Beardslee v. Inflection Energy, LLC

Decision Date31 March 2015
Citation8 N.Y.S.3d 618,2015 N.Y. Slip Op. 02677,25 N.Y.3d 150,31 N.E.3d 80
PartiesWalter R. BEARDSLEE, Individually and as Co–Trustee of the Drusilla W. Beardslee Family Trust, et al., Respondents, v. INFLECTION ENERGY, LLC, et al., Appellants.
CourtNew York Court of Appeals Court of Appeals

The West Firm, PLLC, Albany (Thomas S. West and Cindy Monaco of counsel), for appellants.

Coughlin & Gerhart, LLP, Binghamton (Peter H. Bouman and Robert R. Jones of counsel), for respondents.

OPINION OF THE COURT

PIGOTT, J.

The United States Court of Appeals for the Second Circuit certified to this Court questions relating to oil and gas leases entered into between various New York landowners and energy companies. The questions arise in the context of the energy companies' claim that an express force majeure clause in the subject leases was triggered by events beginning in July 2008, when then-Governor Paterson mandated formal public environmental review to address the impact of the combined use of high-volume hydraulic fracturing and horizontal drilling. We hold that the force majeure clause does not modify the habendum clause and, therefore, the leases terminated at the conclusion of their primary terms.

I.

The relevant statutory framework and background are explained in detail in the decisions of the Federal District Court (Beardslee v. Inflection Energy, LLC, 904 F.Supp.2d 213 [N.D.N.Y.2012] ) and the Second Circuit (761 F.3d 221 [2d Cir.2014] ).

Plaintiffs, various landowners in Tioga County, entered into separate oil and gas leases with Victory Energy Corporation, whereby plaintiffs leased to Victory “the rights of drilling, producing, and otherwise operating for oil and gas and their constituents, including the right to conduct geophysical, seismic and other exploratory tests,” from under their properties for a nominal annual fee or, if drilling commenced, the right to receive a royalty on gross proceeds. The majority of the leases were executed in 2001, although leases were also signed in 2002, 2004, 2005, 2006, and 2009.1 Victory shared its leasehold interests with MegaEnergy, Inc. In July 2010, defendant Inflection Energy, LLC assumed from MegaEnergy, Inc. the operational rights and responsibilities under most of the leases.

Each of the leases contains an identical term clause, also known as a habendum clause,2 which establishes the primary and definite period during which the energy companies may exercise the drilling rights granted by the leases. Specifically, the leases' habendum clause provides: “It is agreed that this lease shall remain in force for a primary term of FIVE (5) years from the date hereof and as long thereafter as the said land is operated by Lessee in the production of oil or gas.” Under this provision, the interests conveyed by the leases exist for a five-year “primary term,” followed by an open secondary term so long as the land is operated by the lessee in the production of oil or gas.

Each lease also contains what the parties refer to as a “force majeure clause.” Generally, a force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance (see Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902, 524 N.Y.S.2d 384, 519 N.E.2d 295 [1987] ). The force majeure clause here provides:

“If and when drilling or other operations hereunder are delayed or interrupted by lack of water, labor or material, or by fire, storm, flood, war, rebellion, riot, strike, differences with workmen, or failure of carriers to transport or furnish facilities for transportation, or as a result of some order, rule, regulation, requisition or necessity of the government, or as the result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding. All express or implied covenants of this lease shall be subject to all Federal and State Laws, Executive Orders, Rules or Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable in damages for failure to comply therewith, if compliance is prevented by, or if such failure is the result of any such Law, Order, Rule or Regulation.”

On July 23, 2008, then-Governor David Paterson ordered formal public environmental review to address the impact of combined use of high-volume hydraulic fracturing (HVHF)3 (commonly known as “fracking”) and horizontal drilling (2008 Directive). In particular, he directed the New York State Department of Environmental Conservation (DEC) to update and supplement its 1992 generic environmental impact statement (GEIS) on conventional oil and gas exploration (seeGovernor's Approval Mem., Bill Jacket, L. 2008, ch. 376 at 5, 2008 N.Y. Legis. Ann. at 252–253). On December 13, 2010, following the DEC's issuance of a draft supplemental GEIS (SGEIS), Governor Paterson issued Executive Order No. 41 in which he instructed the DEC to revise the draft SGEIS and address “comprehensively the environmental impacts associated with [HVHF] combined with horizontal drilling” in a final SGEIS (see Executive Order [Paterson] No. 41 [9 NYCRR 7.41 ] ). The Governor also indicated that pursuant to the State Environmental Quality Review Act, “no [HVHF] permits [could] be issued” by the State before “the completion of a Final SGEIS” (id. ).4 In response to these developments, Inflection sent notices of extension to the landowners, asserting that New York's governmental action constituted a force majeure event under the leases, which purportedly extended the leases' terms.

On September 7, 2011, the DEC released a revised draft SGEIS, and issued a press release informing the public that [n]o permits for [HVHF] will be issued until the SGEIS is finalized and [the] DEC issues the required Findings Statement.”

It is undisputed that no operations have been conducted upon the leaseholds, that the energy companies have not produced oil and gas from the properties within the leases' primary terms, and that no royalties have been paid to the landowners.

II.

In February 2012, after the primary term of the leases had expired, the landowners commenced this declaratory judgment action against Inflection, Victory, and MegaEnergy (collectively, energy companies) in the United States District Court for the Northern District of New York, seeking a declaration that the leases had expired by their own terms. The energy companies answered and counterclaimed for a declaration to the contrary, arguing that each lease was extended by operation of the force majeure clause. In particular, the energy companies referenced the portion of the force majeure clause that states:

[i]f and when drilling ... [is] delayed or interrupted ... as a result of some order, rule, regulation, requisition or necessity of the government, or as the result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding.”

The energy companies averred that New York's moratorium on the use of horizontal drilling and HVHF triggered the force majeure clause. The landowners, insisting that no force majeure event had occurred, moved for summary judgment declaring that the leases had expired. The energy companies opposed the motion and cross-moved for summary judgment declaring that the leases' primary terms were extended by a force majeure event so that the leases were still in full force and effect.

On November 15, 2012, the District Court granted summary judgment to the landowners, declaring that all of the leases had expired by their own terms, and entered judgment accordingly (see 904 F.Supp.2d 213 ). The District Court denied the energy companies' cross motion for summary judgment and dismissed their counterclaims holding that the force majeure clause did not extend the leases.5 It declined to rule on whether a force majeure event occurred, stating that even if it did, the force majeure clause would have no effect on the habendum clause and the lease terms because the energy companies did not have an obligation to drill. The District Court also concluded that Governor Paterson's 2008 Directive did not frustrate the purpose of the leases, because the energy companies could drill using conventional methods, and that the 2008 Directive was foreseeable. The energy companies appealed.

The Second Circuit observed “that this case turns on significant and novel issues of New York law concerning the interpretation of oil and gas leases, a legal field that is both relatively undeveloped in the State and of potentially great commercial and environmental significance to State residents and businesses” (761 F.3d 221, 224 [2d Cir.2014] ). Accordingly, it certified to this Court, and we accepted, the following questions:

“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 event?
“2. If so, does the force majeure clause modify the habendum clause and extend the primary terms of the leases?” (Id. at 232 ; 23 N.Y.3d 1047, 992 N.Y.S.2d 782, 16 N.E.3d 1261 [2014].)

We answer the second certified question, which the Second Circuit characterized as “in some respects more fundamental” (761 F.3d at 230 ), in the negative. The first certified question is therefore academic and need not be addressed.

III.

The construction and interpretation of oil and gas leases is guided by basic principles of contract law (see Estate of Hatch v. Nyco Mins., 245 A.D.2d 746, 747, 666 N.Y.S.2d 296 [3d Dept.1997] ), and the parties agree that New York law governs the leases in dispute.

Under New York contract jurisprudence, the intent of the parties controls and if an agreement is “complete, clear and unambiguous on its face [,] [it] must be enforced according to the plain meaning of its terms” (Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 [200...

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