Oil and Gas Lawyer Blog
The Texas Supreme Court recently decided JPMorgan Chase Bank v. Orca Assets GP, LLC, No. 15-0712, an interesting exposition on the value and risks of including no-warranty language in an oil and gas lease.
JPMorgan was trustee of the Red Crest Trust, which owns about 40,000 acres of minerals in the Eagle Ford Shale. In 2010, JPMorgan leased about 1,800 of those acres to GeoSouthern Energy. Later that year, JPMorgan was approached by another company, Orca Assets GP, to lease some of the same land. JPMorgan’s trust offer erroneously concluded that the acreage Orca wanted had not been previously leased to GeoSouthern, and he negotiated a deal to lease to Orca. But he put the following provision in the proposed leases to Orca:
Negation of Warranty. This lease is made without warranties of any kind, either express or implied, and without recourse against Lessor in the event of a failure of title, not even for the return of the bonus consideration paid for the granting of the lease or for any rental, royalty, shut-in payment, or any other payment now or hereafter made by Lessee to Lessor under the terms of this lease.
This raised a “red flag” for Orca, leading it to conclude that it should obtain “a solid outside legal opinion” as to title before paying for the leases. So Orca and JPMorgan signed a letter of intent that gave Orca 30 days to examine title before paying for the leases. Three days later, GeoSouthern recorded its leases from JPMorgan. Orca never updated its title search and so did not know about the GeoSouthern leases until after it had paid a bonus of $3,217,585 to JPMorgan for its leases. But as Orca’s agent handed JPMorgan’s trust offer the check, she asked him again if he was “sure these are all open.” The trust officer replied “We’re good to go. They’re open.”
When the mistake was discovered, JPMorgan tendered the bonus money back to Orca, though it said it was not obligated to do so under the terms of the leases. But Orca rejected the tender and sued JPMorgan and the trust officer for $400,000,000 in lost profits.
Orca’s claim was that JPMorgan had fraudulently misrepresented or negligently misrepresented that the acreage was unleased. For such a claim to succeed, Orca had to show that it justifiably relied on the misrepresentation. The court concluded that it had not. There were too many “red flags” to believe that Orca had justifiably relied on the trust officer’s assurance that the acreage was “open” – that is, unleased. “A person may not justifiably rely on a misrepresentation if there are ‘red flags’ indicating such reliance is unwarranted.” An Orca employee said himself that the no-warranty language raised a “red flag” and that “we would never — that I would never look to JPMorgan to tell me whether or not [the trust] owned the minerals.” Also, “a party to a written contract cannot justifiably rely on oral misrepresentations regarding the contract’s unambiguous terms.” The lease expressly said there was no warranty that the acreage was unleased. The trust officer’s assurance that it was “open” directly contradicted the express terms of the no-warranty clause. Therefore, no justifiable reliance as a matter of law.
Oil and gas lease forms used by lessees always contain a warranty that the lessor owns title to the interest leased. This is a bit of an issue when both parties to the lease know that the lessor has only an undivided interest in the minerals in the leased premises, even though the lease does not describe what interest is being leased. Exactly what interest is being warranted? The better practice for landowners is to always negate any warranty of title. The language in the JPMorgan lease form provides a good example of such a clause.
Companies buying leases should also be sure to check title down to a current date before paying for a lease.