Tuesday, March 27, 2012

Procedural Decisions Issued in Force Majeure Cases: One Arbitrates, Other Proceeds

The main issue:  Does New York State's Still-Ongoing Shale Gas Freeze, begun in 2008, pose enough of an uncontrollable, external, disruptive event to allow industry to declare force majeure extensions on oil and gas leases which otherwise would have by now expired?

The court's answer:  Don't know yet.

(A prior ruling went in the landowners' favor, but was limited to situations in which the leaseholding side at some point failed to tender additional delay rental payments during the time period in which it claimed to be stymied.)

The interim procedural issue:  Do arbitration clauses embedded within some, but not all, of the underlying leases mean the court should defer to a ruling by a yet-to-be-picked, three-person arbitration panel?

The court's answer:  Yes and no.

(Isn't this fun?)

In the first case — a "yes" on arbitration from the court — nearly all the underlying leases carried arbitration clauses (and, for those few situations in which the landowners happened to have struck that paragraph before signing, there will be a time-limited stay).  In the second case — a "no" on a stay pending arbitration in the first — none of the leases explicitly called for arbitration of disputes, and so the court-based litigation proceeds.

That's the word from U.S. District Court Northern Division Judge David N. Hurd, sitting in Utica, in two decisions dated March 20 and 21 (decisions embedded further down).

[First digression:  None of this has yet been picked up on by Upstate's increasingly under-capitalized media, which appear to me to have difficulty recognizing any oil and gas news that's not aggressively touted by either of the well-organized, enviro's versus industry sides in the Ongoing Persuasive Contest Over Hydraulic Fracturing.]

[Second digression:  New York's well-organized and well-funded anti-drilling forces undoubtedly yearn to paint these cases as examples of Shale Gas Martyrdom.  In that dramatic media narrative, landowners are cast as underdogs going up against the collossal natural gas industry — on the excessively hopeful theory that these folks have become positively twitchy about the now-demonized impacts of extracting their previously unknown shale gas resource.  In actual fact, however (and acknowledging that no one can fairly generalize the mental state of all of them), I think it's fair to say that most of the litigating landowners simply want to be free to lease again — on better terms, should such an opportunity ever again arise, now that they know so much more about the business.]

[Third digression:  It's not correct to report or imply that all industry leaseholders have uniformly attempted to invoke force majeure over any of their Upstate leases that lapped into the time period of NY's moratorium.  Here's my evidence:  Talisman Energy of Canada, f/k/a Fortuna, has, since August 2008, recorded surrenders of 87 leases of similar vintage in Cortland County — based on my having taken a quick look at that locality's remarkably progressive, free, online land records system.  Similar facts may be distilled from other County Clerk's Offices where Talisman had recorded leases, but proving it would require burning through both fossil fuels, and much additional unpaid time, and I'm running short in both areas at the moment.]

The first force majeure case features 259 plaintiff landowners, 150 leases, and 10,000 acres in Broome, Tioga, Cortland, and Chemung counties.  The current leaseholder is an arm of Chesapeake Energy out of Oklahoma, which previously arranged a basically two-thirds/one-third split with a U.S.-organized arm of Statoil, Norway's state-owned oil and gas company.  The clocks on these leases all started ticking way back in 1999/2000 (running for ten years), or in 2004/2005 (running for five years), and so they would seem to have expired in 2009/2010 — without development leading to natural gas production from any formation, which turned out to be what happened.  None of the leases explicitly carried a force majeure clause, but the industry's arguments revolve around whether that was implied under basic contracts law.  The landowners' main lawyer is Robert R. Jones of the Binghamton firm, Coughlin & GerhartThomas S. West of Albany represented CHK.

The second case has 55 landowners, 32 leases, and land in Broome and Tioga counties.  Again, the CHK/Statoil joint venture is the current leaseholder, though the leases were originally purchased by a variety of E&P companies then eagerly operating in Upstate between 2000 and 2006.  These deals also ran for five- or ten-year primary terms, and — undeveloped — expired on their face between 2008 and 2011.  Some of the leases in this second case explicitly carried force majeure clauses, but none of them carried arbitration clauses — thus the main reason for the differing procedural outcomes.  The landowners' main lawyer on this one is Scott R. Kurkoski of Levene Gouldin & Thompson, also of Binghamton, and West, again, was the main rep for the industry side.

[Clarification made April 1, based on a helpful, explanatory post on JLCNY's web site from lawyer Kurkoski:  A number of landowners were at some point removed as plaintiffs from this second case — all those with arbitration clauses in their leases — after the significance of the defendant's angle along these lines became clear.]

A key question:  Given that these landowners represent only a small, actually litigating sample of the total universe of Upstate landowners who are similarly affected by this issue, would a result reached solely in arbitration have much of an impact on the rest of the group — without the others having to go through the whole exercise over and over again? 

A court-issued result?

Here's the decision in the first, sending the matter to arbitration:

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