Do you think that what you say when negotiating a mineral lease does not matter once the agreement is inked and contains boilerplate language declaring it to “supersede all prior negotiations” and “be the complete agreement between the parties”? Think again. The North Dakota Supreme Court recently reminded negotiators that what you say does matter and may allow for rescission of a lease.
This issue came before the North Dakota courts when Golden Eye Resources (“GER”) sought to quiet title in certain oil and gas leases in Williams County, leases that the mineral owners claimed had been cancelled. The minerals owners contend they made it clear at the outset of negotiations that they would only lease to a company which could drill and operate the wells itself. They also contend that GER made representations to this effect during negotiations and thus, despite being approached by another potential lessee offering more favorable financial terms, the mineral owners entered into leases with GER.
When the mineral owners learned that another company had obtained a drilling permit in a drilling unit encompassing some of their minerals, and that GER only has a 19% interest in the spacing units where their minerals were located, they sent GER a notice of rescission. The notice sought to rescind the lease for fraud in the inducement. The matter escalated when, a month later, GER entered into a Participation Agreement, assigning a 58.32% working interest in the drilling unit to another company. The mineral owners then sent a notice of cancellation of the leases, alleging breach of the anti-assignment provisions.
GER responded by suing to quiet title to the leased interests, and while the district court was swayed, the North Dakota Supreme Court was not. On appeal, the Supreme Court held that the district court erred in granting summary judgment dismissing the mineral owners’ claims they were fraudulently induced into signing the leases by GER’s alleged misrepresentations.
As a threshold matter, the Court addressed whether evidence of the parties negotiations leading up to execution of the leases was admissible despite the fact that some purported representations conflicted with certain lease terms; or whether the parol evidence rule barred consideration of such negotiations. Holding that the parol evidence rule does not apply where one of the parties alleges fraud as a defense to the validity of the contract, the Court found it to be immaterial that the alleged oral statements contradicted terms in the written agreement. A boilerplate contract integration clause will not protect a lessee if a mineral owner feels he or she has been misled during lease negotiations.
The remainder of the Court’s opinion serves as a reminder of the line landmen walk between non-actionable “sales talk, puffery, and opinion” and “actual fraud.” In North Dakota actual fraud “includes statements of fact which the party does not believe to be true, the suppression of material facts by one having knowledge or belief of the fact, and a promise made without any intention of performing it.” The following statements allegedly made by GER’s negotiators amounted to actual fraud since they averred past or present facts which GER knew to be untrue:
- The company was going to drill the wells itself and would not assign the leases;
- It had already acquired thousands of mineral acres in the same township;
- It had someone in Bismarck securing drilling permits on the acreage it had already acquired;
- The company had operating/drilling control over the sections where the potential lessee’s minerals were located;
- It would drill lessee’s minerals first;
- It had successfully drilled wells in Canada; and
- The company’s owner owned his own equipment and was very experienced in drilling horizontal wells.
Although negotiators are already mindful of being fair and honest in dealing with landowners, this opinion cautions that negotiation tactics are still open to scrutiny even after the lease is signed. As the North Dakota Supreme Court warns, “consent is not free if obtained through fraud” and without consent there is no lease.