NY Landowners Sue Inflection Energy over Force Majeure

force majeureA group of 18 Tioga County, NY landowners have sued Inflection Energy to overturn Inflection’s “force majeure” claim to extend the lease on their collective 1,200 acres. A force majeure clause is written into most gas lease contracts. It means a driller can automatically extend the length of the lease if there are unforeseen events that hinder the terms of the contract—in this case commencement of drilling—from happening.

Many of the landowners are locked into leases that pay as low as $2 per acre per year, but aren’t seeking monetary compensation, according to Robert Jones, an attorney for Binghamton-based Coughlin & Gerhart.

"All they’re looking for at this point is to get released from the current leases that they believe are expired," Jones said.*

Inflection says that the moratorium on horizontal hydraulic fracturing has prevented them from drilling. Their argument is the state’s moratorium is an unforeseen event and gives them the right to extend the lease agreements until the moratorium is lifted.

"Inflection regrets the fact that these landowners have chosen to file this litigation," Inflection CEO Mark Sexton said, "but believes that we are all in a difficult situation due to the extraordinary circumstances in New York state where Inflection cannot obtain permits to develop the valuable shale resources that are believed to exist in the vicinity of these properties."

He added: "New York is the only state in this country that is chosen to suspend the issuance of permits to develop indigenous resources. As such, we and the landowners have been put into this difficult situation for reasons beyond all of our control."*

The landowners and their attorney point out that Inflection purchased the leases from another company in 2010, long after the current moratorium was in place. They also point out that it’s possible to drill conventionally, without using horizontal fracking. There have been a number of completed wells since 2010 that do not use horizontal fracking.

Inflection says the force majeure clause was already in place when they purchased the leases, that a change in ownership of the lease makes no difference in the legality of the action.

Oy! The matter comes down to this: Is the moratorium in New York on extracting natural gas using horizontal fracking an unforseen event? And relatedly, when the original contract was signed, did is specify that a particular method of drilling (horizontal fracking) would be used, and was the contract contingent on that method? That will likely determine the outcome of this case which may set precedence in other pending cases.

Just four months ago, Inflection made a payment to another group of landowners in neighboring Broome County, NY to continue their leases (see this MDN story). It was a different situation, but similar enough to be instructive. In the Broome County case, Infection signed a deal with landowners in 2010 that would pay a signing bonus of $6,000 per acre (not $2!) over an eight year period. The initial payment was $1,000 per acre paid at signing, with the balance due after drilling begins. Guess what? Drilling has not begun, but the attorney for the Broome landowners worked out a deal to get another $1,000 payment anyway. If Inflection could do it for the landowners in Broome, why not for the landowners in Tioga County?

MDN’s view: Whether or not Inflection is legally justified in claiming force majeure, they could have avoided this situation by offering the Tioga landowners a new payment to continue the existing lease for another period of time beyond the end of the original term. Landowners in New York are rightly concerned that the only money they are ever likely to receive is the signing bonus—they have reason to doubt whether or not drilling will happen. If drilling companies want to roll the dice in New York, they need to assume the risk. Indeed, Inflection should have known it was possible the moratorium would go on indefinitely. Regardless, not many people will regard it as “fair” that Inflection wants to force landowners to continue in contracts beyond the end of the original agreed-upon term that paid them $2 per acre, with no prospect of drilling royalties, when other property owners in neighboring towns and counties are receiving thousands of dollars per acre. You can argue all day long it’s legal, but in the end, it’s a public relations loser for Inflection.

*Ithaca Journal (Feb 19, 2012) – Drilling lawsuit could set precedent