Shale Energy Law Blog
The lessors in this case filed a declaratory judgment action and a fraudulent inducement claim in federal court challenging the validity of their lease, which was two years into its primary term. Out of an abundance of caution, the operator refrained from all operations during the pendency of the litigation. It then asserted a counterclaim seeking to equitably toll the lease in the event it prevailed. Though the operator successfully defeated the lessors’ claims, the District Court denied its equitable tolling claim. As a result, the lease expired while the case was being litigated.
The operator appealed to the Third Circuit, which certified the case to the Pennsylvania Supreme Court on the grounds that it was an issue “of first impression and of significant public importance, given that its resolution may affect a large number of oil-and-gas leases in Pennsylvania.”
In a unanimous decision, the Pennsylvania Supreme Court upheld the District Court’s decision not to toll the lease. In so ruling, the Court noted that its decision went against other jurisdictions that have decided this issue. The Court also noted that the operator should have addressed the issue in its lease by adding a tolling provision. The Court also held that the result may have been different if the lessors had prevented the operator from entering the property to conduct operations.
The case is significant in several respects. First, it opens the door for lessors to try to “run out the clock” on leases by filing frivolous lease litigation. Second, it imposes on operators the obligation and risk to continue operations even in the face of suits challenging the validity of their leases. Third, if a lessor files suit to challenge a lease’s validity, and simultaneously denies the operator the right to conduct operations, the operator must now consider filing for equitable relief through an injunction before seeking to toll the lease term. Lastly, it essentially requires operators to add tolling provisions to their new leases.