Judge Orders Arbitration in Chesapeake ‘Force Majeure’ Case

U.S. District Judge David N. Hurd ordered that a lease dispute case between a group of landowners in Broome and Tioga counties (New York) and Chesapeake Energy will go to arbitration for about 150 of the landowners. That’s not-so-good news for those landowners who want to keep the case in federal court. But he also ruled a second case with 32 landowners can go forward in federal court because those leases did not contain an arbitration clause. That’s good news for those landowners, and may end up being good news for those in arbitration. A copy of the judge’s order is embedded below.

Background of the Case

Nearly a year ago, a group of landowners in Broome and Tioga counties (New York State) sued Chesapeake and partner Statoilhydro over Chesapeake’s claim of “force majeure” in lease contracts. The contracts were originally signed between 1999-2005 for $3 per acre with several different companies. Those companies sold the leases to Chesapeake, and Chesapeake took on Norwegian company Statoilhydro as an investing partner to help develop the land. Last year Chesapeake sent the Broome and Tioga landowners a notice that under the terms of the contracts which contain a clause called force majeure, they (Chesapeake) were unilaterally extending the contracts beyond the original term.

Force majeure is a legal term that means “due to things beyond our control”—like floods, earthquakes, and in this case, the fickle whims of politicians. Chesapeake claims the ongoing moratorium on horizontal hydraulic fracturing in the state has prevented them from drilling (see this MDN story for the full background of this case).

The landowners and their attorneys say, “Wait a minute!” Horizontal hydraulic fracturing wasn’t being used in shale formations when the leases were signed. The leases were signed with the expectation that conventional vertical drilling would happen in other rock strata, not unconventional horizontal drilling in shale. Chesapeake and Statoilhydro could have drilled any time they wanted during the lease period (using conventional technology) and opted not to. So their inaction is their own fault.

Plus, it appears that Chesapeake is trying to twist the law to their advantage so they don’t have to renegotiate and pay current market rates to keep the land under lease. There’s a world of difference between $3 per acre and $5,000 per acre or more.

The Judge’s Split Decision

For about 150 of the leases, there is an arbitration clause, and the judge ordered those cases go to arbitration:

The leases call for each dispute to be decided by three arbitrators: One selected by the landowners, one selected by Chesapeake, and the third selected by the two arbitrators.

"These leases also require that the arbitrators’ decisions be unanimous, and that makes it more difficult to get some resolution in arbitration," [attorney Robert] Jones said.*

In a second case, the leases do not have arbitration clauses:

"We ended up with a strategy of removing everyone with an arbitration clause, because we didn’t want there to be any risk that our case would be held up," said attorney Scott Kurkoski. "And I think now that you look at the two decisions, that was the right call."

Kurkoski said Chesapeake is required to file their legal response in the next few weeks, and the landowners will file a motion for summary judgment within a couple of months.

Ultimately, it will be several months before the court makes a decision on whether the lease extensions are valid.

If the court decides Chesapeake’s lease extensions are invalid, that would help those who are stuck in arbitration. Both Kurkoski and Jones said a court decision could tip the scales in the favor of landowners for the leases that go to arbitration.

"I suspect that many of those cases will be resolved quickly," Kurkoski said. "But even if Chesapeake forced those cases into arbitration, then the arbitrators would have a judicial decision to rely on."*

*Binghamton (NY) Press & Sun-Bulletin (Apr 5, 2012) – Federal court deals blow to landowners in gas lease dispute