72 A.3d 611
Pa. Super. Ct.2013Background
- In 2001 Terry and Carol Caldwell leased ~105 acres to Kriebel Resources under an oil and gas agreement that runs for an initial 24 months and continues so long as oil or gas is produced.
- Defendants have produced gas (shallow production), and thus the lease remains in effect; plaintiffs contend defendants have not drilled into the Marcellus Shale or paid delayed rentals tied to Marcellus production.
- Plaintiffs filed an amended complaint (March 6, 2012) seeking declaratory relief to terminate the lease on four bases: Marcellus gas is part of the mineral estate and was not conveyed; failure to develop Marcellus strata; breach of an implied duty to produce in paying quantities; and reformation/ambiguity as to intent to convey only shallow gas. Two issues were later withdrawn.
- Defendants filed preliminary objections; the trial court sustained them and dismissed the amended complaint on August 2–3, 2012. Plaintiffs appealed.
- The key contractual provision: the lease disclaims implied covenants ("No inference or covenant shall be implied ...") and guarantees production or delayed rental mechanics; parties agree some gas is produced.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an implied covenant to develop requires lessee to develop all economically exploitable strata (e.g., Marcellus) | Caldwell: courts should read an implied duty to develop all strata into leases or attach duty to each strata so lessee must drill deeper to develop Marcellus | Defendants: contract disclaims implied covenants; parties’ express terms govern; Pennsylvania law will not imply a different contract; no PA authority imposing per-strata duty | Court: No. Contract language precludes implying such a duty; plaintiffs’ request to impose a strata-by-strata development duty is rejected |
| Whether there is an implied covenant to produce in paying quantities evaluated under a broad good-faith/industry-standard test | Caldwell: lessee’s limited shallow production yields minimal royalties; paying-quantities and good-faith standards should consider full industry factors and all strata | Defendants: lease requires only that gas be produced; Jedlicka’s paying-quantities framework (and its focus on wells that expressly use that term) does not expand lease here | Court: No expansion. The lease lacks a "paying quantities" term; defendants’ production satisfies the lease; Jedlicka does not change result |
| Whether plaintiffs were entitled to present evidence of bad faith or receive a remand for discovery/testimony | Caldwell: trial court erred by dismissing without allowing proof of bad faith regarding production amounts and efforts to develop Marcellus | Defendants: dismissal proper because legal theory fails as a matter of law given contract language and applicable precedent | Court: No error — preliminary objections properly sustained; plaintiffs failed to state a legally cognizable claim that would survive dismissal |
Key Cases Cited
- Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001) (recognizes implied covenant to develop but allows parties’ express agreements to preclude application)
- Hutchison v. Sunbeam Coal Corp., 519 A.2d 385 (Pa. 1986) (court will not imply covenants that contradict the parties’ explicit contract)
- T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012) (defines "paying quantities" and assesses operator good faith when term is part of lease)
- J.K. Willison v. Consol. Coal Co., 637 A.2d 979 (Pa. 1994) (lease construed as a contract and governed by its express language)