918 N.W.2d 58
N.D.2018Background
- In April 2008 Johnson and A.V.M. each signed three-year oil and gas leases (expiring April 2011) covering eight units; leases used a form with added Pugh clauses.
- The form lease included a habendum clause (three-year primary term, extended by production or drilling) and a continuous drilling-operations clause (extensions while operations are continuously prosecuted).
- The parties inserted identical Pugh clauses stating that at the end of the primary term the lease "shall terminate" as to any part not within a unit "from which oil or gas is being produced in paying quantities," and that this applies "notwithstanding anything to the contrary."
- At the end of the primary term three units had production (undisputed units); five units had no production in paying quantities (disputed units).
- Johnson/A.V.M. argued the Pugh clauses terminated the leases as to the disputed units at the end of the primary term; Statoil argued the leases were extended to those units by ongoing drilling operations per the form clauses.
- The district court granted summary judgment for Statoil; the Supreme Court reversed, holding the Pugh clauses controlled and terminated the leases as to the disputed units at the primary-term end.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Pugh clauses terminated leases as to nonproducing units at end of primary term | Pugh clauses severed nonproducing units because they require production in paying quantities to survive the primary term | Continuous drilling-operations and habendum clauses extend the entire lease by drilling even absent paying production | Held: Pugh clauses control and terminated leases for disputed units at primary-term end |
| Whether the Pugh clauses and continuous-drilling clauses can be harmonized | Pugh clause language ("notwithstanding anything to the contrary") limits both land and method of extension to production in paying quantities | Continuous-drilling clause is part of form lease and extends leases by drilling operations | Held: Clauses are irreconcilable; Pugh clauses prevail over form clauses added earlier |
| Whether precedent (Egeland/Tank) requires explicit drilling-language in a Pugh clause to defeat continuous-operations clause | Pugh clause wording here suffices to prevent extension by drilling | Statoil relied on Egeland/Tank to argue drilling can extend despite Pugh clause | Held: Distinguished Egeland and Tank; this Pugh clause expressly limits the method of extension and controls over form clauses |
| Effect of contract origin (form vs. added clause) on resolving conflict | Added (later) Pugh clauses should control over copied form provisions | Form habendum and continuous-operations clauses remain operative absent clear contrary term | Held: Under N.D.C.C. §9-07-16, provisions added by the parties supersede conflicting language copied from a form; Pugh clauses control |
Key Cases Cited
- Egeland v. Continental Res., Inc., 616 N.W.2d 861 (N.D. 2000) (discusses indivisibility of leases and when Pugh clause is effective to sever nonproducing land)
- Tank v. Citation Oil & Gas Corp., 848 N.W.2d 691 (N.D. 2014) (construed a Pugh clause that expressly addressed drilling operations and reconciled it with continuous-operations clause)
- Estate of Christeson v. Gilstad, 829 N.W.2d 453 (N.D. 2013) (summary-judgment standard review)
- Grynberg v. Dome Petroleum Corp., 599 N.W.2d 261 (N.D. 1999) (principles for construing contractual language in ordinary meaning and reading the contract as a whole)