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Can You Initiate a Class Action Arbitration If You Have a Dispute with Your Oil and Gas Company Over A Lease Matter?

By Paul R. Yagelski, Esq.

If your oil and gas lease does not include a specific method of dispute resolution and if you cannot resolve your issue with the oil and gas company either by agreement or through mediation, then your recourse is either suit in state court or in federal court.  There is, however, another method of dispute resolution; i.e., arbitration; but in order to arbitrate your dispute, your oil and gas lease must include an arbitration clause.  It must be remembered that the oil and gas company has deep pockets.  Suit in state or federal court cannot only be time consuming, but in addition, it can be very expensive.  Whereas if an action is instituted in arbitration, the probabilities are that the issue will be resolved in a more timely manner and the expense will be less.  Accordingly, if the oil and gas lease that has been offered to you does not include an arbitration provision, you should negotiate the inclusion of one.

If you do have an arbitration clause in your oil and gas lease, and should you have a dispute, can you institute a class action arbitration in which other landowners with oil and gas rights and/or royalty owners can be included in your action?  It can be done, but only if the arbitration clause explicitly or implicitly allows for class action arbitration.

The United States Supreme Court has made it clear that “a party may not be compelled . . . to submit to class arbitration unless there is contractual basis for concluding that the party agreed to do so.” Stolt–Nielsen S.A. v. AnimalFeeds Int.’l Corp., 559 U.S. 662, 684 (2010).  Accordingly, if the arbitration clause specifically allows for class action arbitration, then a class action arbitration can be instituted by the lessor.  What happens, however, if the oil and gas lease does not expressly permit class arbitration, but rather is silent with regard to an express agreement to permit a class arbitration?  Can the oil and gas lease still be read to “agree” to class arbitration?  This issue was addressed in Chesapeake Appalachia L.L.C. v. Scout Petroleum, LLC, 727 Fed. Appx. 749 (3rd Cir. 2018).

In Chesapeake Appalachia L.L.C., Chesapeake entered into various oil and gas leases with landowners in several northeastern Pennsylvania counties wherein Chesapeake was the Lessee and the Lessor was (or originally was) the respective landowner.  Scout subsequently purchased the rights to several of these leases, and had been receiving royalties from the sale of natural gas from Chesapeake pursuant to the leases.  The leases included the following arbitration provision:

In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association.  All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.

Scout filed an arbitration demand against Chesapeake on behalf of itself and similarly-situated lessors, alleging that Chesapeake paid insufficient royalties.  In its answer to the arbitration demand, Chesapeake objected to class arbitration on the grounds that it did not agree to resolve disputes arising out of the leases by class arbitration.

Chesapeake filed a declaratory judgment action seeking a judgment declaring that the leases did not permit class arbitration. The District Court granted summary judgment in favor of Chesapeake on Count II of Chesapeake’s complaint concerning clause construction and denied Scout’s cross-motion to dismiss the complaint.  Scout appealed to the United States Court of Appeals for the Third Circuit.

On appeal, the parties did not dispute that the leases did not expressly permit class arbitration.  The dispute instead was whether, despite silence with regard to an express agreement to permit class arbitration, the leases could still be read to “agree” to class arbitration.  Scout contended that the absence of explicit language authorizing class arbitration in a contract is not fatal to class claims because such authorization can be implied.  In other words, Scout argued that if an arbitration clause reflects the parties’ intent to agree to class arbitration, then it should be permitted, even where class arbitration is not explicitly mentioned anywhere in the contract.

The Third Circuit Court of Appeals affirmed the District Court and held that the leases did not permit class arbitration, but rather only permitted individual or bilateral arbitration.  In so doing, the Third Circuit, relied on Stolt-Nielsen, wherein the Supreme Court stated that “[C]lass-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”  The “crucial differences” between bilateral and class arbitration “are too great for arbitrators to presume . . . that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.”  Stolt-Nielsen, 599 U.S. at 687.  Here, because the arbitration clause neither explicitly nor implicitly authorized class arbitration, the Third Circuit Court of Appeals affirmed the District Court.

Accordingly, if your arbitration clause is silent on the issue of class action arbitration, this does not indicate consent to resolve disputes in class proceedings.  If the arbitration clause neither explicitly nor implicitly authorizes class arbitration, the action cannot be instituted by a class arbitration.

As indicated, arbitration is generally quicker and less expensive than resorting to litigation in state or federal court.  If you are offered a lease by an oil and gas company, the dispute resolution mechanism, if the lease even includes one, should be reviewed.  Serious consideration should be given to proceeding in arbitration if a dispute, which cannot be resolved, occurs.  Get yourself an oil and gas attorney to review and negotiate your lease.  We can help you.

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