On September 21, 2015, the North Dakota Supreme Court issued its opinion in Border Res., LLC v. Irish Oil & Gas, Inc., — N.W.2d —-, 2015 WL 5519421, 2015 ND 238 (N.D. 2015), where it reviewed two primary issues:
(1) whether a field land services company owed a fiduciary duty to an oil and gas company, and whether such duty was breached, when the land services company acquired leases within the “review area” and did not offer those leases to the oil and gas company, and
(2) whether the price to be paid to the land services company for other leases sold by the oil and gas company in a package transaction was the “blended price” of the overall transaction, or an allocated value of the specific leases acquired by the land services company.
This case is likely of interest to in-house and field landmen, as it provides additional guidance as to the nature and scope of the relationship between an oil and gas company and field landmen. Additionally, it provides insight into the extent the AAPL standards of ethics and conduct bind landmen, and the importance of clearly addressing parties’ relationship and payment structure in service agreements.
Table of Contents
In 2011, an oil company, Irish Oil & Gas, Inc., contracted for a land services company, Border Resources, LLC, to perform three essential functions: (1) acquire oil and gas leases within the “purchase area,” (2) submit potential leases for review in the larger “review area,” and (3) to perform due diligence and title curative. In exchange, Irish agreed to pay 100 percent of all bonus, and agreed to pay Border 25 percent of any profit from a subsequent sale of those leases and 25 percent of any retained overriding royalty interests.
Border acquired leases within the purchase area until March 22, 2011, when an officer of Irish Oil requested that Border cut off all negotiations, provide a hard schedule of exactly what leases they had by March 25, and prepare for an April 15th closing. Border did not acquire any additional leases, and was not requested to acquire any additional leases. Border continued to perform due diligence and curative work for the leases that were previously acquired.
One day prior, on March 21, a Border landman was independently approached by a mineral owner, Wolski, to acquire leases on his property between four and six miles outside the Irish Oil prospect. They spoke again on April 15, 2011, but this time Wolski informed the Border landman about acreage available in Billings County, which was not in the “purchase area,” but was within the “review area.” Border acquired the Billings County Wolski leases between April 26 and May 11, and did not offer them for review or purchase to Irish Oil.
Irish Oil did not close on the April 15th deal but instead closed with Chesapeake in August of 2011. Irish reported a sale price of $825 per nma to Border and paid all but approximately $45,500 due under that price. Border periodically requested the remaining balance. On October 2011, Irish Oil sent an email to Border taking issue with the Wolski leases, stating as follows:
We do have an issue that we will have to address which is the [Wolski Leases] you bought…. The mineral owners actually called me and said [a Border landman] was dealing with them and I backed off thinking it was for Irish since [it] was in our prospect.
In December of 2011, Border contacted Chesapeake and learned that the sale to Chesapeake also included other leases (“ELCA Leases”), and that the “blended” sales price of all the acreage was $1,100 per nma. Border demanded that Irish Oil pay the $1,100 price. Irish Oil refused, arguing that the ELCA leases were worth far more than the leases acquired by Border, and this suit was filed.
Border sued Irish Oil for breach of contract, and Irish Oil counterclaimed for breach of fiduciary duty for Border’s actions regarding the Wolski leases.
Did the Landmen owe a Fiduciary Duty?
Irish Oil argued that the Border landmen owed Irish a fiduciary duty because (1) there was an agency relationship, and/or (2) the standards promulgated by the American Association of Professional Landmen (AAPL) establish a fiduciary duty. Irish argued that Border and its landmen breached this duty when Border acquired the Wolski leases.
The district court disagreed with Irish Oil, because it found that it terminated the agency relationship with Border in its email on March 24, 2011, and that any obligation of Border to submit leases to Irish for review had been fully performed before entering negotiations for the Wolski Lease on April 15, 2011. Further, the district court stated “any curative work or due diligence left to complete on the already-acquired leases was merely a contractual agreement whereby Border worked for Irish as opposed to working on behalf of Irish as its agent.”
While the Supreme Court of North Dakota stated the correct framing of the issue was not the existence of a fiduciary duty, but the scope of that duty under the contract, it nevertheless found that no fiduciary duty precluded Border from acquiring the Wolski leases after the agency authority was terminated by Irish. Notably, the Supreme Court noted that the result may be different where the contract specifically delineated the intent as to the fiduciary duty, or if Border had used confidential information from Irish Oil in learning of the Wolski acreage’s availability.
As far as the AAPL standards, the Supreme Court also agreed with the district court that they did not impose a fiduciary duty on landmen who are under contract to provide due diligence and curative work. As the district court noted, membership in the AAPL is optional and therefore could not establish an industry-wide standard of care, and a violation of the standards could not establish a basis of civil liability. While the Supreme Court did not fully adopt this view, it agreed with the district court’s conclusion, and indicated “we cannot say that the district court’s findings were induced by an erroneous view of the law, that no evidence exists to support its findings, or that we are left with a definite and firm conviction a mistake has been made.”
Did Irish Owe Border the Full $1,100 per nma?
The district court found persuasive the testimony of a Chesapeake representative who could not recall how the $1,100 per nma price was arrived upon except that it was the same price paid to Irish on a previous deal. Additionally, the Chesapeake representative testified that he did not have authority to purchase at the $1,350 per nma price that Irish claimed was paid for the ECLA Leases.
Irish argued that the ELCA leases were much more valuable, at $1,350 per nma, and the leases acquired by Border were only worth $825 per nma. Therefore, the company argued the “blended price” should be allocated between the two separate lease packages for the purpose of determining what was paid for the leases that had been acquired by Border.
The district court disagreed, summarizing the “gist of Irish’s argument to be that ‘it’s just not fair’ that Border should benefit from that blended sale price.” The district court based its conclusion on the “clear terms of the parties’ contract” and the price evidenced in the Purchase and Sale Agreement with Chesapeake, that the sales price of the disputed leases was $1,100 per nma. The North Dakota Supreme court reviewed the record, and concluded that this holding was not clearly erroneous.
This case is likely of interest to both in-house and field landmen, in that it provides insight as to how some courts view the nature and scope of relationship between land services companies and oil and gas companies. Conflicts of interest and confidentiality requirements are frequently discussed at landman education seminars, and this case illustrates how North Dakota courts analyze the nature, scope, and duration of that relationship as well as the underlying obligations of the parties. Additionally, it provides insight into the extent the AAPL standards of ethics and conduct bind landmen.
This case is also likely of interest to business development professionals in oil and gas companies, because it provides additional guidance as to how North Dakota courts approach the issue of price allocations under package deals, especially where the disputed contractual provisions are contained within an separate agreement that merely references the potential divestiture.
As the district court and the North Dakota Supreme Court in Border v. Irish suggested, both of these matters could have been clarified by language within the contract between the oil and gas company and the land services company.