Commercial Division Blog
Court of Appeals Accepts Certified Questions Regarding Interpretation of Oil and Gas Leases
On August 28, 2014, the Court of Appeals accepted two certified questions from the Second Circuit in Beardslee v. Inflection Energy, LLC, 12-4897-CV, a case involving the interpretation of oil and gas leases. At issue in Beardslee is the interplay between two provisions in the leases: (1) the so-called "habendum" clause, which sets the duration of the lease, and (2) a force majeure clause, which concerns delays or interruptions in drilling. The habendum clauses at issue provided for a five year initial term, and an option for a secondary term, which would extend "as long thereafter" as the land "is operated by the Lessee in the production of oil or gas." The force majeure clauses stated: "If and when drilling . . . [is] delayed or interrupted . . . as a result of some order, rule regulation . . . or necessity of the government, or as the result of any other cause whatsoever beyond the control of the Lessee, the time of such delay or interruption shall not be counted against the Lessee, anything in this lease to the contrary notwithstanding."
After the expiration of the five-year term, the lessee had still not commenced drilling because the only "commercially viable" method of drilling in the property—high-volume hydraulic fracturing, or "fracking"—was subject to a regulatory moratorium in New York (although permits for other unprofitable methods were in theory available). The lessees took the position that the regulations amounted to a force majeure event under the leases, and that the force majeure clause extended the term in the habendum clause. The landowners brought a declaratory judgment action in the Northern District of New York, alleging that the leases expired by their terms after five years because the lessees had not begun drilling. The district judge granted summary judgment to the landowners, declaring the leases expired.
Finding that the case raised novel and important questions of New York law that had not been addressed by the Court of Appeals, or any lower courts, the Second Circuit certified two questions to the Court of Appeals:
1. Under New York Law, and in the context of an oil and gas lease, did the State's Moratorium amount to a force majeure even?
2. If so, does the force majeure clause modify the habendum clause and extend the primary terms of the leases?
As the Second Circuit noted, the outcome of this case could have "potentially great commercial and environmental significance to State residents and businesses." We will continue to follow this case as it makes its way through the Court of Appeals.