Other than say, $8.00 crude, the recent national election, or a top-five recruiting class by your most-reviled gridiron enemies, few events are as likely to work an operator into a worst-case-scenario frenzy as a lease termination claim. Lessors love ‘em, of course!
The question of the day:
In a head-to-head contest between a Louisiana statute and language qualifying an automatic termination provision in an oil and gas lease, which one wins?
If the lease contains a “judicial ascertainment”clause then the lease prevails, says a Louisiana court in B.A. Kelly Land Co., L.L.C. v. Questar Exploration & Prod. Co.
In 1971, the lessor granted an oil and gas lease containing a habendum clause, a shut-in clause, and a “judicial ascertainment” provision, providing that after production was secured,
. . . this lease shall not be subject to forfeiture or loss, . . . for failure to conduct operations in compliance with this contract except after judicial ascertainment that Lessee has failed to conduct such operations and has been given a reasonable opportunity after such judicial ascertainment to prevent such loss or forfeiture . . . .
A successor acquired the mineral rights and sued, claiming the lease was terminated because no minerals were produced and no operations were conducted during certain periods in 1988 and 1989.
The lessor said:
Under Louisiana Revised Statute 31:133, the occurence of an express resolutory condition results in automatic termination of a mineral lease. The judicial ascertainment clause in this lease did not apply because the lease automatically terminated for cessation of production.
The lessee said:
A bona fide dispute existed as to whether cessation of production actually occurred in ’88 and ’89 or whether the cessation of operations fell under the shut-in clause, which would maintain the lease. Because of this dispute, the judicial ascertainment provision trumped any statute providing for the automatic termination of the lease.
And the winner is…
The court reiterated a basic principle of contract law: Absent a violation of law or public policy, the lease is the “law between the parties.” Based on the existence of a bona fide dispute, the judicial ascertainment clause was not against public policy. As the law between the parties, the lease trumped Louisiana law calling for automatic termination upon cessation of production.
Just like the shut-in clause ameliorates the harshness of the habendum clause’s automatic dissolution upon failure to produce in paying quantities, the judicial ascertainment provision is another way to minimize the spectre of automatic termination. When there is a bona-fide dispute between lessor and lessee, the judicial ascertainment provision will govern.
Indidentally, there was lots of procedural goings-on that had little to do with the points of law discussed (I ask for forgiveness for using this lawyer word, but … ) herein.
A related question:
Considering some operators we’ve seen, you’ve got to ask, what’s the difference between a dilatory litigation tactic and a bona fide defense to a claim? What if the conclusion is that the “dispute” isn’t “bona fide”? In its discussion of other cases, the court answers: The clause will not be enforced.
With able assistance from Jonathan Nowlin