When preparing an oil or gas lease, an important clause to keep in mind is the Force Majeure clause.
Literally “superior force,” the French term is found in most Ohio oil and gas leases and allows a contract to be extended if an unforeseen event or new regulation prevents either party from following the terms of the original agreement.
A lease can also be suspended or terminated under “force majeure” if circumstances make performance inadvisable, commercially impractical, illegal, or impossible. The lease may state the contract is temporarily suspended, or terminated if the “force majeure” event continues for a prescribed period of time (often 30 days in the aggregate, but this can be a matter of negotiation between the parties. )
Some prominent cases where Force Majeure was declared (but did not necessarily go into effect) was in 2011 when Norse Energy, a Norwegian natural gas company, then based in Buffalo, N.Y. , announced leases would be extended pending the outcome of an Executive Order by former New York Governor David Paterson which temporarily prevented high-volume hydrofracking in New York.
Another example of a declaration of Force Majeure occurred this past July when the CEO of Shell claimed events in eastern Ukraine, including a plane crash and subsequent US and EU (European Union) sanctions against Moscow, meant his company could not continue operations in that area of Ukraine. The CEO described it as a game-changing situation from a political, economic, trade and investment perspective.
Typical Force Majeure events are wars, riots, fires, floods, hurricanes, typhoons, earthquakes, lightning, explosions, strikes, prolonged shortages of energy, acts of state, civil or military authorities, acts by common carriers, and conditions that are incompatible with safety or good quality workmanship.
As of June 2014, for example, there have been 418 actions (mostly governmental) against fracking in the United States, primarily in New York, California and parts of Pennsylvania.
Typical Force Majeure Clause
A standard force majeure clause in an Ohio oil and gas lease might be worded like this,
“A party shall not be liable for any failure or delay in the performance of this Agreement for the period that such failure or delay is due to causes beyond its reasonable control, including but not limited to. . .”
Here, legal experts advise potential force majeure events be defined in as much detail as possible , specifying any anticipated circumstances. Also, it should be explained in the contract what happens when such an event occurs, who can suspend performance, and what happens if the event continues for more than a specified time.
The party declaring force majeure should also be required to give prompt written notice and to take all necessary steps to mitigate the effects of the cessation, interruption, or delay.
Force Majeure must generally meet four criteria:
• The event must be external to the contract and its parties
• It must render a party’s performance radically different from what the parties originally contemplated
• It must be unforeseeable
• It must be beyond the control of the party seeking to use “force majeure” to excuse non-performance
While acts of terrorism may be a “force majeure” event, it does not necessarily follow that “threats” of terrorism would excuse a party’s performance. Judges have ruled that a lease cannot be extended beyond its primary term if the operator has not performed, has not drilled wells and has not produced any oil or gas.
Many “force majeure” clauses have arbitration clauses built in. Both parties should be aware if such a clause exists in their contract, they should be prepared to arbitrate. Any decision must be unanimous between the arbitrator for the landowner and those for the well operators, and the arbitrator chosen by both parties.
If you have questions about an Ohio oil or gas lease you are thinking about signing, be safe rather than sorry, and speak first with an experienced Ohio oil and gas attorney like those available at Slater & Zurz LLP. Please call 1-888-534-4850 or send a website message. We offer free consultations.