Pennsylvania law does not allow for the primary term of an oil and gas lease to be extended where the lessor has pursued an unsuccessful lawsuit challenging the validity of the lease, the Pennsylvania Supreme Court held in Harrison v. Cabot Oil & Gas Corp., __ A.3d __ (No. 75 MAP 2014, filed February 17, 2015). In doing so, the Supreme Court declined to follow the approach of a substantial number of other jurisdictions.
Wayne Harrison entered into an exclusive lease with Cabot Oil & Gas Corporation for a primary term of five years. Midway through the primary term Harrison and his wife commenced a civil action in federal district court seeking a declaration that the lease was invalid. In a counterclaim, Cabot sought a declaratory judgment that the primary lease term would be equitably tolled while the suit was pending and extended for an equivalent period of time. The district court ruled in Cabot’s favor on the suit to invalidate the lease, but against Cabot on its counterclaim, holding that Pennsylvania law does not provide for an equitable extension of an oil and gas lease under these circumstances. On appeal, the U.S. Court of Appeals for the Third Circuit applied for certification of this issue of first impression to the Supreme Court, which was accepted.
A unanimous Supreme Court rejected Cabot’s position, which was premised on the view that the Harrisons’ declaratory judgment action amounted to an anticipatory repudiation of the lease. Chief Justice Saylor noted that, under Pennsylvania law, anticipatory repudiation or breach requires an “absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so.” The Court held that the mere pursuit of declaratory relief challenging the validity of a lease does not amount to an unequivocal refusal to perform. Chief Justice Saylor noted that the Court’s ruling was consistent with the Declaratory Judgment Act’s objective to dispel uncertainty over legal rights, in this case with regard to a written agreement, without fundamentally altering its material provisions. Chief Justice Saylor also pointed out that gas companies can anticipate validity challenges to their leases and are free to negotiate express tolling provisions.