An agreement to enter into an oil and gas lease is an enforceable contract in Ohio
Landowner enters into an agreement to sign an oil and gas lease, finds outs there may be a better deal elsewhere and tries to get out of the first deal. A federal court in Ohio says, “No, a deal is a deal.” Bruzzese v. Chesapeake Exploration, LLC, U.S. District Court for the Southern District of Ohio, Eastern Division (Feb. 13, 2014).
A group of landowners in eastern Ohio had engaged attorneys to negotiate oil and gas leases on their collective behalves. They signed an Agreement to Accept Lease Offer from Chesapeake Exploration, LLC. About 75 members of the group later sued Chesapeake Exploration, LLC, claiming that the agreement was unenforceable. Chesapeake settled with all the landowners except Stephen and Elizabeth Albery.
The Alberys had printed out the agreement, filled in blanks, signed it and emailed it to the group attorneys on July 16, 2011. Immediately thereafter, Mrs. Albery’s sister told them that she had heard that other energy companies were making better offers to landowners. Under the apparent understanding that they could back out of the agreement because they believed they could still opt out of the landowners group, the Alberys sent a letter to counsel on July 24, 2011, stating that they wished to terminate the agreement.
Chesapeake had prepared a Paid-Up Oil and Gas Lease with accompanying forms for the Alberys to sign. The Lease and forms were dated July 25, 2011. The Alberys did not receive a copy of the forms that Chesapeake prepared for them to sign. The Alberys then joined a different landowners group and on Oct. 19, 2011, signed an oil and gas lease with the Shell Exploration & Production Company.
On Feb. 28, 2012, Shell informed the Alberys by letter that it had discovered during its title review that the Alberys had entered into the Agreement to Accept Lease Offer with Chesapeake. Shell thus terminated the Oct. 19, 2011, oil and gas lease.
Both sides sought summary judgment on the issue of whether the agreement was an enforceable contract. The court began its analysis by noting:
The essential elements of contract formation are an offer, acceptance, contractual capacity, consideration, manifestation of mutual assent, and legality of object and of consideration.
The Alberys set forth that the agreement stated no offer at all, but rather a vague proposition that Chesapeake would make a future offer, which would be memorialized in a lease agreement. The court thought otherwise, finding that this argument was contradicted by the plain language of the agreement. For example, the agreement stated that by signing the agreement the landowners were “accepting Chesapeake’s offer.” And the offer was not vague. Instead, the court found that the contract terms were “definite and certain.” For example, a requirement that a title defect could render the title unacceptable did not make the agreement uncertain. It was a valid offer.
Regarding the issue of consideration, the court noted:
Consideration is a bargained-for legal benefit or detriment. Consideration may consist of either a detriment to the promisee or a benefit to the promisor. A benefit may consist of some right, interest, or profit accruing to the promisor, while a detriment may consist of some forbearance, loss, or responsibility given, suffered or undertaken by the promisee.
The Alberys argued that Chesapeake provided no consideration because it was not obliged to pay the bonus payment until the lease was executed. The court thought otherwise. “Consideration need not come in the form of monetary payment. In the agreement, Chesapeake promised to take on the responsibility of preparing and executing the lease. The consideration provided by Chesapeake was not a promise to pay the bonus, but a promise to execute a lease with the bonus payment as one of its terms. Chesapeake thus took on an obligation (to prepare and execute the lease) that it was not otherwise obligated to take on.”
And Chesapeake’s obligation was not “illusory,” as the Alberys argued. Though the determination of marketable title was within Chesapeake’s “sole discretion,” Ohio law imposes an implied duty on parties to a contract to act in good faith in its performance. “Thus, were it the case that Chesapeake declined to lease land based on a determination made in bad faith as to marketable title, the landowner would have a cause of action against Chesapeake for breach of the agreement.”
Chesapeake did, in fact, draft the lease, thus fulfilling its side of the bargain. Accordingly, the court found that the agreement was supported by consideration.
Mutual assent/meeting of the minds
Next, the Alberys argued that their arrangement with the landowner group allowed them to back out at any time before signing the lease — therefore, the agreement was not binding. As the court pointed out: Chesapeake was not a party to the landowner group agreement in the first place. Further, there had been assent on both sides, i.e., a “meeting of the minds.”
The court’s response regarding assent is worth reading in full.
“[Alberys’] argument fails because an objective standard applies to the determination of whether there was a meeting of the minds. Ohio law does not require contracting parties to share a subjective meeting of the minds to establish a valid contract; otherwise, no matter how clearly the parties wrote their contract, one party could escape its requirements simply by contending that it did not understand them at the time. What it does require is that the terms of the agreement establish an objective meeting of the minds, which is to say that the contract was clear and unambiguous. The relevant inquiry is the manifestation of intent of the parties as seen through the eyes of a reasonable observer, rather than the subjective intention of the parties.” (citations omitted.)
Essential terms of the lease had been available to the Alberys, so the Alberys’ argument that they were not aware of essential terms of the lease was unpersuasive.
That Chesapeake did not sign the agreement was not fatal either. “Though parties ordinarily manifest their assent to a written contract by signing it, a party may manifest its assent by some other act or conduct.” (citation omitted.) Here, Chesapeake had given several indications that it intended to be bound, for example, accepting the landowners’ counter-offer to increase the bonus payment.
“Accordingly, the court finds that the Alberys and Chesapeake both manifested their intent to be bound by the agreement …, and, for the reasons stated above, the parties formed an enforceable contract.”