Chesapeake ‘Force Majeure’ Gas Lease Case In New York

by Kenneth E. DuBose on April 9, 2012

Chesapeake and StatoilHydro’s landowner court case in New York is now going to both federal court and arbitration. The case is over whether or not a state moratorium on hydraulic fracturing is sufficient to declare “force majeure”. Chesapeake acquired leases covering thousands of acres in New York at low prices. Many leases signed before the Marcellus rush included lease bonuses of just $3 per acre. When you consider bonuses that have reached above $5,000 per acre in the better portions of the play, you begin to understand why Chesapeake will fight to hold its current leases. If the company is forced to re-lease, it will potentially cost billions of dollars.

The first lawsuits were filed in April of 2011 and more followed. In one case, all but 2 of the 150 leases will be going to arbitration. The leases signed included an arbitration clause. Be sure you’re prepared to go to arbitration if you sign a lease with an arbitration clause. Many landowners were hoping the limits of force majeure would not fall within the scope of their arbitration clause, but the judge ruled it does.

Now, the landowners will choose an arbitrator, Chesapeake will choose an arbitrator, and the arbitrators will choose an arbitrator. Any decision must be unanimous between the three. That makes negotiations difficult.

On the landowners side, there are 32 leases in a separate case that will be going to federal court. The leases lack an arbitration clause and there should be a judgement before the end of 2012. If the courts side with the landowners, the other landowners will have much more negotiating power in arbitration. If the courts side with Chesapeake, it will be difficult to negotiate much in arbitration…..

Force Majeure – unforeseeable circumstance that prevents someone or an entity from fulfilling a contract

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