How can a court rule that a party to an oil and gas lease is in breach of the contract when the alleged breaches are not actually included in the contract?
The answer lies in the legal concept of implicit agreements, which are agreements that are proposed in the terms of the contract but not dealt with directly. The LSU Journal of Energy Law and Resources explains how these can affect oil and gas leasing.
History of the judgments
In the past, courts have ruled in favor of implicit agreements and set precedents for oil and gas leases.
For example, the implied fair development contract indicates that the lessee will continue to drill wells to thoroughly develop the underlying resources. This prevents a tenant from drilling a well and leaving the rest of the property undeveloped for the remainder of the lease. The need for this undisclosed arrangement arises from the uncertainty surrounding the discovery and production of oil and gas, which makes it difficult to first determine and indicate how many wells the lessee will drill.
Immediate drilling of the first test well, drainage protection, further exploration, surface restoration and marketing are other common implicit agreements.
Determining whether the tenant has fulfilled the obligations of the tacit agreement is not cut and dried like this. The standard for lessees is to act as a reasonably prudent operator, but the courts do not necessarily hold lessees to a fiduciary standard or require them to use perfect judgment. However, lessees should be able to demonstrate that they acted both in their own interests and with the lessors.
Defense for breach of tacit agreements
Often the rental terms negate one or more of the generally accepted but not mentioned agreements. Alternatively, the scope of a specific obligation can be expressly stated in the rental agreement. For example, if the lessee agreed in the contract to drill a certain number of wells, an appropriate development would not occur.
Opportunity for healing
Landlords should provide tenants with a perceived violation and give them time to resolve the issue. While not all jurisdictions have this requirement, proof may be required that the renter is aware of the violation. Oil and gas leases often contain express clauses that require notification and an opportunity to remedy.
Many lessors seek termination of the lease in order to remedy a violation of an implied contract.