My, how times change! In a suit that brings the chaos, frenzy, and all-embracing madness of 2008 Haynesville leasing activity into focus, Hall Ponderosa LLC vs. Petrohawk Properties L.P. held that reformation of an oil and gas lease because of mutual error was not available to a lessor who was negligent in executing the agreement.
In an environment the court described as a “land rush”, Petrohawk was eager to acquire leases, but only on tracts at least 100 acres in size. Hall Ponderosa, owner of Stella Plantation, was eager to receive a big check (Nothing wrong with that). Stella Plantation is located in Section 14 and Section 13 in Red River Parish. Hall Ponderosa believed that Section 14 was 170 acres and Section 13 was 30 acres. The lessor’s representatives, an experienced landman and a petroleum engineer, were not newbies. The negotiations were hurried (15 days passed between the first phone call and execution).
A little law is necessary at this point. Louisiana courts employ the “four corners doctrine” in construing oil and gas leases. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. The reason is obvious: It’s all about certainty and stability of titles and other instruments involving land. A stranger knows the “real deal” from the four corners of the document.
The trial court reformed the lease and awarded $1,971,030 in damages (131.42 acres at $15,000 per acre, the price for the original lease).
More law: Reformation in Louisiana requires clear and convincing evidence (demonstrating that the existence of a disputed fact is highly probable, that is, much more probable than its nonexistence). The court of appeals found that there was not clear and convincing evidence that Petrohawk intended to include the Section 13 property in the lease.
Here is how the court of appeals reported the events before the lease was signed:
• The lessor never mentioned to Petrohawk that they owned property in Section 13;
• The Petrohawk landman didn’t look at Section 13;
• Section 13 was never offered to Petrohawk to be leased.
• Old surveys of Section 13 were available to the lessor.
• Errors in the original lease were cleaned up and Section 13 was not mentioned;
• The lessors surveyed Section 13 and realized for the first time that it had 144 acres.
• Four months later one of the representatives advised Petrohawk that the lessor had acreage in Section 13 that was available to lease;
• Four months after that, the lessor told Petrohawk that the Section 13 acreage had was mistakenly left out of the property description.
One lessor representative said he didn’t read the lease before signing it. Good luck with that one. In Louisiana (as in every other state I am aware of) one who signs an instrument without reading it has no complaint.
There is another, oft-repeated lesson here: When the trial court action is on the home-town lessor’s dance floor, the celebration will be at the expense of the out-of-state lessee with the deep pockets.