Oil and Gas Lawyer Blog
The 5th Circuit affirmed a judgment today against Chesapeake Exploration for $19,951,004 in favor of Peak Energy Corporation, for breach of a contract to purchase oil and gas leases in the Haynesville Shale area of Harrison County, Texas. Coe v. Chesapeake Exploration, No. 11-41003. The Court’s summary of the case:
In July 2008 Chesapeake Exploration LLC entered into an agreement to purchase deep rights held by Peak Energy Corporation in certain oil and gas leases in the Haynesville Shale formation, for the hefty sum of $15,000 per acre. When the price of natural gas plummeted several months later, Chesapeake refused to honor its commitment. In response to the complaint filed by Peak it contended that the parties’ agreement was unenforceable under the Texas statute of frauds, fatally indefinite, and that the plaintiffs had failed to tender performance. The district court disagreed, rendering judgment in favor of Peak and its principals and awarding them damages in the amount of $19,951,004, prejudgment and post-judgment interest, and attorneys’ fees and costs. Finding no error, we affirm.
In 2008, gas prices were high and the boom was on in the Haynesville Shale. Chesapeake was buying all of the acreage it could find. Its brokers identified leases covering 5,405 acres in Harrison County, Texas owned by Peak Energy, and on July 2, Chesapeake sent Peak a letter offering to buy all rights in its leases below the base of the Cotton Valley formation for $15,000 per net acre, with Peak delivering a 75% net revenue interest and reserving an overriding royalty on any excess over 75%. A map generated by Chesapeake was attached to the letter agreement showing the tracts Chesapeake had identified in which Peak had leases. The letter said that it was a “valid and binding agreement,” and that the closing would occur on August 31. Peak signed and returned the letter.
The parties worked to assemble the list of leases and other closing documents. But in the meantime, the stock market and the gas market plunged precipitously. In October, there had still been no closing of the deal, and Chesapeake informed Peak that it would not be completing the transaction. Peak sued. At trial, Peak said it was able to deliver only 1,645.9 acres of leases with a minimum 75% net revenue interest; it showed that the market value of the deep rights in those leases was $3,000 per acre; and it sought damages equal to $12,000 per acre, based on the difference between the contract price of $15,000 per acre and the market price on the date of the breach, $3,000 per acre. The judge agreed with Peak and awarded the damages sought, plus interest and attorneys fees of more than $435,000.
Chesapeake claimed that the contract was not enforceable because the map attached to the letter agreement did not provide an adequate description of the property. The 5th Circuit disagreed. It said that the map provided an adequate nucleus of description to allow a knowledgeable person to identify the leases with reasonable certainty from public records.
Chesapeake claimed that the contract was not enforceable because it did not include “essential terms.” The court said that the letter agreement did provide all of the essential terms – the property to be conveyed, the price, the closing and delivery date, and the purchaser’s interest in the property. The court said that the lack of a final lease schedule, and the fact that the parties did not agree on warranty of title, non-compete provisions, and options to purchase additional acreage, were not essential terms fatal to a binding agreement. “Although the parties must agree to all material terms, they may choose to leave non-essential terms open for later negotiatin without rendering the agreement unenforceable.”
Finally, Chesapeake claimed that the agreement was not enforceable because Peak could not perform its obligations under the agreement. Peak conceded that it could only deliver 1,645 acres of leases meeting the agreement’s specifications. The court said that Chesapeake was bound by the agreement to purchase the leases that Peak could deliver.
It appears to me that Chesapeake did not have any viable defenses to the claim, and that the court clearly reached the correct result. More importantly, the case sheds light on Chesapeake’s attitude about its contractual commitments. Others contemplating deals with Chesapeake, especially on buying oil and gas leases, may be reluctant to deal with the company if this case is representative of its willingness to go back on its deals.