Introduction
The 2024 case of N.D. Energy Services v. Lime Rock Resources III-A, et. al., involves a dispute over surface usage rights and the permissible methods for transporting resources. Specifically, the case examines whether the terms of a lease that grants the right to install pipelines also implicitly or explicitly exclude the right to use temporary layflat hoses for similar purposes.
Background
The leased subject property in dispute involves a severed surface owner and severed mineral rights holders. In 2005, the surface and mineral owners entered into an oil and gas lease covering the same property. Lime Rock Resources III-A, L.P. (“Lime Rock”) subsequently acquired this lease, and maintained it by continuous production from its wells. Additionally, the landowner signed a surface use and damage agreement with another company, in which Lime Rock later acquired an interest in. Although the surface use agreement was not recorded, a recorded memorandum described the surface use agreement.
In February 2023, the surface owner granted a temporary layflat easement to ND Energy Services, LLC (“ND Energy”). This agreement granted ND Energy the exclusive right to transfer water through above ground layflat hoses, and/or any other conduits on and through the property for one year. In May of the same year, Lime Rock laid its own layflat hose across the property to transport water to its wells to continue fracking operations. ND Energy subsequently filed suit against Lime Rock, claiming tortious interference of contract and willful trespass, and requested a permanent injunction.
ND Energy argued that because the lease specifically mentioned the right to lay pipelines, it implicitly excluded the use of layflat hoses. ND Energy also cited a North Dakota Statute, N.D.C.C. § 9-07-21, that states that all things necessary to carry out a contract are implied, and if some are expressly mentioned, other things of the same class are deemed to be excluded. However, the district court rejected this argument, ruling that pipelines and layflat hoses serve different functions and belong to different classes. The court held that under the accommodation doctrine, which limits a mineral owner’s right to use the surface, the mineral owner must act with due regard to the surface owner’s interest. Under this doctrine, the court found Lime Rock was thus entitled to reasonable use of the surface to develop oil and gas, which included placing layflat hoses on the property.
Both parties moved for summary judgment, and the district court ruled in favor of Lime Rock, dismissing ND Energy’s claims.
Decision of the Supreme Court of North Dakota
On appeal, ND Energy argued that the district court erred in allowing Lime Rock the right to install and operate the layflat hoses. The Supreme Court of North Dakota upheld the district court’s decision, holding that specifically mentioning pipelines in the lease did not imply the exclusion of layflat hoses. The lease grants the exclusive right and “easements for laying pipelines,” and does not specify any other mechanisms for performing under the lease. In its analysis, the Court reasoned that oil and gas leases are typically broad, permitting parties to take necessary actions to fulfill the contract. The absence of layflat hoses in the lease, the Court noted, is not evidence of an intentional exclusion. Using such hoses to transport water does not impose a greater burden on the property than pipelines used to transport other resources. Under the Accommodation Doctrine, Lime Rock is entitled to reasonable use of the surface to develop its interest in the oil and gas in the leased premises.
ND Energy also argued that the district court erred by not determining the surface use agreement to be void because it was unrecorded. The company contended they were a good faith purchaser, as it did not have notice of the surface use agreement. The Supreme Court of North Dakota agreed with the district court and held the recorded memorandum of the surface use agreement provided constructive notice. Because ND Energy did not conduct proper research to uncover other agreements, the memorandum was deemed to have put them on notice. Consequently, the Court found ND Energy was not a good faith purchaser.
ND Energy’s final argument was that the district court erred in dismissing its claims of tortious interference and refusing an injunction. ND Energy claimed since it had a surface agreement, Lime Rock’s installation of the layflat hoses interfered with the company’s exclusive right to use the surface. The Supreme Court held the district court was correct when it determined the elements of establishing an intentional interference with a contract were not met. The Court determined Lime Rock had the right to use the surface from the leases and surface agreement, and thereby had the justification to use the layflat hoses. Also, because Lime Rock had the right to use the land prior to ND Energy’s surface use contract, the court held the permanent injunction would be inappropriate.
Implications of the Case
This case is important for the oil and gas industry as it highlights the importance of language used when drafting leases. The Supreme Court of North Dakota clarified that specifically mentioning one method of surface use (pipelines) does not automatically exclude another unmentioned method when both serve to aid the lessee in its reasonable development of the minerals. The court also emphasized that a party cannot be considered a good-faith purchaser if there was constructive notice of another agreement, such as the recorded memorandum of the surface-use agreement in this case. This decision underscores the importance of conducting thorough due diligence and ensuring clarity in lease agreements to avoid future disputes over implied rights and usage.
Kuiper Law Firm, PLLC specializes in all aspects of oil and gas operations including oil, gas, and mineral leases. We will continue to monitor any updates as they pertain to this case law. If you have any questions about the information in this article or how it may affect your operations, please do not hesitate to contact us.
