Challenge of Gas Lease- No Extension of Term

22 Mar

Wayne and Mary Harrison challenged the validity of their gas lease with Cabot Oil & Gas, and Cabot claimed such challenge in the courts acted to repudiate the lease thus entitling it to relief which extended the term of the lease.  The case was tried in federal district court and reached the Court of Appeals. The federal district court awarded summary judgment in Cabot’s favor on the suit to invalidate the lease. That court ruled in Harrison’s favor holding “the law of this Commonwealth does not provide for equitable extensions of oil and gas leases under the circumstances.”  While the appeal to the Court of Appeals (Third Circuit) was pending, that court asked the PA Supreme Court to address this question:  “whether the primary term of an oil-and-gas lease should be equitably extended by the courts, where the lessor has pursued an unsuccessful lawsuit challenging the validity of the lease.”

Cabot argued it could not spend between $4M and $7M to develop a Marcellus Shale well, while it was tied up in court with a challenge to its lease. Cabot claimed it wanted the benefit of its bargain. Cabot asked the PA Supreme Court to join other states which have found meritless challenges to leases to be repudiations which warranted the application of equitable principles to extend the lease terms.  They contended Pennsylvania already recognizes all legal predicates to this equitable extension principle.

The Harrisons described the equitable-extension principle as nothing more than a “judicial affirmative action program” for oil and gas producing companies which “abuses landowners who have done nothing other than exercise their legal rights.”  They claimed the lease was not repudiated by filing the declaratory judgment action.

The Supreme Court first noted something more than a mere assertion of a challenge to the validity of a lease is required to be a breach, or anticipatory breach, of the contract. They noted that in the broader context of contracts, filing a declaratory judgment action does not constitute a refusal to perform.  Reflecting on the Harrisons assertions that the gas companies enjoy superior bargaining position in leasing activities, the Court pointed out that the companies were free to insert tolling language in their leases and did not do so.  The Court then held that the mere pursuit of declaratory relief does not amount to a repudiation of the lease and that Pennsylvania will not adopt a special approach to repudiation pertaining only to oil and gas leases.

See Harrison v. Cabot Oil & Gas Corporation, 75 MAP 2014, February 17, 2015