or contain any language expressly subjecting it to other lease terms,” the Court of Appeals said. The force majeure clause here refers only to delays in “continuous drilling/production operations” caused by state action. Since no drilling ever commenced here, the leases automatically expired after five years.

The Importance of Precise Contract Drafting

As with most contract disputes, the key here was the precise use of language. New York courts are reluctant to read things into a contract unless the parties explicitly put them there. That is why it is always important to work with an experienced New York business attorney before making (or enforcing) any contract. Contact our office today if you would like to speak with an attorney right away.