In a decision that resulted in three separate opinions, the Ohio Supreme Court in Lutz v. Chesapeake Appalachia, L.L.C., Slip Opinion No. 2016-Ohio-7549, refused to answer a question certified from a federal court regarding whether Ohio follows the “at the well” rule or the “marketable product rule.” The Ohio Supreme Court broke from other states and instead held that Ohio will follow neither, holding “an oil and gas lease is a contract that is subject to the traditional rules of contract construction.” The decision may open up the door to allow extrinsic evidence for royalty disputes.
Lutz stems from a federal court class action in which plaintiffs claim that Chesapeake Appalachia, LLC underpaid royalties due under three different royalty clauses contained in five different oil and gas leases that were signed in 1970 and 1971. The leases specifically said that royalties were to be based upon “market value at the well.”
The plaintiffs claimed that Chesapeake unlawfully deducted certain post-production costs and royalties should be based upon the “marketable product rule” which limits deductions of post-production costs. Chesapeake maintained that the language of the leases, which granted royalties based upon the “market value at the well,” allowed deductions for post-production costs because it means royalties are based upon the market value at the well before processing and transportation. The United States District Court for the Northern District of Ohio, Eastern Division asked the Supreme Court of Ohio to decide which “rule” Ohio follows.
Upon certification, the Supreme Court of Ohio appeared to answer “neither” to the question. The Court held that, if there were ambiguities in the language of the leases in question, the Court could not give effect to parties’ intent, because there was no extrinsic evidence in the record. Further, if the language of the leases was not ambiguous, then the federal court should be able to interpret the leases without the Court’s assistance.
This decision is notable because in Ohio there is simply no rule for calculating royalties due under oil and gas leases that contain the common “at the well” language. Instead, the Ohio Supreme Court now suggests such language may be ambiguous and it may be proper to introduce extrinsic evidence to aid in interpretation of these leases.
Two Justices dissented, with Judge Pfeifer holding he would follow the "marketable product" rule, and Judge O’Neill would have followed the "at the well" rule.
If you would like a copy of the Lutz decision or have any questions with respect to oil, gas, or any other energy related issue, please contact a member of Reminger’s Oil, Natural Gas and Energy Practice Group.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
THIS IS AN ADVERTISEMENT
